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Good day, and welcome to the Ranger Oil Corporation’s Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Ranger's Senior Vice President and CFO, Rusty Kelley. Please go ahead.
Good morning. Thanks for dialing in us today for our third quarter conference call. With me this morning is our CEO, Darrin Henke and our COO, Julia Gwaltney.
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 our news release and earnings presentation, which can both be found at www.rangeroil.com.
Our comments today will also 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 and the risk factors in our annual report on Form 10-K and quarterly reports on Form 10-Q.
I'll now hand it over to Darrin.
Thanks, Rusty, and welcome everyone. Yesterday we published our third quarter results along with an updated slide deck. 2022 is proving to be another great year for Ranger. We continue to deliver on our key objectives this year operationally, financially and strategically.
Our company has been dramatically transformed over the last two years. We've strengthened our balance sheet, materially extended our inventory through highly accretive acquisitions. We've grown organically through the drill bed and returned significant cash back to shareholders. Ranger truly is doing it all.
Our company differentiates itself from its peers, as we have the highest margins in the business. Thanks to our low-cost structure and the premium pricing our products received in the Eagle Ford. We have an estimated 20-year inventory of high return development opportunities. We are creating value on a per share basis. Since the fourth quarter of last year Ranger has more than doubled operating cash flow per share, reduced leverage by nearly 45% and increased production per debt adjusted share at a 20% compound annual growth rate.
We are buying back shares paying a dividend reducing leverage and growing through both accretive acquisitions and the drill bed. Ranger certainly has all the right ingredients for premium valuation.
I would like to now summarize our operational financial and strategic accomplishments. Our operating team delivered during a very challenging macro environment for our industry, and our third quarter results were exceptional. Our sales volumes again top the high end of guidance for the quarter coming in at 40,600 barrels of oil equivalent per day. Over the course of the year, we increased our total sales guidance nearly 4% relative to our March guidance and expect to deliver year-over-year oil equivalent sales growth of 48%.
Total drilling and completion capital of $151.9 million stayed inside the guidance range, even with $3.4 million associated with accelerated timing. Capital discipline was paramount to ensure that we funded our best projects while not overspending or allowing inflation to erode our cash margins. Our operating team maintained unprecedented flexibility and found creative ways to simply get the job done.
We previously announced the addition of a third operated rig through year end. When reviewing the best uses for cash, the economics of the third rig are very compelling, especially considering the average expected well level rate of returns year-to-date are exceeding 100% at strip prices. This rig will provide strong momentum into 2023 and we may choose to continue development with a third rig next year, if it is the best investment for our shareholders.
We have an exceptional team at Ranger focused squarely on continuous improvement, whether it's through drilling, longer laterals, optimizing completion efficiencies or negotiating accretive land deals. Our team's operating performance in Eagle Ford is among the best in the business. We are able to identify and capture synergies that others simply cannot.
Next, I'd like to talk about our admirable financial results. Because of our solid operating performance, we've been able to deliver on our key financial objectives. Our pro forma adjusted free cash flow was $58 million, and we had net income of $228 million. Adjusted EBITDAX was $209 million. Our framework to return cash to shareholders as well defined, having returned approximately $80 million to shareholders since mid-May. Repurchases make up about 5% of our total shares outstanding more than 2 million shares. We expect to continue buying our shares, having utilized only about one half of our $140 million authorization. We see repurchasing our shares today as a very compelling investment.
Dividends are also an important component of our cash return framework. Our third quarter dividend of $0.075 per share will be paid on November 28 to shareholders of record as of November 16. Our balance sheet has also continued to strengthen our leverage ratio was 0.75 times as of quarter end, more than half a turn lower than the beginning of this year.
We plan to maintain capital discipline, ensuring our capital is allocated to our highest return opportunities. Our enviable balance sheet is the best risk management tool we have and puts us in a good position to weather future commodity price cycles.
The third and final bucket to discuss today is our strategic highlights. Ranger is executing five key value creation strategies. Those been reducing leverage, purchasing shares, paying dividends, growing organically and increasing scale through creative acquisitions. The $139 million in bolt-ons we've closed this year provide a solid runway, adding 2,000 barrels of oil equivalent per day of loaded climb production, along with 20,000 net acres in over 60 estimated gross high return drilling locations. More than replacing the well count we will drill this year. Importantly, they were funded substantially through cash flow.
We are screening nearly every available acquisition opportunity in the Eagle Ford and selectively competing for those deals that meet our strict criteria where we can lower cost, improve cycle times and generate incremental free cash, all while maintaining our initial balance sheet.
Our strategy today is proven and our execution of the business plan has been very consistent. Because of the quality of both our team and our assets, we can generate attractive cash on cash returns while growing the business through high return investments and smart strategic M&A to create future value all while returning significant cash to shareholders and improving our per share metrics.
Before closing out our remarks, let me provide some early thoughts on 2023. First, be assured that our strategy to create value will remain unchanged. We are confident that we have the key ingredients to earn a premium valuation in the market today. Second, our recent decision to keep a third operated rig running through year-end will provide strong momentum for us in 2023. We have the flexibility to keep this rig past year-end and we'll make that decision late this year. And lastly, we look to 2023 with great confidence. We have the inventory, the team and the right business strategy to create value and we intend to deliver.
That concludes our prepared remarks today. And we are happy to take your questions, operator?
We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Neal Dingmann with Truist Securities. Please go ahead.
Good morning. Thanks for the time. My first question is on M&A specifically. I usually don't ask about specific or other company deals, but I'm just hoping maybe you all can share your thoughts on today's enzyme deal given to me the size looks quite similar to you all. And maybe there in addition that just your thoughts on M&A Eagle Ford M&A opportunities in general?
Yeah, thank you, Neal. Great, great question. When we have looked at Marathon's disclosures, what a great deal for Marathon and for Ensign. Per those disclosures, Ensign has predicted to have 2023 EBITDA of about $900 million, which is basically the same number as consensus has for Ranger for 2023. They also show 130,000 acres and 600 feature locations. Ranger has about 160,000 acres and about 1,000 feature locations.
The Ensign positions a little deeper little gas here position, it'll likely be a little more expensive to develop than Rangers but - and will have a materially lower oil pad as well. But regardless, it's a great deal for Marathon and congrats to them for getting the deal done.
Your second question there relative to feature M&A in the Eagle Ford. Yeah, we've seen a strong pipeline and increasing pipeline of opportunities this year. And we've been active as we said, really trying to look at each and every deal that that takes place in the Eagle Ford. We will remain steadfastly focused on the Eagle Ford.
And when we think about M&A, scale equals relevance today and it's a pathway to higher multiples. We intend to look at everything in the key criteria that we will judge feature Eagle Ford opportunities will be first and foremost strategic fit. We're looking at operational efficiencies as long with G&A efficiencies. We're going to look at accretion, the value both on a cash flow per share basis, and NAV basis. We're also going to judge the merits based on the attractiveness of the opportunity relative to Ranger's enterprise value in concert with its NAV.
And least, but definitely very important is maintaining lease but not last, maintaining a strong balance sheet. Our leverage ratio today is 0.75 times and when we did the Lonestar deal, we got up to 1.5 times with line of sight of getting down below one times in a few quarters. And that's was we think about larger strategic opportunities. We don't want to go above one and a half times and we want to have that line of sight to get him back below one times in a few quarters.
Great details. And then just maybe secondly, maybe talk a little bit on spending, if you will circulate look like you slightly stepped up the '22 CapEx spend. But I'm wondering, I guess my question around that is how do you -- without having full '23 guide, I know you talked about potentially 50,000 plus a day next year. Could you just talk about your thoughts on boosting that CapEx and what it should imply for '23?
Yeah. So focusing first on the midpoint of our guidance for fourth quarter CapEx is $160 million, and about $30 million of that is associated with the addition of the third rig, and an incremental $25 million is associated with additional working interest that we've acquired here in the fourth quarter as well as some non-activity that's taking place with a large, high-quality operator just off our lease lines.
So about $55 million of the $160 million is associated with additional activity or additional interest in our wells. So if you back that out, our fourth quarter guide would have been about $105 million, which is right in line with what we had expected back in the third quarter.
Relative to -- yeah. And I think just to add on, as we look forward to 2023, we're in an enviable position where we are going to deliver double-digit production growth next year. Whether we run two rigs and we stay in the low teens on that production growth or we stick with the three-rig program, we'll have high teens production growth year-over-year. And as we said, we will break 50,000 BOE per day sometime in the first half of the year, of course, depending upon that cadence.
Great details. Thanks, Darrin.
Thank you, Neal.
The next question comes from Michael Furrow with Johnson Rice. Please go ahead.
Hi, good morning. Thanks for taking my questions. So I'd just like to ask a question about the balance between accretive A&D and then share repurchases. I appreciate Slide 7, I think it illustrates the benefit of share repurchase very clearly, where we've seen operating cash flow increase on a per share basis despite the commodity actually going down the third quarter. So my question is, how does Ranger balance these buyback opportunities versus accretive A&D?
Yeah. At the time we're looking at A&D opportunities, we're also evaluating all the other opportunities for investment of that incremental free cash flow. And it really just -- it all comes back to what's the greatest return, what's the greatest investment for our shareholder. We've been blessed with the free cash flow this year to reduce leverage, buy back shares, pay a dividend and also do a significant amount of A&D as well as grow organically. So hopefully, next year will be comparable.
Great. That's helpful. So I guess my next question kind of piggybacks off that in terms of doing what's greatest for the shareholders. In regard to running that third rig into 2023, with individual well level rates of return over 100%, your leverage is down three quarters of a turn. You got a strong hedge book. It almost seems like a no-brainer to continue running it into 2023. So my question is, is what would be some things or a rationale to decide not to run that rig into 2023?
Yeah. I think there's a lot of macro things going on in the world right now. We have midterm elections coming up next week, recession likely on the -- coming down the path. And the last two years have taught us, if anything, that being able to see the future is not always clear. And we've seen some very low commodity price and some pretty vicious cycles in the commodity price sector.
So we intend to watch the commodity prices, watch inflation and look at other strategic M&A opportunities. And we can make this decision later in the year, and we're going to keep our flexibility open as long as we possibly can on making that decision.
Great. That makes sense. It's always good to have some flexibility, especially these days. I appreciate it, guys.
Yeah. Thank you, Michael.
[Operator Instructions] The next question comes from Nicholas Pope with Seaport Global. Please go ahead.
Good morning, everyone.
Good morning, Nick. How are you today?
Great. I was hoping you guys could talk a little bit about the future locations that you all laid out. I think you all say 750 Eagle Ford locations. And as you kind of look at that central area, I'm assuming the bulk of that is in the central area. I guess is there -- I guess, what risks remain with those locations? And are there kind of areas within that footprint that you need to drill to get more comfortable with kind of the risk profile? I guess I'm trying to understand the 750 and kind of what stage all that's at right now.
Yeah. So our confidence level on the 750 locations is very high, Nick. It's only a single landing zone at roughly 450 to 500-foot well spacing. The acreage is all highly delineated. So very, very low risk on those 750 locations. And then, in fact, if you look at what some of the folks of our lease lines are drilling wells at 300, 350-foot spacing, one could argue that's really a pretty conservative number.
Helpful. And as you -- and the distribution of kind of like the expectation of well returns, I mean is it -- are things fairly consistent across that entire central area? Like how wide is the distribution on kind of expectations on wells?
It certainly depends upon commodity price. In the updip portion, we're very -- in the black well area, we're very high oil cut, and economics look great today, lower drilling costs. And then as you get further down dip, you get gassier and your drilling costs go up a touch. But the gas prices we've seen over the last year, that's very attractive as well. So it's -- we have a premium curve that we update regularly, internally, looking at strip pricing and other prices. And that's how we choose. We're always choosing our best inventory or putting our best foot first relative to what we drill going forward. And that changes materially with technology as well as technology on drilling and how fast we can drill and how cheap we can drill them as well as the biggest impact is likely commodity prices.
Got it. That's helpful. And then just one cleanup item on the financial side. Now that you're paying dividends, the Class B shares, those are noneconomic interest, they don't receive dividends? Is that correct?
For all intents and purposes, they do. It's -- they're given distributions technically, but they do receive the equivalent of the dividends.
Got it. All right. That's all I have. Thanks, guys.
Yeah, thank you, Nick.
The next question comes from Davis Petros with RBC Capital Markets. Please go ahead.
Just one for me, since most of the other questions kind of already been asked, but LOE last quarter ticked up a bit. And then I think you all quoted it was added workover activity given the returns at current prices, and then kind of the 4Q guide implies a step down again. Can you just kind of talk about what you're seeing on the inflation front in terms of kind of on the operating cost side as well as the capital cost side going into year-end? And then how maybe your preliminary thoughts into 2023 you're looking at, at this point?
Yeah, this is Julia. On the operating expense side, we've been largely been able to manage the ongoing inflationary pressures largely coming from fuel and labor costs through increased efficiency, putting more of our SWD, our water on pipe, along with some of the increase in costs we've seen was due to picking up. We've tripled our workover activity, which is highly accretive, very valuable projects that we do that really drive improving production volumes. So we see -- when you see the rate decline a little bit on that LOE coming into fourth quarter, it's really driven by the growth in production volumes more than a change in expense.
Predicting the future on inflation is incredibly challenging these days. So I'm hesitant to make a lot of predictions. We do continue to see some commodity price increases. We continue to battle that and fight that with improving efficiency; improving our efficiency on the drilling rigs, completion; making more use of our time and equipment when it's on location.
I guess pressing a little bit kind of---
Did that answer?
Yeah, it does. Kind of pressing a little bit on that answer though, on the capital cost side, we've been hearing for some peers, there's maybe some early signs, inflation maybe tempering kind of bigger line items. Are you all experiencing any of that? Or kind of any color on that?
Yeah, I would agree, the rate of change quarter-over-quarter definitely has improved from what we saw in the early part of 2022, particularly it has leveled off. There still is like trickling in, I would call it, more of inflationary pressures. And we're hearing a similar message coming into 2023 that we'll see increases further in Q1, but then that it's likely going to taper off. But I mean, to be transparent, we heard similar messages going into 2022. And we, as an industry, realize pretty heavy pressures coming through the early half of 2022.
So yeah, I think we'll just continue to navigate that and watch really closely, work very closely with our partners. We work very closely with our service partners and have great relationships. We want them to be sustainable as well as a continuing ongoing very viable project base for ourselves. So that's something we value very closely, and we'll continue to monitor that and understand exactly what the market conditions are.
Got it. And one last one for me. The two rigs you're running, then the third 1 you just recently picked up, will any of those three be up for kind of new contracts into next year? Or are they locked in to rates all the way through next year already?
So we have one that is on a two-year contract right now, and we have two that are on shorter-term contracts.
Got it, okay. Appreciate the time.
Thank you, Davis.
This concludes our question-and-answer session. I would like to turn the conference back over to Darrin Henke for any closing remarks.
Thank you, Betsy. First and foremost, I want to give a big shout out to all of our staff for their hard work and dedication what they delivered for Ranger each and every day. Ranger has a demonstrated record of creating shareholder value, both organically and through M&A. We're generating free cash to reduce leverage, buy back shares, pay a dividend, grow organically and execute on accretive acquisitions. We're really excited about 2023. Thank you for joining our call today. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.