Brendan McCracken speaks with Chris Mathews from Hart Energy

“Everything that we’ve been doing for the last several years has been aligned with what we call our durable return strategy. The premise of that is that the returns that we’re generating in the business today are phenomenal. You can see that in the free cash generation, in the [return on equity] that we’re generating. The idea is, what’s really valuable is to be able to generate those returns over a long period of time.

We’ve really identified a three-part recipe to doing that. The first piece in that recipe is having access to the best rock—capturing a deep, what we call premium-return inventory in the very best parts of the best basins in North America, and indeed, the world.

The second part of the recipe is to have the culture and the expertise to convert that resource to free cash flow at a really high return on invested capital. Various people measure that differently, but you can look at it through the ROIC itself or through our capital efficiency. But the idea here is that it’s really the culture and the expertise of the individual company that determines the efficiency of that conversion.”

“Then the third part of the recipe is really capital discipline. We know that in a shale business, if you stop investing, your production declines next year. So, therefore, your revenue declines next year at a pretty healthy margin—something in the 30s. That just makes the business very capital intense.”

“We saw it as a unique opportunity to cement our inventory depth and the inventory quality for a long time. We saw the asset was incredibly unique from an undeveloped perspective—over three-quarters undeveloped in some of the best rock in the Midland Basin. It was offsetting acreage we already execute and operate on, so we’re very familiar and understand the geology and the resource there.

We were able to get a very compelling valuation that became immediately accretive to free cash flow and returns for our shareholders. We saw it as just an especially unique acquisition to be able to deliver on the pre-cash accretion, the return accretion and the inventory life extension.”

“I think the landscape for unique opportunities like this with the scale and the undeveloped nature of the assets we acquired in the Permian is really rare. Our study and judgment of the basin is that is a very rare thing.”

“The trade-off of exiting the Bakken—while there was a high quality asset and the team had done a fantastic job creating value there—the timing was right to move on from the Bakken and deepen that position in the Permian and really cement that Permian position for us.

Grayson Mill was the adjacent operator in the Bakken, so they were effectively bulking up in the Bakken. Then we bulked up in the Permian. The reciprocal rationale made sense on both sides.”

“I think we’re in a phase where innovation is really driving big differences in return generation from operator to operator. We can see that in the performance data. It’s always amazing to see the spread of returns being generated in relatively adjacent acreage positions. The Permian’s probably the easiest place to see that, just because it’s such a big play and there’s so many operators and different strategies being deployed.

We’re really seeing the advantage swing to operators that can do cube development. That’s this notion of developing the whole stack of resource at once and not cherry-picking just a bench here or there. We’re seeing that that’s really generating leading returns, but also really importantly, advantaging operators on the durability of those returns, because the infills are underperforming. We’re seeing operators that are pursuing an infill strategy instead of a cube strategy run out of that greenfield acreage to pursue that strategy.”

“The Anadarko assets [have] been performing tremendously for us. It’s our largest free cash flow generator today in the portfolio. The team’s done a tremendous job there, both on completion design and generating really strong type curve performance, but also lowering our base decline.
We’ve gotten our base decline in Anadarko down to 20%, which is probably one of the lowest base decline shale assets that I know of. A lot of credit to the team there on that work.”

“I think many people don’t realize the Montney’s an oil play, too. Our numbers have it as second only to the Permian on remaining premium oil resource. It is the biggest remaining premium gas resource in North America. It’s high quality. These are, for us, $4.5 million wells. Very attractive well cost.”

“If we focus on the gas side of things, the market access for gas, whether you’re producing an oil well in the Montney or a gas well in the Montney, you’ve got to find a way to sell the gas.”

“I think it’s a huge thing here because the world needs Canadian LNG. The first project is slated to be onstream in 2025. Then there are several projects trailing in behind that that are in various stages of development.

The strategy we’re pursuing is tightly linked to that market access story that we just talked about. We believe that the next logical market access step for us is to get some LNG exposure in our portfolio.

We’re engaged with each of the LNG projects that are in development on the West Coast of Canada. We’re not going to take an equity interest, but we do think it makes sense for us to try and find a way to get that LNG exposure in the portfolio. That’s the process we’re engaged in pursuing today.”

“Well, I think the world needs all the energy it can get. I think that’s the dynamic we’re in: I think the world is going to need it all.”