Mach Natural Resources - Q1 2024

Transcript

Operator (participant)

Good morning, everyone. Thank you for joining today's call to discuss Mach Natural Resources' first quarter 2024 financial and operational results. During this morning's call, the speakers will be making forward-looking statements that cannot be confirmed by reference to existing information, including statements regarding expectations, projections, future performance, and the assumptions underlying such statements. Please note a number of factors will cause actual results to differ materially from the forward-looking statements, including the factors identified and discussed in their press release this morning and in other SEC filings. For further discussion of risks and uncertainties that could cause actual results to differ from those in such forward-looking statements, please read the company's annual report on Form 10-K, which is available on the company's website or the SEC's website.

Please recognize that except as required by law, they undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements. They may refer to some non-GAAP financial measures. In today's discussion, for reconciliations from non-GAAP financial measures to the most directly comparable GAAP measures, please reference their press release, which is available on Mach's website, and their 10-Q, which is also available on the website when filed. Today's speakers are Tom Ward, CEO, and Kevin White, CFO. Tom will give an introduction and overview. Kevin will discuss Mach's financial results, and then the call will be open for questions. With that, I'll turn the call over to Mr. Tom Ward. Tom?

Tom Ward (CEO)

Thank you. Welcome to Mach Natural Resources' first quarter earnings update. Our last update was only 45 days ago, therefore my prepared comments will be brief. I start each call remembering why we are a bit different than most C corp companies. Mach was formed in 2017 with four main goals in mind. These are maximizing cash distributions, making acquisitions that accretive to our distribution, maintaining low leverage, and reinvesting less than 50% of our operating cash flow. These core tenets remain the same today. Everything we do is centered around our distribution. However, our distribution is variable. We set our distribution on how much cash we have on hand at the end of a quarter. Therefore, the distribution will change each quarter. The price of our three main commodities has the most impact on each quarter.

Our hedging program reduces some price risk, and our drilling offsets most of the production declines. These also help to stabilize our distributions. However, there will be volatility. The $0.02 of past MLPs were high leverage and fixed distributions. We've avoided those and consistently returned cash to our equity holders over the last six years. Mach is an acquisition company. We are adept at adding reserves then finding ways to manage them more efficiently than our underwriting forecasts them. We've been able to achieve positive results in all acquisitions. One factor is that we have a small corporate staff of 125 employees, which can oversee a large portfolio of more than 4,600 operated and 9,000 non-operated wells that hold over 1 million acres of land. Therefore, a new acquisition fits nicely into our existing production without meaningful additional cost.

We also pay close attention to producing wells instead of singular focus on drilling. We take a long-term view on commodity price increases as the world becomes ever more reliant on the products we produce. We do not see a time where demand for oil, natural gas, and natural gas liquids abates. As mentioned before, we're bullish long-term natural gas demand based on LNG exports and continuous increasing power demand. We believe the world will continue to need additional oil production to meet demand as the world tries to move the standard of living towards the lucky 1 billion who have achieved relative luxury in comparison. Mach currently has two rigs running in Oklahoma, one in Canadian County and one in Kingfisher County. We do not see this changing during the second quarter.

As the natural gas strip moves up, we can allow ourselves the ability to unlock some more gas from our inventory. As of today, the forward price is above $4 by the end of next year. However, if you've listened to me before, you know that I believe we'll hit that number earlier. Our drilling results this quarter were in line with our expectations. Our oil production was slightly lower than expected due to the downtime from the January winter storm, which totaled nearly 60,000 barrels. Even after this storm, our natural gas production was slightly higher than expected. LOE came in below the low point of our guidance. Paloma assets have dramatically lowered our LOE. We'll watch this another quarter before making any changes to guidance.

Our CapEx was slightly higher than expected due to drilling more in-unit Oswego wells during the first quarter, where our working interest is higher. We continue to see efficiency gains in our drilling program, with both Oswego and Paloma wells coming in under our estimates. The ability to toggle from acquiring to drilling in bull markets remains one of our key attributes. Once we deliver our quarterly distribution, Mach will have purchased $1.8 billion of producing properties by using $521 million of equity and distributing back over $800 million to our unit holders while maintaining an enterprise value of $2.5 billion. We believe that puts us at the top of upstream operators on cash recovered, on cash invested returns. Our internal estimate for the five-year result of CROCI is 34%, and our five-year return on capital is 19%.

We follow these categories closely because of the importance of returning our profits to unit holders. With that, I'll turn it over to Kevin.

Kevin White (CFO)

Thanks, Tom. The reported results for the first quarter of 2024 represent the first quarter we have publicly reported that show an entire quarter's activity of all the combined entities that make up Mach Natural Resources. Additionally, it is worth noting that the comparative income and cash flow statements for the first quarter of 2023 reflect only the results for Mach 3, the predecessor, and are not useful for direct comparison. For the quarter, we averaged production of 89,000 BOE per day, which was 23% oil, 55% natural gas, and 22% NGLs. Excluding the impact of our hedges, the averaged realized prices were $77.17 per barrel of oil, $2.35 per MCF of gas, and $26.92 per barrel of NGLs. Of the $255 million total oil and gas revenues, the relative contribution for oil was 57%, gas was 24%, and NGLs contributed 19% of that revenue.

On the expense side, as Tom mentioned, our lease operating expense of $41 million or $5.03 per BOE came in lower than our mid-February guidance, and cash G&A of slightly over $9 million or only $1.13 per BOE is notably low compared to many other companies. Total revenues, including our hedges and midstream activities, totaled $239 million, adjusted EBITDA of $169 million, and $144 million of operating cash flow. On June 10th, we will distribute $71.25 million to unit holders of record on May 28th. With that quick overview, Kevin, I will turn the call back to you to open the line for questions.

Operator (participant)

Thank you. We're now conducting a question-and-answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before. One moment, please, while we poll for further questions. Our first question today is coming from Derrick Whitfield from Stifel. Your line is now live.

Derrick Whitfield (Managing Director)

Good morning, all, and thanks for your time. I wanted to open with your 2024 guidance regarding Q1. You guys were ahead of Street expectations for both production and CapEx. Does that pull forward your efficiency and activity impact your production and CapEx trajectory for the year or simply place you guys near the higher end of your ranges?

Kevin White (CFO)

Yeah, I think as we progress through the year, our expectation is that the CapEx will ultimately level out and stay within the guidance range. Our first quarter had some impact, honestly, of higher rig counts in addition to the Oswego drilling that Tom mentioned in his comments where we were drilling higher working interests. Those higher working interests in those Oswego wells would actually impact our production volumes. Just as we go throughout the year, it wouldn't have yet hit volumes just with the first quarter drilling, but we do still expect to come for the full year back within the CapEx guidance range.

Tom Ward (CEO)

Yes. Yeah, Derrick, our goal is and still to maintain that is to be under 50% reinvestment rate. We plan on hitting that. Our drilling is actually going quite well with cost efficiency, the main driver. Our Oswego wells now average under $2.5, $2.63 million per well in the first quarter. If you think back to 2023 first quarter, we were just over $3 million per well. Our estimate on a per well basis in our modeling is $2.7 or $2.5. So we do anticipate that the CapEx number is coming down throughout the year. We're starting out in Paloma also, the Paloma assets beating I think we'll beat those estimates. We've only drilled 1 mile lateral so far, so it's too early to tell. But I'm estimating $750,000-$1 million less than our AFE on the Paloma assets also.

So I think even though our CapEx was a little bit over on a year-long basis, if we kept that, that we'll be back under 50% by the end of the year and for the year in total.

Derrick Whitfield (Managing Director)

Terrific. And then maybe just staying on efficiencies. Last quarter, you highlighted some efficiencies with your first well and with the Paloma asset. I guess if we were to think about the asset and the integration of the asset more broadly, now that it's fully in-house and you've set your operational plans, maybe could you speak to how your views on the asset have evolved and if there have been any notable learnings with the teams and/or assets?

Tom Ward (CEO)

I think the most notable thing is just our LOE continues to move down. We'll wait another quarter before we change guidance, but it seems like the Paloma assets have had a very nice effect on our overall LOE. We knew it would coming in, but it's been better than expected. And then just on drilling, I think we also are seeing positive efficiency gains. We expected that also coming in, but it's been nice to see that. We've TD'd the second well but don't have really any numbers in yet to be able to solidify. But I think we will continue to see the estimates for drilling go down. And as far as just incorporating the asset, it was a large asset by volume but a small asset in number of wells.

It was very easy to bring in the amount of production, and we didn't increase our staff here only by one person from Paloma and a handful of others. I think SOX compliance probably has increased more employees than Paloma did.

Derrick Whitfield (Managing Director)

That's great. Thanks for the color.

Tom Ward (CEO)

You bet.

Operator (participant)

Thank you. Next question today is coming from Charles Meade from Johnson Rice. Your line is now live.

Charles Meade (Research Analyst)

Yes. Good morning, Tom and Kevin.

Kevin White (CFO)

Hi.

Charles Meade (Research Analyst)

Tom.

Kevin White (CFO)

Hey, Charles.

Charles Meade (Research Analyst)

Hey, Tom. Yeah, thank you. I was hoping you could give some comments, offer some comments on how the acquisition opportunity set is evolving for you in the Mid-Con. I'll just leave there whatever you have in that regard.

Tom Ward (CEO)

Yeah. Yeah. We discussed this in early April, and it really hasn't changed. We're seeing more competition. We've always had competition in every acquisition since 2018, basically. But today, I think the competition in the Mid-Con is coming from different sources that have access to capital, and we're seeing prices. The last two deals that we bid on, we weren't even close to. And so I don't know if that's a trend that continues or if there are niches that we can look to or that we need to look outside of the Mid-Con if competition becomes too fierce and people want to pay a premium for undeveloped locations. That doesn't fit our style, so it's probably something we would move away from if we need to.

In the last few transactions that have been made in the Mid-Con, there's been substantial premiums paid for undeveloped land, and that isn't what we do. So I don't know. It's probably too early to see if we can find our niche in different areas like we have in the past. I tend to believe we will. We were able to buy Paloma not that long ago, and it fit all of the criteria we need. I think that you will see us remain steadfast in staying to the four pillars that we have in place. And if that requires us to go fish in a different lake, I guess that's what we'd have to do. But right now, we're still reviewing opportunities and hope to make more acquisitions this year.

Charles Meade (Research Analyst)

Got it. And Tom, correct me. The Paloma, my recollection is you bought that really pretty close to PDP value, not much more. And those are some really great locations. And so that would suggest it's actually changed quite a bit from when you announced that deal.

Tom Ward (CEO)

Yeah, smaller packages make a difference also. So that's fair. We did. We bought Paloma that fit within our guidelines. So yes, you're exactly right. We didn't pay for any upside, and we bought that below PDP PV-10. So yeah, I'm still—I mean, that wasn't that long ago. So things usually don't change that quickly in 90 days. So I remain optimistic. I'm just telling you what the latest is, that there is new competition here, and they're—as most competition always is—they're competitive.

Charles Meade (Research Analyst)

Got it. Then the $150 million in cash, should we think about that you have on your balance sheet at the end of Q1, should we think about that as going to dry powder for future acquisitions? Is that the most likely use of that?

Tom Ward (CEO)

Yeah, I don't think so. I think that whatever we look at our cash on hand and we're distributing out every quarter, you'll see a nice we've always had a lot of cash on hand, and that just it helps to stabilize out our distributions. I don't see that changing, and I doubt that we would drain that to make an acquisition.

Charles Meade (Research Analyst)

Got it. Thank you, Tom.

Tom Ward (CEO)

You bet. Thank you.

Operator (participant)

Thank you. Next question today is coming from Michael Scialla from Stephens. Your line is now live.

Michael Scialla (Managing Director)

Morning, Tom. Morning, Kevin. I want to see if you could talk a little bit more about the Paloma assets. You said you drilled the first two wells, and it sounded like that drilling went really well based on the well costs you've outlined. Can you talk about when the plans are for completion there, how many wells you plan to drill for the year? Will they be a mix of Woodford and the shallower Mississippian zones or just how that asset is going to get developed this year?

Tom Ward (CEO)

Sure, Michael. The amount of wells that we plan to drill on Paloma acreage this year are nine. And I think that's going to be a mix of Woodford and Mississippian wells, but leaning more towards the 2-mile Woodford wells that we're drilling right now. Our drilling schedule is always in flux, so that's not in stone. But that's what we're preparing those locations out in the future. Also, if gas prices were to move up, any we have additional locations not in Paloma that this rig could use to drill more higher gas quality wells. So it does change, but that's our outlook right now as far as the Paloma and I call them Paloma assets, but it's really the deeper assets, the deeper drilling with the 1,250 horsepower rig that we have.

Michael Scialla (Managing Director)

Tom, the $750,000-$1 million below AFE, was that in reference to two-mile Woodford or?

Tom Ward (CEO)

Yeah, it actually was in reference to a 1-mile Mississippian, but I think we'll duplicate that in a 2-mile Woodford.

Michael Scialla (Managing Director)

Great. Okay. And then just wanted to ask on the debt, the term loan, how, Kevin, can you talk about how that gets serviced, what the principal will look like there over the course of the year?

Tom Ward (CEO)

Sure. That's a great question. We start amortizing the principal at, oh, I think it's $20.6 million per quarter starting next month. And then that'll be a quarterly amortization. So that will be a use of part of the cash that we generate on a quarterly basis.

Michael Scialla (Managing Director)

Great. Appreciate the time, guys.

Operator (participant)

Thank you. Next question today is coming from Geoff Jay from Daniel Energy Partners. Your line is now live.

Geoff Jay (Partner)

Morning, Geoff.

Operator (participant)

Geoff, perhaps your phone is on mute.

Geoff Jay (Partner)

Hi, guys. Can you hear me now? I apologize for that.

Tom Ward (CEO)

Hi. Sure. Yeah. Got it.

Geoff Jay (Partner)

So I just wanted to follow up on your comments about natural gas. I talked to a number of people who are maybe a little morebearish than you are based on the Contango and the Strip and some of the LNG projects being pushed kind of back into the right. I wondered if you could tell me why you're so kind of bullish on 2025. I'm curious.

Tom Ward (CEO)

Yeah. I think it's just basically to do with looking at the hub, even 3 Bcf/d of LNG demand coming on. At the same time, I sit around and read just PowerGen, the amount of load that is preparing to come on. If you look at Duke's release, for example, just in the Virginias or the Carolinas, it's extraordinary. If you look out over the next decade, you have between 30-60 gigawatts of power load coming on that can't be met by solar and wind. And I think a large part of that goes to natural gas. I think as we move into we'll see as the summer continues, but I see us at kind of 3-4 Bcf/d day year-over-year tight. And so I think that gets the excess gets wiped out fairly early this summer.

Then going into the fall, we should be looking at a pretty bullish outlook on natural gas. So I would be a buyer of the Strip, the 2025 Strip, and basically the fall of 2024 even.

Geoff Jay (Partner)

Excellent. Thanks for that. I appreciate it.

Tom Ward (CEO)

You bet.

Operator (participant)

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Tom Ward (CEO)

I think nothing else here for close. And just always happy to take questions as you guys want to call in. Thanks for joining us today.

Operator (participant)

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.