Q1 2020 Earnings Call
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Good day, ladies and gentlemen, and thank you for standing by welcome to open kitchen absent 21st quarter results Conference call. As a reminder, today's call is being recorded at this time all participants are in listen only mode. Following the presentation, we will conduct a question and answer.
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I'd now like to turn the conference call over to Steve Campbell from Investor Relations. Please go ahead Mr. Campbell.
Thank you operator, and welcome everyone to our first quarter conference call.
This call is being webcast and the slides are available on our website at <unk> Dot com.
Please take note today or the advisory regarding forward looking statements at the end of our slides ended our disclosure documents that we filed on SEDAR and Edgar.
Following our prepared remarks today from the leadership team, we will all be available and take your specific questions. Please limit your time today to one question and one follow up the simply allows us to get to more of your thoughts and questions I'll now turn the call over to our CEO Doug Suttles.
Thank you and good morning, we very much appreciate you dialing in today for first quarter update.
I hope you are healthy and surviving staying at home.
Today, we are living you know unprecedented times, both in our daily lives and in our industry.
The last two plus months, we've been managing through a challenging combination of events that is one for the ages as shareholders. It's important that you know we're in a very good position and I'm very confident we will come out this even stronger well we didnt predict this situation we did plan on volatility we.
Deliberately built a business that as massive flexibility and that allows us to be very dynamic and how we respond.
The immediate actions, we're taking positions us very well for 2021, and we will talk more about that filling the call today.
Our first quarter financial and operating results were very strong we delivered higher than expected production for less capital, but clearly a lot has changed in our sector. Since we closed the books on the quarter.
We'll focus this morning on how we're effectively using that flexibility we've built into our business to manage through these challenging times and how we see ourselves positioned for recovering world.
We will not only survive, but we'll be position to thrive and I know, we all hope that that day is very soon.
I'm joined today by other members of our team who will help with the presentation and be available to answer your questions. We will reference the slides, we issued yesterday and take your questions. After our prepared remarks.
The market is certainly challenging and something none of us could have predicted I told Solon recently, the while we prepare for black Swan event in our risk management process. We never thought we had to prepare for a whole flock of Fortunately, we have the flexibility to rapidly adapt to changing market conditions without incurring fees are penalty.
These we're adjusting our activities in real time to assure that we get a optic optical optimal outcomes today as well as position us for 2021 and beyond.
You will find in today's stack that we have outlined potential scenarios for the remainder of 2020 and for 2021.
Although we are not issuing formal guidance. It's important that you understand what our business can deliver the recent reductions to our cash cost in a meaningful gains in capital efficiency have enhance the cash flow outlook for 2021, our stay flat capital at a $35 oil price is about 1.5.
Billion dollars.
You will recall that this is about $700 million less than previous estimates more on how we get there later in the call.
As the Cobot 19 demand impact became apparent in oil markets, we immediately announced a series of actions to protect the health and safety over workforce maintained balance sheet strength and preserve liquidity.
Over the next several months, we expected oil prices will be weakened volatile, although encouraged by okay, OPEC plus cuts and the swift actions being taken by producers to cut capital defer completions and shut in production. The covert 19, driven demand losses to great to quickly overcome but it is encouraging.
To begin to see the green shoots of returning demand.
We are laser focused today on the things we can control and are using the tremendous flexibility, we built into our business to make sound decisions consistent with our market views.
Our priorities today are crystal clear there has never been a more important time to focus on efficiency, both cash cost and capital efficiency get the most out of every dollar. We spud. This is something we're very good at and we have a longstanding track record when it comes to innovating and creatively finding new ways to.
Enhance margins and reduce capital costs.
The entirety of workforce is solely focused on safely doing this.
When this crisis began we announced we would reduce cash costs by $100 million and today, we are doubling that to $200 million and we expect the vast majority of this will stick with us in 2021 and beyond in addition in the first quarter, we substantially reduced well costs versus 2000.
18, and now we believe they will be more than 20% lower in 2021 versus 2019.
The steps, we're taking today are maintaining our strong balance sheet and preserving liquidity, we have the flexibility at our business to do this quickly efficiently and without penalties.
In the second quarter, we immediately cut capital by 60%. We went from 23 rigs to the seven we're running today, we reduced frac spreads from eight to zero and we did all of this without incurring penalties or termination fees.
Our 2020 cash flows and balance sheet and some are supported by our strong hedge position successful risk management is a part of our track record and is designed to manage balance sheet risk.
In addition to reducing cost in capital spending we also entered the debt market and repurchased a portion of our 2021 in 2020 and 22 bonds at a discount.
Lowering our debt and our interest expense recall that this is something we did effectively in 2016.
We have substantial in from liquidity today and note that to credit agencies recently reaffirmed our investment grade rating, which we know is a key advantage in today's cap fully constrained market.
With the extreme volatility we've seen in oil prices, we are actively managing our production because we operate substantially all of our production we have almost full control to shut in the right wells based on variable cost market views by areas differentials and the extreme contango in the market today.
We have a thoughtful approach to shut ins and are confident we can quickly return wells to production without reservoir damage or lasting impacts and most importantly, we're protecting the health and safety of our people, we seamlessly deployed our business continuity plan and remove to remote working with our team effectively managing the bid.
Snus from home, we're now beginning to return to more normal working aligned with national and local guidance. We also implemented safety protocols in the field, where we've now completed over 45000 health screenings. This has been very effective we've had no known cases of cobot 19 in our field operations.
Our goal was not just to maintain critical functions, but to effectively run the business I have to complement our team as we haven't missed a beat.
These priorities give us tremendous resilience and position us to thrive during the recovery. Although we are certainly prepare to make additional cuts to preserve our liquidity and protect the balance sheet. We also believe we have to do this in the context of rubber recovery I'll now turn the call over to Brennan Mccracken to discuss our first quarter results.
Yes.
Thanks, Doug.
We had a very strong start to 2020 with production ahead of plan in both capital and cost cash costs below budget.
Our first quarter cash flow was $535 million and operating earnings were 27 million.
Our production was 19000 view is a day higher than expected at 571000 Boe per day.
This outperformance relative to our budget was primarily due to both strong well performance and faster cycle times.
Our first quarter crude and condensate production of 215000 barrels a day was above budget by 7000 barrels a day and was up 4% year over year.
We also produced over 1.5 Bcf a day of natural gas in the quarter.
We remain one of the largest independent crude and condensate producers in the sector today.
One way to think about our production mix is that we produce the same amount of crude and condensate as concho.
And the same amount of natural gas is range resources.
We firmly believe our diversified portfolio is a real advantage through the cycle.
Our original 2020 budget plan was to invest $865 million of capital in the first quarter.
As a reminder, our original guidance called for Us to front end load activity in our base assets to maximize operational efficiency.
With continued efficiency gains our actual investments in the first quarter came in 9% under budget.
Total costs in the first quarter were lower than expectations at $12 in 17 cents per Boe.
As will cover a bit later, we expect to continue to drive savings in both capital and cash costs through the rest of this year and beyond.
Our realized hedge gains in the first quarter were $150 million.
Our total liquidity today is at $3.4 billion during the first quarter, we went into the open market and repurchased $100 million of our 21 and 22 notes for $89 million.
These transactions included $90 million as senior notes with fixed rates of 5.75%.
And $10 million of notes with fixed rate of 3.9%.
The impact of these repurchases reduces debt lowers our interest expense and extends term.
In early March we immediately adjusted our investment levels, we dropped second quarter capital by 60% or $500 million.
We understood the importance of moving fast and we had the flexibility to do so.
As Doug mentioned, we did not incur any penalties or costs to make this change.
In April we restructured our hedge book to further insulate us against lower oil prices today, we are fully hedged on oil for the second quarter with more than 200000 barrels a day hedged at an average price of about $42 a barrel.
The majority are in fixed price swaps at $41 in 50 cents per barrel.
And the remainder are in Costless collars between 50 and nearly $70 per barrel.
Therefore, we have a hard floor at $42 per barrel.
We also have 1.2 Bcf a day of natural gas hedged at attractive prices.
Net today's strip our hedge book has approximately $1.1 billion of value for the last three quarters of 2020.
We traditionally hedged W.T.I. role as part of our risk management process. As a result, we have mitigated more than 70% of our role exposure for the balance of 2020.
With the financial hedges at plus 25 cents per barrel. This is quite favorable relative to the current market.
Our teams have a history of effectively managing risk in our business in this year's hedge book will generate critical cash flow through this period of low prices.
Given ongoing uncertainty continued market volatility and the potential for production shut ins, we have suspended our 2020 guidance.
However in todays presentation, we provide some near term scenarios to help you better understand how we're managing the business.
Generic scenarios show a compelling case for 2020 and 22021.
And our supported by our performance and the decisive actions we've taken.
These are difficult times, but we are well positioned with a strong culture of innovation a track record of delivering on our objectives financial strength and significant flexibility in particular, we have a well established capability to drive down costs and relentlessly enhance efficiency.
Now I'll turn the call over to Mike to further discuss our cost reductions.
Thanks, Brendan we have pushed on all parts of the organization to safely reduce costs.
We have a track record of constantly innovating to find efficiencies to drive down costs and enhance margins.
Over my career I have seen our industry get incredibly efficient during the downturns and we're doing it again.
Our company as a culture of operational excellence this extends across all aspects of the business.
For those of you than a followed us for some time no that if we put a cost target out there we hit it.
Our track record here is second to none.
Our teams came through for US again in the first quarter.
This is a direct result of our culture, which is unwavering and defines who we are and how we operate.
In our appendix, we've summarized the key elements of our culture on a few slides.
As we believe this is often understated advantage.
Come out when you have a moment.
Here's the big take away.
The cost savings we've generated to date when coupled with the reduced legacy cost center business translate into an incremental $300 million in 2021 cash cost savings.
These legacy cost reductions have no risk there simply expiring contracts and commitments.
It's important for you to understand our ability to generate free cash in a low commodity price environment.
And today, we're providing some information to help you get there.
We deploy cutting edge technology with an unrelenting focus on innovation.
This could not be more important as we fight to reduce costs and increased margin.
At the end of the day.
The safe and low cost operators with scale will win.
Our proven ability to constantly innovate to deliver improved results is core to our culture.
The key is to make sure our near term gains translate into permanent economic advantages for us over the life or the assets.
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Our first quarter operating performance was exceptional with today's performance.
With today's focus on macro events, it's easy to overlook the good news occurring at the field level.
Well vintage is a world class operator everywhere, we operate we're consistently at the front of the pack, we lead industry in terms of cost per foot and well productivity.
And we have consistently achieved this without ups facing infill locations and sacrificing future inventory.
Okay.
We had a great story of progressing efficiencies in the first quarter in fact, our drilling completion cost performance was 9% better and our 2019 average.
It's critical to note that we achieved these efficiencies.
Before the recent oil price slide.
We're now forecasting an additional 10% improvement on cost in the second quarter and throughout 2021.
Much of the savings we've seen to date are expected to be permanent.
Leading to lower breakeven projection and our higher cash flow outlook for 2021.
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In each of our quarter regions, we lowered our cost to drill complete equip our wells and reduce cycle times. This means we are stretching capital investments further pushing down breakeven costs expanding margins enhancing returns.
Our new lower expected log cost for each of these plays as shown here.
Notice.
And that we have also shown our pace setter costs.
We're using while costs for planning purposes that are higher than our pace setter results in other words.
We have high confidence we can deliver these estimates because we've already done so.
I'll now turn the call over to our COO Gregg Givens.
Thanks, Mike.
We saw impressive gains across the portfolio in the Permian, our well cost dropped to $700 per lateral foot and we expect them to be just above $600 per foot going forward.
These cost or industry, leading.
One exciting innovation, our Permian operations as the adoption of some of rack completions. This involves fracking two wells at the same time, using a single frac spreads reducing cycle time and saving costs.
More than two thirds of the wells turned in line in Q1 were completed with this technology and we achieved an 18% decrease in our frac cycle time compared to 2019.
We continue to see big gains in the Anadarko the rate of change in this operation is nothing short of phenomenal and clearly demonstrates what an experienced operator with a REIT culture can achieve.
We have recently turned in line 13 stack wells, we're drilling and completion cost less than $5 million.
That's $3 million less or nearly 40% less than new fields legacy well costs.
These cost reductions or result of faster drilling times increased pump rates and innovative supply management solutions.
I applaud the team for continuing to drive down costs and improve margins in this important play.
We have made the Anadarko hugely competitive with every other basins in North America.
Our capital efficiency story was also evident in the Montney, we're optimizing our wellbore construction, increasing time spent pumping and reducing downtime at our operations.
We've got a lot of thought into how we are shutting in wells to preserve future economic value.
We are voluntarily electing to shut in production as opposed to selling at the low netback prices offered in the market today.
It is important to note we're not using the value of our hedges are shut an analysis.
Today, we have about 65000 Boe per day shut in.
Which about 35000 barrels per day as oil and condensate.
This is a combination of shutting in wells and deferring production and recently completed wells.
We expect this number could rise in June.
Our multi basin portfolio is an advantage here as we manage curtailments real time, recognizing not only benchmark prices, but regional differentials and differences in the product mix.
It is a highly integrated approach between our operating and marketing teams.
We are simply electing the store our oil and the reservoirs, we do not expect any detrimental impacts when we turn these wells to production and Thats something we can do very rapidly wants pricing conditions improve.
Ill hand, the call over to according to discuss our liquidity and financial strength in more detail Cory.
Thanks, Greg incidence, it's extremely important that you leave today's call with affirm understanding of our credit fits facilities and the bullet proof nature of our liquidity picture.
We've seen some recent sell side reports that don't quite capture this accurately. So we provided a couple of informative slides and we'll spend a few minutes on this topic today.
We have two facilities with substantial headroom went in Canada and what in the us.
Provide total capacity of $4 billion.
These facilities were just renewed in January and are not subject to any changes through mid 2024, as we can attest from past cycles in energy. There is no greater asset than liquidity is the oxygen that provides the staying power to the business it will get us safely to the other side.
Here are the facts, we do not have a borrowing base or annual redetermination process that is underway today with many other companies our facilities, our unsecured and are not reserve based lending facilities, we have no cash flow EBITDA or leverage covenants, which in today's period of low prices could make reductions in activity level.
Sales and supply curtailments very difficult, we have no onerous covenants and this provides greater certainty and optionality to effectively manage our business like we're doing today.
Although it's a great advantage to be rated investment grade in periods when access to capital is constrained or expenses access to our facilities are not contingent on this rate be assured we will work very hard to keep this rating interactions to date demonstrate our resolve.
Our market capitalization has no impact on the facilities. These facilities are backed by nearly two dozen of the world's largest global financial institutions. All these entities hold an a minus credit rating or better.
The facilities have a financial covenant adjusted debt to book capitalization, It's based on book capitalization with a 7.7 billion dollar permanent add back for noncash write downs.
This add back is locked in and is not subject to re determination. The tables on this slide show the calculation and the ratios at year end 2019, and at the end of the first quarter.
Our balance sheet is strong and resilience backed by the deep liquidity profile I just highlighted by design, our maturity profile as long dated and staggered with more than 80% for long term debt due in 2024 later.
It is an advantage today to be investment grade rated and two rating agencies recently affirmed us as an investment grade credit.
Our two maturities in late 2021, and early 2022 combined total about $1.25 billion.
There may be opportunities to refinance these maturities if attractive rates are available for an investment grade credit like of vintages. However, our facilities have ample capacity to take out these maturities, both extending term and lowering our interest expense.
Maintaining our significant liquidity and limiting the use of our facilities to run the business is extremely important to us as both demand and commodity prices recover we fully intend to run our business free cash positive.
Longer term, we're committed to running our business with a lower level of absolute debt.
I will turn the call back to Doug.
Thanks, Corey let me discuss our scenarios for the remainder of 20 and 21.
The capital efficiency improvements reduced cycle times cash cost reductions and outflow outlook for lower legacy costs in 2021 have significantly enhanced our future outlook.
Recall that we used to refer to our stay flat capital case in the low $2 billion range. Today. This number is much lower around $1.5 billion.
Although we are using the flexibility in our business to managed shut ins. We are confident in our ability to exit 2020 at about 200000 barrels a day of crude and condensate production.
Under this scenario for 2020, we would invest approximately $1.8 billion to $1.9 billion, that's more than $800 million less than our original $2.7 billion budget.
This is a significant reduction, but it maintained scaling our business and when coupled with lower cost and better efficiencies in 2021 results in a strong trajectory for the company.
And I should note that these investments generate quality returns in a $35 WT oil price and two dollar and 75 cent Nymex gas price world.
For 2021, this scenario has us investing about $1.5 billion, which maintains 200000 barrels a day in crude of crude and condensate production at $35 WT into 75, Nymex gas price. This scenario would have us free cash positive, including our dividend it.
It is important to understand how we're thinking about the future and that you know just how resilient our businesses. This is not formal guidance, but the should give you a sense of how we're positioning the business not only for today, but also for 2021 and beyond.
Before opening up for questions I'll quickly summarize today's key messages first we think it's important to balance the challenges of today with positioning for tomorrow and the scenarios, we've highlighted certainly do that.
We are confident in our ability to exit 2020, with 200000 barrels a day of crude and condensate production and then maintain that level through 2021 with far less investment than previously thought.
We can do this because of the substantial efficiency gains we've captured and we continue to improve driving down costs like we demonstrated in the first quarter will inch increase our 2021 cash flow and enhance returns our track record here is quite strong and I know we can deliver third we are advantaged due to our.
Flexibility, we intend to use this flexibility as the options. We keira, we have across our multi basin and multi product portfolio to make the right near term decisions that will put us in the best placed for the long term.
We are laser focused today on preserving liquidity and maintaining our strong balance sheet.
Although the timing of demand recoveries are uncertain, we do know that it will occur the world needs our products and we anticipate we intend to be positioned to thrive on the road ahead.
Lastly, our team has a strong track record from the field to the office, we have a tremendous history of improving efficiency in hitting our targets and on firmly convinced we will do so again.
That concludes our prepared remarks, and operator, when we're now ready for questions.
Okay. At this time with anybody has a question. Please press star one on your telephone keypad again that John one on your telephone.
Your first question comes from.
Then from Bank of America. Your line is open.
Thanks. Good morning. This slide 10 is very useful I just wanted to.
Circle back Doug on the scenario you are highlighted on maintenance capital of 1.5 billion could you share with US again broadly with the split would be between Permian Anadarko Montney and the based assets, perhaps a decline rate improvement embedded in that.
At and.
A level of Doc assumed that the beginning of the year.
Yes. It that was that was quite clever I think you got about four or five questions in there, but let me see what I can do with them.
So first on the distribution of capital.
I think at this point I wouldn't want to guide or give you any indication where that's headed because we have a lot of flexibility I mean, we have a portfolio I think that brand and highlight that produces not only a lot of crude and condensate, but a lot of natural gas and NGL sales as well so theres a number of different distributions across the portfolio portfolio to get to that.
Outcome and of course, it's a bit early to make that decision, but when we model that we can see multiple ways to get there probably up your duck questions very important as well, though because we actually envision exiting this year with a fairly normal number of Ducs. Currently we are building on because we've shut down all completion activity.
But we would expect to roughly exit this year in that scenario with about 30, docs, which would be what we would normally be doing.
A year over year.
May have left something out so if I didnt, they're migrating please.
Decline rate, we actually see it moderating.
Both on be OE sand on a crude and condensate production production by about five percentage points varies a little bit between gas and oil, but clearly when you. When you move off of growth into a stay flat case your underlying decline stocks starts to moderate as you have fewer.
Newer wells in the portfolio.
Thanks, Doug and a big picture question for you if I may in a low price environment would you be revaluating, youre, well spacing and our completion designs.
You know it's a good question, but I think is highlighted in the prepared remarks, what we've been able to do across the portfolio is actually demonstrate that we can give very competitive well results, while actually using our keep approach, which doesnt sacrifice both future locations or this really valuable.
Land that we hold so I don't believe it is it's constantly shifting in moving.
As we learn and then on completion design I think what we've we've shown typically our completions have been staying the same are growing yet we're still driving well costs down in an example of that would be would be well Greg highlighted with the Simon Frac approach. We are now using where we use one frac spread to simultaneously complete too well.
Yes at the same time, so I don't think it would in fact in a few areas. We're still looking at increasing the size of the jobs and we think we can offset that cost with with efficiencies.
Your next question will come from Greg Pardy from RBC capital markets. Your line is open.
Thanks, Good morning, I definitely a number of my question is taken in that first one is a good summary.
Maybe just.
Couple of follow ups, just on the decline rate Doug than the the 5% reduction.
What would that what were the reference case be there like 30 36, 37%.
Yes, Greg we've we've historically talked in the high Thirtys it varies a little bit by product, but it would for instance for for oil they would fall from the high Thirtys to the mid Thirtys floor.
Be always it falls from kind of.
Middle Thirtys to low thirtys. So it does vary a little bit byproduct part part of that is some of our legacy gas production is on lower decline because of solar.
Okay and in terms of the sustaining capital is kind of a dumb question, but thats on a on a on a daily basis or is that really just kind of targeting the oil and commodity that you mentioned.
Yes, today, it's really targeting oil and candy.
It we might have very very small gas decline in that but there isn't a huge difference in that scenario between be always in crude and condensate.
In it but because we have we have quite a bit of flexibility in there and that's why the question about distribution of that capital across the portfolio. We can get there in a number of different ways, depending on what commodities in regional pricing is doing.
Your next question will come from Bryan singer from Goldman Sachs. Your line is open.
Thank you good morning.
Can you give us a little more to grow our color on.
On where to shut ins are by area and are what the what the proportions are and then what oil price would you need to see two boats.
Earlier content curtailments, but then also go into growth mode relative to the 200000 exit target.
Yes, Brian in you know once again, one of the advantages of having a multi basin portfolio.
Yes, we can use is not only what the benchmark prices are doing both regional Diffs are also doing so today when you look at what shut in today, a much larger percentage of the Uinta Bakken and Eagle Ford or shut in in a much smaller percentage of the Permian Anadarko in Montney ours.
Shut in so the biggest chunk is in.
Our base assets and largely that just driven by a regional differentials a little bit by the cost profile.
As to what price, we would return activity will it's two things on them.
On shut ins today, most of our a reasonable portion of our production shut in.
Is clearly doing more than covering variable cost today, but we just decided not to sell those barrels at today's prices and effectively store those for the future because as a as Greg mentioned, it's not only shutting in wells that were already producing we've chosen not to bring on some wells that we've drilled and complete.
Good and other wells that we've recently drilled and completed we're producing it very restricted rates.
It's hard to put a precise number because diffs played a very big role in this conversation and also the product mix plays a very big role in as you know our portfolio as everything from wells that produce 80% of their production is oil to and other places, it's 15 or 20%.
So it's hard to give you an oil price because it actually matters, what gas and Ngls are doing.
And then when we restart activity is also the same answer.
Today's prices, we wouldn't do that but it's going to vary by region and.
And it's not just oil price dependent it will also depend on what gas and Ngls are doing.
Great. Thank you and then my follow up.
And try to get a couple a couple in but not at creatively as others can you talk to the oil mix in the in the Permian and Anadarko basins as you see well performance moving around well performance improvements are coming more on the wet gas side versus the black oil side, and then on a natural gas with higher gas prices.
Basins or in the Montney impacts in influence your interest in drilling more gassier prospects.
Or and shifting capital that direction.
Yes, Brian in terms of the product mix in the Permian in the Anadarko, it's relatively stable. It's it's not moving around a lot. It it does vary a little bit by zone and by county in the Permian and of course as you move across the window, but thats not shifting dramatically.
Your question on gas prices is interesting and we're currently studying that at what point would the wells you target shift based on product pricing and I do want to give you a precise number but clearly.
There's a number of people who are are getting more bullish on natural gas prices and of course, what that does in a play like the anadarko or the montney. It just makes them more attractive because we still get the liquids production, but we'd get an even better price.
For the natural gas.
It could make a difference on capital allocation at the margin we're studying that today because as you probably know Brian as you move into particularly in the Montney.
As is into some of the different type curve areas. They actually you actually get higher rate wells.
You get a lot more gas in you may not be giving up much on the condensate side. So it could drive it at the margin I don't think it'll be a huge effect, but at the margin it could make a difference.
Okay.
Your next question comes from Jay ran from JP Morgan Your line is open.
Good morning, Doug I I know you guys employ a rigorous capital allocation process just wanted to to see if you could.
Give some more thoughts on the 2020 scenarios that you outlined today, though the one eight to one nine.
What kind of oil price.
Are you thinking about to support that level of investment this year and maybe it and maybe talk about what.
What would drive that to be a lower level of spending if prices don't.
Show some recovery in the back half of the year.
Yes Rooney the.
If you look at that scenario it broadly be supported by something we see in the strip today, but I think is this corey highlighted.
If we see weaker prices, we're clearly going to focus in on the balance sheet.
And the intent here is not to use up our liquidity.
But I think in in a scenario that looks not to broadly different than you see in the forward curve it feels reasonable, but if we found that prices aren't recovering in their weaker we would ultimately pull capital back.
And that's why we've described it as a scenario as opposed to guidance. So we have to see but I think.
It's not broadly different than what you see in the forward curve at the moment.
Yeah. The second question is that could you talk a little bit more about your well costs are now.
Trending below your peers bye bye bye quite a.
Big margin as we studied this on a per foot basis could you talk about what's driving that and just broadly what's influencing the sustaining capex to be.
One and a half versus call. It a 2 billion dollar rate the before the downturn.
Yeah right. Thank you for the question I mean first of all I'd highlight that there's only one company in the world.
These drilled and completed more horizontal wells, where the multistage frac than us. So we have incredible experience. We think one of the advantages of being in multi basin his ability to learn in lots of places than applied across the portfolio.
And in tied to that it which I think Brendan highlighted as our culture.
This is all about innovation in constantly challenging what we do and how we do it.
I think if you look at our track record, we're always changing we're always driving it forward. We're always looking for the next improvement in some of that's with technology. Some of its with the supply chain you might remember, while others were thinking they should own sand mines, we were working on local sand and while others were spending large amounts of money on.
Water infrastructure, we came up with a very creative solution.
To that problem and it just doesn't stop I remember in 15 and 16. Many people were saying the cost reductions. We delivered then would reverse out in 17 and 18, well if you look at our costs they went down.
Year over year, and we firmly believe they're going to go down in in 21, and I think Mike highlighted in his comments.
That the numbers were using in the forward look scenario are actually higher than cost we've actually delivered today, our pacesetter, well, which is our are well with the lowest cost is actually less expensive than what we've used in that planning scenario and if you look at our tracker is that's information we usually publish on a run.
Either basis, you'll find that quickly our pacesetters become our average and we have established a new pacesetter.
And continue to drive down so a lot of its technology driven it's not based on massive assumptions about lower service pricing.
It's really driven by the innovation, we're going to do in our operations.
Your next question comes from Brian Delaney from Citigroup. Your line is open.
Good morning, everyone. Thanks for taking my questions I wanted to ask one on the 2021 commentary. So you note a potential scenarios in which you're free cash flow positive next year.
Dividend at a commodity price not too dissimilar from the current 2021 forward curve for both oil and natural gas I'm curious your hedging thoughts or hedging strategy given that backdrop at what point would you look to layer in hedge protection on that 2021 plan versus targeting further free cash flow upside and net debt reduction potential F.
Commodity prices were to continue to improve.
Yes, Brian Good question and you know if you look at our history, we always enter.
The current year with a strong hedge book and remember we do this to protect our balance sheet, which you're seeing the effect of that this year. We also use a variety of products based on our views in the market in the in the risks it's out there so everything from fixed price swaps to three ways.
And I know there was some commentary are not very long ago that are three ways, we're providing protection, which which actually wasn't true because link people fail to understand that you can convert those in the spread value in there does have value. So we'll build the book as we go through the year and as we from up our plans for 2021, it will be underpin.
And the balance sheet to be underpinned by hedge book, but at this point I wouldn't want to indicate what the prices I think it's too early to do that and at the moment, we're not out in the market.
Hedging all at the current strip, but as we get closer to the ended the year and begin to firm up our plans and also see how 20 finishes will end up with a strong hedge book for next year, which is consistent with our plants.
Okay. Appreciate and then as a follow up you disclose purchasing roughly 100 million of 2021 and 22 senior notes in the open market I'm curious how much additional runway you may have there in the open market seems as if you are prioritizing the 20 twos based on the combination of interest rate interest savings and percent discount.
The face value, but any thoughts on strategy and whether there's a limit to how much you do in the open market.
Yeah, maybe I'll, let corey pick that up.
Hey, Brian Yeah. Thanks for noticing the repurchase obviously when we are targeting the 20 ones than 20 twos. It was really just an ability to extend maturity as well as capture some of the discount I think what we saw initially anyway on the trading was that the 20 twos traded at wider.
Then the 21, so we just preferentially went for those based on price.
Your next question will come from Jeanine Wai from Barclays. Your line is open.
Hi, good morning, everyone anyway.
My first question is on that and I guess following up on Brian's question, we recognize that you have revolver capacity for sure.
In terms of maturities that are coming due over the next two years is the plan to pay the strictly out of free cash flow and if that is the plan is the stay flat Marianne something that's likely to get pushed forward and what the VTI price do you think is required to cover that maturity out of the free cash flow and.
I think we saw the unhedged price sensitivity that you provided what you're really helpful. And we think that doesn't have any imply that debbie.
Probably average something closer to 45 over the next couple of years to cover that maturity. If you go at ground. So we're just wondering if we're thinking about that right and if you have any further color. Thank you.
Jay maybe I'll make a couple of comments Ns best Corey to.
It's more detailed.
What we've outlined in when we've looked at various scenarios, we've taken a very conservative view.
On a on our projections on liquidity.
So as Corey indicated we can clearly.
Repay those maturities with our with our credit facility, if we need to.
But you also are probably aware that the credit markets are slowly opening up in that provides another option.
And then clearly as prices improve we'll be generating more free cash flow, which can also contribute to that.
So I think we have a number of options here and as we look forward, but koreas or anything else you'd like to end.
Yes, I think generally clarification I make his comments, we also highlighted as Doug alluded to the the option to refinance as one that in a more normalized open market for our investment grade credit, we would entertain that as well so.
To the extent, we want to reduce overall debt. We also have some short term.
Borrowings on our credit facility that can be repaid easily as well. So we've got lots of flexibility on that on the capital structure front as well.
Okay. Thank you and I appreciate all that color I guess the second question is moving on your operations on the assets in the past you've mentioned that your core three plays all have very similar returns and in todays oil price environment with the differential than your cost improvement.
Still the case, so just wanted to check in on that and if it's not the case at what natural gas NGL prices. You. This that does this docs are to exceed the Permian on the Karen. Thank you.
Yeah, It's it's interesting insight and I think what we have to be very cautious about right now is that.
This has been an unprecedented set of conditions, where you had massive demand destruction that happened very very quickly in the supply response has taken some time it but now you're seeing its also quite strong in factors, even some indications that the two points may cross.
At some point in the not too distant future, but that varies a lot by regions.
We've seen differentials.
In areas move radically.
To the tune of $15 are more per barrel over the course of days or a week.
And I don't think when we look at making capital investments, we would use that sort of volatility in today's market to influence as we're going to take it would be taking a longer term look so in longer term we're not.
We're not that concern that the big historic Diffs or a lot different in the future in fact, if anything because of lower production levels and lower growth levels, it's going to tighten those in so I don't think that will drive it but your comment about.
About natural gas mix uneven NGL mix because there is some there is some.
Encouraging signs on the NGL side and it out there as well that Ed that at the margin it could shift some capital around but once again I'd. Just highlight this is the advantage of our portfolio and why we've never wanted to be or intended to be a single basin player.
This allows us to just under eight react to that I would tell you though that.
When we think about investments is not just on the current or the short term commodity price would be looking for what at what level. We think it would be sustained at or what the forward look is.
And I think there is some optimism on gas on the next 12 to 24 months. The question would be is how sustain that will be overtime.
Your next question will come from Neil Dingmann from Suntrust. Your line is open.
My first question is on Doug on your operational efficiency I'm. Just wondering very briefly can you continue to achieve these with the.
Kind of the minimal DNC that you all are planning for the remainder of this year and then what you're thinking about into 2021.
Yeah, Neel, it's a it's a great question and.
Scale does help here, but the environment is quite a bit different right now that obviously it was just a few months ago.
And.
I think we're firmly convinced we can.
But it is clearly when you're doing more it's easier to do a bit more experimentation and test new things, but many of many of the things we've been implementing over the last six to nine months, we're continuing to scale up and then once again I'd reference Simon Fracs, which is something we've started in the Permian and are now beginning to spread across.
Our our portfolio. So I believe we will get there.
Even at a lower activity level and clearly our teams.
Our thinking about while were lower in this pause phase right now.
About how they can take further costs out of the business and drive further efficiency savings. So I believe we can do that.
But you're right. It is it is a little more challenging at a lower activity levels.
And he is great detail than my sort of follow up was in that same vein I was just looking at that presentation that just that really detailed Anadarko basin presentation, you'll put out early this year and you talked about I know and one of the mid slides there about being prime for the full field development. So again in that same vein.
Just running two rigs there in is that yes.
I'm, just kind of wondering what sort of plan to tackle that versus you know talking about early this year, maybe more of a full field development. So I'm just when how you're thinking about that in the play now.
Yes, I think if you look at the spread the seven rigs the three two into what it still allows us to do is efficiently do these larger pads that we do today, which we typically use.
Multiple rigs on a on a single location and Thats, partly what drove that decision. So I think we will still be able to deliver those efficiencies there and in the Anadarko.
The things we talked about.
Coming into the year was how we would be doing a bit more activity in the scoop.
Which we have been doing in that because we do have quality acreage down there with the stacking and you've seen us mixing.
Those two pieces in this year and we continue to do that in and it's an area. We've also seen radical cost savings improvements and.
Particularly in drilling time, I think that the team I mean these numbers are incredible. We're we've now got wells at less than $5 million were just slightly over a year ago. These cost almost eight.
And.
I don't believe the teams going to stop where they are today.
Okay.
And your next question will come from Jeffrey Zandi John.
Pickering Holt your line is open.
Good morning, Thanks for taking my questions minus a two parter on the on the Montney.
First can you just comment on the capital outlook, you're envisioning there when it comes from meeting plant expansions coming out and then bigger picture when the medium out medium term outlook is for the region overall point in time.
Yes. Good question I mean, we do a working with care, we are building a new gas plant in the Pipestone area.
Which we've been consistently talking about coming online early next year that that plan. As you know this is a similar arrangement to what we did in cutbank, where we're actually building the facility and will operate it but it's owned by care. So we're working quite quite closely with and that's going incredibly well.
We think we have some really good practices and a great team, they're delivering results that the most interesting thing about that though is.
When we start that up we haven't been drilling wells.
To pre pre drill wells for that facility, because we can divert existing production into that plant when it becomes available.
We don't have take or pay commitments there so it isn't going to create a drag on cash flow.
Depending on how we allocate capital across the business. So it doesn't create any additional capital strain on the business and it has a little bit of incremental upside because it will reduce the gathering pressures in that area, which will which will enhance our base performance.
You know on the allocation of capital kind of could try to cover that earlier, it's a bit early to tell I mean clearly.
The improvement in gas prices and you've probably seen the differentials in Canada have tightened in considerably.
As I mentioned, we're looking at that to see how it might shift some capital allocation in the company and once again I'd. Just highlight this is the advantage of our portfolio, we have that ability to do that and respond to the both fundamental prices as well as regional differentials, but you shouldn't be concerned about the new gas.
Plant, creating any capital drag or cost drag on the business.
All right. Thank you.
And our final question for today will come from Jeffrey Campbell from Tuohy Brothers. Your line is open.
Good morning.
Doug I was wondering on the 2020 stay flat can you disclose.
However, you want the relative capital allocation between the fourth replace based on the benchmark supplied on slide down and I've also wondering if there would be a significant differences and allocation and stay flat versus the free Kelvin.
Plans.
Yes, Jeff I think at this point.
It's it's hard I wouldn't want to get very precise I think all three will attract capital.
Exactly what the proportion is will be dependent on the various products and the.
And what the fundamental prices are doing but all three will attract it. We also do have about half of our current ducs are in or base assets. Today. So the we have ducs in the Eagle Ford the Bakken and in the Uinta.
Complete, which we'll we'll look at how we do that so it's a bit early to tell and as I mentioned earlier when we model. This we can we can look at various distributions of capital across the portfolio and get to that outcome. So it's just it's just a little too early in the good news is as we've shown once again.
We can move capital around very rapidly in the company.
We can we can both stop it and started and shift it and we've done that through a combination of how we're organized and how our supply chain team works I mean, I'd just highlight while others have talked about penalties and termination fees they've incurred with ramping down activity I'd highlight we didn't incur any of those.
And this is some fantastic work by our supply chain team.
Okay.
Helpful.
The other question I want ask is referring to slide seven 400000 per well dancing costs and upon them.
Hello, I was wondering first of all.
We have an average length of these laterals and isn't fully loaded costs and if it's not what do you think that would add to it.
Yes, I think it when we when we talk about this this is against our our standard well and it's a number of things which have gone into that we continue to reduce drilling time I mean.
Rotary Steerable tools, now I've gotten into a pricing zone, where they make sense and reduce drilling time and cost the completion concepts as Greg mentioned and our average lateral lengths.
Average wells lateral length is getting longer as our land team continues to work to consolidate our acreage. So when you look at those savings some.
$400000 per well versus 19, a number of things go into that but it feels very repeatable and we think there theyre going to go down further.
I turn the call back over the presenters now for closing remarks.
[noise], Thanks, operator, and thank you everyone for joining us today.
They stay healthy and we look forward to seeing on the road in person very soon good day.
Thank you everyone. This will conclude today's conference call you may now disconnect.
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