Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by your conference will begin momentarily again. Please continue to hold your conference will be good momentarily.
[music].
Good morning, ladies and gentlemen, welcome to Parsley Energy's fourth quarter 2019 earnings conference call.
My name is Christine and I'll be your operator today.
As a reminder, this call is being recorded.
At this time all participants are in listen only mode. Hey question answer session will follow the formal presentation.
And now I'm pleased to turn the call over to call Road, how roads parsley Energys Vice President of Investor Relations.
Thank you operator, and good morning, everyone.
With me on the call. This morning, our President and CEO, Matt Gallagher, Chief operating officer, David to low sell Chief Financial Officer, Brian.
Senior Vice President corporate development land and midstream Stephanie.
Our remarks today may contain forward looking statements. So please see our earnings release for a discussion of these statements associated risks.
And the fact that actual results may differ materially below our expectations.
We also make reference to non-GAAP measures. So please see the reconciliations in the earnings release.
During this call.
Further investor presentation I can be found on our website and are prepared remarks, we'll begin with reference to fly three that presentation.
After our prepared remarks, well we have to take your questions.
That I'll turn the call over time.
Thanks Kyle.
Before I get going I want to take a moment and send Parsons respect condolences to the Williams family.
Clayton Williams is a life.
[laughter] impacts will be long lasting in west Texas.
Oh, Texas at all a big oil field.
It was a true wildcatter.
Crowd or man harnessed the entrepreneurial spirit.
Flourishing in our industry.
Thank you for a long time is honor.
[noise] it wasn't visit here proportionally I'm proud to say the teams spread through the finish line has carried that falling into 2020.
In December we publish or not real corporate responsibility report.
First interest.
Be living document outlining the company's commitment to environmental stewardship.
In early January we close or acquisition, our jagged peak.
Less than 90 days after announcing.
They truly remarkable pace.
The dedication effort of our multidisciplinary integration team provides us a head start capturing synergies.
Fosters a quick timeline for sure. The go forward development of these assets trade more returns focused approach.
With that I'd like to further highlight our dedicated integration team.
We are at a 41 post close but there were really began on October 14.
Hey, orphan nations in their efforts and we're already seeing results.
And we'll go into more details.
On top of this I personally have been very impressed with a forced multiplier of our IP group.
I come back integration and pushing real time capabilities aggressively across the organization.
We are energized to deliver and the team is off to a great start execution is key.
In late January we boosted our return of capital program with an increase to our dividend reinforcing our commitment to a sustainable free cash flow profile.
In early February we refinanced a tranche of our bond.
The 4% to 8% interest rate.
Lowering our cost of capital as we continue to progress towards a collective investment grade ratings.
All these accomplishments supplemented a strong fourth quarter on home base highlighted by continued improvements in capital efficiency.
As a reminder, or capital spending came in nearly 30 million below our bottom of our full year guidance range of 1.4 billion.
Our team is firing on all cylinders.
Let's move on to slide four.
And this market accountability is more critical than ever.
The industry currently has a credibility gap that can only be bridged by 10-Q's and Kate.
It's partially demonstrated throughout 2019 delivering on what we say it's important to us.
That might lead to check back on our 2019 action plan.
A lot of good news here down the right hand side of the page if you recall coming into 2019, one of our key goals supposed to accelerate our timeline to sustainable free cash flow.
We got there ahead of schedule with free cash flow generation in both the third and fourth quarters and we see much of this corporate mindset with the initiation of a regular dividend program.
Another key objective for 2019, what could tangibly improve our capital efficiency.
We initially targeted at the 8% to 10% improvement.
The parsley team delivered twice that.
Strong cost controls operational efficiency and I'm buying across the organization for partially is return focused development approach made this achievement possible.
We have to screen area teams and I want to recognize those teams and embracing this mindset and delivering results.
Next I want to provide a brief update on the strategic review for our water assets a process initiated in early 2019.
Over the past few months, Archie and performance due diligence on a potential minority sale to a financial partner and ultimately decided not to reach a conclusion during the exclusivity period.
As we have long stated you almost check every box for us to pursue.
Concluding that effort our water team's focus is on integrating jagged peak complimentary infrastructure aligning reporting measures and driving further improvements in capital efficiency.
We will continue to evaluate opportunistic value enhancing transactions for this strategic that's it overtime or.
The key word is opportunistic.
Right now we are focused on integration.
Finally, one of our key goals was to publish our inaugural corporate responsibility report, which we accomplished in the fourth quarter.
Let's turn to slide five for a closer look at this important U.S.G. focused initiative.
We have spent a lot of time talking about the financial and operational success, we achieved during the year, but I'm equally proud at the recent strikes we have made on various DSG initiatives.
Simply put organizational excellence on this front is quickly becoming a requisite for a license to operate.
Fostering a culture that for most and prioritizes community stewardship, it's not a new regulation here at parsing.
We haven't made significant contributions to the local areas we operate.
We have reduced our reaction time scaling our technology investments to provide real time facility monitoring enhanced virtual site visits we have formed and E.S.G. focus employee committee that is empowered and led by senior leaders.
But I do believe we needed to do a better job I'm, telling our story on the U.S.G. product and that also includes providing more transparent <unk>.
And that's where our corporate responsibility report comes out.
Before a word of this report was ever credit we solicited input from key stakeholders to help determine the focal points top shareholders passes money managers community officials and landowners and government agencies always going to help shape the concept.
Nagaworld report was steered by members of senior management establishes an important baseline.
From which we can measure our future improvements.
And as I mentioned before this will be an ongoing publication that we'll update annually as we continue to track and promote the company's commitment to environmental stewardship.
Turning to slide six.
I wanted to zoom in on a recurring topic up concern for multiple stakeholders natural gas Larry.
Mitigating flaring has been a longstanding priority for partially I want to commend our teams operational diligence and scheduling dexterity to help keep our flared volumes to less than 3% of our total gas production in both 2018 in 2019.
This was partially among the industry leaders, but there's still room to improve.
As you can see on the graph, which I could be assets, we acquired flared more than 20% of gas production over the course of 2019 in certain months declared more than 25% of gas production.
This will not be acceptable going forward.
Our near term mission is to reduce ancillary on these recently acquired assets to less than 5% by year end.
We are backstopping this commitment by including a quantifiable flaring medication target our 2020 incentive plans for all partially employees.
Personally will again inclusive of these assets.
At or below 2.5% by year end 2020.
Is the goal I'm proud of our teams desire to take a meaningful and proactive stance on this critical issue.
Now onto slide seven.
The last year was a resounding success were partially on many fronts, but we all know the market looks forward.
So as we turn to page to our 2020 action plan.
We plan to maintain both at sense of urgency and accountability, we will again treat this slide as a tangible scorecard as we progress through the year.
As you will note our key objectives are not seasonal in fact, many tenants of our 2020 action plan she to build upon our 2019 achievements sustaining free cash flow in a $50 oil world continues to be a key objective and frankly is now a mandatory objective given our commitment to a regular day.
Dividend program.
It's strong balance sheet is paramount.
We believe a dividend needs to be organically funded with free cash flow period.
At $50 Wcrf, we expect to generate at least 200 million in free cash flow in 2020.
And a higher oil price environment, we would expect to generate additional free cash flow and whatnot plan to increase development activity.
If oil prices dropped materially below $50, we have the commercial flexibility to adjust activity as needed to meet our dividend commitments, while protecting the balance sheet.
We're also striving to preserve and build upon the heart arm capital efficiency gains made in 2019.
You are not climbing the latter youre getting passed by falling down.
Standing still should not be a desired outcome for operators have sufficient scale in a softer services environment.
Yes, we are again, putting a measurable target on the board in our aim for 2% to 5% plus improvement year over year.
One important New addition to our 2020 actually were involved it successful integration of our recent JV peak acquisition. This includes accountability on multiple fronts. The first is steady execution.
Continuing to do what we said we were going to do.
The second is flaring litigation, which I touched on earlier.
The third area of accountability synergy capture.
Brian will provide an update on this front later, but our headline goal is to realize it at least $25 million and Gionee savings this year.
To reiterate Parsons execution on these objectives will be measurable and tied into our 2020 incentive plans.
Our team remains motivated as we start tracking our progress on value creation in 2020.
With that I'll hand over to David to review some of our 2019 operational highlights and touch on where operations are headed in 2020.
Thanks, Matt, let's move to slide eight.
Excited to report when we May do it on a main objective of our 2019 action plan and delivered a step change improvement in capital efficiency.
All told we recorded a 19% year on year improvement, which is roughly double our initial goal.
As a reminder, we initially targeting 8% to 10% year on year improvement, but we steadily squeeze out more organic well production adds for less capital over the course of 29 feet.
Our latest up taking capital efficiency is largely due to the capital side of ledger with strong fourth quarter efficiencies and cost control helped push our spend rate nearly $30 million below the bottom end of our full year 2018 budget.
Looking ahead to our 2020 action plan, it's safe to say, our basic play, but will not be changing.
We still look at capital efficiencies and equation you can attack on two fronts.
On the numerator and productivity side of the equation you're on your changes should be relatively modest.
First we expect a relatively steady geographic mix with changes, including a rolling of expected activity on our recently acquired Delaware basin acreage and a slight uptick in activity in our western Midland Basin acreage.
Second while we do not plan to change our returns focused development approach on parsley legacy program. We can apply that approach and I go forward basis to the jagged peak projects, which has recently lean a little more towards an NPV bookings.
Moving to the denominator or the cost side of the capital efficiency equation, there's a little more space for annual improvement as you can see was a laundry list of bullets there.
As a reminder, recaptured a good deal. This in our recently revised 2020 budget, which was lower to $1.6 billion to $1.8 billion.
When you add it all up it amounts to a 2% to 5% year on year improvement in capital efficiency for our 2020 action plan and to reiterate this is on top of the step change improvement that we delivered 29 feet.
We will dig into this little bit deeper into various components. This capital efficiency equation in the following slide with that in mind, let's turn to slide nine.
It would provide a little more color on our expected development blueprint for 2020 in my view of one of the main highlights for 2020 program. So we're expecting to reduce capital spending by roughly 15% year on year on a combined basis inorganically grow oil production by 10% year on year.
This is a healthy trend and shows the benefits of maintaining a returns focused development approach.
Zooming in on our expected activity mix, you'll notice a healthy dose of our Midland activities weighted to that western drilling quarter or Martin the wind it up in counties.
In general these western project exhibit a moderately better rate of return than our eastern Midland Basin drilling quarter that said, there's a fairly tight distribution for the returns profile of our 2020 program and you'll notice we still have activity plan and Howard Glasscock and Reagan counties. So good economic projects in their own right to compete for capital and tough at $50 Wi Fi.
Added repetition means more learning, which can lead to improved capital efficiency in a given area.
In other words, the cost curve is not static.
For legacy Delaware assets provide nice examples this point in mid 2018, our Delaware well costs were too high. Consequently program returns were deficient to our Midland Basin assets.
We reacted in shifted more capital to the Midland. However, we kept one or two rigs running in the Delaware efficiency gains started to compound local sand test look encouraging and well cost dropped significantly.
So in the Spanish six nine months, we saw material rate of change our Delaware Economics I.
I think this is an important example to keep in mind when thinking about our Midland base East development program.
Moving on to slide 10, another one of the goals we laid out in our 2019 action plan was to continue to drive operational efficiency gains throughout the organization.
As shown in the grass, we delivered on this target with drilling completions efficiency, both up double digits versus 2018 averages.
Partially recalibration to a higher efficiency levels allow for lower equipment levels and reduced well costs. During 2008 feet. We aim to make this the new normal harshly.
On the drilling side, we started 2019 speaking, we would need 12 rigs to deliver which contemplated in our program.
Persistent efficiency gains loudest dropped to 11 rigs at mid year drop again to 10 rigs in the fourth quarter.
Faster cycle times, not only allow for lower equipment levels, but also reduced well costs.
Completion side, we significantly reduced or non pumping consciously new through 2019 at the end of the year, we leveraged our skill former comprehensive our acute and work with a high performing service partners on pricing keep in mind, we proactively managed our completion schedule so as not to exhaust our budget in required extended track holiday in the year end.
It's helpful. On two fronts first it allowed us to maintain operational momentum into 2020.
Second it allows service providers to gain efficiencies as well and likely gave us a better leg to stand on during our contract negotiations in the fourth quarter.
Turning to our 2020 action plan, we aim to dependent extend the efficiency gains we captured in 2019.
Jagged peak integration efforts are progressing well as our team fast track collaboration on best practices.
Fleet of 14 to 15 high spec rigs and fortify high quality Frac crews ready, we expect to reside in that sweet spot for scale.
Turning to slide 11, I wanted to take a minute to discuss the topics that have focus of investors the past few months.
Namely how partially skill for development approach differ from some of the recent jagged peak projects.
The short answer is will be implementing our 2019 playbook on Jack's asset base.
Still all about rate of return.
In our view jagged peaks recent projects lead a little more towards an optimization for NPV.
Recent production results from these projects are shown in the bottom left table below and are tracking in line with service expectations Importantly capital costs in these projects it trended favorably versus our expectations, which speaks the strong level engagement the JV PGIM exhibited throughout the transition period.
Moving forward will be shifting more of a rate of return focused on the acquired jagged peak assets to better align with partially approach. Our teams will continue to utilize a rifle approach when it comes the package figuration by area, but there are few overarching designed to each first we expect use a little more proppant in widen the disputes between wellbores in all directions.
Decreased vertical density of water horizontal spacing to be specific.
We will also dial back delineation activity as Jagadish recent projects included some landing zones as it tends to be more.
Focused on resource capture as opposed to returns.
The comparison in the bottom right at the pace highlights some of the key differences in the three recent jagadish projects in the parsley go for development approach.
We expect these tweaks in design will ship productivity higher and leveraging partially scale across supply chain will grind costs lower in summary, we are still pushing on our capital efficiency equation working for more production with less capital and now I'll pass it over to Ryan to discuss parsley strong financial position walk through our 2020 outlet.
Thanks, David now on to Slide 12, I want to stick with the theme of accountability remaining front and center or partially in 2020.
We unveiled this synergy scorecard, when we announced the geography transaction last October and we intend to revisit this but on a regular basis throughout 2020.
We view these tangible synergies as true value enhancers that accrued to all shareholders. So it's only logical to keep shareholders updated.
With that in mind, we are already recordings notable progress on our synergy objectives.
You can find a handful of update on the right side of the page, but here are two items in particular I want to call attention to first I want to highlight the expedient timeline from announcement to close less than 90 days, which is a testament to the collective efforts of our integration team.
Importantly, this gives us a head start on synergy capture and shifting the go forward development approach that David just just spoke to.
Secondly, we made it known last October we believe the JV transaction costs to accelerate our path to an investment grade credit profile.
In February this initiated with an investment grade credit rating and we ranked refinanced the tranche or bonds at a 4.18 interest rate.
This is a meaningful milestone that lowers our cost of capital as we continued our progress toward a collective investment grade credit rating.
Turning to slide 13, our leverage and liquidity profile remains healthy after the close of the all stock.
The action.
Our corporate commitment to free cash flow generation should only improve this position the financial strength.
As I mentioned a minute ago credit market has recognized this allowing us to achieve an $8.5 million of annual interest savings from our recent notes refinancing.
Future opportunities to reduce interest expense will only serve to further enhance our free cash flow profile, which in turn removes a little bit of risk from the system.
Finally, I will note partially continues to protect its free cash flow through an active hedging strategy with the majority of our forecasted 2020 oil production now hedged.
You can view, our full hedge position in the supplementary slides.
[music].
Turning to slide 14, we're reiterating our 2020 guidance, we laid out in late January in Reconfirming, the priorities of our 2020 budget.
Growing free cash flow and improved capital efficiency are once again key objectives.
As Matt mentioned earlier, we budget the $50 oil, but if oil prices dropped below that we have commercial flexibility to adjust activity is needed and meet our dividend commitments, while protecting the balance sheet.
Next I wanted to provide a little more detail on our activity plans to start the year during the first quarter, partially expects to run 15 rigs in five frac spreads in place 50 gross horizontal wells on production.
We're guiding to first quarter oil production of 123 to 129000 barrels per day, which excludes jagged peak production prior to close.
To wrap things up 2019, with a great year for parsley and I expect our team to build upon that success in 2020 with that we'll be happy to take your questions.
Thank you we will now be conducting a question and answer session.
Did you time constraints, we ask that all callers limit yourself to one question and one follow up.
If you have additional questions you may be Q in those questions will be addressed time permitting.
If you would like to ask a question. Please press star one on your telephone keypad.
He told me until indicate your line is my question Q.
The press star to he would like to remove your question from the Q.
It's been using speaker equipment, it may be necessary to pick up your hands up before persons dorky.
One moment, please while we pull for questions.
Thank you. Our first question comes from the line of John Freeman with Raymond James. Please proceed with your question.
Good morning, guys.
John.
When I when I look at slide eight real sort of detail the initial.
Capital efficiency sort of goal of that 8% to 10%, which I'll end up doing twice as good as you broke out kind of when you had the initial target how much you originally expected to come from.
Each of the buckets capex savings activity mix optimized completions and then how you ended up doing where the lion share of the upside was was due the capex savings. If we took that same sort of comparison with your 2020 target of 2% to 5% is there a way to sort of break out kind of what's embedded in that 2% to 5%.
We just sort of eyeball sort of the boxes and say okay. It looks like the Capex bucket is something close to two thirds of that that 2% to 5% I'm target just any color you could provide on that.
Yeah. Thanks for your question, John Davis is going to jump to that and just a minute, but I did want to address one more item before getting to the question I know this is an earnings call but.
We had a big debate last night National debate and I think it's crucial to tell our story because it's a good one.
So parsley was founded in the Mitch the financial crisis in 2008 by two people with zero production to our name through innovation grid and great people, we now produce enough energy to power the entire population of Las Vegas, which is where the debate was hill.
We just plays foreign source energy in that timeframe instead of handing our energy security back to foreign governments, we should demand higher standards on DSG from our domestic producers.
And we should support American jobs.
Just wanted to say that and then we'll get back to our questions I'm. David do you want to address the capital efficiency split sure. John you mentioned the three buckets that we characterize 2019 with I would say that best way to think about that is where we're holding the line on the productivity gains that we saw when an 18, obviously will always be pushing.
For improving productivity, but I would look at that primarily is driven by improvements in well cost. So the softening of the mark growth will get the services in our continued bidding process and harnessing the opportunities. This market presents its going to make up the lion share that 2% to 5% as we see today.
Okay, so potentially a lot of the upside can come from kinda optimizing Diaz jag assets with some of that the changes you mentioned on the the pad design on slide 11.
I guess, if I was just had one one follow up you mentioned how in the slides how you want to avoid the friction costs and should we assume that that kind of means regardless of if the oil prices within a reasonable sort of band do you try as best as possible sort of maintain kinda that I assume.
That is sort of rig count of the 14 or 15 rigs afford to five crews as well as sort of the asset mix between Midland and Delaware is that what you kind of mean by avoiding kind of friction costs.
Yes, I think that's the idea the stable program is is something that we aim for I think ultimately pricing.
And how it in Prince our program, it's all going to come down to the generation of free cash flow in the dividend versus foremost activity comes after that but we do want to build towards a steady activity profile, we actually take a lot of organizational pride in 2018 of the fact that we didnt have to yank the break.
Due to budget exhausts, you were able to keep our full activity pace going through the end of the year not not everybody was able to do that I think that gives us additional credibility with our our service providers. So that's a.
2018 is a case example of why we value that continuity of pace now obviously, if we're able to continue to build on efficiency gains. There are ways you can maintain that pace of developing footage with less equipment. So we were able to step down a rig count for that reason, but yes, we don't want to be yanking break and slamming the throttle it at your true.
Additions due to how we build the budget. So we will continue to to focus on on on that.
Our next question comes from the line of Scott Hanold with RBC capital markets. Please proceed with your question. Yeah thing. Some appreciate you guys really being forward looking with what's most DSD efforts, Matt can can you talk through some of the specific I know you gave.
Up where you want to be at year end, but can you give us some specifics on especially with the jagged peak assets, how you get that flaring down I mean, it or are there specific projects in the works and you can give us a said.
Some of the timelines on that and it also part of this question will we get like quarterly updates on where you're at.
Yes, Scott.
This is something we obviously looked at.
Very intently when we went through the data room.
And we evaluated these assets.
Objective peak known these assets for a long time their operating right next to our assets. So they had the same opportunity said operationally, it's just a minute or how you go about the business. So we price that in do our forward looking budget to do to do at our way and the and greatly reduced the amount of.
Flaring Stefanie will go into to some of the details.
Thanks, Matt Hi, Scott This is Doug.
And as Matt mentioned this is Dan front and center for our integration team and prior to closing.
Jack if you got that we were able to you identified several tactical and actionable pass to reducing their flared volumes.
The ultimate driver is insufficient infrastructure on the gas gathering side and we're working with our GMP partners and our action plan is in full flight across our multi disciplinary integration team.
As Matt mentioned, there were several times throughout 2019, where GDP flaring in excess of 25% of their total gas production.
In our view this is unacceptable and we look forward to executing on best friend and reducing these volumes.
Okay below that 5% Mark on the ticket the legacy jagged peak assets before year end and as operators. We feel we have the responsibility to reduce methane emissions across our operational footprint. So were excited and anxious to elevate these assets partially standards are there.
Got it will be project throughout the year.
Okay and in those Pacific gas gathering projects that that that get you to where you need to go too or is that still networks.
And that is that the work in progress and we do plans provided as you mentioned earlier kind of a quarter over quarter update on our progress.
But yet they that that action plan. It then in full flight and it's a mixture of parsley an effort and our GMP partners on that on that side and another thing worth noting is that the any capital spend necessary, albeit small is already fully included in baked in.
2020 capital budget.
There's pipe actively going in the ground right now.
Our next question comes were line of Charles Meade with Johnson Rice. Please proceed with your question.
Good morning, Matt do you and your team there.
Morning, Charles.
I wanted to ask a question on flannery, but little bit in a different direction. You know the deliberate commission came out with that that flaring report a few days back and it seems to me that that was up.
Behind the curve from the way a lot of companies I think you included our our are focusing on clearance. So I'm I'm curious what your thoughts or do you think that this is a case where.
The industry is leading the regulators and and you know the railroad commission is going to going to catch up to the way you guys are talking your or the way some other companies talking or Alternatively, it's just going to be the kind of thing where.
You know some companies decide that they're going to really push hard on on on the CSG and it would be corporate city. Good corporate citizens and then other companies just decide you know what we're going to check the heat in the public market. We're just we're knocking the spend spend the money to to make those reductions <unk>. How do you have you seen is playing out how many interesting scale.
Yes, I do think you'd see a slight divergence in philosophy via some operators, but I do think theres that large group.
Of operators the large names in the Permian that are.
Primarily taking a leadership position and in any of our operations were not going to rely on an external body or governing body to give us a the.
The advice on on how to best run the company, we're going to try to be out in front and drive safety standards and U.S.G. standards.
Two of Pinnacle. So we it's incumbent on US we have to take a leadership position as as companies and we have to communicate and educate and country on on the steps that we're taking and how it's beneficial source of energy comparatively especially to a lot of the international sources.
Of energy.
Got it got it thanks for that that insight and then this question is perhaps for a for David David I appreciate that the what you'd laid out here art I believe the slide I don't know that the slide number where.
Where are you talking about how you're going to develop those jag assets in the Delaware basin differently, but can you give us an idea. It's slide 11 can you give us an idea.
When we're going to see a pad with those design changes you're talking about it will be the kind of up a six to eight well pad like you identified earlier in your.
In your in your presentations, but kind of the the size of the ideal size you're looking at in a in 20.
Yes, Hey, Charles Thanks for the question. The short answer is right now we do have several pads that are in motion that kind of came in and we're already in motion or just about to be emotion I'm close there are there are projects.
Late first quarter early second quarter, where on the drilling side, you're starting to imprint. The partially velocity. Obviously those have to go to the full cycle of drilling and completions and then.
Put online we will have some of our Pops. This year that are full sort of partially mentality as characterize on that slide 11, but there are going to be some some legacy.
I get the design pads some of the pads that we're going to be putting aboard are going to be larger projects. So we'll see we'll continue to be.
Doing larger projects in the legacy assets on on the Delaware side and on the middle inside that yes, we'll we'll also see some bigger projects.
On on the Jack side or on the legacy Jag assets, maybe not as big on average, but that six to eight well is something that you'll you'll start to see is more of standard over there too.
Our next question comes from the line of Neal Dingmann with Suntrust Robinson Humphrey. Please proceed with your question.
A more to help my first question is for Matt David guys looking at slide 11 on to the return of oral our approach could you give some details you talked a bit about this I know in the prepared remarks, but just wondering now based looking at that slide you talk maybe more detail on your comfort level in the area for the vertical and horizontal space in is there.
Or potential go down I know just looking at sort of the pads that you have there I'm wondering.
What your comfort level is currently.
[noise] artist or operations have been based off this 990 foot spacing underpins, our our forecast and our budget that went into 2019, which we executed well on and then so we have large data set and also underpinned our our analysis of the.
Acquisition so.
Really large large body of data set this spacing the shift in the spacing test for jagged peak were really a.
2019 event and these were there there are three projects on the ships. So it's really back to historical playbook across the board so feel pretty good about it and have a lot of data behind it.
Makes sense and then just one last follow up Matt obviously, great financial position them investment grade in the whole bit could you talk is that changed your your thoughts on potentially doing something with the water or mineral businesses here, maybe just a detailed you could give around that that for the remainder of the year.
Yeah, I think that definitely goes into the analysis when we kicked off the process in early 2019.
We are in a different.
Boat and we exceeded our our forecast across all marks you take that into into play for sure.
But you also you also look at the structure in the valuation of those there's those entities that are still tremendous value there.
So our focus is 100% on integration, but we do hedge to a very valuable embedded businesses and overtime, we'll evaluate if theres anything opportunistic to look at if it if it's not burdensome on on a controls basis. So I don't think values is.
Her been the questions, just keeping something clean and and making it clean for the future. So.
Right now our focus is on integration.
Our next question comes from the line of Heat Sen with Bank of America Merrill Lynch. Please proceed with your question.
Good morning, Matt now that you have.
You're running to complain assets just wondering if you could help define a decline rate for PDP production for the pro forma entity in any early thoughts on sustaining capex.
Yes personally proper came into 2019 about 40, 41% and exited the year around.
30, 738% or bringing on these assets the combined assets enter 2020 at about 40% and we'd anticipate a similar draw down a couple of percentage and that base decline throughout 2020, So really reboot of the 2019 playbook.
And then sorry, it was there a second parts that question any thoughts on sustaining capex.
It's going to be we look at 1.3 to 1.4 billion.
Okay. My follow up its for David David Rising Hello, He has been a.
A trend at least among some other companies that have been reporting, particularly in the Permian can you discuss some of the dynamic that's behind us and comment a little bit on how you expect your a cadence of employee to play out over the course of the year.
Sure to us in a yeah for us.
We've been a long time leader in yellow he space and it's something that we think we're heavily good at.
In terms of manager operating costs at the end of the day, though as the Permian asset bases age and as you know. These these based production wages are underpinned by larger bodies of folks about producing wells there is going to be some upward pressure no wells need working over and that type of thing. So were we did guide to a higher LLC for 2020 part of it is just.
That's sort of natural forces of aging aging wells. Additionally, some of that jagged peak wells would bring in started a higher level, though but theres a number of things that we have a eyes on.
Some that were already put in place by the Jagged peak team for example, there's a there's a substation coming in at Whiskey River, which is going to allow us to fewer workovers more stability in our Sps.
We will continue to manage artificial lift program that that that plays into it you know selection of different artificial lift technologies chemical program, but we're taking the same kind of structured a bidding approach to our l., we goods and services. We have in the capital program. So we're going to just continue to push on of the overtime there is going to.
Upward pressure for us.
As other operators do a best to manage it.
Our next question comes from the line Leo Mariani with Keybanc. Please proceed with your question.
Hey, guys wanted to touch on the $25 million Genie reductions that you guys expect.
That's something you think kind of will be accomplished pretty fully as we roll into the second half just trying to get a sense of when a lot of deep integration costs and I'm sure. There's some onetime charges I kind of start to go waned unite here.
Yes, definitely second half weighted given that we've got employees and transition.
And we're closing the we clean clothes that Denver office in Q2.
As we note on floods, well, we're only keeping about 20% of the Jag employees.
Many of the others have already completed their transition and 40 left the company and then you know sub leasing efforts already underway on a on the Denver office.
Okay. That's helpful for sure.
And I guess you guys certainly sounding like there were a lot of pops coming on in first quarter. A you know would that 50 wells. So certainly oh, it looks like in a pretty robust activity quarter there.
I guess just kind of looking at the guidance. Your first quarter, obviously is pretty strong oil growth not you know versus Fourq. You then it kind of looks like it slows down a bit in subsequent quarters I'm just trying to get senses is a lot of that just driven by a you know sort of lower pop count in those subsequent quarters in so.
Turning a sense, maybe there's kind of some conservativism based in just on the Jang production just getting given the fact that you guys having operated till recently.
Yes, it is kind of a mix of all that you mentioned the the.
You want to get the assets under under your belt before you tighten down any of the forecast, but also if you remember when we acquired the asset we wanted to to flip that independent asset to free cash flow. So on that on the legacy asset we did dropped rig in the in the back half of $2020.
Plant. So you have that going on you also have.
You know slightly larger pads being delivered throughout the year, which drives a pad cost down even though that is out of spaced pad spacing. So all that yields a Q1 is the highest growth quarter, and then kind of steady moderate growth throughout the remainder of the year.
And then we'll be tightening up.
Our analysis throughout the year as we have full quarters of operations on their assets under the belt.
Our next question comes from the line of Jeanine way with Barclays. Please proceed with your question.
Hi, good morning, everyone.
Hi, Janine.
Hi, My questions are on 20, Tony returns and inventory and you have prepared Mark you mentioned that tiny tiny activity levels, they need to kind of fall into a tight economic than for the wells. So can you discuss the parameters of this band and maybe what the hurdle rate is and as a follow up to that how many years of inventory do you have.
At that same 2020 economic band and I know in the side do you give great detail, where you say 12 to 18 years inventory in the well.
Over 20 in east, but just wondering if you talk a little bit more specifically about the quality pairing within your areas.
Sure I actually think our band is probably a little more resilient than most of the peers out there are given one the asset base and the durability of that have that return profile. You mentioned so were fairly uniform across the asset base I'd say.
Between 30% and 60% project level rate of returns there between Midland to use Midland West and Delaware Basin. So it's fairly uniform very robust you fit these types of returns into most companies return stack in there in the top.
Top hat.
So as as we look at potential sensitivities oil prices going down.
We are corporate breakeven you know into the low fortys.
But obviously you'd want to just to ensure that free cash flow delivery.
Before that so you would moderate.
Activity, a little bit in the low Fortys and then as oil prices run up.
Were to be the case weird <unk> allow that extra free cash flow to accrue to the balance sheet and shareholder friendly initiatives. So.
Pretty wide band there actually of of our secured returns here well above our costs it cost of capital.
And for the corporate breakeven in the low Fortys is that a hedge number.
We know it's.
That's looking at.
UN hedged in the out years, we do have a we do have a large portion of that hedged that's on hedged in the out years.
Our next question comes from a line of Kashy Harrison with Simmons Energy. Please proceed with your question.
Hi, good morning.
So first off map team congrats on solid year and getting to the point, where you can support the growing dividend, Matt do you think through some of shales.
General competitive disadvantage as one of the Pushbacks around the higher base declines that you talked about 40% sounds like on a 37% next year and then maybe the low thirtys the year after.
Just wondering are there any opportunities or technologies that you're looking at bad could reduce that based declined faster than what is currently being contemplated by the street.
Yeah, we're always always looking at things and I think was exciting is when you when you rewind 20, or 30 years ago and the push on the safety front and people thought it was solely a cost at that time when in reality. The safety leaders are actually the most profitable companies.
I think you're going to see Oh, and then there is a tie over to.
Theres tie over to technology with real time monitoring I think you're going to see a lot of that in the E.S.G. leadership front and when you put bright minds together and you look at potential Reinjection you look at a potential water recycling and on all these solutions you actually start.
Driving moderated are beneficial maybe unintended consequences. So you could have moderated declines through some of that some of those efforts. That's one example, but but yes.
We're always trying to look at recovering the resource as efficiently as possible and there's a few things in the hopper.
But we don't see anything as it sits today that is a step change, but I think you'll you'll continue to see improvements in.
As you mentioned that the decline does moderate a few percentage every year. So that's kind of a built in.
Tailwind or two to the lower your your maintenance capital over time.
Okay. That's helpful and very very interesting on the side effects potential positive side effects of the S.G.
And then just as my my follow up you know I know you were you raise your dividend a month or early so you're a little bit early for the party, but I'm just wondering how should we think about your dividend growth rate over the medium term.
We do we do look at what's competitive out there and we see we're competing against multiple industries not just the energy industry. So everyone's looking at that S&P 500.
2% yield and we do see moderate growth in the dividend annually for a long time to come as a as a corporate objective. So those are the two two things that are guiding the dividend growth annually.
Yeah.
Our next question comes from the line of Mikes Kiala with Stifel. Please proceed with your question [noise].
Hi, good morning [noise].
Brian alluded to it in his prepared remarks, but ahead I know you're well hedged this year, but wanted to see if you could give any details on how the plan changes if oil averages somewhere in the low fortys, rather than the 50 or above.
As far as our our hedge strategy I don't think it really really changes we.
We haven't really started on 2021, yet we will take small by that we have historically.
And you know try to be opportunistic we get you know small runups try to add and or at least have a baseline above $50.
But you know a long lines that we haven't 2020, so we can feel comfortable budgeting $50.
In running the business at 40.
Similar to the dividend strategy of growing over time, we need to grow free cash flow overtime. So that would that would sacrifice activity levels are below 40, degenerate growing free cash flow and consistent free cash flow overtime, and I think you need to listen to market conditions to drive the need for.
For additional growth there.
Okay.
And Matt is interested in your comments about the accomplishments of the company from its inception us start up with no production to be coming to us.
A significant source energy for the country and obviously your focus on you see initiatives along the way.
Sounds like you have a lot to say.
People that believe the industry should go away I, just wondered if theres anything more you would add there and any change to your plans. If a deal we got a new administration that that shared that belief.
Well I think I think first and foremost we just need to educate based off of hard numbers and be a part of the solution I think we're extremely supportive of renewables and penetration.
Of that.
We want to compete or as a business. So I think for a long time, our business assumed we're in a commodity business, but commodities don't have any competition and we do have competition now so we need to put our best foot forward.
On an operating as efficiently as possible on the products that would with minimal impact.
On our footprint as possible. So there's there's a good story to tell for the American independent and if anybody should be.
Providing this energy need it should be the American independent due to our social standards.
Our labor laws the high high level that we operate at across the country and Sporting American jobs.
All along the meantime, we need to be cognizant about our footprint and we need to look to look to alternatives and see how we can actually.
[music].
Bring our top talent some of the best engineers and scientists geoscientist on the planet as an industry, let's bring those ideas to the forefront, let's let's invest and partner in future solution. So so yeah, we have lots and say we're biased on on on how we can fit into the solution and.
And I think it's it's probably pretty dangerous sport for the American consumer.
Good to talk about these lytswitch approaches where you just flip everything off there's there's some serious unintended consequences that will probably hurt the people that they think they're they're helping the most.
Thank you, ladies and gentlemen, due to time constraints and fairness to all questionnaires. We now ask that you limit yourself to one question.
Our next question comes from the line of Gabe Daoud with Cowen. Please proceed with your question.
Hey, good morning, everyone that was just wondering I guess about your.
Views on the mineral position given slide 21, and all the all the good detail. There I'm. Just curious you know you you have the chart that shows.
The public mineral comps. So just curious if there's any thoughts on potentially real realizing some of that value in 2020.
No that's something we looked at in early 2019, as we assess which which business to market. We did a light marketing process of a water business and again explained explained that earlier that through this integration process, we wouldn't want to integrate jags asset.
As it sits you know these extremely valuable businesses are sitting making a very clean.
Hi margin company.
On a go forward basis for PD proper. So ideally that's the way that's the way it stays its a lever that's always they're able to analyze with no plans in 2020, focusing on delivering this free cash flow organically and a long term sustainable business models with the without any shots in the.
But but over time, it's always a lever to assess.
Our next question comes for line of Joe Allman with Baird. Please proceed with your question.
Thank you and thanks for all the comments, including attribute to Clayton Williams, so very appropriate.
Yes. My one question is are you planning to try or have you tried to slow back technique.
Similar to how Felix has done in the Delaware basin and would it be applicable in the Midland Basin well.
Hey, Joe we tried to a variety of.
Flowback techniques Weve also we've got establish lines communication with several of our neighboring operators. So.
We we do think we have a pretty good sense of of the type of low back strategy and approach to take in different areas I wouldn't I wouldn't expect to see us getting more conservative.
With with our flow back approach so.
Again, it's like just like the way, we allocate capital and configure pad. It's a rifle approach should we take into account.
Downhole pressures and that type of the or that type of the variable, but I wouldn't expect us to start getting more conservative with our flow backs.
Our next question comes from the line of Bryan singer with Goldman Sachs. Please proceed with your question.
Thank you good morning, <unk>, you talked about the water business a bit and one other things I think I highlighted in the presentation has the.
Rising contribution, though at a very low base from that third parties can you talk about what the opportunity set is to add third party volumes where capacity in capacity utilization is and what impact that could have on a on profitability cash flow.
Hey, Brian Sir This is Stephanie as you stated we're starting from a relatively small base years, though it's 50% increase and from the first half in 2019 of the second half 2019.
Not large volumes.
There's definitely potential here I'm, having stood at fire wire. So good management team along we increased the likelihood of that improved system utilization coming to separation on does that.
Cash water in produced water side. So there's definitely potential that's sad partially will remain a priority on this system and and ensuring that we have ample takeaway properties letter.
Thank you. Our final question comes the line of Gail Nicholson with Stephens. Please proceed with your question.
Good morning makes it pretty Nan kind of curious on how you guys are thinking about the appropriate not what's your thought because pricing versus Midland pricing and how that works where are you confident your portfolio, how that potentially could change over time.
Sure, Yes, hi, this is happening and in 2019, our exposure with more weighted keys in Midland pricing. So we had about 70% of our volumes exposed to Midland 30% to any age.
Then in 2020, we'll actually see that tend to want tween, we we want some exposure to Midland, we think exposure and that one can be really get in 2020 and that said, we'll have more exposure to what we call waterborne indexes. So it's a mixture of any age and brand, but that the full year 2020, we've seen more b.
Kind of a 50 50 split maybe a slightly more weighted towards the waterborne indexes.
Thank you ladies and gentlemen, we have reached the end of the question answer session and with that the conclusion of today's conference. You may disconnect. Your lines. This time. Thank you for your participation and have a wonderful day.