Good morning, and welcome to Centennial Resource Development Conference Call to Discuss its Fourth Quarter and Full-Year 2021 Earnings. Today's call is being recorded. A replay of the call will be accessible until March 3, 2022, by dialing 855-859-2056 and entering the conference ID number 2597505 or by visiting Centennial's website at www.cdevinc.com. At this time, I will turn the call over to Hays Mabry, Centennial's Senior Director of Investor Relations, for some opening remarks. Please go ahead.

Thank you, Justin, and thank you all for joining us on the company's fourth quarter earnings call. Presenting on the call today are Sean Smith, our Chief Executive Officer; George Glyphis, our Chief Financial Officer; and Matt Garrison, our Chief Operating Officer. Yesterday, February 23, we filed a Form 8-K with an earnings release reporting fourth quarter and full-year earnings results as well as operational results for the company. We also posted an earnings presentation to our website that we will reference during today's call. You can find the presentation on our website homepage or under presentations at www.cdevinc.com. I would like to note that many of the comments during this earnings call are forward-looking statements that involve risks and uncertainties that could affect our actual results and plans. Many of these risks are beyond our control and are discussed in more detail in the risk factors and forward-looking statements sections of our filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2021, which we expect to file with the SEC later this afternoon. Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance and actual results or developments may differ materially. We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers. For any non-GAAP measure we use, a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release or presentation, which are both available on our website. And with that, I'll turn the call over to Sean Smith, our CEO.

Thank you, Hays. Good morning, and welcome to Centennial's fourth quarter earnings call. I'll start off by saying that 2021 was an outstanding year for Centennial, both operationally and financially. We generated over $200 million of free cash flow and repaid more than $300 million in borrowings under our credit facility. As a result, we overwhelmingly achieved our primary goal for 2021 of significantly reducing our leverage and total net debt. We also delivered oil on the high end of our increased guidance range due to strong well results and solid execution in the field. Additionally, we accomplished our ESG goals for the year and continue to look for ways to advance our already strong track record. These achievements are a testament to the focus, hard work and talent of our employee base. The year-end 2021 results, combined with a robust multi-year outlook have provided us with the confidence to announce a meaningful first step in Centennial's commitment to return capital to shareholders. As we evaluate the shareholder return landscape, we believe that returning capital in the form of a measured share repurchase program will deliver the most value for our shareholders over time by enhancing the per share ownership and per share financial and operational metrics of the company. As such, we are excited to announce that our Board has authorized a $350 million share repurchase program over the next two years to enable us to deliver that value, which equates to approximately 15% of our current market cap. Our intent is to begin executing this repurchase program once we have achieved our leverage target of approximately 1x or less, a level that we believe is optimal for our business and provides resiliency through the inherent cyclical nature of our industry. After achieving this leverage target, which we anticipate…

Thank you, Sean. During 2021, our 2-rig program drove steady quarterly oil production growth, which coupled with recovering commodity prices generated significant free cash flow and the rapid deleveraging of Centennial's balance sheet. As you can reference on Page 9 of the earnings presentation, debt repayment totaled approximately $260 million for the year, and net debt to LTM EBITDAX declined to 1.4x at December 31 compared to 4.1x at year-end 2020. While we're pleased with the progress we've made, we are committed to further balance sheet improvements. Additionally, even though commodity prices are strong today, we operate in a highly cyclical industry where balance sheet resiliency is critical. Therefore, we will continue to focus on driving leverage metrics to below 1x, which we expect will occur during the second quarter of 2022. Additionally, last week, we closed on a new five year $750 million revolving credit facility. The transaction was well oversubscribed, and we were pleased to welcome several new banks into the syndicate. Under the new facility, our borrowing base was increased by nearly 65% to $1.15 billion, which is a significant cushion relative to the $750 million of elected commitments and the $25 million of revolver borrowings outstanding at year-end. Importantly, the terms of the new facility will allow for our new share repurchase program and provide flexibility to manage our long-term capital structure. As illustrated on Slide 14, the refinancing also improves our maturity profile as our nearest debt maturity is now scheduled for January of 2026. While we anticipate that the credit facility will be largely unused, we are pleased to have a low-cost source of debt capital to maintain liquidity and financial flexibility. Turning to the share repurchase, which is summarized on Slide 6. As Sean mentioned, the Board has authorized a $350 million program,…

Thank you, George. Q4 rounded out a transformative year for Centennial. On Slide 11 of the earnings presentation, you can see we are as operationally efficient as we have ever been as a company. Our drilling and completion cycle times are at all-time lows, while developing the longest average lateral length program in our five year history. We had demonstrable success in both our Texas and New Mexico development programs as we tested co-development scenarios in the Wolfcamp C and Third Bone Spring in Texas and larger scale development of the Bone Spring in New Mexico. Turning to well results. On Slide 10, our operations team brought online some outstanding wells in the fourth quarter, including 3 of our top 10 wells in the company's history. Located in the southernmost portion of our Lee County acreage position, the Juliet Shiba Solomon package was a 4-well grouping targeting the second Bone Spring sand. This development averaged just over 7,100 foot in lateral length and the average IP30 for the package was over 3,000 barrels of oil equivalent per day, roughly 82% oil, said another way, 2,500 barrels of oil per day. These wells demonstrated strong 90-day rates of almost 1,700 barrels of oil per day. Additionally, the Solomon 505 saw single day production numbers that exceeded 5,600 barrels of oil per day, while the Shiba 506 and Juliet 514 each boasted single-day production numbers exceeding 4,300 barrels of oil per day. These are fantastic wells, and I'm extremely proud of our operations and asset teams for delivering these results. With the current commodity price environment driving inflationary pressures for the entire industry, capital efficiency and continued emphasis on cycle time reductions have never been more in focus for the company and we remain at the forefront -- and remain at the…

Thanks, Matt. In closing, consistent with our message from day one of Centennial, we recognize that our fundamental value creation starts with our high-quality asset base and inventory, our differentiated technical team and our consistent track record of operational execution. We have set the company up to be in position to generate significant and sustainable free cash flow that is supported by over 15 years of economic inventory in the most productive oil basin in the United States. Additionally, with the significant financial and operational improvements we have made over the last 18 months, we now have near-term line of sight on a balance sheet and capital structure that is resilient through commodity price cycles and provides significant financial flexibility to return a meaningful portion of our anticipated free cash flow to our shareholders. Thanks for listening, and now we'll go over to Q&A.

Thank you. The question-and-answer session will be conducted electronically. And our first question comes from Scott Hanold from RBC Capital Markets. Your line is now open.

Yes, thanks. A question going on to the stock buyback. I know, Sean and George, you did a lot of conversation around how you think about that. And plans on how to execute it. But just a couple of things. One, it sounds like maybe you'll have some sort of like a 10b5 plan in addition to some opportunistic buybacks. But like as we sit here and try to model, what kind of return we could be looking at going forward? I mean is there a specific sort of percentage of free cash flow that you're looking to deploy to this? Just give us a sense around some of the upward and lower boundaries of what to expect for this program?

Sure. Yes. Thanks, Scott. I appreciate the question. First of all, I'm very pleased that we're having this discussion. I think it's been a long time coming. It's been certainly something that the company has always look forward to is to returning capital to our shareholders and the day is nearly here. So look forward to executing around that. As a percent of free cash flow, that is not an input that goes into our equation. I know some folks have talked about a percent of free cash flow back to their shareholders. For us, it's an output. We look about executing our program as several different steps. We put that forward on Slide 5 of the earnings presentation, but it goes through a series of items that we are executing against that generates what -- if you just did simple math, is approximately a 45% free cash flow return to shareholders. But it all starts with an investment, utilizing the capital discipline that we have in place around a two-rig program generating high rate of return results that generate meaningful free cash flow. So that's where it all starts. And then we've continued to focus on our balance sheet. That has been our #1 goal last year and even the first part of this year is still our primary goal is getting to a leverage target that we think is the right place for a company of our size to be, which we believe is 1x or less. So those are the first aspects of our business plan. And then the free cash flow above and beyond that will be put towards this $350 million share repurchase program. So we are solving for that, not so much as a percent of free cash flow. I think, obviously, with today's prices, it's -- it may likely swing one way or the other as a percent of free cash flow. So again, it's not something we focus on there. But I do think that we have a very solid plan that we can execute against. And should prices go our way maybe that gets accelerated even further. You mentioned the 10b5 scenario. That is something that we are -- we recognize an option out there. We haven't committed to that type of disclosure yet. But we have a team in place that is evaluating how we're going to fully implement this, again, disciplined and measured approach to buying back shares. We also want to make sure that we remain opportunistic as George mentioned in his portion of the script that when there is severe market dislocation, whether that's on a daily, weekly, monthly basis, we want to be in market and take advantage of that above and beyond just our measured approach. So it's kind of a two-pronged attack on executing against the $350 million share repurchase program.

Yes, it's George. The only thing I would add to that is part of the reason we like the share repurchase program is it does provide a lot of flexibility but it's not as easy to target a payout ratio like you would have with a dividend where you know there's kind of a set amount of cash going out the door. And so it's just easier to quantify. With the share repurchase, there are more variables that go into it, including where your share price is and obviously, commodity prices and so forth. So it's just more difficult to do that. And so we like the flexibility of the program and didn't want to put any boundaries on it given the reasons I mentioned.

And I would assume then the flexibility to sort of, I guess, skewed you to this versus variable or fixed dividend returns. And maybe in that sort of a subtle question, but like my next line of question is just sort of looking at your thoughts on your inventory death. I mean, you obviously had very -- some very strong wells this quarter. Can you give us a sense of what the duration of what you think your Tier 1 inventory is? And thoughts on like further consolidation to bolster that or just corporate scales as other options for free cash flow usage.

Sure. Yes. I appreciate that. It's kind of a two-part question there. I would say we've continued to message around our 15-year inventory. That again assumes a two-rig cadence throughout the life of that inventory. And I would say that our inventory is extraordinarily high quality and that we expect to have very strong results for the majority of that time. So it is a -- it's hard to say that a small portion of that is Tier 1. It's a high proportion of that is Tier 1 inventory that will get developed and even much lower commodity price environments. So it's very pleased with what we have and which is why we said on previous calls, from an M&A perspective, inventory is not something we are after any acquisitions that we would bid on successfully would need to compete with that very high-quality 15-year inventory as well as be accretive, particularly now on a cash flow per share basis. So it would be a combination of those things if we were successful in the M&A side of things. And I would add that the -- it doesn't preclude us, it actually enhances our shareholder return program, if the acquisition is, again, cash flow per share positive. So all of those things would have to come into place for us to make a successful acquisition. And there are some opportunities that we are always out there looking at there's very few deals that happen in the basin that we haven't at least taken a look at to see if it fits within our framework. I hope that covered your question, Scott.

Yes, I'm sorry. Thank you, yes.

Thank you. . And our next question comes from Neal Dingmann from Truist Securities. Your line is now open.

Certainly for you, George, just a bit of a different quick shareholder return question. I'm just wondering what you all would need to see or what would have to happen for you all to consider? I know this is probably quite a ways down the line but adding variable dividend to that mix of shareholder return.

Yes. Thanks, Neal. Appreciate the question. I think that we're excited about this first step of shareholder return. I think it is a meaningful first step. We aren't just dipping our toe into it. A $350 million share repurchase as it sits today or at least as of yesterday, is approximately 15% of our market cap, which I think if you look at what's been published so far over last year and first part of this year, puts us in top quartile a share repurchase program versus other E&P companies. So I think it's a meaningful first step to a longer-term shareholder return program that we will plan to implement very much committed to giving capital back to our shareholders over time, and we will continue to look for ways to do so at this present time, we very much feel like the best way, the best value for our shareholders is through this repurchase program, so that's what we're going to focus on. So I'm not going to comment as if we'll do a variable or special or fix down the road. We will always look for ways to benefit our shareholders through a capital return program. And -- but first is the execution of this buyback program.

No, fantastic plan so far. I think you guys laid out exactly for what I've heard from investors exactly what everybody was looking for. And then just quickly second, maybe, Sean, just on ops specifically, you guys had some stellar. I was just looking. I think it's on -- I don't remember. Slide, I think, 10 here. Just shows some of those stellar second Bone Spring wells that you all had. So I guess my question is, when you look at the plan this year, maybe could talk a bit about -- just kind of curious on the formational mix. How much majority continue to be Second Bone Spring? And given that mix, do you all anticipate to have some variability variation between as you hit different zones or not necessarily too much. It just seems your efficiencies are really accounting for a lot of this, so I'm just wondering maybe we don't see a whole lot of variation as you start knocking out some other zones. Thanks.

Yes. In fact, I'll let Matt, our COO, handle that question, Neal.

Yes. Good question, Neal. Yes, 2022's mix of wells in New Mexico, particularly is going to remain focused primarily on the second and Third Bone Spring. So I would say there's going to be some additional testing of shallower horizons, other Bone Spring zones, sprinkled throughout the program as we've as we've started to efficiently develop over the top of existing units, so much of the facilities discussion around expandable facilities really allows us to do that because we can move into existing drilling units, add additional wells to the known central tank battery and continue to develop over the top. So it's been very helpful from an operations standpoint. And so yes, we're going to remain focused in '22 on the second and third Bone Spring, and we have a high degree of confidence in that -- in those formations, primarily because we've been testing the second and Third Bone Spring across the entire position for the last couple of years. And so we have it pretty much zeroed in on the targets, the spacing and what we want to do. Now we're going to start to take advantage of some of the facility expansions and really try to get after it in 2022.

Thank you all for the details.

Thanks, Neal.

Thank you. Thank you. I am showing no further questions. I would now like to turn the call back to Sean Smith, CEO, for closing remarks.

Thank you. I hope what everyone took from the call is that we had a tremendous 2021 very pleased with the results, both operationally, financially as well as on the ESG side of the business. I think we've set the company up very well. I look forward to carrying that momentum as we've already done getting into 2022. I think the game plan that we've put forth, which we've mentioned is kind of a three-pronged approach that allows us to grow the business annually over the next two years at a 10% CAGR. Allows us to delever the company further and returning a meaningful amount of capital to the shareholders is one that I think we can execute across and I think drives value for all of our existing shareholders. So look forward to implementing that plan and executing against it. I think it's going to be a very promising year for Centennial, and thank you all for participating in the call.

And thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.