Q3 2019 Earnings Call
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Thank you good morning, welcome the launch of third quarter 2019 earnings call. Our earnings release in corporate presentation are both available on our website.
It just depends on today's call will make forward looking statements based on current expectation they are subject to risks and uncertainties forward looking statement and other disclaimers are provided in the earnings release and presentation.
Our comments today. They also reference non-GAAP financial measures, you'll find the appropriate reconciliations in our earnings materials.
I'm joined the Midland today by Tim Leach, our chairman and CEO , along with President Jack Harper Chief operating officer will drop and members of the conscious senior management team. Following our prepared remarks, we will host a question and answer session. Please limit yourself to one question and one follow up now let me turn the call over time.
Thanks, Meghan good morning.
Last quarter's results undermined our consistent track record and raise concerns about our execution ability do the performance of several spacing test.
Of course corrected and our <unk> priorities are to demonstrate our execution ability.
Hi, lighter asset quality I.
I continue to show financial discipline and cost management.
Our results for the third quarter demonstrate that we're focused on these priorities and there were making solid progress on what we set out to do.
Confident that Concho hasn't lost our ability to execute that our performance are sustainable over the long term.
During today's call I hope these key messages resonate.
Well cost improved dramatically.
We're reducing our operating cost structure.
We generated strong cash flow, which exceeded our exploration and development cost.
We continue to high grade our portfolio.
We have a strong balance sheet, which we reinforced with proceeds from asset sales.
We're positioned for growth and returning capital to shareholders.
We want to use our call. This morning to emphasize that we're executing a clear strategy and taking steps to position the company for 2020 to provide free cash flow and growth.
An important step in improving our capital efficiency and cost structure is the sale of into Mexico shelf.
The cash flow from this asset funded our discovery and development of other plays in the Permian However, within our broader portfolio it no longer competes for capital.
And the shale is consistent with our ongoing effort to high grade or assets and accelerate returns to shareholders.
We have a strong foundation for future success and the fundamentals of our business are improving.
Looking ahead to 2020.
Planning around a conservative commodity price you can deliver oil growth free cash flow and shareholder returns.
At lower oil prices, our financial strength provides flexibility and we'll manage the business within cash flow at higher prices will generate more free cash flow, which will fund more shareholder returns.
The industry's based a lot of different challenges overtime.
Today sentiment toward the sectors low and amplified by campaign promises to severely limit or regulate away oil and gas operations.
This comes at a time, when Concho and our peers are making significant strides and reducing our environmental footprint.
All the while unlocking in energy source in our country. This provided us with more security and change the go global balance in our favor.
Since we don't know how the politics will resolve I'll clarify that our exposure to federal acreage is about 20% of our total gross and net acreage position and our capital allocation toward that acreage is roughly the same.
Have a great deal flexibility, if we need to reallocate that capital.
The last five years W.T.I.s average between 50 and $60 with frequent moves outside this range.
It has provided a dynamic backdrop as we transition from delineation mode to development.
Well also optimizing drilling and completion methods.
And this new phase for U.S. shale, we were early to recognize the importance of scale, we built a strong team and high quality portfolio.
Both of which had been our biggest competitive advantages.
Our results for the third quarter demonstrate our ability to leverage those advantages and create value for shareholders.
Before I hand, it over I want to say that I'm proud of the efforts of our employees.
I'm thankful for your hard work and dedication to Concho.
Here's Jack with more details on the quarter.
Thanks, Tim and good morning.
Operationally, we performed well in the third quarter.
Production averaged 330000 Boe per day and exceeded the high end of our guidance range.
It also represented a 15% interest from the same period last year.
Oil volumes increased 12% year over year.
To 206000 barrels per day.
For the fourth quarter, we expect production to average between 318 and 325000 Boe per day.
Which includes one month of production volumes from the shelf and compares to our pre divestiture outlook of 334 to 341000 Boe per day.
Lastly on production our spacing tests are cycling through and our guidance incorporates our expectations for those tests in other words, we believe that weve adequately risk the volume guidance to account for the remaining tests that are coming online.
And importantly, as we plan for 2020 and beyond we will develop fewer wells per project at wider spacing.
Financially, we're focused on the things within our control.
Performance was also good.
Controllable cash cost which includes lease operating.
Good day and interest expense totaled 957 per Boe easy, which represents improvement year over year end sequentially.
We're working to further reduce controllable cash costs to $9 per BLE by year end 2020.
With the shelf sale, we will divest one third of our Wellbores, which will contribute to lower lease operating expense.
Also we plan to allocate a portion of the sales proceeds to pay off our revolver balance which will reduce interest expense.
I'm happy to report that the third quarter operating cash flow before working capital changes of 706 million exceeded exploration and development capital of $670 million.
This marks an important returned to free cash generation for the company, primarily driven by better capital costs.
As you can see on slide seven in the earnings materials.
Third quarter, well cost represent a strong rate of change in middle East from high starting point.
Our progress this year is the culmination of a lot of work across the organization, which has resulted in efficiency gains and improving cycle times.
Key initiatives include continuing to optimize drilling and completion designs.
Water is also an important part of the supply chain and then the second quarter, we entered into a joint venture with Solaris that leverages the scale of their system to provide cost effective water management to operations in Eddy County.
These operating efficiencies and well cost reductions provide momentum as we come to the end of 2019 and look ahead to 2020.
Leo has been a decade in the making and our work in 2019 informs our go forward development strategy.
We're assembling a 2020 development program that incorporates incorporates everything we've learned this year from well spacing and density to lateral placement and completion techniques.
We will continue to learn and adapt but not at the expense of returns or consistent execution you expect from us.
For the sharp focus on capital efficiency and managing leverage we control, we're well positioned to deliver on the framework for 2020, the Tim outlined.
Sustainable oil growth free cash flow and shareholder returns.
We plan to run a steady program in 2020.
This will support predictable performance and a growing wedge of free cash.
Which we estimate to be 350 million at $50 diabetes.
And 750 million at $60 oil.
Importantly, if oil prices increase we want chased the incremental barrel.
We have strong commitment to capital discipline, because we believe it's key to maintaining a strong balance sheet and growing long term value.
Now, we'll turn the call over for Q on a.
Ladies and gentlemen, silver question or comment at this time. Please press the star than the one key on your Touchtone telephone. Your question has been answered you were similar yourself when would you. Please press the pound Keith.
First question comes from John Freeman with Raymond James.
When I when I look at it slide 12 that you all provided which is sort of gives the guide posts on a on the free cash flow outlook for for 2020, which looks you know it's very similar to what you have communicated in the past about sort of steady rig adds and then free cash flow positive it fit.
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During the billion as you get closer to 60 should I assume that the kind of same applies with the previous commentary of had on on production in terms of kind of double digit kinda production growth with kind of oil production outpacing the overall growth.
Yeah, John I think that the way to think about 2020 is those are the sideboards and we're going to run a steady ship within those side boards and so that that.
Pro forma oil growth within those sideboards this kind of that load up double digit growth no matter. If oil is 50 or 60 and if it goes above 60, then it will we won't chased oil up as Jack said, if it goes below 50, we had the flexibility than to stay within cash flow.
Great and then just a follow up for me can you sort of talk about kind of that decision process to to drawdown docs, maybe a little earlier than anticipated and maintain sort of the study a frac crew count was that just mainly due to the improvements on the cost fronts.
Hey, John its will that that's exactly it.
We've seen a pretty meaningful efficiency gain and cost savings over the last quarter and so that's going to allow us to keep running two frac crews that we were planning on dropping in the fourth quarter.
And the result of that is a more smooth transition from the fourth quarter of 19 into the first quarter 20, and a reduction in the year end 19, DUC count down to roughly 70.
But importantly, our 2019 capital budget guidance is unchanged.
Great I appreciate it well done guys.
Thank you.
Our next question comes from Doug Leggate with Bank of America.
Hi, good morning, everyone. Thanks for taking my questions.
Tim a a I wonder if I could.
Go but to the got the gate cause for 2020.
Ask what I know you're going to give you guidance later on but what kind of capital goes along with thought.
50 to 70 375 to 750 free cash flow number because I'm guessing the capex is stopping through the year.
If I could bolt on to that maybe this is Mike part too if you could help us with what was the cash flow given up from the.
The sale of the off the shelf I'll leave it there. Thanks.
Well, we haven't come out with our capital budget.
And communicated that for 2020, but its oh, we have said it would be kind of steady throughout the year and.
Jack do you want to comment on the.
Sure Yes in previous calls we've talked about at $60 oil.
Free cash approaching.
A $1 billion and so when you when you add the the shelf cash flow at that level plus.
Revert to gas prices that were it looked more like they look a year ago that that kind of bridges that gap.
That's helpful guys, maybe it will take a second if I may that the cadence on the on the sales.
I just wonder if you could obviously, you've you've said backup the completions again as you pointed out with the.
The additional fraud, retaining the flight crews, but it looks to was this is going to set you up is pretty strong momentum going into the back end of year I'm. Just wondering if you could give us some idea as to what the cadence of those completions looks like as we as we head into 2020.
We'll leave it there thank you.
Sure I mean.
Just for clarity say, what we're doing is not dropping those two crews is not the we're adding and sort of the cadence all look pretty steady.
Through the quarter will.
Yes.
Okay, great stuff thanks cells.
Yes.
Our next question comes from Maroon Jerome with JP Morgan.
Good morning first question regarding your free cash flow outlook for 2020.
It looks to be called 100 million above where the streets that using a more conservative deck. I was wondering if you could give us some color on what kind of DNC cost savings that you're assuming.
Which is underpinning that debt free cash flow outlook. It looks like you did about $955 per lateral foot in the third quarter.
Wondering if you maybe comment on what drove the decline that you saw in the third quarter, the sustainability and how our service cost of factoring in to deal with overall DNC environment.
Sure Ryan.
Going to your first question.
You know that outlook kind of reflects the world as we see it today from a cost standpoint and the.
We are shown in there on slide seven.
The cost were running hot in the back half of 18 and I've been a major focus point throughout 19.
The inefficiencies peaked in the first quarter with several shorter lateral projects and negative impacts from rapidly ramping down from kind of a mid thirtys rig count to the 18, we're at today.
And that steady improvement in cost per foot in the second third quarters were driven both by a sustainable gains and how we drill and complete the wells, but also more cyclical benefits of an overall slowing Permian activity.
Great and just my follow up.
Tim You mentioned you know some assuming some thoughts on maybe a low double digit oil growth number and 2020 I just for modeling could you give us what your pro forma.
2019 oil number excluding the impact from shelf volumes would be so what the the pro forma 2019 oil number including the fourth quarter guide.
Oh, I think we'll probably have Megan follow up with you on that but but as we've said before the shelf was producing about 25000 Boe per day and it was 15000 about 57 56, 57% oil. So I think that can that could get to there.
Okay. Thanks, a lot guys.
Our next question comes from Derrick Whitfield with Stifel.
Hi, good morning on congrats on a strong quarter in operations update.
Okay. Thanks.
Perhaps for Tim could you elaborate on the measures management can take to mitigate potential federal exposure from a frac fan and perhaps more specifically how fluently can the company redeploy capital into non federal lands.
Yes, I commented on that in my prepared remarks that we can move rigs and our capital around a pretty efficiently.
It's obvious that the federal lands are in new Mexico and the.
The permits on federal lands take longer to get so they're more lead time.
So the things that we are doing too to mitigate that are.
We have quite a bit of activity on them right now and and then we've always run a program where we have.
Properties right across the state line, where you can move rigs back and forth. So that's a those.
Some of the beauty to of having.
Assets in both the Delaware and the Midland Basin, and in New Mexico, and the Texas side, the Delaware Basin.
Yes.
Great and for my follow up perhaps for for Jack or well based on our last meeting I know management generally wants to let the results through the talking from here.
Having said that are there any qualitative or quantitative comments you can make on the performance of your Q3 wells put on production and also what would it be safe to assume that the tighter in wider spaced wells are performing in line or better than your expectations.
Sure I mean, we've shown you there on slide eight kind of a.
Hundred 80 day look at a couple of different assets and so.
Weve per better worse, we have a series of spacing tests and 19, our guidance here in the fourth quarter bakes in kind of what we're seeing.
On that.
I would say, it's all generally performing as we expect.
It's very helpful. Thanks for your time.
Thank you.
Our next question comes from Michael Hall, with Heikkinen Energy Advisors.
Thanks.
Congrats on the progress.
I guess kind of following up a little bit on on out if and when do you think so it seems like caustic the capital side any questions very clearly been addressed and.
Has a lot of momentum behind it and.
I guess, what we still see some questions around the productivity side of the concerns raised in the first half of the year.
It sounds like you're still working some of those projects through here obviously in the back half how quickly do you think you see or we see in the quarterly results.
The kind of improved productivity from from the shift to wider spacing.
Smaller projects and away from the spacing test that's something that very quickly becomes evident and you think in the beginning in 2020 or is that going to take a little longer to work its way through the system.
Sure.
Well, we began moving into the the wider spacing program. This summer so while we still have a few spacing test rattling through the back half of this year you should see those less densely space projects could be put on a production in the fourth quarter and then increasingly into 2020.
And okay, and so like I guess early in 2020, then it seems reasonable to start to maybe see an uplift and capital efficiency.
From a productivity standpoint, that's right right yeah, Okay and then.
Yeah I was just curious as we as you think about the cost side the.
The.
Substantially improvements you saw in the third quarter versus the first half.
How you're thinking about the rest of the year like is it.
I guess, how you're playing that through the guys and the commentary for next year, but then yes, I think it's reasonable to think we'll still see continued improvement in the fourth quarter or.
You think you've kind of cut what you can out at this point.
Well, that's a tough question I mean, there theres been a lot of work. That's that's happened this year to get us in a position we are today.
There are certainly things were continuing to work on both from kind of a.
Structural sustainable improvements side.
Which we've seen a lot of improvement there.
On the cyclical side, that's really that's really hard to predict I mean, a big question is what happens when the calendar turns to 2020.
It's clear that independence of gun religion around capital discipline, and so we don't expect a meaningful pickup in activity there.
Any real incremental benefit there on the cyclical side, probably relies on the majors in the private is not increasing activity into 2020, which is a big unknown.
Yeah.
Okay Fair enough I appreciate it and then.
I'll turn it over thanks.
Thank you.
Next question comes from Bryan singer with Goldman Sachs.
Thank you good morning couple of follow ups on a similar topics on slide nine you talk about decade on inventory and a six to eight wells per section spacing range to what degree would you be planning to be using the low end of that range and the 2020 program and what do you see as the impact on productivity.
What does the gain and you are that a six wells per section.
Program would provide versus say in a well per section.
Sure.
I will get into a whole lot more detail about 2020, and the individual spacing on the the projects probably next quarter, but I think the main take where there ought to be that regardless of the ultimate spacing density we expect to have an inventory life measured in multiple decades.
But clearly 2020 will will move towards a more meaningfully up space program that we've had in the past that we've had a 19.
Got it okay. Thanks, and then.
You do have a few moving pieces that are impacting end of year into early next year production trajectory, you've got the tighter spaced wells, which have the strong first three month production, but the greater subsequent decline and one would think there would be an impact from wells drilled.
And third quarter or even second quarter that are going to be seen then.
You've got the mix to wider spaced wells and then you've got the Dockstar highlighted earlier coming online can you just speak to what you see at the aggregate impact on the trajectory in the first half first quarter second quarter next year, and whether you expect ratable growth, particularly on the oil side through the quarters, where more backend loaded production profile.
Yes, Brian So I think said another way of the collection of those things and the sale of the shelf.
Has increased our base decline a bit.
However.
The efficiency gains that we've seen and the up space program in 2020, I think provides a pretty good offset to that so.
We expect to continue the fourth quarter momentum and into 2020.
Got it and can you say, but the base with the updated based based decline as is and does that come down over the course of 2020 .
Sure Yeah. The our overall based decline is in the high Thirtys.
And oil is is in the low fortys.
As we move through 2020 and move into 2021.
We see that oil decline moving back into the Thirtys.
Great. Thank you.
Our next question comes from didn't low bid you live with Mizuho.
Then your line is hoping you can ask your question.
Hi, sorry, guys is cool thank you I wasn't thinking.
The.
2020 years, obviously very important we really appreciate the the free cash flow parameter you've laid down could we just getting a little bit more your cost Glenn or you may be reluctance along so some of these questions but.
Got you implied that you are using a lower gas and NGL price could you talk more about what you're assuming there could you talk a bit about nonoperated activity or assumed as well and any thoughts about well cost reductions and any other parameters that you can give us so to dig into that.
350, or 60 number which is so important thank you.
Good morning, Paul It's Jack.
I don't want to comment on the.
On the exact gas and NGL assumption other than to say it's conservative.
And then on the the non upside I think what you should expect from US a year over year is probably a bit less activity in that area in more more control over our a higher percentage of our capital.
For 2020.
Okay. Thank you and then a follow up this increase is the potential for more disposals are on can you talk a little bit more about decisions buyback stock as opposed to for example, raising the dividend. Thank you.
Sure on Slide 10, we show kind of the last four years worth of.
Of asset divestitures, and I think some level.
Of that is should be expected I think this year was a bit higher because of the shelf.
Yeah, Let me Oh on the.
How we balance the dividend versus stock buy backs up I would say that it was kind of laid out a framework for what we think the free cash flow could be under the different sideboards and I think you know philosophically, you'll see us kind of.
Increased the dividend more in a systematic way and the way that we can sustain for ever and then every other dollar thats available, especially at this price on the I'm going to be buying stock back.
Thank you.
Yeah.
Yes.
Our next question comes from David Deckelbaum account.
Hi, Good morning, everyone. Appreciate the time.
When it makes it.
Jack I wanted to.
Ask a little bit more around the comments about not chasing the incremental barrel with the 20 thoughts I guess.
One should we think about those bookends of free cash is sort of underpinning and identical rig program.
At the bottom end top engine that spectrum and then too.
Are you conceptualizing. This is finding a steady state rig program that you would then just extrapolate into 21 unless you know.
Oil prices were lower than 50, so that this free cash switch that you're targeting and 20 would grow into 21.
Yes. Good question, we you know as we've mentioned in the prepared remarks, we really value a steady program from from here out and so to answer your specific question. There is no rig.
Change is assumed in that different in those different oil price scenarios.
And then beyond 2020, we'll have to see what the landscape looks like but.
Combining growth with an ever increasing free cash.
Flow amount is what we're targeting and so whatever rig count is appropriate to to effect that is what we're targeting but but anything that from this point on will be steady and marked as we move up.
I appreciate that.
Okay.
So just curious as you you commented earlier that your gas and NGL assumption for next year is a conservative.
We obviously, what's happening on the screen is that influencing any difference in capital allocation next year, maybe away from Delaware and Midland.
That's maybe helping that oil growth in the model.
Sure, there's a lot of things impacting.
Our our allocation decisions and 20, and I really don't want to get into too much detail, but we do have a portfolio that allows us to.
Target more oily zones, if need be.
I would also remind you we have some some.
Gas hedges in place.
In 2020, as well that help help offset.
Some of those declines and the sale of the shelf is gassier than the whole the whole company exactly.
With that improves.
I appreciate the responses guys. Good luck. Thanks, Thank you David.
Our next question comes from Scott Hanold with RBC capital markets.
Thanks, Good morning, inner nice rebound guys you know if I if I go back to page seven because I think this is you know to me an important slide. It shows you know certainly great progression on on the cost side. You know obviously you guys came down to a very competitive level relative to you know the best peers.
You know this quarter already in do you find these is generally sustainable levels and is there more opportunity to improve as you go to these pilots that aren't as you know go to development, that's not as at least it based as the pilots, meaning you know as you kind of more from the tighter spacing pilots you know off to your 2020 per.
Hi, Graham later in the year does that provide a little bit of a tailwind on the cost side.
Sure I mean, I do think the teams have done a great job getting the cost down pretty pretty impressively over the course of the year and I wouldn't want to predict the ability to improve from here, but certainly that's a major focal point I kind of talked earlier about what some of the factors are on the cyclical side.
Could cause it to to improve potentially from here. They are definitely things theres, a whole slew of smaller gains around how we drill and complete the wells.
It should allow us to to shave kind of days and thus costs fall, but it's going to probably be a bit of us log from here to implement those.
I I would I would just add that we pointed out before.
That.
Changing pace there was a lot of inefficiency into the system and that's when we slowed down in early 2019. It created a lot of inefficiency in our system as well and as Jack as described a more steady pace.
I think just by its very nature that steady pace will be more efficient than what we've done a 19.
Okay, perfect and as a follow up and in Tim you talked about.
Free cash flow priorities certainly the dividends one of those can can you give a little color on what you see the competitive dividend for your company. It was it relative to some of your large cap MP peers do you look at the S&P 500, what is sort of that benchmark you'd like to see it at.
Well you know we've said for a couple of years now that we would like the dividend to be an important part of your investment decision and Concho and so I think it it has to be competitive with.
Other peers and other industrial companies eventually, but I think the most important thing on the dividend is that just the steady growth of the dividend.
Understood. Thank you Jeff Thanks, Thanks, Scott.
Next question comes from Bob Brackett with Bernstein Research.
Good morning, if we could revisit the the comments you made on the federal Frac ban could you give us any color you had with conversations with the new Mexico government given your important role in that state.
Yeah, they they've become very.
An important partner to work within the state into Mexico.
Because of how much of their budget comes from.
The oil and gas industry.
And.
You know.
Probably more than half of their lands in new Mexico more than half of the revenues are getting are coming from federal activity.
So you know that they're running a bird budget surplus right now they understand completely that that budget surplus is coming from the activity and Lea and Eddy County, New Mexico and.
So they're very much on the same page with us.
Interested in continuing that economic activity and understanding that that's what's going to fund schools arose in their state.
Thanks.
Follow up on a different topic, you mentioned the allocation of asset sale proceeds this sort of 60 40 split between debt and share repurchases. How do we think about that ratio for future free cash flow or another way to think about it once the ideal sort of debt level at which you're happy with debt and incremental cash goes.
To share repurchases.
Sure well.
This sale and paying down our revolver balance, we're happy with where our debt stands for now and so incremental.
Cash flow.
In the near term will be divided between our dividend and the share repurchase.
Great Thanks for that.
Thanks.
Our next question comes from Liam or any with Keybanc.
Hey, guys just wanted to conceptually follow up a little bit on the goalposts here you know for 2020, you guys did mention some steady rig adds or throughout the year. Obviously, you guys reduced activity substantially during 2019 in the past you guys did talk to.
About kind of a similar level of an activity in capex in 2020, just trying to get a sense does that still apply are we going to see similar activity or should we expect you know maybe a little bit lower activity in 20 versus 19.
Oh, I think whatever you should expect it won't be steady and.
Nothing drastic.
You know when we do add.
Rig or two.
From where we are at this moment so.
We will give all those details though in February .
When we still in the current cost at that time, our current efficiency outlook.
So thats, one will roll that out.
Okay. I guess just a question around a your comment about low double digit oil growth in 20 is the expectation.
Just trying to get answers that sort of adjusts for the new Mexico shelf sale I guess, what I'm going is well that's sort of assume you didn't have the shelf in 2019, when we do that kind of low double digit percentage increase to get their noted that's correct prize pro forma oil growth.
Okay that makes sense, all right and just a couple questions on a few of your guidance number. So you guys talked about GP in t. going up to about $1.40 per BOE, we in the fourth quarter I'm, just trying to get a sense. If that's the right. The right run rate, we should be thinking about into 2020, and then same question the G and H.
Side, I guess that went down a bunch this quarter is that kind of the right run rate on gionee as well.
I'll take the GP into piece, which is just what you're saying there is that Gulf coast pricing contract coming into effect in the fourth quarter.
Okay at 400, G.P.T., rather than the impact of realized price.
Jack you will hit the Jeter.
Yeah, I think there there when you think about DNA in the near term roughly $2. A unit is the is the right way to think about that and trending down overtime as we work towards that a nine dollar.
Controllable cash goals.
Okay. Thank you.
Our next question comes from Ryan Todd with Piper Jaffray.
Thanks, maybe just.
Hi level kind of some of philosophical point of view, how do you think about ideal.
Pace of growth for your company over the medium to long term.
Indicated low double digits for next year is that.
That's the right number in terms of in terms of kind of maximizing the efficiency. The organization that you have how do you think about relative to.
You know a mid single or mid double digit type of growth number in terms of the most efficient.
You said the organization.
Yeah well.
I've always thought of growth being an output of good.
Execution and efficiency. So it you know.
I don't I don't start with a targeted growth number I.
I think on this and as we described in the slides we've kind of targeted.
A lower commodity price that we could operate and have a free cash flow or breakeven cash flow at lower oil prices. That's the starting point and then that what we think the average oil prices I described in my prepared remarks.
The average of what has been over the last five years that gives you the sideboards of.
You know our activity level and how much free cash flow you can expect in addition to what I think double digit growth is is growth enough I think.
For our industry to start attracting capital again.
We're going to have to offer an investment thesis that is different than what we've done in the past and I think having growth.
And a robust them out of a free cash flow. This returned to shareholders. I think we can do that and we may be one of the few companies that can do that and so that's what we're going to demonstrate.
Thanks, that's helpful. I appreciate the color there and then maybe just a quick when the.
On slide eight the production curves that you have there that show.
It's in between the more tightly spaced and the wider spaced wells are those those wider spaced curve there are those based on.
Recent developments of of yours that have done.
I would have been a wider spacing going back a couple of years over you know a different projects. You had is that that's based on actual data and is that kind of represented representative of what.
We should expect going going forward from a real well productivity point of view.
Yeah, I mean, we've been on a relatively long evolutionary track of.
Density testing kind of over the years, we've been drilling horizontal wells and so yes that reflects though the wider spacing we tested before we move to the more dense space.
Really what underlies our confidence and.
It will happen as revert to a wider spacing pattern.
Great.
Great quarter guys.
Hi, Thank you.
Our next question comes from this and Kumar with Wells Fargo.
Hi, good morning, and thank you for taking my questions.
Just wanted to touch base on the slide seven there obviously very impressive.
<expletive> finding costs I'm just wondering.
Let's say you had a few more closely spaced wells in the first half of this year or was there any part of their design on those wells that drove cost up you've talked about efficiency developing.
Let me said differently could you do it will closely spaced wells for about 1100 Boes a foot good day.
No that's a that's a good question.
Probably not as the answer today I mean, clearly one of the things you saw there with the.
Our cost in the end of 18 in the very first quarter of 19 was we found some inefficiencies as you.
Tried to more densely develop and keep will you know as you're drilling within a more tightly spaced window for example, and so portion to slow down relative to what you can do if you don't have such a narrow window that you're targeting so I do think theres. Some some of the improvement is the decision to move to a wider spacing.
Okay, Great and just as my follow up at the end of the core you had 85 dogs, that's about four and a half belts per rig.
Thank you mentioned 70 does spending is your what's her normal run rate as you move to the wider spacing and showed her sorry smaller projects in 2020, what's a good run rate for us and think about in terms of ducs permitting.
Probably in that two to three times.
Territory the rig count.
Great. Thank you.
Our next question comes from Girl Nicholson with Stephens.
Good morning, everyone. Thanks for taking my questions in regards to that JV with Polaris can you talk about any potential capex.
<unk> cost savings they said conceptualize the thought agreement.
Oh, one of the big benefits as they have a very sizable amount of existing infrastructure and that as part of that deal. We contributed in in Eddy County, our water handling infrastructure as well so it should help us mitigate the need to spend incremental capital on those types of things in the future.
Okay, Great and then just some housekeeping aspect, let's see what was the AOI for the shelf.
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It was a substantially higher than our company average.
I think I. Thank you.
Oh last question comes from Richard Tullis with capital one.
Thanks, Good morning, everyone.
Two quick questions one for will.
See planned average project size for 2020 and.
At a high level, what do you expect allocation of capex to be between the Midland and Delaware Basin next year.
Yeah, those are definitely topics, we'll get into and a lot more detail here in February but but in general I would say the average project size will be.
Slightly smaller and certainly the change will be.
The very largest projects will will be a lot closer to that average number.
Okay, and then just lastly for Tim or Jack just maybe more of a macro view question. What's next for the U.S.C.N.P. sector are you expecting that acceleration of consolidation due to the.
Current investor environment for free cash flow slower growth than maybe the scale required to deliver consistent operational results.
I think.
Yes on both front I think first of all.
More disciplined capital.
Decisions and capital efficiency more discipline across the industry and then yeah I think.
We've been talking about consolidation for years, though and it's just a slow process.
To grind out cost.
And in efficiency out of this industry, Yeah, Richard I think this this price discovery phase is.
It will it will single out the companies that have the scale on the capabilities to.
Do what we're talking about over a multiple decade period and I think that's what we'll we'll define the winter.
Alright, very good nice quarter. Thank you all right. Thank you.
Ladies and gentlemen, this concludes todays Q and a portion I'd like turn the call back over to warehouse.
Great. Thank you again for.
Dialing in this this is a great conversation very proud as I said of our employees at Concho into work they've done.
This quarter and I'm very happy with the results and look forward to talking to you in February . Thank you.
Ladies and gentlemen. This concludes today's presentation. You may now disconnect have a wonderful day.