Mach Natural Resources LP (MNR) 2023 Q4 法說會逐字稿

Hello, and welcome to the Mach Natural Resources year-end 2023 earnings call.

(Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Daniel Reineke, Executive Vice President of Business Development.

Please go ahead, Daniel.

Thank you, Kevin.

Good morning, everyone, and thanks for joining our call today to discuss Mach Natural Resources' 2023 financial and operational results.

During this morning's call, we will be making forward-looking statements that cannot be confirmed by reference to existing information, including statements regarding expectations, projections, future performance, and the assumptions underlying such statements.

Please note, a number of factors may cause actual results to differ materially from our forward-looking statements, including the factors identified and discussed in our press release this morning and in other SEC filings.

Please recognize that except as required by law, we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements.

We may refer to some non-GAAP financial measures in today's discussion.

For reconciliation from non-GAAP financial measures to the most directly comparable GAAP measures, please reference our press release, which is available on our website; and our 10-K, which will be available on our website when filed.

With me on the call today, Tom Ward, CEO; and Kevin White, CFO.

Tom will give an introduction and an overview, Kevin will discuss our financial results, and then we will open up the call for questions.

With that, I'll turn it over to Tom.

Thank you, Daniel.

Welcome to Mach Natural Resources' fourth quarter earnings update.

During the quarter, Mach completed the corporate combination of BCE-Mach, BCE-Mach II, and BCE-Mach III.

We also completed our IPO and financed the closing of the $815 million acquisition of Paloma Partners.

In short, the fourth quarter was busy.

Early in the new year, we shifted our focus to integrating the acquired Paloma production and implementing a drilling program on their accompanying acreage.

I'll lead any discussion about Mach with our four founding principles.

These are, number one, maximizing cash distributions to our equity holders.

Since our founding in 2017, we have focused on distributing maximum amounts of cash back to our equity holders.

To achieve these results, we've focused on free cash-flowing assets through acquisitions.

To date, we have purchased $1.8 billion of producing properties by using $521 million of equity and have distributed back $743 million to our equity holders while we still have a company with an enterprise value of $2.5 billion.

Number two, disciplined execution of accretive-only acquisitions.

Our 17 acquisitions were acquired at discounts to PDP PV-10 yet have meaningful upside in undrilled locations and tremendous amounts of held-by-production acreage.

In addition to the cash flow from the acquired production, we now hold over 1 million acres of leasehold that we and others find valuable.

It's not surprising to our team that over time, there are valuable swaths of acreage that are beginning to be developed on and near our properties that we essentially paid nothing for.

Number three, maintain financial strength through low leverage.

We remain committed to maintaining financial strength through all commodity cycles by maintaining a net debt to EBITDA ratio of 1 times or less.

Number four, disciplined reinvestment rate.

Our disciplined reinvestment rate of less than 50% provides for developing value in our properties while simultaneously optimizing the distribution to unitholders.

By following these guiding principles, we've been able to produce consistent results.

I want to emphasize that our distribution is variable.

Our goal is to maintain production and revenue through all commodity cycles.

Therefore, our distributions will be greater in terms of higher commodity prices.

Our goal is to maintain low leverage in order to be successful regardless of prices.

We did use leverage to buy the Paloma assets.

Therefore, we're currently at our goal of 1 times net debt to EBITDA.

Going into the Paloma acquisition, we essentially had no leverage on net debt to EBITDA basis and carried very few hedges.

However, post Paloma, we added hedges as our debt level reached our targeted internal limit.

Today, we've hedged approximately 50% of our next 12 months production and 25% of our second 12 months.

Over time, we see this leverage coming down to between 0.5 turn to 1 turn of leverage as we continue to evaluate accretive acquisitions.

If prices were to run up and not allow us to purchase assets within our guidelines, we would pivot towards to drilling -- more drilling while maintaining our 50% reinvestment rate.

Mach currently has two rigs running, one in the Kingfisher Oswego and the other on the acreage acquired with Paloma in the oil window of Canadian County, Oklahoma.

We moved down from two Oswego rigs to one in order to participate in some non-operated Western Oklahoma wells while maintaining our less than 50% reinvestment rate of operating cash flow.

Therefore, we did not change our overall CapEx guidance for 2024.

As mentioned earlier, Mach owns over 1 million acres of HBP land.

We continually are being asked to sell acreage to others who want to develop land that we control.

In all of our acquisitions, these acres came to us at zero cost.

We evaluate each by their own merits, and in most instances, it's better to sell than to participate.

This results in the millions of dollars for us to distribute to our unitholders.

We continue to see attractive non-op drilling opportunities to participate in in the Mississippian oil and gas windows of Western Oklahoma and the Sycamore/Woodford formations in Southern Oklahoma.

As I mentioned, we have moved down our rig count to two rigs from three to capture these drilling opportunities while not losing any of our operated held-by-production locations.

We also continue to see opportunities for accretive acquisitions.

There is not a day that goes by when we're not evaluating acquisitions.

Granted, most of these do not fit our criteria for investment as there's always competition for good assets.

However, for many, capital sources remain challenging.

And our belief is that we will continue to be successful in adding reserves and growing through future acquisitions of free cash flow and production in the coming months.

During 2023, we generated $762 million of total revenues and net income of $347 million, while providing net cash from operating activities of $492 million on adjusted EBITDA of $450 million.

Our year-end total proved reserves are $2.58 billion.

On March 14, 2024, we distributed $0.95 per unit to equity holders, representing our fourth-quarter 2023 quarterly cash distribution.

Our goal for 2024 is to spend $250 million to $275 million to produce between 81.3 and 86.4 MBO equivalent per day.

As I've stated, our goal is to purchase when we can make accretive acquisitions to our distribution.

If that cannot be done, we'll rely on our drilling program to continue to provide us with the ability to maintain our production and support our distributions.

Our preference is to buy assets in a backward market.

Today, spot crude is over $83, but if we purchase an asset, we'd be paying -- buying 2026 and beyond crude for under $70.

We believe the back of the curve is inefficient.

And then over time, the market tends to gravitate towards the front.

Buying into a backwardated curve has provided a large amount of value to Mach over the past six years.

Therefore, when we are buying PDP reserves that are oil weighted for less than PDP PV-10, we believe we're making a very good transaction.

The risk and bet is that the oil market is somewhat stable and that outyear crude is not overpriced.

If it happens that outyear crude is overpriced, then it will be even better positioned to be able to add to a heavy crude acquisition during a time of distress to other participants.

The opposite is true for natural gas.

Today, we're in a time of contango in the market.

The 2024 strip is less than the 2025 strip by over $1 an Mcf.

We are fundamentally bullish natural gas would not be surprised to see a $5 print by the end of 2024.

Therefore, if we can buy near-term gas, it is historically inexpensive prices compared to the current power demand through electrical generation.

We're happy to pay the contango.

Even though our product mix is 24% oil, 23% liquids, and 53% natural gas, our revenue mix of 59% oil, 19% liquids, and 21% natural gas.

We believe most Mid-Con acquisitions will be close to the same mix as that.

Our workforce continues to do more with less employees and G&A than our peers.

The Paloma acquisition was made at a cost of $815 million, and Mach added only eight corporate employees with one being from Paloma.

That makes our total corporate head count 126, which is only 70 above where we started in 2018.

Lastly, management is aligned with the unitholders.

We own over 17% of the company and have the same desire as you to have cash distributions maximized every quarter while maintaining your asset base.

What is our differentiating factor?

We work.

Our managers work harder than the people they have working for them.

We work five days a week in the office instead of three.

We desire to be the best of what we do and take pride in the outcome.

We expect to be good, and we are.

I can name names, but they know who they are and do not expect any praise.

Because at the end of the day, they're proud of their accomplishments.

These are the people that unitholders can look to and say thank you.

We have nearly 500 corporate and field employees.

We expect more than just paying a paycheck, and it all starts with every hire.

I'll now turn the call over to Kevin to discuss our financial results.

Thanks, Tom.

As we mentioned in our release, and I would like to reiterate that Mach Natural Resources' full-year results reported are comprised of BCE-Mach III, the predecessor for accounting purposes for all of 2023.

And then BCE-Mach and BCE-Mach II results are added in from October 25, until the end of the year.

Also, I would like to note, you could expect to see the 10-K filed a little bit later today.

For the year, Mach Natural Resources averaged production of 50,440 BOE a day, which was 29% oil, 17% natural gas liquids, and 54% gas.

As just mentioned, the 2023 average only captured Mach I and II production for the last couple of months and only included four days of production acquired from Paloma.

We issued our 2024 guidance press release on February 15.

And there, you will find the forecast volumes for each of the four quarters in 2024.

This release includes all three entities, plus the Paloma acquisition and is a better current Mach Natural Resource Representation than the 2023 averages.

Our averaged realized prices for 2023 were $77.57 per barrel of oil, $24.52 per barrel of NGLs, and $2.52 per Mcf of gas.

And as Tom mentioned, we had total revenues of $762 million, net income of $347 million, cash provided by operations of $492 million, and adjusted EBITDA of $450 million.

At the end of 2023, we had total reserves, which are inclusive of Paloma, of 75.5 million barrels of oil, 1.1 trillion cubic feet of gas, and 85.7 million barrels of NGLs; increases of 56%, 76%, and 83%, respectively, from the end of 2022.

The SEC pricing of $2.5 billion for total proved reserves gives us an asset coverage ratio of over 3 times our term loan amount.

We ended the year with over $150 million in cash, and our $75 million revolving credit facility was undrawn and is still undrawn.

And with that brief overview, Kevin, I'll turn it back to you to open the call up for questions.

(Operator Instructions) Derrick Whitfield, Stifel.

Good morning, all, and thanks for your time.

Good morning.

With my first question, I wanted to focus on the M&A landscape in the Anadarko.

Tom, in light of your opening comments on macro, could you speak to what you're seeing in deal flow in the basin and if you're seeing any more or less competitive environments for Anadarko assets?

Yes, Derrick, the landscape is -- as we anticipated, there's still a number of properties that are coming on the market that we're actively looking at.

I'd say, though, in the last six months, there is increased competition.

There seems to be more access to revolvers than what has been in the last five years as a lot of mergers are taking place and wiping out some revolvers.

The larger banks are becoming more aggressive in wanting to lend, which has not really happened since late 2017, early 2018.

So the market for the Mid-Con, I think, also has increased with people looking for producing reserves.

It's a great place to buy producing reserves just because access to markets if nothing else.

So I do see us having more competition, and we've always had competition.

And meeting the criteria for how we want to buy something is never easy, but it seems to -- having a low -- I mean, that's why having low amount of leverage is important to us because we think there will be cycles of time that you can still buy assets just because there's more supply on the market to sell than demand through buying.

But it is always difficult and maybe a little more difficult today than it was a few months ago.

Perfect.

And shifting over to Paloma with my follow up, could you speak to your operational plans and objectives for your first few wells?

I know you're just getting started with your first well, so I'd appreciate any color you could offer.

Sure.

Our first well has been -- has reached TD.

We came in about $500,000 under AFE on the drilling side.

We haven't completed it yet.

That reduced about nine days off of our curve.

So for a new rig coming into our fleet and the new crews, we did very well.

Our team is obviously a seasoned drilling team for the Mid-Continent.

They really achieved a high mark to get started.

Now we're moving more into the volatile oil phase in Canadian County, the -- I'd say the more core Paloma assets and around El Reno.

It's very all around the 12 North, 8 West area in Canadian County where we have some by production acreage.

Perfect.

Thanks.

Thank you.

Charles Meade, Johnson Rice.

Good morning, Tom, and good morning, Kevin.

Tom, a lot of interesting comments in your prepared commentary.

I think you've already indicated that you like the outlook on both commodities.

I'm curious.

Another thing you mentioned about was that you guys have a lot of incoming, I guess, requests for other operators to have some kind of activity on your acreage.

I wonder if you could tell us what form that's taking and how you go about deciding whether to participate, sell, farm out with an override, or -- what other kind of options you evaluate when you get those sorts of requests?

Sure.

Remember, we have over 1 million acres of land scattered across of basically Western Oklahoma and the Texas Panhandle and Southern Kansas.

We have always received a number of requests that as I think drilling has increased.

Not the number of wells necessarily, but it has kind of expanded outside of a couple of areas, which was the ones that we've talked about, mainly the Mississippian oil and gas deeper play in Western Oklahoma and the Southern Oklahoma Sycamore/Woodford

There have been other areas being developed, the Cherokee Shale in Western Oklahoma, even some Granite Wash in the Texas Panhandle.

There's the Red Fork plays that are developing across the Western Oklahoma also.

But in general, it just seems to be more appetite maybe by a non-op funds to come in and bid aggressively for acreage.

And so we are seeing more activity from across our acreage, but we've always had a number of -- the ability to sell acreage into the market.

Today, it's still a high hurdle for us to participate the well.

We probably don't participate in 80% or 90% of the locations that are proposed to us just because we have a restriction, our self-imposed restriction on CapEx that we don't want to spend more than 50% of operating cash flow.

And so with that, we have to choose on locations that are going to be able to beat out in Oswego or Paloma location, which is fairly hard to do.

So that's -- and then with regard to your second part of the question, we usually take cash rather than holding an override.

So it's either participate or take cash.

I think it also -- Charles, it probably matters to us whether an operator has drilled in the area before.

For example, we view Continental as one of the best operators in the country and are happy to participate with the in some of their proposals that they make in Western Oklahoma.

No, that makes sense.

And so, Tom, to the extent that you want to, I guess, give a little more incremental detail, you did -- I think I heard you mention -- you said you dropped one of your Oswego rigs to participate in some outside-operated Western Oklahoma stuff.

Is that with a big established operator like Continental or is this -- is there something -- is this one of those further outplays like a Cherokee or Red Fork?

Well, we have different operators.

But yes, the main core of our non-op drilling is with Continental in Western Oklahoma.

Got it.

Thank you.

Thank you.

Thank you.

We reached the end of our question-and-answer session.

I'd like to turn the floor back over to management for any further or closing comments.

Thanks, everyone, for joining us this morning for our year-end 2023 conference call.

We look forward to talking again next quarter, which will be coming up here pretty soon in May.

Thank you.

Thank you.

That does conclude today's teleconference and webcast.

You may disconnect your line at this time and have a wonderful day.

We thank you for your participation today.