Q4 2019 Earnings Call
You are currently on hold for the pioneer natural resources fourth quarter conference call. That's somewhere so instead of audience implants anyway. Shortly that's why am I noticed star one if he would like to ask a question. We appreciate your patience I'm struggling.
[music].
Welcome to pioneer natural resources fourth quarter conference call joining us today will be such I felt president and Chief Executive Officer.
Rich Daly executive Vice President and Chief Financial Officer.
We call Executive Vice President.
Operations, and Neil Shah Vice President Investor Relations.
I didn't hear has prepared powerpoint slides to supplement their comments today. These slides can be outsized over the internet www Dot P action D Dot com.
Hi, Dan the Internet site to access that's why it's related to today's call is www dot Pete XT dotcom.
At the web site selection dusters bands to watch earnings on the web cast.
This call is being recorded.
A replay on the call will be archived on the Internet site during March Twentyth 2020.
The company's comments today will include forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements and the fastest hospice a pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially on a forward looking statements.
These risks and uncertainties are described in pioneers news release on page two of the fight presentation.
And then pioneers public filings made with Securities and Exchange Commission.
At this time for opening remarks, I will turn the call or what's the pioneers Vice President Investor Relations Neil Shah. Please go ahead Sir.
Thank you Amanda.
Morning, everyone and thank you for joining US let me briefly review the agenda for today's call Scott will be a first with some introductory remarks. He will then discuss our strong fourth quarter and full year 2019 results driven by solid execution continued efficiency gains from the teams.
After Scott concludes his remarks, Joe we will review our strong horizontal well performance optimize for rate of return, while delivering best in class oil production as well as the drivers behind 29 change strong efficiency gains.
Which will then discuss the benefits of thoughtful long term planning and the impacts to our cash flow as well as the benefits from our legacy acreage position.
Scott will then return to discuss playing here, it's focused on sustainable practices. After that we will open up the call for your questions. Thank you so with that I'll turn it over to Scott.
Thank you Neil good morning, Thank you for joining us.
Are you all know 2019 was an accident year for buying here.
We will outline we expect 2020 to be even better when I returned upon your in February 19, we set out a number of specific initiatives to return pioneered a top before much I'm happy to report all those objectives.
I didn't are now in place and now complete while they get a little decision we right size the organization to reflect the one basin company, reducing or do you need to be Gulfport, though we organized in flatten a reporting structure.
Yeah, the individual benefit of providing greater transparency and visibility across all levels, resulting in a company Holly focused on strong execution in capital discipline.
During 2019, we assessed options to monetize long dated noncore inventory now would have expired, but little or no present value.
We reevaluated our capital allocation framework to consider options.
<unk> cash flow profile and generate stronger returns today, we're pleased to announce we haven't agreement in place with target and our 2020 budget, that's no capital spending related to our interest in targets Midland Basin gas processing system.
Our non core inventory monetization efforts resulted in a signed agreement spray drillco in our southern JV acreage as well as the sale of approximately 8000 net noncore acres that yielded approximately 130 million during 2019.
There are going forward for our shareholders and they disappeared and thoughtful manner lastly, our water system is still under evaluation and I'm still expect an update in late 2020.
That's a field level or facilities are now optimized to our current growth right.
Enabling us to dropping more capital efficient program also we're making great progress as you see in fourth quarter in regard to reducing our lease operating expense cost.
2019 was an exciting year for Bonnie or you're a change your what was materially reduced our cost structure increased our corporate returns generated free cash.
Turn significant capital back to shareholders.
Thank you did all the employees up on here for their hard work strong willdan determination, there perseverance to achieve at the highest level that drives our company for.
Another milestone happened this week.
I've been talking about over the last several months Yeah I came out with the report early this week U.S. shelf set to increase only 11000 barrels per day of all in February 18000 barrels a day in March.
No what is growth in three years, all shale basins are in a decline now except the Permian.
I mean is expected to grow about 40000 barrels of all per day.
Or mark in the months of February and March not been estimating roughly about 500000 barrels a day growth in the Permian over the last several months.
Looking to our first slide number three and getting into the fourth quarter in 2020.
I think the top thing.
We did generate 385 million or free cash flow in the fourth quarter. When you look at just the second half of 2019 generated over $600 million a free cash flow.
Tremendous cost reduction we've seen will talk more about a lighter and Joe you'll spend more time talking about it but it's starting to percent improvement in well costs to 90, and a 10% do decrease in our Permian Halloween.
Again, what's important given capital back to the shareholders or we're increasing our dividend up to 220 per share did 185% increase compared to the full year of 2019.
Also in addition.
Yeah, we're continuing to buy back shares were up to about 749 million. So we have left about 1.25 billion.
On our authorization.
Also a very important in regard to where the best in basin. Now we were in second place. We have moved up to first place less than 1% of our produced gas flared.
And then probably one of the most important items besides free cash flow. What we're focused is the increase to return on capital employed a 11% we delivered in 2019, that's up from 9% in 18 and 4% in 17.
That's a nice thing about that that's with a 12% drop in oil prices W.
To achieve that or C.E. of 11% in 2019.
Turning to slide number.
For all.
Obviously, we had a very successful fourth quarter at the high end up production on oral above.
Total production 363000 barrels of all per day.
Again free cash flow or 384 million.
Also keep in a very very strong balance sheet and you can see the summary for 2019 again to keep 0.0 production the top into guidance.
Total production.
Above the top end of Guy.
So I want to slide number five.
Again.
I really key focus on your <unk>, reducing well cost a 30% reduction you could see estimates going from about 12, and a half million down to about eight half a million for well that includes full de senior network cost.
We'll talk about a need to these items turn it over to Joey layer.
Slide number six.
In regard to 2020 outlook.
Again, it's what we've been talking to the street about doing 35 to 245 oil sort of production 383 to 403000 barrels all per day all products are sold in premium markets, obviously, including natural gas.
Capital budget about three to 3.3.
Again cash flow based on the current strip.
We're almost back to the price that we were using.
Well brings back to about 59 for the rest of year. This is run on $60, Brent case or $55 WD gauge the cash flow of about 3.9 billion Richard talked a strong hedges in place.
And even with WT are going down to $50, a W.G., we only see a drop of about $200 a free cash flow.
The balance sheet expected to improve down to pulling for.
Between now and ended the year number if you look at the midpoint of oil we are growing about 14% oil for the entire year.
Slide number seven in regard to operational plan again, we've been saying over the last 12 months, we'll be adding roughly two to three rigs per year. This gives you the rig count.
The number of Pops, it's about 360 about the midpoint.
Saying well makes as we saw in regard to 2019.
You have a cop two or three new slides that we weren't dong. These are things, we've been saying to investors in regard to a wide mid teens growth, it's a combination of execution.
Free cash flow net asset value return on capital employed.
He just like each of these items are affected or depending on what growth right is the up.
The key point out there, making the growth Reagan's the output what you're trying to accomplish all four days I think the key driver is free cash flow Anoro C E.
In regard to how we're running the company today and we have a great you haven't inventories that we can deliver deliver this program for a long time.
Slide number nine just shows you the benefit, especially when you have 600 million to 900 million or free cash flow and a $55 WT price environment for 2020.
Maintenance capital is about 2.1 billion now and with our banks do you have it in your dividend increase.
In part of the growth capital you can see even at $40 WG yard that we're able to pace.
Most of this and part of the gross capital either they're very very low price. So continued to drive down our breakeven price.
Slide number 10 again, that's another way to talk about what we've been discussing in regard to work as free cash flow go.
We see we have stated.
To get our base dividend up to about the averages. The S&P 500, we're getting close obviously with our recent increase.
Long term will continue to look at other increases in the base.
In regard to share repurchases will continue to do that opportunistically.
We're still gonna have a great balance sheet as you can see will be driving our debt to EBITDA down to about 0.4.
$60 brand or 55 dollar WD price for the entire year and then we'd been exploring with a lot of our shareholder base or the last several months and will continue as we go out and discuss.
Well shareholders.
Oh, the variable dividend.
I think the reason that's been in or days, because everybody knows we have fluctuating commodity prices.
And secondly, we do not want to get the base so high.
That you right in to any type of situation, where either consider cutting a nice.
So the best option it to create a variable dividend and pay that out to the shareholders.
[laughter].
Slide number 11 again.
Just reemphasizing, the fact free cash flow falling back to the shareholders.
After buying back over 700 750 million of stock. In addition to our dividend going forward is about 360 million. So we've got about 1.1 billion combined the two together that we've returned to shareholders again, 185% increase from our dividends we paid.
In 2019.
[laughter].
Again, emphasizing aro see up to 11% and that's with a 12% decrease in all price. If you can see from 65 to $57 also you can see the.
This is all prior to the fact, if we focused on the cost side of the business.
Moving to slide number.
13.
Talk to your returns driven by like which cost basis.
I would say a key point here. Besides the fact that we went up from 9% to 11%.
Let's see when you look at using credit Swets information that our peer average actually decreased.
Down from 8% in 2018, despite a 6% average so we're gaining on peer number one significantly in 2019 and starting to lead starting to move about the pack from peer to peer 12, and a lot of it has to do with the fact, where cost structure and secondly, the fact that we essentially have very little.
Investment in most of our 680000 acres.
Slide number 14, I think you've seen this already.
I think the only other key point here is that there's a couple of points here to emphasize the fact that.
Starting to see some certain large integrated and also some large on Permian companies move to a greater mix in the Midland Basin and you look at the amount of acreage and they have so we're saying that and I think that's obvious why when you look at the benefits of the Midland Basin pulled the Delaware and another key point will emphasize to when we get.
We ended the flaring slides U.S.G. slides is at the Midland Basin, obviously, when you look at the mine learning that's going on.
The biggest culprit is in the Delaware basin.
Its primary due the fact that the Midland Basin has been there a long period of time and that's a lot more existing infrastructure.
Again slide number 15.
Probably had the best footprint and worked in a world class assets.
The shows the two acreage noncore deals that we made in 2019.
For 129 million. In addition over 10 billion barrels a resource base.
680000 acres and my first opening statement you did make a comment about the fact that we are signed up a recent drillco to drill about nine wells.
And that will start shortly in regard to taking acreage that will eventually expire.
Over time in our southern JV acreage.
Slide number 16 again.
This slide it's been around just show that use the percent of acreage it's been developed coming out of Wells Fargo.
Pioneer leads the pack significantly of everybody in the Permian basin years of inventories break even less than $50 WT Guy we're way after the right and we've developed very little of it is the key point with his slot I'm now going to turn it over to Ah Joey.
Thank you Scott good morning, everybody I'm going to be picking up on slide 17.
Continuing a same from the last two quarters and starting on the left hand side of the slide.
You can see the when you normalize gross production for all peers on a two stream basis pioneer has the highest oil percentage and then moving over to the right. We also have the best 24 month cumulative oil production. So simply stated pioneer How's your wireless production mix and girls the most productive wells in the basin.
These two facts of course combined should lead to the best margins and the highest returns in the basin overtime.
Now moving onto slide 18.
Scott already mentioned, our execution changes had a tremendous year, most notably by reducing our well costs by 30%.
You can see on the left a large fortunately savings were driven by significant efficiency gains.
On a feed her feet per day in both drilling and completions have improved over 30% since 2017 with most of these gains coming in 2019.
Although not highlighted here in a Scott as mentioned our operations team also realize significant cost reductions and facility construction.
And we've also achieved significant reductions in L. are we.
And Additionally, as you can see on the right. Our field development came continues to plan and deliver best in basin oil wells.
And of course building off my previous slide lower well costs combined with increased productivity leads to improved capital efficiency and thought your returns.
I'd like to offer my congratulations to the entire piner organization on a great here. Thank you to our Geo scientists analyst engineers supply chain management team and especially those executing safely up in the field everyday for a tremendous year and I'll now turn it over but [noise].
Thanks, Joey and good morning, and I'm going to start on slide 19, and besides really there is to highlight the attributes of attributes are pioneers assets in a strategy that we employ to improve margins generating strong margins. As you know is key to improving returns maintaining a strong balance sheet and returning capital to shareholders. You can see thing the graph on the right.
We generate peer leading EBITDA privia, we margins this incremental margin relative to our peers is a function of.
[laughter], a higher percentage or do we produced in our wells that Joe just talked about or high net revenue interest in our wells that I will talk more about in a minute and maximizing the price that we received from the products that we sell by moving into higher priced markets.
It's also driven by protecting our cash flow with derivatives and as Scott talked about our strong focus on reducing our cost structure.
If you look at they.
Graph. It is just for the third quarter just to give you an updated view recalculate then on a fourth quarter basis, our EBITDA up or be a we increased about $31 per be a week, reflecting the benefit of higher commodity prices during the fourth quarter and the company's continued cost reduction efforts.
Turning to slide 20.
Slide really highlights the benefits of our legacy acreage position, where we have low basis and high net revenue interest you can see from the chart on the left the benefit of having a high net revenue interest the chart illustrates how much incremental drilling activity that our peers must execute in order to accomplish the same level of growth is pioneer.
In addition to more efficient growth for high net revenue interest across our acreage also provide for better returns and higher margins as Jos discussed.
And then when you think about it from a drilling inventory perspective. The chart also illustrates how much faster our peers have to drill through their inventory to accomplish the same level of growth is pioneering.
Turning to slide 21.
Really highlights the focus of our improving cash flow margins by moving our products to higher priced markets and using derivatives to protect cash flow in particular during the fourth quarter, we significantly improved our gas price realizations by selling or I guess outside of the Permian Basin with Gulf Coast Express coming online, we transport nearly all of our gas to the west coast or.
The Gulf coast selling it there versus selling it in the Permian Basin. This resulted in gas price realizations being two doors and 21 cents per Mcf versus if we sold it in Permian being based off the wall index of $1.11. So significant uplift.
On the oil side that we transport in nearly all of our 220000 barrels a day production to the Gulf coast, and 95% or it was exported during the quarter.
So you can also see on the right side of the page that we have a strong derivative position for 2020 was 67% of our first quarter oil production and 54% of our full year oil production protected with derivatives at $62 $62, Brent prices with upside to the high Sixtys.
As a result of this strong derivative position our cash flow variability between 55 and 50 as Scott talked about there's only about $200 million. So you can see them well protected in 2020 from oil price volatility.
So I'll stop there and turn it back over to Scott for some discussion on environmental progress.
Thanks, Rich on slide 22 is delivering low emission barrels you can see were shale oil. This is a close to leading the pack in regard to lessen stellar density, including methane. This is coming out of a woodmac report wouldn't it seems you report a.
That said it was published recently.
Slide number.
23 were the lowest of our peers and missions intensity, where pioneer is on both greenhouse gas intensity and also methane at density.
This is.
Primarily due to the fact that we have some of the best Eldar programs leak detection recording low level fly over several using one of the few companies just doing low low level flyovers with new technology are the are you catheters.
It's a recovery in its well one of the first do require every gaslog has to be a guess why has to be connected on essentially all new horizontal wells and what are the other major changes, we're making an R.E.S.G. in regard to use 'em compensation were increasing that these from 10% to 15% and going forward in 2000.
20 [noise].
Looking at slide 24 in regard to the flaring up obviously, it's been in.
Several newspapers, including the New York Times recently pioneer Happy to report we're now number one in regard to we have then number two when you look at some of the data in 2018 now looking at the data 19 on here, it's down less than 1% at number one.
We originally you probably had the largest flaring the first thing in the largest flaring conference in Austin, Texas. It was put on by Columbia, and UTI Energy yesterday, I think coming out of that conference.
We have agreed and we'd like to get all producers committed to this we're committed to better reporting to all agencies. Both in the state of Texas, and New Mexico, We're committed to sharing best practices among all producers.
And thirdly, a couple of interesting ideas came out we think it's important to say, 8% target no pioneer would like to be able to continue to produce below 2%. If you look there's only really six companies that are below 2% I think every CEO should set a target of 2% or less it'll help solve the problem and then another interesting.
The idea came out of the conference and the fact is back to the shareholders shareholders and public companies shareholders and private equity companies shareholders in regard to bonds that are being down.
Is that you all can help and also requires companies to be 2% or less they're not 2% or last within a certain period of time, especially when it to the pipelines come on in the first half of 2021 that you would end up you're not doing business or sell whatever you have in regard to that company that wed also.
Help so those are something interesting ideas coming out of that conference I think it's important to remove that black guy on the Permian basin going forward.
Final slide number 20 525.
Again, the company tremendous turnaround from 2019 focused on returns capital disciplines in place return of capital is in place already.
Great probably the best balance sheet of any independent and U.S. and we have probably the best inventory of in company going forward, So I'm going to stop there and we'll open it up or culinary.
[noise] feeling like asking question if I go by pressing star one on your telephone keypad.
Hearing anything in Speakerphone. Please make sure your immune function has turned off to a liar said no to meet your equipment.
That is star one if you're willing to ask a question.
Well now take question from Scott Wheeler with Citi.
That's good morning.
Well hear me [noise].
Yeah, Yeah, one Scott.
Do you think that's getting those are the possibility of a variable dividend I'm just kind of how do you think about where the prudent take the base dividend paying a deck the yield thinking to increase it how do you think about where did pretty good.
Do you think about percentage of cash flow protect your cash flow, but legals capex and some framework on that front will be great.
Yeah, we haven't time established a percent I mean, we're looking at other in study other industries that have had bearable dividends. We've had several companies and other industries that have as accessible variable dividends.
We got a lot of those comments from in talking to them out of our shareholders over the last 12 months, we'll be going out again and visiting with our shareholders over the next to the pretty much in March and April with appointments and talking to and go into a couple of the converts is I'm still trying to establish it but you know the date, we already have a great balance sheet.
And we're going to establish a base and then base is gonna be.
Eventually close to the S&P 500.
Around it and were slight increases going forward on that base, but then when you look at the amount of free cash flow. The company has and we've we've mentioned before I didn't Barclays conference that we have over 5 billion or from cash. So the next five years, you still have sufficient amount or free cash flow. What do you do with it and like I said don't want to most of our shareholders.
We've discussed.
Do not want an E and become the getting your base up so high.
And so it leads toward a variable dividend.
So.
We'll have to come out with the mechanics as we develop our first year free significant free cash flow opened above our base dividend in any stock buybacks. That's what's left and have to come out with the plant and will be visiting with everybody as we speak with you over the next several weeks.
Scott just one other thing to add to that.
We believe it's important that is stable and growing dividend. So I think that's you know kind of under getting on the on the base, but we also think about that growth needs to be consistent overtime or what the S&P 500 or slightly better. So yeah, that's where we won't overtime, we place dividends.
Great and.
An unrelated follow up I look at a slide five and the deck you guys are they Greg.
Yes on well costs 329.
Yes, just give me the efficiency gains into 20, I'm Blessed survived the midpoint of your core cap that.
315 over your pop guys about 316, I've come to an average well cost that's a round or the 20 liking average.
Why isn't that simple math show a greater adoption is there something that's impacting the year on year comparison.
Hey, Scott its Neil.
If you if you look at all we did in 2019 in the capital program that May 2020 capital guidance also includes any potential rig adds towards year end that we would require for 2021 again similar to what we did last year. So that's that's embedded in there as well also that range encompass is somewhat in correlates to the range and pop so there's a correlation between the two.
So I'd say, if you look at a strong efficiency gains that we experienced the route 2019, let us to over a cruise slightly based on Q2 in Q3. So there's a onetime benefit to Q4, such that the Q4 run rate would be somewhat higher. So if you encapsulate all those three factors that kind of leads into the range. We currently stand.
Got you effect you recall it.
You're welcome.
Well now take question, that's like with Bank of America.
Thanks, Good morning, everyone wants drop.
Scott you previously talked about $5 billion of cumulative free cash flow over a five year period.
I'm curious with a significant reduction in well costs you've shown here I'm.
What are what you are assuming another five going door number I'm just curious how do you see about free cash flow.
As ability today, yet so under the same price deck.
Now that the number really hasn't changed doug's since my announcement in September at the Barclays coverage. So that number is still about look it's a little over rounding off to 5 billion or free cash flow and that's it $55 W.G.I. flat during that timeframe, obviously you have more bullish.
Especially with you as shale.
Essentially slowing it's grown significantly going in 2020, once we get through the Corona demand issues I'm more optimistic there we're going to see a much higher priced it over the next five years in that number will increase substantially and as we go out.
Over time that number will increase or even in a flat pricing market.
Because the first couple of years, it's a little bit lower and then in increasing significantly as you get into year 2020 to.
20, 324th a number keeps increasing significantly.
Thanks for the color, but my follow up is just a couple of things you mentioned in your prepared remarks about the cool.
In the water still under under evaluation I, just wonder if you could this brings up to date as to.
Oh, you see the potential for additional non core I don't want to see divestments initiatives.
Release, additional volume, especially from your longer dated acreage and if you could bolt ons that not just remind us walk the invested capital in the water businesses.
As of today.
Thanks.
In regard to the the water as I stated before we do not want it freight cost I think most of the companies that are going on water deals are doing disposal deals and they're basically trading or they're bringing in capital or cash for the balance sheet and their operating cost are going up and so we just don't want to trade cost.
And that's why we're taking more time minimal won't make a decision until late 2020. So we just do not want to trade cost and see it any increase in or L.E. cost.
And Doug on terms of the.
Dispositions.
I think as we did in 2019. Similarly, we'll look to opportunities to continue to monetize long dated and noncore inventory in an effort to pull that value forward to shareholders, but they'll they'll have to be when they come to fruition. So there's nothing on the docking just and I will continue to look at it.
No, it's I'm talking to market out there.
I was going to say how does the appetite for.
Rich deals at this point is is it pretty quiet or how would you characterize it never leave it there. Thank you.
I'd characterize it pretty quiet rather than I think it because the activity levels are there.
For teaching nature, what you've seen as people doing deals that you know are locking up acreage similar doing trades and so just a they can drill longer laterals.
Thanks, guys congrats on the core.
Thanks.
Okay question from everyone from JP Morgan.
Yeah. Good morning, Scott I was wondering if you could perhaps elaborate on details of the target agreement and how this will impact a call to go forward financials as you're no longer gonna be incurring that capex.
Hey, rich rich I'll tackle that one yeah, we've been working with target as Guy mentioned for a number of months on.
Our non consent agreement that we recently completed so would that agreement done they will fund the capital going forward on 100% and they'll get 100% of the revenue on new clients.
But we'll still retain our cash flow from the existing plants. So the benefit that we show in L. or we can happen showing will continue and from our existing ownership and those.
So we have invested enough in the past about future ones target will take the revenue from that.
Great and just maybe a follow up to Scott's question on the variable dividend what does the path from here you're going to be evaluating this with your major shareholders.
Scott what are your philosophical philosophical views on this and and if you did decide this year to shift to a variable dividend <unk> distribution type model. In addition to the base dividend.
What are you thinking about in terms of timing of implementation.
Like I said are ready to make the first thing. The first comment is that I'm going to say, most maybe 75 to maybe as high as 90% plus shareholders that I've talked to.
And.
And we'll talk to they prefer dividends over share buybacks jumpstarting would that premise secondly.
We don't want to get the base to high as we have seen with major all companies and we have seen with refining industry as to where the and be industry can't support it.
So that leads to an alternative you have 5 billion plus of excess cash flow and I think we're we're generating right now our dividend payout is roughly 360 million year towns five years. So what's at 1.8 billion close to 2 billion. So we're paying out 2 billion already with our Dear.
None of the 5 billion. So we've got 3 billion left to the payout under that price scenario and so that leaves toward a variable dividend, we gotta fluctuating commodity price market and the question is how much of that and the timing of it and when to pay it out and we're still working through the mechanics in learning about how other companies do it in other industries.
And we'll be speaking with people over the next several weeks about how to put it for us.
Great. That's helpful. Thanks, a lot Scott.
Next question comes from Gennine away with Barclays.
Hi, good morning, everyone.
My question is on everything he agreements good morning, my questions on U.S.T. agreements and I believe pioneer has now well over 200000 barrels a day and firm transport to the Gulf Coast and I think that's supposed to grow over time would perhaps and maybe not exactly in lock step, but that it would kind of keep pace I'm not sure if I'm thinking about that correctly.
So any color would be helpful, but I guess, what I'm getting at is on the W. Ti Brent spread has been narrowing relative to where it's been paid over the past two years or so and you got some kind of spread that you need to breakeven on your contacts. So I just wanted to check and see if there's any appetite to revisit the amount of incremental S.P.E.
Take on from here on out over the medium or long term.
Yeah, Geneva, you're correct that we are losing about 220000 barrels a day that does grow overtime to over 300000 barrels a day matches our growth profile going forward.
I've got 50.
I still think been moving it to the Gulf Coast is long term will be advantageous we're getting into higher priced markets, where we can get Brent pricing for yesterday, it's kind of a neutral breakeven proposition that for the year. We've made $283 million. So I think there'll be times is still is advantageous to get to higher priced markets. So I don't.
Things were going to change that strategy I think in general.
The differential between Midland and Brent prices being four to $5 a it's a break even type transactions, but we are making sure that were available in there and benefit when we see price spikes in the future.
Okay, great. Thank you for taking my question.
Sure.
Well now take our next question from Michael Hall, with Heikkinen Energy Advisors.
Thanks, I appreciate the time.
Well just kind of curious if they think about efficiencies and all the cost improvements that you rolled through the the system in 2019 kind of set yourself up pretty high bar there how do you think about.
Further efficiency gains 2020 and beyond.
You know what can really move so from here are we really just kind of looking at incremental changes and what sort of a key key initiatives you have in place for.
Further improvements in 2020.
Hi, Good morning, Michael [noise] Oh. This is Joey Yeah, I think as you pointed out that whenever you have a year, where you get almost 25%.
Efficiency gains in one year and 30% cost improvement, it's not reasonable to expect that you would duplicate that the following year and I think one of our slides basically references the trajectory we shouldn't expect it to be the same.
Having said that though that it doesn't mean that were not are still being relentless about focusing [noise].
On those initiatives and continuing to drive or cost down and we continue to do so even you know as we move forward, we see efficiency gains everyday but.
He said, we shouldn't expect to see us some or step change [noise].
But as for what are we going to focus on.
And I continue to focus on the things we've been focused on and that's primarily just looking at and efficiency side Lehman lean manufacturing methodologies and being relent, most with K P eyes and.
Measuring what we're doing out in the field I'm trying to understand better more effective ways to go about that.
Continuing to leverage technology.
As it develops through our service companies and so our internal efforts and taking on those kinds of things. We're we're trying to make our practices consistent all across the field you know taking some of the southwest Airlines methodology with.
Where any pilot can flying the plane and having consistency across all of our drilling rigs and Frac fleets. So you know I'm just a combination of all those efforts leads me to believe we still have several bites of the Apple but to expected it would be similar to what we saw this year is probably not reasonable.
That's helpful and I guess as a follow up on a similar topic, then I mean, you've talked about for long time.
Late last year, plus you know two to three wells, they're starting two to three rigs of.
Incremental rigs to to maintain or sustain that the mid teens growth in oil is that something that maybe over time.
The required rig adds.
Gets muted or any any evolution and that I guess as you think about 2021 and beyond.
Yeah, Michael I, I know that we always try to communicate and use things like a rig adds and frac fleets and Pops is proxies to determine future performance, but no I think stating the obvious when you have a 25% improvement and cycle time in one year, you kind of change that.
Mentality and you know a frankly my teams focused on trying to do the same amount of work with.
Less equipment [noise].
So like you said when do you have more like I said, when you have a 25% improvement that implies or do you need 25% less equipment. So it's getting more and more difficult for us to explain our business based on rig adds having said that though.
That's still kind of our mentality that we'll continue to focus on the growth and our expectation would be based on current efficiencies a two to three rig adds per year wouldn't be kind of the measure by which you should see our activity increase but that but those numbers change by the day.
Okay fair enough I appreciate it and solid weren't guys. Thanks.
Well now take our next question from John Freeman with Raymond James.
Good morning.
Don't show the a the average pad size in a in 2020 moving up a little bit to to four wells per pad is the well spacing still similar to what you all kinda characterizing the path of kind of around 850 foot spacing.
Yeah.
John whenever we talk about increasing pad sizes. It that's really not a reflection of a well spacing that's more reflection of doing more stock developments Soviet the short answer. Your question is that does not imply any change in our well spacing or well spacing. Those are basically staying in the same area 800 850 feet.
For.
The wolfcamp.
Oh zones.
Okay, and then just a follow up should we anticipate that the pad size sort of continues to kind of creep up in the subsequent years or is kind of four wells per pad about about the right right number.
No I would expect as we increase the amount of stock developments that were doing and co developments that were doing that she would see that increase sometime.
Good example was last year I think 35% of our targets were a single zone targets and this year, that's down to 15% well continue to drive that down as we zone, you know I'm kinda hone in on our development and so you'll see the the number of wells per pad creep up overtime.
Thanks I appreciate it.
Well now take a question from Joseph Allman with Baird.
Good morning, and thanks for retirement. So my question is about a natural gas and Ngls and not the most important part of your portfolio, but still important what assumptions do you make about say wahab gas prices going forward.
Do you assume basically close to zero what is what assumptions he make about NGL prices and what do you do to maximize the value those assets as production increases.
Yeah, Joe I think the big thing on natural gas is we have very little gas. It's now exposed to waha virtually all our gas is either going out west and getting a based on it. So kill index, we're going to the Gulf coast on a Henry hub or Nymex index. So we've made steps to make sure that we're not really subject to Wally I think.
As you say until a bunch more pipes get.
The built that was going to be low. So I just think that we're focused on getting it out a base and get into higher priced markets what to longer term look at <unk> LNG and moving it you know international like we've done on oil.
NGL.
How do we make sure that we all are ngls or process at Mt, Belvieu, and but you know given what's happened with it the amount of liquids it or.
Getting the Mt Belvieu and given the weather than we've had the winter in just a lack of demand for you I expect NGL prices still to be week for a while they were good in the fourth quarter or better in the fourth quarter and they've fallen back some here in the first quarter.
That's very helpful. And then just as a follow ups Scott I know you made comments about the some of your bullishness on oil related to the slowdown of shell grows but could you just give us your you're kind of macro view over the next several months and into the next couple of years.
Yes, I think maybe to OPEC really had to go until the Corona virus brand was up to 65 and W.G. I was up to 60, so granola bars here as that is it is peaking as we get into summer months I'm confident that the price will be up another five bucks.
And it should stay there most of the non OPEC I'm fields are coming on.
This year very little non OPEC fields coming on and 20 120 to 20 324, and that's why I'm a lot more bullish in regard to price bullishness.
I hope it doesn't go up too much but you know somewhere in that 65 to $70 for Brent.
Okay very helpful. Thanks for all the comments.
Well now take a question from Charles Meade with Johnson Rice.
Good morning, Scott you and your whole team there I Wonder if we go back you touched a little bit he made a few comments about the drillco, but I think he said nine wells can use or anything else you could offer about about you know how how big that was whether it's you know four sections transactions and and are we.
Getting the right feel that we shouldn't looks or you know it and the current circumstances, we shouldn't look for a repeat of that.
Yeah, Yeah, Charles is rich I think I would you know, we we need to execute it first and so this.
Drill goes in our southern.
Part of what the acreage and they'll start in the second quarter of this year and so I'd say, let's just wait and see overtime and as we get that when done then we'll see what what maybe next.
Okay. Thanks for that Rich and then and then this is a up perhaps for Joe going back to the I'm going back to the pad size.
Bumping up to four on average.
Sure I just two questions on the one you know what's what's the what's the dispersion around that mean, you know another <unk> or maybe that's the same thing differently what percentage of your of your pads are going to be four well pads is that kind of <unk> really truly representative thing and then and then should we be on to look out for anything different as.
You know as is bigger pads roll through your Ah you know roll through your operations and didn't show up in your firm in financials.
[noise].
So on the first part.
That average is made up of we still have a relatively significant portion I can't remember the exact percentages, but we still have quite a few three well pads.
I would say four well pads, five well pads and six well pads are growing in percentages year over year.
On a I think for a this year four well pads will be the predominant a percentage and then slowly followed by the five and six well pads.
As for how how would that show up in our financials of course, you know the more activity. We can put on one location. So there's an opportunity to continue to drive down well cost one of the you know or other aspects of this isn't may seem a little bit more subtle those you know our typical cycle time for us.
Three well pad is about 190 days.
Of course whenever you have that fourth well on you know that increases your cycle time, so that may have the opportunity depending on the dispersion of the pads throughout the year to make a production a little bit lumpier and the timing of bringing those pads on.
Crave some noise on the production, but overall it so that's a net positive because you know it also goes back to our development strategy and doing co development.
Which helps us with increased well productivity. So as we move in that direction I just show certain dinner development plan and that does nothing but really great benefits, the only downside band to slightly longer cycle times.
The other thing, but I'd tell jokes.
Well now take a question from Scott Hanold with RBC capital markets.
Yeah, Thanks, and take a look at your your lead cost came in below expectations or at least below your guidance and you know part of that is that gas processing I guess recovery I'll call. It that you all good.
Could you give us some color on how you see that you know going forward.
Through this year, especially now that you're going to be non consenting on some of the target stuff and really what are the ebbs and flows to that than in is that in some your for guidance.
Yeah, we build it into our guidance transfer production costs into that natural gas processing, Ben if it really isn't dependent on where NGL prices sit for the most part into it lesser extent residue gas because most of the contracts out there are driven by pop contracts. So.
That's why when you look across the bottom of that chart. It ebbs and flows really with NGL and gas prices, but going forward with the I don't expect it to meaningfully changed over the next two years, just because we're going to bring.
Yeah. One plant later this year, the gateway plants that targets, bringing on and so that it just won't change a whole lot going forward other than tracking with commodity prices NGL and gas prices.
Okay. Okay, that's appreciated and a in you know on you stick in I guess on Ngls and your price realizations on Ngls were really strong I guess relative to a lot of your peers is again is a is that attributed to some of the you know the gas processing in the better NGL yields you're getting on under this new plants.
I definitely we've seen or NGL production up obviously, the new plants as I have higher recovery levels, but they've also tried to increase their recovery levels across the system, because ngls or better price, then waha gas, where a lot of that yes ends up being sold.
Other than the stuff that we've taken kind.
From a processor standpoint, so unfortunately first quarter ethane and propane prices are little bit lower so yeah, we're not gonna have quite the realizations in first quarter that we had in the fourth quarter.
Yeah, it either way to explain why you guys were in the fourth quarter strong relative to some of your peers is there something unique about you know the fourth quarter or just you know how you guys failures.
Nothing unique that I can point to and I don't I'm not familiar enough with what the peers have reported or how they market. It. So I can't really speak other than you given our size and scale, maybe we have a little better pop contract.
Understood. Thanks.
Well now take our next question from Bryan singer with Goldman Sachs.
Thank you good morning.
I wanted to pick up on the topic of cost efficiencies from here and Scott Big picture. When you came back a CEO you noted the pioneer as well cost in the Permian were too high and Youve subsequently lowered cost and improve efficiencies are you where you want to be now and do you now view your well costs position as sufficiently competitive based on the size scale and.
Quality pioneers acreage.
Yeah, Brian I've seen some offset data from other beers and a this is the first out we're actually beating some of the Permian peers now, especially in the Midland Basin I know, we're bidding Delaware, but you can't really compare delaware's since it's a higher cost area, but Ah I mean looking at some of the Permian basin companies.
Our disclosures, we are definitely as competitive or better than most companies today.
And I still anticipate as Joey said.
We're going to continue to achieve more reduction so in our long term plan, we show a certain number raising it I don't think at the end of the day, we're gonna be adding two to three rigs every year you get the same growth right over the next 10 years.
Great. Thanks, and then my follow up is on that a mid teens growth longer term plan and the points that you bring out on slide eight you talked about the free cash flow and our I see maximization is your focus and I wanted to ask about one of the other points, which is execution.
How do you when you think about trying to continue to grow from an an already decently high base mid teens growth. How do you focused on the short and long term rest execution and what do you see in twentytwenty as to keep potential upside and downside risk from an execution perspective that you and the team are focused on.
I think where I think we've taken the risk off the table. So that means to me I see very little risk at all we've taken it off the table, we've proven that after overspending 850 million in 2018 and under spending several hundred million 2019, it's one of those items I think that everybody's focused on everybody's held accountable.
So I don't even look at as a risky anymore and in regard to the free cash flow in capital just to make it a fair point you know right now I think we have about 1.8 billion at a 5 billion spoken for a 5 billion plus free cash flow and that's in the base dividend will continue to allocate that most of buyback.
Backs and also to.
Potentially that variable dividend.
Great. Thank you.
Well now take our next question, David Deckelbaum Web Catlin.
Good morning, everyone. Thanks for the time.
Scott I just wanted to follow up on the considerations around your water business outside of finance or market arbitrage.
What would be some of the variables are considerations that would prevent you from moderate.
Well, we don't start off with I think most appears that in my opinion is that.
Their balance sheet is still do I, they have too much debt and they're using the proceeds to reduce the balance sheet. So we don't need to do it for that reason so.
We have to decide what multiple if we do sell a portion of it.
In fact, we're probably going to rule out selling I think I've already said this we're going to roll out selling the entire thing. It's two important for us to question, whether or not we bring in a long term partner as we continue to build it out.
And so they just something that we're going to make a decision on by the end of this year. So.
Thanks for that.
My follow up as Doug.
Yes. The are you guys are having not consistent walmex, a wolfcamp, a and wolfcamp b, it's about 80% of your Ah you are well turn and.
What point about future you start seeing a greater contribution from from some others. You all had made some headway wolfcamp b over the last couple of years delineation efforts as any color you can provide around what that development books for it now.
You know if that there's a shift away from Wolfcamp, a and b, there's some expand the outer here.
Yeah, David would you know we prioritize our portfolio every year based on.
Returns and you know as far as looking from last year. This year. The the major shifts the you'll see is kind of any more equal percentage of wolfcamp, a and wolfcamp b together, that's primarily because of the fact that we're focused on co development.
Continuing to deliver significant number of general mills, because they have strong returns.
Wolfcamp D will continue to be a small part of our portfolio at this point in time.
We're focused on understanding the development strategy for the Wolfcamp D and you know focusing on getting the returns up and whenever we feel like Weve got that perfected and got other returns similar to what we see in the Wolfcamp a b in Jo mill and lower Spraberry shale will start to bring those and but you know the short.
The answer is or we're not really doing it just based on a portfolio we're doing it to make sure we maximize.
The returns that we can for each and every year.
Thank you got.
That concludes our question answer session for today, let's turn the conference back over to Mr. shutdowns for any additional or closing remark.
[noise]. Thank you all very much we look forward to the the call.
Next quarter and hopefully a good to see a lot of the all over the next few weeks several months as we get out on the road. Thanks again.
Once again that does conclude today's conference. We thank you welfare participation you may now disconnect.
[music].