Mach Natural Resources LP (MNR) Q3 2026 Earnings Call Transcript

Operator: Good morning, everyone, and thank you for joining us and welcome to Mach Natural Resources Third Quarter 26 Earnings Call. During this morning's call, the speakers will be making forward looking statements that cannot be confirmed by reference to existing information, including statements regarding expectations, projections, future performance, and the assumptions underlying such statements. Please note a number of factors may cause actual results to differ materially from their forward looking statements, including the factors identified and discussed in their press release and in other SEC filings. For a further discussion of risks and uncertainties that could cause actual results to differ from those in such forward looking statements, please read the company's filings with the SEC. We recognize that except as required by law, they undertake no duty to update any forward looking statements and you should not place undue reliance on such statements. They may refer to some non GAAP financial measures in today's discussion. For reconciliation from non GAAP financial measures to the most directly comparable GAAP measures, please reference the press release and supplemental tables which are available on Mach's website and their 10 Q will also be available on their website when filed. Today's speakers are Tom L. Ward, CEO and Kevin R. White, CFO. Tom will give an introduction and overview and Kevin will discuss Mach's financial results. And then the call will be opened for questions. With that, I will turn the call over to Mr. Tom L. Ward.

Tom L. Ward: Thank you, Melissa. Welcome to Mach Natural Resources third quarter earnings update. With each quarter, we reiterate the company's 4 strategic pillars that have guided this since our founding in 2017. The first pillar is disciplined execution. Only purchased cash flowing assets at a value of PDP, PV-10 or less and do not pay for any leasehold, PUDs, midstream or infrastructure. In today's market, there is a lack of opportunity for investment. At the discount we demand. Even in small packages, we are seeing aggressive bids on oil and bid ask disagreement on natural gas assets. Therefore, we remain on the sidelines until a market disruption occurs. Our business is cyclical. We feel there will be a time when some other areas some areas of areas experience enough distress to allow us to acquire our desired levels again. The second pillar is disciplined reinvestment rate. We maintain a reinvestment rate of less than 50% of our operating cash flow. In 2026, our summer drilling program in the San Juan Mancos shale made our CapEx higher in Q2 and Q3 versus the first quarter. And the projected amount in the fourth quarter. The higher CapEx spending for these 2 quarters resulted in lower distributions paid in August and later this month. The offset will be higher distributions in February and May next year. We have slowed our drilling pace to 1 Oswego rig in Q4 to meet our internally mandated reinvestment rate of below 50% of operating cash flow. This slowed drilling pace in Q4 will translate to a significant increase in per unit cash distribution. The third pillar is maintain financial strength, We have maintained a goal to be at less than 1x leverage prior to using substantial debt to make an acquisition. We project ending the year 1.4x. We do not believe we currently operate in an area of high leverage, we are cognizant that more opportunities will be available to us if we were closer to a turn of leverage so our goal remains in place. The point of this pillar is ultimate flexibility. When the market gives us a chance to buy at attractive prices, want our balance sheet to be an advantage not a constraint. The fourth pillar is maximizing distributions to unitholders. This pillar drives all of our decisions. We have distributed nearly $7 to our unitholders since 2024. Very few public companies have yields at max level. And none of them are oil and gas producers. Yields like ours are usually only found at businesses carrying a high amount of leverage that often cannot sustain once credit tightens or rates move up against them. Mach was built entirely different. Our distributions and the cash returns we deliver are second to none. And they are the result of a disciplined, the discipline behind our 3 pillars. Mach's established around a cash return model. We have said many times that we had a belief for several years before forming the company that there would be a time when we could buy cash flowing assets at seldom seen prices by avoiding the tendency of the industry to look for growth through the drill bit. Our goal is to buy distressed asset at discounted prices to throw off cash. We were fortunate to pick the timing correctly and build a large producing base at bargain prices. We continue to look for those type of assets, but it is become more difficult as more capital is now chasing the same type of cash flowing assets that we propose to buy and others are willing to pay premiums to our model. However, our steadfast approach to value is paid off by giving us a 50-year cash flow stream plus nearly 3 million acres of land that is HBP to hold our production flat by spending less than 50% of our operating cash flow. Therefore, in times of excess capital provided by private equity and ABS we can pivot to rely on drilling to sustain our model. Mach has a history of strong cash returns on capital invested and cash distributions. Over the past 5 years, we have have delivered an industry leading croquis averaging 35%. This is not only industry leading, but it is also the top 1% of all public companies in The US. We also distributed an industry leading distribution yield of 15% since 2024 through Q3 26. This performance was achieved through different pricing cycles ranging from $94.23 per barrel in 2022 when we achieved a 53% CROCI to $64.81 per barrel in 2025 when our CROCI was 23%. Since our inception, we have never had a croquis of less than 20%. We cannot find another company with such a strong record of cash returns. As we look to 2027, analysts'' expectations are somewhere between $2.00-$2.50 per unit of CAD. In that scenario, we are now trading at closer to a 20% yield versus our previous range of 10% to 15%. That gap sits on in the unit price, not in the business. As yield is a ratio and only 1 side of it is in our control. What we generate and distribute is independent of where our units trade. We will distribute back as much cash as possible and let our unitholders decide if they would like to buy Mach. For any investor with a long term outlook, our units are a good purchase. Because we are not in distress and trade outside of any normal yield equity. In other words, we will distribute the same amount of cash no matter whether where our unit price trades. We have now finished our natural gas drilling until we see some price recovery. The last of 7 Mancos shale wells were drilled in September, We have 1 Oswego rig running that will increase to 2 Oswego-style rigs running in 2027, along with the completion of the 7 Mancos shale wells in Q2 and Q3 of 27. This program fits the profile being less than 50% of operating cash flow while focusing on oil drilling. However, as you know, we could adjust our schedule very quickly if we see other opportunities that have potentially higher rates of return. We continue to have high expectations for the natural gas market. We see natural gas demand increasing nearly 15 Bcf a day in 2028, with 2027 being a transition time from the loose market today. To an adjusted world LNG base price as demand arrives. We expect to San Juan over the next 5 years have additional takeaway capacity. These outlets, will be installed to get to the premium gas markets of Arizona and the Pacific Coast LNG markets. We currently have a gas delivery agreement in place through 2030 that hedges approximately 60% of our San Juan natural gas. By the time the contract expires in 2030, we will have strategic optionality. For our 350 million cubic feet of gas that could be held flat by drilling only 5 net wells per year. If we choose to increase activity to 10 net wells per year, we could grow Mach's net production to more than 500 million cubic feet a day. This is the benefit of buying low decline cash flowing assets that also have fantastic upside potential. The Mancos shows potential to dominate the Mach story in years to come. With regard to oil, we plan to increase by 1 rig in 2027 to maximize rates of return while staying under our 50% reinvestment rate. The current environment bodes much better for oil reinvestment than natural gas. We have many years of inventory left to focus on oil drilling. If that is where the returns remain. Our decision to add oil reserves at a time when the oil market was in turmoil has put us in a good position to shift capital where returns are best. We have built a company that can do well in any environment. We can sit around and wring our hands over our unit price, or we can choose to be comforted by knowing our yield is safe. I choose the latter. The unit price will ultimately take care of itself. I will now turn the call over to Kevin to discuss the financial results.

Kevin R. White: Thanks, Tom. For the quarter, our production of 140 thousand boe per day was 15% oil, 69% natural gas and 16% NGLs. Our average realized prices were $84.84 per barrel of oil, 2.17 per Mc of gas and $30.00 $2 per barrel of NGLs. Of the $360 million total oil and gas revenues, the relative contribution for oil was 49%, 34% for gas and 17% for NGLs. On the operating expense side, lease operating expense was $88 million for the quarter or $6.49 per BOE. Cash G&A was $6 million or $0.44 per BOE. We ended the quarter with $31 million in cash $250 million of availability under the credit facility. Total revenues including our hedges and midstream activities totaled $319 million, adjusted EBITDA of $183 million and $165 million of operating cash flow. Development CapEx for the quarter was $126 million which was 77% of the operating cash flow for the quarter. Year to date, our development CapEx is 59% of our operating cash flow. In the quarter, we had $38 million of cash available for distribution resulting in a distribution of $0.22 per unit which will be paid on November 30 to holders of record on November 16. With that quick overview, Melissa, I will turn the call back to you to open the line for questions.

Operator: Thank you. Before pressing the star keys. Our first question comes from the line of Neal Dingmann with William Blair. Please proceed with your question.

Neal Dingmann: Good morning, Tom, the rest of the team. Tom, I appreciate your distribution comments. I think they are well taken. My first question is really on your continued development program, specifically was wondering, will the Oswego continue to make up most of the activity next year or are there potentially other oily plays you would add in this? And then, secondly, I would assume it does seem like you have more than ample Oswego inventory for this continuous program.

Tom L. Ward: Yes. So the to the latter part, yes. We have tremendous amount of Oswego locations left to be drilled That is our primary target for oil. We have 2 rigs slated, to work in the Oswego with other Oswego type or oil high rate of return oil wells to be drilled. Some of those could be Western Anadarko and the Red Fork. They could be Clear Fork wells in Texas. We might look at some oil locations in New Mexico, there. That we have a very wide and broad and deep, inventory of locations to choose from. And so if you once you get down to where you only have 1 or 2 rigs running, we will keep 1 rig in the Oswego constant and have another rig that comes in and out of the Oswego as we see other areas that can that compete with those types of returns. But it is difficult to beat the offspring of returns just because of how little we spend.

Neal Dingmann: Fantastic. And then my second question I do not know if you are doing this, just really on gas marketing. Specifically, are there are you considering any additional opportunities around gas? I mean, I know you are not focused there, but you still produce a fair amount of gas. Are there opportunities that, you know, marketing wise that, you know, you can potentially get a little bit of boost there?

Tom L. Ward: We look at basis hedges. We put some on in San Juan earlier this year. that is gone away. You remember whenever we bought iCAV, we already had a marketing arrangement in place that we just bought a stream of cash flow, from the BP and iCAV had a long term marketing agreement, that covers about 60% of our volumes through 2030. So that it really opens up perfectly for us that we become unhedged and bought iCAV when we bought that. We only paid for that stream of cash. And so it. At about the time that you are going to have a pipe go more than likely west through Phoenix and around to, the Baja California. to LNG markets, you are going to see a tremendous amount of uplift in the ability to market San Juan gas. So that the. That particular transaction around iCAV just gave us a tremendous amount of marketing ability in the future. And keep in mind that there continue to be talks of data centers in and around, the San Juan. It has tremendous water assets. It has a lot of land And, if that comes to fruition, it also would take away some of the restriction around the, the San Juan basis. I am pretty comfortable in the San Juan over the longer term. We did not pay for any of the upside anyway. So for us, to sit and wait and to harvest that when prices do change is a fairly easy decision. Today it is the difference between where I believe gas prices are in the winter of 26, 27, which could go dramatically even lower to where prices could be in 2028 and beyond is really the opportunity around gas companies. And that is why you see the disconnect in sales packages to be very difficult for someone to buy at today's strip when there is a belief that things are much better. In just a few years. So in the Mid Con, that we just have a tremendous amount of takeaway capacity, so there is there is no restrictions. We do not even need data centers here. To be able to get gas out. So that is that is the difference between the 2.

Neal Dingmann: Great details. Thanks, Tom. Thanks.

Operator: Thank you. Our next question comes from the line of Charles Meade with John Rice. Please proceed with your question.

Charles Meade: Yes, good morning, Tom, to you and Kevin. And the rest of the Mach team there. Tom, I wanna ask about the Q4 distribution. So it looks like with the with CapEx going down in oil prices, I mean, we have got a couple of months left to see, but still looking strong. It looks like you guys are set up for and I think you mentioned this in your prepared remarks that you are expecting the bigger Q4 distribution. My question is, do you, do you do you consider a lower distribution in Q4 as an alternative versus at the market shares as a as a route to delevering? Or to you, are those just, you know, separate buckets and you are going to-- they are not alternatives?

Kevin R. White: Yeah. I think I will let Kevin answer what he believes on. I look at them as separate buckets. Yes, the same, Charles. I do not think we would use any part of the distribution in Q4 for either debt reduction or unit repurchases, either 1. Got it. Okay.

Tom L. Ward: I do not see as Charles as being over levered, especially whenever. I mean, in the near term because there is really nothing we can buy, that requires us to be down to a point that we need to use debt. So, I mean, still would love to find an asset that was accretive to our cash available for distribution and use equity around an acquisition as a way to lower the debt levels. Those just really are not coming around and we continue to look, but there is there is just not many around today to be able to do that. Got it.

Charles Meade: And then Tom, if we could go back to some of your previous answer. I wanna. And this is around just elaborating on your options for oil drilling or oil weighted, drilling aside from the Oswego. You mentioned the Red Fork in the Mid-Con. You Mentioned The Clear Fork in the Permian. And I think you said, you know, which would be new for me, that there is maybe some liquids weighted opportunities in the San Juan. So could you maybe, you know, pick up on that last 1? What if there is any opportunities that are more liquids-rich in the San Juan? And, also, just if there is if that is the 3 other options or if there is anything else.

Tom L. Ward: Yeah. I was not referring to San Juan. Enduring has all that tied up. But it. For liquids. I was just thinking in the Permian, New Mexico. Where we have a little acreage. We picked that up mainly through the Sabinal acquisition. Scattered amounts of acreage around that have. Every acquisition, you can find a few locations that have high rates of return. So the point is it is it is New Mexico Permian, not New Mexico San Juan. Correct. Right. Got it.

Charles Meade: that is it for me. Thank you. Thank you, Charles.

Operator: Thank you. Our next question comes from the line of Derrick Whitfield with Texas Capital. Please proceed with your question.

Derrick Whitfield: Good morning, Tom and team, thanks for taking my questions. Sure. Tom, I wanted to start first with your 2027 guidance. Well, I realize you are not providing CAD guidance and commodity prices are subject to change, we are back into a yield of over 20% at current prices based on your guidance and based on the curves To kind of put a firm point on it for the benefit of shareholders, is that similar to what you are seeing on your dashboard? A. And then b, you guys are committed to a 100% payout CAD. Just wanna be clear on those 2 points.

Tom L. Ward: I will, I will say yes. That in my prepared remarks, I am saying I am using you guys and agreeing with you that somewhere we have projected between $200 million-$250 million of CAD next year, looking at what you project we are not giving guidance on that. But the other it is a board decision. My personal preference is until I feel a need to be paying down debt. I would wait around a little bit for cash prices to perk up, and, it is it is my it is always my first desire is to pay back all the CAD to unitholders and then let unitholders decide what to do with that. that is the way I prefer to run this. And so that is as strong of an answer as I can give you.

Derrick Whitfield: Appreciate that. And then on my I wanted to come back just onto what is embedded in guidance for 2027. Could you speak to kind of 2 things? Just on the activity inflation front, what do you have assumed for CapEx? And then secondarily, given that medium-term-- Neil, to medium-term-ish, constructive nature on natural gas, How are you thinking about the 7 ducks that are in the San Juan?

Tom L. Ward: We are seeing inflation in so far in diesel bits and what is my last 1? Was casing. Thank you. Yes. So those 3 are up dramatically quarter over quarter, so maybe 30% to 50%. As we increased our Oswego drilling by 11% for 2027. That we are not seeing a reduction in pricing. So we assume you might be getting some sand increase soon That might have to go up a little bit more, but the rates return if you keep anywhere near the $70 range or so are still extremely good around our oil drilling. So it would not really affect us there. It might, you know, if prices dramatically reduced, we might have to cut back our drilling program just from operating cash flow standpoint. But other than that, we do keep 50% hedged, as you know. So we have a fairly good view into the next year and that still gives us a lot of opportunity if prices were to change. To the upside. So I like having exposure to higher prices. I think that in both oil and natural gas, there is just as much potential to be higher instead of just looking at it from a viewpoint of the things are only going to be lower from here.

Derrick Whitfield: And, Tom, just quickly just to get on San Juan there. So. Yeah. Sorry. Yeah.

Tom L. Ward: I forgot about the San Juan ducks. So the San Juan ducks are in our model. They have a very. Once you take away the capital for drilling, it is hard not to complete a well and have a rate of return that is comparative to even our oil drilling. So they are in line right now. If natural gas prices were to fall tremendously, and maybe they do not get completed. But more than likely, we will be looking forward into the 27, 28 winter and projecting that we need to be bringing those wells online.

Derrick Whitfield: Fantastic. Really appreciate it. Thanks, guys. Goodbye. Thank you.

Operator: Thank you. Our next question comes from the line of Michael Scialla with Stephens Inc. Proceed with your question.

Michael Scialla: Good morning Tom, morning Kevin. I want to follow-up on 2027, just kind of high level. You have given full year guidance. It sounds like oil price stays flat throughout the year and then should we anticipate gas declines first half and then grows second half if you do complete the Mancos wells?

Tom L. Ward: Yes. I mean oil could be slightly higher year over year. But I mean in all things we look at, it is just kind of keeping our production basically flat either up or up or down below somewhere in plus or minus 5%. So I think that is the way to look at it. But, yes, it is difficult with 1 or 2 rigs running to grow, oil production dramatically. Offsetting the declines that we have. And natural gas, it is it could decline just the way I would think of it is oil goes up in single digits and gas goes down in single digits.

Michael Scialla: Okay. Got it. And then I wanted to ask on your Slide 24, you look back at your 2025 drilling program, you give the rates of return there. That is interesting. The rate of return for the program, all look very good. It looks like there is quite a bit of variability in the Oswego. You have got you know, several wells that are kind of off the charts on the high end of the returns and then you have got some that are at the very low end as well. Just wondering if there is anything you have learned about the play that helps you avoid that low end, or is that just the variability you have to live with?

Tom L. Ward: Yeah. that is why nobody else does that. Because everyone has the same look except for they do not go as high with the wells on the left. it is just every play that you draw has variability and I. I would say Peyto does it. And so I copied this from Peyto because they do it every year. I just think it is very rare for a company to show every well they drill because we drill bad wells, and then we drill really good wells, and then ultimately ends up that you try to find somewhere in the 20% to 30% rates of return that can that really move the company forward. And that is that is what we look for. We have been able to beat that and that is. You know, what is really rare about our company is that we paid zero for leasehold, for future leasehold. We bought 10. So we bought a cash flow stream and we paid nothing for the upside and that and that. Yet, we have spent a billion and $0.5 since inception or since, you know, since drilling wells on land that was valued at as being worthless. So that is that is my take. And then if you even look at outside parties, I think we have a slide on that was done last year, that our results are in the top quartile-- well, heck, in the top 5% of everyone that is drilling wells, both in gas and oil. So, that is what is kind of interesting. And I think that has to do with having a very small drilling program where you get to pick locations 1 at a time instead of having this just kinda we are gonna run 10 rigs out here in the Permian, and they are all gonna be exactly alike, but they are just not.

Michael Scialla: And then it ends up your drilling program takes over your life, and it. And then it takes away from being able to keep your LOE down. So all of this is trying to run a company that is not so focused on drilling, but that can pick out very high rates of return drilling from a massive land scale. And that is the secret. Appreciate the transparency on that slide. That was really interesting. Thanks, Tom.

Operator: Thank you. Thank you. Our next question comes from the line of Jeff Grampp with Northland Capital Markets. Please proceed with your question.

Jeff Grampp: Hey, good morning. I wanted to circle back on the leverage front. Just wanted to confirm here. It sounds like there is not a tremendous urgency to get the leverage down through any proactive measures until I guess the M&A market looks a little more enticing? I guess, A, I wanted to confirm that and B, is it fair that, in a world where M&A is more interesting, maybe you can just touch on the main avenues you see to get leverage down to where you guys can be a little bit more on the offense, if you will? Thanks.

Tom L. Ward: Yes. If I thought there were just a lot of opportunities to go and put together assets at discounts to PDP, PV-10 or in a cycle where things are kind of falling apart and we could put money to work, I would be in a more aggressive in trying to get leverage down so we could participate. But as I look forward, it just it does not appear to be that way. We do. We are cognizant, that we are higher than we want to be. I think just in 2027 alone, in natural gas prices moving somewhere above $3 our leverage kind of takes care of itself. So by whenever I look out to 2028, and see what I believe will be a market that goes on the natural gas front that brings us closer to a world price of. Between the TTF and JK the Japanese Korean market, and the LNG in the U.S. becoming more of a worldwide thing, gas becomes more of a worldwide asset that prices will move up and that. that is-- you know, there are lot of ifs in this, but the. It just makes me not too worried Yes. We have higher leverage than I want to, but I think it can be managed in the in the next year. And so it does not make us in any hurry, to make this, something as that we would go issue equities, or that we need to take away from our distributions.

Jeff Grampp: Got it. that is that is helpful details. For my follow-up, on slide 15 with some of the efficiencies in the Oswego, trending up through the last few years, can you just touch on more recent results? Are those kind of tracking in line with some of the recent improvements? Is there more to go? Or just any kind of updates relative to that slide would be interesting.

Tom L. Ward: Yeah. it is mainly just drilling longer laterals So when we first started drilling in the Oswego, we focused on 1 mile laterals. Not knowing really the nature of the reservoir And over time, we have been able to have land situation where we can drill longer laterals. that is just made us more efficient.

Jeff Grampp: Gotcha. Appreciate the time, guys. Thank you. Thank you.

Operator: Thank you. Our next question comes from the line of John Christopher Freeman with Raymond James. Please proceed with your question.

John Freeman: Thank you. Good morning. Good morning. Tom, on the comments that you made on the M&A you have gotten pretty wide good spreads and there is a lot more parties that are kind of looking at some of the kind of asset profiles that you guys have targeted. All along. Just given, the massive sort of acreage position you have got, does it actually cause you all to maybe consider you know, divesting some assets if the market's just you know, pretty hot for certain assets that maybe right now just given the big position you all have do not compete for capital. Is that something y'all consider?

Tom L. Ward: Yeah. Not too often. We have sold a little bit of acreage in the past but more than likely we trade that is-- there is usually trades to be made around our positions with others that improves the positions we have and helps others drill their wells. that is what we mainly do in land. The other thing you do not wanna do is be giving away your future drilling that is even in Western Oklahoma now, there are some formations that are being drilled, new formations that are looking quite good that if we if we would have sold those in the past, looking-- we would not have known. We want to keep our inventory. that is basically it. it is. there is no real need, to be bringing in additional CAD. We already have a tremendous amount going forward But I like the idea of having locations in your back pocket. So whenever oil price change or gas prices change, you can move a rig around and get those high rates of return. So it is not anything we really focus on.

John Freeman: Understood. And then my follow-up question, I appreciate all the detailed numbers and outlook on 2027. Just to make sure we sort of capture maybe if there is any fluctuations in the capital next year. Just at a high level, should we just think of it as you got like, the steady 2 rig program in Oklahoma and then you just got those Mancos completions in 2Q and 3Q. So from a capital standpoint, does that kind of indicate like 1Q and 4Q are kinda lower in 2Q and 3Q kind of bump up in terms of capital? Just at a high level.

Tom L. Ward: that is correct. And not necessarily Oklahoma, but 2 oil rigs and 1 gas completion drilling no new gas wells. Assuming your operating cash flow does not change dramatically?

John Freeman: Thank you.

Operator: Ladies and gentlemen, that concludes our question and answer session. And we will conclude our call today. We thank you for your interest and participation You may now disconnect your lines.