Q3 2019 Earnings Call - Q&A

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I'll now hand, the conference over to Jennifer Samuels.

Vice President of Investor Relations. Please go ahead.

Thank you Amy good morning, everyone and thank you for joining US allow me to quickly remind you that we made just go forward looking statements about our plans expectations and assumptions regarding future performance. These statements involve risks that may cause our actual.

Results to differ materially in the results expressed or implied in our forward looking statements.

Please refer to the cautionary information about forward looking statements in the third quarter earnings release, the IR presentation in the risk factor section of our Form 10-K , and our Form 10-Q , which was filed this morning, Oh look like.

Her posted to our website. Our discussion today may include discussion of non-GAAP financial measures that we believe are useful in understanding in evaluating our performance reconciliation of those measures for the most directly comparable GAAP measures and other information about these non-GAAP metrics are provided in our earnings release and IR.

Visitation here today to answer your question, we have president and CEO , Jay Ottoson, SVP, and CFO wage Purcell and C O Herb Vogel I will now turn it to Jay for some opening remarks Gerry.

Well, thanks, Jennifer Good morning, everyone I Hope you all recuperated for meeting.

Although sugary treat [laughter] I just wanted to take a minute ahead of Q and a here just to emphasize our recent progress on cost reduction because I think weve undersold to some extent a noteworthy achievements.

During the third quarter, our operations team along with her terrific vendor group drilled uncompleted wells much faster than our.

Expectations in our plan.

For example, we pump more than nine stages per day per spread on average in the Midland basin, the 23% improvement from our expectations.

They're not directly translate it into quantifiable capital efficiency as our well costs are now averaging right at $700 per lateral foot.

No that number is.

Clearly top tier I know one of our larger peers announced Midland basin, well cost of around $790 a put some mclean.

Let earlier this week.

Our improving capital efficiency will obviously directly translate into lower 2020 capital costs and supports our commitment to generating free cash flow.

We've.

Already achieved a nearly 10% improvement per lateral foot over our 2019 plant costs and we're still working.

Combined with lower operating costs and actions, we've been taking to reduce DNA.

We're positioned we think for a very positive 2020.

No I hope the higher third quarter Capex didn't spoke you because it's just the habit.

Evidence of our faster drilling and completions pace.

Well, we reported 19 net flowing completions in the Permian, we actually completed a number of additional wells.

That will come on during the fourth quarter, we just held up production to better manage our flowback costs.

So in short we're extremely pleased with our capital efficiency and its implications for.

Our 2020 performance.

So operator lets turn it over for questions.

Not to find ladies and gentlemen, if he would like to ask a question. Please go ahead and press Star then the number one on your telephone keypad.

Your first question today comes from the line of Brad Heffern of RBC.

Your line is open.

Hey, good morning, everyone.

I'll start with a question on the talk so you guys, obviously have the four wells now.

There are sort of spread out across the acreage position you have a feel now for how consistent that play is gonna be and any clues as to what the inventory might look like.

Brad This term so yeah, we're real pleased with the Austin chalk resolve those rates in the liquids content are great and the returns there are great. What we like about it is the consistency that it does show in terms of the rock across the acreage and then we can predict the variability in illiquid, a we'll be doing in.

Inventory assessment as usual at the end of the year and we would be publishing that in February I like normal so, but yeah. We're pleased with what we're seeing so far.

Okay, and then you guys mentioned that you drop the second Permian completion crew is the plan for that to to stay down for all of the fourth quarter, and then front to come back at the beginning.

Getting him next year.

Rob This herb so we were running three or frac spreads and the third quarter and we dropped to two just at the very beginning of October and we're just going to continue that until we get our budget lined out and we'll figure out though the level will be doing next year at that time.

Okay Yeah.

Okay, Yeah. Thanks for that correction, there sorry, and then I guess.

You know what the prior quarter release, you guys talked about shut in volumes in the second half of around 8000 barrels a day I was just curious if that's approximately what the Threeq your number wise and if you have any estimate of what the.

Okay number it's only about that thanks.

Yeah, we don't we don't really put out an estimate on post.

The result, but it's a difficult thing to estimate, but we know we have shut ins and they're hard to forecast because theres a lot of operators offsetting as you've probably seen how much off that operate activities out there because power county.

I talked in the right now so we do have an embedded assumption onto our interim shut ins and that's true for the fourth quarter also.

I would just said it was consistent with our expectations in the third quarter Yep, that's baked into guidance.

Okay. Thank you.

Your next question today.

Comes from the line of Gabe Daoud of Cowen Your line is open.

Hey, good morning, everyone.

Obviously, some nice and improved results the Eagle Ford, but I guess on our numbers, we still kind of show the Permian as being more accretive to returns and free cash flow and also just from a de leveraging standpoint, so I was curious.

Thanks, Jay if you could maybe just talk about how you're thinking about.

Capital allocation between the two plays in 2020.

Gave this herb so obviously, we see value in South, Texas Wells, and we really proven that with these latest wells and I know people have been waiting for those for.

While but we see a clear path to additional cost savings and productivity improvements and that we anticipate enhancing returns where the wells will be competitive in the portfolio and that will be even more so once those midstream contracts expire or hub and real lower rates as we've talked about before.

So as.

We've said you know will span plan to spend less in 2020 than we did a 19 and it will really be to confirm these better returns.

And right now we're basically in the budget process and we'll share that in February with what the ultimate capital allocation will be.

Oh.

Hi, Thanks, So that's helpful.

And then just a follow up I guess, obviously doing a great job on Dean see per foot in the middle Im kind of curious your closer to 10% target. How you think that that shakes out I guess that ultimately hitting the 10% and if you think you could even exceed that at this point. Thank you.

Yeah, I gave again this herb so.

Yeah, we do see the potential to reduce costs. Further obviously, we're in a deflationary environment and then we are seeing different ways that we can get the same productivity with a.

Slightly different completion design that at that helps out on the cost.

Side, so yeah, we see the potential for lower.

Alright, great. Thanks.

Your next question comes from the line of Neal Dingmann of Suntrust. Your line is open.

Wonderful Jay that question you guys continued heavy said deficiencies well noted by your cost I'm just wondering.

When you look at.

The plan for next year.

You know in order to achieve continue achieved these higher efficiencies you know how do you think about as far as a number of sort of rigs and spreads needed to be run versus you know obviously that.

You know the test of trying to stay closer to cash flow because it gives you a lot of times there's always.

Argument of having to run the hot you know the higher activity to stay more efficient, but I'm just wondering how you all sort of view that.

Yeah Neel. This survey so we put together a program with activity for the year and then as activity as were faster and executing where more.

We have a choice of.

Dropping rigs are dropping frac spreads or doing more activity and we basically look at the free cash flow level on the commodity prices and make that I call. So that's just what we've done now as we said we're going to stick with the capital. We said we would for the year, even though we've been much more efficient and that led to going from three to two.

Frac spreads in October and we'll get all activity and more for the same capital.

Got it don't make sense and then just to follow up on that.

The efficiencies that you see it mean is it largely through just the longer laterals is it a continued improved the completion design Im just wondering.

Anything else you can sort of shed on that how you continue to achieve such such great prices there.

Yeah, I would say, it's all the above but the number one one is the consistency of using the same frac providers and the team we have and looking at every minute of execution and optimizing there. So it's.

Really comes down to people.

That are out there doing the work.

Very good thank you.

Your next question comes from the line of Leo Mariani of Keybanc. Your line is open.

Yeah. Thanks, So just a philosophical question I know you guys had mentioned it.

A number town center the budgets not set for next year, but you kind of continue that you mentioned about kind of planning for neutrality. So just to just to be clear on that so essentially the is the plan to as the ended the year approaches in early next year, we sort of get there and how did you guys. It hedges in place as you look at the budget are you truly dry.

Turning to set that at a neutral level and then whatever activity sort of fall down from that.

Sort of so be it does that kind of the philosophy.

No. This is Jay when our philosophy is we're going to generate free cash flow I mean, that's that's what this is about we want to have a positive free cash will yield we're doing everything we can fill in every night, we can working on.

Every angle, we can get ourselves to that point.

Okay, obviously youve documented a lot of the bulk cost reductions, which clearly will benefit can you folks.

Are there any other sort of major things I know you guys talked about DNA or anything else that you can kind of due to kind of get that spending down.

Well, we lowered our ela, we as well as well we guidance as well this quarter. So in general our costs are moving lower and Doug certainly we're working on every every single line item of cost and every single thing we can to make wealth better so.

We're going to we're going to everything we can to get to a positive free cash will yield. We think we can do that in 2020.

Okay, and I guess just on the Eagle Ford.

You all talked about some plans to kind of lower well cost there, obviously, well documented 10% reduction in the Midland.

D a as you sort of.

For the that plan down the road I guess do you expect to see.

Similar.

Hi, Preproduction Eagle Ford, maybe 12 months from now we can get kind of 12% off those costs what are we sort of sit there.

Okay. Leo this herb so you've probably seen in previous earnings reports, we've talked about $650 per foot in the Eagle Ford and we expect the same sort of.

Environment, there, which would be deflation in addition to.

Completion enhancements and we have specific we identified where those could be and we would implement those next year.

Okay. Thanks.

[noise].

Your next question comes from the line of Karl Blunden of Goldman Sachs. Your line is open.

Good morning, Thanks for the time.

We're not there yet and I think your maturity schedule allow some flexibility black flexibility <unk> versus peers, but.

As you think about cash level 2020.

If it's not forthcoming for 2020 and 21 as you planning what part of this do you have for the 20 122 maturities.

What weve could you refine ericsson.

Yeah. This wade.

I think you said it well than we do have some yes, we have.

For years here to to deal with this the first first real maturity is not till the end of 22. So you know that I guess I would say given our liquidity situation given the time between now and then given the.

The plans for getting within free cash flow.

Finitely see chipping away at that.

We now and Dan.

And again lots of liquidity in the revolver as well to use some of that if needed but.

But you know there's there's just there's just a lot of things that can change over a two or three year period as well. So I feel like we have a lot of flexibility and where we're in a good place to deal with those as we yet as we go from here to there and.

Yes, well between now and then we'll watch the capital markets do those could change but.

Lots of flexibility I think we have that more time than that and most of our appears as you said to that to deal with it.

Makes sense I guess just to be a bit more specific on the.

Ways in which you can be flexible would you.

Still see convertibles as as an option in the market cap is down from.

<unk> when those are the existing ones are issued and.

You know their non core assets as well basically just trying to assess the reliance on the capital markets.

Yeah, I know you mentioned a couple of other [laughter] things I mean, there there are many there are many options and.

I would not say that that we would take a look harder at one versus the other right now I mean things are at things change a lot and.

There are lot of options out there. So that's that's all I'll say a.

Great. Thanks, and congrats on good progress Yep. Thank you.

Your next question comes from the line of.

Joe Allman Baird. Your line is open.

Thank you and thanks for all the comments yesterday today. So my first question is in terms of your 2020 targeted debt reduction do you expect reduce debt on an absolute basis and reduce the leverage ratio solely through free cash flow already.

I'd also add some other means such as asset sales and.

If youre thinking about asset sales, what particular assets are you thinking about.

Well I'll take the first part the wheel as Jay said very clearly we are planning generate free cash flow next year. The use of that free cash flow would be would be debt reduction.

The leverage.

Metric.

Also will be going down toward the toward the lower twos area. So a combination of those two and there are there are other possibilities I guess I'll, let Jay talked about that.

Well certainly asset sales rose a possibility right, it's not a particularly constructive market per asset sales right now.

Well, we'll look at we look at all the alternatives and will make the best choice, we can I'm happy shareholders at the time.

Great. Thanks for that and then.

Yes, I knew in July you said that in 2020, you expect to spend about the same amount as in 2019 and I think yesterday said that you expect 2020 to have a similar sized.

Operations plan.

So with your improving capital efficiencies and lower cost does that mean for 2020, a similar spend.

Where does that actually mean less than but a similar amount of activity.

Well I don't think we actually said yesterday, what are what our program would be for 2000.

What we said is at a similar level of activity, we would expect costs to be lower.

In a general sense I think we've we've talked for quite some time about 2020 activity being relatively flat to 2019 again, we won't guide that until February .

At that same level of activity, we would expect costs to be lower.

So in a general sense.

I would say right now wieters, we're assuming that our capital program will be smaller than it was last year in terms of dollar spent.

I should say less this year [laughter] 2019 still this year.

That's right all right. Thanks, everybody.

[noise].

Your next question comes from the line of Kevin Mccarthy of Heikkinen Energy. Your line is open.

Hey, good morning, I was hoping maybe you could provide a goalpost for 2020, South Texas activity.

Compared to the 19 wells. This year are we kind of talking about double digit completions or maybe just a handful.

So I'm just trying to get an idea of how much you know you'd be willing to cut to get to free cash flow next year.

Well, that's that's really two different questions first in terms of goalpost for activity I think we've already said, we're still looking at our budget, we're not going to guide that our activity will be lower our net spending in south, Texas, we expect to be.

Lower than it was this year.

And we'll as we are getting toward that time there in February we guide will will tie that up.

We're going to do as we said earlier, we're very committed to be objective of achieving free cash flow next year.

We're really excited about the progress we've made these eagle Ford wells.

But no free cash flow is our primary.

Our objective so we're going to do what we need to do.

Okay. That's helpful.

On the Opex side, you made great progress on Ela, we is for Q, a good run rate for 2020 or what could you do to get that even lower.

So oh, Kevin obviously, we.

Evan done our budgeting activity, but where.

Deflationary environment and we are trying everything we can drive l. OE down and I would expect I continue but I don't have a number or 2020 at this point.

I would only out there.

You know as South Texas.

Becomes a smaller proportion of total following but that kind of a counter some of the say additional savings will generate on.

I mean inside because it has such low hourly and obviously, we're talking about my spending in South Texas next year.

Okay.

It's helpful. Thanks.

[noise] next question comes from the line of Oliver Hong of Tudor Pickering Holdco. Your line is open.

Good morning, and thanks for taking my question.

On the Eagleford the results from the new JV design, certainly look encouraging.

I was hoping that you all might be able to elaborate on the details as to what you've learned from the spacing tests and if there any specific reasons as to why no upper Eagle Ford Wells were targeted utilizing the new JV design.

Oliver This is herb what we were really striving for was to get higher.

Our returns through longer laterals, and the wider spacing and so that that's what we were really proving with that program and we wanted to see the results and you can see see where they are from here we know.

What we can do to optimize and we're going to continue to do that because as we've been stating we're trying to get high return to that.

To free cash flow earlier.

Okay. That's helpful and I know, it's still very early days on these wells, but also what might.

This imply in terms of wells per section that you all are willing to underwrite and that northern Eagle Ford area, just based on the data that you all have today.

So Oliver we do that resource assessment, the yearend and we're going to going to go over all our inventory that would be in February . So we'll take what we've learned this year it will lay it out for.

Next year and beyond and that's when we do that exercise so I wouldn't venture a guess at this point.

Okay. Thank you very much.

Your next question comes the line Bedi Singh of Credit Suisse. Your line is open.

Thank you good morning.

Oh, sorry impact, but just wondering how much of this impact is being caused by.

Hi.

Third party operators versus your own activity and would you be able to manage the schedule around to avoid or reduced this issue over the next several quarters.

I think this herb I'm, assuming you're talking about the Permian and there.

It's a combination of our own activity as well as offset operators, we can control our own activity and we understand what we need to do there.

And opposite operated activity, we're all in communication with each other to make sure we don't harm each other's wells, but it's very variable.

And depends on which wells you're talking about in what the location as so it's not something that is easy to forecast.

Got it but in terms of the impact is that should that.

Improve in the coming quarters since were probably going into the second quarter of seeing.

That tempering or production in the Permian.

Beddia as I said, it's really hard to forecast because it depends on what offset operator will do and where they lay out their program and we don't have their program for 2020, So we can't say which quarter they'll be active.

But at what point there will be.

Selling and at what point, there will be completing wells, we can do that for our own but as you can see we have quite a large perimeter area.

Where.

There are offset operators.

Okay. So it's a continuing.

Continuing a piece that we have to include in our guidance.

And we keep doing that we've been fairly accurate with what we said today.

Got it okay. Thanks, and then my follow up I'm not there's many questions on the free cash flow for 2020 Eagle for activity is certainly and on obvious lover to the capex budget, but would temper.

Sorry, Permian activity be an option to that balances wall.

Well I bet, you know all comes down returns and.

I think clearly we're going we're looking to prioritize free cash flow, because we want to prioritize absolute debt reduction.

Oh, so we're still working a number of different alternatives looking at various growth rates, how much free cash flow they generate versus how much Rick.

Cash flow growth debt adjusted per share type growth they generate.

We haven't we haven't gotten to the point, yet where we can exactly say, where we're going to land in general we're we're.

Moving more towards the direction of free cash flow and debt reduction, but we'll we'll give you official guidance on that after the first year.

Let me just out of one thing on that piece and that's a we want to be able to optimize our eagle Ford and Austin chalk developments in the future. So we want to run that at a pace that enables us to optimize the not suboptimized by drilling a fast program. So we want to do that at the right pace and that's how we're going to decide the program.

Got it.

Could you remind us what's your budgeting on commodity price assumptions, whether its strip using strip or something but more conservative.

Well, we're will run strip.

We'll run the strip case and then we as you know, we're very well hedged for next year, but we generally run strip cases.

For budgets.

Okay, great. Thank you.

Your next question comes from the line of speech you parent guarantees of Susquehanna. Your line is open.

Hi, good morning.

I think it's early in the Austin Chalk program, but at this point.

I mean any early read on sort of relative economics of the Austin chalk wells, where since the new Eagle Ford completions thing.

And so you can say about.

Mix going forward.

Feed you. This is this.

As herb so we have a lot of room to optimize the Austin chalk since really we have four fully dedicated wells to date and we're pumping Eagle Ford completion, So we will be potentially modifying that as we learn more for the Austin chalk.

In terms of mix, we have not lined out that mix for 2020 yet.

Okay and.

And then maybe in the Permian.

What kind of.

Well cadence and you need to keep production flat.

What it is today or in the fourth quarter.

[noise].

Be do that.

We've we've been saying somewhere in the.

80 to 85 range, but it could be a little bit less depending on where the wells are.

But that's sort of number of completions you'd need in a year.

I think it's pretty clear if you look at our third quarter results in our base has been outperforming our.

Expectations, we actually beat in the third quarter with fewer completions and we pure flowing than we anticipated so the basis actually and doing a little better than we expected.

Okay.

And and that is from.

Downtime management and is that.

What is driving that and these are more world.

Hi, Ben for better based products and management.

BG with I would say that the combination of us being conservative in our base production forecast and actually getting better uptime than planned.

And better well performance overall, so there's there's there's a number of contributors to that and it's impossible of pinned down exactly which one it is.

Oh.

Thanks.

Thank you very much.

Mhm.

Your next question comes the line of Mike's got.

Of Stifel. Your line is open.

Hi, good morning, everybody.

Well.

Innovation that you're implementing wanted to see if that is going to limit your ability to grow in the future or.

Does it give us an indication of your outlook that you are kind of.

Preparing the company for a lower growth.

Oil and gas.

Yeah, Mike Thats It Thats, great question, I think or.

Really what we're looking at we're just looking at our activity operates mostly an operating reorganization in the sense that weve always run as a regionally focused company.

And when you look at our planned operations now for the next few years, we're going to be largely Permian based.

And if you start to look at Theres redundancies, obviously management positions and other things by having a regionally focused organization. So it just makes sense to us to.

To simplify our operations and eliminate some of those redundancies right now.

And where we're going to continue to have.

A robust exploration effort here continued robust.

Looking at new opportunities business development, we're not cutting those functions.

Really this is just an opportunity to streamline our up the operations portion of our business. So I look at it I don't see this.

As an impediment to growth at all I think it's a normal streamlining.

You would do given given the situation we see going forward now I'll also note that and it's important to people know we've cut our head count here by a third over the last four years.

And so you look at this cut and say well it's not.

That big of content is.

It is.

It's additional on top of the third we've already reduced so we've been very attentive to DNA.

And very focused on our efficiency.

But I don't think we're giving up future growth here in what we're doing.

And I'll add on that one that we were really view ourselves.

This is one of the most technically proficient operators and we've been very careful to ensure that we maintain our ability to be at the cutting edge from the technological standpoint, and we've really preserve that with the way we've reorganized.

Got some good insight.

Yes.

Obviously, you haven't formalize the 2020 plan, you've Gotta love questions around 2020, <unk> just wondering.

Given that it's 80 to 85 tools to keep things flato I assume you're still plan it on.

Base case at this point based on what you know that you'd still generate some growth next year.

Well I think I addressed this earlier, we're running a range of alternatives from very low growth to some growth and and really focusing on how much free cash flow and how much debt adjusted per share cash flow growth we did.

Because we want to reduce absolute debt and we also want to reduce leverage and those are the denoms we're turning.

And obviously, we need to achieve very high.

Capital efficiencies to do well on those metrics so.

Other than that we'll just have to lead that until that until we actually guide.

Understood.

Last one yet.

Like I guess, one point just oil production is going to grow ride Permian, we're gonna grow in the Permian, There's no there's no issue with that okay.

But but.

How much how much and how much that what happens in the Eagle Ford and in terms of gas volumes, we'll see how that works out.

That's helpful.

You can share at all on your discussions with income this point.

In cap.

Hi.

Yes, I assume you're asking because of the filing yesterday I mean at I don't think we have any color to add to that I think it's we probably should speak for them.

We did notice that they did the same valley on an ever better holding so.

It's probably all we should say well they've they've held our stock for a number of years as a result, we gave them soccer in an acquisition as you're aware.

Right.

Got it thank you.

Your next question comes the line of Gail Nicholson of Stephens. Your line is open.

Good morning, I know you guys had been working to optimize artificial lift and not a piece of the improvement in the L.. We I'm just wondering if you could talk about what the.

Optimization entail and does that change at all the flow back of the wells.

Hi, good yeah, that's there's a lot of pieces to the answer to that one but.

First of all.

On an allergy side, when we're able to switch from using.

Generators powered by diesel.

For power rather than electric line power that is an allergy reductions. So that's one aspect when we're able to switch from Sps to gas lift that's another reduction in <unk> Louis and then.

When we initially turn on wells, if we're using high pressure gas lift versus.

As he Sps electric submersible pumps.

That will change the character in the first 30 to 60 days somewhat but in terms of no.

Recovery over a year, it's not really going to be very different so you'll see some little differences that the first 30 to 60 days, but after that it's pretty similar.

But we are focused on the elouise side.

Awesome, Okay great.

And then I mean everyone's talking about the Eagle Ford, which is great. This quarter, but I also thought the Midland was very impressive I said 11, new wells that you guys disclosed on page six are tracking with the previous average, but the bulk of those wells are lower spraberry or or on the.

Eastern add to the asset, which typically has a lower IP and a flatter clients I was just curious if those lower spraberry and eastern edge execution was actually outperforming expectations are you did anything different in the design there.

Again, yeah that is a great point there are some some wells actually on the eastern edge that were performing extremely.

Well and the lower Spraberry is where were mixed.

But wherever there is a lower IP, we tend to see the lower decline rate. So the they'll offset each other so you can have a great well initially which has a great IP and then a.

A more rapid decline in the Wolfcamp, a and then that.

Offset overtime by lower Spraberry that have the.

The behavior. So now we're pleased with the results there.

Thank you for noticing that we spent a lot of time talking about something thats, a very relatively small percentages the program [laughter].

Oh, great great great quarter guys. Thanks.

And at this time there are no further questions.

Q I turn the call back to Jennifer Samuel.

Well. Thank you all for joining us today and I look forward to seeing a a number of you I believe at the upcoming conferences. This month. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[noise].

Yes.

Okay.