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00:04 Good morning and welcome to the Ranger Oil First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask question. [Operator Instructions] Please note, this event is being recorded.
00:35 I would now like to turn the conference over to Rusty Kelley, Chief Financial Officer. Please go ahead.
00:44 Thank you, and good morning everybody. We're pleased today to discuss our 2022 first quarter operational and financial results, our recent bolt-on transactions and other recent accomplishments. With me today is our President, CEO and Director, Darrin Henke; and our Senior Vice President and Chief Operating Officer, Julia Gwaltney.
01:04 Before we begin, please note that we will discuss certain non-GAAP measures. Definitions and reconciliations of these measures to the most comparable GAAP measures are provided in the company's first quarter earnings presentation and news release that can be found at rangeroil.com.
01:20 Our comments today will contain forward-looking statements within the meaning of Federal Securities Laws. These statements are subject to a number of risks and uncertainties that could cause actual results to be materially different from those forward-looking statements, including those identified in the Risk Factors of our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.
01:42 So with that, I'll hand it over to Darrin to discuss our recent results and events. Darrin?
1:50 Thanks, Rusty. And good morning, everyone. By now, I hope you've had a chance to review yesterday's release. Julia, Rusty and I are eager to address your questions. Before doing so, I wanted to take a moment to reflect on our recent accomplishments and our confidence in the opportunities that lie ahead for Ranger.
02:12 Just 18 short months ago, we began a journey to fundamentally transform Ranger into an industry leader. We started by clearly establishing our risk-adjusted returns focused strategy. This strategy was designed to provide flexibility to deliver results for our shareholders through multiple vehicles, including disciplined capital investments and a strong balance sheet, operational expertise that allows for a robust through the cycle returns, a solid framework for returning cash to our shareholders and timely acquisitions at the right valuation. By any measure, we have made significant progress and our year-to-date results have only accelerated our path to creating differential value for our shareholders.
03:00 Let's review the highlights. First, we are high-grading and deepening our portfolio behind a series of accretive transactions, the latest of which we announced on Tuesday, which fit perfectly with our existing acreage and will grow our position by greater than 10%. At today's prices and activity levels, and assuming the closing of the recently announced transactions, we have approximately 20 years of high margin inventory across more than 155,000 net acres in the prolific Eagle Ford shale, effectively doubling our inventory since year-end 2020.
03:41 Our acreage is advantaged due to its high oil cut, existing infrastructure and close proximity to premium Gulf Coast markets, yielding the highest EBITDAX margin over the last two years of any publicly traded US independent in our business. Should WTI decrease to $50 per barrel, we would still have approximately 14 years of drilling inventory at today's activity level.
04:11 We are extremely excited about our recently announced bolt-on transactions. With 19 miles of shared lease lines, the new assets fit hand in glove with our existing portfolio and will provide significant synergies with our current development program. The transactions add nearly 28,000 completable lateral footage within offset or stranded acreage, where we can extend lateral lengths of wells already in our inventory, including adding an expected 7,000 completable lateral footage to our 2022 drilling program.
04:49 The substantial operational synergies we expect to recognize mitigate the need for additional rigs and services, further strengthening returns. We plan to fund the recent transactions from free cash generated in the first quarter. This organic funding would not have been possible without the significant improvements to our balance sheet, our disciplined approach to capital allocation and enviable operational execution. We achieved a leverage ratio below 1 times earlier this year and plan to maintain our formidable balance sheet moving forward as we view it as foundational to the strength of our company.
05:28 Lastly, our robust balance sheet and free cash flow profile have allowed us to establish an extremely competitive framework to return cash to our shareholders. Our Board of Directors recently authorized a $100 million share buyback program, and we plan to initiate a dividend program in the third quarter. Our commitment to these two efforts illustrates our confidence in what we believe our capital program can deliver and the sustainability of our returns focused business.
06:03 Our strong first quarter performance is just the beginning of what you can expect to see from our company. In the quarter, we delivered free cash flow of $65 million, which is approximately 60% of the free cash flow we generated in all of 2021. We also achieved the upper-end of our quarterly production guidance with oil sales of 27,000 barrels per day, and total sales of 37,800 barrels of oil equivalent per day. Importantly, our disciplined capital spending approach saw our drilling and completion expenditures fall below the mid-point of our quarterly guidance.
06:45 As we look towards the rest of the year, we expect to see notable cost savings and improved cycle times from our shift to larger pads and longer laterals. Second quarter average sales are anticipated to show slight growth over the first quarter and we have a significant amount of ongoing activity that is expected to begin the turn in line process in the back half of the quarter.
07:11 With our larger pads and longer laterals yielding higher initial production and shallower declines, we anticipate sales will significantly grow throughout the year, enhancing our already robust free cash flow forecast. Our performance to-date and confidence in the deliverability of our future wells allows us to raise the midpoint of our 2022 production guidance, while importantly maintaining our existing capital expenditure guidance. Additional details on our guidance can be found in the release.
07:46 In closing, we have an exceptional team of people at Ranger that are aligned to deliver on our investment thesis. While we know that our operating results are among the very best in the Eagle Ford, we remain laser focused on continuous improvement in everything we do. I'm so proud of our team and all that we have accomplished together and look forward to further demonstrating both the power of our people and the depth and scale of our high margin portfolio.
08:16 I will now turn the call back to the operator to lead our Q&A. Operator?
08:21 We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Neal Dingmann of Truist. Please go ahead.
08:59 Good morning, all. I'm going to hit the, sorry, I guess, the two topic deserves today. First let's hit on [OSF] (ph) inflation in logistics. I'm just wondering, you all continue to do a great job of containing inflation. I'm just wondering maybe Darrin, can you speak to the plans to continue running the three rigs, specifically, you all -- maybe you and Rusty could talk about what you have all done [indiscernible] you have in the pipe and other products going forward to run this type of expanded plant?
09:25 Yeah, Neal. Thanks for the question. So yes, today we have two rigs running and we've been running two rigs for the first part of the year. We did just contract a third rig and we'll pick that up and we turn into the right in the middle of May. And so, we talked about having spot rigs on the last call and we've been successful in securing a spot rig for some additional wells down in LaSalle County.
09:51 Relative to services, of course, there -- we're all experiencing difficulties with the supply chain, but Ranger has done a great job of securing pipe and services ahead of time and we have great confidence that we will be able to execute our program this year and get the services that we need to execute that program.
10:13 Relative to inflation, we felt like we're seeing a 20% to 25% increase year-over-year, but with our efficiencies that we've been able to implement, including things like drilling longer laterals and switching to six-inch pipe, which we'll do later this year, which will allow us to lengthen out our stage spacing and become more efficient in our completion design being able to pop higher rates and things of that nature. We've been able to contain it to more like 10% to 15% on the bottom line. So that's why we were able to reiterate our capital guidance and we did bump our production guidance slightly.
10:52 Good to hear. And then just to follow-up on -- second really on shareholder return. Could you all speak to how you think about share repurchases? Would you use this -- would you use upcoming share repurchases, I guess, I'd call it, as a backstop if your shares continue to trade at a discount to where peers or M&A is trading out there? Or how do you view that on a go forward?
11:15 Yes, great question. We really think about five pillars that we can use to deploy additional free cash flow. We can do additional debt reduction, share repurchases, we've announced a dividend program that will start in the third quarter, we can do additional capital deployed at the drill pit, the organic drilling, and of course, we can do additional M&A. And we're going to look at those five different opportunities and figure out what's most accretive for our shareholders.
11:44 Relative to share repurchases, we look at the value of our -- what our shares are trading at relative to the intrinsic value of our company. And when we see opportunities to buy shares at a good price relative to the value of the company, you'll definitely see us out there in the marketplace buying shares.
12:04 Great. Would love to hear. Thanks Russ. Thanks, Darrin.
12:10 The next question comes from Charles Meade of Johnson Rice. Please go ahead.
12:16 Hi, good morning. This is Michael Furrow filling in for Charles.
12:20 Good morning.
12:22 Could you provide some further detail on how these three acquisitions came together?
12:28 Yes. So we have a slide in the deck on page six that specifically shows you a map of the bolt-ons and we -- for this announcement, we have three transactions that came together to -- that we roll together and two of those were a public process and one, I would say, was a small marketed process to a limited number of potential buyers.
12:57 Great. Thank you. That's helpful. So sort of just a follow-up on that is, our understanding is that there is methodology change in the Eagle Ford as the acreage extends to the Northeast. So is it proper for us to think about the contiguous acreage required to be in the near-term development plans with the further out acreage as more experimental?
13:20 Yes, I think that from a lower Eagle Ford perspective, that's a good synopsis of how we think of the acreage today, like we do with all the acreage just like with Lonestar, we bring it into the portfolio and we start tearing it apart technically. And specific to Lonestar, six of the 11 wells that we've spud this year are actually on Lonestar acreage. And so I'm sure, we'll bring this in and we'll tear it apart, and some of it we're more excited about than the acreage to the far Northeast relative to lower Eagle Ford.
13:53 That being said, looking quickly at the Austin Chalk, we do think that as you head to the Northeast it appears more attractive and so some of the acreage could be more attractive in the Austin Chalk and we'll tear it apart technically and figure out what makes sense. But immediately, this year we will be drilling additional laterals onto this acreage.
14:16 All right. Great. Thanks for taking my questions.
14:18 Yes, sir. Thank you, Michael.
14:22 The next question comes from Davis Petros of RBC Capital Markets. Please go ahead.
14:29 Good morning, all. Thanks for taking my questions. Kind of my first one and kind of piggyback on the five kind of potential uses of free cash flow, I mean, how should we think about kind of increasing shareholder returns over time kind of either through growing the base dividend or kind of getting that buyback started, when could we maybe see that start to initiate?
14:51 Yes, so the buyback was authorized a couple of weeks ago. We had a press release in April on that. And the -- we go into an open period next week. So I think you'll see if the marketplace is right, we will -- you'll see immediately that we will be in the share buyback market. And the dividends will start in the third quarter -- end of the third quarter.
15:16 And it may be a little early sense that you have initiate, but is there kind of a way that you're thinking about that maybe longer-term, either on targeted payout or kind of a level of free cash flow anything like that, or kind of too early to say?
15:30 You know what, I think we will balance it with the five pillars that I talked about previously, and we'll look at the -- what's the best and most accretive uses of the free cash and head that direction. It's great that we have five different options and we're in a wonderful place relative to the strength of our balance sheet.
15:48 Got it, okay. Makes sense. And then one last one, talking about kind of that last pillar for free cash flow. I would love to hear kind of your updated thoughts on the M&A market kind of those recently announced three bolt-ons made a lot of strategic sense. I'd love to see or love to hear what other opportunities you're seeing out in the basin, as well as kind of how you're thinking about future M&A going forward now that you have kind of two decades plus of inventory?
16:15 Yes. So relative to the number of opportunities, as we look forward, it's probably a stronger number of opportunities coming to market in the Eagle Ford that we've seen in quite a period of time. And our goal is to focus on the Eagle Ford and we intend to look at all those opportunities it -- relative to having 20 years of inventory, when we look at purchasing something just like these bolt-ons, we are able to buy them at a discount to PDP, PV-10. And so it just makes a ton of sense. It's very accretive for our shareholders and we love transactions like that and we'll think there'll be -- we definitely think there'll be more opportunities similar going forward, both small ones like we're seeing here and large material ones and they just have to make sense relative to our inventory. As I said earlier, it's got to be done at the right price at an accretive valuation.
17:15 And can you remind us, is there kind of a max target size on a deal, kind of the bolt-ons easily funded within cash flow, but kind of those bigger deals to say something that may be too big to take on?
17:28 You know what, we've talked about publicly when we're looking at larger opportunities and using both cash and equity, we want to keep our -- we worked hard to get our leverage ratio below 1 times. And what we've publicly talked about is not having that leverage ratio go above 1.5 times in this commodity price environment when we look at potential opportunities on the M&A front.
17:53 Got it. Appreciate the time.
17:54 Yes. Thank you.
17:57 [Operator Instructions] And our next question will come from Nicholas Pope of Seaport Research. Please go ahead.
18:10 Good morning, everyone.
18:11 Good morning, Nick.
18:14 Can I follow on the same topic of M&A, which seems to be of interest today. The -- on the flip side of everything, you look at these -- what seemed to be more non-core right now positions for you in that Northern and Southern areas that you've got via Lonestar. I was kind of curious how you're thinking about those kind of smaller acreage positions. And maybe, is there a decision point or any work that you all are doing to kind of decide is that something that you want to keep in the portfolio or is that something that you could divest? I guess, what is the thinking on those two assets and maybe what are you all working on kind of towards that end right now?
18:54 Yes. So we continue to really tear apart technically all the assets that we picked up from Lonestar and others, and where do they make sense in our portfolio, how do they make sense from rate of return standpoint, profitability, as well as a scale standpoint. And there are some areas that I think we need to expand the scale and we're working to do that where we can. And ultimately, if we can expand the scale on a few of our stranded assets, I could see those -- we'd look for trade to be first and foremost ways that we can trade those assets for other assets that would help us with our scale. But at this point, it doesn’t really tearing things apart and don't have anything that we're planning on divesting at this point.
19:43 Got it. That makes sense. And you kind of mentioned kind of Austin Chalk potential on some of the newly acquired acreage, is there any plan right now on kind of targeting the Chalk at some point this year or is that a longer-term goal?
20:03 Yes, we don't have Austin Chalk plans specifically on the drill schedule today. We do have a offset operator that's going to -- that's just permitted or in the process of permitting an Austin Chalk well directly offsetting our central acreage in Gonzales. And so it will be fun to keep an eye on that. And so, I look it as early adopters. We have such a deep inventory of lower Eagle Ford, low risk, high return opportunities, 20 years of inventory. We don't really have to spend our risk dollars proving up the Austin Chalk. We can really allow the operators around us that are not blessed with the same depth of inventory, let them prove up the Austin Chalk and we can be early adopters there.
20:48 Got it. I appreciate all that. That's all I really had. Thanks for the time this morning, everyone.
20:53 Thank you, Nick.
20:57 This concludes our question-and-answer session. I would like to turn the conference back over to Darrin Henke for any closing remarks.
21:05 Thank you, operator. In less than two years, we've extended our inventory to 20 years, building a basin leading, high margin portfolio with the scale to deliver. We have strengthened our balance sheet reducing our leverage to below 1 times. We've improved the efficiency of our operations through longer laterals and optimized completions, ultimately delivering the highest margins in the industry. Simply put, Ranger has the talented employees, the scale, high margin inventory, formidable balance sheet, operational expertise and capital discipline to deliver sustainable risk adjusted returns for years to come. And we're just getting started. We look forward to updating you on our continued progression. Thank you for joining our call this morning. Have a great day.
21:54 The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.