Q1 2020 Earnings Call
[music].
Good day, everyone and welcome to the energy resources first quarter 2020 earnings results Conference call.
All participants will be in listen only about.
You need assistance, placing only talking especially the spread pressing star then zero.
Pat.
Please note this event is being recorded.
At this side for opening remarks, and introductions I would now like turn the conference over to the Chief Financial Officer Resources Mr., Tim Driggers. Please go ahead Sir.
Thanks, and good morning, Thanks for joining us we hope everyone is seem to press release announcing first quarter 2020 earnings and operational results.
This conference call includes forward looking statements the risk associated with forward looking statements have been outlined in the earnings release, and a year Jesus SEC filings and we incorporate those by reference for this call.
This conference call also contain certain non-GAAP financial measures.
Definitions as well as reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found on our website at www Dot energy resources Dot com.
Some of the reserve estimates on this conference call in any accompanying investor presentation slides may include estimated potential reserves and estimated resource potential not necessarily calculated in accordance with the Fccs reserve reporting guidelines.
Incorporate my reference the cautionary note U.S. investors that appears at the bottom of our earnings release issued yesterday.
Participating on the call. This morning, our Bill Thomas Chairman and CEO.
The only Helms Chief operating officer.
Ken Medicare exploration and production as react exploration and production.
Lance Terveen senior VP marketing and David strike, VP, Investor and public relations.
Here's Bill Thomas.
Thanks, Tim and good morning, everyone.
First we want to getting knowledge those responding to the coded 19 pandemic in particular, the healthcare workers first responders and other dedicated professionals addressing this crisis on the front lines. Some of you or part of the LNG family and we thank you for your dedicated and courageous service.
He is a resilient company and we believe the severity of this crosses will demonstrate just how resilient we are.
The cobot 19 pandemic come compounded what started as an oil price war.
Which drove oil prices to levels, we have not seen in more than 20 years.
While this shock.
To the market is unprecedented and it's difficult to predict exactly how long.
It will take demand to recover and inventories to decline like every other downturn LG will emerge a stronger global competitor uniquely positioned to capture the upside of the all market recovery.
There are two reasons, we're confident in our resiliency.
First is the LNG culture, and second is our premium drilling strategy.
Times like these are when the yield GE culture shines and becomes even more valuable because downturn supercharge our ability to improve our culture has responded quickly by aggressively reducing capital spending to level that will allow LG to generate free cash flow. This year, assuming current commodity strip prices.
We continue to be in innovative and entrepreneurial by identifying creative ways to rapidly reduce operating expenses and develop new technical improvements that we can sustain into the oil price recovery.
EOG is decentralized driven by interdisciplinary teams that are empowered to make real time data decisions based on basin specific market conditions.
Most importantly, we are right of return driven and we will not invested dollar unless it earns a good return.
Even in this price environment.
The yield GE culture is rising to the challenge and making a difference at every level and in every area of the company.
Our super talented EOG employees armed with our advanced information technology analytics are at the heart of this culture and I am incredibly grateful for the way. They have responded to this unique downturn I cant thank our employees enough.
The second reason, we're confident that yields you will whether this severe downturn is our Permian drilling strategy.
We believe it's the most strict investment hurdle right in the industry.
Premium requires at all investments aren't at 30% direct after tax rate of return using an oil price of $40 flat.
We initiate initiated our premium strategy in 2016 during the last downturn.
Since then we have continued to improve the quality of our drilling inventory was substantial and sustainable oil cost reductions.
The improvement in our returns and cost structure has made UGI more resilient to low oil prices and positioned us to respond quickly to this unprecedented downturn and manage our business efficiently should the downturn beep prolonged.
As a result, we have a significant amount of premium inventory more than 4500 identified locations in fact.
That aren't at least that 30% direct after tax rate of return with $30 oil.
Which is even lower than the 40 used to meet the premium hurdle.
Armed with this high return inventory UGI is well positioned to continued to be a leader in returns.
We ended this downturn in a position of operational and financial strength and the reason for this is our consistent approach to the fundamentals of our business return focus capital allocation supported by strong balance sheet.
Rest assured that Yohji priorities will remain the same throughout the duration of this crisis.
First only invest capital if it generates premium rates of return.
Our disciplined approach to reinvestment does not change.
We invest to make a return even with low oil prices.
We will not drill a well if it doesnt earn at least a 30% direct after tax rate of return.
Second utilize our operational flexibility to cut expenditures quickly.
We exercise that we exercise the operational flexibility allowed by our contracts with service providers to revise our development plan to be consistent with our outlook for oil prices over the next three quarters.
Third accelerate technical innovation across the company.
Lower activity does not hamper our innovation in fact through to the easy culture. Each of our divisions have already started to implement multiple initiatives to further reduce our cost structure improved well productivity and advance our exploration program.
Fourth.
Exit 2020 with momentum by increasing production and to the price recovery.
While we remain flexible and responsive to the pace of the price recovery, we have a large inventory of newly completed wells waiting to be put online.
We plan to bring those to sales this price prices begin to recover during the second half of 2020 and exit the year with momentum heading into 2021.
Fifth protect to financial strength of the company.
Our goal each year is to spend within cash flow and maintain an impeccable balance sheet to support operations and protect our dividend through challenging times.
Six continue to strategically invest in the long term value of our business.
They are each of the prior downturns EOG has emerged a stronger business because we continue to invest in the long term value of the company.
Whether it was leasing exploration acreage in the Eagle Ford to jumpstart, our transition to oil or the Yates acquisition in 2016 challenging times for the industry off often offer the best opportunities to invest.
And finally, and most importantly maintain our unique culture.
Our culture is the key to our success and we put a priority on protecting our unique ability to sustainably reduce cost improvement, our inventory and strategically adjust to market conditions.
Our ultimate goal has not changed to be one of the best companies in the S&P 500.
We believe the company will make tremendous progress towards this goal and Tony Tony.
Making UGI more cost efficient by fostering innovation sharpening, our technical edge and progressing new exploration potential we will emerge a stronger global competitor uniquely positioned to capture the upside when oil markets recover and continue creating long term value for our shareholders.
Next step is Tim to review, our current financial position.
Thanks, Phil.
A conservative approach to our capital structure has been a cornerstone of EOG is financial strategy throughout our history.
This is born out of a recognition that oil and gas business has has always been capital intensive inseparable.
These cycles ours inevitable once they are unpredictable and so our business must be built not just to withstand them, but to have the financial strength at the right times to be able to take advantage of them.
EOG entered the downturn in very good shape.
Cash at the ended the first quarter was $2.9 billion, which included roughly $760 million of collateral from hedge contracts.
This compares to totaled at a 5.2 billion for a net debt to total capital ratio of less than 10%.
This is down from 13% at the end of last year and our recent peak up 34% in 2016.
We reduced debt net debt by $4 billion in the last four years.
Our liquidity position is further supported by 2 billion dollar unsecured revolving line of credit, which has no borrowings against it.
Our long term debt ratings, which recently reaffirmed by S&P and Moody's stand for notches into investment grade.
Furthermore, on April 14th Emoji issued 10, and 30 year bonds totaling $1.5 billion.
Enhancing our already strong liquidity position.
Last month, we also repaid a maturing $500 million bond and we plan to repay with cash on hand, the $500 million bond maturing on June 1st.
Given the outlook for oil prices for the remainder of the year UGI has also added additional hedges for 2020.
We now have hedge more than 95% of our second quarter oil production at an average price of $48 and more than 50% of our third quarter production at $47.
This mirrors, how we view the periods of greatest price risk and adds another dimension to our approach to maintaining a resilient business by securing that portion of our cash flow.
We will begin to look at adding additional 2021 hedges later in the year, if prices look attractive relative to our assessment of the market fundamentals.
Maintaining and growing the dividend remains a top priority as it has the most tangible output of EOG is high return premium business model.
We have never cut the dividend.
Never issued equity is support the dividend and have not relied on asset sales that fire sale prices to make it through a downturn.
The board yesterday declared a quarterly dividend of 37, and a half cent per share. Our dollar 50 per share annualized rate, which maintains the rate from the 30% increase declared last quarter.
The dividend is designed to be sustainable through low price cycles without straining the balance sheet or sacrificing other priorities.
We test these priorities against numerous down cycle scenarios. So we can be confident these goals are achievable even under extremely stressed conditions.
This resilience reflects EOG is strong returns while cost structure and financial flexibility.
EEG financial Straits also gives our operations teams to be able to take necessary actions with a focus on long term benefits to the company instead of making forced short term decisions.
Next up is believed to review our operational performance.
Thanks, Tim.
I want to highlight the major steps taken to adjust our operating plan by providing some detail first on our capital and operating cost reduction efforts and second the steps taken to reduce production during the low points in the oil price curve.
Our Swift response to the current environment is evident in our first quarter performance.
We reduced capital by $265 million or 14%.
While essentially hitting the midpoint of the guidance for oil volumes.
For the entire year, we reduced our capital plan to $3.5 billion more than 45, 5% lower than the original plan.
Demonstrating the flexibility in our operation our plan, we reduced our drilling rig fleet, 78%.
From a peak of 36 rigs down to eight in the span of just six weeks.
On the completion side, we reduced activity, 69% from 16 Frac fleets to just five.
Our flexible contracting strategy combined with our established reputation as a consistent operator that value strategic vendor relationships have allowed us to make these adjustments without incurring significant cost.
The goal is to generate high rates of return for the capital we choose to invest.
Along with free cash flow, while maintaining our leverage to the upcycle as demand recovers.
Our ability to reposition the company to achieved that goal in a few short weeks is a testament to EOG is strong culture and decentralized organization and most of all our fast acting innovative employees I'm incredibly proud of them.
We also reduced exploration in infrastructure capital without sacrificing projects with the highest long term benefit to the company.
Exploration capital has been focused on the prospects with the most promise to add future shareholder value.
On the infrastructure side, the concentration of our activity in the Delaware Basin in Eagle Ford, where we have existing well developed assets in place.
Naturally reduces infrastructure needs.
And we are also maintaining our commitment to reducing our environmental footprint.
Retaining investment in high impact projects.
On the operating cost side.
We reduced lease operating expense by more than $300 million or approximately 20% compared to the original plan.
Our operations teams are highly engaged in cost reduction and.
And we are realizing savings from many areas, including fewer expense workovers reduced maintenance and repairs water disposal and compression expanse and contract labor.
While reducing activity has driven significant initial cost reductions.
We are maintaining a level of activity that allows us to accelerate technical innovation.
The biggest opportunity from the downturn will be to identify step change efficiencies and operational improvements that lead to sustainable cost reductions.
For example, our drilling and completion teams continue to established new performance records in each area as illustrated on slide 39, and 43 of our Investor presentation.
Across all our operations, we believe will we will be able to lower well cost another 8% this year.
Most of which will be sustainable as a result of the improved efficiencies.
This is a testament to the continued drive in innovation to raise the performance bar and the spirit of continuous improvement that allows us to contestant consistently reduced well costs in each of our place.
The cadence of our new capital plan is heavily front end loaded.
Most of the for $1.7 billion.
First quarter capital was spent before the downturn began.
As a result of rapidly reducing activity, we expect to spend about $650 million in the second quarter and declined sequentially in the third and fourth.
The total just $3.5 billion for the year nearly half of our original plan.
Our 2020 production prop profile reflects a rate of return decision.
Even though 90% of our shutting in production is cash flow positive at $10 per barrel.
And we have access to multiple markets.
Rather than produced at potentially the lowest price point of the year, we elected to shut in existing and deferred additional production by delaying the startup of new wells.
We plan to continue to defer production through the first half of the year.
This deferred inventory of new wells has been completed and is simply waiting to produce.
This allows us to exert more control over the cash margins of every barrel, we produce and provides us the ability to quickly increase all volumes into an improving oil price environment.
We began deferring production during the first quarter.
And even after delaying initial production from new wells and shedding in 8000 barrels a day in March from existing wells.
We achieved the midpoint of our guidance.
First quarter and second quarter represent a peak and the trough respectively of R. U shape production profile in 2020.
Between deferred startups in new wells drilled and completed we anticipate turning online approximately 300 additional wells in the second half of the year for a total of 485 by the end of 2020.
Volumes are currently forecasted to increase in the second half of 2020.
With fourth quarter production, averaging about 420000 barrels of oil per day.
As to obviously momentum going into next year.
The capital required to maintain this level of production going forward would be approximately $3.4 billion per year.
Our production profile corresponds to the current outlook for oil prices. However, we will remain flexible to make further adjustments if the operating plan as conditions into the operating plan as conditions change.
If prices stay lower for longer we can make additional reductions to our capital and operating cost and further deferred bringing new wells online to be clear.
We would rather shut in production than sell into an uncertain low price market.
Ultimately the decision to begin increasing production will be based on a more sustainable and constructive outlook for oil prices in the second half of the year.
For the oil that we do choose to sale, we have secured favorable prices through various contracts, providing exposure to Brent Gulf coast, WT and fixed prices.
The marketing strategy provides flexibility to pivot each of our producing areas to multiple markets to capture the highest margin.
In conclusion I.
I am proud of how decisively and thoughtfully our employees responded to this downturn.
We exercised our flexibility to quickly cut capital and operating cost.
And the decision to reduce volumes at the lowest point of the price curve supports our intent to a comp is two primary objectives.
One enhanced the margins from air from each barrel. It is produced and to maximize our rate of return for any investment.
While LNG is not immune from the effects of low oil prices.
We have the tools and the information to make real time adjustments to maximize our profitability.
We will remain disciplined invest wisely.
And constantly evaluate market conditions to generate the most shareholder value.
Now here's be able to wrap up.
Thanks billing.
Fields.
Yes.
While we are completely immune to that level demand destruction.
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Pardon me. This is the operator it appears the main speaker line is not producing audit please stand by for one.
Thanks.
Thanks.
Thank you please.
Yes. This is bill.
Thank you Bill we missed the last part of your presentation Sir.
Alright and conclusion.
Oh, Gee as a resistant company and while we aren't completely immune to the level of demand destruction caused by the endemic we are prepared for it our financial structure is very conservative and our capital allocation process is hyper disciplined.
This is an unprecedented downturn.
US all production is in severe decline and it could take years for domestic production to turnaround we believe that the historic and prolific all production growth by US sale may have been forever altered.
And while the timing and level remains uncertain, we are confident demand will improve.
Therefore current prices are not sustainable.
In the inevitable price recovery ahead, there is tremendous opportunity for UGI.
With a strong balance sheet enhance our culture that drives continuous improvement and our commitment to generate strong returns with free cash flow he'll GE will be ready to provide much needed supply when prices so sustainable improvement.
We don't believe there is a better company.
Positioned to capture the upside as they all market recovers yields you will not only survive this downturn that emerge as a stronger competitor in the global market.
Thank you for joining us this morning, our thoughts are with you as we navigate this pandemic together, we sincerely hope your family friends and colleagues are healthy and site.
Operator that concludes our remarks. So please open up the lines for questions.
Thank you good question and answer session will be conducted.
Thank you like to ask the question. Please do so that doesn't just starkey followed by the digit alone there.
Hello.
If we are using the speakers. Please make sure your mute function sendoff cylinders single the chart.
Questions are limited to one question and one follow up questions.
We will take as many questions and from mix.
Once again, please press star one other question John to ask a question.
If you find your question has been answered you maybe lugar. So my question start a bit too.
Well pause for just to give everyone an opportunity the signals for questions.
In today's first question ill show the over there with Keybanc. Please go ahead.
Hey, guys just wanted to.
Ask in terms of the budget. This year, obviously, you've cut it a couple times here clearly putting in response to it to oil prices.
I do you agree that oil prices are unsustainable at these levels on a global basis. If we were to see just a rapid increase saying oil prices as we got later in the third quarter in fourth quarter would you guys consider adding more capital back late this year to get you guys little bit more ready for growth mode in 21.
Yes, this is bill and.
Now I think we're going to be very cautious before we add capital this year.
And it's unlikely that we would add anymore additional capital until.
We want to get into 2021 and see.
How demand continues to recover.
And so.
We would and I don't think we're going to be adding any capital than their remaining of the year.
Okay. That's helpful.
And you feel you certainly talked about emerging stronger from this pandemic.
He kind of referenced a potential M&A and is an option.
What do you think sort of other than kind of continuing to add to lower the cost structure of what you guys are doing.
Now what are the other keys to kind of emerging stronger and you think maybe there could be some some likely M&A late this year, if there are opportunities.
Yes, I want to be I think we've been pretty clear over the years about M&A we're not.
Really.
Interested at all and any certainly.
Low return.
M&A or our acquisitions.
It's really difficult it has been historically as everybody knows M&A market is very difficult to make a good acquisition and generated strong returns the same time and everything we do as you know Yohji. We're we're totally focused on returns.
And so every dollar we spend every deal we do has to be.
Competitive on return basis, and it's very difficult to compete with organic exploration effort, where we're adding a lot of very low cost acreage that we believe.
Contains drilling inventory that we'll be.
Better accretive to the quality that we have now so.
It's very unlikely, we'll do certainly a large M&A, we do do.
Small bolt on acquisitions to supplement our exploration efforts is to get low cost acreage.
But the large M&A is are really not in our view.
Competitive.
Other than.
You know the cost reductions that were making obviously, we spelled out a lot of those here Billy has.
We we continued to be very innovative.
All over the company, we continue to see.
Excellent technical work.
And the and a focus on innovation and new ideas.
And those are just coming out you know in multiple areas of the company completion technology a lot of great deal technical work going on in the company and we Havent taken our eye off of our exploration effort.
And I'm going to ask the Ezra.
Good to maybe comment on that a little bit.
Thanks Bill.
As everyone knows we entered the year with a pretty exciting exploration program.
We're focused on kapstream positions in in basins, where we capture the tier one position and we're working plays that we think will be improving the inventory quality with with low decline and certainly low cost plays.
And were we entered this year with the with the plan of testing and leasing and in 10 different prospects.
And we've obviously reduced our.
Exploration budget this year commensurate with reductions across other categories.
Lower still planning to progress each of those prospects a little bit this year will remain flexible as we do but really the purpose as bill said is that these all have the potential to add significant long term value creation for the business and for our shareholders and as Bill pointed out we've all seen here over the past say six or.
Eight weeks since our employees have been working from home is really just an amazing effort from all of them on the development side and the exploration side to come up with and generate new ideas.
And we just couldn't be more impressed recommend the employees for their efforts on that.
That's great color. Thanks.
Our next question today comes from Bryan singer with Goldman Sachs. Please go.
Thank you good morning, good morning, Ryan.
We appreciate the specificity on guidance for production for the remainder of the year and the quantification of expected shut and when we look at the production excluding the set and second quarter oil production is implied down about 19% from the first quarter can can you just talk to the drivers of that and whether to use that 19%.
It could have an annualized natural decline whether there are other factors that are influencing that.
Ron I'm going to ask the ability to comment on that.
Yes, good morning, Brian.
Les I would look at that we're still I would still like to emphasize that our annual decline rate that we've provided in previous guidance of 32% is still accurate and true.
The shape of that on a quarter to quarter basis.
Depends a lot on the the nature and the timing of when you bring on wells prior to that so it can be a little bit it can fluctuate quite a bit it can be a little bit lumpy as you might think of it.
It's strictly depending on the timing of bringing on wells in the quarter or two prior to that so.
So naturally it's a little steeper at the first part of the life of a well and then flattens out later in the life. So.
Thats kind of what you're seeing in the second quarter I wouldn't take the.
The decline you're calculating there, 19% as an indication of a change in our quarterly or annual.
Decline that we've given you in the past.
Great. Thank you and then my follow up is that both that and even in a broader question with regard to maintenance capital NGL supply cut how much of that 3.4 billion of maintenance capital.
Do you think include cost reduction you believe our secular versus cyclical.
Talked about I think 8% cost reductions coming from here to well cost and wonder whether that was factored into the 3.4 billion and then I get that the lower maintenance capital you and other companies are highlighting.
Reflecting another large step down in the supply cost for UGI entailed generally you're just a function of.
The market than the low oil price environment that we're in.
I want to ask Philly.
Talk about the first part of a question, yes, Brian So just to be clear our $3.4 billion maintenance capital. We talked about is to maintain the 420000 barrels a day, we plan to exit the fourth quarter AD and to be ill give you a little more color on how we calculate that that does not anticipate.
Right.
The cost savings that we've talked about here today, we are.
Our capital programs are based on the kind of a backward looking actual well costs that we've been able to attain to date and doesn't bake in costs anticipated cost savings on a go forward basis.
So in light of that I think there's we always think about that as potential upside to to achieve better results.
So our capital plan this year in our capital plan or the maintenance costs that we've quoted here the $3.4 billion doesn't bake into the.
Into the they percent cost savings that we're talking about in this call.
In addition to that I think.
It's important to know that the 3.4 billion. It just go back to that it's a it's maintain the 420000 barrels a day that we're exiting the year end.
On the second part of that question, Brian you know as we look at the whole industry.
This certainly our companies that are doing a good job.
Continuing to lower costs.
We believe there's a there's a really small set of those.
Because it really takes a scale is probably one of the biggest drivers.
To be able to continuing to the lower costs a lot of the cost reductions are certainly in infrastructure.
In a very continuous drilling program and the completion program et cetera et cetera.
I think really so I think.
Few companies is kind of commented in the opening remarks, we believe there will be less companies out of the after this downturn in the were before.
We think there will be more disciplined.
Certainly there'll be more there will be less capital.
Employed.
In the shale business.
But we believe you know as we said that EOG is going to emerge as a leader and most of our cost reduction in nearly all of our cost reduction is driven internally through.
The technical innovation and the company and the efficiencies.
We just is there is a lot of data and our IR charge that shows.
You know the amount of stages per day.
Certainly the feet per day on drilling et cetera, et cetera, as well as I want to know maybe there's a slide in the powder River basin on our recent completions in the Mallory and the Niobrara, where our completion technology is certainly make any huge difference in the well productivity. So.
Most of the improvements in LNG or driven from our internal culture.
And our innovation.
Just desire to always continue to get better we have a very sustainable.
Model and culture.
And we don't do not see any end in sight and getting better.
Great. Thank you.
Our next question today comes from Charles Mead Johnson Rice. Please go.
Good morning build to you and your whole team there and I. Appreciate the sentiments you expressed their at the end of your prepared remarks, and I'd just reflect that back to you and everyone bear ideology.
One question I was a little bit surprised to see that you guys still are forecasting.
Some shut ins to go into Fourq, you and I'm curious if you could kind of characterize what what sort of production that is that still shut in in four key like I could see an argument for being.
The last quarter of legacy vertical wells to come back all but I could also see an argument for being.
High rate wells that you want to deliver to the strongest markets I Wonder if you could add some color there.
Charles I'll ask ability to comment on that yeah. Good morning Charles.
So that's a that's a good question I'm glad you asked it.
That 20000 barrels a day that we referenced that would likely still be shut in in the fourth quarter is simply wells that.
Have some form of expense that's required to make him back on production for instance, you have a lot of reasons why production goes down.
These are wells that might have to replace gas lift valve and downhole or maybe a hole in the tubing or things that require some expense workover to bring back to production and we.
We just haven't made the decision yet to expand the capital or they expanse dollars to bring those wells back to production until we see the margins improved to a point, where we would do that so for the sake of the plan.
We just assume those wouldn't be up brought back on until next year.
Got it Okay. That's helpful and then and then maybe perhaps related to that.
It's interesting to me that.
Bill you mentioned in your prepared remarks that you guys have.
Okay going ahead, and completed wells, but are awaiting to turn them to sales and that's a little different from what were.
What I've heard from one month number of other.
Companies that it may be just electing to build docs and not complete and and I'm wondering if thats. If thats just a function of you guys want me to.
Honor your your commitments to Frac to Frac crews or if thats actually expression of some other view about the best way to to leave your well toward the or the response.
Response time that you want to have when you do see a price signal.
Yes, Charles this is really again.
So the way I would think about that is.
Two things I guess, we started the as the downturn started to happen. We are in the process of course of completing several wells as I mentioned in the prepared remarks, we dropped our Frac fleet count quite considerably there at the start of the year, but we still had wells that were at the process of being completed or just been completed we elected to not bring those on.
On.
Production at a time when prices were falling so steeply.
And is likewise as we continue to cut our Frac count down I think we're running about five today.
Then those wells as they are finishing up the completions.
We're not bringing those wells on either so its just built up the.
I'd say an inventory of wells that are in that category. It we're waiting on the right timing as to when we view the market fundamentals, improving and being constructive going forward to bring those wells on production.
Thank you Bill.
Our next question today comes from Paul Turning away Scotia Bank. Please.
Thank you good morning, gentlemen.
Two questions.
One yet either you or building I.
I think one of the Super lying off.
Opened 19, yes that yeah, it that trick lot creativity and you got cemetery on a lot of up that you mentioned, so what that we've done bump this whole episode and that what is the somewhat the best practice that may impact youre.
Seem to how your one go operation.
Yes, Paul this is bill.
You know every situation because of the company over 40 years and we've been through a number of these downturns. This is certainly the most unique one.
That we've ever experience.
What is really what we've really seen inside the company.
Is the tremendous value that our information systems and technology.
As a loud yields you need to make a very granular evaluation of everything we do.
Every well in a company we know about it we have all the data.
In through our decentralized organization.
We've been able to analyze the down to a very granular level everything we're doing.
And so we've learned how important it is to have a great information systems.
And technology.
And how effective.
Our employees have been.
To perform even you know in most of them are working from their homes like everybody else in the moral.
So so thats been a great experience for us on a learning curve.
And and we see areas and that we can continue to improve and and get better and.
The.
I think on I think on them on the technical side of it.
We we just did not see any end.
In the advancements.
Huh.
Coming from the company because as you all know yields either.
They all the ideas and all the creativity and all the improvements in the company are from every really every person.
In the company, it's not from the top down it's really from the bottom up.
In everybody's engaged.
In the communications have been really good we're using.
Microsoft teams.
To have big meetings.
Divisional meetings in department meetings in the.
No.
Meetings between.
Different groups and the company and that's working out really well.
And so.
It's been a learning experience, but but but I think.
We're fortunate you know.
I have a lot of that in place that if we can see some areas and in that process that we can continue to prove then.
Hi, Bill, Yes that a couple of example, you pad site that in the polls open.
At some point that we will come up on that that you are saying it will fundamentally change because uptakes, David that you've done with the fundamentally changing how you manage episodes.
And the process or any examples that you can site.
I think the fundamentals of the company.
Return driven.
Well certainly committed to generating strong free cash flow.
Maintaining the balance sheet.
Strong balance sheet.
You know spin in within our means and then focus on returns. We are so focused on returns those things are not going to change those are the fundamentals that that drive our business.
I think the changes that you see.
In in E G or just the organic changes that are happening every day.
As we continued to just.
Gather data and analyze it.
And the and apply it.
And I.
I think a those are things that that.
That make Koji, who we are so I don't see those things changing.
We're focused.
On totally getting better literally every day.
And we believe the opportunity in front of us because a we believe this a unique downturn has been so severe.
We believe our opportunities will be greater in the future them and they've been in the past.
Hi final question for me I saw one Ondeck apparel Lynn.
Can you tell us that may be how's that.
General basins.
And also that what the.
Or the timing is essentially shut the analog involving some yes.
Well equipped with upset.
Paul I'll ask ability to comment on that.
Yeah Paul.
So the way we go about analyzing our business is shut in wells is at a very granular level.
All of our areas are operated in the same manner. We have the tools as bill described the information technology together they information.
Analyze it and push that decision down to the lowest level and our organization to.
I understand the the profit margins on every well throughout the company.
So with that information, we can make decisions on when and where best to shut in wells to maximize our cash flow at any given time.
So the shut ins are curve on economics based on that way.
We also analyze things from a market perspective in the same manner.
We had the same information to understand the markets, we can take the products too.
How to maximize our our netbacks at add forever product on a well level.
And so we can do the same kind of analysis from marketing perspective and simply.
Part of that decision is making a larger rate of return decision.
That helps us think about is it better to produce most of that volume into a more volatile and lower priced environment or based on a macro outlook for the product is it passed away at a month or two are potentially longer to bring that production back on in so I'd say most of the production falls into that.
Around and it's made pretty much on every basin across the company.
In every area. So that's how we analyze it to its a very granular look across the company.
It takes a lot of effort all of our.
It goes back to the culture of the company, though and we have so many engaged.
Employees that are really.
Committed to the company and making sure we all do the best thing we can to continue to make the company better so couldn't be more proud of the people that we have to make it all work.
Hey, There next question today comes from Neil Glynn with Suntrust. Please go ahead.
What else.
First question is just around your return requirements wondering you all to certainly some major steps this quarter and curtailing existing production spending DNC I'm. Just wondering are your margin below your margin requirements different when you look at.
Turning in those curtailments back versus thinking about that wrapping up the DMC activity.
Thank you.
You know when we look at one we're going to bring you know wells shut in our new wells on we're really just looking at the.
The strip and and we obviously stay very engaged.
Really daily weekly basis on world events in them and the macro view of oil.
And so when that becomes more positive and we get more firm.
Thats sustainable recovery.
That's why don't you know will will begin opening opening things up we don't have a.
Exactly.
Number on the margin.
We're just looking for the trends and then as certainly we're not to his ability to talked about and what we've done we're not.
Interested in selling our oil at the lowest part of the market.
When there's a steep contango in the prices you know there's no use a selling it now than we can get double.
In a in a few months. So that's really that's all we're doing on that.
In that area.
Very good and then just one last question you you definitely hit this quite a bit but just on activity. It was looking back in 16. It looks like you I think you all had gotten down debt I think nine or 10 rigs during that time only were around $26. It I'm just wonder does does some of that decision on sort of DNC it activity at all and just.
Here is I guess activity in all come to how many of these premium locations you have or is it simply bill what you just mentioned just you know not wanting to produce.
Ted sort of this environment I guess I was just sort of comparing today versus 2016, maybe and maybe you could just tell us a little color on how you look in differently at these two periods at this point.
Well certainly we're not limited by inventory that we have a.
Tremendous inventory likely said, we've got 4500 locations already identified that will do a 30% ready return at $30 and I'm sure that will grow over time.
So that's not that's not the issue at all.
Really.
You know our investment pace.
Every year.
I've said on a very conservative price deck.
And our view of the macro.
And the limitations on that or we want to generate free cash flow, we want to spend within our means and generate free cash flow and maintain an impeccable balance sheet.
And also obviously generate very very high rates of return. So those are the things that guide us.
And.
So in this particular instance, you know we're just looking for.
For a bit of better view.
The other future and what the recoveries going to look like.
Not only in the price, but in the what.
What what's your sales on a look like.
And the orders are whereas our spot.
In there we think we're well continue to be the leader in returns and continuing to be the company the.
Continue add to very very significant value.
The Charles isn't Neal's question, it seems to us that ear jeeze, just taking or more aggressive approach our production side and then others I know it all depends on your Mac review and whatever you know contacts or lease stuff you have or any elite it shut down or start up costs, but you haven't estimate on the m.
P.D. uplift for the year for doing the shot and then a while referral the well deferral versus maybe the business as usual case with no shut ins and <unk>.
[noise] Gianino no. We don't have a number you know we can certainly.
Like that but it's a it's more just the commonsense.
We just don't like given are all like.
We want to make me want to make money. We're we're focused on returns and we believe you know just waiting a few months or recorder.
That we could get twice as much of Royal then we are today and so it's really just a common sense approach and a return focus and in our view you know on a market this improving.
Okay and then my second question is I know where in the middle Okay oil rally here that we're still only yet oh called 25, T.I., if we see a pool back in oil prices to what extent are you willing to lean on the balance sheet to support long term value like I know, you're not trying to maximize their smile, but trends of the law.
<unk>, if we see that that pulled back is there a point, where it becomes just to detrimental to monitor value to keep cutting cat back then so kind of what is that level. Thank you.
Yeah. The name, we certainly have a lot of flexibility to continue the cut capital no last Billy to come in a bid on that.
Yeah Jeanine. So we we got back to the level, we did to basically be able to do the things built talked about make sure we generate a rate of return and and generate free cash flow. It while we see the commodity price outlook today, if that changes and we feel like that we need to cut more certainly we had that flexibility.
To do so.
And would continue to push that lever down throughout the year, depending on the output.
So we could still try to manage within cash flow, even with process stay lower for longer.
I don't Miss question today, I'll show a room J.R.J.P. Morgan. Please go ahead.
Yeah. Good morning Bell, we've seen you know a lot of different approaches to shut ins with you know, yeah, G. Conoco, Exxon and Chevron doubts and significant shut ins. It's whether it is how clear is this the decision to shut in.
Versus not and I'd also just want to see if you could address what are the questions that came in last night was just the execution risk.
You know shutting down you know.
Hundreds maybe thousands of well other than restarting those you know consistent with <unk> guided to in in the deck.
[noise], yeah rent I'm less Billy to comment I'm on the execution Park.
Yeah run thanks for the question Yeah, I think is we talked before one of the unique things that we've built the company around is our ability to gather data and analyze it very quickly.
And have that information and basically in the hands of every employee in the company, including at the field level.
So the actually the actual execution of being able to shut in and bring back the wells on is fairly painless, it's a very simple.
Exercise by communicating that data down to the people out there in the field to be able to make those actions happen.
So that effort is very easy to do as far as any risk of shut ends you know, there's really not any risk in our part I think the the cost of shutting into wells is very very minimal if not zero the cost of bringing the wells back honest kind of the same thing and.
Yeah, we could actually have all the world's back on production and just a matter of days because you have to remember we are Decentralised organization. We have these assets across the country, we have people managing those assets.
That are very capable and committed to making sure that we do the best things we can as quick as we can.
Safely. So the effort is is very easy to attain with a culture or the company that we have the operations we have set up.
And I was just yeah.
<unk>.
One more comment on that I think you know we have multiple you know years and years of experience of shutting in Wales for different lengths of time and we've got a chart in the I.R. deck. You know that shows you know only shale wells, there's absolutely no damage.
When you shut a man and bring them back on for you know whether it's two weeks for two months, we feel very confident about that so we just view is shedding yeah. There's just low cost storage. That's the lowest cost orange that we that we can come up with and and it's a great way to manage your business, especially in.
<unk> environment like we're in.
Yeah, that's a clever way to think about it.
Just a quick follow up you guys cited 3.4 billion.
Sustaining capital for the the <unk> at 420, how fully loaded belly is that you know 3.4, <unk> I know you talked a little bit about the ability to even maybe push that down based on incremental costs savings, but how fully loaded is that cat number.
It's it's in keeping with how we would run our business. So it's it's the way I would think about it. It's it is a maybe a little more high grade than it was in a 4.1 billion dollar capital plan that we announced some time ago as that people might remember in that previous maintenance capital plan, where it was.
Pretty much designed to keep each division kind of operating flat. This one is truly a we're going to go to the.
Wells that have the highest return it today's prices and so it is a little bit more high grade and you might think of it's still spread across multiple basins, though so I wouldn't take jumped to the conclusion is just one area is still spread across multiple areas and then includes infrastructure and facility costs and E.S.G. spending and those kind of things that would typically would incur.
Food.
Normal budget, just maybe it a little bit lesser scale.
I don't know suppressing today Council dog, Oregon, where.
<unk>.
Oh. Thank you good morning, everyone I hope the hope everyone's doing well out there.
You made a number of comments if I could read them by T.A., U.S. she'll just sort of or altered.
This is a unique done turn.
And there's been a price war.
My question is can you share with is what I'm means for.
You're a go forward strategy and you come to know what I'm getting out here is the U.S. is doing the 50 per cents and Sony removed the lowest cost falls off the market. So it sounds like.
It was a little bit of a pivot here and I'm just wondering if you if I'm reading that it right. If you can walk us through how you see the right mix.
Reinvestment go cash flow and I've got a full place.
[noise], Yeah, Doug I think you know.
Looking into the future as we said we you know we believe there's going to be a structural change in U.S. jail.
There's going to be less players I think certainly the industry is becoming more disciplined and it will be even hyper discipline to coming out of this.
Downturn. So we we believe there's gonna be significant less.
Capital.
Invested in growth in the U.S.
And so.
And certainly there will be substantially less growth, we <unk>, we have a hard time, saying that the U.S.
Reduction will be able to certainly in the next several years get back up to the levels. We been just a few months ago.
So in that.
Why in that lives of tremendous opportunities for the for the companies.
That survive and it's an enormous opportunity for evil g.
If you look back on our last three years, we've generated an industry leading return on capital boy the 14%.
Regenerated $5.6 billion for free cash flow.
We return $3.3 billion back in shareholder friendly ways.
Substantial dividend growth in debt reduction.
That last three year period, we've increased our proven reserves about 55%.
And we've accomplished this all with an average or that'd be t. all class that'd be.
That'd be T.I. or processor $58.
So.
Fundamentally we're not going to change were as we've been talking about where return driven and believe in a strong balance sheet and we believe we're improving at a rate much faster then we have in the past and that we're going to merge a much better company and the next recovery. So.
We're going to continue to stick with our fundamentals they wait to market conditions and continue to create value.
I I appreciate the answer my full up is is going to be able to leaving question because I just like to pressing a little bit on this.
Because it 50, a golden oil price, though but subsidized by Saturday on the U.S. schools rate in my opinion is no longer going to be pulled related then obviously you've been a lot of part of like North Sliminess into there's no issue around the all producing capability of the company you are clearly the <unk> one of the leaders in the industry. The issue is one of the business model.
And used to reinvest 90% of his castle and go in the worst to detect just commissioned a wasteful level in excess of reasonable demand. So the questions really know what about your capabilities about the behaviour coming out the other side of this going from 36 weeks to six do we see you go by.
It's too dot level of dual so did you see you right size you organization to to that more to for example, documenting what I'm getting I 'cause up 50 of those you'd offensive was with Saudi taking the lowest cost falls off market.
Well I mean, <unk> make one correction there right off the bat, we've we've invested about 80% of our cash flow, which is which is about a really good level, we've been very committed.
Generating substantial amount of free cash flow, we pay it off all that that increased their dividend end of the year last year with $2 billion.
Cash on the balance sheets so.
We haven't been spending all of our cash we've done very disciplined generating tremendous value with that as we go ahead and we look to the future again, we think it's gonna be different.
So, we'll certainly will be continuing to evaluate that.
And and continued to stick with aren't fundamentals and see what's the best way for L.G. to continue to to generate significant value.
<unk>.
This includes the question answer session.
<unk>.
[noise]. Thank you in closing I, just want to say, we've never been so proud of the employees of V.O.G. The way you have responded to this historic coded 19 crisis has been outstanding and heroic.
During every downturn in in my over 40 years with the O.G. accompany responds was wrecking record breaking improvements sooner or later this crisis will be over in oil will recover.
We believe ill g. will emerge with the ability to be a stronger.
Higher recurrent company than ever before.
Thanks for listening and thanks for your support.
Yeah. So <unk>. So you may notice next in line.
Wonderful there.