Chord Energy: Will Q3's Production Growth Continue

seekingalpha01-27

Chord Energy was able to report significant oil production growth in Q3.The company has developed an efficient well spacing program that they believe will create similar oil recovery with less capital...

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The company currently has a market cap of $6.21 billion. The company, which is the result of the merger of Oasis Petroleum and Whiting Petroleum in June 2022, is reportedly the largest acreage holder in the Bakken Shale Play. In my last article covering Chord Energy, I gave the stock a 'hold' rating primarily due to its lack of production growth. When I made my hold recommendation, the company was trading at $168.69, and today it is trading at around $153 equaling a decline of roughly 9.3%. Since writing my last article, Chord Energy reported Q3 results on November 2 and after a couple of years of stagnant production, the company saw some meaningful growth in oil production. Daily oil volumes for the third quarter were 101.4 MBopd which was a significant increase over the previous quarter of 96.4 MBopd. Now the question becomes, what will the Q4 results look like, and furthermore, what will the guidance for the full year 2024 be? The company is expected to report Q4 results sometime in February. Chord Energy Bakken Position (Q3 Chord Energy Presentation)Chord Energy Q3 Highlights (Q3 Chord Energy Presentation) Balance Sheet The company has an excellent balance sheet with $400 million in long-term unsecured debt due June 2026 with a 6.375% interest rate. All the company's other liabilities are short-term and are adequately covered by the company's short-term assets.   (millions) 2020 2021 2022 2023   Assets 2,159.0 3,026.8 6,631.1 6,912.5   Debt 1,146.3 1,805.2 1,951.3 1,971.5   Debt-to-Asset Ratio .53 .596 .295 .285   Click to enlarge Source: Seeking Alpha Production In my last article covering Chord Energy, I noted how the company hadn't seen very strong growth in their oil production, and it was my primary reason for rating the company as a 'hold' rather than a buy. It seems that in Q3 2023, their production finally broke out of its multi-year stagnation with significant growth. Although this is encouraging to see, I would wait to see guidance for FY2024 before changing my recommendation. You will notice that the company's NGLs and natural gas production have remained level, even in the third quarter. This isn't all that concerning as oil is the more profitable hydrocarbon for E&P companies. Below is a chart of the company's quarterly production so you can see the company's daily production track record for yourself.   (thousands) Q1 '22 Q2 '22 Q3 '22 Q4 '22 Q1 '23 Q2 '23 Q3 '23   Natural Gas (MBoepd) 36.5 33.8 37.6 37.8 36.9 36.6 38.6   NGL(MBoepd) 37.2 34.8 38.7 37.7 32.7 36.0 36.0   Oil(MBopd) 97.4 90.0 96.2 95.8 95.1 96.4 101.4   Total MBoepd 171.1 158.6 172.4 171.2 164.7 169.0 176.0   Click to enlarge Source: Chord Energy Presentations Projected/Estimated Q4 Volumes     Q4 '23 Guidance Projected QoQ Growth** Projected YoY Growth*   Natural Gas(MBoepd) 37.3 - 38.3 ~0% ~0%   NGL(MBoepd) 35.5 - 36.5 ~0% ~0%   Oil(MBopd) 102 - 105 1.58% 8.0%   Total MBopd 174.8 - 179.8 177.3 3.56%   Click to enlarge *Calculated as percentage increase from Q4 '22 based on the midpoint of guidance **Calculated based on the midpoint of guidance When the company reported Q4 2022 results, they originally gave guidance for the full year 2023 of MBopd in the range of 165.5 to 172. As of Q3, they are projecting guidance for the full year 2023 of 171 to 172.5. It is encouraging to see that their full-year numbers should come in at or near the top end of their original production guidance for 2023. Drilling Inventory The company claims to have 10+ years of profitable drilling inventory. As oil prices rise, naturally, the company claims that this will unlock additional inventory. Chord Energy Drilling Inventory (Q3 Chord Energy ) I was curious how this compares to other companies and their claimed drilling inventory, and Chord's inventory is very comparable. The drilling inventory below comes from each company's most recent Q3 results.  Permian Resources Corporation (PR): 15+ years (Mid Cap). EOG Resources, Inc. (EOG):10+ years of inventory (Large Cap). Ring Energy, Inc. (REI): 21 years of inventory (Small Cap). Coterra Energy Inc. (CTRA): 15+ Years (Large Cap). Devon Energy Corporation (DVN): 12 Years (Large cap). SilverBow Resources, Inc. (SBOW): 10+ Years (Small Cap).  Cash Flow In spite of falling oil prices, the company has been able to maintain strong cash flows. The company has a consistent capital return program that is based on their balance sheet.     2022 2023 TTM   Operating Cash Flow 1,924.0 1,754.9   Capital Expenditure (531.3) (870.8)   Free Cash Flow 1,392.7 884.1   Click to enlarge Source: Seeking Alpha According to the company 2022 10K, this is the company's plan for capital return. Given their balance sheet is below the targeted 0.5 leverage, the company will be returning approximately 75% of adjusted free cash flow.  Below 0.5x leverage: 75%+ of Adjusted FCF. Below 1.0x leverage: 50%+ of Adjusted FCF. >1.0x leverage: Base dividend+ ($5.00 per share annualized).  Q3 Return of Capital (Q3 Chord Presentation) The slide above provides the calculations for capital distributions during the third quarter and should provide an idea of what distributions could be going forward. Well Spacing The company has discovered that they are realizing better efficiency with wider well-spacing. The company believes they can extract the same amount of oil with wider well spacing, thus resulting in higher rates of return. This is encouraging as it should result in greater growth in oil production over the long term. This will be something to keep an eye on in the coming years and quarters. Returns Driven By Well Spacing (Q3 Chord Energy Report) This is exemplified in the slide below. You can see that they believe that the wells drilled that target the Bakken Shale are also able to sufficiently assist in releasing oil from the lower Three Forks formation as well. Well Spacing Example (Q3 Chord Energy Presentation) Conclusion My 'hold' rating for Chord Energy remains after reviewing Q3 results. Following their Q4 results which should be presented sometime in February, it will be interesting to see where the company's production guidance comes in. Although Chord Energy has a strong return of capital program in place, I view production growth to be the primary risk for Chord Energy (along with the obvious risks of owning any commodity-focused business). In my last article, I compared Chord Energy's growth in production to a company that I am more bullish on to highlight the difference. I will briefly share that again.  Here is a quick snapshot of Permian Resources production growth between Q1 2023 and Q3 2023. They have grown all facets of their production in the Permian Basin. Additionally, Permian Resources maintains a really strong balance sheet. I only provide this as a reference point so that investors can see what another company's production growth (in the Permian) looks like. Permian Resources just completed an acquisition of Earthstone Energy (ESTE) and so their next quarter's results will be skewed and incomparable on an apples-to-apples basis.     Q1 2023 Q2 2023 Q3 2023   Oil (Bbls/day) 78,332 84,393 89,800   Natural Gas (Mcf/day) 266,374 275,734 283,351   NGLs (Bbls/day) 31,094 35,502 34,917   BOE per Day 153,822 165,850 171,966   Click to enlarge","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2406813718"}