Continental Resources, inc (CLR) Q3 2021 Earnings Call Transcript

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Continental Resources, inc (CLR)
Q3 2021 Earnings Call
Nov 4, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Continental Resources, Inc. Third Quarter 2021 Conference -- Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Rory Sabino, Vice President of Investor Relations. Please go ahead, sir.

Rory Sabino -- Vice President, Investor Relations

Good morning, everybody, and thank you for joining us. Welcome to today's earnings call. 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.

Today's call will contain forward-looking statements that address projections, assumptions and guidance. Actual results may differ materially from those contained in forward-looking statements. Please refer to the company's SEC filings for additional information concerning these statements and risks. In addition, Continental does not undertake any obligation to update forward-looking statements made on this call. Finally, on the call, we will refer to certain non-GAAP financial measures. For a reconciliation of these measures to Generally Accepted Accounting Principles, please refer to the updated investor presentation that has been posted on the company's website at www.clr.com.

With that, I will turn the call over to Mr. Berry. Bill?

William B. Berry -- Chief Executive Officer

Thank you, Rory, and good morning, everyone. 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.

I'll now turn the call over to John and Jack for more texture on the acquisition.

John D. Hart -- Senior Vice President, Chief Financial Officer and Chief Strategy Officer

Thank you, Bill. 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. Before I turn the call over to Jack, I would like to note some of the key financial highlights from the quarter. 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 would now like to turn the call back over to Jack to discuss some of the key operational highlights of the deal.

Jack H. Stark -- President and Chief Operating Officer

Thank you, John, and good morning, everyone. 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. I'll stop there. But before I turn the call back to Bill, I want to close by pointing out how impactful our strategic moves over the past 18 months have been for Continental and its shareholders.

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.

With that, I'll turn it back over to Bill.

William B. Berry -- Chief Executive Officer

Thank you, Jack. 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. I'll turn the call over to the operator.

Questions and Answers:

Operator

[Operator Instructions] Today's first question comes from Neal Dingmann at Truist.

Neal Dingmann -- Truist -- Analyst

Good morning. Congrats on a nice deal, guys. Maybe my question, Bill, for you, is just curious to know how maybe the deal came to be. And maybe this is too early to ask, Jack, one of you guys, but just early thoughts on all the infrastructure associated with the deal?

William B. Berry -- Chief Executive Officer

Yes. Thanks, Neal. Appreciate the question. Yes, I know this might have caught some of our investors and some of you guys by surprise. But actually, if you look at the -- our involvement in the Permian, we actually looked at putting something together about the turn of the century out in the Permian. So we've actively been pursuing things out there. We've looked, we looked -- we've been pretty deliberate in our process, very disciplined never thought the time was right or the economics were right to enter the basin. Obviously, it's a great basin, and we're happy to be there. But this is something that we have a really strong active new ventures -- geologic new ventures team. We actually like the diversity of geography in the markets, and this brings that to us. And this is as I know you run the numbers on this, it's very accretive with our operating capabilities, and we'll compete with anything in the country. So that's a little bit of the history. It started probably 20-plus years ago, maybe started 50 years ago when they all started the company. But the Permian specific was about 20 years ago. And yes, we're just delighted to have this really, really good asset as part of our portfolio.

Neal Dingmann -- Truist -- Analyst

Okay. And then a question for John, maybe on the potential -- on share buybacks. Obviously, the new property to me, adds nicely to the free cash flow as you all pointed out for next year. So just thinking, John, is it too early to say just how you guys are thinking about you -- sort of the timing of buybacks? Or anything you'd say about maybe the timing of shareholder returns next year?

John D. Hart -- Senior Vice President, Chief Financial Officer and Chief Strategy Officer

Absolutely. Our commitment to shareholder returns remains solid and strong. We are more in line than any company in the industry with shareholders with our ownership. Buybacks are an important part of that. They remain in place. We bought about two million shares this quarter. That will continue ongoing. Debt reduction has been a part of it. That is achievable as well. And obviously, we increased the dividend. We're generating a significant amount of cash flow. So that gives us the ability to add resource here and fund it while continuing with share buybacks and strong competitive dividends.

Neal Dingmann -- Truist -- Analyst

Thank you guys.

Operator

And our next question today comes from Scott Hanold of RBC Capital Markets. Please go ahead.

Scott Hanold -- RBC Capital Markets -- Analyst

Yes, thanks all. Just going back to the Permian transaction. And I think you did give some color you've been looking at it quite some time. Obviously, the seller had indicated it was unsolicited interest. But can you give us a sense of what did you do from a geological standpoint to kind of get comfortable with that position. Did you -- was there some actual drilling you've been able to get out there and do yourself on some adjacent acreage? Or was it just based on geological data that was available?

William B. Berry -- Chief Executive Officer

Well, Scott, I'll let Jack and Tony probably weigh in on this as well. But if you look at the capabilities of the company, and there's a lot of similarities geologically from the Oklahoma area and this area out in the Delaware. And so the transference of that geologic understanding is a pretty easy thing for us to do. And the basins fairly well understood, but there's also a lot of capabilities that we think we can bring operationally to it. We are the largest three-mile driller -- a lateral driller in the country. And so that, plus some other skill sets that we think we've got the unique ability to bring to the value proposition. I think it's going to transfer a lot of value to this property with Continental operating it. And Jack, Tony, why don't you maybe I'll a little bit more on the geology side.

Jack H. Stark -- President and Chief Operating Officer

Tony may have some things to add here as a follow-up to me. But when we look at this, obviously, we started the geology, and we know the rock really well. And so one of the big components of this, obviously, is well performance. And how wells have been completed. And we look at this, we see that there's a big opportunity here to essentially improve performance and enhance the asset here through more optimized density and well placement. And of course, our operating efficiencies everywhere we're at, we're the lowest cost operator and we bring -- we'll be bringing that to the table here and just really continue to see the opportunity being something that is just right up our alley. I mean this asset when you look at it, we've got -- it's got all the components that we look for in assets when you consider the concentrated acreage position, large -- I mean, 93% average working interest, 98% operated, 90% HBPed, all contiguous acreage. I mean we have the ability to go in here and just develop this at our pace and our -- and with really -- with an infrastructure in place already with this. Gathering system that's in place for water and the facilities there. I mean, as I said in my comments here, it's just teed up for development. And a lot of people were looking to rearview mirror at results and you've got to look ahead. You got to take a look at technology and where it's taking you not where it's been. And so when we look at these assets, we see where they're going. And we see that there's a lot of opportunity here to really generate a lot of future value for the Continental shareholders in these assets.

Tony Barrett -- Vice President, Exploration

Yes. The one other thing I might add on this that maybe is not apparent to everyone is that we've got a really talented team here, a lot of which have really deep operational skill sets from this basin. So it's not like it's something that we've never operated in. There's several sitting around this table that have actually had a lot of experience out in the Midland area. The other one that I now want to take your attention is that this is an asset deal versus a corporate deal. So a lot of times, the integration and inefficiencies that come with big dollar type of asset acquisition through a corporate, we're not going to have that difficulty here. It's just an asset, and so it's a real quick and seamless integration into the company.

Scott Hanold -- RBC Capital Markets -- Analyst

Okay. Great. And as my follow-up, in the 10-Q, it did highlight that there was, I think, about another $375 million of A and D activity, you all are looking to close in the fourth quarter. Can you give a little color on that and maybe help me square the circle on your acreage position in the Texas Permian. I think this deal was 90,000 acres. And I think you said at 140,000 that you have. Is the transactions you're looking to close in the fourth quarter adjacent to some of this, and that's the variance.

Jack H. Stark -- President and Chief Operating Officer

Yes. It's a great question, and I'm not surprised you would like to get more details on that. But for competitive reasons, we're not going to share a whole bunch about that right now. We've got some things in the works here from that we're following up on with our -- based on our geologic understanding. But yes, a lot of this will be right in adjacent to and contiguous to, but others not.

Operator

And our next question today comes from Derrick Whitfield at Stifel. Please go ahead.

Derrick Whitfield -- Stifel -- Analyst

Good morning all and thanks for taking my questions. With my first question, I wanted to ask a more direct question on your longer-term corporate objectives, specifically in thinking about the transaction, how does it change your $3 billion debt target, if at all? And then your ability to more aggressively pursue a return of capital objectives once that debt objective is achieved?

John D. Hart -- Senior Vice President, Chief Financial Officer and Chief Strategy Officer

Great question. We expect to be back to roughly $4 billion by the end of '22. That's where we're at here at [9:30]. And with that, we're projecting for multiple years in the future, multibillion dollar cash flows coming back -- free cash flow. So we have a lot of ability to continue that trajectory. It's important to us, and we will continue that. We've been able, over the last couple of years to balance a number of things. We bought roughly -- I don't have the exact number in front of me, but corporately, we bought roughly 15 million shares through our share buyback through 2020. And into '21. Additionally, we've obviously reduced debt by in excess of $1.5 billion during that time. And we reinstated our dividend and have sequentially increased it quarter-upon-quarter in a material way. Our models, our views looking forward. So it's not only being able to achieve the $3 billion. But if we chose to, to go substantially below that, we have the ability over the next five years to go to zero debt. So we've got a lot of cash flow, a lot of ability and adding resource that is accretive and adding to that cash flow as this is very beneficial to that trajectory.

Derrick Whitfield -- Stifel -- Analyst

Terrific. And then as my follow-up, I really wanted to ask a question to build on some of your earlier comments. And that specifically with the transaction, where are you seeing the greatest opportunity for well performance improvement and value uplift?

Jack H. Stark -- President and Chief Operating Officer

Well, it's a combination of things. I mean it comes down to, as I said, wellbore placement, density and just our operational efficiencies, stimulations, you name it. We've got a lot of ideas. And then on top of that, there's a lot of -- we highlighted the three main targets here, the Third Bone, Wolfcamp A and B, but there's a lot of other reservoirs out there that we know are known producers in there in the basin, and we have them underneath our leasehold, and we'll surely be able to harvest those down the road, add to at long laterals. I mean, should we be looking with this acreage position, a contiguous nature of it, we can be looking at three-mile laterals in here to more efficiently even develop this. And so just a lot of benefits here just from our experience that we're bringing to the basin. We obviously know there's things we can learn from others down there and have been paying attention to that. But I think that everywhere we go, we seem to be able to raise the bar on performance in all of our assets.

Derrick Whitfield -- Stifel -- Analyst

That's very helpful, thanks guys.

Operator

And our next question today comes from Phillips Johnston of Capital One. Please go ahead.

Phillips Johnston -- Capital One -- Analyst

Hey guys, thanks. I think Pioneer started the year with zero rigs on these properties. And I think at one point, in September, had about three or four rigs running and is now back down to one rig. My question is, as you look to next year, how many rigs would you expect to run on these properties? And what sort of capex would you anticipate spending?

William B. Berry -- Chief Executive Officer

Yes. That's a great question. You're right. They did have about four rigs running actually at the days of discussion with them on this. They were running about four rigs and they're dropping that down. But our expectation is that, based on our development plan right now in 2022, and we're not giving obviously guidance on 2022, but probably be running a couple of rigs in this area in 2022..

Phillips Johnston -- Capital One -- Analyst

Okay. And what sort of capex would that imply?

William B. Berry -- Chief Executive Officer

PYes. That's one that we're just putting the numbers together on total 2022 on that, but there -- so we're not really giving the numbers at this point in time.

Phillips Johnston -- Capital One -- Analyst

Okay. Fair enough. And then, John, if I heard you correctly, the additional $150 million of capex for '21 versus your prior guidance includes some capex on these properties as well as some additional leasehold would the $375 million of other property acquisitions that you disclosed in the Q be in addition to that?

John D. Hart -- Senior Vice President, Chief Financial Officer and Chief Strategy Officer

They're -- I don't know the timing on those closings. They're factored into our cash flow projections if they do. But yes, they would be incremental for the most part. So it's a mixture, but -- so a bit of both.

Operator

And our next question today comes from Doug Leggate with Bank of America. Please go ahead.

Doug Leggate -- Bank of America -- Analyst

Thanks guys for getting the honor. Thanks for the opportunity. I wonder if I could just start with a bit of random question on the water infrastructure that you've acquired. It's not that long ago that you decided against doing a transaction on your legacy infrastructure. But it seems to me there's -- am I thinking too deeply about this that maybe there's another layer of value on this acquisition that we might be overlooking just on the production coming out of the basin?

William B. Berry -- Chief Executive Officer

Yes, Doug, you're absolutely correct. The water assets about 180 miles of system that's there, add significant value to this just because of the integral nature of it. And so that is a value proposition that we've looked at and actually, one of the things that we considered when we were interested in this property because of the facilities they had in place, it makes us able to hit the ground running.

Doug Leggate -- Bank of America -- Analyst

But just to be clear on my question, would there be a monetization opportunity at some point?

William B. Berry -- Chief Executive Officer

Well, that's always an option. Just as you saw as we talked about, up with our position in the Bakken, we looked at that last year and earlier this year. And at some point in time, that could be a monetization opportunity. Right now, we have no plans to do that.

Doug Leggate -- Bank of America -- Analyst

Okay. All right. I appreciate the answer. My follow-up is, John, is -- I'm afraid it's a mechanical question on cash taxes. Obviously, the NOL situation, if you could just give us a quick refresh on that. But what I'm really interested in is that when you're in a kind of a low -- no growth mode, a level of sustaining capital, there's a large amount of IDCs that you essentially get to write-off instantaneously against your tax burden. Should we expect at any point in the future, you're going to have any meaningful cash tax exposure?

John D. Hart -- Senior Vice President, Chief Financial Officer and Chief Strategy Officer

So we've done a lot of analysis on that. I think we've got a good hold on it with and without this acquisition. We looked at it. Don't expect any -- the NOL as you focused on is an important part and driver. You're also correct when you're not -- when you're investing at the levels that companies are investing at that you do transition to cash taxes. It's a mechanical, I think, as you said. So we see that, but the NOL defers that into the future. 2021, I don't see us paying cash taxes. We used a portion of the NOL. The NOL will largely cover us in '22. We could have less than $100 million of cash taxes in '22. Looking longer-term than that, where it varies by year and timing of different things coming on, etc. But I would say it's $100 million to $300 million on the upside through that '23 to '26. So NOL, obviously, is a big significant component. That's Federal. Tax level in states is different and would be lower than that, obviously, and in some states wouldn't come into play.

Operator

And our next question today comes from Arun Jayaram at JPMorgan. Please go ahead.

Arun Jayaram -- JPMorgan -- Analyst

I wanted to see if you guys could elaborate a little bit on the expansion in the Permian Basin. And just wanted to see if we could get a little bit more thoughts. You've now added a third leg to the store in the PRB and now you're in the Permian. But what is the longer-term -- how is the longer-term strategy evolving? And do you look to be a consolidator in the Permian, just given the number of private operators in the basin?

William B. Berry -- Chief Executive Officer

Yes, there's a couple of parts to that question. Obviously, the Permian is a great big basin with a lot of significant players there. I think what you'd probably look to us to do in the Permian is what we've done elsewhere, it was mentioned earlier, that everywhere we go, we have a demonstrated track record of being the low-cost, most efficient operator, and we anticipate being able to deliver that in the Permian as well. So that would probably be the primary focus. I think you'd be looking at us pursuing in that area. There is as was described by Jack, there's some geologic opportunities that we're considering out there for competitive reasons that we're not talking about right now.

Arun Jayaram -- JPMorgan -- Analyst

Great. And one for John Hart. John, you got upgraded by Moody's this morning. So congratulations there. And I just wanted to see if you could talk about some of the benefits, cost of capital, etc, from getting back to IG.

John D. Hart -- Senior Vice President, Chief Financial Officer and Chief Strategy Officer

The move to IG can be 25 basis points to 38. So I think that's positive, possibly more. We have a long-term track history in the debt and equity markets are delivering on what we say we're going to do. We've obviously paid down debt. We've obviously been a -- this will be the sixth year in a row of positive cash flow. Obviously, it's the largest in this -- the projections looking forward are significant free cash flow as well. All of that factors into our cost of capital and gives us a very attractive and improving cost of capital. So that's important. And Fitch upgraded us as well to BBB. So that's important as well. And S and P is right there on the cusp with the positive outlook. So it makes it very attractive.

Operator

And our next question today comes from Neil Mehta at Goldman Sachs. Please go ahead.

Neil Mehta -- Goldman Sachs -- Analyst

I apologize if this has been asked and answered. But the first question is about how you evaluated this transaction relative to repurchasing your own shares where you have been aggressive. And as you think about the share repurchase program, will you be able to both execute the transaction with cash and still be aggressive around share count reduction.

William B. Berry -- Chief Executive Officer

No, I think the [Indecipherable] answer on that is both when we go into these type of acquisitions, we look at what the impact is going to be the balance sheet, the impact is going to be to the shareholder return. At the end of the day, we are balancing two things, on value creation [Indecipherable] that if you look at the second cash returns to shareholders, that's driven by the form of value creation. And this is what I think John was alluding to it earlier, this is actually going to create value ability for us to make larger distributions in the future.

Neil Mehta -- Goldman Sachs -- Analyst

And the follow-up is just where do you think we are in terms of Bakken maturity and your runway in the Bakken? Is this a opportunistic transaction to diversify the portfolio? Or does this, in some ways, reflect your view that this -- the Bakken part of the portfolio is mature?

William B. Berry -- Chief Executive Officer

I think there's two parts to that. And when you're talking about the geologic side of things and what's the running room there, and there's still significant running room. The other is the consolidation that's been going on in the area, and it's a value creation question. I think you're asking. There are things in the Bakken, we think, that has additional significant running room. There's actually been transactions up there that could have been considered that would have fit well with us. However, on the value proposition, they just want the right things to do. This is one that overall value creation to the company is really strong for us. But the Bakken, we've got eight rigs running there now. So quite a bit of inventory that we're still pursuing developing up in that area. And I think we're a long, long way from seeing anybody saying the Bakken is going to be falling off. So Jack, you probably got some comments?

Jack H. Stark -- President and Chief Operating Officer

No, just -- I'd point to some color on that, too. Here, we are way down from what Bakken was actually kicked off out in Montana back in early 2000s. And here we are in 2021. And if you take a look at see that on Page eight, you look at our performance here, well, over -- since 2018. You can see all the -- basically the performance on average of the wells during those drilling program years and take a look at the Long Creek wells. I mean we've got 11 wells in there. They're the first 11 we've completed -- And they are substantially outperforming the statistical average we've had over the prior years. And it just shows that there's still a lot of out here in the Bakken that remains to be tapped. And we've got six -- 56 wells in this Long Creek unit to drill. And we've got five more that will get completed here probably by year-end. And then the rest 50% of those will be completed next year and another 20% the following year. So I mean this is a bellwether for the type of performance. You can expect that unit. And to me, that doesn't look like a play that has reached full maturity.

William B. Berry -- Chief Executive Officer

Yes, Neil. To build on that. If you look at almost every year, and that's what Jack is highlighting, we're drilling our best wells in the Bakken. So this year is better than last year, better than previous years and next year is going to be better than this year. I think you can see that trend continue.

Jack H. Stark -- President and Chief Operating Officer

Yes. And I think you've got to keep in mind the leasehold position is key. For some operators, definitely, they reached maturity or they have no inventory to drill because of our large and basically industry-leading footprint out here, we've just been able to continue to develop the Bakken here and deliver these type of results. So it's proportionate to your position in the play, and we're early in the play and build a dominant position in the play, and it's continuing to deliver.

Operator

And our next question today comes from Paul Cheng at Scotiabank. Your line is now open.

Paul Cheng -- Scotiabank -- Analyst

Just curious that if we're looking at with [Indecipherable] basin. From an inventory backlog standpoint, you said something that you can share? What's the number of locations that is economic for U.S. $40 WTI and $2.50 can we help by region or total.

Jack H. Stark -- President and Chief Operating Officer

When I look at it, I mean, you're asking almost like a breakeven question. Is that what you're asking?

Paul Cheng -- Scotiabank -- Analyst

That's correct.

Jack H. Stark -- President and Chief Operating Officer

Breakeven price on these...

Paul Cheng -- Scotiabank -- Analyst

Yes. And also that, I mean, we're trying to [Indecipherable] that, I mean, you certainly improve your inventory backlog a lot with this deal. So we're trying to understand that, I mean, how many years of the drilling inventory with this still now we're talking about if you just want to sustain your operation?

Jack H. Stark -- President and Chief Operating Officer

Yes. Well, I mean, if you look at 650 wells and assume what guys are going to get about 18 wells a year per rig. So I mean what that gives you a 30-plus year -- rig years of inventory there. So I mean that gives you an idea. You can put out as many rigs you went in there and get an idea of the sustainability of that inventory. And your other part of the question was how this competes. Is that it? Is that what you're asking?

Paul Cheng -- Scotiabank -- Analyst

Well, we're basically looking at, say, some of your competitors will give the inventory backlog based on I think a lot of people that would be looking at $40 WTI and $2.50 is pretty conservative. And so based on this kind of conservative pricing, what is your inventory backlog that we are looking at?

Jack H. Stark -- President and Chief Operating Officer

Yes. Well, this inventory that we're looking at here is it's got breakeven below $40. And so -- and what you got to keep in mind here is that these -- this acreage here, remember, we've got 70% of our minerals underlie our leasehold position. So our net revenues here are very strong. They're 80% on average across this acreage. And so these -- so you've benefited from that, you benefited from the water infrastructure, the surface ownership, you name it. That's why I say this thing has got all the component parts that are basically Continental assets have. This is like going to SpringBoard. We own basically the infrastructure. We have 360 square miles of basically acreage we control in there. I mean, that's the size of the project there, 75% average working interest. I mean it is a carbon copy of the type of projects that Continental export together. And that's why this we saw as a unique opportunity to grab a hold of and then we can take our geologic and operational expertise and apply it and take this asset basically to the next level.

Paul Cheng -- Scotiabank -- Analyst

My second question is that -- there's a two-part. One, Bill, I know it's early, but for next year, on a pro forma basis, that do you expect production -- oil production will grow comparing to the fourth quarter level? Or that you think is going to remain relatively flat? And also when we're looking at the Delaware Basin, once you get the offset, can you tell us that most of the oil and gas currently selling is under existing customer contract you also inherit. If not, you plan to mostly sold them in the basin or that you would undistributed to the Gulf Coast? And whether that you have existing high oxygenation ship of relationship when you sold do that?

William B. Berry -- Chief Executive Officer

Yes. Thanks, Paul. So two questions. The production versus this year and then the other is the ability to be able to market the product out of it. Yes, I think you've heard us say on previous calls, and we're still in the exact same position. The oil market is still pretty fragile. We're thinking maybe Q1, Q2, it's going to be close to getting balanced, but it's still pretty fragile. And so I don't think it's appropriate for anyone in the industry to be overproducing into that potentially fragile oversupplied market and so. For next year, we're going to be low single-digit growth rates. I think what you'll see from us. As far as market offtake, the opportunity is there to be able to produce at the levels that we are producing and to grow that in the Permian. Obviously, there's been some tight gas in the past with Woha differentials and flowing out. But -- That's one of the things that we factored into the analysis is the ability to ship the crude and to ship the gas as well. And that's what you're seeing with our approach to come in with a couple of rigs, and that's what's driving that.

Operator

And ladies and gentlemen, this concludes today's question-and-answer session. I'd like to turn the conference back over to Rory Sabino for any closing remarks.

Rory Sabino -- Vice President, Investor Relations

Great. Thank you very much for your time today, and please feel free to address any additional questions to the Investor Relations team. Have a great day. Thank you.

William B. Berry -- Chief Executive Officer

Thanks, everyone.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Rory Sabino -- Vice President, Investor Relations

William B. Berry -- Chief Executive Officer

John D. Hart -- Senior Vice President, Chief Financial Officer and Chief Strategy Officer

Jack H. Stark -- President and Chief Operating Officer

Tony Barrett -- Vice President, Exploration

Neal Dingmann -- Truist -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

Derrick Whitfield -- Stifel -- Analyst

Phillips Johnston -- Capital One -- Analyst

Doug Leggate -- Bank of America -- Analyst

Arun Jayaram -- JPMorgan -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Paul Cheng -- Scotiabank -- Analyst

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