Q1 2020 Earnings Call

Hey, good morning Doug. It's Jack. I'll take that one. So as we mentioned the prepared remarks this this lower level of of capital will get us to that sort of Maintenance level of capital for this year importantly though the trajectory that spend over the last three quarters of the year is lower than it was off the first quarter and when you when you look at the mass of around a 200 average for the year and you the first quarter was 209, I think a good way to think about that is just resetting off closer to that average number throughout the rest of the year and then being able to maintain that.

That's really helpful. Jack Link's my follow-up is is probably a little bit more philosophical. Obviously you guys had written to the Texas Railroad Commission. You've seen what way in has come out with and I'm sure I'm watching to see what happens next week, but my question is probably 10 for you when you come out the other side of this what what is Cointreau look like you are you're very welcome to try and balance cash returns withdraw and also one where we expect but when you come out the other side of this, what is the rate business model grow three balance or maybe reinvest in reeds wait with your thoughts about it in terms of cash flow how how will control manage its business going forward and white of you know, I guess what is never a headline of wasteful production from Texas you could say based off the that the case has been put forward by pioneer.

Yeah, well, that's a that's a great question and I have a long answer for it. But I think the short part of the answer is I think what Cointreau looks like in the strategy going forward will be continuation of what we were building going into this and it it's more of a model of moderated growth and cash-flow generation. If it would be companies in our company with a stronger balance sheet with less leverage and and I think that we have shown that the u.s. Show production is the swing production in the world and we've talked a lot with you and others about how that's going to be sloppy going forward because we're not a cartel we're off a bunch of individually managed private companies and that you know, we from time to time we will get strong price signals that will cause us either to a dog.

Or curtail production and so we're strong Believers in the market working. You ask me about the Wayne and and that and and I think the market is working and I think about the reaction you're you're going to see throughout the industry is going to be more timely and and probably a greater action of what you would see from from if we had regulation.

I appreciate you know, it's not easy to to to answer if I can maybe squeeze one quick one into two just for housekeeping your cost benefits. Obviously lower-cost. You're achieving is that money is the stuff you're shutting in higher cost or should we think of it the other way makes and I'll leave it there. Thank you.

Sure, they'll get it the higher cost things that are shut-in right now.

Great stuff, I can't get you to quantify that will.

Oh, probably not. All right. Well good luck guys can just kind of environment.

Thank you. Our next question comes from Scott handled with RBC Capital markets your line is open.

Yeah, thanks. You all are in a little bit of more of a unique situation with you know, your cash flow generation and and certainly strong Hedgehog this year. And you know, I think that chart that you had in your slide down. It shows that you know, those those receipts is is is pretty telling bud, you know, when you step back and look at that cash, you know balance and and you know where your stock price is, you know, how do you think about you know that cash of going forward, you know, is is that something we're in this environment you'd rather just be a little bit more cautious or would you be opportunistic on on stock BuyBacks? You know your end. Can you just talk about like shareholder returns, you know going forward and and you know again, I understand it's a tough situation right now, but you guys are uniquely positioned. Yeah, but let me take a first habitat and Jackal come in and correct me but I would say that use the word caution. I think we're kind of in an unprecedented times right now. So as we generate more cash of birth

I don't think it would be unexpected to see us to continue to add cash to our balance sheet and be cautious both in adding back activity. But also how we manage our balance sheet and Thursday. We still you know, are are bargaining with our shareholders involves return of of capital and we we still are committed to that and but I do think that it's generating increasing amounts of free cash flow or a part of the investment pieces with Concho.

Great, and and my follow-up question is is you know pricing, you know of, you know, various, you know types of crude wage. Can you just give a sense on on you know what your exposure to w t l as in and you know, what what you see on that market, you know here right now. It's got well off a portion of the barrels we produce in the Delaware are classified as w t l or west Texas light. Most of them are only about a degree or so above that break point between Iraq and W T L. And so our marketing team historically has done a fantastic job managing it such that are realized pricing has not been impacted by wtl at all going forward, I think we'll be able to continue to manage around that and not be meaningfully impacted in our realized pricing. But we also do recognize the next couple of months could be difficult to predict with any certain place.

Just kind of given Midstream Logistics becoming more challenging likely but I think we've done a good job. And I think if you look at our realized pricing for example in one q and compare that against other peers of ours including Midland Basin players. I think it Compares very favorably

Fair enough. Thanks.

Thank you. Our next question comes from Bryan Singer with Goldman Sachs. Your loan is open. Thank you. Good morning. Wanted to follow up on Scott's question a couple of the earlier years when you talked I think in response to Doug's question of what Cointreau looks like stronger balance sheet less leverage didn't necessarily here consolidation in there. And I know that's been an area that contract participated in the past when you think about that cash in response to Scotts question and potentially building cash. Where does consolidation Rank and if not, I can just leave the cash on the balance sheet or do you think about allocating more to special dividends or or or any other any other activities? I I do believe the consolidation is going to be a narrative that you hear more about just because we have to continue to drive down cost in our industry, but I can tell you right now, you know consolidation other than wage.

Security on the trades that we've been doing to kind of clean up our asset base consolidation kind of the furthest thing from my mind right now and we have all the necessary components to run a business off multiple decades, so

I'm really happy with my position when we come out of this and having cash on the balance sheet having a strong balance sheet being able to return increasing amounts to the shareholders wage. I think that is kind of the what you can expect.

Great. Thanks. And then my follow-up is if we look back at the last down cycle 20 2015 2016-2017. This was a time in which the Permian really started to differentiate itself off the curve and we saw some secular reductions in in the field cost structure. When you look at the Permian today in this down cycle. Do you see the opportunity for more secular cost deflation or supply cost reductions and weird as that come from if you look out on the side of the cost of productivity side sure. Hey Brian will I do Thursday? I mean you've seen pretty dramatic improvement in our cost structure on like a DC any basis over the last couple of quarters. I think the teams have done a fantastic job doing that took us on a kind of sustainable efficiency gain side, but also to your point on more of a cyclical, you know, absolute service cost savings side one key was a continuation of that wage.

We're we're comfortably below that low end that we had previously guided to of 852 $900 a foot in the first quarter and I think from April going forward we will continue to to drive that down modestly and it's a blend of both. It's a blend of of secular and cyclical and I would say from here probably that's absolute cost savings are out Wing some of those more sustainable efficiency gains, just because activity levels have gotten so low,

Great, if I could sneak one last one in were the well that you brought on line positively impacting well performance in the first quarter at wider than normal spacing or normal Fitness.

Oh, the the wells that are coming online in the first quarter still have you know, a fair amount of kind of the the 2019 spacing still you're starting to see that that batch of UPS paste kind of from our where our design had evolved coming on but but you probably didn't see that many of them in one Cube or switch. We'll see here over the course of the rest of this month.

Thank you.

Thank you. Our next question comes from a rune daram.

with JPMorgan Chase

Yeah, good morning. Maybe just a bit of a follow-up to Brian. This is a question. Well, you're seeing me cos you mentioned are coming in below your 8:50 to nine hundred foot of it was wondering if you could give this may be some thoughts on on where it costs are in the Midland versus Delaware Basin and at what oil price, you know would would Concho considered kind of reacting restarting activity. You know, what type of price signal would you need to perhaps, you know move up from I think you're going to be running a Triggs in the back half of the Year given where your life structures trending today the 2nd, but yeah, we had previously said that you know that Blended 8/50 foot 8:50 to 900. We had guided to you could kind of add a hundred bucks for the Delaware Basin and subtract a hundred bucks for the Midland Basin and and I think that that relationship still holds true.

Yeah, I think as far as the activity level and pricing signals and things like that. I think it would generally you're going to see us be cautious. I think I think we will enjoy putting more cash on the balance sheet rather than starting up activity and I think it would require something that would be approaching sustainable pricing and the old normal ranges, M as in US generating new budgets in the future rather than adding back activity in the short-term.

Sure, nothing just my follow-up is the guidance assumes, you know, a hundred and twenty gross operated well over the balance of the year. I was wondering if you could give us maybe Jackson thoughts on you know, the Cadence of those completions over the balance of the year. I know there's a lot of them and and maybe some thoughts on how many completion Crews that you plan to run over the balance of 2020.

Yeah, thanks. I'm pumped that one too. Will yeah, I think it generally follows that rig Cadence that you see. So we're coming out of the first quarter will be a little bit higher here in the summer quarter than we will in the third and fourth and I think it would follow that same pattern and then I do want to mention I saw in your note this morning. There was a there was a piece around some potential English. Well costs. I think I think the issue there is just around the modeling and the assumed working interests and the inclusion of non-operated capital as well. We met Circle up with you offline on that. Yeah, happy happy to do that and just well just on the Frack Fleet assumptions for the back of the year how many crews it will get down? It's it's still in the three or four territory, but at the back half of the year, it'll be in the 3 is our current plan.

Great, that's super helpful. Thanks.

Thank you. And next question comes from Paul Chang with Scotiabank. Your line is open. Thank you. Gentlemen took accounting question d d n a house that you need. The Christian radio is going to look like after your way.

Yeah Paul, this is Jack. So so you saw that with the impairment we we marked down our our property roughly 50% So I think that's that's a good proxy found that gets you somewhere in the you know, plus or minus $10 range or or less, but there will be more moving Parts between now and then but I think that's a good start.

Okay, and that I think that when asked a question and you saying that your business model with the same but in terms of the actual operating or financial parameters, is there any guidance that you can give that I mean how before and after the Cooper this incident that may change my previously. I think you're talking June 7th to 10% production growth is that now? You're still the number or that that actually being revised somewhere further and also work out balance sheets. Do you even want to be more conservative and keep more cash on the balance sheet going forward? Yeah, let me take a shot that well first off. I am reacting to the current situation. We're in right now and we're we're balancing maintaining production being responsive to to today's environment, but also preserved.

Ability to to operate and and to run our company more like we had had in the past and as Tim mentioned we we still believe that on the other side of this thing a combination of some amount of growth and increasing returns to our shareholders is the proper model and I don't think we will get back to that model until we know what the other side of this situation looks like. But in the meantime, I think we are doing that with perhaps more free cash flow at the moment.

Okay. All right, that's fine. Thank you.

Thank you. Our next question comes from Leo Mariani with KeyBank your line is open.

Hey guys. Wanted to get back to the yes. What did you get back to the the shut-in question a little bit more here. Just trying to get a sense. Obviously, you talked about 45% of volume shut in it and were to come off. Just wanted to to feel you guys out. I mean you think that's going to be primarily just a second quarter in terms of when the the shut-ins are necessary and any color in terms of the interaction with your marketers. Are you starting to hear from your mom is that they don't really want to take, you know volumes later in May or into June just any more color would be helpful sure. It will I think it's important to note we belong today. We'll be able to flow all of our barrels through this. But that's not really our goal. I mean as as Jack mentioned our goal is to maximize cash flow. And so we're going to be very responsive to the pricing that we see and I think it's also important to just get out there that Jack reference that our our Hedges don't justify producing a barrel. That's otherwise uneconomic log.

H basis and so

That allows us to be very thoughtful and reactive in our decision-making. We have a tremendous amount of flexibility as it relates to our contractual situation. We have some limitations. Here's the month of May just around the nomination process and all of those things. But as you move farther into this into June, we have tremendous flexibility to curtail, you know, significant amounts of volumes wage has to the duration question. I think that's one of the hardest things to try and estimate I do think we see May and and especially June as the most challenging. Of this and not expect as the restrictions on on kind of Commerce and and things aloud demand to come back that you you come out the other side to some regard but then you still have a significant amount of oil and storage that you're going to have to deal with over a period of time. So I think time will tell I think I think the next couple of weeks will be helpful to see how our industry is responding in terms of dead.

Curtailment and and the supply side of the equation. Okay, that's that's very helpful color. And I guess just with respect to activity levels you guys obviously gave a a good Cadence in terms of how things progress and in 2 Q in the second half but wanted to ask around, you know new well turn in lines. You're continuing to Frack here in the second quarter. Are you looking at maybe delaying, you know those turning lines to kind of more the second half, how can we sort of think about when you know new new volumes from D? Well start to come on from Concho. Yeah, just just to be totally transparent. That's that's one of the big discussions we have here today. Cuz again, you're you're looking at the price signals the markets giving you for May and June and so that that could certainly be wage strategies for managing through this is to not produce those Wells for a month or two.

Okay, and I guess would there be any concerns around if you Frack those Wells and and let them sit for a couple of months with the Frac water in them that there could be any issues or do you think that operation that's not really a problem with a pretty confident based on looking at previous examples where we've had to do that for a variety of operational reasons. You don't have a you know, a gas line in time we've both on that and I'm sure that the related, I've seen a lot is around, you know shutting in producing Wells and what's the impact on that and in both of those circumstances, we've got a pretty robust data set of horizontal Wells that have been off ahead or not used to your specific question for one reason or another and we don't see any negative impact when they are turned on or returned to production admittedly. It's not a perfect life but it gives us a lot of comfort as we head into this. Okay. Thanks very helpful.

Thank you. And next question comes from Derek Whitfield with stifel line is open. Thanks. Good morning all hey Derek, May perhaps four wheel with regard to your revised Capital program. Does the lower price environment encourage you to further change your development approach to pad size and or spacing in an effort to improve returns month. It probably does not given where we were already headed, you know, certainly as we continue to reduce our budget we are high grading the things we're off the zones so and so, you know, I think it's important to note that that one point six billion dollar budget. That's our our third budget is a year and so it wouldn't you know again try to be extremely transparent our plan today, but we will continue to to watch the overall situation and react accordingly, but but no it probably doesn't change the components as it relates to space birth.

project sizing

Reference your 100 million in operating Productions on page eight. Did you speak to how much of that is 6 versus variable?

Sure, Derek. Well, when you think about that that total, you know, it's it's broken into both of the components that you mentioned. Probably a little more waited on the on the front office in that 60 40 range and and fixed costs are typically, you know more closely associated with with labor. And as I think I said earlier of that total we think that half or more of that are are sustainable changes that that will be made and and have have already been made in some cases.

That's great. Thanks. Well done in this particularly challenging environment. Thank you.

Our next question comes from Neil Diamond with SunTrust Shoreline is open during guys. My first question is really just on the 20/20 operation plans. It looks well never of your peers seem to be focusing more activity. I'd say primary more in the middle and dates and you all appear to be still producing both Delaware Midland and fact, maybe even a bit more in the Dell. Could you just speak to you know for a jet for any you guys I guess how often sort of use a regional decisions this year going into Twenty-One, they're both very competitive and and it seems like for our program is kind of a fifty-fifty balance between the two Asians.

So it's a lot of guys said question about you know, cycle times and such that for you all that that still doesn't necessarily come into play the economics still rule be the primary focus off. Yeah. I'm not I'm not sure. I'm tracking with your question though. Well, some other superiors had said that you know, they're doing a little bit more in the middle and bass and only because the cycle time for some of the you know, pads are a little bit quicker there in this type of environment. But you know, you know again you all seem to indicate your sort of seeing equally as positive economic. Yeah. I don't see any difference based on that. Okay? Okay, and then my second question is just based on the new cares act. I'm just wondering what y'all be eligible for any AMT tax credits in 20 or 21 that you could accelerate this year. And just wonder if there's any other new government programs you all might qualify for.

Yeah, certainly. If if if we are eligible, we will take advantage of of tax help. Otherwise, you know, we're we're we're not looking for any Financial or other health.

Very good. Thanks. Jeff Thanksgiving.

Thank you. Our next question comes from Michael Hall with hiking in energy advisors. Your line is open. Thanks. Good morning. Appreciate the time might have been addressed. I'm just kind of wanted to follow up a little bit on on some of the questions around Cadence and trajectory and just better understand your thought process how you thinking about evaluating? The the Ford program is we look at the month your Ford activity profiles, you know one observation is that the deeper deeper you cut today, you know, the bigger the whole you have to climb out of and the harder that is to than balance the the kind of cash flow and capex equation in you know, Twenty-One Twenty-One and coming out of twenty-twenty. Well, you know for you as well as just broadly across industry just kind of curious how much that sort of dynamic is it play as you evaluate the the Ford program and trying to trying to balance, you know dead.

great and as my

cutting, you know appropriately today but not too much to where you can impair the

I need to bounce back and play in the future. Sure. Michael is Jack. That's a that's exactly I think the point you're making there is is is what we think we are uniquely able to walk do in this environment which is react to the situation. We're in but maintain not only our production levels, but our organizational capacity to wage be you know on the ground at least at a fast walk if not running when that seems appropriate and so that is we think we have struck that balance with this plan change. But but as we've continued to say here that all the variables seem to be changing weekly so we will keep both hands on the wheel of course and then I guess last one is just kind of housekeeping. Are you all going to be building any sort of duck inventory over the course of the year do you think or will that be pretty balanced as we sit here today? I think it would be pretty balanced.

Okay, that's good change. All right. Well good luck out there and stay safe appreciate the time. Thank you so much.

Thank you. Our next question comes from Jeffrey Campbell with two brothers. Your line is open.

Good morning. Congratulations on the quarter make you as a result of reducing investment in response to the current market wage as to how much are the climb rate might be reduced as you continue this maintenance type spending.

Sure, you know what we talked about in the previous quarter's is is an oil decline rate.

That was in the low 40s and and moderating even with the previous capital budget amounts. And so most certainly at this lower amount should see that moderate even more quickly as we go into next year. So that that is another benefit towards a you know, a a bed Capital efficiency and and maintenance level going forward. So I I expect it to get better more quickly as the short answer.

Right. My second question was the second half 20 looks like you're going to average eight operated rigs. Is this an approximate headcount that we should assume is being associated with maintenance mode off the market demands greater Supply.

Oh, I mean that's that's a pretty good proxy in the back half of the year. So yeah, I think that's a good way to think about it right now. And if I could ask just one last one. I've been listening to call today. You've talked about both GNA cost reductions as part of your drive to reduce costs and also maintaining operation a passing to return to growth when the market supports the same a little potentially a little bit contradictory. So, I was just hoping you could give a little color to give us some insight as to get that all balances up. Thank you.

well

Would just say that as I started the presentation, you know, our team is one of our core strengths of our strategy and off our ability to execute in the field and the Permian Basin one of the things that differentiates us, I think and that's one of the things we're trying to preserve for the long-term. I'll say is we roll through all this though. If you see that we're going to be in an environment that has a long-term lower level of activity, you know that has a direct implication to GNA.

Okay, thank you. Thank you.

Thank you. And next question comes from Charles meet with Johnson rice your line is open.

Morning, Jim and injecting the whole team there. You guys have already covered a lot of ground this morning. And I appreciate that. I just wanted to ask one question that goes back to 2, and I believe Will May and I think in response to earlier question. You mentioned that that you expect so I think you said, you know, maybe about four or five percent is currently curtailed that's higher cost of production. But that you see that that was probably growing in May and I'm curious it will will the possible curtailment said that you have in front of you may be of a different character than kind of than than the parents behind you. In other words the ones the ones that may happen. Are they going to be are they going to perhaps be in one geography or another press related to the to the apis you producing there or in are you even looking at maybe some older vintage horizontal Wells as possibly shutting in in in this difficult period of Manju

Sure, I think in in May the The Next Step will be to get into the the horizontal Wells the older higher-cost horizontal Wells next and and as we've kind of talked to them about on this call one of them. There's a lot of things we're trying to balance between our contractual commitments and May and and other you know, leasehold issues and whatnot. And so one of them also is a a mind-set towards what can you bring back? And and so that that's where that conversation around, you know is would you consider not producing a brand new completed well for a month or two months you may get into that as well. But it like a like we've said a number of times we have a lot of flexibility. We are not going to fight the need to curtail will be God by that cash flow goal on an unhedged basis. And so I do think it'll be meaningful and I think it will increase from here.

with with getting into horizontal production

got it. And actually let me let me follow up with one with one question. So when you guys talk about curtailing production, is that is that shutting in wheels or is that just you know dialing back to 10% of maybe what they what they were able to do and and in the case of where you actually might consider shutting in a well. What's the you know, it doesn't make sense to think of a minimum duration that she was shut-in or well for I mean, you know to kind of put some some you know, you know balance on it. You wouldn't get shut in a well for a for a day, right? There's going to be some minimum length. It would seem to me that you if you went out there and you know send your lease operator out there to you know, turn all the valves that you have to be planning to doing it for at least some length of time. It's a blend of both, you know reducing production, but also in some cases choosing to shut in and the decision Matrix on it is is complicated and related to decisions around at least at least holding up.

applications

and other economic decisions

All right. Thanks for the detail guys. Appreciate it. Thank you.

Thank you. And our next question comes from Gail Nicholson with Stevens is open. Good morning taking my question. Most of my have been asked that I was just kind of curious on work overnight and how the lower pricing environment has changed your thoughts over thoughts on your work over program. And then how does that work over program potentially change as if oil prices do increase over time wage?

That's a that's a good question. It certainly has impacted our work over program. And and again it's going to be guided by economics. And so at these commodity prices to the extent a of higher-cost Welcome goes down you will not rush out there to to do much work on it. And and so, you know the longer this goes I would imagine the more of that you start to have but I don't expect to be a a huge component of of this process over the next couple of months.

Great, and then just on the standpoint of on the LG side looking at do you know what the current l e is for the horizontal program versus the Blended basis?

Yeah, I didn't it's in the ballpark of five bucks.

for the horizontal

great. Thank you.

Our next question comes with from Richard Ellis with Capital One Securities your line is open.

Thanks. Good morning. Everyone two quick questions. Probably the first four will looking at rates of return currently will using current lower wage costs and maybe you know higher oil price but say a 30 $40 sort of realized price which sort of rates return for your your main operating areas. Would you estimate I'm sure you know, as as I mentioned we've we've been working pretty hard at each time. We can reduce the capital budget to high-grade the investment decisions we're making and so is there an acceptable level as we sit here looking at the strip today, which those prices you mentioned kind of I would I would say roughly where you can get ultimately and so often they're acceptable today, but they're probably in the 30% rate of return which is a plus or minus ballpark. There's some that are higher and some that are lower.

Okay, that's helpful. Thank you. And then probably for Jack, you know regarding the impairment. What were they will price what oil price was used to arrive at that amount. And did you run it say it at higher oil prices as well to to see what the impairment would be say at $40 oil Richard. We we use the prevailing commodity prices at the end of the quarter and you know that first year averaged in the twenties.

Okay. All right. Well, that's all for me. Thank you. Thank you.

Thank you, and we have a question from David with Cowan your line is open.

Thanks guys for sneaking me in.

Jack I wanted to follow up on on the comments. He had made around prioritizing cash in this environment obviously by slowing the program now with the benefit of their heads book you have a huge free cash generation number this year one, I guess. How do you think about using that cash this year? Is there anything opportunistic to do is that there a threshold at which you'd start paying down debt early? And and how are you thinking about just the use of cash now and given that you're not using the hedges to justify operating decisions or field level Visions, you know has there has there been a thought to monetizing that hedge book early.

Okay. Yeah, good morning David in the near-term and really

most likely for the rest of the year. We would like to see cash continue to accrue to the balance sheet. And really that's the way we envisioned monetizing those Hedges just walk in our spending and and letting the cash come on to the balance sheet at some point though. I think we'll get to the the time for we want to have some baseline level of cash on the balance sheet, but the rest would be used for debt reduction in the near-term that were really, you know, even better set of set up the company for a job delivering on the business model that we've we've outlined of of balancing growth with with more return to shareholders.

Thank you, and I'm showing no further questions at this time. I'd like to turn the call back to mr. Tim Leach for any closing remarks. Thank you for great questions and participating in this call, and I look forward to talking to you next quarter, hopefully in a better environment. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect everyone. Have a great day.

Thursday Thursday, Thursday Thursday