Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2019 Concho Resources earnings Conference call. At this time, they're all participants are in listen only mode. After the speaker presentation, there will be a question and answer session.

Good question during the session you'll need to press star one on your telephone please be advised that today's conference is being recorded.

We require any further assistance. Please press star zero I would now like to handle conference over to your Speaker Ms., Megan Hays Vice President of Investor Relations. Please go ahead.

Thank you good morning, and welcome to Contra Sports 2019 earnings call.

Our earnings release and corporate presentation are available on our website and we plan to file our annual report on form 10-K today after market close.

Participants on today's call will make forward looking statements based on current expectation.

There are subject to risks and uncertainties forward looking statement and other disclaimers are provided in the earnings release and presentation.

Comments today May also reference non-GAAP financial measures.

You'll find the appropriate reconciliations in our earnings materials.

I'm joined today in Midland by Tim Leach, our chairman and CEO, along with President John Barber, Chief Operating Officer will Jerome 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 Uh Huh. Thanks, Greg Good morning.

I'm very pleased with the fourth quarter and the reasons to be a concho shareholder continue to be compelling.

We're growing margins growing free cash flow.

Growing distributions to shareholders and doing this while advancing sustainability.

It was simple to talk to your Permian asset base in our own backyard multiple decades project inventory that strengthens our ability to generate free cash flow increased returns to shareholders.

This dynamic environment.

Continue to focus on disciplined reinvestment controlling cost maintaining a strong financial position.

Since our third quarter of 19 earnings call, we've seen oil prices roller coaster between 50 and 60.

We've been both places twice.

Despotic, despite the commodity price volatility in many uncertainties. Our business model is designed to deliver free cash flow across a wide range of commodity prices.

Last year, we identified six key areas for improvement.

Which included reducing well cost.

Our well costs continue to move into right direction as a result of safely drilling and completing wells faster.

We're also transitioning to next generation Frac equipment.

As more efficient and provides cost savings and emission reductions.

Second lowering our cost structure.

For the fourth quarter of 19 controllable costs were 17% lower year over year and were well below our target a $9 per be are we.

Third selling noncore assets.

We closed in Mexico shelf assets sale on November 1st, bringing full year 2019 sales proceeds to 1.3 billion.

Fourth delivering profitable growth.

Fourth quarter oil volumes increased 4% quarter over quarter Inspite of the production impact, resulting from the new Mexico shelf asset sale.

Phil reducing debt.

With the proceeds from the shelf sale, we ended the year with no bank debt and $70 million of cash on the balance sheet.

And finally, increasing returns to shareholders.

In 2019, we paid $100 million of dividends and repurchased 250 million.

Dollars stock.

Going forward, we recognize that both asset quality and execution are necessary to the success of our business.

We made real progress toward our goals in the second half a year and I'm proud of our employees for their performance their efforts are directly benefiting our bottom line and driving the inflection in free cash flow.

That we delivered in the fourth quarter.

Now turning to 2020, Jack will speak to the specific numbers, but I want to summarize our high level strategy for the year.

We're focused on four things first growing margins.

We have several ways with it within our control to grow margins, including cost reductions and a better capital program.

We also stand to benefit from better oil price realizations as Permian barrels are now pricing at a premium.

Second growing free cash flow.

We expect lower well cost in our focus on smaller projects and wider spacing will result in better well productivity.

Which supports growing free cash flow and we have the inventory and operational capability to support our commitment to free cash flow over the long term.

Third growing distributions.

Yesterday, we announced a 60% increase to our dividend.

The dividend raise demonstrates our confidence and the cash flow potential of our business.

Also in the fourth quarter of a 19, we initiated a 1.5 billion dollar share repurchase program.

We were active in the fourth quarter and bought back 3.3 million shares at an average price of $76 per share.

Fourth advancing sustainability.

Our stakeholders are seeking greater transparency regarding sustainability and we take the seriously.

Our flared volumes averaged 1.6% of gross and 19 compared to 2.7% in 18.

We've published a two degree scenario report and we're working on it the sustainability report to detail our progress.

This set of priorities and the results of our drilling in 19 guided our capital allocation and development strategy for 2020 and beyond.

We're developing the assets with wider spacing and have multiple decades of inventory.

Additionally, we're looking to optimize our acreage position through trades with adjacent operators.

Our portfolio management efforts in 2019 increased the average lateral length of our inventory by 7% and are working interest by 2%.

Our inventories a key advantage that enables us to deliver attractive long term returns.

We talked about the evolution of the MP business model from pure growth.

To restrain growth greater free cash flow and higher returns.

Built momentum over the last two quarters delivering on strategic focus that we laid out last year and providing a plan for 2020, we believe makes a compelling investment case for the future.

With that I'll turn it over to Jack.

Thanks, Tim and good morning.

I'm proud of the results that an increasing cash flow the team delivered in the fourth quarter.

We continue to prioritize financial disciplined cost management.

And our performance over the past two quarters enhances our competitiveness.

Improves our platform for continued growth.

Strengthens the investment case for Concho.

Revealing the fourth quarter, specifically oil volumes totaled 215000 barrels per day.

Which exceeded the high end of our guidance range.

It also represented an 8% increase from the same period last year.

On the cost side, we made significant progress as well controllable cost, which includes lease operating cash DNA and interest expense totaled 843 per unit.

Achieving our nine dollar.

Target ahead of schedule.

Also during the final quarter the year, we reinforced our investment grade balance sheet by eliminating our revolver balance.

Now that the key metric free cash flow.

We generated $187 million and free cash flow for the quarter.

Which reflects the difference between operating cash flow before changes in working capital of 801 million.

And exploration and development cost incurred of 614 million.

There are two important drivers for the cash flow growth.

Our high cash margin production and improving efficiencies across our drilling and completion operations.

For 2019 average drilling completion and equipment costs per foot were just below $1000.

Which reflects an 18% decrease compared to 2018.

Despite all the movement during 2019, we stayed within our guided capital budget and grew oil production, 25% year over year.

We also moved to a steadier drilling program in the second half 2019.

Which carries into 2020 and will lead to a more efficient capital program.

For 2020, we're planning a $2.6 billion to $2.8 billion capital budget.

With our activity equally split between the Delaware and Midland Basin.

We expect this level of investment will result in drilling completing and turning online approximately 300 wells during the year.

The average project size will be six wells.

And our average well spacing will be 700 800 feet.

As compared to approximately 550 feet last year.

Rolling our cost improvements and faster cycle times together.

We expect to spend approximately 10% less year over year, while completing about 10% more lateral feet.

Our activity is expected to generate 10% to 12% oil production growth.

Which represents 217, the 221000 barrels oil per day.

Compared to pro forma 2019 volume.

197000 barrels per day.

Gas and NGL prices have fallen since our third quarter 19 call.

But our hedge book has us in a position to deliver on the priorities and targets that we've previously discussed.

We expect to fund the capital program.

And generate 350 million of free cash flow at $50 oil and current prices for gas and NGL.

Due to lower well cost lower cost structure.

And beneficial hedges that provides stability in a volatile market.

After our third quarter call, we layered on hedges at $57 Debbie.

So while they limit our upside.

And $60 scenario, they are substantially above market in today's $50 environment.

Our forecast for 650 million a free cash flow at $60 oil includes the new hedges as well as current NGL prices.

We see the potential to deliver $750 million in free cash flow with strong execution, and an NGL environment consistent with $6 crude.

So again 2020 is off to a great Stark and we will continue to focus on growing margins growing free cash flow growing distribution and advancing sustainability.

These priorities will support our our performance.

We also have a very strong commitment to capital discipline, because we believe is key to maintaining a strong balance sheet and growing long term value through the cycles.

We'll now turn the call back over to the moderator for questions.

Thank you.

Hi, Andrew to ask a question you will need to press star one on your telephone.

We ask that you. Please limit yourself to one question and one follow up question. You May then returned to the Q to withdraw your question <unk>. Please standby, while we compile the culinary roster.

My first question comes from Iran Jiwon.

The more again.

Yeah. Good morning. My first question is related to the improvement in cash margins that we saw in for Q.

In for Q, your controllable cash costs, Hello, EG, and eight interests or $8.43 per Boe easy and that did include some of the impact from your higher cost a new Mexico shelf assets.

The 2020 guide.

You know using the Midpoints it looks like it's 917 per barrel a if you use the low end of the guidance range. It's around nine just wondering if he could help us reconcile the the for Q a run rate in the cost structure versus the 2020 guide.

Yes around this is Jack in the fourth quarter had a couple of things in their first off strong production.

We also had a couple of onetime.

Items that will not be recurring.

But as we look at look forward to 2020, our midpoint of our guided you say, it's just above $9, a I hope with strong performance.

And execution throughout the year, we can we can make our way towards that amount.

Great and just just on the oil differentials were also tighter.

Then your guidance, which obviously drove the cash margin uptick in the fourth quarter.

What's your thoughts on on Diffs into 20.

Yes, well you know going back a little bit in time, we're glad that we were patient.

Thing that the Midland pricing, what was coming to us and that has happened.

And so that has been very beneficial.

The price a barrel in Midland.

And we see it like that.

For the next couple of years.

Great and just my follow up Jack.

What stood out to US is the fact that you're completing 20 more wells a than your then you're placing under production. This year what is driving that delta into this has some positive implications for for 21.

As well.

Sure the way I really characterize the entire 2020 program is steady we're going to run.

About the same number of rigs and completion crews throughout the year. So it it really should be.

Roughly equal during the year wells drilled and then and put on.

Okay fair enough. Thanks, a lot.

Thank you. Our next question will come from Bryan singer with Goldman Sachs.

Thank you good morning.

Good morning.

Given some of the movement in terms of how the reserve set up an added in the cost of reserve FMT cost to add reserves.

With a better program focused on wider spacing in Twentytwenty, what would be your expectations for what the Twentytwenty capital program would deliver from a reserve replacement perspective based on kind of what your expectations are for.

FNB costs on the wider spacing.

Good morning, Brian as Jack I would expect the go forward 2020 and beyond.

FNB and reserve replacement to look a lot more like the path.

We had some well documented issues in 2019 with some spacing test, but going forward.

With the space program and the efficiency, we're seeing in or in our drilling program I feel.

We will look more like the path.

Great. Thanks, and then on slide eight you talk about your expectations for lateral length, moving up to about 10000 feet and twentytwenty versus 9000 feet.

Can you add a bit more color on how you see the Midland Basin hearing from the Delaware Basin and then can you also talk to where you see if at all any maximum ER lateral lengths or at least any limitations on lateral lengths.

From a technology perspective, or just a re risking perspective.

Brian its will.

Yes, pushing that average lateral links up to 10000 feet is really result of teams doing a good job trading around and locking up or acreage position. So I think thats I think thats a.

Positive driver into 2020.

As to between the different basins the way you get to that 10000 on average.

As a blend of a little bit higher than that on the Midland basin that a little bit less than that on the Delaware basin, but broadly in both places we're getting the two miles as our base.

Literal link in the Midland Basin, we've pushed to two and a half an uneven some examples recently three.

But from a acreage position two miles is really a good number to use.

Do you think that there is a or do you see an opportunity to add more acreage for the purposes of increasing the lateral length beyond the two beyond the two miles or is that something that will be part of how you would think about youssef use of capital to further improve efficiencies.

Oh, I think theres opportunity to do that.

When you ask about use of capital I think the best way to do that as with.

Noncore assets as currency in these trades, so thats really.

What we're using to to.

Length laterals and kind of continue to block up a position.

Thank you.

Oh.

Thank you. Our next question comes from Derrick Whitfield with Stifel.

Good morning on congrats on a strong year enough Dave.

Thank you thanks.

Beginning with your capital efficiency chart on page eight the year over year sequential improvement is quite impressive.

Could you comment on what degree of improved well productivity year over year is implied in your forecast.

Hey, Derek it's Jack good morning.

Yeah, Weve, but with the ETF space program and our.

That well costs coming down.

2020 does imply a more efficient program no doubt, but it's driven both by.

The cost and the and the expected performance.

Okay, Thanks, and as my follow up I'd like to focus on sustainability and would certainly want to come in you and your team on the sustainability initiatives tenure positive recognition in yesterday's, Texas Railroad Commission flaring study.

Perhaps for Timur will or Jack.

Could you guys elaborate on your efforts to expand water recycling firm wide as you referenced on page 12 of the deck.

Hi, there will.

Yeah water recycling has a big push right now.

And for ourselves and for industry to get to higher and higher percentages of water recycling, it's going to require big.

Trunkline shared third party infrastructure, so that that's been one of the drivers behind some of these transactions you've seen us do on the water side.

So that we can we can source more recycled water and also recycle an increasing percentage of our own.

That's very helpful guys. Thanks for your time.

Thank you Eric.

Thank you. Our next question comes from Paul Chang with Scotiabank.

Paul Your line is open. Please go ahead.

[music].

Okay, well take our next question from Douglas <unk> with Bank of America.

Oh. Thank you good morning, everybody guys I Wonder if I could just one housekeeping question on one.

Detailed question on inventory small housekeeping question is is that the GP in T. guidance is obviously up a little bit My guess is outs released its oh Gulf Coast sales can you just walk us through how you expect thought the trend what your current.

Gulf Coast exposure looks like and whether you would consider changing.

The absolute volume's committed that the cost at some point.

Sure Hi, Doug. This is will yeah. The driver there we've talked about that waterborne pricing deal. We did on about 50000 barrels of oil gross.

And so that's that's what's pushing GPM tee up Ah Theres also an offsetting increase in the price we realize for that.

And as Jack mentioned earlier, just in terms of thinking about how that may change over time.

We did that transaction to get access to waterborne pressing to kind of build that portfolio of pricing points, but as we sit here today, we like the blend we have kind of Midland based pricing for a majority of it and some exposure to waterborne present for the rest.

So the 50 is a good number going forward for what you ration will.

Oh.

It's kind of a five or so your deal.

Okay.

Like I say it was really more about the realization that that goes on the other side at all it was trying to get to so thank you for that.

My follow up is really is this use defined in your dad cause youve done many many times that you've got decades of inventory.

I think you guys have done a pretty good job as you've probably seen an hour or work at least of emphasizing free cash flow what should we think there's about the only reasonable way the volume.

Any in P. nowadays.

The other said it all have other is what the sustaining capital is it goes along with its free cash flow in inventory numbers. So I'm wondering if you can walk us through where that stands today maintenance capital if you like and how you think it evolves as your portfolio.

Lets assume this 10% plus growth rate is the new normal how does not touch sustaining capital evolve and I'll leave it there. Thanks.

Yes, Doug the the way we see it today, our sustaining capital is about $2 billion.

You know that.

Over a longer period of time, we think the base decline rate will moderate somewhat so my expectation is that a number would could improve.

Overtime.

And yield more fret more free cash flow.

Okay, I guess, if I may just sell for an observation nothing in order to compare.

Yes, any in P. with a broader market some visibility on those numbers as.

What we would hope would be more consistent disclosure. So you guys could gives out some thought it would be much appreciated.

Okay.

One other thing I would add its just.

You know the the focus in 2020, and then a $50 environment is a more tilted towards rate of return as we've we've spoken about you you ask about our inventory and so that does have implications on the inventory.

But the good news is I think we see strong opportunities for as far out as we can see.

It will that will allow for the the way I described our.

Our capital over in the future.

I appreciate the answers guys. Thanks again.

Thank you. Our next question comes from Neal Dingmann with Suntrust.

Morning, guys. My first questions on growth in yields I'm just wondering you.

You definitely now have a very compelling oil growth free cash will yield and dividend yield I'm. Just wondering how would you think about Tim prioritizing. These if you had do going forward.

Yeah, we spend a lot of time talking about that we've talked about that on this call from the past that Oh, we want the dividend to be a meaningful part of the investment consideration, we took a big step in this quarter to get there and that's a you know our first priority and call on cash flow and so.

As I think about returning capital to shareholders I think a growing a dividend or is the.

Highest priority way and but we've also demonstrated that at different pricing levels will generate different amounts of free cash flow that will be available to also returned to shareholders and that way, we would do primarily through share repurchases.

No that's the right time.

No that certainly makes sense I like the combination then set my second question is on the flexibility, but 2020, probably I'm just wondering how actually will you move around those 18 or so rigs that you have throughout your northern and southern Midland and Delaware positions. This year or is it kind of set does is where they might operate.

Well I think the way Jack characterized the program a steady as a good way to think about the activity level of those rigs as a move around different parts of the base.

And what does that include what if I could just one follow up just does that include you certainly have seemed to have one of the more stable or steadier programs I think almost the same rigs since late August now is that even in this environment, you're pretty comfortable is running around that same type of program throughout this year.

For sure I mean, I think that was a big part of our 2020 budget was to budget around that conservative oil price.

And plan to run that activity not.

Foolishly, if we see something dramatically lower but.

One of the big lessons from last year is the benefits of running a steady consistent program.

No very noticeable thanks guys.

Thank you.

Thank you. Our next question will come from John Freeman with Raymond James.

Good morning, guys.

When John just looking again at the a really big improvement on the cycle times, especially from three Threeq you 19 to Fourq you 19 with another 10% improvement is is there any way to drill down a little bit more into that just in terms of what drove that big of an increase I mean, any any few things that you could point too.

Sure John.

It's that steadiness, it's staying in the same areas and really focusing on doing the same well types over over and over again. We also did think improve our overall well design.

Over the course of the back half of 19.

And then just we've we've had really good run times and overall efficiencies with our different partners.

And then like last quarter, you <unk> you broke out the sort of what was driving some of the savings in a in the northern Delaware and it pointed out the water was about 30% of the savings then in the Delaware, what sort of the just big high high level ballpark sort of asked him.

That's on on the middle inside in terms of your break it out a somewhat how you did the northern Delaware last quarter.

Yes, it probably doesn't look that different.

Like we talked about earlier, increasing the amount of recycled water. We use there's a there's a savings element in that clearly the to the extent sand costs have improved that applies to both sides of the basin.

And then you know the Midland is probably where we've been able to continue to push lateral links past that two mile.

Piece, which which helps you meaningfully on a dollar per foot basis.

Great. Thanks, guys appreciate it thanks John.

Thank you. Our next question will come from Scott has handled with RBC capital markets.

Thanks, Good morning, <unk>, if I wasn't a could the drive into the resources that you all have I mean in past you guys have talked about.

I know your resource base, a little but I think the prior one last year was.

26000 location at about 12 billion be a we even when you look at your your new spacing configuration in how you view as premium inventory I know you talked about having plenty of lengthen that but do you have some numbers you can help kind of quantify for us with that.

Yeah, It's got the way I would characterize that it's just to say that we have we have prioritized rate of return.

In the back half of of 19 in going forward in 2020.

And we have as many years of that as we can see looking forward.

In a very similar.

[music].

Disbursement of rates of return in our assets so.

While it's it's still married measured in decades.

If rate of return a remains the focus in this commodity price.

It will not be as many as the highest it once was that it will be measured in decades.

I think it's good to do a.

Remind you that you know in previous conversations we've talked about the balance a rate of return and recoveries and and.

But as Jack said that.

In this environment 2020 were we've got a spacing program is focused on on a rate of return and we have ample inventory of around that spacing design.

But as you know its flexible in those those two things are related the the.

The resource base and and the economics.

Based on the spacing design.

So so when you when you step back and look at it I mean in you talked about decades of inventory in you know certainly I think Youve you know got that the you know good.

Visibility with your footprint on a map, but do you sense that the inventories you know adequate or do you think it's it's you know maybe a little bit too much work you need still look at some select you know larger or you know monetizations stuff you may not get to for a while or is it just more blocking and tackling today.

Yes, we certainly have we're happy with the amount of inventory we have if you look at what we've done over the last two or three years in terms of monetizing assets.

Both midstream and upstream.

I hope that that's an indication of our willingness to to sell things that are at the backend of our priority from a capital allocation standpoint, we will we will continue.

Looking at our portfolio to that same lens.

Understood. Thanks.

Thank you My next question will come from Leo Mariani with Keybanc.

Hey, guys. Just a question here around oil cut off I'm looking at this right in terms of your 2020 guidance I'm seeing about a 66% or oil cut a this year.

It looked like to be about 64% in Q4, and again about 64% in the first quarter. So just wanted to get a sense of.

How that's what it evolves throughout the year and what's kind of driving improvement.

Yeah, you know the mid Sixtys, plus or minus is due to our capital allocation across the basin is is what we see and it should be pretty steady at that level.

So in the shelf was that the shelf was a gas yes it.

Okay. Thanks.

And I guess just from the perspective I'm looking at your 2020 production guidance and comparing that with kind of where you guys were a in the fourth quarter, if I kind of back out the the shelf sale in the fourth quarter of 19 me looks like 2020 is kind of expected to be sort of flattish.

Just with fourth quarter, but I guess down a little bit in the first quarter 20, just kind of wanted to to get a you know a little color on that and I guess do you guys just see production starting to pick up in terms of the growth coming in a in the second quarter, a and I guess just overall I mean.

Looking at that kind of level there. It seems like maybe there was a little conservativism and those numbers.

Sure Leo.

Just to kind of recap I mean, if you take the shell out of the year for 2019, we're projecting two to grow our oil rates in 2020, a little more than 10%.

So that that that I think your question really is about the cadence of that growth because you point correctly to that fourth quarter number we reported to 15, if you take the shelf felt and it's about two Tim.

And our first quarter guide at the high end is essentially flat with that number.

So I.

I wouldn't read too much into that there's a little bit just inter quarter noise around the first quarter, there's probably more completion or more wells put on production in the back half of the quarter than the front, but as Jack as mentioned the theme of steady should be the way you think about 2020 is growth.

Okay. That's a that's helpful color I guess just on your dividends versus buybacks you guys had a pretty significant buyback activity in the fourth quarter I know part of that was driven by the shelf still you've obviously boosted the dividend aggressively here in 2020, which is great to see I should have quite a bit of other free cash flow you guys going to stay.

We'll stay aggressive on the buyback here in 2020, you guys kind of view that hi, fourth quarter buyback is little bit more onetime in nature.

Well, we talked about using the proceeds from the sale of the shelf.

On buybacks and we did that and I would say that we also talked about the various levels of free cash flow that are possible between 50 and $60 oil and one one of the greatest uses of that amount of free cash flow will be opportunistic stock buybacks. So.

Okay. Thanks, guys. Thanks.

Thank you. Our next question will come from Bob Brackett with Bernstein Research.

Hey, good morning, I'm intrigued by slide 15 in the deck, where you talk about your horizontal wells drilled by zone and formation and there's a bit of two questions. Here. One is there's a mix shift between say your pre 2018 program and the current program for example in the Delaware.

The second bone springs into the Wolfcamp, a and for the Midland from the Wolfcamp a into the lower Spraberry. <unk> question is what drives that shift assuming that you're trying to maximize the IR of every well you drill.

Sure Bob I mean, there's a variety of things driving that in the Delaware and one of them is just trying to target the oiliest zones with the backdrop, we have in terms of.

Natural gas pricing at NGL pricing, so theres theres some aspect of that but also is just to.

In the in the Midland Basin as you talk about this different spraberry animals, the the rates of return to there.

I have been superior for us than than many of the wolfcamp zones in the middle basins of capital has moved that way as well.

And how do I think about Prospectivity should I use sort of the level of activity in the last couple of years as a measure of how good the zones are or is that too simplistic.

I think that's probably too simplistic I mean part of this is as Tim has talked about before you know there over the last couple of years, there's always been an element of exploration.

And our program or we've tried to continue testing other zones, where the knowledge of the if you don't go get them now you may or may not be able to go get them in the same way later and so we continued to kind of.

Trying to figure out exactly right answer on that I think one lesson from 19, as especially in a $50 oil environment, we're going to have less risk tolerance in terms of doing that here in 2020, but it's still an important question to answer the long term.

Okay. Thank you.

Thank you. Our next question will come from Jeffrey Campbell with Tuohy Brothers.

Good morning, and congratulations on the call the quarter under here.

I noticed with interested Capex is now split 50 50 between the Delaware Basin Midland Basin as opposed to 60 40 in 2019 I just wondered what was driving the increase capital allocation to the Midland Basin.

Yes.

Hey, Jeffrey.

I wouldn't read too much into that I mean, our capital allocation process.

Definitely looks a lot like what we've done in previous years, which is the teams compete with each other for capital.

Based on a rate of return basis, and also kind of so right. So long term ROI and so.

60, 40, 50 50 are generally similar numbers to me.

Okay. Thank you I appreciate that and on slide 12.

Going back to the flaring.

Obviously, a lot of improvement there I just wanted to zero physical constraint to further.

Reducing the flaring and if so how's that going to be resolved.

Oh, there's that's the result of very intentional effort on our part.

There's a lot of push obviously, all the industry and from within the industry to continue to move that number down.

[music].

So that's a big focal point here.

Well I guess, what I was asking it was do we need any further pipeline development to reduce the flaring I mean is there some specific physical constrain or physical catalyst, that's going to help push that down any further.

Yes, we are dancer. Your one question, yes, there does need to be additional pipeline development and there are Fortunately a couple enough.

In the Q.

As for now we are happy with our providers and our agreements and we are moving all of our gas and we don't anticipate any change to our our program in 2020 based on constraints.

Okay, great. Thank you I appreciate it.

Thank you. Our next question will come from David Deckelbaum with Cowen.

Good morning, guys. Thanks for taking my questions.

I wanted to just go.

Thank you just wanted to go back real quickly to the conversation on the split <unk> allocation between Midland and Delaware.

Did that capital allocation process change in 20 versus what it was in 19.

Being that sort of team driven model and I guess.

As we think beyond 20, I know you said you won't see a big difference between.

60, 40, 50, 50 or does that change precipitously overtime as we get into its a 21 and beyond.

I I don't think so.

This is Tim I mean.

We're constantly learning new things about the program and our assets through the science that we're doing and that informs and drives.

How we build future programs and we've had great success on the Midland Basin side in certain zones that are like those zones more competitive for capital so.

But I like having a balance between the two areas and or the ability to move capital back and forth.

Our new Mexico areas still has some some of the best rock in the entire world and it will continue to get a large amount of capital allocated to it.

I appreciate that are there specific areas that you drilled in 19 that you are shifting capital away from and 20 in the Delaware.

Not really.

The only thing that shifting is the style of development in the spacing as well.

But other than that no.

Okay, and just the last one I had I.

I know you guys have have increased your the number of locations lateral lengths. So on average by 7% this year.

And your drilling a program in 20 with averages of 10000 feet.

What does how long does that sort of 10000.

So its average lateral lengths program extends for.

Well it's dynamic.

As we sit here today, you've got you've got a lot of its still too, but I think one of the challenges to our team is to continue to do the work all the assets.

With acreage swaps and otherwise to extend that runway as far as we can see.

Got it but as as we stand today, if we were to allocate like a 21 program. It would be somewhat similar I guess, yeah about what to get into modeling input, which should be able to do 10000 foot laterals for a long time.

Thank you guys.

Thank you.

Thank you. Our next question will come from Matt what deal with TPH.

Good morning, all good morning.

And just a follow up question on the dividend policy going forward, assuming crude generally holds around 50 to $60. Wi Fi is there a framework with which investors should be thinking about the dividend as it relates to progression in gross.

Well, yeah, I would say that the difference between 50, and 60 and free cash flows as large but Oh, you know as I've stated we view our.

The dividend is the first call on our cash flow and capital and if we want to.

Grow that dividend and they are compelling and competitive way so.

As the company is able to grow but I think that dividend you gotta expected to grow overtime as well.

Perfect and then a follow up question as it relates to the shift in the business model that you mentioned over the last few years targeting more of a moderated growth program with growing free cash flow over time could you potentially talk about any directional color on how capex might progress over the next year.

Here's this crude is to stay at or above $50 barrel.

Yeah, I think that one of the important things and we've said it several times on this call is that steady means efficiency and so.

The growth of the capital spend I think we'll be very restrained and you know in fact, you know this year's capital spend is less than last years, and we're getting more from that capital that we're spending more lateral feet. It's a tremendous driver in and efficiency and in our margins and things like that so.

I think that and expect that.

The capital program going forward will the growth of that will be very muted and but the results you see from it ought to grow.

Thank you.

Yeah.

Thank you. Our next question will come from Paul Chang Scotiabank.

Hi, Thank you can you maybe.

Okay. Yeah. Okay. Thank you sorry that I think last time I have some problem with Stifel.

I'd have to apologize that's because I missed the first six or seven minutes off the call. So give my question has already been addressed piece I mean <unk>.

If I look at a longer time, I think I love the investor, especially in the Valley was fine they would like to have a more feel well Matt in terms on how the future cash flows being used so wondering that that's the company's shift more to listen to that free cash flow went to return more.

Do you have a talk had how much is that the saying Oh the Rachel off your cash flow you go into we invest seen deficits and how much you expect that to we tend to the shareholder.

Sure.

We've laid out our framework.

In a slide.

Pretty well here that you know, we expect it $50 oil plus or minus be able to grow our business.

And generate increasing amounts of free cash flow, but.

In the points in the cycle when the price goes above that.

Chasing that price and letting all the free cash come back to see the shareholders either in the form of a dividend.

Or buyback and so that's that's the underlying framework that I think you should expect and as Tim just mentioned.

That can improve with better efficiencies and getting more for less.

That's 50 told US that do you have a hey, Tom CAD, how much is that free cash that you want to January overtime as a percentage.

Well you can see what we're doing in 2020, a $50 and my expectation is that we should be able to improve from that level going forward.

Okay. So the 50, yes, the face night that we should use and assume yes, it's going to do better in the future and bend that bank.

Union to what is the Capex that you might use.

Okay.

Long time do you have a pocket production growth now I think that one poignant a few seem to post that you're talking about 15% and for this year that say, 10% to 12% on close six three it's saying on the total one in growth instead, a reasonably pocketbooks Lee on in the future.

On the longer term.

Yeah as we've described it many times, but were searching for that optimal mix of of growth in free cash flow you can see what the output of that isn't in 2020, a and beyond that we will see what the circumstances or hold.

Yes. Thank you I would just make one comment that I think for you'd mess that he would want that that to see a higher free cash flow and how you go from me given to grocery and mass that no. We don't get here I don't think Pat the mockup. We've won any company, we're winning phase call you not be John tend to spend level. Thank you.

[laughter] next question will come from Gail Nicholson with Stephen.

Good morning, [laughter] standpoint, the hedge book you guys very healthy hatch book this year with the continued volatility that we have experienced in the commodity hedging side you changed at all the standpoint, you know what you feel is needed from a hedge protection on a go forward basis.

Our strategy really hasn't changed I mean, the the basis of this strategy is.

Hedging the PDP volumes out for.

Couple of cycles for 12 to 24 months.

That's the basis, but the tactics have changed you know where we've got the water or.

Waterborne volumes that you hate hedge that a little bit differently.

We've talked about you know the past, we didnt hedging a gas and NGL. So much weve, you've seen us be more active.

With that.

Thankfully and so that's the basis basic strategy still the same and it's not to assume that we know which direction commodity prices are going there's just to take some of that risk and volatility of our cash flow in the short term.

Great. Thank you and then on regard Oh, we when we look out you know potential future improvements is that more water water cost saving driven is there on incremental savings from electricity that being put in a switch from yes. The gas lift or just can you talk about the times some of the project that are being.

Implemented in 2020 to further improve the L. <unk> cost.

Sure I mean, the or the the water piece is probably a net neutral up to the extent, we're doing those transactions. It's the to the market rate and so it shouldn't have much of an impact either way on l. away.

As it relates just broader improvement.

In L., we I would say that it's going to come through the aggregation of a whole lot of small efforts as opposed to any one big gain I mean as time passes in electrical infrastructure is built out and needless generators.

As time passes and the technology helps you improve things on the productivity side with automation to another was.

Theres definitely long term opportunity there, but it's it's going to be a grant.

[music].

Okay, great. Thank you.

Thank you. Our next question will come from Josh Silverstein with Wolfe Research.

Thanks, Good morning, guys I'm, just I'm on the capital budget for this year, maybe just clarification. There is the two six to two eight all Len I'm asking because you guys have historically put some capital into midstream projects have added some are spending dollars on acreage additions. So just wanted to see if we should be thinking about any additional cash.

It'll be on that level.

Yeah, the any any additional capital beyond that.

Should be pretty minimal.

So I think that waste look at it in terms of the specific items you mentioned the same percentages hold that we've talked about in the past four.

Infrastructure, it and non <unk> exploration and development capital.

Got it later they are included in that number the two six to two a <unk>.

Got it so that like the roughly 150 or so that you spent over the last couple of years. That's that's in that that number for this year now.

Yeah, that's kinda, that's 7% to 10% of the total.

Got it okay. Thanks for that and then just on the cost structure, but between the two basins, obviously, there's a big.

The client expected in the Delaware. This year, just curious where the leading edge is right now and is there any any reason to think why the Delaware couldn't get below the Midland or entering 2021.

Well I do think the forward guidance, we're giving there on the DC any per foot.

Flex kind of the environment as we sit at Fourq, you and projects it is being steady across 2020.

You know I think it if you looked at the breakout between.

That number in the Delaware basins, probably 100 Bucks a foot higher on average in the Midland basins about 100 Bucks a foot lower on average and while they have had similar drivers in terms of causing that that number to come down over time.

There has been dramatic improvement of the Delaware, especially around some of our things we're doing all the drill side. So I do expect the Delaware number just structurally to stay higher because of some pressures.

Got it thanks guys.

Thank you.

Thank you. Our next question comes from Noel Parks with Coker and Palmer.

Good morning.

I can hear me.

Yes, good morning.

Oh, great. Thanks.

In the.

In your comments earlier today, you were talking about Nexgen Frac equipment and I was curious do you view the next stage of proficiency more beating on the equipment side as opposed to the Frac recipe side going forward.

Well I'll, let will jump in on this in detail, but I would say.

Efficiencies come in small bites everywhere and.

And that's been the case for a long time, so I would expect everything to get.

More efficient overtime.

Yeah, so that I.

I agree ER and the.

Well, we're really trying to highlight there is just the move to these this dual fuel, including one tier four week, we think thats another opportunity to keep driving cost down to the extent, you're you're burning a.

Compressed natural gas or even field guess in your fleet. Instead, so we're pushing on that side pretty hard.

Great and.

<unk> done a lot as far as.

Lateral lengths is as you described but I'm wondering for those remaining areas where you are.

Your leases.

Are you having to do short lateral how much of a compromise in return or worse efficiency.

Do you have at this point with.

Shorter lateral.

Well I mean, we're trying to pretty hard to not drill one mile laterals, but I mean, the uptick from go into one mile to two is very significant I mean, it on order magnitude it can double the rate of return.

Okay, and or are there any any any differences and I guess.

In relation to talk to miss or anything I'm thinking about.

With the longer laterals of course, you have on sort of more complex completion, yeah. The.

She is how many has happened after told <unk> well compared to on a shorter lateral or are those affected at all.

I mean, I wouldn't say just flattened, though but technology is fixed most of the big problems. You know you dissolvable plugs to the extent you're going.

Beyond two miles for the two or in some of those types of things but.

Broadly the answers, though is the the effect of this is to say.

Thanks.

Thank you. Our next question comes from Richard Tullis with capital one Securities.

Thanks. Good morning, most my questions have been asked but just one last one for Tim or Jack It's been I guess, a little more than a year since the RSP acquisition closed any one or two items stand out at this point that may have surprise to the upside or maybe even caused some disappointment compared to the initial thoughts at the time of the acquisition.

Yeah.

No its oh, great combination of of like assets I still think size scale and blocking this of our acreage position is very important then you can see that through the efficiency numbers that were continuing to gain also allowed US you know that the.

Sale of the shelf and continue to high grade our properties is makes us better company.

Thank you that's helpful and.

Lastly, just thanks for the detail in the presentation on the different cost components I think that's helpful. That's all for me.

Thanks.

Thank you and your final question will come from Jeanine Wang with Barclays.

Hi, good morning, everyone.

I wanted to follow up good morning.

I wanted to follow up on some of the dividend questions I'm, you announced that nice dividend increase and in terms of just understanding it a little better for the different N dividend coverage what oil price are you comfortable where you've got a really strong hedged about program. This year that puts a lot of protection and on the downside and also makes a breakeven prady.

Hello at 'em, five below $50, W.P.I., but what about unhedged and maybe as a follow up to that going forward. That's the ship is pretty flat at 51 for hedging purposes.

Where do you feel comfortable for 21 and 22 coverage.

Yeah. It in starting in 2020, you know were we feel comfortable that sub $45 oil we can cover our capital plan and that dividend.

So that gives us comfort a this year to weather or anything that may come in if if oil looks like it's going to be lower for longer below that price. We will we will modify our capital plan.

Going forward I think just philosophically the way to think about the dividend is that it should represent an increasing.

Percentage of our cash flow and it should most likely outpace our growth in production.

Okay, great. Thank you for taking my question.

Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Mr., Tim Leach for any further Mike.

Thank you and I know that a this was a busy morning, there's lots of companies reporting. This morning I appreciate all the a good questions and interest in our company. We look forward to talking to you next quarter. Thank you.

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

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