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Ladies and gentlemen, welcome to the Callon Petroleum Second Quarter 2023 Earnings Conference Call. [Operator instructions] Just to remind you today’s conference is being recorded. [Operator Instructions]
I will now turn the call over Callon’s Head of Investor Relations, Kevin Smith.
Good morning everyone and thanks for dialing in today. I am joined by our CEO, Joe Gatto; our COO, Russell Parker; and our CFO, Kevin Haggard.
During our prepared remarks today, we will reference our second quarter earnings release and our supplemental slides, both of which are available on our website, at www.callon.com.
Today's call will include forward-looking statements that refer to estimates and plans. Actual results could differ materially due to risk factors noted in our presentation and SEC filings. We will also refer to some non-GAAP financial measures that help facilitate comparisons across periods and with our peers. For any non-GAAP measures reference, we provide a reconciliation to the nearest corresponding GAAP measure in the appendix to our slide deck and in our earnings press release, both of which are available on our website. Following our prepared remarks, we will open the call for Q&A.
I would now like to turn the call over to Joe Gatto. Joe?
Thank you, Kevin. Good morning everyone. Before we get started, I'd like to formally introduce Russell Parker, our new Chief Operating Officer. Russell brings more than 20 years of operations and strategic leadership experience to Callon and a partnership for the oil and gas industry. He most recently served as the President and CEO of EP Energy. We’re off to a great start since he joined in June; I know that you'll enjoy working with him.
Now turning to the quarter, we posted strong operational results as production came in above the midpoint of our guidance, increasing sequentially by 7% while capital spending came in at the low end of guidance. We are also progressing initiatives to reduce our cost structure with LOE and GP&T for Boe both coming in below guidance.
Later in our prepared remarks, Russell will discuss some of his key operational priorities, which includes steps we plan to take to further reduce costs and increase margins and free cash flow.
In July, we closed on a compelling bolt-on acquisition in the Delaware Basin, and the simultaneous divestiture of our Eagle Ford asset position. We are now focused solely on our funding footprint of almost 150,000 net acres, with core areas, the status expertise in both the Delaware and Midland Basins. These transactions also enabled us to improve our balance sheet, putting us in the position to launch the shareholder return program.
To summarize a few key highlights of this call, we are executing extremely well, our second quarter financial and operating results were in line or better across all key metrics. We are drilling faster, pumping more completion stages per day and realizing the benefits of large scale code development projects and improved cycle content. We now have a premium focused organization and asset base. We’ve have had a long lateral inventory that is contiguous to our operations, which also increased our scale and the premium base. The combination of having the right assets, plus the right operations team and knowledge base, positions us improve our cost structure and ultimately our conversion of field level cash flows into free cash flow.
Lastly, we have initiated a shareholder return program. I'm proud of delivering on our commitment to shareholders by launching a two year $300 million stock buyback program. Needless to say, we are eager to start this program this quarter. Given our current valuation in the market, buying back our shares is one of the most economically attractive uses of our cash flow.
So moving to operating highlights, we place 32 wells online during the second quarter, including three wells in the Eagle Ford. As part of our Delaware program, we had another successful well targeting a 3rd bone spring formation, expanding the aerial extent of our development of the zone as shown on slide six.
The wells are performing expectations and is our best 3rd bone spring share well to date. Our 3rd bone spring wells are delivering similar oil EUR's throughput as our Wolfcamp A results. So we are not only adding incremental core inventory as we expand the play, but also improving the economics of the inventory that we are currently carrying in the zone.
In some, the 3rd bone spring continues to elevate its contribution to our development plans across an expanding portion of our Delaware footprint. Operationally, we have delivered improvements in both drilling and completions. In the Delaware, we have lowered our time from spud to rig release by 14% due to improved bit design, consistency of operation.
On the completion side, we forced a substantial gains in stages completed per day across the Permian. One of the drivers of the gains reduced down time from optimized scheduling. This will only improve moving forward with a singular focus on Permian operations. These D&C improvements combine the simultaneous operations on our large projects are also benefiting cyclones.
I will now turn the call over Russell for some of his early thoughts on opportunities he sees at Callon.
Thank you, Joe. I'm very happy to have joined the team at Callon. I have Deep Permian Basin roots and I feel right at home walking around the oil fields of West Texas. For those of you familiar with me, you know that the majority of my career has been with private operators, where optimizing free cash flow per barrel is not only the key to the culture, but necessary for survival. As such, my constant focus is efficiency, lifting and development costs per barrel, free cash flow per barrel, and innovation to increase inventory.
This is an exciting time in the company's history. The work that Joe and the rest of the team have done to build this asset base and strong inventory position, while also deleveraging the company, puts us in a unique, competitive advantage compared to our peers. I joined Callon to further build on our advantages. My near-term priorities are focused on improving the capital efficiency of the Boe’s we produce and increasing our margins through cost reductions and further innovation.
In addition, we will leverage previous infrastructure investments and the natural evolution of our life of field co-development model to further improve capital efficiency. We look to minimize well downtime as we continue to optimize artificial lift systems and improve overall well performance while also reducing all-in costs per barrel.
Perhaps what I'm most excited about is our ability to now focus on a singular area, the Permian Basin. Streamlining our operations, unleashing the full potential of our team, combined with an increased adoption of technology will help provide improved real-time responses and drive increased ownership of results. These steps will provide us the tools needed to drive down costs, increase margins, and ultimately help deliver increased free cash flow.
While I'm not ready to discuss the exact numbers on cost savings at this point, I know it will be meaningful. As Joe mentioned, we are focused on adding to our peer-leading inventory position by innovation through the drill bit. We are blessed in the Permian Basin with many hydrocarbon-bearing formations, and we have a tremendous opportunity to increase our financial performance, well performance, improve our recoveries, and organically increase our inventory position. I'm excited to be here, and I look forward to meeting with you and updating you in the future quarters about the progress I know we will make on these priorities.
With that, I'll now turn it back over to Joe. Joe?
Thanks, Russell. I'll pick up with the discussion of the second half of the year after integrating the recent acquisition and transitioning to a new optimized development program. We are currently operating six rigs; plan to release a rig this month, maintaining a five-rig program for the remainder of the year.
The Delaware West area that is targeting full development of the Wolfcamp Zone is just coming online as we enter August, yet another example of the scaled application of our co-development model.
In addition, for our Delaware Basin acquisition, we acquired five wells that were drilled by the previous operator and will co-develop three zones, including the 3rd bone spring. I also wanted to bring you up to date on our production cadence in the second half following the optimization of our D&C program in the Permian with an expanded asset base and singular focus.
As a starting point, the Eagleford produced just over 3,000 Boe per day more than the acquired assets in the second quarter with a similar oil cut of 70% as three new Eagleford wells were brought online in April.
As shown on slide eight, we are now scheduled to bring the five required ducts on line in October, which is later than the next round of Eagleford wells that were part of the previous 2023 plans. As a result, our new production profile will now be a bit more weighted to the fourth quarter. In addition, given the net lateral length advantage from acquiring long lateral inventory relative to our Eagleford wells, we will be completing a similar amount of net lateral feet in the second half despite the lower well count.
Also, as part of our production guidance for the third quarter, we have included the impact of an extended force majeure [Ph] event, the large gas processing facility in the Basin that lasted for two weeks, reducing both oil and gas volumes. To a lesser extent, our range incorporates weather-related disruptions related to the third-party power and midstream services that started in June and lingered into July.
In total, the impact on third quarter guidance is incremental to our standard downtime assumptions is approximately 1,500 Boe per day on a quarterly basis. As we look past these transitory issues in the fourth quarter, we see a strong production trajectory with estimates for 104 to 108 Boe per day and 63 to 65 Boe [Ph] per day.
This is often on items like sand, steel casing, chemicals, and other service equipment. Specifically, spot market items like steel casing and sand are being priced down between 15% and 20%. We are also starting to realize price relief in items like chemicals. As another data point we recently recontracted two drilling rigs at rates that were below our previous rates.
Overall, we expect to realize an incremental $15 million in savings in the second half, both from service costs, and the early impacts of structural design modifications. These savings have not been earmarked for the funding of a similar dollar amount of non-operated D&C activity later this year that has recently been accelerated by the operator. This non-operated activity is associated with a newly acquired assets and is anticipated to benefit early 2024 production.
So, while we have not formally reduced our capital expenditures estimate for the year due this increase in activity related to our previous plans, we expect additional service savings to be captured in the coming quarters and complement the design related savings that Russell and the team are working on.
In closing, we've made a tremendous amount of progress over the last six months, both operationally and financially. Operationally, we are delivering improvements in D&C times and our life-of-field code development model continues to drive production results that are meeting or exceeding expectations. We achieved our initial debt milestone ahead of schedule and are looking forward to starting our share-by-back program. I'm excited about unlocking the full potential of our focus-Permian basin asset base and what -- further update regarding the progress we're making on capital efficiency gains and further cost improvements under Russell's leadership. This concludes our prepared marks and happy to take questions.
Operator, turn it back to you.
[Operator Instructions] Your first question comes from Derrick Whitfield with Stifel. Your line is open.
He is no longer there. The next question comes from Zach Parham with JPMorgan.
Hey guys, thanks for taking my question. I guess first, just on cash return. Your free cash flow is going to accelerate in the second half of the year as CapEx moves lower and you're going to be starting out a draw-back program. I know you said in the past, you wouldn't be performing – with that programs, but any color on how we should be thinking about the split between buybacks and debt reduction in the second half.
Yes, Zach, this is Kevin. I’ll take this. I know many of you want to call it like to know the formula here, and I might as well get all the additional information into a signal answer here. So first, a couple of guide rails that we've talked about in other forums. We don't intend to use more than 50% of free cash flow in any one-quartered repurchase shares. And second we’re going to use those repurchase programs to help support the count share price and hopefully take some volatility out of the stock.
So our guidance regarding your models is we're going to let you know our targeted repurchase percentage during the earnings call for the quarter. For instance, this quarter, the third quarter, we intend to use around 50% of our free cash flow of the repurchase shares. That that ultimate percentage will probably flex a little bit, plus or minus a few percentage points, because some items are booked out to the quarter closest.
Regarding a price limit or target, the share repurchase assistance starts with a view of our NAF, under planning, price assumptions, and costs, and for Callon, we see a significant disconnect at our current market valuation. Now, to your other point about how we intend to split that between debt and equity, we do want to remind you that we intend to do the $300 million purchase program, hand in hand with the additional $400 million debt paid out. So we want to accomplish both of them over that same or eight quarter period of time. So hopefully that answers more than you wanted, but it gives all the answers surrounding the purchase program in one answer.
Thanks, Kevin. Russell, maybe one for you. First off, congrats on the new role. I know you've only been there a little more than a month at this point, but can you give us some thoughts on what some of the opportunities you’ve seen already to produce cost then, how you can accomplish those?
Absolutely. Yes, no specifics yet. I do think the cost reductions will be meaningful over time, but the good news is we've invested a lot over the last several years in infrastructure that we can now start leveraging, which will reduce our total DC&F especially on the upside. The other opportunities lie around improving the base production, not only the cost of that base production through design change, but the amount of downtime through design changes. So we're going to be taking a clean, our fresh approach to all things artificial lift, all things field infrastructure, and also just innovation. Where are we landing our wealth? How are we completing our wealth? How are we spacing our wealth? I just a new fresh approach to that that will help improve both our F&D and our lifting costs and our base production over time. Purely to give you exact numbers on all of that, but I'm telling you, I'm very confident in that opportunity set.
The next call comes from Derrick Whitfield with Stifel. Your line is open.
Hey, good morning. On sorry about earlier.
Good to hear you. Thanks, Derrick.
Perhaps, high level for the first question. In light of your portfolio transformation and the improving capital efficiency as shown on slide five. Could you speak to a range of maintenance capital cost scenarios for 2024 assuming current cost and perhaps also the benefit of deflation?
Derrick, this is Joe. I think it's a bit premature. I mean, going back to Russell's last answer, hopefully if you were right on back online for that. But we've got a lot of things moving real time on the cost side of the equation. Not just the service cost, but real structural design costs as he said are going to be impactful. I could say that, we expect that capital efficiency will improve, whether it be on a, a CapEx to be a lead basis or free cash flow conversion of EBITDA, but right now it's a little bit premature on 24. Russell will get in the seat for another month before we start pinning that on things like that.
All right, Russell, you're up in Q3 as my -- as my as my follow up reference in slide six. Could you comment on the change in your completion approach with the 3rd bone spring shale that's leading to productivity similar to that of the Wolf Campaign?
So we've tried a few different techniques. This one was more intense in terms of both sand loading and fluid loading. And we are seeing reduced our or less drawdown to produce the same amount of Boe's that you've seen on some of the other wells. I'd say we still have more work to do here both and just figuring out what the ultimate inventory looks like and what the ultimate economics will be, but I'm encouraged to see that improvement already and I would say look for not only in just this interval, but as the copy progresses, we're going to see more and more tweaks and optimization and design experimentation to help us improve our cash flow per barrel.
And one clarification Russell, if I could so with respect to co-development, do you view the 3rd bone spring shale as part of the same pressure tank as the Wolf Campaign.
I don't think you can make that blanket answer across the area, and it also depends on whether you're talking about the 3rd bone shale or 3rd bone sand which are both considered 3rd bone by certain operators, but different folks pick the top different places, so there's not one blanket answer to that. But we like what we're seeing in the 3rd bone shale well early time, I'll say that.
Great, great update guys. Thanks for your time.
Thanks Derrick.
Your next question comes from the line of Neal Dingmann with Truist Securities. Your line is open.
Morning guys. Maybe I just ask a little bit of that 3rd bone shale is a different way, I'm just wondering. Now, after the success there, just trying to, when I look at your maps, how large an area, you have confidence that, that can be perspective in that, it seems to be a very nice add in this quarter, how large a area can we start to run with on that?
Yes, Neal, this is Joe. As you see on the map here on page six, it covers a broad swath of wells that we have down now or in process and feel good about the work that has been done there not only by us and by others, I think that's where we're focused right now and I say that we can expand this down further south. But this is going to give you a good representation of things that are either in our current inventory or areas where we think are near term ads, but we'll continue to work on not only the 3rd bone here. But there's other zones we haven't talked about here today that certainly in process like the Wolfcamp C something that we are doing some additional work on and co-development as we speak and we'll be able to talk about that.
But give us a little bit more time to get into your end and provide some more inventory on page on 3rd bone and can talk a little bit about where we plan to go next. But I think the answer to your question, we think it's substantial part of this Delaware position that we have.
Well, that's great to hear. And then guys, just cycling on the infrastructure downtime that you talked about in the middle and natural gas [Indiscernible] facility and the sort of weather related midstream disruptions, I'm just wondering, what it sounds like all of that now has passed, I believe. And then secondly, on a go-forward, just anything else you can do more to mitigate that? Or is that just sort of part of the business out there?
Yes, so Neal, it's a good question. It is over. The situation has passed. And long-term, yes, we're looking at a variety of options. One, different off takes so that we have multiple parties to work with to take the gas, and also just different utilization of the gas on location. And so between all of that and time, that will just help us have a more robust base production and reduce downtime.
Awesome. Thanks so much, guys.
Thanks, Neal.
[Operator Instructions] At this time, there are no more questions. I'll turn the call back over to Joe Gatto.
Great. Thank you. Again, thanks to everyone for joining today. A lot of good things to update you on, and obviously some more updates to come on our next call. Again, we look forward to talking to you. Any additional questions you have, please feel free to give us a call. Thank you.
This concludes today's conference call. You can now disconnect.