Q1 2020 Earnings Call

May 5, 2020

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Good morning, ladies and gentlemen, welcome to the Parsley Energy's first quarter 2020 earnings call. My name is Shomali I will be your operator today as a reminder, this call is being recorded at this time all participants are in a listen only mode.

Question answer session will follow the formal presentation.

And now I'm pleased to turn call over two car rentals Parsley Energy's Vice President.

Investor Relations.

Thank you operator, and good morning, everyone. We're dialing in from our respective home offices. This morning.

With me on the call or bad Gallagher, President and CEO, David to low So chief operating Officer, Ryan Dalton, Chief Financial Officer, and Stephanie read Senior Vice President corporate development land in midstream.

Our remarks today may contain forward looking statements. So please see our earnings release for discussion of these statements and associated risks, including the fact that actual results may differ materially from our expectations.

We also make reference to non-GAAP measures. So please see the reconciliations in the earnings release.

During this call we will refer to investor presentation that can be found on our website. You know prepared remarks, we'll begin with reference to slide three of that presentation.

After our prepared remarks, we'll be happy to take your questions and with that I'll turn the call or wood Mac.

Thanks Kyle.

Instead of just over 10 weeks since we hosted our fourth quarter earnings call, but in some ways. It feels like 10 years. The covert 19 pandemic carries with it a steep cost both socially and economically.

The full extent of which likely won't be tabulated for some time to come.

For the energy industry, specifically covert 19 has called unparalleled global oil demand destruction.

Resulting in a sharp drop in near term oil prices.

In this time I need to commend our own heroes, our field operators and our contractors and our vendor partners, whose work continues to provide domestically sourced energy day in and out, albeit in a modified process due to the buyers.

Partially took swift action in response to the buyers and the pending oil demand charge.

All focused on the health of our employees and the health of our business.

Turning to those business results I want to acknowledge some accomplishments IR team I would have normally receive the lion share of attention in a typical quarter.

First after closing or jagged peak acquisition in early January the integration process has been seamless.

This is a testament to rigorous planning collaboration and behind the scenes effort from numerous departmental groups.

Truly a team effort.

This is partially at its best.

Synergy capture is well in hand.

Next I want to highlight our drilling completions and facilities teams for continuing to grind well costs lower well safely pushing efficiencies higher.

David will touch on the continuous organic improvements recorded by our team a bit later.

Finally, I'd be remiss for not mentioning that strides taken on multiple fronts year to date to reinforce the strength of our balance sheet and these challenging times strong financial footing is paramount.

With that let's turn to slide four.

The World change quickly over these past few bonds and partially responded in kind of taking decisive action on multiple fronts.

Oil prices will recover but there is no crystal ball as to when.

Partially because well built for the endurance test now facing the industry.

We will remain focused on controlling what we can control.

And as you can see in the timeline Parsons responsiveness has truly been collected the major spanning multiple disciplines across our organization. These coordinated efforts all had been saying goal in mind to protect the long term resiliency of our business model.

The partially king is highly engaged and utilizing our solutions driven mindset agile corporate structure to navigate this environment.

Turning to slide five.

One key advantage of the short cycle capital projects delivered by parsley and other domestic shale producers is that activity and spending plans can quickly adapt to changing market conditions.

We started this year budgeting at $50 oil with a capital budget of $1.6 billion to $1.8 billion.

We were running 15 rigs and five Frac crews during January and February but steadily reduced activity throughout March as oil prices and market fundamentals deteriorated.

In mid April we temporarily suspended sanctioning all new drilling and completion operations are 2020 activity plans will remain flexible and our capital allocation philosophy will remain simple we wouldn't not build through our hedge book.

Well, we'll evaluate incremental capital investment decisions based on an edge economics and prevailing market conditions.

The table at the bottom left in the page describes our near term plans for the second quarter characterized in the shutdown sensitivity.

And also lays out our stabilized activity planned.

Hey greatly reduced activity level versus our original long range planning allows for even further high grading of projects based on rates of return.

As things sit today, we are now budgeting at 20 to $30 oil for the remainder of the year and plan to spend less than $700 million in capital in our stabilized activity model. The majority of which was shipped during the first quarter.

Let's begin on slide six.

Where we demonstrate the shape of the production under our current plan and also under a more draconian scenario.

The dark blue wedge represents that scenario, which would be a formal capital shutdown.

No new wells placed on production in effect. This is a PDP blowdown case.

Delightedly wedge represents our current plans to reactivate to its stabilized activity level pop uncompleted wells completing DUC wells in reestablishing a baseline development activity running four to five rigs and wanted to Frac crews.

Cases yields healthy free cash flow and moderating declines, which position our company to be on solid footing for years to come.

Oh no you will see we are voluntarily curtailing may production to the tune of about 25%. This is a choice five weeks ago. We saw the mandated pointing to an unparalleled demand shock five weeks ago, we saw data pointing to storage levels, increasing on a global level at weight seen during.

Hurricane Harvey at a local level.

Yes for the Texas Railroad Commission to have a hearing for a probation order.

They had a robust debate over 10 hours of testimony.

Today It appears that no action will be taken by the commission.

Partially was in position to make a choice about how to manage our volumes and that choice is clear for us, but some other operators had no choice. Some independent oil producers, who are having purchasing contracts cancel that pulled out from under than.

Others, not due to market condition or market signals, we're producing at maximum rates to fulfill pipeline commitments or other obligations compounding in near term problem.

Disproportionately thousands of truly independent oil producers were in gridlock.

Partially was started by a small number of value minded people and we grew this company from scratch investing our own money and with Great partners along the way in the private days.

Most of those in support of Proration like US started with two to three people and put their own capital at risk, we often remind ourselves to act as we did in those days when we looked at every dollar in every dollar out.

Didn't just bet on greener pastures.

The choices clear for near term curtailment currently the world does not need more of our product and we only get one chance to produce this precious resource for our stakeholders.

We will be closely evaluating conditions for June with our current visibility we see at maximum repeating may curtailments, but if our full realizations return at this current strip, we will follow the shape as listed on slide six.

We have also provided a glimpse.

Of what maintenance capital program. It looked like in 2021 in short the treadmill is slowing down making it easier to turn cash flow into free cash flow.

For example, and the stabilize activity scenario, we estimate it would take almost $600 million to hold fourth quarter 2020 oil production flat for the subsequent year.

In both scenarios, we expect to generate healthy amounts of free cash flow in 2020 to the tune of $300 million plus.

And exit the year with a solid balance sheet ample scale in a shallower oil base decline and visibility to sustain free cash flow in 2021.

Stepping back this is the most uncertain business climate in the post war era for all industries in our industry. Many operators are hoping simply to survive.

For partially survival is not of question are relative advantages will shine brighter in as trying time, we will endure with relevance.

With that I'll turn it over to David for more operational details.

Thanks, Matt I want to start by providing a little more color on our voluntary proactive production curtailments strategy turning to slide seven.

For the month of made we expect curtailed that oil production by up to 20 to 30000 barrels a day.

On a gross basis this equates to a little over 40000 barrels a day and.

And it's not mentioned earlier this is a choice for partially.

The table at the bottom of the page breaks down its curtailment into various segments.

In aggregate, we have a very resilient low cost production stream, which provides us a lot of flexibilities, we manage our base production.

At that point, roughly 90% of our operated volumes had variable that the cost under $3 per barrels oil equivalent.

We expect these curtailments and made a modestly enhance our free cash flow profile in 2020.

Furthermore, targeted curtailments will be used as a temporary bridged one of our key corporate SG initiatives for this year, reducing natural gas flaring.

Our operations team not some nice flaring mitigation wins from new infrastructure solutions put in place during the first quarter, specifically on recently acquired Jagged peak properties, where historical flaring had been high.

Then in mid April partially voluntarily shut in several pads, we're clearing natural gas.

This is a commonsense approach in the interim.

Our operations team is already lined out more permanent flaring solutions to these pads, which are expected to be completed in the coming weeks and months.

Finally, there seem to be to common questions with regards to curtailments I wanted to touch on briefly.

First is halcon, how quickly can curtailed production be restored to rent back to previous levels for partially the answer is fairly quickly we would estimate one to two weeks.

Importantly, our marketing arrangements continue to provide us with advantage flow assurance. So we do not currently see that as a limiting factor storing volumes either.

To reiterate though the plant laid out here for the month of May we will continue to evaluate this voluntary curtailment level on a regular basis going forward and we'll adjust production levels quickly and responsibly as Mark mentioned the ball.

The second common question focuses on the impact production curtailments have on the reservoir itself.

As the Permian shifted more to development mode temporary shut in became part of normal operation.

Based on our historical data, we have not seen evidence to suggest the temporary curtailments negatively impact longer term reservoir integrity.

Turning to slide eight.

Our drilling and completions team continue to raise the bar setting New company records for footage per day, both in Midland or Delaware Basin.

These continued operational efficiency gains helped drive our well costs, even lower during the first quarter shaving about 10% offer initially budgeted cost.

And the fact that jagged peak was integrated during the same timeframe only makes this operational excellence more impressive when we first announced the acquisition of Jagged peak last October we highlighted a capital efficiency gains on these assets were going to be expected 2000.

A seamless integration effort, coupled with record efficiency enhancements I mentioned earlier enabled us to significantly outpace our original improvement expectations.

This is a true testament to the cohesive integration delivered by the partially team.

As market dynamics shifted throughout March our supply chain management team led an outreach program targeting all suppliers across all spend category.

These comprehensive efforts helped generate line of sight, the second leg down an estimated well cost depicted in the bottom right graph.

Importantly, these price reductions did not require significant supplier turnover or new activity commitments from parsley in other words. These are low risk savings, we expect to generate wants it makes financial sense to restart activity.

Moving on to slide nine.

Lower commodity price environment, the advantages of being a low cost operator or more pronounced.

We have long been best in class when it comes to lease operating expenses you can see in the graph on the left.

We expect this differentiated effort will continue.

Recent efforts by partially supply chain management team helps secure price reductions on key elouise spend items.

The shut in a vertical well take higher unit cost production out of the system in the company's integrated water handling system is a strategic margin enhancer.

Overall this combination of factors should help offset a decrease in near term production volumes.

We're also extracting cash costs in the model on the DNA side again controlling what we can control and protecting our margins.

Jagged peak synergy capture is ahead of schedule and executive leadership was early to step to the plate with voluntary compensation reduction will continue to attack other overhead for multiple angles.

In total between Gionee and our OE, we see combined cash cost savings at roughly $65 million versus the mid points for initial budget ranges.

And now I'll pass it over to step me to your marketing position.

Thanks, David flipping to slide 10, we have long stated that our marketing strategy centers on Q guiding principle, dependability and diversification as principal that never been more important.

Our sales contracts provide us exposure to the Magellan Houston, Brent in Midland benchmark, and a broad portfolio, a physical pie mitigating risk associated with a localized hub pipeline airport.

Our counterparty on these firm transportation agreement, our collection of large international marketers with the best skills that took place barrel downstream in a challenging market.

As barrels continue to flow and hi, finding ways to market in a safe testing partially barrels will be amanda's transport. It if we could achieve.

Which leads me to another key advantage of my marketing position.

Stability.

Although we Havent managed flow assurance, we do not have burdensome associated take or pay liability.

First off we will not incur any firm takeaway related deficiency payment due to our voluntary choices are curtailing production volume.

And as you can see on the table on the left side of the page as we proceed to stabilize activity plan for the rest of the year. Our estimated deficiency payment in 2020 is only around $2 million.

Other word future upstream capital allocation decisions will not be motivated and midstream consideration.

Tail will not wag the dog.

Finally, as you can see in them out on the right our acreage that's in that Apiay gravity sweet spot our weighted average barilla production at 41 degree.

This matters more than ever in an environment, where refiners are shutting higher grabby created to minimize gasoline yield and Asian export economics are challenged.

Our sales volumes are not subject to any discount applied to higher apiay gravity created like West, Texas like let's begin the month of May trading at a $5 per barrel discount to W.G.I. Midland.

In an environment, where every extra dollar margin will have a meaningful impact on free cash flow is that in a favorable crude quality continues to be a nice inherent advantage.

And now I'll pass it over its Ryan to discuss parsley sound financial position.

Thanks, Stephanie now on to slide 11, it consistent hedging program has always been a cornerstone partially financial strategy and the importance of these risk mitigation efforts was highlighted during the recent sharp fall in oil prices.

Partially believed that increased uncertainty in crude market fundamentals required additional actions on our part to manage that risk.

So during March and April partially proactively managed its hedge position.

We restructured our existing 2020 hedge positions to provide additional protection against lower oil prices using swaps and two way callers.

Over 80% of our hedges in the second quarter, our swaps or two way callers with unlimited downside protection.

Additionally, partially moved aggressively to protect its 2021 cash flow by adding swap positions, which are well in the money based on today's strip.

Our full hedge position can be found supplementary slides.

Turning to slide 12, our leverage profile remains healthy and our liquidity position was recently enhanced during our April bank Redetermination.

Our borrowing base was reaffirmed at $2.7 billion.

Our commitment amount was increased by 7.5% to 1.075 billion.

And our maturity date was extended by two years.

These proactive steps in this challenging environment speaks to the credit quality parsley and highlight strong support from our bank group.

With a healthy free cash flow target in 2020, we will continue to prioritize paying down debt returning capital to shareholders through our dividend program and further fortifying our financial position.

Turning to slide 13, we're now budgeting at 20 to $30 oil for the remainder of 2020 in this context, our corresponding capital budget will be less than $700 million with more than half of that spending having already occurred in Q1 2000.

Given recent market volatility and ongoing uncertainty the company has temporarily suspended its detailed guidance on production activity and unit call.

But we have not altered our guiding principles.

Reserving stable free cash flow.

Maintaining a healthy leverage profile allocating incremental capital based on unhedged economics.

These will continue to serve guide puts pressure to wrap things up existing flexible and we'll continue to do what is necessary to preserve long term shareholder value.

That we'd be happy to take your questions.

Okay.

Thank you at this time, we will be conducting a question and answer session. If you like to ask your question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Q.

You mean fresh start to fuel entropy movie like your question from the Q.

Parts distribution speaker equipment, and maybe necessary to pick up your answer before question to start keys due to time constraints will only except one question one follow up quick.

One moment, please along pull for questions.

Okay.

Our first question is not handled RBC capital markets. Please proceed with your question.

Yeah. Thanks, appreciate all the detail and specifically with the progression of shut ins or at least defining how you're going about that obviously the bulk of its in you know the bucket of pop deferrals volume management and shut ins can can you just give a sense of when you look at volume management and shut ins how big of that.

Total is that and how do you go both selecting which wells those are.

As Scott its a.

It's a chunk of that for sure. We look at cash margin is kind of the first cut.

Beyond that there are several other variables, we look at before shutting a well and everything from its vintage where it is it's artificial lift tight.

So as you as you progress through this it makes up a pretty good pretty good piece of that but the pop. So there's there's about 15 pops. It hasnt come online yet so that obviously is a material piece.

The year.

Okay understood and you know with respect to you're getting in the back half year. If you get to your baseline view of you know more you know looks like maintenance you know activity by the time getting the late Threeq into Fourq. You you know how do you plan and how do you view you know kind of.

The goal for planned at this point like what price you do you guys feel comfortable moving above that four to five rigs in one do frac crews have you kind of migrate into you know 2021, and just talk about like what kind of levels of free cash flow doing just see in and how does that plan looked moving forward.

Hey, Scott, we're going to have to take a look at you know the whole macro environment, we're going to be watching right.

Reactivation of these economies were going to be watching.

Storage levels and inventory levels across the globe and of course, you then have your price signal and you're seeing your shape of the curve so in a flat curve.

Where we're getting that 25 to $30 were perfectly comfortable and this four to five rig stabilized program. The returns justify the inventory said, Ken can definitely handle that for over a decade, even at those low prices.

And generates pretty robust cash flow so were.

Gives us plenty of cushion as well too to continue to return return a healthy amount of cash flow to shareholders. So.

On the top side of that will just be looking at all those macro conditions.

For some moderated growth to return.

And our next question is from John Freeman from Raymond James. Please proceed with your question.

Good morning, everyone.

First question, if the stabilized activity scenario plays out to you all.

When you look at sort of the preliminary.

Mark you 20 maintenance Capex number you gave for to hold that got level slide into 21.

What what level of ER docs does that assume at the end of 2020.

At the end of 2020.

We have.

About 40 does so that.

Thats up through 2022, where you are able to continue to have that lever. If you need to see price signal that you like and want to accelerate a little bit gives you a little bit an accelerator pedal. There also allows us to continue to.

Deliver larger projects if warranted so that's it at the Doug balance that we think.

Makes pretty good sense, the carry through 2020 into 2021.

Okay.

Great and then just my follow up question sort of on the line with what Scott was asking about if I, if I think about.

The vertical wells that have been shut in and even the the over horizontal wells I guess sort of what scenario or price environment would you need to want to to bring those back online can I assume while it's a very small percentage of your a of your production, it's a much more meaningful percentage of.

The total Ela we.

Well.

Yes, that's almost.

Significant out of that is already cash positive so I think.

Right now, we'd like to see a little bit more stability, we'd look at storage, we look at the shape of the forward curve.

So it's not it's not necessarily about just making a positive cash margin. It's about feeling like things are balanced that up to to warrant, bringing those volumes that a lot. We'll watch again inventories will watch for a little bit less volatility between supply and demand and really getting some firmer views of near term and longer term pricing before.

We commit opening those back up.

And our next question is from Jeanine way from Barclays. Please proceed with your question.

Hi, good morning, everyone.

Good morning question. Good morning, Thanks have me on the call on my first question is on the tiny tiny plan. So the new Capex reset for the year under estimated 300 million or free cash flow at a pretty low 20 to $30 can you talk about how you settle specifically on this plan, meaning or are you focus on.

The answer and free cash flow level or was it more related to maybe like a hurdle target you had on your activity and the free cash flow is what Phil.

It was a combination Janine we came into the year with the $250 million target.

And as we saw a free cash flow and of course, we saw drastically increased volatility so we needed to up that cushion and.

Still deliver it stabilize case.

But then the sanctioning projects is all driven by by rate of return.

Economics, so we still have a healthy amount of those so then it falls back into our view on volatility here in the short term and and growing that free cash flow cushion. So we definitely want to to.

Push on the model and make sure we could.

Insulate ourselves.

And the time high volatility.

Okay, Great and then maybe fast forwarding to 2021 and base decline do you have an estimate on what your 2021 basically look like now given that you significantly reduce capex. This year I think your prior 40 to 42 basic crying for this year with about 40%. So I'm curious what kind of him.

Proved that you're anticipating for next year.

Yes, that's right is around 40% drops down into the low thirtys, 30% to 33% under this scenario.

Which has a follow on effects for years to come. So this is a quick look at 2020 maintenance cap. The 550, the 650 range.

And that range holds true for 2022, even as you work through the ducks because of that moderating declines so.

Of course, then we will continue to work our cost and efficiency down, but it's really really healthy and resilient go forward plan.

And our next question is from Bryan singer from Goldman Sachs. Please go see was your question.

Thank you Ed good morning.

I wanted to follow up on really more of a philosophical question you highlighted a few times here that you're drilling is based on unhedged rate of return philosophically when oil prices are higher and potentially if oil prices in 2021 were to exceed the prices that which you hedged.

Ramp up based on on hedge rate of return all up on Janine and is there a minimum free cash flow target or line in it and when you think about next year.

Good question on one we hope hope to be addressing in the next in the coming months and there will be a cap to activity. So I think we'd want to deliver a moderate amount of growth in the single digits.

And that would probably cap and give us comfort you know we've seen so many compounding benefits of slowing down the model working on our efficiencies and building a cash cushion.

We're very comfortable with our leverage profile coming into this but reactivated Kate.

In the one you mentioned moderate growth and then additional free cash is down the debt and of course your insulating returning to shareholders. All along the way. So I think there would be a cap too.

To the amount of activity, we we'd reactivate too.

Great. Thanks, and then my follow up is with regards to stabilize activity plan a couple of questions on both the productivity in the cost side.

What are your expectations for well productivity and relative to the initial budget as you shift more towards the western portions in the Midland Basin and then.

And that you've highlighted on slide eight do you view the stabilized activity cost improvement piece as cyclical or secular Iot prices recover.

Back to 900 from seven.

And Brian as far as though well performance I mean, certainly as you pivot more toward more capital towards the the western Midland in particular, I would certainly exceeded expect to see your average well increase hesitate to give too much specific on that yet were.

Yes, things are pretty dynamic, but certainly upward.

And as far as whether you'd go back towards the.

The 900.

How sticky those.

You are those prices you're gonna be from a service cost standpoint, I think it's going to be a function of a price I think it can be a function of how well capitalized the industry is at that time that prices start to improve so what is the competition level for those services. It there's enough moving parts now for where I think it's probably a little little difficult to project exactly what that.

As with certainty, but we feel like that on slide eight that middle bucket, that's something that's organic that we can repeat and when you look at the 900 and the 700 for the Delaware in the Midland respectively yet.

You're probably looking somewhere between those two.

Even even if prices were to come back up and you started to see some restoration of service costs, but we feel like the one in the middle is absolutely defensible under under most of real estate condition going forward.

Thank you.

Our next question is from Charles need from Johnson Rice. Please proceed with your question.

Good morning that to you and your whole team there.

I wanted to ask a question about June and Everything's looking.

Better today than I Echo your sentiment that up it'd be nice to go back to having.

To answer questions about what we do a rebound scenario, but but specific June.

When when will your volume picture.

Come into better focus and for June and how do you foresee.

The pieces coming together.

To to see if you're you're shut ins extended unit or perhaps increase or decrease.

Hi, Charles we have a lot of flexibility on on when we make those calls.

The minimum committed.

14.

Through the 21.

And then asked that we have we can make calls really on a on a week by week basis, as we see signal responses, so well be again washing washing market conditions and as I mentioned in the prepared remarks set of Maxim you'd see a repeat of the may shut ins, but with.

Things firming up you can easily.

To get back to.

That the dark blue, which pretty quickly one to one week time, one to two week time ramp up of the wells.

Got it thanks to that clarification met and then my second follow up question I think this goes back to appointed David made earlier referencing to the Ducks as maybe an then accelerator pedal specific to how you're going to make the decision to just start ramping back up your completion activity you hopefully in the back.

Of 20 here.

Is that going to be or you're going to be evaluated as I. Our IR ours just on the point forward a completion dollars or are you also gonna be rolling into that the.

The drilling costs too to effectively replaced that ducking your inventory.

Yes, we're looking at the the full side of.

The cost equation, there I mean.

Certainly the IR ours, if you look at it from a point forward basis will be higher but these were wells that were there were drilled in high quality areas in anything certainly that the drill bit touches the ground on going forward is full.

Got a full fully loaded costs, but.

Yeah, we're not going to be making costs for decisions on any new investments. It's these are going to be these are quality ducs that are in the ground.

So, we'll we'll make rate of return prioritize decisions all those future.

[laughter].

And our next question comes from Michael Hall from.

<unk> advisors. Please proceed with your question.

Thanks, Good morning, and congrats on navigating what has been very volatile environment.

Our Oh, I guess I wanted to take a little bit about the reached our oh volumes and activity.

I'm just get a little better feel for how you guys are thinking about that is it.

It literally going to be kinda, you know step by step step wise, where.

You know curtailed volumes come back can you bring on a.

Well that have yet to pop that are tail or until that are pop or completed rather and then then start completing or does that all kind of start to happen all at once once you get the price signal.

I'm just trying to think about how.

How how gradual that is versus how how quickly you bring things but.

It's driven by by the price signal and the macro view. So maybe you can have a one day price. Then you also have the shape of the curve.

But let's say both of those from.

In unison.

It would be a one week all the above if you see.

If not if you're seeing varying degrees of signals you can obviously turn on your volumes that are being moderated on the production basis. You can you can easily pop the wells that are drilled out and then you can reactivate.

The lower margin well so it just depends on the magnitude of both price signal and the macro conditions, but the quickest you can reactivate is about a week and then after that it would take it.

It would be stepwise throughout all the.

The matrix so of the wells that are shut in.

Yeah. That's that's helpful. I'm, just trying to get to handle how you're thinking about it. So that's helpful for sure and then.

I guess as it relates to signals are you seeing any anecdotes in the field. Currently that you know suggests the physical market has improved.

You know, where we stand today relative to what it looks like at the height of the downside volatility. The you know the came with last month or.

Are you know any any insights are anecdotes you can provide on that front.

Sure. Michael This is definitely and you know that's not in thank you both mentioned just really watching background.

We're watching May ends and we think a mid one maintenance short volumes and in June and not providing the uplift that were seen recently or sorry in may that were seen recently for June I think if that a few different signals and we all of that they curtailments across the space.

Inc.

And there is no concern about volumes flowing we got not concerned about being able to plate barrel.

And I think that high and the volume.

Hi, Chris essentially and showing that we we continue to watch the June oral and and the death and as well.

Close out around the Twentyth and 20 cents of May and well give us additional price signals and help determine what we planned isn't in June.

Okay.

Our next question is from Brian Downey from Citigroup. Please proceed with your question.

Okay.

Good morning, Thanks for taking the questions just wanted to follow up on Brian's earlier question, I'm curious, what but explicit while cost or service pricing level assumptions are baked into the the maintenance scenario is that a that you show in slide six into a into next year.

Yes, we have.

Basically what we show on slide eight those types of.

Those types of cost per foot or what's baked into our end of 2020, but going forward in 2021, yeah. We're not assuming that we in all cases get below those those those numbers I think we're gonna have to see how that the industry response.

How much activity returns to the basin before really know, but that the range that we put out there for.

For that capital for the maintenance Capex should encapsulate those potential outcome.

Okay and then the the four to five Mboe per day that that you mentioned are shut in in the Delaware basin due to gas flaring could you just remind us on the process to reduce that flaring and returned to production one pricing cooperates is that something that requires any further capital I'm just trying to dimension, how timing there may be oil prices.

And it versus other factors.

Sure, Brian Stephanie and as we reported last quarter and decrease on that original about 20% on the legacy jagged peak volumes that were flaring.

We have line of sight further mitigation throughout 2020.

We're actually able to head we were able to hit our year end goal of less than 5% on these assets.

Those efforts included both.

Internal mitigation efforts and successful implementation of additional gas gathering infrastructure by our midstream partners.

The pipe that we referenced last quarter that was going into the ground. That's actually being high then as we speak and we'll be in service. This week and targets. Our main gas gathered on that asset and they will also be adding additional compression.

And sour gas gathering add to essentially fully mitigate that additional four and a half thousand video that was associated with those that's flared volumes. So at this point no additional capital needs on our front and.

Overall, just successful execution across the board for but partially in our midstream partners.

[laughter].

Great. Thank you.

Our next question is from Leo Mariano from Keybanc. Please proceed with your question.

Hi, guys just wanted to ask your question on the dividend here. It was certainly nice to see you guys.

Amount in kind of reaffirm the dividend here this quarter, just given the strong levels of hedging.

This year in the expectations for free cash flow.

This year next a you know do you guys feel pretty good about the dividend here in terms of being able to kind of maintain it pretty solidly throughout this enormous trough in the energy cycle.

Yes, so we really do and as a priority for US you can see on this projection is about 27% of free cash flow goes back to shareholders. And then we are extremely well hedged position going into 2021. So we're going to continue to make that a priority it's been a along.

Journey to get here, we didn't take the decision to start a dividend lightly we wanted to have the right amount of cushion and we do feel good about.

The quarterly quarterly analysis that the board will do and we think that theres plenty of cushion as priority for us.

Okay. That's a that's helpful. I guess just in terms of.

Activity levels I mean, it sounded like you guys had kind of really shut everything down I, you know sort of mid April I'm, just trying to get a sense.

I know, it's kind of sticky here, but.

It sounds like maybe there's some kind of lingering.

Spanned a you know kind of into April here and then obviously you guys are kind of reevaluating Wendy kind of start things back up just depending on how it.

Plays out, but I guess, just kind of in that in the downside.

Scenario case versus I guess, the new spend for the rest of year versus the upside it and 700 million here just trying to get a sense of kind of spending trajectory you know as it is it fair to say in the upside case, the restart kind of starts a you know sort of circuit June 30, Anthony Capex start picking up in the second half.

And accelerates in Fourq, you and you can tell us qualitatively about the stabilization case.

I mean I. Thank you you just did a pretty good job of describing what that stabilize activity would look like yes, probably a near the beginning of third quarter.

Restart and feathered in not necessarily a slammed the throttle case, we'd be able to kinda ease into it but maybe a little more capital in the fourth quarter.

The first part if you were asking if we if I kind of got the impression you're asking if there was a bunch of lingering spend where with spending be if we if you want would that dark blue case on the on the production volumes and I wouldn't say theres much lingering spent I mean, there's there's a pretty healthy ramp down a pace that we that we underwent.

So I don't I wouldn't look at a lot of lingering in follow on on spend we have a high degree of confidence that we'll be out of that 700 million see a ceiling in all cases so.

Okay that was perfect really appreciate the color. Thank you.

Okay.

And our next question from Neal Dingmann from Suntrust. Please proceed with your question.

Good morning, All my first question really a metric or the team pertains to slide six and really you're sort of production.

It appears looking at slide six said.

I couldn't be returned at the beginning of third quarter that no question. Your production will be more than stable in the 21 I'm. Just wondering if you know this didn't occur and your continued with done limited or no drilling and completion as well as some shut ins could you just address kind of your thoughts on trajectory into 21.

The.

Yes, the limited activity.

I would pretty much follow that PDP shape courses as David mentioned, we have 15 or so wells that are waiting on the banks are ready to get on the feel.

So we feel comfortable about about that smooth trajectory there and then as we really reengage and feather in in the third quarter you don't see an immediate response. It takes a few months for for those new capital projects to get in line, which is why you still see.

Natural decline before you run into the stabilization model.

Oh, Okay. Okay very good it makes sense and then my second question really not just on I think you hit this a little bit earlier, but just a little on activity in hedges I'm. Just wondering you mentioned you wouldn't drill through your hedge book, which makes sense, but you know what that 20 or $30 scenario that you all are laying out I mean do all sort of look at you.

Our activity in hedges somebody exclusively or you don't ask to asked another way is it purely just these unhedged well enough economics that you look at it not you don't necessarily your hedge levels.

Yes.

Correct.

We want our capital products to generate returns on the right we view the hedges more as.

Support for the balance sheet opposed to support for the capital program.

And our next question is from Josh Silverstein from Wolfe Research. Please proceed with your question.

Yeah. Good morning, Thanks, as I'm, not just targeting a couple of things on a on the growth rates you were talking about previously.

Has the idea of 10% growth been been kind of thrown off the table. These for the foreseeable future. Now. This was something that you guys were previously targeting around 50 W.P.I. I was just wondering if given all the the lower cost right right now if that's actually been moved lower for you guys to be able to grow that amount.

That's a great question, we'll have to evaluated when we get to that point the inventory set a balance sheet.

Everything could deliver it but I think when you see negative pricing printed on the books you have to change just as the insurance actuary would change how they would gauge risk we have to change that and just as our free cash flow target. This year went from 250 up to 300 million to give us.

Additional cushion I think thats going to be pretty enduring for the long run so.

We haven't.

We haven't reassess the 50 dollar case, but my bias would probably be.

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