Whiting Petroleum (WLL) Q3 2021 Earnings Call Transcript

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Whiting Petroleum (WLL)
Q3 2021 Earnings Call
Nov 04, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Andrea and I will be your conference facilitator today. Welcome to Whiting Petroleum's third quarter 2021 conference call. The call will be limited to 45 minutes, including Q&A.

[Operator instructions] I will now turn the call over to Brandon Day, Whiting's investor relations manager. Please go ahead.

Brandon Day -- Investor Relations Manager

Thank you, Andrea. Good morning, everyone. This is Brandon Day, Whiting's investor relations Manager. Thank you for joining us to discuss Whiting's third quarter results for the period ended September 30, 2021.

With me today is Whiting's CEO, Lynn Peterson. Also available to answer questions during the Q&A session will be our CFO, Jimmy Henderson; COO, Chip Rimer; and VP Commercial, Jo Ann Stockton. Please be advised that our remarks today, including answers to your questions, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.

Those include risks relating to commodity prices, competition, technology, environmental and regulatory compliance, midstream availability and others described in our filings with the Securities and Exchange Commission, which are incorporated by reference. We disclaim any obligation to update these forward-looking statements. In addition, we may provide certain non-GAAP financial information in this call. The relevant definitions and GAAP reconciliations may be found in our earnings release which can be found on our website in the investor relations section.

Following the prepared remarks, we'll open the call to your questions. I would like to remind everyone that a replay of this audio webcast will be available via the company's investor relations page on our website. I'd now like to turn the call over to our CEO, Whiting Petroleum, Mr. Lynn Peterson.

Lynn Peterson -- Chief Executive Officer

Thank you, Brandon and let's go ahead and get started this morning. Good morning and thanks for everybody joining us. I believe you have all thoroughly read and enjoyed our 10-Q we filed last evening as well as our news release and reconciliations to non-GAAP measures and you can refer to them for detailed information. Over the past year, the macroenvironment has changed dramatically.

However, we have remained disciplined in our approach and continue to execute on our plan. We find ourselves in an enviable financial position, whereby we expect to have no debt and be cash positive before the end of 2021. We're working through the 2022 capital plans now and I'll give some high-level thoughts after briefly discussing some of the quarterly financial numbers. Starting with our financial results for the third quarter of 2021, we had net income, on a GAAP basis, of $198 million or $5 per diluted share during the quarter as compared to a loss of $61 million or $1.57 per share for the previous quarter.

Adjusting for certain items, primarily the mark-to-market of hedging instruments and the gain on sale properties in the previously announced divestiture, we had adjusted net income of $142 million or $3.57 per diluted share as compared to $118 million or $3.01 per share for the previous quarter. Adjusted EBITDAX was $201 million compared to $176 million in the previous quarter, primarily due to better commodity prices. Our company's production on a barrels of oil equivalent remained relatively flat quarter over quarter, averaging 92,100 boe compared to second quarter production of 92,600 boe. Oil production for the third quarter averaged 51,800 barrels of oil, which was down from the second quarter of 53.4 million barrels of oil -- 53,400 barrels of oil.

Most of the wells turned in line during the quarter were in our Sanish field, which typically come on with lower initial production rates, but experienced a shallow overall decline, particularly in the first year. Additionally, some of our third-party midstream providers have continued to increase ethane recoveries as illustrated by our NGL yield for the quarter. Oil differentials have continued to narrow given an overall basin production level that remains significantly behind total takeaway capacity of which increased during the quarter as expansion capacity was placed into service. On an activity basis, our oil differential was similar to what we realized in the second quarter.

However, revisions primarily from third-party providers recognized in the third quarter resulted in a wider differential reflected in our financials. We expect our full year oil differentials to land within the low end of our stated guidance. Additionally, with the majority of our G&P agreements structured on a fixed fee, we've seen a more pronounced benefit to our net realized price from the increase in both residue gas and purity product benchmark prices. The company invested capex of $67 million during the third quarter to bring 17 gross 9.1 net wells on to production and we drilled 10 gross 5.6 net operated wells.

We ended the quarter with 25 gross 14.3 net drilled uncompleted wells. The company currently has a rig running in the Sanish Field and a second rig in our Cassandra area, that commenced drilling operations at the end of September. We have just released a completion crew this week and we expect them to return in mid-December. Lease operating expenses were $57 million or $6.68 per boe for the third quarter of 2021.

LOE benefited from less operating expense workovers during the quarter. General and administrative expenses of $12 million or $1.41 per boe was similar quarter over quarter. In September, we completed the previously announced acquisition of assets in North Dakota and divested our Redtail assets located in Colorado. The assets in the Williston Basin overlap our Sanish field and expand our inventory by over 60 gross locations.

The acquisition also included five drilled uncompleted wells. The acquired assets will allow us to maximize lateral length across several DSUs, allow us to develop stranded resources and eliminate costs for frac protect as acreage is developed. We plan to issue our 2020 sustainability report later this quarter. I'm pleased with the progress the company has made and how we continue to improve on the goals we've set for the safety of our employees, the environmental controls for our operations and the ongoing governance improvements.

Gas capture remains to be an area of focus for the company and we continue to make improvements in that area. I would now like to spend a little time thinking about 2022. We expect the company's reinvestment rate in 2022 to be similar to what we saw here in 2021 where we will have invested roughly 35% of our EBITDA. Let me highlight a few items that we think will impact our 2022 outlook.

First, we are budgeting for some additional activity in '22, both from an operating standpoint, as shown from our second drilling rig that we brought in during September, but also non-operated properties and we've seen our peers increase activity during the year. 2021 has been somewhat of an anomaly for us and that the company shut down operations during its restructuring in '20 and therefore, '21 has been a rebuilding year. Our corporate decline rate increased during '21 as we brought on new wells and therefore, we will need some additional activity level to replace that production. Second, we do believe we will be dealing with some inflationary costs and we are estimating this to be in a range of high single-digit to low double-digit percentages.

To address price inflation, the team has been aggressively securing contracts and lining up equipment through the first half of '22. We are hoping to see some relief with supply chain issues and perhaps some rollover with steel prices in the back half of '22. And finally, we have some infrastructure to build out next year, particularly in the Sanish field for new well connections and to alleviate flaring and/or curtailment of production. Some of these costs were deferred in '21 due to the lower commodity price environment at the beginning of the year.

Most importantly, the company is in a desirable financial position as we exit 2021 and move into 2022. Many of the derivatives that were linked to much lower prices rolled off during 2021 and we now have a much more attractive hedge portfolio and commodity prices continue to benefit the bottom line, increasing our free cash flow. With the free cash flow we expect to generate from operations, we will continue to pursue acquisitions which enhance Whiting's competitive position in the Williston Basin including bolt-on opportunities that create synergies with Whiting's existing asset base. While we continue to believe that we will have attractive opportunities to create value through investments in our operations, Management and the board also understands important to returning capital to shareholders.

Now that we have the company in a solid financial position, we expect to initiate a return of capital to shareholders in some form commencing in the first quarter of 2022 at a level that is competitive with our peers. With that, I will turn it back to the operator and any Q&A we might have.

Questions & Answers:

Operator

[Operator instructions] And our first question will come from William Howell of Stifel. Please go ahead.

William Howell -- Stifel Financial Corp. -- Analyst

Good morning guys and congrats on the quarter. My question is around how you see the M&A market right now, if you could talk about that a little bit. Are you willing to look outside the Williston? And if so, any preference among basin?

Lynn Peterson -- Chief Executive Officer

Good morning, William. Thank you for calling in. We continue to look at a lot of opportunities. We've been -- remain focused in the Williston Basin.

We think that's where our expertise is. I think during a period of rising volatility and commodity prices, some of these acquisitions are a challenge. So I think if we remain patient here, I think things will come to us. I mean, we're delighted to get our acquisition done here in the third quarter.

We're looking at some smaller things right now, looking at some large things as well. So opportunistic and we're actually, we're anxious to see what unfolds during the next few months. So stay tuned I guess is what I'd say.

William Howell -- Stifel Financial Corp. -- Analyst

Great. Thanks. My other question is around oilfield servicing cost inflation. If you could talk a little bit about the extent to which you're seeing that? And maybe how much of that you might be able to offset with efficiency improvements?

Lynn Peterson -- Chief Executive Officer

Yeah, I'll start and I'll turn it over to Chip here a little bit. Obviously, steel prices have been the one that's really ratcheted up for us. We think labor issues are something that we're certainly concerned about. But Chip, maybe you can give your thoughts on what we're seeing in the field.

Chip Rimer -- Chief Operating Officer

Yeah. Thanks, Lynn. Yeah, I think we're in pretty good shape with supply chain. Our guys have really worked really hard to locking contracts and services and find those supplies like casing, tube to billers.

We've had additional stuff like pumping units we bought this year that carried into last year. But I think the big thing is our partnership. Lynn and I both believe in having partnerships as providers and using those partnerships to make sure we have access to all the commodities, all the things that we need going forward. So along with that, you then have less nonproductive time typically when you have partnerships and you can build in efficiency.

So we'll continue to look at efficiencies, continue to try to reduce the cycle time to create capital efficiency.

Lynn Peterson -- Chief Executive Officer

Yeah. Again, we don't know what we threw out that high single digit, low double digit. We've built some inflation into the end of '21. And so I think we're in a pretty reasonable session here.

William Howell -- Stifel Financial Corp. -- Analyst

Got it. Thanks guys, and congrats, again, on the quarter.

Lynn Peterson -- Chief Executive Officer

All right. Appreciate. Thank you.

Operator

Our next question comes from Bertrand Donnes of Truist. Please go ahead.

Bertrand Donnes -- Truist Securities -- Analyst

All right. Good morning, Lynn and Jimmy. Great, great news on the shareholder initiatives. The obvious question is which bucket you guys are going to focus more on.

We've seen some other peers try to push shareholder -- share repurchases a little too hard and it's not working and now they're kind of breaking back toward a variable dividend. Just where do you guys fall?

Lynn Peterson -- Chief Executive Officer

Yeah. And I applaud our board for taking a very balanced approach to this. I mean, we've obviously taken a little bit of time trying to get to where we want to be. I think I'm going to still push off to the first quarter.

We are looking at some type of fixed dividend possibly, some -- the buybacks. I think a lot of us share your opinion there, but I think we're also looking at continued investment in our business here because I think in so many ways, that's the best return we can get to our shareholders. So everything is still being discussed. Again, we feel like we're approaching that point where we need to do something.

And so we'll lay that out as we get into the first quarter of 2022.

Bertrand Donnes -- Truist Securities -- Analyst

That makes sense. And then just for the follow-up, not to beat a dead horse, but on the M&A front, are you only looking at a transformational deal? Or is there maybe the possibility that you line up two or three small deals in a row and that will still accomplish what you're looking for?

Lynn Peterson -- Chief Executive Officer

Again, we're kind of looking at everything. Clearly, we've done some of the bolt-on things. The last one we did here in the third quarter, it was not transformational, but it was very good to have an inventory to us in our area that we think we understand very well. So we're looking at everything and whatever we think creates the best value for our shareholders, we will try to pursue.

Bertrand Donnes -- Truist Securities -- Analyst

That's fine. And then this one is really just a housekeeping. You didn't explicitly update the guidance. I mean you just did it.

I wasn't sure if we should -- you're just waiting for the end of the year to update full year '22 or if we should read into something with no official update?

Lynn Peterson -- Chief Executive Officer

I think we're in pretty good shape. Jimmy, do you want to kind of walk through. I mean, we think we're going to be at the high end to some, low end of others and maybe just kind of walk through it.

Jimmy Henderson -- Chief Financial Officer

No, that's right. You took the words out of my mouth. Bertrand, but really give you guys credit that you can kind of trend -- see where the trend is going for the last quarter of the year and that we're trending toward kind of the high end on our production measures and lower end on days. And so kind of everything going in the right direction.

We just didn't feel like we needed to slightly adjust anything and let you guys do your work and get -- I think we'll get to the right point, but looks pretty good for the year. We're really happy about where we're at through three quarters and really kudos to the team throughout the company and being able to predict the outcome for the year and be in a position where we can slightly increase it as we've gone through the year and have very predictable results. That's where we want to be.

Lynn Peterson -- Chief Executive Officer

I want to ankle that what Jimmy said. I mean the team has done an excellent job. We came together about a year ago, a little over a year ago. Uncertainties in the environment we were dealing with, the commodity environment and to put out numbers and be able to meet these for the last three quarters spot on.

I feel very good about the team and congratulate them on their efforts.

Bertrand Donnes -- Truist Securities -- Analyst

Well, I know it's been said before, but what a year can make. So I appreciate your concept.

Lynn Peterson -- Chief Executive Officer

That's a fact. Thank you. Appreciate it.

Operator

Ladies and gentlemen, there are no further questions at this time. I'll turn the floor back to management for closing remarks.

Lynn Peterson -- Chief Executive Officer

OK. Thank you. In closing, I just want to thank our shareholders for their continued and growing faith in our program. I look forward to the continued dialogue.

And I want to thank our staff for their continued effort, dedication. We can all take pride that we have performed at or above expectations for three straight quarters in 2021 with production and cost metrics as complement to the work done by our team, both in the field and in the office and I want to thank everybody on our side. We'll attend some conferences here over the next few weeks, months and I look forward to talking to many of you in these events. And with that, I'd like to thank you for joining us this morning and wish you a wonderful day.

Thank you very much.

Operator

[Operator signoff]

Duration: 20 minutes

Call participants:

Brandon Day -- Investor Relations Manager

Lynn Peterson -- Chief Executive Officer

William Howell -- Stifel Financial Corp. -- Analyst

Chip Rimer -- Chief Operating Officer

Bertrand Donnes -- Truist Securities -- Analyst

Jimmy Henderson -- Chief Financial Officer

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