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Text: We will start today's call with remarks from Bill Berry, Continental's Chief Executive Officer; John Hart, Chief Financial Officer and Chief Strategy Officer; And Jack Stark, President and Chief Operating Officer.
Additional members of our senior executive team, including Mr. Harold Hamm, Chairman of the Board, will be available for Question and Answer.
Finally, on the call, we will refer to certain non-GAAP financial measures.
I hope moving the earnings date was not an inconvenience for any of you.
We did this to be able to share several exciting things with you today.
First, is our record free cash flow for the quarter of $669 million.
Clearly, 2021 is going to be a record year for us in terms of free cash flow generation.
Second, we have expanded both our shareholder capital and corporate returns.
This includes increasing our dividend by 33% from $0.15 to $0.20 per share with our return on capital employed and increasing to approximately 21%.
Third, is the exciting news that we now have strategic positions in four leading basins across the Lower 48 with a $3.25 billion acquisition of Delaware assets from Pioneer, providing our company and shareholders with material, geologic and geographic diversity.
Like our first quarter Powder River Basin acquisition, this transaction is accretive on key financial metrics, and the acquired assets will complement our existing deep portfolio in the Bakken, Oklahoma and Powder River.
And fourth, we are now post this transaction, we have been fully returned to fully investment grade.
And as we've indicated on previous calls, we believe Continental has more alignment with shareholders than any other public E and P company.
We focus every day on maximizing both shareholder and corporate returns.
The Permian Basin acquisition will be an integral contributor to these shareholder return plans.
This is an outstanding asset with 92,000 acres, over 1,000 locations, 50,000 net royalty acres.
The acquisition also comes with about 55,000 BOE per day from PDP and anticipated volumes from wells in progress.
And finally, and possibly most importantly, this Permian transaction is projected to add up to 2% to our return on capital employed annually over the next five years.
The acquisition of these assets strongly supports the tenants of Continental's shareholder return on investment and return of investment, dividends and share repurchases.
These are all driven by a continued commitment to strong free cash flow.
Our plans for low single-digit production growth are the foundation for being able to deliver strong free cash flow.
During the third quarter, we took additional steps to increase returns to shareholders with our third dividend increase in as many quarters and executing on $65 million in share repurchases.
While we will be taking on some additional debt to pay for the transaction, our net debt-to-EBITDAX target remains the same, less than one.
We expect to exit this year at a quarter annualized net debt-to-EBITDA of about 1.3 and expect to be below 1-0 1.0 by year-end 2022, assuming $60 and strip gas pricing.
We are unwavering in our commitment to reduce debt.
Our 2021 cash flow generation remains very competitive versus our peers in the broader market, as shown on Slide seven.
This is even after our stock has nearly tripled year-to-date.
We see the potential to generate $2.6 billion of free cash flow this year, which equates to about 14% free cash flow yield at current prices.
This is significantly above the majority of our industry peers and the broader market, indicating further upside in the value of our stock.
As we look to 2022, we expect to provide updates on capital budget and operations, including the pending integration of our newly acquired Permian assets early next year.
We are confident this acquisition will further enhance our free cash flow generation.
Our ESG performance is top of mind for me, and I want to update you with regards to our ESG performance year-to-date.
In the third quarter, we achieved a 98.9% gas capture rate, up from 98.3% in 2020.
In support of our industry-leading ESG gas capture stewardship, we have deferred approximately $45 million in revenue in 2021.
Additionally, we have achieved zero recordable injuries among our employees, through the third quarter 2021.
Congratulations to the team on an outstanding performance.
We're proud of our teams and their exceptional commitment to continuously operate with integrity in a safe and environmentally responsible manner.
We'll spend the remainder of the call discussing some of the specifics on our recently announced and highly accretive expansion into the Permian Basin.
John will highlight the compelling financial aspects of our expansion, and Jack will provide details regarding the outstanding geologic attributes and fully integrated nature of the deal.
Our new position in the Permian as shown on Slide four, was driven by our geology-led corporate strategy and is built on a strong foundation of geoscience and technical operation skills, coupled with the management team fully aligned with shareholders.
This transaction increases Continental's operational footprint in the area with our current acreage position across the Permian now approximately 140,000 net acres.
Later on the call, Jack will provide details regarding this expanded Permian footprint, along with the tremendous success our teams have had growing our top-tier corporate portfolio of Lower 48 assets.
Approximately, 75% of the price of this asset is covered by PDP value and wells in progress at current strip prices, leaving significant upside value and undeveloped acreage.
On a pro forma basis and at current strip prices, we expect to generate at least $3 billion of cash flow in 2022.
Our pro forma free cash flow in '22 is projected to be about 17%.
This compares very favorably to our 2021 projected free cash flow yield of about 14%.
Like our other assets, the fully integrated nature of this asset offers a multifaceted value proposition including minerals and water infrastructure that we control and provides tremendous optionality and upside in the future, as shown on Slide four.
The transaction has been unanimously approved by the company's Board of Directors and is effective as of October 1, with an expected closing date in the fourth quarter.
As Bill mentioned, today's acquisition is immediately financially accretive on cash flow and free cash flow per share, earnings per share, return on capital employed and cash margin.
This transaction has a number of benefits to Continental shareholders.
Let's discuss a few of those items.
This transaction is credit-enhancing due to projected cash flow and rapid debt paydown benefiting our credit metrics while enhancing our commodity optionality and geographic diversity.
It is beneficial to the ongoing trajectory of our credit rating.
I will discuss agency views momentarily.
This transaction includes a healthy amount of PDP, benefiting our EBITDAX by approximately $900 million per year at current strip prices, enhancing our credit metrics.
Additionally, we are projecting an incremental $500 million of free cash flow from the acquired asset in 2022 at current strip prices based on estimated '22 production and capital spending.
Combined with our legacy assets, we expect 2022 free cash flow of at least $3 billion at strip prices for Continental.
We have significant flexibility in how we plan to finance the transaction.
As of September 30, we had approximately $700 million of cash on hand with expectations for strong free cash flow moving forward.
Our revolver remains fully undrawn.
On October 29, we extended our revolver maturity to October 2026.
And increased available commitments to $1.7 billion.
We intend to utilize available cash and our revolver to fund a significant amount of this transaction.
Remaining acquisition financing will be derived from debt capital markets and/or bank term facilities.
We will not issue additional equity as a means to fund this deal.
This financing approach amplifies the accretive nature of this transaction on a per share basis.
Our credit metrics also remained strong with net debt to EBITDAX projected to increase only slightly from 0.9 times in the third quarter to 1.3 times initially with the transaction but is expected to drop below 1 times during 2022 at current strip prices.
Our target is to reduce net debt back to current levels or approximately $4 billion by year-end '22.
We plan to utilize 2022 cash flow to pay off the revolver funding, rebuild our cash position and pay off our '23 and '24 bond maturities at the earliest possible opportunity.
As you may have noted, the rating agencies have been supportive of this transaction and our plans.
Fitch has upgraded us to BBB.
Moody's has upgraded us to Baa3 and S and P has maintained a positive outlook to upgrade to IG.
This positions us with two agencies at investment grade, making us fully investment-grade eligible, and one agency with a positive outlook to investment grade.
We are pleased with this progress as our objective is three investment-grade ratings.
As we have discussed in previous quarters, and as you will note in the Form 10-Q with the rise in natural gas prices, the company has elected to lock in a portion of associated cash flows through natural gas hedges at attractive prices.
Subsequent to September 30, we have continued to layer in natural gas hedges for the second quarter of 2022 through year-end 2023.
We've utilized a combination of swaps and collars with an average swap of $371 and an average foot of $325 at an average collar of $496.
These positions are summarized in our 10-Q along with our prior positions.
We are largely in hedged for oil, as we believe market fundamentals are supportive of price participation due to supply and demand rebalancing.
We have remained capital disciplined with a projected reinvestment ratio of approximately 40%.
Reflecting back on our original guidance in February, we were projecting at that time, $1 billion of free cash flow with a reinvestment rate of 58%.
With our free cash flow now up approximately 160% from our original guidance, we have decided to reinvest a modest amount of additional capital this year or just under 10% of that incremental cash flow figure.
This is due to the associated capex from the pending Permian acquisition, additional leasehold acquisitions and incremental gas-focused activity in order to meet domestic and global natural gas consumer demand, given an undersupplied market outlook this winter.
I'll start out by saying that the Permian assets we acquired are excellent addition to our existing portfolio.
They contain the key strategic components common to all of Continental's assets, including the right rocks, excellent economics, a significant contiguous acreage position with high working interest and net revenue interest, mineral ownership, surface ownership, operated water infrastructure and significant upside potential through continued operating efficiencies, technology and exploration.
I'll touch on each of these briefly here.
First and foremost, it's all about the rocks.
Referring to Slide four, these assets contain proven, stacked oil-rich reservoirs as well as other high potential reservoirs we intend to explore and develop in the future.
We estimate that these assets contain an inventory of over 650 gross wells targeting three primary reservoirs, including the third Bone Spring, the Wolfcamp A, Wolfcamp B, and we think there are over 1,000 locations when you consider other known producing reservoirs that underlie this acreage.
On an economic basis, these assets complement our existing inventory very well delivering rates of return from 50% to well over 100% at $60 WTI and $3 NYMEX.
The 92,000 net leasehold acres being acquired are largely contiguous, as you can see on Slide four and highly concentrated.
Continental will operate 98% of this acreage with an average working interest of approximately 93% per well, and over 90% of this acreage is held by production.
The acquisition also includes 50,000 net royalty acres.
Approximately 70% of these royalty acres directly underlie our leasehold, which raises the average net revenue interest for wells drilled on this acreage to around 80%.
The acquisition also includes significant water infrastructure and surface ownership, including 31,000 surface acres, approximately 180 miles of pipeline, water facilities and disposal wells that can be expanded to accommodate growth.
This will provide immediate operating efficiencies and cost benefits to our operations.
The acquisition also includes approximately 55,000 BOE per day of production, which is inclusive of 10 wells in progress on a pro forma basis, and approximately 70% of this production is oil.
The last point I'll make on these assets is that they are in the early stage of development, which is exactly what we like.
The initial phase of testing and reservoir delineation is complete and the properties are teed-up for full field development.
And as in all of our plays, we see significant opportunity to improve well performance and financial returns through optimized density and wellbore placement, operational efficiency gains and asset growth through exploration.
Most importantly, we've expanded our operations into two additional world-class oil-weighted basins, the Powder River Basin and Permian Basin.
Through Grassroots leasing, trades and strategic acquisitions, we now own or have under contract approximately 140,000 net acres in the Texas portion of the Permian Basin and approximately 215,000 acres -- net acres in the Powder River Basin.
During this time, we also expanded -- or we also added approximately 47,000 net acres in the heart of our springboard assets in Oklahoma.
Combined, these assets have tremendous resource potential, adding well over one billion barrels of net resource potential to our industry-leading assets in the Bakken and Oklahoma, providing Continental shareholders a deep and geologically diverse oil-weighted inventory that will drive strong returns and profitability for decades to come.
This company has a long well-established track record of having an exceptional capability of transferring our unique geologic and operational expertise to new and existing basins.
We have created significant inflection points for the company in the past with our entry into the Bakken and Oklahoma positions.
We now see our position in the Permian and Powder River as an additional inflection point, representing significant complementary step changes to the company's portfolio.
With that, we're ready to begin the Questions and Answers section of the call.

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delivering record free cash flow & strategic expansion into permian basin.
$1.20 per adjusted share (non-gaap)) in 3q21.

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