Q3 2019 Earnings Call
Good morning, ladies and gentlemen, welcome to Parsley Energy's third quarter 2019 earnings call.
Name as Robin I'll be your operator today.
As a reminder, this call is being recorded at this time all participants are in listen only mode.
Question and answer session will follow the formal presentation.
And now I'm pleased to turn the call over to Kyle Rhodes Parsley Energy's Vice President of Investor Relations. Thank you you may begin.
Thank you operator, and good morning, everyone.
With me on the call. This morning, our President and CEO , Matt Gallagher, Chief operating officer, David to low So Chief Financial Officer, Brian <unk>, Senior Vice President of land and marketing definitely arena.
Our remarks today may contain forward looking statements. So please see our earnings release for discussion of these statements associated risks, including the fact that actual results may differ materially more expectations.
We also make reference to non-GAAP measures. So please see the reconciliation any earnings release.
During this call what FERC in Investor presentation that can be found on our website and prepared remarks.
Referenced a flight for about presentation.
After our prepared remarks, we'll be happy to take your questions.
And with that I'll turn the call over to Matt.
Thanks Kyle.
[noise], partially is executed with a sense of urgency throughout 2019 in a third quarter was no different.
We turned the corner to sustainable free cash flow sooner than we had initially expected and start a return of capital program to shareholders, where the initiation of a regular quarterly dividend program.
Our capital efficiency continues to grind higher.
Once again eclipsing our prior target.
Finally, we announced an accretive Delaware basin transaction with our acquisition of Jagged peak energy.
As you can see on that this was a natural fit with our legacy Delaware position.
Let's move on to slide five.
Before we went ahead, we have to focus on home based first.
That is what we have done with our 2019 action plans.
Delivery on these targets is important to us personally accountability, it's critical to us corporately.
This is another quarter of positive progress reports.
Good news here does right hand side of the page, but a couple of items in particular I wanted to highlight.
First.
One of the partially is key goals. This year was accelerating our timeline to sustainable free cash flow.
Thanks to the high level execution delivered across our organization.
We generated 21 million of positive free cash flow this quarter and initiate a regular dividend program.
The JV transaction enhances this free cash flow profile in 2020 and beyond.
Another key objective for us this year was to deliver improved capital efficiency I'm excited to report that strong cost controls coupled with our returns focused development approach have indeed generated a step change in capital efficiency and we are again boosting our target.
We now expect a 14% to 16% plus year over year improvement.
Again, the jagged peak transaction helps preserved and build upon these capital efficiency gains and 2020 and beyond.
Finally, I wanted to touch base briefly on the strategic review for our water assets.
To start we have had a lot of interest across the board and our team has evaluated at array of options.
At this juncture, we've really monetizing a minority stake to a financial partner seems to be the best pad for partially we are currently an exclusive discussions and consistent with our prior time I expect to provide a more fulsome update in the next month to too.
I will also note that JMP has built out a complimentary water infrastructure, which could provide additional optionality in the future.
I'm proud that our team has delivered across the board on our 2019 action plan.
However, we recognize the in this market environment a company is only as good as its last quarter. Thus, we must fairly strong and maintaining the sense of urgency in 2020.
Turning to slide six.
I want to reiterate the J.P. transaction is about more than color on him at.
Critically it enhances partially as a competitive advantage in some key value drivers.
We've shown this relative ranking graphic in the past and here, we presented on a pro forma basis.
We have often talked about the importance of strong operating margins in supporting a sustainable free cash flow profile.
Yeah, it's awfully low cost assets our margin enhancing.
We have you capital efficiency as another key value drivers.
Hey, top tier recycle ratio signals that when you put in an incremental dollar in the ground you are getting well more than that dollar back.
Jags assets reinforce our top tier recycle ratio.
Especially on scale for a minute this transaction makes us a better company not simply a bigger company. We have long said that fishing capital allocation within the Permian requires sufficient scale.
We worked hard to achieve that operational scale. During 2017 in 2018 and now we can apply our scale advantages to jagged peak assets.
And with 15 rigs running in 2020, we will remain in that shale scale sweet spot.
And we will retain our corporate agility.
I think were added scale structurally will help parsley is on our cost of capital with our path to investment grade credit profile now likely accelerated.
Finally, with one of the highest insider ownership positions in the in peace Phase, we had a highly visible alignment of interest with shareholders. Upon closing I look forward to welcoming jagged peak representatives with a significant equity ownership to our board.
Which only strengthened this long standing alignment with our shareholders simply put we are invented this transaction makes us more capital efficient and ultimately a more attractive company that can create incremental value for all shareholders.
Now onto the slide seven.
Accountability will remain front and center in execution will remain Paramount for partially in 2020.
We unveiled the synergy scorecard, when we announced the jagged peak transaction and I believe it is important to highlight at achieving integration success will be built in to go forward incentive plans for all partially employees.
Furthermore, I want to reiterate that the purchase price paid for jagged peak was a close to at the market deal, making these tangible synergies will become true value enhancers that accrue to all shareholders.
That's it is clear again in this market that the burden of Pru and a transaction is assumed to be waiting until proven otherwise internally. This isn't motivator and our team is excited to track or progress on value creation and 2020 and beyond.
Ultimately, we remain convinced that partially will be a more capital efficient company when more free cash flow as a result of this deal.
We have made major strides this year solidifying operational excellence.
I'll now turn to David to highlight how we see this magnifying on a larger and complementary asset base.
Thanks, Matt and natural question on the jacket, Pete transaction might be why now and why these assets.
That's already stepped through a host of the answers here, but I want to address that question specifically through capital efficiency went.
There's a cost side the productivity side of that equation.
So, let's turn to slide eight and start with the cost side [noise].
I think the graph at the bottom left to the page provide some useful context to start with about this time last years, we're bumping up our 2019 capital budget, you can see where our Delaware costs were.
As you know rate of returns gears, our capital allocation that.
So as we finalize and 2019 budget, a higher Delaware cost structure resulted in a smaller capital allocation during 2019.
The costs are not present a time.
Our team is constantly working on grinding cost lowered your wide ranging efforts shortening cycle times, optimizing well designs leveraging scale benefits in improving supply chain management just to name a few.
And as you can see we achieved a material improvement in our Delaware cost structure, well costs down more than 20% over the past year.
These significant cost savings boosted the returns profile of our legacy Delaware Basin assets.
So as we started to sketch out in 2020 budget on a standalone basis, the Delaware was poised to garner increased capital allocations and returns focused development plan.
In the graph at the bottom center that page you can see the jacket peaks Delaware cost structure has also been a night downward trajectory, albeit with the Twoq you 19, well costs. It is still 10% to 15% about partially six month rolling average.
Importantly, the walcott differences not consumables driven as you will note that parts. These based design proppant loadings are higher it typically consistent more northern white sand.
Rather this is where scale helps and we believe applying partially scale advantage will help drive well cost lower on jackie's asset base.
On a combined basis, we expect to register your all in drill complete and equip costs in a low 11 hundreds per foot in 2020, providing a nice capital efficiency tailwind.
Turning to slide nine, let's now I'll touch on the productivity side of the capital efficiency equation.
Sure the graph on the left well productivity of Jagadish core assets have been consistently better than our comparable Delaware basin assets.
Simply put the rock underlying jacket these assets civilians do it.
The Wolfcamp a third bone targets ticket as you move northwestern my trees ranch area, making for more productive wells.
So again tying it back the original question why now and why these assets.
Simply put.
Adding better wells at our existing cost structure makes us a more capital efficient company moving forward.
Let's move to slide 10 times back to accountability.
Well, we unveiled our returns book is 2019 actually playing in February one of our key objectives recording measurable year over year capital efficiency eight we originally targeted 8% to 10% plus improvement.
Route 2019, we've continued to squeeze out more organic loan production for less capital for the second quarter to ROE, we're raising our 2018 capital efficiency target.
As shown in the graph on the left we now expect to deliver a 14% to 16% plus year over year improvement.
I'm proud to Nashville Strider team has made on this key objective in 2018, but our work is far from done.
Looking ahead, we take the jagged peak transaction will preserve it for steam is new normal capital efficiency at 2020 and beyond.
Finally, I think it's important to highlight the does go forward capital efficiency Allen does not rely on future service cost deflation.
With that in mind, let's turn to slide 11.
Things have gone well this year, which may beg. The question does this deal now increase our operational risk going forward.
It's a fair question it would not be intellectually honest for me to say the integration risk is zero.
But we believe that risk needs to be way relative to the reward.
That is already hit on the rewards that it is transaction to hear we reiterate what this path of value creation looks like.
On the other side, we believe execution risk is sufficiently low we have a high degree of confidence in managing it our confidence stems from two primary forces familiarity and activity pace.
On the former Theres, a deep institutional knowledge base on the jagged peak assets residing at partially the geology is familiar in some areas a natural extension from our legacy trees ranch asset in our teams are well versed in this particular asset.
On the second point, we're referring to both the activity pace of partially in the broader industry.
A one hand, partially has done this before as we ran 16 rigs throughout those the 2018.
Furthermore, it's always easier to slow down a model that speed went up.
We're not ramping activity on these newly acquired asset instead, we are slightly moderating activity to prioritize free cash flow that has a knock on effect of reducing our operational risk profile.
Finally, as shown on the right access to the right graph, we're in a deflationary service environment, which should result in optimal service quality for operators of scale like parsley.
So to conclude by certainly back to answer. The original question. We're excited that this transaction offers a favorable asymmetric risk reward outcome for our shareholders and look forward to making meaningful strides on the straightforward path of value creation.
Now I'll pass it over to Ryan to discuss parsley strong financial position and walk through our approved 2018 outlook.
Thanks, David turning to Slide 12, Davis last comments were focused on operational risk, but I'm more focused on the financial risk.
The strong balance sheet is of Paramount importance to us and we feel like the jagged peak transaction only reinforces that corporate strength proportionately.
Not only do the assets hand in glove jogging peaks conservative balance sheet management complements our legacy strategy.
As we noted at announcement, our leverage profile hold steady after this all stock transaction is on a path to further deleveraging.
In recent weeks.
Fortunately has received an upgrade and then and improved outlook from the credit rating agencies and ultimately we believe this transaction accelerates our path toward an investment grade profile.
Finally, I will note that both partially and jagged peak have taken a proactive approach to mitigating oil price risk with the majority of forecast the 2020 oil production now hedge.
You can view, our pro forma hedge position and the supplementary slides.
Turning to slide 13, I'm excited to walk through another positive guidance update where the numbers really speak for themselves we turned the corner to positive free cash flow.
Net footage is once again up in capital budget range is once again tightened lower.
Oil production up in unit operating cost down.
All of us add to continued improvement in capital efficiency.
Next I wanted to provide more detail our activity plans into year end.
During the third quarter, partially utilized three to four frac spreads and proactively managed its completion schedule.
We intend to continue this practice through the end of 2019 and believe this steady capital investment pace will help avoid operational friction costs associated with budget exhaustion and will facilitate strong organic oil production growth in early 2020.
In the fourth quarter, we're guiding to oil production at 88.5 to 92000 barrels per day.
We expect to turn 32 gross horizontal wells to production.
Slightly weighted toward the back half of the quarter.
Working interest on our Four Q1 9 wells is expected to average roughly 85%.
Before I wrap up I want to point out that the guidance on this slide speaks to partially on a standalone basis for 2019 as the jagged peak transaction is not expected to close until the first quarter of 2020.
We provided preliminary pro forma 2020 outlook, when we announced the transaction in mid October and are reaffirming that high level outlook today.
You can find incremental detailed in our supplementary slide.
And now we'll be happy to take your questions.
At this time will be conduction a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tailwind to get your line is well it's been Q.
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My first question comes from John Freeman with Raymond James. Please proceed with your question.
Good morning, guys.
Jonathan.
Yeah. The first my questions I wanted to focus on a on slide eight and yup Yup articulated you know how you're going to drive a the jag legacy costs down about 100 per foot sort of embedded in the 2020 guide.
But when I think about kind of out of the partially legacy.
Well when we think about the drivers that there would have been too hard to drive the cost lower there one of them that it doesn't look like especially being embedded in the guidance was inc. I sort of a switch or increased use of local sand and I know last quarter. You told me down a couple of task it was pretty early.
You probably need more task, but I guess since Jag is 100% local San do you feel like you know given the data set your inheriting that accelerate your ability to move over to the local fan.
Yeah, John as David We certainly do expect to increase our regional sand usage and it's part of why you see to the bottom into that range attend 75 as an example, there's there's potential to save more than what we've seen in our recent twoq to Threeq results. Those results did have some regional usage Buddy.
It was a minority fractions of you're absolutely right. It is an opportunity going forward and we're just we're gonna have to see we've got a are you going for stimulation, which will which include the state as well and so we're going to get a little more data on that pretty soon.
Great and then my follow up question in the 2020 guidance outlook that you have given I do you assume that yeah. It's a lateral link the jag is sort of stays where it's at or do you factor and obviously with the land synergies you're picking up in the deal that the lateral link for Jag probably moves close.
Sort of what you all then it closer to 10000 feet.
For 2020 in the near term don't expect doesn't change much. There. We did highlight the those lands synergies, which will create benefits over the long term in the very near term, though it's based on a pretty comparable lateral length. It that we show on slide eight.
Our next question comes from Charles Meade with Johnson Rice. Please proceed with your question.
Yes. Good morning, Matt you increased your whole team there I'm, Matt I Wonder if we could go back to your prepared comments you talked about the.
The water infrastructure.
And and did you guys have I believe I would I heard you say that you've settled on the structure and you're working.
With a part of your a couple of third parties.
Can you elaborate a little bit on on what led you to job I guess you pick. This this structure I believe what you said you. So you know a minority haven't into more minority investor in the project in what timeline, we should be thinking about.
Sure Charles No anytime we go into analysis of one of our assets, we cast a wide net of possibilities and we funnel down based on what fits our needs. The best and we really believe or do you can look at our lease operating expenses that we are leader in operation.
So these assets.
So this the structure allows us to continue those operations across the basin and bringing to bring in a partner a financial partner essentially.
Okay, good over to Dalton for more of the a timeframe on that.
Yeah, I mean, what what became apparent to us as we look they're all these different.
Different options not to review a method was operation control is very important to us in the long because off at night, Oh, we know that is being addressed by but partially employees, but again timeframe is as Matt mentioned hopefully within the next month or two we'll be able to go into more details.
But the you know even though we're we're saying we're just monetizing a portion of the water assets, we wouldn't be doing so if it weren't.
Briefly clear about.
For our shareholders.
Okay. Thanks for that added color than they did this question is perhaps for for the David and I. Appreciate you guys have a lot of up.
And then slides with lot of information put together on this capital efficiency.
Theme and it makes sense to me the way David you were talking about you know there's productivity saw idea in a cost side, but does it does it also makes it makes sense to perhaps think about it as a as a you know what assets you have and and how you prosecute those assets and if you can if separated that way in the how cortez.
Affects on both the costs and the productivity side, how much of this of this uplift you're seeing on Jack <unk> or <unk> or pro forma partially how much of that is just better Jack rocks to work with.
And how much of that is.
How you're going to be do any differently at Charles I think going forward. The there's a slide a little bit later now we're talking about Whiting fairways, we kinda give a refreshing our inventories I think with the Jag assets. It allows us to.
So sort of.
The increase our capital allocation to the Delaware, but within the Midland you're going to see a pretty similar 2020 pro forma look.
And what you saw in 2019 will have some some continue true there. So yeah. There were there I take your point there are going to be differences between certain areas and a higher allocation in the Delaware is part of it but as we talked about you more more value per dollar invested with sit with these new assets should.
Should help on the Delaware side, and the lower cost structure allowed it to normalize it more with what we've seen in the Midland This year.
Our next question comes from Neal Dingmann with Suntrust. Please proceed with your question.
Thanks for the color so far and could you you all walks through I'm looking at specifically that slide 16, where you base for detail that said that the proposed spend about 35% of Delaware allocation next year post jazz and just wondering.
No again, how fluid is that in sort of the thought process behind.
The 35% spend there and 65 in the Midland Basin.
Sure.
We got to when you combine the two companies together.
That's where the rig map is essentially so you'd see essentially no changes in the Midland Basin, and then a moderation of activity in the Delaware just a flip to free cash flow as we've done corporately in 2019 hitting on it this quarter.
So then as we then within a horseshoe in percentages that is essentially what we foresee even throughout the budgeting process in a wide range of commodity prices. So I don't see that changing much we're coming down in the home stretch in Pennsylvania and that the final details on on the schedule and on the on fit.
Nicole rig moves so I think what she sees essentially what you get there in 2020 and then there's no reason to think that wouldn't be an approximate it for a longer term capital allocation as well.
No great detail. Thanks spend and then just separately, but I know you'd I've talked about productivity sort of assumptions. The past I'm. Just wondering could you comment how you all sort of view and and you know look at sort of productivity changes maybe as you begin 2020, and you know how you sort of baked that into your 2020 guidance I know you guys tend to be a little.
Conserved there, which I like to see I'm, just wondering anything you could talk about sort of these productivity assumptions not only as you start the year, but through that whole 2020 guide.
Well one thing we do that maybe maybe different just across the industry is as you as you look out over a longer term and this whole basin is developed we put what we call a 3% aging factor essentially on her on our long range planning and our modeling.
So that's you're always fighting against that on the productivity front and I think that's fair when you look at a reservoir system.
Based on all of our analysis to start off or some sort of some sort of degradation.
Obviously, we're going to be attempting to offset that year and you're out with technology and approach people processes and technology and we think we have a nice headstart on a lot of those items and then you can see on process. This year the rate of change that we saw in the Delaware just from.
On budget cycle last October into a six month period following that.
It was immaterial rate of change and that really kicked off the analysis going into this this jacket acquisition. So you're gonna have ER positive surprises along the way, but we think it's important.
Fundamentally could you put an aging factor on productivity over the long term.
Our next question comes from a since then with Bank of America Merrill Lynch. Please proceed with your question.
Thanks, Good morning on slide.
620, I'm, sorry, 16, I appreciate all the color on 2020 outlook details, but just wondering if you could broadly speak to.
The number of completions relative to 140 and in 2019 and working interest to how that changes relative to a 93, 94% in 2019.
Well well the 140 is gonna be on partially stand alone and that should be about.
About the same ratable assumption in this and we're pretty excited about this preliminary 2020 outlook. When you think is the combined company, we can reduce capex, 15% and generate a 10% year over year coil production growth, but a maybe a code has some additional details on completion timing and the aside.
Yeah, I would just seems kind of similar 10000 foot lateral as your base assumption, there and well have more details a high resolution on the 2020 outlook with the working interest, but I think 90% is probably good place holder until hearing otherwise.
And Matt you were pretty clear and budgeting at $50 oil, but just wondering how we your strategy would change if oil prices, where do hole at $60 per barrel and Conversely.
If you had to cut back where would you reallocation likely change based on what you know so far.
I think a lot of the same as as we promise to going into 2019 at as oil prices rebound and that would accrue to our balance sheet positively and cash on balance sheet or or likely paydown of debt and then so.
So we don't see re ramping activity. We think this model is is sufficiently competitive I'm not only in the industry landscape, but across multiple industries. So we think we would enjoy the benefits of the additional a run up in revenues if oil prices recovered on it.
Onsite. We also think that we have some of the lowest breakevens in the industry and so we think we're more resilient to the downside add on top of that well over $1.2 billion of hedged cash flow.
On a standalone basis going into 2020 I'm. So there's some resiliency. There you don't you don't make capital allocation based off our hedges, but it does give some insulation so.
I don't see a it would have to be a very low fortys or or below before we we are meeting our free cash flow objectives. So I think we that's it would be in that ballpark before you saw activity reductions. So I think we'd be one of the glass to reduce pertinent to the did.
Then and committed to growing the dividend over time, so those are going to be the priority on the on the downside.
Our next question comes from Leo Mariani with Keybanc. Please proceed with your question.
Hey, guys I think you've obviously are kind of outlined the fact that you expect your Delaware costs to be lower in in 2020, just want to get a sense on the budget for next year are you, assuming a lower Midland costs as well are you just kind of using sort of today's cost for 2020.
Yeah, we are.
Going forward in the Midland I would say we are using today's costs, which are lower than they were when we budgeted 2019. So we're not assuming further significant inflation and then when but we do expect our milling costs to be lower probably thinking that say 925 ish for D.C. any further Midland basin and that I want.
I mentioned that includes you quit facilities.
So back in the past, we've often referred reference our cost DNC. So I'm talking all in 925 per foot commitment.
Okay. That's a that's helpful and I guess.
Just with respect to rounding out 2019 should we still expect fourth COVID-19 to kind of be done at a low point for capex for this year.
Well, we that we've we've had the 23 or four frac spreads running throughout the year that more spread is essentially a flat spread it allows us to manage our capital pacing.
Yeah, our small dot bank and so I would say I wouldn't is really characterize for to you is as definetly, a low point because part about half of third quarter, we had blessed to three so half or other quarters refractories happens for will be at a higher proportion of four throughout the fourth quarter.
Fourth quarter 2019, so that will reflect a little bit any capex.
Just part of our what we baked into our guide.
Our next question comes from Jeff Grampp with Northland Capital markets. Please proceed with your question.
Morning, guys.
The the water transaction <unk> I'm curious how you guys are kind of evaluating bring in cash and the door today versus maybe a capital carry on any future buildouts. Each talk about how you guys kind of evaluating those trade offs and what use of proceeds might be for any cash cash proceeds up front.
Sure.
Yeah, you have to look at it Holistically, that's exactly right pad as to be a beneficial trade off for shareholders over a long term you got discount rate assumptions and there are going to be additional.
Cost versus keeping at 100% in house. So it has to be made up for in space and the valuation and then you have to.
Take take that capital and you have to you have to deployed or into a shareholder friendly and valuation creation model. So.
It's not without analysis, that's why it's been taking a long time and without the.
The mechanical tradeoffs that that should all be corrected for him the evaluation.
And then Jeff you asked about use of proceeds we will pick up little bit of revolver debt with the geography transaction. So I'd expect the first use of proceeds would be a would be debt pay down.
Any proceeds beyond that really isn't earmarked at this time other than optionality as it.
I've never really bad things have a bit of cash on the balance sheet.
Yeah I understood appreciate those details and my follow up I'm referencing slide 10 here you guys reference kind of going to optimal project size six day wells.
Yeah, I think that's maybe a bit higher if memory serves them than what you guys said maybe down in recent path. So it's just wondering how fast can you guys transition to that is that something that you know maybe wait until merger closing and you do that from day, one or do you kind of walk that up to that level over time, just kind of one of the know how you guys maybe thinking about that.
Yeah, Jeff I'll remind we've actually executed projects at this scale before and we'll have a few of them even here in the back half between 19, though this Saturday night, I think really going from average of about three for pad to this six per project in 2020.
That's a shift up certainly it allows us to achieve better surface level not cost efficiencies, but it doesn't get into that Mega project scope, where you have to significantly larger and more complex facility feel would handle massive and in some cases surges in production upon initiating flow back. So we don't see this is a major scared to death.
Change we've done before we have confidence we'll be able to do it effectively throughout 2018.
And it allows us to say some costs, but.
I think very much of that fairway of what we've done before.
Next question comes from Mikes yellow with Stifel. Please proceed with your question.
Hi, good morning, everybody.
Hi, good morning like.
It seems like good jagged peak had come to the conclusion they needed to co develop all the zones from the third bone spring down through the Wolfcamp b on their properties.
Well I get your thoughts on that and how you might develop those assets any differently than what they were doing with some of the new projects that they were working on.
I think when we look at our projects we have development slots that we've been doing since 2000.
16, really and we've been in two and three wells in two three bench.
License been doing co development, so that that is a path forward and we talk about these six and eight wells as we we envision co development of of multiple slots any just keep.
You just keep growing that overtime.
They do acts as a system.
And you want to do you want to draw it down in unison essentially so there might be some differences on that downstairs, we called downstairs spacing.
You could you can pull out as a single well or single slot here. There. We do per project reviews are based on our our seismic in our interpretation of Frac baffling and the geoscience associated with each project and there maybe a slight.
The difference in interpretation on a one or two will basis here in there, but I don't see anything dramatically different.
Okay, and I know, it's early days in the transaction, but I'm sure you've been following their projects just.
Wanted to see I think they had some some data on their coriander project anything you can.
Say as to how that as look in terms of spacing or anything else in terms of well performance there.
No broadly you know theres still a separate company and they'll be reporting.
Subsequent to us.
So nothing nothing to comment really on their operations.
Our next question comes from Bryan singer with Goldman Sachs. Please proceed with your question.
Thank you good morning.
A couple of follow up some of the earlier questions on the cost side slide a in the productivity side on slide eight or nine beyond the local sand savings that you addressed earlier, what opportunities and impacts are there for you as a result of the acquisition or otherwise to further reduce your legacy well cost preferred.
And then on the productivity front on slide nine what does the scope for opportunities if any to improve productivity on parsley legacy acreage versus just blending in the higher productivity coming from coming from Jack.
I think on the cost side, Brian the Oh, we emission of Frac argues that will include more than just the saying we're going to have to see that that part of the market's been then soft but it's increasingly a soft as time has gone on duty that 29 feet. So we're going to get some information on that you know as the the basin slows down.
Broadly we continue to see some rig attrition.
The Permian.
Unemployment remains low we're going to keep watching that at some point other ancillary services could could could potentially see some additional softness and will be mindful that we structurally RSU several services and gets kind of throughout time, so there could be broader possibilities there and we're all obviously always pursuing.
The cycle time improvements and other things that can drive down the variable cost associated with our development as far as the productivity side.
We're going to go into this in a collaborative manner and we mentioned the improvement in rock quality, particularly to the northwest there, but we're absolutely open minded about learning ways to potentially take some of what has been done adaptable and applying it to our legacy assets. So I'd say, it's too early to forecast or estimate what if any.
Product a productivity improvements can be could be taken but we'll certainly be seeking those where possible.
Great. Thanks, then my follow up is with regards to slide 13, you make the point that your facilitating steady organic growth into the first quarter of 20, and I think you mentioned earlier that you have a modest a inventory of ducs or something that seemed relatively small can you just talked about what you're doing on that front are there late in the core.
<unk> type, but type completions that will help first quarter growth and how you see that evolving within your capex budget.
Yeah, Brian you just you kind of a hit on record in the fourth quarter. The Pops that we had our more backward they're more toward the back half of the quarter. So you're going to your to see that in the first quarter 2020.
As we've been at the fourth quarter Frac cadence that all of that will continue so you're going to see some of that manifest. That's why we expect to see that tick up in one Q. After a more flattish threeq to Fourq you want the magnitude of that you know as we mentioned earlier, we're still working through budgeting and finalizing all that so there will be more information on it.
The magnitude later, but you'll see a tick up mostly for the reason that you stated.
Our next question comes from Michael Hall, with Heikkinen Energy Advisors. Please proceed with your question.
Thanks, Good morning, guys.
That's kinda one follow up I guess some of your opening comments matter on execution, you know with the consolidation we've seen in the last couple of years certainly across the industry consolidation hasn't gone.
Without any challenges.
Yeah, and hoping you could maybe just describe a little more details in a specific things that you've learned from your past.
Consolidation efforts.
I will help.
De risk the the execution of bringing jag into the fold in in 2000 Tony.
I think that is a great question and I think hitting on obviously one of our larger integration in the past a.
Transaction double Eagle that we had not achieve.
Our our stated forecast in the in the prior 12 months or in the subsequent 12 month.
When we look back and that we're entering into eight new counties in a leasehold position without insights you operations from that operator.
We added 188 people and in the 12 months following.
The operation essentially building a company from scratch.
So there is and we're doing it in an inflationary environment in 2000.
17 and 18.
Extreme rig ramps in the basin. That's why we thought it was important to show the reduction in activity. The effective we had been at this activity levels in since you to the company.
This time last year.
And then also we're in a deflationary environment. So those are nice tailwinds, but it doesn't take the the honest away from elevating our game on the.
On the integration process, which we are in full swing on right now.
I look at our teams when I look at that type of caliber of processes, we had in place or analytics.
Visualization of the business. We are light years ahead of what we were at that time, one case in point, we've gone live with what we call. Our integrated operations Center, we happen to start that up in the Delaware in 2019 as fortuitous.
That will be able to apply that oversight and insight into.
The jagged peak operations in fairly short order. So that's a 24 seven 365 monitoring or operation utilizing a control systems automated control systems, and and and visualization. So we have some tools at our disposal that we've been working on.
Posted a double Eagle transaction.
Yes, it's a it's a scar that has heels, but but we look at it and we remember it and not to mention we just really view this as a bolt on asset work these assets.
ER evaluated them essentially since we.
Evaluated the trees position in 2012, so we have been internet with it and it. It is it is right along right next door to us so.
Things are income in a comparable fashion things are stacked in our favor now we have to go out and deliver on on the execution.
Appreciate that color and openness and discuss into legal thanks, guys I'll leave it at that I appreciate it.
Our next question comes some bees you powered shell with Susquehanna. Please proceed with your question.
Hi, good morning.
My question.
So look going back today, it's a question on while cost in the Delaware Basin looking at slide eight.
Oh.
I think you guys started out our proppant loading.
[noise] it sounded lower and moved higher and I think Jack has on the opposite direction. So now when you look at that the two sets of data.
Do you see an opportunity to.
[laughter] pull back on your proppant loading and.
Save some well costs now.
Hey, we're open minded we recognize the delta between the design and we pumped on average and what jagged peak is probably averaging.
Recognizing no well formans they've seen we've got expanded datasets now that 2019 is progressed. So that is absolutely a variable when we talk about it in that slide collaborative approach best practice, we we are constantly seeking to.
No were to turn those dials not only in terms of of the probably quality were tight but also on the proppant loadings will.
I don't think its I think it's a little early to the Bulls eye exactly where that lands, but that is a variable we're looking at.
Got it and my follow up was on a.
In the past you talked about compressed stage completions and I think you've had a few of them come online in a during the quarter.
Hi, So first any early read into the performance of and.
And the thing in the Oh.
If I remember I wonder if your hesitation was sort of at higher risk profile.
And.
What do you if that's still valid can send given sort of.
The state of the service.
Sector and availability of the high quality providers.
Oh, yes in terms of compressed stages, specifically, if you're referring to the risk profile of that I think the fact, we've been able to execute a number of those this year our sense of what the risk profile. There is has diminished due to the performance that we've been able to accomplish as far as isolating the there's that there's numerous variables at play in will perform.
And one of the one of the things to happens when you you ship your capital allocation makes a bit you develop multiple horizons you change completion designs. The literally all those are aimed at.
Improvements in capital efficiency, which we've seen broadly kind of deacon valving that data and isolating exactly what the compressed age itself has contributed it's I think we still are going to need a little bit more data to get a quantitative on that but we are seem to be up retail.
In terms of compressed ages upsize simulations landing zones spacing all those things were studying with our internal analytics group, but in the meantime, we're we're pleased to have successfully executed. These indices abroad improvements in capital efficiency will will continue to refine those designs and decisions going forward.
Our next question comes from Kashy Harrison with Simmons Energy. Please proceed with your question.
Hi, Good morning, everyone and thank you for taking my questions.
Touching.
So I was wondering if you could if you could refresh us on where oil base declines might be headed in 2020 pro forma for jagged peak and then how you think about.
Maintenance DCM me spend for the combined entity.
Yeah, we're going to be a about 1% higher.
Integrated them they were on a standalone basis on a.
With jagged peak integrated on a on a decline profile, so but even after that we will be.
A lower on an annual decline than we were exiting 2018.
And worked on efficiency throughout the year.
I see much the same happening in in 2020 N.B. on.
Makes sense. So we found that 40% about 40% of pro forma is what we're looking at.
Oh, that's always helpful.
And I I think earlier, Matt you were talking about your intention to grow the dividend I was wondering you just dive into perhaps a bit more detail. Specifically are you trying to get to it you know a market competitive yield do you have any thoughts on variable dividends just the the bigger dividends strategy would be helpful. Thank you.
Sure. Good question I think that's that's still a very robust and live discussion.
Amongst the board.
Will be coming into a nice framework within that in these early days, we do see you know obviously the rate of change in the free cash flow generation is high and favorable and we need to keep up on the dividend in the early in the early times So 2020.
ER increases, but overtime it needs to be you know consistent.
And line to a strategy or approximating some portion of your of your free cash as part of your capital allocation. So I think early on it maybe it may be disproportionate, but <unk> overtime I it gets into a more more linear and graduated increase.
Our next question comes from a 10-K umar with Wells Fargo. Please proceed with your question.
Mine guys. Then thank you will take my questions.
Wonder to touch base on you know 2019, if I remember correctly you one of the things you change about your development schedule was moving just like you wider spacing and <unk> focusing on those capital frequencies.
Costs have come down significantly from that time, and <unk> need to return equation Cos I'm just run understanding is there.
I drive or maybe a need to me degree visit some of those tighter spacings or are we looking at these wider spacings for now and you look at you in memory.
No I think I think more of a good thing is good thing at higher rate of return.
Have have a nice calm having effect on the company model. So I think we like where the spacing is at you bring up a great points that there is room to downspace and still more than sufficiently cover the cost of capital, but again it goes back to the original analysis, when we build out a long term model against.
Runway and the compelling effects.
Of high rates of return capital allocation. It just more than all says the benefit of.
Of trying to extend the runway at the tail end of of a decade or so on your inventory length. So as it sits right now we feel we feel we we liked the spacing assumptions that we're at don't see any any additional downspacing, even though there's probably a.
A little bit of room in a rate of return profile.
Right.
And as you are just didn't kill themselves activity in the nice.
You're managing your your francs schedule, some guys are taking holidays.
You hear about accurately impact yeah, all of the fourth quarter.
As to be some continues to get developed how much impact are you, having from offset shocked and offset activity.
Just trying to understand the basic level dynamics right now from the operation standpoint.
Yeah [noise].
And we've.
We certainly seen it.
In terms of Frack interference, we've seen in Vermont or operate our own operations, we have good communication with offset operators.
Yeah dearly modeling for sito's, those things in building into our plan mechanically.
Thing that is going to be a a positive about moving towards the the bigger project development is you're more geographic concentration. So you're you know things like brackets are gonna be more kind of centralizing here is so yeah, six well projects may not creating more you know frat downtime that a two or three well project. So you have yeah.
Fewer larger projects I see that is going for broadly the more that <unk>, yeah, that's probably a good thing but at the other day, we you take those things into account in our motto and we have yeah communications with with offset operators in and make sure from a safety standpoint execution standpoint that that those impacts or or take.
Get into account.
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