Mach Natural Resources Third Quarter 2026 Results - MACH NATURAL RESOURCES LP

Financial Performance:

• Q3 2026 production averaged 147,000 BOE/d (15% oil, 69% gas, 16% NGLs).
• Total revenues (including hedges/midstream) reached $319 million; adjusted EBITDA was $183 million; operating cash flow was $165 million.
• Operating expenses: Lease operating expense (LOE) $6.49/BOE; Cash G&A $0.44/BOE.
• Capital expenditures (development) totaled $126 million, representing 77% of quarterly operating cash flow (59% year-to-date).
• Cash available for distribution (CFAD) was $38 million, resulting in a distribution of $0.22 per unit.
• Balance sheet: $31 million in cash and $250 million available under the credit facility; projected leverage remains around 1.4x.
• Five-year Return on Capital Invested (ROCI) averaged 35%, with a distribution yield exceeding 15% since 2024.

Guidance and Future Outlook:

• Management projects 2027 Cash Available for Distribution (CAD) between $2.00 and $2.50 per unit based on current market assumptions.
• Expected to trade at a >20% yield in 2027 if the lower end of the CAD guidance is met.
• 2027 Activity Plan: Increase oil drilling to two rigs (one constant Oswego rig + one flexible rig); drill no new gas wells but complete seven previously drilled Mancos shale wells in Q2 and Q3 2027.
• Long-term natural gas outlook anticipates demand growth of ~15 BCF/d by 2028; 2027 viewed as a transition to an adjusted LNG-based global price.
• Production guidance aims for flat output (±5%) in 2027, with oil potentially rising in single digits and gas declining in single digits.

Business Segments and Product Lines:

• Oil: Primary focus on the Oswego play with extensive inventory; exploring Red Fork, Clear Fork, and Permian (NM) for high-rate oil opportunities.
• Natural Gas: Currently paused on new drilling in the San Juan Basin until price recovery; 60% of San Juan volumes hedged via marketing agreement through 2030.
• Mancos Shale: Seven wells drilled in Q3 2026 scheduled for completion in 2027 to sustain gas production.
• Distribution Strategy: Committed to distributing nearly all cash to unit holders; reinvestment rate capped at <50% of operating cash flow to maintain flexibility.
• Acquisition Strategy: Strict discipline to acquire cash-flowing PDP assets at PDP or PV10 discounts; currently on sidelines due to aggressive market bids.

Market and Competitive Landscape:

• M&A Environment: High bid-ask spreads and "aggressive bids" on assets; lack of distressed opportunities allowing for value-based purchases.
• Commodity Prices: Oil markets viewed as more conducive to reinvestment than natural gas currently; gas prices expected to be volatile in late 2026/2027 with significant upside potential post-2027.
• Competitive Advantage: Low-cost structure due to zero expenditure on leaseholds/PUDs; superior rate of return selection from a massive land base compared to industry peers.
• Infrastructure: Expectation of increased takeaway capacity to Arizona and Pacific Coast LNG markets; hedging agreements align with future pipeline expansions.

Risks and Challenges:

• Commodity Volatility: Exposure to potential further declines in natural gas prices in the short term.
• Cost Inflation: Drilling AFEs for 2027 assumed to rise 11% year-over-year; sand and diesel costs up 30-50% quarter-over-quarter.
• Market Access: Current gas basis constraints in the San Juan Basin, though expected to resolve with new infrastructure.
• Leverage: Current leverage (1.4x) is higher than the target (<1.0x) for acquisitions, limiting immediate M&A flexibility.

Management Commentary and Tone:

• Confidence: Management expressed high confidence in the "cash return model" and stated they are "not in distress," choosing to let unit price find its own value.
• Strategic Discipline: Reiterated commitment to four pillars: disciplined execution, reinvestment rates, financial strength, and maximizing distributions.
• Capital Allocation: Prioritizes unit holder returns over deleveraging; will only use equity for accretive acquisitions if distressed assets become available.
• Tone: Optimistic on long-term gas fundamentals (2028+) but cautious on current near-term gas pricing; pragmatic on operational efficiency.

Analyst Questions and Answers:

• 2027 CapEx Inflation: Confirmed ~11% increase in AFEs; returns remain attractive in the $70 oil price range even with inflation.
• Leverage Strategy: No urgency to reduce leverage via equity issuance or cut distributions; plan to wait for attractive M&A opportunities or gas price improvements to naturally lower leverage.
• Gas Marketing: San Juan gas marketing secured via 2030 agreement; potential upside from data centers and new pipeline infrastructure.
• Drilling Inventory: "Tremendous" inventory available; flexible rig usage allows pivoting between Oswego and other plays (Permian, Red Fork) based on returns.
• Drilling Variability: Management highlighted high variability in well returns (bad vs. good) but emphasized their ability to select high-performing locations due to a small, selective drilling program compared to large-scale operators.
• Asset Divestiture: No plans to sell acreage; preference is to hold inventory to capitalize on future price changes rather than trading locations.

Other Key Points:

• Distribution Adjustments: Q4 distribution expected to be higher due to reduced drilling pace (one rig) in Q4; lower distributions occurred in August/November due to higher Q2/Q3 capex.
• Hedging: 50% of production hedged for the next year; 60% of San Juan gas hedged through 2030.
• Long-term Growth: Potential to grow net production to >500 MMcf/d with only 10 new wells/year if natural gas prices support higher activity.
• ESG/Operational: Mention of water assets and land potential regarding data centers in the San Juan Basin.