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

Explicit Guidance:

• Capital Expenditures: Projected 2027 operating cash flow reinvestment rate to remain under 50%. Capex for 2027 assumes a $70/bbl oil price; drilling AFEs for Oswego increased 11% in 2027 with sand costs potentially rising 30–50% due to inflation (diesel, casing, sand).
• Production Outlook: 2027 production expected to remain flat (±5%) despite drilling; oil production may see single-digit year-over-year growth, while natural gas may see single-digit declines in the first half of the year due to timing of Mancos completions.
• Distribution Guidance: Management projects 2027 CAD (Cash Available for Distribution) per unit between $2.00 and $2.50; anticipates a significant increase in per-unit distributions in 2027 due to a reduced Q4 2026 drilling pace (slowing to one rig) to meet the <50% reinvestment target.
• Leverage Target: Goal to maintain leverage below 1.0x prior to making substantial acquisitions; projecting leverage of 1.4x for any point in the current year.

Business-Segment Outlook:

• Natural Gas: Expectation of a "transition" in 2027 from a loose market to an adjusted world LNG base price; demand projected to increase by nearly 15 BCF/day in 2028. Seven remaining Mancos shale wells scheduled for completion in Q2 and Q3 2027, with drilling halted until price recovery.
• Oil: Planned to increase active oil rigs to two in 2027 (currently one Oswego rig) to maximize returns while staying under the reinvestment cap. Primary focus remains on the Oswego play (Red Fork/Clear Fork/Permian New Mexico) with "tremendous" inventory remaining.
• Inventory Strategy: Potential to increase natural gas production from 350 MMcf/day to 500+ MMcf/day by increasing activity to 10 net wells/year (holding flat with 5 net wells); currently prioritizing oil due to better current reinvestment returns.

Market and Competitive Outlook:

• M&A Environment: Current market characterized by "aggressive bids" and "bid-ask disagreements" on oil and gas assets; no acquisition opportunities identified at desired discounts (PDP/PV10 or less), leading to a continued "sideline" stance until market disruption occurs.
• Pricing Dynamics: Natural gas basis expected to tighten and uplift in 2028–2030 due to new takeaway capacity (pipelines to Arizona, Pacific Coast, and Baja LNG markets); current gas strip prices deemed unattractive for buyers due to expected 2028–2029 recovery.
• Operational Efficiency: Oswego drilling efficiency continuing to improve via longer laterals; well returns remain in the top 1% of US public companies with historical CROIC averaging 35% over five years.

Macro / Industry Outlook:

• Natural Gas Supply/Demand: Anticipates 2027 as a transition year where additional takeaway capacity installations will align with rising demand, moving prices toward global LNG benchmarks (TTF/JKM).
• Regulatory/Infrastructure: Data center growth in the San Juan basin is viewed as a potential catalyst to further alleviate basis restrictions, though not considered necessary for future gas marketing success.
• Capital Markets: Management believes the current lack of attractive M&A targets and the cyclicality of the market favor maintaining the current capital structure rather than proactive deleveraging via equity issuance.

Strategic Initiatives:

• Capital Allocation: Adherence to a strict <50% reinvestment rate of operating cash flow; prioritizes cash distributions to unitholders over debt reduction or share buybacks in the absence of accretive M&A targets.
• Hedging Strategy: 60% of San Juan natural gas volumes hedged via long-term agreements through 2030; strategy includes holding gas inventory to benefit from projected price spikes in 2028–2029.
• Asset Optimization: No new gas drilling planned for 2027; focus shifts entirely to completing existing Mancos inventory and expanding oil activity.

Risks and Headwinds to Outlook:

• Commodity Price Volatility: Significant downside risk if oil prices fall dramatically below the $70 assumption, which could necessitate cuts to the drilling program due to operating cash flow constraints.
• Cost Inflation: Dramatic increases in input costs (sand, diesel, casing) of 30–50% could impact drilling economics if prices do not remain in the high range.
• Market Disruption: The strategy relies on a future market disruption or price recovery to unlock M&A opportunities; failure of these events could delay asset acquisition plans.
• Execution Risk: Potential to underperform if gas prices fall "tremendously" in the near term, potentially delaying the completion of the seven Mancos wells despite their high rate of return profile.

Management Tone on the Future:

• Confidence Level: High confidence in the long-term safety of distributions and the "cash return model"; explicitly states they are "not in distress" and will let unit holders decide on share purchases rather than managing the unit price.
• Strategic Patience: Management expresses patience with the current M&A environment and leverage levels, preferring to wait for "distress" to acquire assets at discounts.
• Yield Focus: Emphasis on the company's ability to deliver a >20% yield in 2027 under current analyst projections, contrasting their stability with leveraged peers that would fail under similar credit tightening.

Miscellaneous:

• Hedge Portfolio: Current hedging covers approximately 60% of San Juan natural gas volumes through 2030; no new long-term price hedges mentioned for the future beyond the existing portfolio.
• Leverage Management: Management rejects the notion of using 4Q distributions or equity issuance for deleveraging, viewing the current 1.4x leverage as manageable given the anticipated natural gas price recovery in 2027–2028.