Q4 2019 Earnings Call
[music].
Good day, everyone and welcome to <unk>, Oh, Gee resources fourth quarter 2019 earnings results Conference call. As a reminder, this call is being recorded.
At this time for opening remarks, and introductions I would like to turn the call over to the Chief Financial Officer of EOG resources Mr., Tim Driggers. Please go ahead Sir.
Thank you and good morning, thanks for joining us.
We hope everyone has seen the press release announcing fourth quarter and full year 2019 earnings and operational results.
This conference call includes forward looking statements the risk associated with forward looking statements have been outlined in the earnings release Energy's FCC filings.
We incorporate those by reference for this call.
This conference call also contain certain non-GAAP financial measures.
Definitions as well as reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found on our website at www Dot EOG resources Dot com.
Some of the reserve estimates on this conference call May include estimated potential reserves and estimated resource potential not necessarily calculated in accordance with the Fccs reserve reporting guidelines.
We incorporated by reference the cautionary note to U.S. investors that appears at the bottom of our earnings release issued yesterday.
Participating on the call. This morning, our Bill Thomas Chairman and CEO.
Billy Helms, Chief operating officer, Ken Burdick, or exploration and production as <unk> exploration and production.
Lance Terveen senior VP marketing and David strike, VP, Investor and public relations.
For the call. This morning, we want to cover three topics.
First Bill Thomas will review the characteristics of UGI that contributed to our long term sustainable success.
Second I will discuss our financial strategy.
And third Billy Helms review, the outstanding 2019 operating performance in the 2020 plan.
Here's Bill Thomas.
Thanks, Tim and good morning, everyone.
In times of than in in times of uncertainty UGI sustainable business model is well suited to navigate a volatile environment.
In fact, we're more confident in the ILG future today than we've ever been in the history of the company.
With our strong balance sheet and flexibility UGI is better position now both financially and operationally to.
So what are the storms than it's ever been in the past.
Our operational performance last year was the best in the company history, and we believe yield G.'s performance in 2020 will be even better than 20 like team.
With an industry, leading return on capital employed at 12% and 29 team we beat our plan in every respect.
Capital spending was below plan volumes were over plan and per unit operating expenses.
Decline more than forecast, we grew oil production at a lower cost per barrel than ever before and delivered on our goal a double digit returns and double digit growth in a modest oil price environment.
The company also generated.
Nearly 1.9 billion a free cash flow to find is our discretionary cash flow list, our total cash cash capital expenditures.
That cash flow funded the retirement of $900 million, the debt and the payment of $588 million and dividends. We accomplished all this with oil prices averaging $57 a barrel.
Today due to our confidence in the future performance of the company, we are increasing the dividend again for the third year in a row by another 30%.
With this increase our dividend has more than doubled since 2017 and represents an annual return of cash to shareholders are more than $800 million in 2020.
Our confidence in this companies for future is based on two unique characteristics of the GE. The first is our culture and the second is our premium investment standard. These two qualities driver company and give you a unique and sustainable competitive advantage.
You cheese culture is the foundation of our long term success first and foremost we're return focused which drives disciplined capital allocation. Our decentralized organization supports an entrepreneurial mindset to drive bottom up value creation, we embraced technology and innovation that make better way.
Sales for lower cost.
Counterintuitively, our capital efficiency improves year after year, because we don't consider this a manufacturing process.
We pride ourselves on being a responsible operator good to employees our communities our partners and our vendors we embrace technology.
And innovation in every aspect of the company, including reducing our environmental footprint.
You'll g.'s culture is our number one competitive advantage and has driven our strong historical success and we were confident it will continue to drive success in the future.
[noise] the second unique characteristic vo GE is our premium in investment standard, which is rooted in our return focused culture. The premium wealth strategy dictates that a well isn't a well unless it earns at least 30% return at an oil price of $40.
Requiring are overweight of 30% for direct capital ensures that once full cost is applied we earn a healthy double digit all in return.
We believe our premium standards as one of the most strict investment hurdle rates in the industry and position Theyll GE to be one of the lowest cost producers in the global energy market.
Our premium inventory is growing faster than we drill it and the quality. The wells, we were adding to that inventory is improving.
I didn't still to illustrate this point after three years of Eddie.
Premium inventory, our medium premium well today actually yield so direct at eight tax rate of return of over 55% at $40 flat oil prices.
With a $50 oil price the median return sourced or more than 80%.
The combination of our ability to replace and improve our inventory while continuously lowering costs at the same time is why we're so excited and confident about yield g.'s future.
Premium drilling delivers exceptional capital efficiency that has allowed UGI and a modest oil price environment to grow all volume sets strong double digit rates and generate significant free cash flow at the same time.
A financial profile that has competitive with the best companies in the S&P 500.
For 2020, our goal is to continue to create significant shareholder by the disciplined investment and high return premium wells, while ensuring the capital program and dividend payments can be funded at a conservative oil price.
In response to lower oil prices, we reduce capital allocation to premium drilling in the oil production growth versus 29 team.
However, we did not slow down investments and projects that we believe he will improve the future of the company.
These include drilling and testing a number of noodle harsh play he's to improve our inventory building infrastructure to lower operational costs and investing in projects that were lower future GHG emissions.
It's important to note that our 2020, all and capital efficiency, including infrastructure and exploration is better than 20 high teen consistent with our commitment to getting better every year.
And it all cross of less than 50, our disciplined capital plan of $6.5 billion supports growth in crude oil production of 12% sets the company up for better returns in the future and comfortably funds the dividend.
Finally, we want to review, our environmental social and governance performance, we made significant progress last year in both our Iasci disclosure and more importantly, our iOS cheap performance.
He is one of the Lois flaring intensity rates in the industry as recently reported by the Texas Railroad Commission.
We're very excited about the level of innovation and degree a focus and the company to drive further environmental improvements.
We continue to expand our water reuse technology throughout the company.
We've been a leader in the use of electric flex Frac fleets and continued to electrify our operations, replacing diesel generation where feasible.
We are piloting the use of alternative energy sources, such as solar to power compressors and reduced GHG emissions and last but certainly not least all these projects are expected to earn a return we're optimistic that most if not all of these efforts and many others will help lower our gvhd of Miss.
Since intensity.
To sum up we hope you can see why we're so confident about you'll g.'s future, our unique culture and premium investment strategy or competitive advantages that will drive or long term operational financial and environmental performance and together underpin our long term sustainable success.
Next up is 10 to review, our 2019 financial performance and long term the natural outlet.
Thanks Bill.
He or she had outstanding financial performance in 2019, demonstrating the resiliency of our business. Our 2019 return on capital employed was 12% with oil averaging $57 per barrel for the year. It was meaningful lead lower NGL and natural gas prices compared to 2018.
He has unit generated discretionary cash flow for the full year of $8.1 billion.
And invested $6.2 billion, an exploration and development expenditures.
Resulting in full year free cash flow of $1.9 billion.
Proceeds from asset sales and 2019 contributed an additional $140 million.
We paid $588 million in dividends and retired $900 million and debt.
Cash on the balance sheet at year end was $2 billion in total debt was $5.2 billion.
Our net debt to total cap rate show, a 13% down from 19% at the end of 2018.
The power of our premium wealth strategy can be seen in our financial performance for the last three years.
We establish the premium hurdle rate in 2016, and his strategy shelf began paying off the very next year.
Beginning in 2017, we have averaged 14% return on capital employed.
Our return measure that can be directly calculated from our financial statements using GAAP earnings.
Generated nearly $4.6 billion of free cash flow, while growing U.S. all production by 64%.
Paid out $1.4 billion in dividends or 30% of free cash flow.
And retired nearly $1.9 billion in that cutting our debt to cap ratio by more than half from 28% that 13%.
Our focus video GE is creating long term shareholder value.
The clearest way to realize this goal is to grow the business value of our company over time, while at the same time protecting that value through commodity price cycles.
How do we do this.
We compound attractive corporate level returns through disciplined growth, while ensuring the company remains profitable and lower commodity price environments.
We analyze and modeled a company under numerous scenarios and the outcome from each of them is clear.
By reinvesting and growing Yohji generates higher ROI E.
Higher cash flow and higher free cash flow in the future and ultimately higher business value.
The most tangible output at this strategy is the payment of a regular dividend.
Attainment of payment of a growing sustainable dividend is the best way to return cash to shareholders and as an integral part of our successful business model high return reinvestment.
UGI is dividend growth has grown at a compound annual rate of 22% over the last 20 years.
I'm pleased to say, we have never cut the dividend and never issued equity to support it.
In the past three years, the adoption of our premium strategy has dramatically increased the capacity to pay a sustainable dividend.
In a volatile commodity environment.
And he has responded with healthy increases.
We analyzed the amount of the dividend under many scenarios there is no simple formula.
So one way you can think about just consider the financial profile of the company under various oil price environments.
Yes, as illustrated on slide nine of the Investor Press presentation.
In 2020 maintenance Capex of $4.1 billion, plus the dividend can be funded an oil price of $40 per barrel.
Maintenance Capex is the amount of capital required to fund drilling as well as infrastructure requirements to keep all production flat relative to 2019 across all premium or plays.
Our premium strategy has dramatically lowered the cost structure improved capital efficiency, the company and increase the capacity to pay a sustainable dividend.
We are proud of the performance that allowed us to reward shareholders with sustainable dividends of more than 30% in the last three years.
Looking ahead, the board of directors will ultimately evaluate them out of the dividend each year based on business conduction conditions at the time and expectations for the future.
Our goal remains the same pay a growing sustainable dividend that represents a tangible return to shareholders long term value creation.
Next up is believed to review our operational performance.
Thanks, Dan.
Let me first start by saying that I'm extremely proud of the efforts and achievements of our talented employees for their tremendous execution in 2019.
Oh Gee delivered more all for less capital in all four quarters of 2019.
For the full year, we increased U.S. oil production, 15%.
Producing 5000 barrels of oil per day more than we initially estimated at the start of 29 team.
Capex that was near the low end of the guidance.
We achieved this with four fewer rigs and two fewer completions spreads than originally planned.
Driven by efficiency improvements across our operation.
Total well costs declined 7% in 2019.
Internally generated improvements came from every area of our operations sparked by innovation from EOG East Creative decentralized organization.
And our drilling operations a good example is our premium drilling motor program.
The program implemented in the Permian led to a 50% reduction in motor failures in 2019.
Generating a cost savings of $20000 per well.
We are now implementing this program and the Rockies at mid continent areas, joining the Eagle Ford, which has had a similar program for some time.
Our drilling teams are also delivering performance improvements more consistently.
Which reduces downtime.
As a result, our drilling times improved 17% across our 36 rig program.
Our completion teams also delivered outstanding improvements in 2019.
Due to the employment of electric Frac fleets and the use of Diverter material.
As a result overall well performance increased and completion cost were down 15%.
Our drilling and completion advantest advancements last year were the primary reason, we delivered higher production with lower capital cost expenditures.
Capex savings driven by well cost improvements in 2019 allowed us to invest more money and the infrastructure projects and acreage acquisitions than the original plan.
Investments in infrastructure like water handling systems have very high rates of return and pay back quickly often within months.
In acquiring low cost anchorage, and our new exploration prospects will enable the company too sick to sustain the growth well into the future.
Operating expenses also improved significantly in 2019, especially per unit Ela, we cost which declined by 6% for the full year and a whopping 13% into fourth quarter 2019 versus the fourth quarter 28 team.
Savings from infrastructure investments supported these improvements.
Use a diversion material and our completion designs was another driver of operating expense improvement.
The Burger mitigates the risk of sand in water incursion into offset wells, reducing workover expense.
We had some great accomplishments in 2019 in our environmental and safety performance as well.
Most importantly, we reduced the recordable incident rate by nearly 30%.
We decreased our use of freshwater for the total company, 75% of the water source from reuse was non freshwater sources.
But 75% of the water source from reuse or non freshwater sources decreased freshwater consumption by more than 25% versus the previous year.
In the Permian, 98% of the water was from reuse or non fresh water sources, reducing the freshwater consumed by more than 60%.
We achieved a wellhead gas capture rate of over 98% across the company, including the Permian Basin performance, We think places EG amongst industry leaders.
Now just to comment on our reserves are 20, not taking capital program yielded more than 250% reserve replacement and the low finding cost of just $8.21 per Boe we.
Excluding revisions due to commodity price changes.
That finding cost is 12% lower than 2018.
As a result, our proved reserves increased by 401 million barrels of oil equivalent or 14% year over year, two to 3.3 billion barrels of oil equivalent.
Our premium our permanent shift to premium drilling.
Focus on efficiencies driven by innovation in our unique culture or while cap our capital efficiency continues to improve and how we've lowered our corporate finding costs to less than $8.50 per barrel of oil equivalent.
The marketing team also did a phenomenal job last year to position Neo GE to capture the highest prices for our products.
Bypassing pinch points, while avoiding the kinds of long term expensive commitments that narrow profit margins and constrain operational flexibility.
And 29 team he LG sold its first cargoes of crude oil into the export market.
And we'll and we will build on that success in 2020, as our long term export capacity for crude oil and natural gas continues to expand.
In 2020, we will be able to successfully tranche port nearly all of our crude oil natural gas and Ngls out of the basins, where they are produced to capture the highest prices in the domestic markets.
While also igs <unk> accessing export markets for all these products for the first time.
Looking ahead into our 2020 capital plan.
Due to the commodity uncertainty in.
Due to the current uncertainty and commodity prices, we reduced capital allocated to oil growth.
However, we have allocated capital to fund investments that will continue to improve the company such as drilling to test and bring forward new play drilling potential.
That will improve the quality of our inventory.
Infrastructure to lower cost and environmental projects to lower GHG emissions and increase waterside recycling.
The plan allows us to accomplished several key objectives.
One our capital efficiency improved over last year.
Our goal is to continue to get better every year and our premium strategy continues to transform the financial and operational efficiency of the company.
In fact, our capital efficiency is strong enough to carry the additional capital allocated to exploration and infrastructure, which will continue to improve future drilling returns lower cash operating cost and lower the breakeven price needed to generate 10% Aro C.
Number two.
The plan is balanced at $50 oil.
Meaning we can fund capital expenditures and pay the dividend with discretionary cash flow.
To be clear.
We have a tremendous amount of flexibility to adjust our activity levels as we see how the commodity landscape plays out.
Should we see oil prices continue to trend lower over the sustained period of time.
We would reduce our activity in capital budget in order to generate free cash flow.
At higher prices, we would not increase activity.
And our 2020 plan generates significant free cash flow.
Number three.
We are allocating capital is test several.
Key new exploration projects.
Our 2020 program includes multiple exploration wells in at least six new plays.
Along with additional leasing of low cost acreage.
We are confident that our exploration efforts will add future high return growth potential to are already deep inventory.
And number four.
We anticipate continued improvements in our operational efficiencies, we lowered well costs, 7% last year and have said an initial goal to lower our well cost another 4%.
We also expect to reduce the l. away by another 2%.
Our operating teams are highly focused on capturing additional efficiency gains in each area of our operation and we anticipate that there will be some additional savings from service pricing as well.
It's important to note that none of that we have not included these potential savings in our 2020 plan.
Finally.
We are starting 2020 off just like we did in 2019 with Capex slightly weighted to the first half of the year.
We had excellent results in 2019, and we're confident that we will continue to continue that performance into 2020.
We allocated capital to Trinidad.
Infrastructure and environmental projects early in the year to allow them most benefit to this year's economics.
We will continue to monitor the commodity markets and make adjustments to ensure we need we meet our objectives of generating free cash flow and solid returns.
We have a great deal of flexibility to adjust as needed.
Because of our decentralized organizational structure multi play portfolio and deeply ingrained culture that fosters innovation continuous improvement and growth.
I'm highly confident LG can sustain our success well into the future.
Now here's bill to wrap up.
Thanks billing in closing I will leave you with these thoughts first our 2020 plan is set to perform even stronger than 2019 with improved capital efficiency. We are set to deliver strong high return growth and investments that will strengthen the future other company.
We're particularly excited about cost reduction and drilling a significant number of wells on several new large exploration plays that we believe we'll continue to improve our inventory.
We see no in to improving the company and 2020.
Second he'll g.'s unique return focused and innovative culture has proven for decades to deliver significant shareholder value. Our culture continues to improve and we'll continue to drive our future success.
Third.
Our strict premium investment hurdle is the most stringent and the industry and a significant and unique competitive advantage that allows LNG to be one of the lowest costs operators and the global energy market.
And finally.
He is positioned better than ever to be the leader in our Oh, CE and delivered double digit growth was significant free cash flow through the commodity cycles.
We are.
More confident and excited about our future now than we've ever done before.
Thanks for listening and now we'll go to Q and <unk>.
Thank you.
The question and answer session will be conducted electronically. If you would like to ask a question. Please do so by pressing to Starkey followed by the digit one on your Touchtone telephone.
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Well pause for just a moment to give everyone everyone an opportunity to signal for questions.
And the first question comes from Doug lay Gate with Bank of America. Please go ahead.
Oh, sorry, sorry, good morning, everyone and Bill I'm hitting me I see thank you for the disclosure on sustaining capital of economic scheme for.
So it makes life, a little more transparent and a little easier for us.
Figure out how do we think about valuations who appreciate not on best like nine if your debt.
My My question is on the inventory I guess is slice 12, and 13 again terrific disclosure, but can you just help us understand how to what the process is excuse me.
Well the processes to translate.
On the <unk> I think you called the conversion potential some 5000 locations and whatnot visibility loot slight longer term because the only nalc on stock not to be constantly here is.
Well as you continue to grow an increase to case dot inventory like he's going to shrink so applying some kind of a new evaluation becomes problematic unless you've got visibility. So what is that what does the process and what is the debt I guess is a question.
Yeah, Doug Thank you.
Yeah, our inventory you know when I think about Ito G.'s inventory life, a it's probably last on my list of things to worry about US is because the company is just a historically and continues to be a profit a holistic a generator of inventory.
And the you know since we you know started premium in 2016, you know we've just steadily increase the inventory up and currently it's 10500.
And and we have added an additional 5000 locations that really are just on the verge of converting into premium.
And alone a AFE Ezra to give a little bit more color on about how we do this and then maybe talk about some of our additional inventory through our exploration.
Yes, Doug this is as well thanks for the question.
As Bill pointed out we have identified 10500, a premium locations right now, which at our current pace the drilling represents [noise].
About 13 years of drilling and then those 5000 locations that that a U bold pointed out with that conversion potential would add another another six years at the current pace so going back to the conversion potential I think as Billy noted in the opening remarks this past year, we [noise].
We're able to reduce well costs across the company by approximately 7% and that's really the one that the number one driver of converting those well locations and that's something we've done over the past four years is build a lower well cost every year through not just a you know reduce contract pricing, but dominantly through our increased operational efficiency.
Okay, and applying a innovative technologies and capture in different parts of the value chain. So that's the first way that we look to.
Expand the the inventory the premium inventory the second thing, we do which is a bit more challenging of course is through our exploration effort. That's an organic exploration effort, where we're currently trying to add not only additional premium locations were really improve the quality of the locations. So as you mentioned a on slide 12.
We've shown with the medium rate of return of our current premium a well inventory is there at a 58% rate of return on that premium price deck of $40 flat oil to 50 natural gas what we're trying to do is really increased that and we're currently for the past 12 to 18 months we've been.
Leasing and across a 10 different prospects and as Billy mentioned opening remarks, we look to be testing about six of those this year and we're very excited about the progress of those exploration prospects and the potential or they could add to it so the inventory.
So thanks for the details on so guys my an immediate part beachfront real quick the maintenance capital number was a decline that goes with that.
Well ask ability to comment on that.
It's yeah, the that might decline on the main on the base production, 32% Doug.
Thank you. Thank you. So my follow up then there's just a real quick one thing I believe it's also for you I guess, because you talked about you wouldn't increase spending in a high at oil price environment, well I guess the question that kind of falls from not as are we seeing then a reset.
And you are sort of Beast planning assumptions for the commodity and you know because even even we believe your stock is very undervalued here, I know, whom that of share buybacks becomes a consideration at some point.
Yeah it.
Doug This is Billy I might give you some thoughts and then maybe bill one them want to answer but since you directed the question to me I guess, yeah. The point is that a we're going to stay disciplined on our on our capital program. So we'll certainly adjust downward if commodity prices show that this is going to last for a sustained.
Period of time, but if they do rebound Oh, we will not outspend, our capital that weve allocated for this year and we're going to stay disciplined with that and that the reason is is a where we're going to as we've stated in the past. We also continue to find at a point, which we can continue to get better we have a lot of different agenda.
Just to try to improve this year and a including the exploration projects we talked about.
Many of the other projects, we've got underway and we certainly want to see those through so I if oil prices suddenly jump way up a we're not going to rush out in nicks and.
And you know increased capital. So our plan is really set based on a conservative outlook at the time, we set the plan and that's not going to change that we go through the year.
Yeah, Doug I'll just comment you known your question about the you know would we consider share buybacks and this you know.
Just reiterate our priorities really have not changed you know number one.
As Tim talked about the best way to create a business value is there's no question about it anyway, you want to run it.
ER is reinvesting at high rates return and that's what we're committed to and that's what we really want to stay focused on.
The next.
Poverty is.
Sustaining and growing the dividend and a week. We believe the dividend is the best way to return cash to shareholders over the long term and the obviously.
We have been demonstrated a very very strong commitment to that this year in previous years. So that's the way that we want to continue to focus on on returning cash to shareholders.
And our next question will come from a rune Jay ROM with JP Morgan. Please go ahead.
Yeah, Bill I was wondering if you could comment on how he or she is thinking about into some of the demand impacts from the current a virus in the state of the oil market today, and what would be the company's game plan. If we did a move into an environment, where we have sustained oil price. It caught in the low fortys for some bit of time.
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Yeah, Ryan certainly you know this is HM.
The huge world event and the it's developing.
And we'd like everybody else is you know watching really daily and the developments around the world.
And we certainly hope and pray it's a short term.
Event, but if it turned to a longer term event you know as Billy said, we're in a fantastic ER physician you know number one we got if we got a great balance sheet and we've we're committed to that and that's a certainly been a strength of yohji for years years and years and so.
That puts us in a great position.
And then we're very flexible we have an operational.
Ability.
To to adjust activity.
And and I think I'll, let Billy a comment a little bit more about that maybe some of the specifics.
Yeah, Ryan so the way I would add to that is we have the capability to adjust our rig activity in frac fleets down.
To really be inline with our sustainable capex or from our maintenance capital numbers.
So we've set out a plan that.
Really allows us to capture the highest performing a rigs and frac crews in the market, but we have a tremendous amount or flexibility to adjust downward if we need to and and so in the same would apply to our allocation of capital to our infrastructure spend another things we have the same capability to adjust that.
Downward if needed. So we're just be patient here and watch to see how the market unfolds and a adjust accordingly.
Fair enough I believe in your prepared comments you talked about some of the infrastructure spend which is designed to lower your operating cost I was wondering if you get maybe give us a little bit more color on the though the magnitude and the level of these investments what exactly are you investing in.
On the infrastructure side.
Yeah. The infrastructure is just very critical to build out that infrastructure ahead of the drilling.
Because it has significant well cost reduction.
And which certainly increases the returns.
It has a significant.
Influence on lowering operating costs.
A significantly also.
And it allows US you know too I think certainly market our products and get our products online a reduced flaring just all kinds of tremendous benefit. So it's a really important to stay ahead of that and maybe ability what you could give a little bit more color on some of the specifics.
Yeah on the specific side of that around as Bill mentioned, there's there's a lot of things that we like to find and I would all of these projects have a direct impact not only on our capital cost in the future of our drilling program.
But also lowering our unit operating cost so I would point you to slide 16 in our deck that shows.
In the last several years, we've reduced our el <unk> or a cash operating expense.
Tremendously, 33% since 2014 at large part of that decrease came from investment in infrastructure. It allows US you know even as as we've talked earlier about or inventory and our ability to convert these wells to premium part of that cost goes back to investing in infrastructure. So there are.
Things like a <unk> the most of economic part of that would be getting a trucks off the road and reducing our transportation costs are getting water on pipe oil and gas infrastructure in place well ahead of the drilling program. So that we minimize not only our capital cost for that upcoming year.
And future years, but also the biggest impact on a lowering our full full years LLC and certainly our transportation costs. So that's largely what it entails.
Great. Thanks, a lot.
Your next question comes from Neil Dingmann with Suntrust. Please go ahead.
Good morning billing team my first questions on your 2020 plan on specifically how fluid is your allocation to the various high return plays along with how active you know how actively you might change or well spacing and other development plans based on what the commodity prices still.
Neil This is bill.
On the last part I don't think we would change spacing that much based on the commodity prices Oh.
Oh really.
We're already.
Facing our economics on all of our drilling on $40 flat oil so were.
Even with a drop in price, where we're still a have a very strict reinvestment hurdle. So.
That part we wouldn't we wouldn't really changed too much as far as the plays the reason, it's really easy for us too.
I guess ramped down activity is that we're in multiple plays we're developing six plays out of multiple divisions. So you just take one rig a per play you know, which is an easy reduction out of each play. It's it is really easy to do and a it makes it really.
Fluid.
You know you can take two rigs out of each play. That's that's 12 rigs. So we have a we haven't because of our decentralized organization and multiple plays its not that difficult to you know systematically reduce as a commodity price changes.
No that makes sense and then my second question Bill for you or the teams just on infrastructure youre, suggesting that in the release that you'd allocate a bit more infrastructure.
I'm, just wondering whether come a time down the road, where your infrastructure reaches a size we continue to consider monetizing or there's just remain two critical and keeping your cost lower.
Last Billy to comment on that.
Yeah, Neel, Yeah, I would say that infrastructure is it just a critical component of our development activities on a go forward basis, then and it really doesn't make sense for us economically or financially to to monetize that because it is a big part as I mentioned earlier, it's a big part of driving our unit costs down.
And improving our returns long term. So we plan to we look at each case independently to see where it makes sense for us to invest in that infrastructure versus a others and a large part of that goes back to our need to control, how we get those products to market all.
So to capture the biggest.
Prices in them and not only domestic markets, but also be able to export that as we need to.
Perfect. Thanks for the details guys.
The next question is from Bryan singer with Goldman Sachs.
Thank you good morning.
My first questions on the Eagle Ford shale, there's been much made about the shift from east to west within the portfolio and concerns over a falling you are on slide 42, you highlight the extent to which well costs were lower in the Eagle Ford, which arguably offset some of that last year about 11% well cost reduction in 2020.
Our target for well cost reductions just a bit more modest at 4% and so I wanted to ask how you see well productivity playing out in the Eagle Ford in 2020, and your outlook for the trajectory for capital efficiency there.
Yeah, Brian. Thank thank you for the question on the Eagle Ford I. Thank them. The main thing that's really important on the Eagle for is that due to the dramatic cost reductions. We continued to have their our economics remain very very very strong and so kanzi expert on the Eagle Ford I'm going to ask him to comment on specifics there.
Yeah, [noise], yes, Brian as we've moved to the west over the last few years, we've continued to lower the cost bases in the Eagle Ford and improve our returns. If you look at the cost bases. So everything that it takes is defined develop produce and market. Our oil there you can see the that cost bases contain.
When you do reduce even though our percentage to the go under the West is increased by several percent over the last few years out in the west it's less structurally complex. So we're able to drill longer wells and as we bring our cost cost reductions into that area, along with our improved targeting and better completion strategies, we expect.
Those costs to continue to reduce our field crew there in the Eagle Ford is just doing an outstanding job and driving those costs down.
And so net net in Twentytwenty, then just a follow up tested to do you continue to see at or better capital efficiency. When you think about a cost reduction potential and then how you see your well performance.
Yes, we would expect to see actually better capital efficiency in 2020 than we saw 19 in the Eagle Ford.
Great. Thanks, and then my follow up is with regards to acreage acquisitions, you talked about that in some capital being being earmarked for that did here again can you characterize what stage you are in there that the acreage that you're entering or the capital that your earmarking.
And it to is that capital that it is for.
Based on well results that you know of that are already meeting your return threshold or is this acreage that essentially being bought in advance of testing.
And then one of the items. It's also on your list for use in excess cash is premium property additions and perhaps he can give an update on how that market looks.
Well I'm often asked that's where the comment on the acreage.
Yes, Brian this is as right.
As far as the acreage in the exploration plays we really spent I think as I just mentioned last 12 to 18 months or putting together acreage and what we consider to be the highest quality kind of the tier one if you will parts of the its exploration plays and we've been doing that at relatively low cost really a well well under it.
Thousand dollars per acre I'd say across all of those plays and we've gotten a at least six of those plays as we mentioned to a point where.
There'll still be some additional acreage or to put together, but were worth a point on those plays where we plan on drilling and testing those this year.
And then we'll still be leasing across some of the other exploration plays as well and obviously with these exploration plays just to keep our competitive advantage up you know, we probably don't want to want to say too much more than that yeah.
Yeah, Brian as far as the maybe bolt on acquisitions, a we really.
Don't plan on doing any a significant bolt ons you know this year that maybe as a few little really small ones a in our exploration plays.
But you know with the with the commodity prices. What they are you know, we're gonna be really careful with cash and make sure that we are focusing on things that are going to.
Generate super high returns.
The next question will come from Leo Mariani with Keybanc. Please go ahead.
Hey, guys just once you get a sense as to whether or not in this type of market, which clearly has been quite weak it feels a little bit like 2016, a you know right now whether or not you guys would take advantage of your strong balance sheet to maybe look at a you know some chunky or bolt on.
M&A type situations like you did.
The age back then.
[noise] Galileo Yeah, I think we just talked about that no. We don't really have any big plans to do any bolt on a larger deals. We then a very.
Fortunate as as Rick talked about over the last a year and a half weve accreted, a significant amount of acreage and a number of full we think are very very high quality place.
And we.
We've created that at very low cost per acre.
And so we're gonna be focus on you know testing those this year that Oh, we increased a in the X Ray exploration spend. This year is is all in drilling. So we're really set up to test those this year and we're excited about.
Adding new higher quality potential and improving our inventory through our exploration efforts.
Okay. That's helpful. I guess, just with respect to that well cost reductions. It looks like you guys. You know beat your target last year, 5% came in at seven new target here. It's 4% you know when in 2020 I just wanted to get a sense. Then you know where are you kind of he is the high level.
On a big drivers and I guess, none of this is service costs in terms of why I can lead to those cost reductions here in 20.
Well, that's Billy to comment on that one.
Yeah Leo there's several factors there's not one single thing is you ought him why did you might imagine a we're seeing a certainly some softness in the tubular side that will be probably be about 8% lower on tubulars. This year.
Relative to last year, certainly on the completion side of the business, that's probably the area. The the biggest decreases we'll see this year and large even part of that steel is on sand cost that could be down again. This year, just due to mainly getting.
Sandeep and closer to the wellhead than we did last year.
And your even seeing some softness and a drilling rig rates. So.
The biggest thing, though I think this kind of drive that is just our continued push so that so those all were service related issues. The biggest cost drivers will be on efficiency gains were.
We just continue to get better and better at everything we do a drilling wells much faster.
The use of Diverter, improving our completion efficiencies and lowering our well cost.
Those things all drive the biggest majority of our savings year over year.
Our next question will come from Paul Chang with Scotia Bank.
Hi, good morning, guys.
Morning.
Two quick question.
I think a b. They do you have set that you me if in the event that you need to be Tuesday, I tip to teach I felt that you could be very easy to just maybe pick on one <unk> paid but yes that depend on what that you would be more looking at say a particular pay you going to see more do one or two is going.
To be pocket foods or that you would be talking on the infrastructure or do we saw keep them in spending.
Yeah, if I understand the past a question, Paul you're asking a where would we reduce would there be any specific plays.
That would we reduce more other or when we maybe look at infrastructure reduction.
Battling I need <unk>, yeah, Yeah, Yeah, Yeah. Paul This is Billy just to give me a sense. We we have a lot of flexibility in all areas. So we would look at each part of our plan and accordingly, a just as we need to so it would be not only just drilling it could be a infrastructure projects as well.
All and you know we like to get out ahead of the drilling just to put in the infrastructure to maximize our benefit but if we slowed down drilling in an area was certainly slowdown infrastructure spend as well. So that's one way to think about it as far as one play relative to the other.
As Bill mentioned earlier, it's really easy to adjust each play down.
And we'll certainly make those decisions when we see the market unfold. So as we mentioned earlier, we'll just be patient and kind of watch to see what happens before we start making any adjustments.
Okay. The second question, just dieting dish and knee a LNG export terms, yes stocking up soon.
Okay can you tell us that I mean, how much you paid for the toll and that the physical timestamp.
Hi, Paul Good morning.
He is going to get Wham, two to 440 million cubic feet per day.
Okay and come when Paul Thanks for the question first off related to the contractual terms just due to the confidentiality we can't disclose that that I can walk you through a little bit of you know when I started up so we actually did start wishing air excited about that we actually had our first lifting on January twentyth.
So that is 140 million today that will be linked to checking am so that started up in January and then that will ramp up to 440 million a day, a with 300 of that being linked to Henry hub. So that's currently what's in place today.
Thank you. Our next question will come from Scott Gruber with Citigroup. Please go ahead.
Yes. Good morning, Thanks for taking my question.
Can you hear me morning, Yeah. We can go ahead of target [laughter] I'm, just coming back to the infrastructure question I'm, just some of your spend not facilities, GP and t. and environmental projects thinking about 20% well there. So this year how should we think about that overtime, you know where can it go.
Some of these strategic investments fade.
Yeah, Bill we will comment on that Scott, Yes, Scott I'm, you know, we typically a budget every year. The overall infrastructure part facilities and GNP is usually about 15% to 20% of our typical plan and this year, we've allocated a little bit more closer to the 20% numbers you just mentioned and.
The that varies year to year, depending on where we are in the development of each play.
And our need for infrastructure to expand those plays and get our cost reductions that we anticipate so this particular year. It's it's so closer to the high end, but I think in general, it's usually between 15 and 20%.
Got it and then I appreciate the disclosure on the maintenance Capex, how should we think about the infrastructure percentage within that figure.
It would probably.
Yeah, It would probably be on the low end of that number 15% to 20% that I mentioned earlier would be on the low into that.
Certainly we would focus in on our core areas, where we have a little need for additional infrastructure expansion and that would just remind you that that's a maintenance capital number for this year.
Based on keeping this year's number flat.
Got it makes sense. Thank you.
The next question comes from Joseph Allman with Baird.
Thank you. Thanks, Rami comments on the dividend what analysis do you do to determined that the dividend is sustainable and to determine how much to increase it I know Tim a comment on this earlier, but like how many years do you look out three years five years 10 years or more and what are the factors that you model and what type of stress testing.
You do.
Yeah, well asked him to comment on that.
Joe Yeah, we when we model it we modeled on several different scenarios, but as far as how far out we look we look out about five years.
'cause that's really about as far as she could look out as far as the strip goes to get to the idea of what the how to model commodity prices are we stress tested on just about every metric you can imagine to come up with a recommendation to the board on where to moved the dividend and so then.
As you can imagine there's lots of discussion around all that analysis and then the board either agrees with us or doesn't and then we move forward that that increase.
That's helpful to and then on slide nine to maintenance Capex slide I assume that that's a dynamic metric. So could you describe how that might change over the next few years.
Well as Billy to comment on that.
Yeah, Joe I'm, So just important to understand how we come up with the maintenance capital number to star with its a very detailed a bottoms up approach starting with a this year's plan or 2020 plant and then scaling that down and each one of our plays to make sure we maintain a kind of flat.
Growth and each one of our premium place. So that's kind of the approach so each year certainly depending on what our volumes were would determine what that level of maintenance capital would be needed to replace or at least maintain the prior years production.
Number so again this number would fluctuate just depending on what kind of target we're trying to hit but Oh, we would approach at the same way and then that its im pretty important to note too that you know that's.
Covers both the capital and the dividend at a $40. So it's a pretty it pretty good number it just demonstrates the.
The improvement in our capital efficiencies.
And.
And basically this assumes also that we don't see any improvements in either our production performance or additional gains in our lower and lowering well costs. So it's taking existing conditions as we have today.
Our next question will be from Bob Brackett with Bernstein Research. Please go ahead.
Good morning, Bill you mentioned that inventory was last on the list of things that you worry about could you go to the top of that list and talk about the things specific to E. G. Then you worry about <unk>.
Well Bob of course oil prices would be number one it's always number one so that's the most you know difficult part and are volatile environment that we deal with really the company is in the such fantastic shape, you know I don't really spend a lot of Tom you know up at night you know we're in.
About.
The direction of the company as we said we've got tremendous confidence.
In our ability to to really.
They continue to have very very very good success and the main and the and the reason.
It is simply what we stated before is our culture I mean, we haven't seen I think a very unique.
Incredible culture, and the and the bottom and the value of the company is is bottom up driven.
It's not me driving it it's not me, making decisions on where to drill the wells or how to get the cost down a it's literally every person then that company is is a business person.
And we give them they have the data there that have the ability to analyze it and make decisions.
And it's just really the results that we have in the company are very sustainable because they come from 1000 different places.
And so that takes the pressure off a me and it really is it just a fantastic organization. So that really is the basis of our confidence.
Okay, so not not much to worry about from a from that perspective. Thank you for that.
And our next question will come from Genie <unk> way with Barclays. Please go ahead.
Hi, Good morning, this is janine.
My question is on inventory quality back to that slide 13, where you show rate of return versus your premium well count at different.
[laughter], what does the distribution basin and yeah can you point to kind of where 2020 where that sits on the cars.
Yes, certainly are on the on the curve.
Ah the distribution of the wells other returns is about the same at each one of our place it looks very much the same we have.
Single premium double premium Triple Permian Wells and really every play that we're developing and then our 2020 plan.
The returns on our Tony <unk> plan would reflect about the median there a when we look back on our scorecard for last year or not a 2019 plan.
Our returns at the at the current prices are at $40 flat oil a were about the median so so that represent the median.
Returns, there which are.
53% at a $40 I mean at 58% at $40 flat and then incredible 83% aftereffect, where the return at $50.
<unk> oil prices are about the returns that were getting on our drilling program.
Okay, Great. That's that's really helpful. My second question is on the balance sheet and maybe we're just being a little too nuanced here, but we notice that there was a slight change and messaging on the debt reduction parent ran from I think the flight targeting 3 billion and debt reduction to kind of evaluating options are current maturities. So can you just provide a little.
Color on F <unk>, any new debt or cash targets. Our response to the NACHER to you and I guess the reason why are asking is because we had thought that you're getting to your 3 billion dollar debt reduction program like.
Actually a trigger for doing chaired by Dr. or other things that Uh huh.
Yeah, Tim will comment on that yes. So there was a slight change there and the reason was with where we're out in the commodity cycle, we will pay off our two bonds that come due this year. One is due April 1st in the others do June 1st there are $500 million. Each so obviously, we'll pay those off well then evaluate where the.
Market is currently and where it looks like it will be going long term to see where commodity prices are going and make a decision a prudent decision where they're not to refinance those bonds or not the goal is still to pay off $3 billion over that period of time, but we have to be prudent and look at the the conditions at the time to decide where.
To go.
Thank you. This concludes our question and answer session I would like to turn the conference back over to Bill Thomas for any closing remarks.
Well first of all US you know 29 team was the best operating performance in the history of the company and that there's just due to their this what we've been talking about us to everybody and he O.G. So thank you everybody O.G. for doing a fantastic job, we're excited about carrying that momentum into 2020.
The company has got a great balance sheet, we got operational for likes Flexibilities, we've talked about industry, leading premium inventory and a unique UGI culture. So the company is set to weather the storms and whether that out downturns and to continue to deliver strong results in the future. We're really excited about.
Where we are and where we're headed so thanks for listening and thanks for your support.
And thank you Sir the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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