Business Context and Reporting Period
Chord Energy Corporation, formerly Oasis Petroleum, is an independent exploration and production company focused on oil-rich assets in the Williston Basin. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022.
Chord completed its merger of equals with Whiting Petroleum on July 1, 2022. Periods before the merger primarily reflect legacy Oasis, while subsequent periods include Whiting. Accordingly, year-over-year comparisons are not fully comparable. Chord also began reporting crude oil, NGLs and natural gas separately on July 1, 2022.
Key Financial Metrics
| Metric | Q3 2022 | 9M 2022 | Comparable prior period |
|---|---|---|---|
| Total revenue | $1.189 billion | $2.631 billion | $369.0 million and $1.058 billion, respectively |
| Operating income | $537.3 million | $1.160 billion | $150.8 million and $575.3 million, respectively |
| Net income attributable to Chord | $881.8 million | $1.479 billion | $72.0 million and $101.7 million, respectively |
| Diluted EPS | $20.45 | $51.99 | $3.46 and $4.96, respectively |
| Operating margin | 45.2% | 44.1% | Derived from reported revenue and operating income |
| Net margin | 74.2% | 56.2% | Includes derivative, investment and discontinued-operation effects |
| Cash flow from operations | Not separately provided for the quarter | $1.446 billion | $644.7 million |
| Capital expenditures | $233.8 million total; $224.8 million E&P | $339.4 million total; $333.7 million E&P | Not directly comparable in the filing |
Q3 production averaged 172,481 barrels of oil equivalent per day, including 96,201 barrels of oil per day. Q3 lease operating expense was $9.86 per Boe, gathering, processing and transportation expense was $2.24 per Boe, and production taxes were $5.26 per Boe.
Average Q3 sales prices before derivative settlements were $93.13 per barrel for crude oil, $29.82 per barrel for NGLs and $6.06 per Mcf for natural gas. After derivative settlements, realized prices were $73.34 per crude oil barrel, $29.71 per NGL barrel and $4.39 per Mcf of natural gas.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $658.9 million at September 30, 2022, versus $172.1 million at December 31, 2021.
- Total assets were $6.555 billion and total stockholders’ equity was $4.471 billion.
- Long-term debt was $393.8 million net, consisting primarily of $400.0 million of 6.375% senior unsecured notes due June 2026.
- The revolving credit facility had no borrowings and $5.9 million of letters of credit outstanding, leaving $794.1 million of unused elected commitments at quarter-end.
- Total reported liquidity was approximately $1.5 billion, comprising cash and unused revolving capacity. On October 31, 2022, the borrowing base increased from $2.0 billion to $2.75 billion and elected commitments increased from $800 million to $1.0 billion.
- Working capital was negative $34.8 million at September 30, 2022, primarily because of current commodity derivative liabilities.
Material Changes Versus Prior Comparable Period
- Revenue increased 222% in Q3 and 149% for the nine-month period, largely because the Whiting merger significantly expanded production and operations, while commodity prices were also higher year over year.
- Operating income increased to $537.3 million in Q3 and $1.160 billion for nine months. The nine-month 2021 operating results included a substantially larger $228.5 million gain on asset sales, primarily related to the Permian Basin sale.
- Q3 net income benefited from a $337.4 million net derivative gain, compared with a $101.8 million derivative loss in Q3 2021. For the nine months, Chord recorded a $128.8 million derivative loss versus a $550.3 million loss in 2021.
- Merger-related costs were $73.4 million in Q3 and $82.8 million for the nine-month period, including severance, transaction costs and accelerated equity compensation.
- Net income for the nine-month period included $425.7 million from discontinued operations, principally a $518.9 million gain on the OMP merger, partially offset by related taxes and expenses.
- Cash flow from operations increased by $800.9 million year over year to $1.446 billion, while financing cash flow shifted to a $635.9 million use, primarily because of dividends and share repurchases.
Guidance, Outlook, Commentary and Risks
Management emphasized capital discipline, free cash flow generation and shareholder returns. The return-of-capital plan targets a $1.25 quarterly base dividend, variable dividends and share repurchases based on free cash flow and leverage. The company declared a $1.25 base dividend and a $2.42 variable dividend payable in November 2022.
Chord repurchased 1.175 million shares for $124.8 million during the nine months ended September 30, 2022. A new $300 million repurchase authorization was approved in August 2022, but no shares had been repurchased under that authorization through September 30.
Management reported higher labor, materials and services costs due to supply-chain constraints, strong service demand and tight labor markets. Crude oil and NGL prices declined during Q3 as economic activity slowed, while natural gas prices increased amid stronger liquefied natural gas demand and reduced Russian supply.
- Commodity prices, production volumes, inflation, recession risk and transportation constraints remain key drivers of results.
- Derivative positions reduced realized prices and created substantial mark-to-market exposure. At quarter-end, unrealized derivative positions were a net crude oil liability of $301.6 million and a net natural gas liability of $50.1 million.
- Integration of Whiting may generate synergies but carries execution, personnel, systems, control and cost risks. Management’s internal-control assessment excluded Whiting, which represented approximately 57% of consolidated assets and 47% of Q3 revenue.
- Chord had remaining commitments to deliver approximately 12.3 million barrels under Sanish field agreements and 4.7 million barrels under transportation agreements through 2024.
- A $55.0 million Point Arguello litigation liability was recorded in connection with the merger; the company paid $55.0 million after quarter-end to resolve the claims.
- The Inflation Reduction Act’s methane fee, beginning in 2024, could increase operating costs. Proposed SEC climate-disclosure requirements could also increase compliance and litigation costs.
- The company expects to realize most of its remaining tax valuation allowance through the fourth quarter of 2022, subject to future taxable income and tax-law limitations. Acquired federal net operating losses of approximately $1.1 billion are subject to an annual Section 382 limitation of $7.0 million.
Important Facts for Investors to Verify
- Separate the post-merger Chord results from legacy Oasis results when assessing growth and operating performance.
- Assess how much reported earnings and margins were affected by derivative mark-to-market gains, realized hedge losses and investment valuation changes.
- Reconcile free cash flow after capital expenditures, derivative settlements, dividends, repurchases and merger-related cash costs.
- Review the sustainability of the base and variable dividend policy under lower commodity prices and higher operating costs.
- Monitor Whiting integration progress, internal-control coverage, expected synergies and remaining merger-related liabilities.
- Evaluate derivative volumes, strike prices and potential cash settlements through 2023 and 2024.
- Confirm the updated October 31, 2022 borrowing-base and elected-commitment amounts and ongoing compliance with credit-facility covenants.
- Review environmental, methane, climate-disclosure, transportation, litigation and minimum-volume obligations.