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ENERGY VALUATION INSIGHTS

A weekly update on issues important to the oil and gas industry


THEMES FROM Q3 EARNINGS CALLS


PART 1: UPSTREAM

November 10, 2023 Special Topics





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In Themes from Q2 2023 Earnings Calls, we noted E&P operators’ search for ways
to maintain production levels, expectations for low crude oil inventories, and
decreased activity in the Haynesville shale region. This week, we focus on the
key takeaways from Upstream Q3 2023 earnings calls.


CONSOLIDATION

Despite the ongoing high-interest rate environment, one of the most significant
topics in upstream earnings calls this quarter was the industry’s M&A activity.
The most notable acquisition was the highly publicized acquisition of Pioneer
Natural Resources by Exxon Mobil, the largest of Exxon’s acquisitions since it
merged with Mobil in 1998.1  Other upstream companies completed their own deals,
and they overwhelmingly cite expanding inventory and improving efficiency as
their primary motivations.

 * “Shareholders of ExxonMobil and of Pioneer will benefit from the resulting
   synergies of the combination as well as further upside potential from
   emerging technology investments… Synergies are approximately $1 billion
   beginning the second year post-closing, growing substantially over the next 5
   years and averaging about $2 billion per year over the next decade. At a high
   level, this can be broken down to about 2/3 from improved resource recovery
   and 1/3 from CapEx and OpEx efficiencies. We expect the transaction to be
   immediately accretive to our earnings per share, cash flow and free cash
   flow. Pioneer offers peer-leading asset margins and immediately adds $5
   billion in annual free cash flow. The transaction is more accretive in the
   mid- to long-term as synergies build and it offers a long cash flow runway.
   With synergies, we expect incremental free cash flow of $6 billion of the
   second full year post-closing, growing to more than $10 billion by the end of
   the decade. The strong balance sheet and incremental cash flows generated
   post-closing will provide even more opportunity to enhance shareholder
   distributions.”
   –Kathryn A. Mikells, Senior V.P. & CFO, Exxon Mobil Corporation
 * “We have benefited from recent acquisitions and are now a Permian-focused oil
   and gas company with scale. We added quality assets in the Permian and
   extended our runway of high-return long-lateral development locations. In
   terms of our recent Delaware acquisition, our first 5-well project is
   currently coming online, and we are encouraged by early time oil production
   rates and wellhead pressures.”
   –Joseph C. Gatto, President, CEO, & Director, Callon Petroleum Company
 *  “We’ve obviously seen significant consolidation in our peer space recently…
   Recently, you may have seen articles speculating on Marathon’s involvement in
   M&A. While I won’t address any specific market rumors or speculation on
   today’s call, I will reiterate that it’s our duty to always explore avenues
   to further enhance the long-term value for our shareholders, whether those
   opportunities are organic or inorganic… For Marathon Oil, our approach to
   M&A, small or large, has been consistent and will not be compromised as
   exemplified by the Ensign transaction, which ticked all the boxes of our
   well-established criteria… Any transaction must meet our tried and true
   principles of financial and return of cash accretion, industrial logic within
   our existing basins, inventory life extension and no harm to our
   investment-grade balance sheet.”
   –Lee M. Tillman, Chairman, President, & CEO, Marathon Oil Corporation 


OPERATORS HIGHLIGHT EFFICIENCY GAINS

Many companies took the opportunity to tout their operational efficiency.
Managers frequently pointed to improved technology as a key driver in this shift
and generally expect that their efficiency will allow them to continue paying
out strong dividends and create sustainable free cash flow regardless of market
cyclicality.

 * “The big change is coming from shifting from kind of a standard mindset, a
   standard way of doing things to a fit for purpose. So we’re looking at each
   individual location and looking at where we can reduce casing streams, reduce
   hole sizes, run our bit program and our bit life much longer than what we
   have been potentially drilling with conventional tools instead of rotary
   steerables. And in some places, we actually save money doing that and we can
   keep the tools in the hole longer. And then on the facility — on the
   completion side, a lot of that savings is coming from sand. That’s not unique
   to Callon. Now some of the logistics… are unique to Callon. That’s the bulk
   of where we see that savings coming from. We think we could probably stretch
   a little bit further on the completion side even as we go into 2024, and that
   will be our goal. As we look to increase our pump rates, potentially complete
   2 pads at the same time. We’re throwing a lot of ideas out there. We’re going
   to let the team really stretch their legs, really kind of push the envelope
   of engineering excellence to help reduce those costs.”
   –Russell E. Parker, Senior V.P. and COO, Callon Petroleum Company
 * “In the Delaware, in the Eagle Ford and in Utica, we’ve had great operational
   efficiency with our 3-mile laterals. And that’s one of the things, as you
   start stretching out the length of these laterals, you want to make sure that
   operationally you don’t have any issues on the drilling side and you’re able
   to optimally complete that. And we’ve seen really, really good results with
   that. The other thing we’re also seeing is by drilling these longer laterals,
   we’re able to supplement 1 vertical with a 3-mile lateral versus 2 verticals
   and a 2-mile and half lateral. So we’re able to see substantial cost savings
   there anywhere from kind of 15% to 25%. So we’re definitely excited about
   where we’re seeing it. Obviously, it ties in with our leasehold, and we have
   to see where we can actually drill 3-mile laterals. But we are looking to
   expand that across our plays moving into next year and beyond.”
   –Jeffrey R. Leitzell, Executive Vice President of Exploration and Production,
   EOG Resources, Inc.
 * “Year-to-date completion stages per day have averaged 11 stages a day, a 35%
   improvement compared to the 2022 average and is a nearly 90% increase from
   our 2019 levels. The net impact of all of our operational improvements has
   led to significantly shorter cycle times… These cycle times reflect the total
   number of days it takes on average from first studying the pad and to turning
   that entire pad to sales… In June, we had the fastest cycle times in our
   company history at 129 days. Shorter cycle times means higher capital
   efficiency… Faster cycle times and improving well performance has led to 2
   production guidance increases in 2023. This gain in capital efficiencies is
   highlighted by our 9% total production growth in the third quarter compared
   to the year ago period. Our production growth was driven by an 18% liquids
   growth while natural gas volumes increased 4% year-over-year. Looking at this
   on an annual basis, we now expect production this year to increase by 225
   million cubic feet equivalent per day or 7% from the exit rate in 2022 to the
   exit rate in 2023. Importantly, these capital efficiency gains also reduced
   our maintenance capital budget. We continue to expect materially lower D&C
   capital in 2024 driven by operational efficiency gains alone.”
   –Paul M. Rady, President, Chairman, & CEO, Antero Resources, Inc.


STRONG PRODUCTION VOLUMES IN 2023

As OPEC+ countries continue to limit volumes, domestic operators have stepped up
to fill the gap. Operators noted that production in the third quarter remained
strong or even unexpectedly high and seem to believe that demand will persist
going into 2024. References to international production were fairly limited, but
industry operators expect a favorable environment going forward.

 * “Third quarter production of 202,000 barrels equivalent per day again
   exceeded the upper end of our guidance range with oil production averaging
   103,000 barrels per day. Our 2023 onshore program delivered strong well
   performance improvements with over 50% of our new wells, achieving all-time
   highest well performance for their respective areas… Murphy produced an
   average of 202,000 barrels equivalent per day with 51% oil in the quarter.
   Production was nearly 10,000 barrels equivalent per day, above the midpoint
   of our guidance due to a combination of stronger onshore well performance,
   lower realized tougher Montney royalty rates in the absence of any hurricane
   events in the Gulf of Mexico.”
   –Roger W. Jenkins, CEO, President, & Director, Murphy Oil Corporation
 * “We generated total production volumes for the Third Quarter of [42.600] BOE
   per day, an increase of 18% from our second quarter volumes and now we expect
   to be in the upper end of our production guidance range of 37,000 to 39,000
   BOE per day. Much of the increase was driven by royalty volumes, which
   increased 20% from the second quarter to [40.300] BOE per day and 8% above
   the third quarter of ’22…. We saw a 4% increase in rigs operating on our
   acreage in the third quarter. The increase driven by Haynesville and Gulf
   Coast with 76 rigs currently running as of September 30. Throughout the
   quarter, we saw rig count peak at 90 in August due to new drilling in the
   Permian from various operators.”
   –Thomas L. Carter, CEO & Chairman of the Board, Black Stone Minerals, L.P.
 * “Overall, we expect fourth quarter oil production in the range of 56,000 to
   59,000 barrels per day, with total production in the range of 100 to 103 BOE
   per day, comprised of approximately 79% liquids. As part of our fourth
   quarter activity, we expect to turn 14 gross wells in line in the fourth
   quarter in our oilier areas, the Delaware East and Midland Basin, which will
   benefit our 2024 mix. Our forecasted capital investments for both full year
   and fourth quarter 2023 remain unchanged, despite an increase in drilling and
   completion activity driven by improving cycle times…”
   –Joseph C. Gatto, President, CEO, & Director, Callon Petroleum Company

Mercer Capital has its finger on the pulse of the upstream market. As the oil
and gas industry evolves through these pivotal times, we take a holistic
perspective to bring you thoughtful analysis and commentary regarding the full
hydrocarbon stream, including the E&P operators and mineral aggregators
comprising the upstream space. For more targeted energy sector analysis to meet
your valuation needs, please contact the Mercer Capital Oil & Gas Team for
further assistance.

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1 “Exxon to Buy Pioneer in $60 Billion Deal to Create Shale Giant” by Collin
Eaton and Benoît Morenne for the Wall Street Journal, published October 12,
2023. Available online with a subscription.

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THOMAS G. KASIERSKI

SENIOR FINANCIAL ANALYST

(281) 378-1510

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