Q4 2019 Earnings Call
[music], ladies and gentlemen, thank you for standing by welcome to the fourth quarter 2019, W.P. ex Energy earnings Conference call. At this time, all participants' lines are in listen only mode. After the speakers presentation there'll be a question and answer session to ask a question. During this session you'll need to press star one on your teller.
So.
If you require any further assistance plus star zero.
Now I'd like to hand, the conference over to your Speaker today Mr., David Sullivan, Vice Vice President of Investor Relations. Please go ahead Sir.
Thank you good morning, everybody welcome to W.P. ex energy fourth quarter 2019 call. We appreciate your interest in W.P. ex energy, Rick Muncrief, our chairman and CEO Clay Gaspar bar, President and COO and Kevin Vann, Our CFO will review the prepared a slide presentation. This morning, along with Rick playing cabin other members of.
The management team or are available for questions. After the presentation on our website WPS energy Dot com, you'll find today's presentation. The press release that was issued after the market closed yesterday also our 10-K will be filed later today. Please review the forward looking statement and disclaimer on oil and gas reserves at the end of the presentation. They are important.
An integral to our remarks. So please review them so with that Rick I'll turn it over to you.
Thank you David Thank you everyone, who is joining us. This morning, we sincerely appreciate your Bible time, and your interest in our company.
Today, we're going to discuss our strong fourth quarter and full year results for 2019.
For about an update on are attractive acquisition to Felix energy that we announced in mid December.
Sure a thoughtful balancing free cash flow generation with capital spending a growth and provider perspective on some of the concerns the investment community and the entire world are currently feeling.
Certainly the financial markets are unnerved published rather the Corona bars that health care professionals and governments around the world are actively body.
We wish them godspeed as they diligently work.
To lessen the impact.
I don't think will they have many of central tools and pharmaceutical components that are derived from the very products that our industry delivers as the battle This awful slickness.
Because of how the commodity markets are currently being impacted I want to remind investors or just how hard to WPS team has worked to stay focused and build a company that can withstand headwinds such as these.
You should know position to perform well regardless of commodity prices.
I believe this is why the Phoenix transaction. So watch so well received by both the debt and equity markets.
As we shared we can continue to return capital to shareholders much sooner than we contemplated.
Headwinds or something our team has come to anticipate to counteract them, we've employed or financial discipline, our technical and operational savvy.
Our commercial acumen or flexibility.
And ourselves for transactional timing.
You can also be assured that we take our environmental social and government governance actions to heart.
We will stay proactive as we engage both shareholders and other stakeholders in the pursuit of continuous improvement.
WPS today is the financial story, and outperformance story and a free cash flow story.
Currently the 2020 guidance, we gave at the time of our Felix announcement remains intact.
[noise] post close on Felix we will immediately be producing over 150000 barrels of oil per day with an attractive cost structure, a strong hedge book and a solid balance sheet.
That's a very nice position to be a.
From my perspective, after organically tripling, our oil production through the drill bit through excellent execution over the past three years in both the Permian and Williston Basin, and then adding an attractive and accretive acquisition on top of that.
Doubts about our ability to deliver growth should be view for between.
Now that being said weren't piddly watching and evaluating data and trends our current plans deliver well over $200 million of free cash flow. This year net of our plan dividend assuming $50 oil prices.
You'll get more details throughout todays discussion, but if market conditions dictate we have the ability to moderate or growth by pulling back some more capex and thus generating even more free cash flow.
That's the flexibility I was speaking about earlier.
With that let's turn to page two.
In 2019, WPS shares closed the year up 21% versus an average declined 13% or peer group.
We also raised thus adjusted EBITDAX by 27%, despite a 10% decline in our oil price realizations, and a 21% decline in or natural gas realization.
So how is that possible.
It all ties back to the outperformance that you see here on page two.
We made promises than we over delivered.
We also did it in ways that accelerated what we thought was practical and possible at the time.
That happens when you do things like turning $125 million of midstream investments into half a billion dollars in proceeds.
What happens to when you bet on yourself for example, we said we start returning capital to shareholders about 2021.
Instead, we were able to execute on that beginning in 2019.
We did so by retiring 5.7 million.
Shares of our equity.
And we'll certainly remain opportunistic if we see your rationality and are sure fries again.
We also paid down debt last year reduced our leverage metric to nearly 1.5 turns and exceeded our guidance for output by a wide margin without increasing our capital budget.
In my mind.
Even starting to look more and more like an investment grade company.
Just a few weeks ago, we obtained acquisition related related financing at a rate of just for a half percent.
For a 10 year term.
That outcome reflects on the clarity were plans the quality revision of the credibility we have in the market. We worked hard to earn it and we'll keep working hard to retain it.
So now let's turn to page three.
So for 2020, here's what you can expect from us.
First and foremost, we're poised and ready to close our acquisition of Felix energy very quickly pending shareholder approval on March Bill.
We fully expected to be a smooth seamless integration that will help further strengthen the outlook for our company.
As you may recall the intent behind this acquisition is to accelerate how quickly we can reach our five year targets.
The acreage, we're acquiring complements our core stateline position in the northern Delaware Basin, and enhances our already strong per share metrics I.
Action increases our margin per BOE easy delivers meaningful cash flow increases our oil cut which will allow us to maintain a consolidated commodity mix of over 60% crude oil on a three stream basis for the foreseeable future.
In 2019, we generated $101 million of free cash flow into back half the year and with the additional.
And with the addition of the Felix assets, we believe that we can more than double that amount in 2020.
All of this helps paved the way for WPS is first dividends on our common stock we're targeting 10 cents per share on annualized basis with the first payment expected in the third quarter of this year.
And we'll begin to chip away at or leverage in 2020 with the goal of ultimately get it down to a single turned in a couple of years.
Now, let's turn to page four and I'll hand, the call over to play gas bar, our president and Chief operating officer.
Thank you Rick and good morning, everyone as I look back at our 2019 results. There are several key events and accomplishments to be very proud of the greater WPS team was once again prepared and position to act as opportunities materialize.
We're also patient as evidenced by our three year acquisition hiatus, and then courageously moving when the stars aligned on the Felix opportunity.
We've also executed on literal millions of decisions and task that never make the light of the earnings call, but nonetheless allow us to deliver impressive results quarter after quarter.
And importantly, we're extremely aware of our responsibility to all stakeholders not just investors to cultivate those critical relationships and our communities with our service providers and with the greater public courage results and relationships are the key ingredients are WPS culture and our success.
Going into 2019, we were laser focused on generating cash flow and as promised we were positive for the year and generated over $100 million and free cash flow in the back half of the year.
As I mentioned last quarter. This is not a one and done strategy for WPS and as Rick just mentioned, we expect to generate over 200 million in free cash flow in 2020 at a flat $50 VTI.
Also a major focus for our operations group was to deliver more for less.
This was accomplished by maintaining our capital guidance for the full year, but we delivered an incremental 5600 barrels of oil per day above plan.
Remember our original full year guidance for 2019 was 98000 barrels oil per day, but we achieved 103600 barrels oil per day, a 6% 6% increase.
And production with no impact on capital.
Hi, good that excess production growth can be an off putting comment in today's world, but let me be clear, we will always strive to create more barrels and therefore more revenue for the same and less or less investment.
Well, that's a fundamental business philosophy I also want to be clear that our pre eminent driver is to create value to the bottom line that supports our five year vision of returning significant value to shareholders and further strengthen our already strong balance sheet.
As we plan forward with our variable options regarding growth note that our conversation begins and ends with cash flow implications.
Now, let's turn to slide five and discuss the Felix integration that is well underway.
The integration has been and continues to be a critical focus throughout the company.
As Rick described in his prepared remarks as seamless integration is a key to WPS is 2020 success.
As we think about deals that we've done here WPS and others. We've been involved with throughout our careers. This deal had some significant integration advantages.
First of all Felix's design with an exit in mind. The employees are highly incentivized to see the clothes and transaction and transition work well and it shows.
The Felix people have been a pleasure to work with in the room for between our teams is impressive.
Lets close we hope to bring over a select number Felix employees to our tolls office. We will also take this opportunity to lean on our very strong industry reputation to inject some additional talent from around the industry to keep our knowledge pool fresh Andy.
In the end I would estimate that we had about 10 net gionee employees to the WPS mix.
This will allow us to be positioned well to handle the incremental 190 wells and five rigs associated with Felix transaction.
While we were clear in the deal announcement that we were not justifying the deal on synergies we knew that we could see some improvement to the plan $20 million DNA and this is a nice start.
Despite these built in advantages, we're not taking anything for granted each functional area has been in continuous contact with their Felix counterparts.
This included Daily Conference calls onsite meetings in Denver, and in Tulsa, and multiple field visits in conjunction with our integration. We're also looking at optimization opportunities. Some of these opportunities are provided by the scale of 12 rigs in three completion crews in the same basin. This gives us the opportunity to smooth out the completion crew.
Utilization, which is mutually beneficial to WPS and the service companies involved.
In 2019 will continue to learn quite a bit about optimizing well design and proper spacing of our legacy Delaware position.
The wells, we designed in the 60 to $70 2018 world than planned permitted drilled completed and then finally brought online in early 2019 saw more interference and we would have liked and a 50 to $55 environment.
Mid 19, we were again adjusting our landing zones and moving towards a four to five well spacing per landing zone.
The wells that we brought on the tail into 2019, and so far in 20 has seen a nice uptick in performance and worked very well in a 50 to $55 tape.
It looks appears to be about six month six months behind us on the spacing in landing zone work by our estimates the three large passive Felix is bringing on right now maybe testing too many landing zones and may be space spaced a bit tight for today's price environment. We're watching these wells closely and their performance and it will help contribute to that.
Significant upside that we may be able to achieve with this asset.
Operationally, we're not planning on making wholesale changes day, one we plan to systematically test components of our well design on the Felix assets and Felix ideas on some of the legacy WPS wells as well.
We continue to be open minded about what we do and how we do it and every day, we strive to get better results to the bottom line.
We do see some capital improvement that will aim to capture right away.
And time I expect there will be able to shave off more than half a million dollars per well to what Felix is doing now.
We're also challenging some of our own procedures will likely realize additional additional savings there as well.
Again, we did not just by the deal on synergies.
But these are meaningful savings that will create value above and beyond our acquisition assumptions.
On the marketing and risk management slide we have been coordinating with Felix and Opportunistically executing hedges on over 26000 barrels of oil per day at a fixed price of 50 780 per barrel.
The announcement as part of the deal our marketing group is engaged with counterparties to incorporate felix's barrels into our overall marketing strategy.
As I mentioned before Im very proud of our strategic thinking of our marketing team and I'm fully confident our ability to create incremental value with this new asset.
Now, let's turn to slide six and talk more about the legacy Delaware assets.
As I mentioned 2019 was an important year for our Delaware basin assets, and understanding spacing and driving well costs down.
Despite being less than optimal with only five rigs running in the basin, we learned a tremendous amount about the proper co development spacing and a 50 to 55 dollar world.
As we look to the 2020 co development drilling program and the Wolf Upper Wolfcamp, we're seeing strong well results with the four and five will Vince spacing.
Previously we put out an equal you are for one model upper Wolfcamp parent wells of 1 million barrels of oil equivalent.
As we shifted to co development, we're maintaining that 1 million barrels of oil equivalent you are for the state line Upper Wolfcamp also were formerly giving you ours for Mylan, a half and two mile Cold co development Upper Wolfcamp of 1.4, and 1.75 million barrels of oil equivalent.
Respectively.
On the drilling completion side, we've been able to drive costs down significantly from 2018.
Since 2018 dropped our total well cost that is drilling completions facilities and artificial lift down over $500 per foot or 36% or well planned cost for 2020 of just over $900 per lateral foot on a blended average over the entire WPS legacy programs.
And fourth quarter of our Delaware realizations continue to be strong our average realized price and Delaware was Debbie T plus 15 cents including basis swaps.
On the natural gas side, we average Nymex minus 22 cents, including basis swaps I can't say enough about the great work. Our teams have done to protect prices and stay out in front of price challenges and basin differential blowouts.
Now, let's turn to slide seven in discuss well since 2020 drilling program.
And never gets old showing the year over year, Williston, well performance improvement the Wilson assets continue to be a strong performer for WPS.
The 2020 drilling program is primarily focused on Mandaree man to resell and Moccasin Creek. These are some of the same areas, we drilled an 18 and 19, which should deliver similar results.
Our current well costs and Wilson $6.7 million for drilling completions facilities and artificial lift.
We believe our wealth and asset is delivering basin, leading costs and economics that should continue with our 2020 drilling program.
Now I'll turn it over to Kevin Vann, our CFO for the financial update.
Thanks Clay last year during our fourth quarter conference call I stated that we had conquered leverage and that the next steps for the spend within cash flows and start returning capital to shareholders in 2021.
At that time, conquering leveraged look like an annualized fourth quarter net debt to EBITDA of around two turns we currently stand at 1.5 turns so check the box on that.
On the free cash flow front, we generated a little over 100 million the second half of 2019.
So again check the box on spending within cash flow and sticking to our capital guidance Lastly in regards to starting to return capital to shareholders. We initially had our sights set on 2021 as you know we began our share repurchase program during the third quarter of 2019 and plan to initiate our first dividend during the third quarter of this year check.
Check and check.
As an organization, we're performing at a very high level, we can see it in our 2019 financial results. We can see it in the performance of our business development operations finance teams as well as all the teams to support our our success behind it.
We can also see it and our how our teams are working on the integration of our Felix acquisition.
Our ability to execute is the reason for the confidence we have in our five year vision for shareholders. We set the bar high for a reason to what the market expects from a company like ours and the track record we have.
And yes, there are very real challenges in the market today.
We've worked very hard to put WPS on a stable path to sustainable earnings.
With that we obviously believe we're going to have some staying power to compete against the broader S&P 500.
Building shareholder value is our job and we're constantly thinking about new ways to accomplish it.
Now, let's turn to slide nine.
For the quarter at 111 point thousand barrels per day, our oil production is 16% higher than for the same period of 2018.
This oil growth was fueled by 34% increase in our Willis milissent output for the full year are.
Production averaged 103.6 thousand barrels per day, which is 27% higher than last year. This growth was not achieve just to put production numbers up almost scoreboard in 2018, we had a levered to goal that drove our production growth in 2019, we had another financial goal of achieving positive free cash flow again, we.
Achieved that goal in the back half of the year, establishing financial metric goals is not a new concept for us given our size and Mark cap. We know that we are unique spot of being able to generate free cash flow at $50 WT for years to come.
Our five year goals for the next step in establishing a new wave of financial metrics that can compete against the S&P.
Given our track record and history of execution, we are extremely confident and hitting these goals.
At over 179000 equivalent barrels per day, our our overall production is 15% higher than the fourth quarter of last year.
167000 barrels per day per day, we are 31% higher on a full year basis.
For the fourth quarter, we are reporting an adjusted EBITDAX of $366 million, which is 60 million higher than the fourth quarter of 2018.
The full year was one point the full year 1.37 billion of EBITDAX was 288 million higher than last year. Most impressive is that we achieved this financial success with realized oil prices settling nearly $6 per barrel lower than 2018.
We didn't see a small increase in our operating cash operating cost inclusive of lease operating expense GP and team and production taxes on a per unit basis. Those costs went from 11 54 in 2018 to approximately $12 per barrel. This year as far as other cost in the system. Our DNA cost per barrel went down from 392 to 340.
In addition, with our focus on de leveraging Andy decreasing absolute debt, our interest expense went down from 351% to 261%.
Barrel.
These results are what we planned on and what we told you we would deliver.
For the quarter, we are reporting an adjusted net income of 42 million versus 9 million in 2018. The improvement was driven by the same factors impacting adjusted EBITDAX, but also impacting those numbers was $151 million of higher depreciation depletion and amortization in 2019.
The higher asset level of DNA was driven by the higher production volumes, how however, our BDNA rate.
Fell by nearly 10% as we continue to drill better wells at lower cost.
WPS is and will remain committed to financial discipline, and specifically hitting our capital capital budget.
I said it across the table from analyst shareholders and potential shareholders in early 2019, and assured them that we would hit our capex guidance.
It was definitely hey, we will believe it when we see it reaction.
Well believe it we guided tour range of 1.1 to five to 1.25 billion, which excluded land. So excluding those land expenditures, we are a little under $1.2 billion for the full year close to our the midpoint of our range and excluding the 15 million Atlanta, another small miscellaneous expenditures, our capex for the fourth quarter.
268 million.
Now turning to slide 10.
WPS enters 2020 with financial strength that is highly coveted across the industry.
Obviously, having superior assets as part of the equation to achieving these types of financial metrics. However, you must have an operational team like we have here that BPX a bias for action and a commitment to managing the health of the balance sheet.
I had a board member tell me back in 2014 debt towers from committee a lot faster than what you anticipate.
Two years ago, we started thinking about how to manage our 2022 maturity. We developed a game plan to refinance pay down instead committed to getting ahead of our peers across the industry, who would be facing maturities during the same time period.
Taking a step ahead is what we pride ourselves on here at WPS and what we will continue to be with leverage at roughly 1.5 turns and Undrawn credit facility and no signet significant debt maturity until 2023, we are in great shape.
We have also been active commodity risk managers of the last several years, our approach to managing commodity risk has not changed and where we will continue to do so for 2020, we have approximately 70% of our expected oil production hedged with fixed price swaps and collars inclusive inclusive of the hedges that were put on for the underlying Felix production.
Our 91000 barrels per day swap position has an average price over $57. A barrel. We also have an additional 20000 barrels per day hedged through a color with a $53 lower in $63 cap.
I'm very pleased with the steps that WPS team has taken in getting us to the financial position that we're in today.
Our team understands how to work together to win.
Plays operational folks to the transactions, Brian Kandarian service business development team has pushed through to the legal support provided by Dems desk Cameron staff to the work Angela Coconuts team has done on the in HR front and the reliable and consistent work my M&A team brings to the table, we know how to get things done here WPS, we know how to manage risk.
And we know how to be opportunistic.
With that I'll turn it back to Rick for some closing comments.
Thank you Kevin.
We conclude the prepared remarks, I'd love to reiterate a few key points.
Number one our assets are performing very well as evidenced by our 2019 results.
Number two the Phoenix transaction is on track to close soon those assets are quickly approaching the expected 60000 Boe per day of which 70% is crude oil.
We've already seen several opportunities to develop these assets even more efficiently.
Can't wait for our team to get the keys to the car.
Number three our focus on generating attractive free cash flow for shareholders is of extreme importance to our team.
We will strive to seek the proper balance between free cash flow moderate growth and efficient capital spending.
Number four our plan to implement a sustainable durable dividend during the third quarter. This year is on track.
Additional free cash flow could be earmarked for opportunities luck share repurchases for variable dividends.
Number five our oil production production is strong and getting stronger.
Margins are strong and getting stronger our balance sheet is strong and getting stronger.
A number six and finally for WPS has accomplished in the last six years as sick is simply second to none in our sector from a transformational perspective.
You should expect more top tier performance from most of the future as we deliver much needed to energy to a complex world in a safe efficient and responsible manner.
At this time, we can now open the lines up for questions and I'll turn it back over to the operator.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound Keith.
Please limit yourself to one question and one follow up.
Our first question comes from Gabe Daoud with Cowen Your line is open.
Hey, good morning, guys. Thanks for all the prepared remarks.
Maybe starting with Felix I think looking at stay data in Fourq to maybe producing around 43000 BOE a day net from call. It 150 wells or so so.
One Q you mentioned some of the large pads coming on is that I guess 40 wells are so to get you up to that 190 number you'd mentioned at the acquisition and then yes.
Clearly you would also mentioned the perhaps spacing is a bit too tight on some of these has been as productivity Ben FINRA with within the the expectation to get up to 60000 Boe per day.
Yes, I gave several questions I'll try to address them and then I'll, let you clarify what I didnt get too yeah. The three pads that we're bringing on Felix bringing on right now to total about 46 wells.
They are in the number to get us to 60, they are risk to get us to 60, I just wanted to through that cautionary note in there.
What we've seen what we've learned throughout 2019, we're actively kind of ups facing our wells to the point that we're already seeing results from that I just want to make sure that we that you knew that we probably have that in our plans that is baked into the the inventory count that we've talked about most recently and it's also baked into some.
Our guidance how it all materialize over time once we get our arms really around the asset will build a belt better talk first hand about the actual performance and where we go from here.
Got it thanks Thats helpful, but okay. So it sounds like you did.
Maybe into 2020 guide you baked in some productivity improvements lease on WPS legacy within that volume does.
Yeah.
Yes, I would say differently, we have baked in some risk into the wells that we know where space very tight I think we have a pretty good handle on the legacy assets and how they're performing the four to five wells.
Upside case, we've seen that in the past we see it.
In the most recent examples but inevitably as you're bringing on you movement for this Felix assets from 150 wells to nearly 200 with all at the same time, you're about to close the assets I am going operations Guy always, though a little cautionary risk out there.
Just things do go bump in the night, so I want to.
Make sure we have a little cover on that.
Gotcha Gotcha, Okay. Thanks to that's helpful. And then just a follow up just given the rig additions on the legacy Permian position and then the rig drop in the Bakken how should we think about production in capital cadence as you move throughout 2020.
Yes, so we are actively adding rigs right now in our legacy Delaware assets as Felix roles in it'll be a flat five rig cadence and so you're moving to seven rigs in the Delaware legacy flat five and.
Felix So combined to 12, you'll see a little bit of a growth profile in the first quarter.
And capital and then you will see a kind of essentially a flat.
Second third and fourth quarter beyond that of course, you got the the disruption of clothes and partial monson partial quarters to deal with Williston, We're starting the rig the year with three rigs mid year will drop two rigs and continue that cadence from there on a completion standpoint should be relatively steady I would say maybe fourth quarter we.
Actually slowed down a little bit relative to the other the other quarters.
Great. Thanks, so much foot.
You bet. Thank you gave.
Thank you next question comes from Neal Dingmann with Suntrust. Your line is open.
Good morning, written team My first question and closed for you on the well design I'm. Just wondering if you will been very proactive space, you're well multi zone pads appropriately to ensure adequate returns on each of these wells and I'm, just one or each of these pads Im just wondering could you speak huddled wages plunging oil prices might impact your upcoming pad designs or if it will.
Yes, good question, Neil I think we.
We look forward.
To getting our hands on the on the Felix assets. They are doing some really cool stuff that I think we'll be able to bring into our way of thinking and vice versa.
Your question, specifically around commodity price I would say look we we.
Plan all of our activities in a 50 dollar world, we're not too terribly far from 50, right now, but Rick mentioned in his prepared remarks, I mean, we've got great flexibility to dial back to more of a maintenance capital mode.
What we spelled out this in this environment you can see as it is a little bit of a growth mode still generating free cash and then referencing back to my my prepared remarks, all of these conversations that we regularly have and will have again later today in this week and the balance of the month start and end with free cash flow we want.
To make sure we protect that we're thoughtful about.
How do we continue to drive that year over year.
The Great news is we have the flexibility to do that and we don't take that for granted thats.
Kind of a rare commodity and in the business today.
Great and my second question might involve Kevin on the allocation of capital while your stock certainly held up better than others.
Certainly still looks attractive you Im just wondering could you will talk about how the lower equity price might play a factor with capital allocation when comparing this alternative to the incremental activity or your new dividend et cetera, Yes, I mean, obviously, we talked about as clay mentioned, we developed the capital plan around $50 WT I had pulled back a little.
That farther than 50, where we currently stand today.
I will simply to say within the last week, but obviously, we are prepared for at least in terms of how we evaluate share repo share repurchases.
And you know our our hedge book gives us that flexibility to still continue to generate free cash flow in 2020. So.
If the underlying well performance if it doesn't make sense to come to continue to grow at a roughly 10% pace or cadence and we can pull back on that and reallocate some of that capital too.
Other means of returning value to shareholders and obviously the implementation of the dividend in the third quarter is one thing, but having the opportunity to flexibility to buy back shares in this environment will will continue to look at and see what that return is versus.
Growing at that same rate.
Yes, I love the flexibility thanks, guys.
Thanks Neil.
Thank you. Our next question comes from Derrick Whitfield with Stifel. Your line is open.
Good morning on congrats on a strong quarter, an exceptional execution, particularly in such a challenging environment.
Thanks to earnings.
For my first question I wanted to clarify a couple of comments on the state line asset perhaps were clay.
Regarding your new development, our co development type curves could you confirm the or uplift from wider spacing is reflected in those type curves and that the inventory is consistent with the inventory you noted in the Felix acquisition presentation.
Yes, thanks for that clarification, and it's yes to both.
Yes, the four to five.
Spacing is contemplated in the one one for 175 type curves and the inventory.
Numbers that we just put out are reflective of the same same numbers as well as I mentioned.
These numbers show up in state data pretty late after we make these changes.
The original the 19 wells contemplated in 2018.
20 wells that we're bringing on now really all comp contemplated in 2019. So we've been on this case for I would say nine months or so in earnest.
Great and then as my follow up I'd like to focus really on a bigger picture topic that rig product in his prepared comments.
Perhaps for you Rick.
We've been somewhat amazed by the speed at which the SG conversation is evolving it's clear to us the U.S. independents are positioned to deliver hydrocarbons.
Certainly a clear and more efficient manner than generally the balance of the world in light of the current political environment could you share with us your broad views on this topic and how your business. How you think your business should be evaluated permit SC perspective.
Yes. Good question. It is the issue that is all in the mines of management teams and board just on the mines of investors of banks.
Just just really the the whole arena, if you will around energy production.
And from our perspective.
We're pleased with.
Some of these the dialogue bid we are or involve with and it comes in several several areas number one some of trade groups that we have that were associated with were involved with three distinct trade groups were SG is for the most part one of the preeminent.
Pre eminent.
Topics of discussion.
And so we're number one we need to make sure that we start talking the same language we understand things.
And we understand what the what are the best sources of books of as you'd like disclosure.
Things like that so.
So when it I've asked clay to really take a big lead on.
Especially as with our operating.
Several organization is something we're focused on I can say I'm focused on it or boards focused on it and the certainly clay is is is working to show a lot leadership here internally to WPS will turn it over to clay.
Derek I appreciate the question I'll, just add a little bit more granularity to Rick's comments I mean, we're fully engaged in this conversation. This is internal external conversations to third parties that Rick mentioned, we've actually engaged in environmental consultant that help kind of steer us through this dismays as you will know it's pretty unchartered territory. There is.
A lot of different standard quote semi standards out there and just even trying to navigate that is a bit.
Can be a bit overwhelming we want to make sure that we're taking the right steps as we take these steps forward last year, we publish our first DSG report soon we will publish our second SG report you will see a nice step change. This is not an end product certainly with the consultants very high priority is to help us understand the right disclosure.
And how much do we put out it's an infinite amount of data even small things that we take for granted aren't measured consistently aren't captured consistently around the the industry in the even from standard standards. So we want to make sure that we're reporting that we that's viable that's verifiable and consistent as we can see.
You to roll that forward, we have an internal.
SG Committee head headed by our a director VH analysis and then she reports she pulls together a larger group from around the company. We've also restructured one of our board committees, the nom and go committed to heavily.
Heightened awareness of SGN tell you, we just had our board conversation earlier. This week. It was a very large percentage of our conversation around DSG and don't think of it is just a negative we we honestly believe every negative out there WPS, we have an opportunity to really take a step forward and to leverage.
And so we see this as an operator opportunistic opportunity for us.
And just know that we want to do things right I mean rig Kevin and I are all land owners were all we all have kids we.
By definition were environmentalist, we want the world to be better place to live in my prepared remarks, we talked about relationships all of that comes into the greater SG focus where we want to make sure. We're doing as we're taking the right steps to move proactively in the right direction and help drive the communication I'm incredibly proud of our industry and the.
Great things that we do for humankind, both quantity and quality of life. So that can't be lost as well. It is an important thing that we do and we're very proud of it. We also want to make sure that we're always looking to get better. So thanks for that question.
I agree and thanks very helpful guys and thanks for your thoughtful response on the matter.
Thanks dirt.
Thank you. Our next question comes from Bryan singer with Goldman Sachs. Your line is open.
Good morning.
On the Felix integration I'm, one of the points that you talked about on slide five was leveraging Debbie pxs marketing agreements as well as the current takeaway agreements and I wondered if you could talk a little bit more to that and the impact that that could have.
If any to the cost or to the overall cost structure for Bailey.
Thanks, Brian I'll, let Greg warm address that our VP of midstream marketing.
Sure Brian.
Right now Felix has a major relationship with.
A midstream company that is well known throughout the industry and that we have a significant previous experience with very good experience and currently most of those barrels will end up in Midland.
With where Midland.
Markets are for the foreseeable 12 to 18 months.
We're anticipating that most of those barrels stay there we're in active discussions.
The pair up and expand that some of our relationships and agreements that get further downstream and that effectively hit the water and export markets. So we'll continue to work on those you'll hear more about those as the year miracles Muslim.
Yes, I would just had just a brief comments about some of this stuff is.
You don't just an instantly put our.
Existing contracts that we put in place couple of years ago on top of the Felix deal. We just you that's not possible you are limited to whats available today, you saw us proactively move from the time slot time assigning to close more than 26000 barrels a day $57, an 80 cents weve lock that down those kind of some.
Some thoughtfulness those kind of steps that we put in place you'll see our hedging program more reflective of 150, plus thousand barrels a day and some of that stuff just takes a few quarters to really bake in but I think the creativity that our team has shown around getting.
Gas to market getting oil to market and again I see that isn't SGS thing. We have been we've worked exceptionally hard to underpin a lot of projects that would not have made it otherwise to build infrastructure critical infrastructure to make sure. The gas is not flare that it is synta market. So we take a lot of pride in that and we will continue to do that do.
In time.
Great. Thank you and then my follow up is with regards to the backend the Williston basin on slide seven you highlight the type curve improvements that you've seen over the last couple of years. When you think about the inventory that's left in the tank or you think about the 2020 program. How do you expect data well productivity well productivity to look.
Yes, one of the things we've we've done as we've drawn some kind of sub areas on that map with the idea in mind that this is we've tested this area.
You can see what areas, we've drilled each year and then what we plan on drilling in 2020 and it tends to be kind of 2018 2019, similar activity and so I would put it in that category.
Tell you, we always risk that back.
Williston has some crazy weather at times and.
There's always things that kind of.
Our challenges.
So started with with overall production, but.
When you just lay it out year after year that continual improvement isn't going away, we're going to try to try and continue to drive down well cost Ela, we improved netbacks and ultimately improve production.
Create value to the bottom line.
Great. Thank you.
Thanks, Brian Thank Brian.
Thank you.
Our next question comes from.
Leo Baran with Keybanc Your line is open.
Hey, guys just a question on your 2020 production guidance.
Couldn't help the notice that you guys Didnt change the guidance. Despite the fact that looks like you're going to be closing Felix roughly a month early so just kind of wanted to get a sense of what's going on is that just that conservative stance is based on uncertainty around the timing.
I appreciate the question Leo Yes, simple math would say that number would go up.
I I drew caution to those three big pads 46 wells that are coming online.
It's a big unknown and not operating the wells not having.
Things in your hand, as another layer of complexity, we thought it was prudent at this time to make sure we didnt.
Get out too far ahead of our skis on this so we've maintained at Onesixty expect in the first quarter call, we'll be able to add a lot more color on how those wells are performing.
The Slowback technique that we've talked about with investors before we're going to approach at the same way.
With these wells will that evolve over time, I would fully expect than it would.
But not in the first quarter, but you know having run the spreadsheets and million times, what happens in the first quarter and that.
The first three four months of the year just dictates the rest of the year. So any kind of upset bobl in that could have meaningful impact. So we just wanted to make sure be thoughtful about how we projected.
Okay. That's helpful for sure and I guess.
You know just follow up on that line of thinking here you certainly mentioned that that 46 wells were non operated by you folks I guess, you're looking to close Felix hopefully in a few weeks when do you guys expect that you'll be able to.
Get in there and begin drilling and fracking LTX operated wells on the Felix acreage and when you think the kind of seen as time frame those wells could start to come online and they can impact would that be TX would be.
Just generally speaking, it's about a six month or so.
Procedure, when you say, okay, here's what I want to do and then let me see it show up in the meter in the tank.
So that's kind of just a rough timeline now we are influencing as I mentioned the Felix team has been great to work with their wide open to suggestions we're doing some tweaking, but you're you're you're playing the cards that are dealt and once the wells have been drilled spaced.
Landed you can't change that and so think of the first three months or so of that in the spacing period and then the second three months is kind of the operations of of executing the drilling completion and bringing the wells online so.
Three months from now, we'll actually be drilling wells with.
Ex stickers on them.
Six months from now we'll be bringing on wells with WPS, a 100% thoughtfulness on around it.
Okay. That's helpful and I guess you guys also were good not to give some updated you are assessments side Stateline just wanted to get a sense. If you look at what happened two mile laterals. How would you expect those to be different on the Felix assets I know those are oilier.
I would guide how would you got to be looking at you are in that area.
Yes, I would say that's.
For three years ago, four years ago, five years ago, I think we're having conversations about we're drilling one mile laterals now how do you see to scale up and the numbers that we've thrown out just as rules of thumb. When you double up the length of the lateral you end up with about 70% or so increase any you ours, okay, maybe 50% to 60%.
An increase in.
Piece, you will see an increased cost of 1.3 or 1.4 times I think all those numbers are kind of holding up.
To what we're seeing so I would extrapolate that to the Felix as well kind of same.
Same way of thinking, but you hit the nail on the head. It's it's really a higher oil cut so you're getting higher percentages of oil that usually has a little bit negative impact on be OE fees, but its value accretive. So as we start thinking about video we type curves 1.75 million barrels.
As an example of state line as we push over to the Felix assets higher oil cuts. If it's a 1.5 million barrel type curve no. That's that's very competitive with the state line one seven lives.
Okay. That's helpful. Thanks, guys.
Thank you all do.
Thank you next question comes from.
Brad Heffern with RBC Your line is open.
Hi, everyone.
Yes, I appreciate the earlier comments about pulling back potentially in lower commodity prices. I was just wondering if you could discuss where that activity might come from obviously in the Bakken you have shorter inventory life and so maybe you could extend that but then the Permian obviously has more activity to cut so any thoughts around that thanks.
Yes, Brad I think the comments were really mid to be somewhat global higher level. We would actually go in close talking about we're actually seeing with the the true.
Felix results, we would just have to us to step back and and look at the Bakken versus legacy versus.
The likes of where you would would travel.
It'll capital.
And that so we just have to.
Go through that evaluate you have things that come into play like differentials and.
And maybe that maybe the Bakken differential.
Either grows we're contraction that that kind of has as you don't impact gonya.
Typically if you look at EUR 2020 capital program or Bakken is at the.
The top the he from recurrent standpoint, so you wouldn't think you would cut their this early first but.
The true answer is we would just have to go in and very rationally think through and evaluate replaced a trend a little closer to give any other thoughts there.
Yeah I appreciate that Rick has had a little bit.
As oil price moves, obviously, the williston being 80% to 85% oil moves even more dramatically so $5 swing in state line is it nearly as impactful swing in Williston. So we definitely take all that into account just just a global statement to think about.
This Felix acquisition one of our most important objectives in doing this was to acquire more oily inventory, we get that we are limited on Williston inventory, we love that asset we have.
We love to have more of it but the reality is we've got a couple of hundred wells left to drill so as we've kind of feathered that.
That rig cadence I tell you that having more oily inventory via Felix kind of frees us up to just look at returns and be a little bit more objective about eight years, the best opportunity for us to create value deliver their value to the bottom line and less concerned about.
Shape of the world curve and Willie inventory as you move from oily Bakken to less oily state line now you've got a midpoint in between.
And on one thing I'll, just add is that when the hedge position that we have in 2020 the need to react.
Some of the companies that are out there that don't have the hedge position that we have.
Gives us them less flexibility in terms of how quickly they need to move in order to really make money I think when you think about our hedge book coupled with the just the returns that we can get on on our wells at $50 oil obviously, it's trended below $50 oil now and we'll be looking at it.
But we get we have all a lot more flexibility have watched this thing, but we will react as quickly as we need to in order to optimize value to shareholders.
Okay. Thanks for all that color.
And then I guess on spacing topic I was just wondering if.
Theres been a change in completion intensity.
We moved higher given that you have more I'm sort of aerial extent to ticket after what the wider spacing.
Yes, Brad the short answer is yes, I mean, it you'd never make any of these changes in a vacuum you look at well costs you look at.
Productivity you look at it.
At commodity price all those factors play in and as you spaced wells out you certainly would adjust the the completion design to optimize that's kind of your your secondary knob. Your first novel be well spacing the finer tuning would be.
The completion design itself and then there is some very small subtleties beyond that.
Okay. Thank you.
For sure.
Thank you. Our next question comes from Sitcen with Bank of America. Your line is open.
Thanks, Good morning, everyone for playing one for Rick Clay appreciate all the details on moderating Capex, you're obviously 50, well hedged for 2020, but philosophically how long do you have to be in a sub $50 and Raman to think about adjustment or make adjustment and you earlier mentioned about.
Talked about maintenance capital any early thoughts on maintenance capital post Felix.
Yes. So the first question is how long until we think about it and say, it's we instantaneously think about it you gave me a little bit of a pass will now and how long until we act. It just depends on how the numbers rollout Kevin made an excellent point, we've got that shock absorber of 70%.
Hedge that allows us to be more diligent and mean more thoughtful to protect that free cash flow that we have clearly stated we will achieve this year.
But we will we will see how it rolls out overtime, we have a lot of flexibility in our contracts rig contracts in particular that if we need to make a change we can but we're not saying that we are dropping rigs today, we'd be clear we are evaluating that we have that flexibility.
But we will continue to watch and be very attuned to that the follow up or not follow up I guess parse part B of your first question is around maintenance capital I would say for 2020 were somewhere around one three maybe one for depending on what fields roles in.
Just a hold that as of March six.
Flat for the year.
I feel good about those numbers I think that we can.
Obviously, we knew you fast for one year that drops down 21 to probably closer to one to maybe one three.
Just you get a little bit flatter decline with the lower pace of activity and thats well within our bandwidth again just for.
Clarity, we're not saying that's our plan today, but know that we have that that capability and that would be something I think in the right conditions. The market would would appreciate as well.
Appreciate the color clear and brick on on cash returns to shareholders.
In this new environment, how you're thinking about the efficacy of buyback relative to dividends.
Perhaps update us on your.
And conversation when investors and and your personal views on the in this topic.
Sure so from our perspective I think that.
If you you asked the lions share of investors out there I think the preference would would.
Lead you to good.
Solid growing durable dividend and I think that's that's what we hear.
Probably more for more investors on.
And then.
Followed by.
I think an increasing discussion has been on in a case, where you do have incremental.
Free cash being generated something akin to a variable type dividend.
And.
So there's we've had quite a constant dialogue with some are larger.
Larger investors and so were.
Monitoring that we're modeling some of those sort of things and and then certainly the from a share above.
Program that we implemented.
Last year having.
Having that is in your.
In your Twoq is so to speak when you have these these times, where it just appears to be somewhat.
You are rational I think thats, they would probably be the third of importance frost and but but certainly a wonderful wonderful tool to have in so I think it's held ranked number one a good solid durable based dividend that will grow over time once again it will compete.
With the S&P type dividends within within a few years.
And then number two excess free cash would be.
Variable dividend so some degree.
Followed by the share repurchase.
I appreciate the color. Thank you. Thank you.
Thank you. Our next question comes from Charles Meade with Johnson Rice. Your line is open.
Good morning, Rick Ankiel heading into the whole team there.
If I could go back in asked a question about this.
Up spacing you really when when you expect your wouldn't would we should expect to see a.
To see any effects role to my understanding is if you look at these when you go back to wider spacing you look at it on a on a rate versus Cume chart, you'll really see any difference in upfront rate, but that does maybe this curve start to start to diverge after 689 months, depending on on what the changes is.
The right way to be to be thinking about the timeframe for these.
Pattern.
Spacing pattern shifts to roll through.
I think to be very thorough in your valuation you need to six 912 months, but.
Our experience is you will see you can see this earlier I mean, even 30 days in.
You can see some of the the communication between the wells the that the interference reaching for the same barrels so to speak and so and we've seen that and you can see that especially in a in a vertical sense remember we were thinking threedemin dimensionally, especially in a place like the Delaware, where you may have communicate.
Patient in a in a vertical sense and less than a horizontal the vertical of communication could happen a lot quicker, maybe even instantaneously, depending on how you stack and stagger those wells and how your Frac develops vertically now horizontally, you're relying on that matrix permeability for that transmits ability of the of the wave to happen.
And that can take a certain amount of time, so I would say, yes for a more thorough look but we watch it much quicker and I would say you can see it much quicker as well.
Got it that's helpful play and then if I could roll that that theme. It to the next question going back to this up to this big Big slugs wells that fix is bringing August skinny increase their their gross well count by a third and that would be interesting even if there wasn't a transaction going on right, but but do you have the added.
Good layer that did you guys are going to.
Taking control. These wells. So you mentioned earlier that maybe you'd have.
You'd have something to say probably around one key reporting a couple of two months from now.
Is that is is that the anticipate timeframe that you think you'll be able to see you're anticipating some vertical communication that you're going to be we'll see whether they're not or are we going have to wait later before you guys make a.
Big judgment on the efficacy of their spacing and how you would change over time.
All right. So a few things there, yes, I would say we will have to communicate to the market a much firmer number around the Felix assets and we will have much more information early March or excuse me early may we have our first quarter call. So.
I feel like we will have a much better understanding but back to part of your question.
The six to nine to 12 months is really important to kind of fully get your arms around it I think we have enough experience both in the Felix area end state line that our tendency, especially in a $50 strip would beat us to widen these out and like I said Felix is on the case as well the wells we're drilling.
What were drilled and that will be bringing on next the cathedral and the where orphaned though.
Those two pads are spaced a little wider we do have higher expectations and ultimately need to compare.
Cost benefit analysis on on both scenarios.
Thank you that's helpful looks like you're thinking.
We're thinking.
Okay.
Thank you. Our next question comes from Kashy Harrison with some synergy your line is open.
Hi, good morning, and thanks for taking my questions and all the thoughts just on everything from U.S.G. too.
The guidance sensitivity I guess I only really have one for Kevin.
Can you provide us a free cash flow you show free cash flow 200 million plus that 50 Bucks then I think it. The pass you had showed US a 50 560 case, but.
Given where we are vast majority question can you show us a $45 sensitivity what free cash flow will look like and then maybe and cash flow will look like at 40, Yes, 50, I'll say that we're we're conservatively were saying a little over 200 I would say.
You could kind of benchmark data around 10 15.
The 200 that we references post dividend implementation, but at the same Todd I think for every $5 moving crude.
You can kind of just anticipate about another $70 million plus up or down depending on whether or not.
My price goes up or down, but about 70 $70 sensitivity to $5 in process.
Got it anything still be generating free cash flow $40 then absolutely.
And remember at $40 flat I would say, we will probably taken pretty significant changes and capital program. So.
We're not just relying on blindly going and hey, we're hedged this year.
You throughout the 40, I would say that's different than that 49 and change that we're seeing.
And current environment.
Appreciate the color guys. Thank you.
Thanks, guys.
Thank you our next question.
Comes from Jeff Grampp with Northland capital markets your life consultant.
When you guys. Thanks for squeezing man.
I'll just keep it up to one as well I was hoping to get updated.
Thoughts for you guys in regards to longer term midstream strategy and I guess in particular, how you guys kind of view in the context of the free cash flow dividend component of the WPS story, and maybe if any potential rationalization of the asset could could make sense, some point and kind of the medium term for yet.
Yes, Jeff we still of course play on that and we're evaluating a lot of different options, we still own a very significant water business.
We own a very significant gas gathering business all in state line and then the bolt ons from the other.
Areas as well or kind of nice adders, we're always in conversations one of the the real advantages of having done some pretty unique deals is your name kind of gets out there is somebody thats willing to do pretty unique deals and so you get to see more unique deals come your way and so it's kind of us a bit of a self fulfilling prophecy, we want to make sure that we are always.
These open to creating value.
That could be in various forms that we've exhibited before maybe something new we haven't done.
Done yet so.
The you tied to cast to free cash flow dividends and all that what we try and do as we try and separate out the new opportunities.
And the.
The disposals or the divestitures as kind of separate from core business.
Well really think about his commodity price production all the cost structure generating free cash flow, making sure that that supports sustainably our our dividend sustainably our buyback program and generates cash flow above and beyond that now if we end up selling an asset I don't think that really kind of.
Next the box for us nor if we were to do some kind of deal a bolt on what we consider that free cash flow impact. So I think we think about that a little bit in two different buckets, but very disciplined about making sure that we have a sustainable durable generation of free cash flow to support the core activities.
All right I appreciate the thoughts thanks.
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Thank you and our final question comes from Jeffrey Campbell with Tuohy Brothers. Your line is open.
Good morning, and congratulations on slide two.
Oh, Hi, when you mentioned that when you mentioned the relationship between spacing and commodity price sensitivity as for make sure I understand what you're talking about does that surround drop in capital efficiency with the tighter spacing and you're saying that any potential wasting the capital becomes less tolerable in a lower price environment or is this something else.
Wasting of capital is not tolerable in any price environment.
What I would say is when you're chasing think given these terms when you're chasing hundred dollar barrels you can put a whole lot of effort and you could put a lot of capital to chase that when you're chasing 50, or even worse $40 barrels you need to be much more disciplined and so when you're when you have two wells, reaching for the same set of barrels.
Your your the interference or the communication between wells is more tolerated in higher price environment as you move down and commodity price you need more unique barrels for each well and you make sure that you have little to no.
Well interference because the the economics just can't support it.
Hello.
Yes, that's I think we were on same wavelengths I just wanted to make sure you referred to a lot. So just want to make sure I understood. It.
It looked like you had some very nice realizations and costs in the quarter I was just wondering skin should get asked about midstream all the time.
Wondering to what degree is supported by midstream assets that you own and how would that be affected if you sold them.
Greg.
Ill take a stab at that Jeffery so.
A lot of the realized prices are supported by the midstream assets that we own from the joint venture with the Howard Energy partners folks.
In our legacy asset to.
We have transport positions that move out of.
The Bakken as well and you think about the Bakken and realizations there.
And our realizations have been very strong in the Permian just the nature of the Bakken right now with kind of take away.
Our such that.
We're really looking for those to improve as you get towards the end of this year and then early 21 with a couple a new projects coming online clearing more barrels out of that basin. So.
That will be a good story for the Bakken, but if we were to sell these midstream assets.
I don't see a big impact to our cost structure, we're already paying.
Gathering processing and transportation, our legacy asset so the other one to think about is water. We operate our water system now and we think we do it somewhere around market rate. So not sure that we see a big impact there as well.
Okay. That's good color I appreciate that thank you.
Thank you.
Thank you.
And there are no further questions at this time.
Thank you might haven't turned go ahead, okay. Thank you operator and for those of you still on the call. Thank you very much I know, it's a busy day with several calls ongoing but would like viewed to be left with is number. One is the PX team is focused we're working hard to make sure that we can generate free cash flow.
This year, we're excited about the Felix transaction, what it does to awesome and just know that in 150000 barrel of oil a day operation. It gives you a lot more flexibility than we.
We've had in the past so we're excited about the future.
Good luck to you every day.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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