Q2 2020 Concho Resources Inc Earnings Call
Welcome to the second quarter Twentytwenty control resources Inc. earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
A question during the session you would need to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero, our knowledge and the conference over to MS. Megan Hays, Vice President of Investor Relations and public Affairs, Ma'am you may begin.
Thank you and good morning, everyone and welcome to our second quarter Conference call. As a reminder to during today's conference calls we will provide forward looking statement based on current expectation.
Call your attention to the forward looking statements and the other disclaimers.
What are provided in the earnings release and presentation.
Our comments today May also reference non-GAAP financial metrics and reconciliations for those metrics can be found in our earnings release.
You can find the earnings release and presentation on the Investor Relations page of the Concho website.
Joining me on the call today, or Tim Leach conscious chairman and CEO, along with President Jack Harper Chief operating officer willed her out.
10, it's Gonna began followed by Jack will give your view of our financial results and outlook.
Following their prepared remarks.
Be happy to take your question. Please limit yourself to one question and one follow up without a phone call over to Tom. Thanks, Meghan Good morning.
Second quarter test of the strength of the industry.
I'm confident we're even stronger company after the recent challenges.
Not many companies are going to come out of the stronger, but I believe that we're one of them.
As I think about the first half of this year, we've made real progress on several properties that will position us for the future.
Maximizing our cash flow by just in our spend rate production and cost structure.
Increasing the strength of our balance sheet.
Continuing to return capital to shareholders through our dividend.
And managing the oil price volatility with capital discipline, well also preserving our operational capacity.
The last several much had been more volatile than anything we've ever seen.
Oil ended the quarter up 92%.
The largest move in a quarter in 30 years, the water right well prices dropped to negative $38 than rebounded to positive 40.
As a U.S. and Opex plus cut production.
I guess, the volatile backdrop, and historically, we price realizations concho delivered strong operational and financial performance in the second quarter.
Our results reflect the strength of our portfolio and our team.
We delivered strong cash flows and lower cost well, we've cut our activity.
Moving forward, we're maintaining the same level of focus that helped us navigate the first half of the year.
Sure well continue to remain flexible as we look past 2020, we will be patient for sustained higher prices.
For increasing spending.
Today, there are 125 rigs running in the Permian.
A year ago, there were 440.
And frac spreads have declined even more dramatically.
This reduction in activity is starting to show up as declining Permian production.
In addition field declines are setting in <unk>.
Capital continues to be scarce, and we're seeing the effects of a shrinking industry.
We believe the future of our industry requires better capitalized companies.
More capital discipline.
Less leverage and being more aware of market signals for growth.
Before the pandemic, we outlined a clear vision for the evolution of our business delivering both sustainable cash flow growth production growth increasing returns to shareholders.
Well, there's more uncertainty than usual around the macro economic environment.
This plan remains unchanged.
And the principles that form our strategy people asset returns and financial strength.
We'll guide us along the way.
Operating responsibly is key to the evolution of the business model as well.
We believe that operating responsibly and delivering good financial performance or not mutually exclusive.
Our flaring performance in 2020 is trending toward what percent of gross operated gas volumes as compared to 1.8% in 2019.
In August will publish our first sustainability report.
We look forward to engaging with you on these important topics.
We continue to work through the pandemic and the impact that is having on our communities and workforce.
I want to acknowledge the hard work of our employees.
They continue to perform well in a tough environment.
This was a great quarter and I'm proud of our performance.
Before I turn the call over to Jack I want to summarize a few things that I hope you'll come away with.
First we are successfully managing the cycle without losing focus on the long term value and operational capacity of the company.
Also we're improving our operational performance, which is lowering our cost structure.
Next we're continuing to reduce our net debt.
And finally, we will be patient on the recovery prioritizing free cash flow and reinforcing our machine.
With that let me turn it over to Jack.
Thank you Tim.
Our results for the second quarter, not only continue our trend of blood.
Financial and operating performance. They also demonstrate that we're controlling what we can.
And by doing so we are well positioned to become a more profitable company.
Last quarter, we outlined the steps that we're taking to align our business with the current environment.
Those steps include reducing our capital program, improving our cost structure and reinforcing our balance sheet.
Regarding our capital program.
Capex in the second quarter totaled 312 million.
44% lower than the first quarter this year.
The step down in the quarter reflects less overall activity as well as continued improvement our well costs.
For the second time this year, we're producing.
Our well cost guidance due to better operational efficiencies and lower surface service cost environment.
We expect the cost to drill complete and equip well to average less than $800 per foot.
For more than 30% lower than the cost to do that work last year.
With respect to our cost structure.
Controllable costs, which includes lease operating cash DNA and interest expense totaled $7.49 per unit.
Around 20% from 2019.
We are managing all aspects of our cost structure.
Examples include the logical items like well maintenance workovers water handling and optimizing artificial lift.
We also made the difficult decision to implement a voluntary separation program.
These combined efforts are expected to result in more than 135 million in reduced operating and DNA cost.
From our prior target of 100 million Oh.
Quickly adjusting our capital program and managing our costs lower combined with our hedge position.
Drove strong cash flow generation.
Operating cash flow before working capital was 550 million.
Which resulted in 238 million a free cash flow.
Which brings me to reinforcing our balance sheet.
Our cash position nearly doubled to 320 million and at the ended the second quarter. Our net debt was 3.6 billion down from 4.3 billion a year ago, despite commodity price volatility.
And although we have one of the better balance sheets in the industry. We plan to direct the 375 to 450 million a free cash flow anticipated in the back half the year to our balance sheet.
One quick progress towards our goal to reduce net debt by another 600 million.
Oil volumes for the second quarter averaged 200000 barrels per day, and we remain on track with our full year guide.
Of approximately 197000 barrels per day, and 1.6 billion in capital spending.
We've built the leading position in one of the best resource basins in the world.
Our portfolio quality depth and durability or nearly unmatched.
Importantly, we have a good mix of investment opportunities across federal state and private lands.
This mix allows us to redirect capital without degrading the returns or to the capital efficiency of our drilling program.
And as Tim discussed, we're working to minimize our missions as well.
Im confident that our operating principles and performance regardless of the environment. We're in.
Without question this had been a challenging year, thus far testing every company.
To meet the challenge, we're maintaining our approach to capital discipline and prioritizing free cash flow.
I believe that our second quarter results showed that the steps, we're taking our enabling us to build a better company driven by more efficient capital investment and cost control.
With that let me turn the call over to the operator for today.
As a reminder to ask a question you would need to press star one on your telephone.
ASCII. Please standby we've compiled the culinary roster.
Uh huh.
Your first question comes from the line of John Freeman with Raymond James.
Good morning, guys.
Joining me.
So so obviously all tricky.
Capital efficiencies realized so far and directed that sets a drilling and completing the 20 additional wells, which obviously subsea off without a lot more momentum and the into 2021 and just hoping you all can maybe kind of elaborate on kind of how youre went through sort of the thought process on.
The trade off of what do you drill and complete the 20 additional wells are you just reduce the.
For your Capex budget.
Yeah sure John It's Jack you know as we described last quarter, we're trying to to.
Have that balance between prudently investing our capital and maintaining our production base as we end the year and we feel like this strikes that balance of.
Of maintaining a stable production base, but also yeah building a little better momentum as we as we start the budget season for 21.
And then when we we look at the other continued progress shelf made on reducing well cost canal, that's a less than 800, a foot versus the age 50 or can you elaborate a little bit more on sort of just ballpark you know a backdrop how much is just due to efficiency.
He gains versus service pricing and then sort of what areas. If any if you think there's still room to kind of drive those efficiencies more.
Hi, John its will.
Yeah, I think if you just kind of looked at the improvement roughly half of it is related to efficiency gains and another half is kind of more just service cost pricing coming down.
And I think there's probably still some work to be done on both of those thoughts I think the teams have done a really good job continuing to improved cycle times.
I think I think there's more to do there as well.
On the service costs out of it will depend on what activity levels looked like here in the Permian on the back half of here.
Great I appreciate it guys nice quarter.
Thank you thanks John.
Your next question comes from the line of Bryan singer with Goldman Sachs.
Thank you good morning.
Got it.
Wanted to follow up on your debt reduction objective to get down to $3.0 billion of 600 million reduction what are your thoughts and how to philosophically would achieving that goal then impact subsequent action. When you get to 3 billion. Then what happens next a is that where you would.
More quickly increased returns to shareholders, which we just continue to have an even lower debt reduction goal would there be capital to allocate to production growth, which you said earlier was and longer term a longer term objective can you talk a little more about that.
Yeah, we've talked about that in the past two that.
You know that we felt like a stronger balance sheet and this kind of environment was kind of a top priority. So I think getting to that goal getting to that go quickly enables you to then look at all the other options on how to return capital to shareholders. So I think that is the logical next step.
Great and is there any frameworks that your that you're considering either in terms as more of a variable variable dividend dividend versus share repurchase and a and then per cent of capital allocated to just due to growth projects versus two were to shareholders I mean.
We've talked about all those you know the variable dividend is getting a lot of traction right now, but I'll tell you I'm just.
Hey message from this quarters I'm, so happy that we have a viable strong business at this new pricing level. That's that's the main message and that.
We can very quickly get oh by producing more free cash flow and running our business we can.
Get this thing balance sheet position, where we think it's appropriate for any scenario in the future that gives us all kind of optionality, especially we have returned to a pricing like we've had in the past.
Great. Thanks, and then my last one is on a well performance and really a little bit of a two parter for the first is can you just talk a little bit about what you're seeing from the well performance to date, particularly as it relates to that more not to the spacing and how some of those wells are performing maybe not necessarily in their first 30 or 60 or 90 days.
But they're thereafter and then also can you talk about the base decline rate and if a if there's anything beyond it does anything you're doing to managed at the best management.
Sure Brian its will on the performance side, mainly the quarterly production was right kind of inline with what we expected the well performance.
I would characterize the same.
If you're asking about kind of the latest batch of projects that are at a spacing density less than than some of the test. We did in 2019, those it's worth noting there is still relatively early in their life, but they look inline with what we would expect so that all feels pretty good.
As it relates to the base decline.
It's still I think we would still talk about that low fortys for this first year decline, but finding a way to continue to moderate that I do think that as we go to slower pace you will see that moderate maybe a little faster than we were expecting in previous conversations, but that's probably to come later.
Thank you.
Your next question comes from the line of Derrick Whitfield with Stifel.
Hi, Thanks, good morning, all.
Derek.
Perhaps for for you Jack with regard to your 2020 outlook I certainly appreciate the challenges of providing quarterly guidance and the current environment.
With the activity you've outlined would it be safe to assume you could exit the year about where you are now.
And the reason I ask is I seem to recall on your Q1 commentary to flattish profile.
For the balance of the year that was your comments back then.
Sure. Thanks, Derek yes.
Anything since our last call in our last conversation my my confidence has increased in our business.
And as for the second half oil production I.
I do still expect for to stabilize in that 190 to 200 day range.
But we left our annual guidance unchanged for a couple of reasons.
First off mid nineties.
Oil in the back half the year.
Only positively impacts that annual number by about 1%.
And additionally, exit to exit rate basis, we see our production holding up.
Well and better than most.
And secondly, we described in last quarter, our focus on free cash flow generation.
And our improved cost structure, along with the stable production base have US ahead of plan in that regard.
And then lastly, I guess I'd say the style and cadence of our program in the back half of the year.
We will allow us to enter next year with maximum flexibility stable production base and a strong financial position I.
I think many of our peers will struggle to achieve that.
<unk>.
Great. Thanks for the detail and then perhaps for three year well on the the follow up question and I'd like to really circle back to a topic that I raised last quarter and frame it slightly differently.
That is what a lower for longer price environment, whether investors ask is flattish gross return of capital would that environment change your view on optimal spacing and I acknowledge and asking this question that your spacing is conservative relative to industry based on the operational adjustments you made the second half of last year, but is there an opportunity to get greater reach.
Turns with wider spacing.
And we've definitely moved to a wider spacing here in 2020.
I don't necessarily think that you'd see us adjust to something wider than that if that kind of what you're asking if I'm understanding the question right.
You know I do think given the volatility we see in the commodity and and a whole host of other factors, including wanting to run a relatively steady program I think we're very comfortable with the cadence of our business right now and also the spacing patterns and targets were going after.
Thanks, all well done guys.
Thank you thanks.
Your next question comes on the line of a range of wrong with JP Morgan Chase.
Good morning.
I guess the story is a quarter with clearly the free cash flow in the lower Capex I was wondering if you could help us think about maybe the second half a trajectory of Capex and perhaps some of the drivers of the lower capex into Q.
Sure Hey around cuts will.
Yes, the drivers on the on the Capex improvements so far as Jack mentioned was.
It was a couple things it was activity, obviously slowing down over the first the year, but then also.
Pretty impressive improvement and just our cost structure on the drilling completed equip side.
As it relates to the back half of the year, there's a couple of things happening there.
First our activity in the second half has a little bit more activity on higher working interest properties.
Including five rigs that are currently on the maybe branch, we've got 100% working interest.
Second we saw very low amount of non operated capital into Q and so I think our expectation is we'll still see that non off activity come to see us in the back half of the year and so that was kind of another talking.
On the Kevin.
Great and well how does this influence your views kind of the of sustaining capex on a go forward basis, I mean I think.
You guys have publicly talked about something now and called in the $1.4 billion range.
Please stop me, if I'm incorrect with that view and just thoughts on.
How but could translate in terms of 2021 sustaining capex.
Yeah.
We've talked a lot about kind of that run rate, we're going to be out here in the back half of the year, that's the threefifty a quarter.
Being a good proxy for maintenance capital.
You know I think this quarter shows that really what we're focused on right now is controlling the things we can control and grinding on costs, whether their capital costs. Our lease expense costs are Gina costs. So we're going to keep working on that number.
But for now I think thats a good number to him. Okay. It just wanted to clarify Jack your commentary on second half oil. If we look at the current Street median numbers for oil and Bloomberg <unk> hundred 95 for Threeq Q1 91.
For for Q, which would average just under 199 can you just clarify your thoughts on the second half oil numbers at that 1.6 billion of Capex.
Yeah, I think those numbers you just reference a from consensus seem reasonable to me and so.
I think that ties with what I said earlier, great. Thanks, a lot Jack will cure.
Your next question comes from the line of Scott Hanold with RBC capital markets.
Yes, thanks, great quarter, guys, maybe another slight follow up on that maintenance capital question.
The the eight rigs in two Frac crews you all are running in the second half of the or is that generally a good.
Good level to think about that's maintenance capex or to be at your maintenance production levels. When would you need to add a little bit more on the rigor frackers side.
Hi, Scott will I think its aided for right now eight rigs for completion crews and that's probably a good number we try to talk more in terms of capital than activity just because as I mentioned, there can be a little bit of noise as we bounced around between different working interests.
In different projects, but but that is a good just kind of strong man for activity.
Got it appreciate that and then and then Tim you had mentioned that you know obviously you committee that are better capitalized you know <unk> or in a better position, especially news. This so.
Volatile oil market that we're in you didn't do you guys give us your 10000 foot view on on M&A going forward here, considering what's occurred and how does concho play into that.
Well, we're really focused on running our business efficiently and.
I do think I mean, we're seeing consolidation.
Happened in our industry I think.
Uh huh individual deals are just that their individual deals which are all different.
So I don't think you can characterize.
Consolidation by.
Any one deal or perhaps the last deal that just happened.
But I.
I do think the industry in general is going to have to get more efficient.
And.
To get more efficient that these companies and the industry is gonna have to be better capitalized and be able to run.
At lower cost and and.
With with less debt and so.
I think we'll see that happen I'm not sure how that affects concho concho is really well positioned with the property base. We have in where we are located I think we can.
We continue to work.
A long time so.
I think our number one mission right now is just to continue to create a more efficient.
Company with what we've got.
Okay.
Appreciate that but you just out of curiosity. How are you in I'm, assuming you guys look at the market constantly.
Have you seen anything change in that market over the last several months.
Well I mean, the second quarter was maybe the worst quarter, we've ever had as an industry as far as of.
The oil price movement and.
Just.
So yeah, I think that everybody.
I was looking at their business plan and there were very few business plans that were viable in our industry. So I think that forces the industry to reevaluate itself.
Appreciate it. Thank you. Thank you.
Your next question comes from the line of Neal Dingmann with Suntrust.
Good morning ill first I guess my two questions just well based on Tim What you and wells said earlier first.
I had mentioned talked about maintenance capital. Another question that Jim not a surprise you talked about returning.
We're just talking about shareholder returns. So both my question on this I'm just wondering on the Eyeq 350 to 375 per quarter maintenance capital. My first question is is that you under you have you anticipate that continuing to come down even a bit more.
Is it just seems like you guys do an incredible job was efficiencies and then my second part today would be.
If that does come down or or I guess, let's say.
Adverse about prices go up.
Sounds like Tim would you just keep that the same and not grow production anymore, and just take that capital and give it back to shareholders or I'm. Just wondering again basically around this maintenance capital can it get any better and what would you do with the excess.
I'll take the first part of that and then let timber Jack take the second.
And as it relates to what we've been able to do so far this year.
I can't say enough positive things about our drilling and completion teams and and what Theyve done.
To take advantage of not not only the lower service cost environment, we're in it and have a flexible program.
Able to take advantage of that.
But also the efficiency gains the cycle time the.
Footage per day improvement et cetera.
It's been really impressive and.
Optimistic that given more time, the machine will continue to grind out game.
And over some measure of time, we will continue to.
Hello.
Neil I think the answer to your other question as I mentioned at the very opening that we're going to be very cautious on increase in any kind of activity and require a much stronger in longer price.
Signals from the market before we do such.
So Jim let me ask one let's just take it so does that mean you'd consider even though it is potentially would be called variable dividend is that something you would look at and you know something you'd consider from time to time throughout the year. When you when you consider shareholder.
Yeah, I'm, not really ready to talk about the mechanic of it but that the concept of a variable dividends being talked about throughout our industry and I think we'd be well positioned to do something like that.
Very good thanks, guys. Thanks.
Your next question comes from the line of Leo Mariani with Keybanc.
Hey, guys just wanted to follow up a little bit on free cash flow.
Certainly seems like your message was pretty clear in terms, what you'd be doing in the second half of the year with I guess building cash to reduce net debt, but I guess, maybe just kind of going forward into next year.
Wanted to get a sense of how share buybacks might play into the equation here I wasn't a word that I heard you guys I guess mention of late.
Yeah Leo this is Jack.
Yes, as Tim alluded to earlier I think we can get substantially there on our debt reduction by the end of this year with with perhaps a little bit of work to do.
Next year, but beyond that what we've described in the past and on this call is a range of opportunities.
Between the increasing dividends share buyback.
Or further cash build and I think we really have to see what the circumstances looked like.
At that point in time to determine if which one is the most effective.
Okay, and I guess, just I know, it's kind of jumped to say how things play out obviously on the oil price side. You know is we get into next year, but.
Yeah, we kind of stabilized here it in roughly $40 and it sounds like the situation. You guys are describing is that you can kind of start to stabilize your oil volumes into year end to mean words your mouth, but it would be reasonable to assume that if we continue to muddle along at $40 next year, we should think of Concho volumes.
As is fairly flat in activity fairly flat and you guys talk about needing a.
Much higher oil price to potentially grow again would that be closer to 40 fives just trying to get some book ends as to how this could play out.
Sure when we came into this year, we described our business plan in the 50 dollar environment and the things we can do.
And as prices have bounced around and cost of change.
Clearly what could be done it 50 can now be done at a lower price and when we look out at the strip currently.
And what we think our business can do it's a it's a viable business that can achieve a lot of the same objectives, we came into you're talking about.
Okay, and maybe just lastly on the shut ins are all those back online at this point in any if not can you quantify what still offline.
Yes.
It's all generally on.
Okay. Thanks, guys.
Your next question comes from the line of Matt Portillo with TPH.
Good morning.
When it Matt.
Can you just briefly discuss I guess your thoughts around permitting on federal acreage how much are running room you have at the moment and then as you mentioned in the prepared remarks, just the quality of the reservoir on federal acreage relative to non federal acreage in new Mexico, and kind of how we should think about.
Your inventory profile potentially allowing you to avoid.
Drilling federal lands, if there is a slowdown on permitting or other issues.
Hey, Matt at will.
You know that obviously is very topical right now I think one of the challenges is it's hard to know exactly what and how do administration might do to limit onshore development.
From a federal permitting front, though we believe we have enough permits in hand, the foreign process.
Probably one to two years' worth of drilling on our federal acreage.
I think probably more importantly, though we run a number of scenarios and event were unable to develop our federal acreage in new Mexico over the next five years and we feel confident we can quickly shift our capital to other acreage in our portfolio without any significant impact to our capital efficiency over that period.
Great and then a follow up question for Tim just philosophically longer term I was curious how you're thinking about capital allocation to the drill bit relative to cash flow and specifically, if there's kind of a longer term plan around reinvestment of that capital allocation potentially below.
Your cash flow profile to continue to drive free cash flow generation through the cycles.
Well I think as a as I mentioned I'm, just happy to get through the second quarter and such good shape.
As far as looking out long term.
We just see being able to deliver more free cash flow.
Lower reinvestment rate back into the business over longer period of time so.
I don't think we're prepared to talk about percentages or anything like that right now, but it just.
It looks good over a long period of time that how much free cash what we can generate as a business.
Thank you.
Your next question comes from the line of Paul Cheng with Scotiabank.
Hi, good morning, Thank you.
You said that the that this has led to change.
The more disciplined then also that January thing Thats, a free cash flow and that's all the time, we totally agree and from that standpoint.
You have a pocket that you can share cool konczal.
The longer term EFI cycle.
Return on capital employed and also.
That you would be pocketing that you think will lead to be in order to attractive best.
Compete with the general market and also path.
When I think that's somewhat.
Other companies that Youre Keith.
That would be pocketing say, a overall we investment.
Maybe 70% off the total fig total cash flow on a full out cycle. This that approach that you could be yes.
He's on the FFO for the industry and pull yourself and yet Mark why not.
Hey, Paul It's Jack Let me, let me P. set out a little bit I think on the first part of the question.
Our business the needs to generate returns and we need to generate returns that exceed our cost of capital and we think we have business that can do that.
So that's point number one and I guess.
The second part of your question had to do with.
Cash flow at percentages of reinvestment and.
Again going back to some things that we've we've said on this call. We think we're positioning our business to allow for that type of flexibility too.
Invest.
[music].
More efficiently and increase our free cash flow. So by definition that would mean, a lower percentage of our cash flow overtime would be necessary to to maintain or grow production.
Jack Thank your for patent in terms of the return on capital employed obviously that you have one off the field can do better than your cost of capital.
To compete with the market.
How much but that you think you need to be north that to be competitive.
I'm just trying to see that what you stated expectation from the company, what what will you see pockets.
Well I'm I'm very competitive so so the more the better and.
I hope that you're seeing evidence of that in our in the actions, we're taking and our cost structure.
Our realizations for our oil.
And the efficiency on the drilling and completion side. So my expectation is that we're going to maintain the intensity on all of those things.
A final question for me.
One quick one for the federal mandate by looking at North from a total land position, but from an inventory.
Backlog standpoint.
What is the fat so land inventory as a percentage to your total inventory.
Sure Paul.
It's about the federal acreage is about 20%.
Our total that acreage.
So from an inventory standpoint, it's higher than that I mean, the federal acreage is generally good acreage, especially in Lea County, So it's it's something between probably 25 and 30% of our total inventory.
Thank you win.
Your next question.
Your next question comes from the line of Duck indicates with Bank of America.
Good morning, guys, all while all the Dcs. So we could questions have been asked so.
Yeah.
I appreciate getting I'll, let me try a couple a couple of maybe you saw slightly differently on the sustaining capital X. hedging when would you say your oil breakeven as at this point on the 350 per quarter.
[noise], Doug its jaclyn, let me take a shot at that I think that hour.
Breakeven too.
Cover our program in our dividend is somewhere in that mid to high Thirtys range.
On oil.
Okay. That's great. Thank you.
Now I'll hopefully going to take a shot the the whole.
Comments around the business model, because I think finally, the market might be wishing to higher volume was established in these businesses your business in particular and John just this kind of free cash flow. So your comments, then we'll compression and great to hear your via three along this morning. My question is this.
If and when oil prices due to recover how do you think about the planning process going forward I mean, obviously some level of growth versus the broader market is probably a desirable just anil 2025, 30% with the industry's walls. So how do you think about thought reinvestment rate.
Is there a cap on your spending is that our comp on your growth rate.
We're not there yet because if you have survived the second quarter motives are going to second quarter, but it just philosophically when you think about the long term what are the parameters are feeding into your thought process about what do you want all come to market.
Right you know for for most of my career, we would reinvest all our cash flow and then show our success by how much we could grow our production. That's how this industry work for long time, well, that's that's not how it's going to work in the future and so I think philosophically staying focused on the efficiency of the business.
Driving down cost what does it cost at a barrel production what are your returns those types of things.
I think it's probably going to be.
Measured in percentages of your total cash flow that are reinvested into the business.
And reducing those percentages overtime.
To be able to show continued growth I also mentioned that I thought.
Our industry as a whole needed to be more aware of price signals and what was going on in the market. So.
As we entered this cycle no one really thought the U.S. shales could grow as much as they did add as much production.
And that through everything out of balance at a.
Really bad time, and so I think.
As consolidation takes place in the major producers.
Get their shops in order I think everybody's going have to be more aware of.
Supply demand fundamentals in the World and yes, I think what you're talking about is.
Lower growth Oh required bigger cash flow distributions.
Less percentage of.
Total cash flow reinvested into the business more efficient machines.
Well some you've led the market hourly from two years ago. When you started talking about she'll to fund operations model. So it's great to hear and again congrats on sticking with it through the stuff.
Thank you.
Your next question comes from the line of Jeffrey Campbell <unk> brothers.
Good morning.
Tim We've had a lot of talk about consolidation and rationalization and so forth and.
It seems obviously one of the reasons for the Industrys capital efficiency has because creditors continue to restructure losing business instead of just selling assets I'm just wondering what your sense was if any.
Some of the folks behind the scenes, providing this capital to industrial is in patients with the effort.
Yeah largest.
I commented that there wasn't any capital available and to our industry.
The private equity seems to be of close public equities close the markets are tougher.
So I think Thats is a key signal and.
Think there will not be as much sloppiness.
In the future is there has been in the past.
Okay. Thank you for my follow up if you can comment.
Shouldn't do administration beyond constructive on the federal leases.
We're conscious capital allocation between the Midland and Delaware remain roughly similar to the present or might it change on that basis.
I don't have the probably kick it to will but.
We have a big position in new Mexico, and in state land and private and also and also a big position in the Delaware in Texas. So we think we can keep our balance between those two basins.
I think thats, probably good approximation.
I mentioned in my comments on I think one of the challenges.
And talking about it you don't exactly know what a new administration, but do it so you'd have to kind of take effect as they come to you.
No I think Thats fair. Thanks for the answer I appreciate it.
Thank you.
Your next question comes from the line up David Heikkinen Heikkinen energy.
Good morning, everybody and thanks for taking my question.
One question as you think about the expansion of the Solaris water joint venture can you talk about.
Your capital commitment and then the overall impacts on conscious financial does that.
Flows forward.
Sure.
Yup.
Yes, I mean, a lot of the commentary we gave around the transaction, we did with them and Eddy County, a couple of quarters ago would apply to this conversation around what we've done now with them expanding into Lea County.
The benefits to us are.
Oh, both the capital side and that this entity will be spending capital dollars to build on water infrastructure as opposed to ourselves.
It will also help on lease operating expense side and help us continue to drive down to the extent were trucking any water. This this will get get all of our water on pipe overtime.
And then.
One of the kind of longer term, but it's still very important goals is to increase our percentage of recycled water use and our opinion is that you're going to need to have big third party infrastructure.
To to handle big bonds of water and move it around the basin, where it's needed as opposed to the older model, where individual companies kind of build the buildup themselves and utilize it at pretty low rates. So I.
Those are kind of the drivers for it I think an important also piece of it is the existing equity owners agreed to increase their capital commitment to the entity. So I think it sits in a very good position and helps take the burden of us from a capital stack.
Yeah the share the burden okay. Thanks, guys.
Thanks.
Your next question comes from the long enough.
David Deckelbaum <unk>.
Hi, Good morning, guys. Thanks for the time.
Yes.
I could ask I guess just following up.
On David's question, Yes, we county has been one of your more active areas.
How how quickly should we see this impacts to low cost in that low we.
And then my follow up to that would just be.
Thank you comment and obviously that you're below your target for footage costs. This year, leading edge could you give us some parameters around so I guess, if we had annualized.
Sounds like you'd be.
Similarly in that sort of mid single digits going into next year.
Sure on the on the water question to me I think it's noteworthy that.
A big portion of the improvement on both the capital and Allawi side of them some of the things we're doing around water.
Sourcing and disposal standpoint, so a fair amount of that was already baked into getting to where we are today, we do expect to see incremental benefit, but it will probably be modest.
Where we are that transaction.
As the year kind of broader question on.
Drilled completed equip costs and where they go in the future you know the number we're talking about as a.
Annual program wide number.
Not aspirationally kind of the whole program short laterals long laterals et cetera, and so I do think we'll continue that down.
Over the course of the year and into next year, but time will tell on in terms of where that goes and I think it will also be driven by what's happening from an activity level in the Permian in the back half of this year.
Do you do you suspect sit there there are there are going to be some inflationary pressures on the service costs, I mean of everyone's more or less holding maintenance mode similar to yours.
It's using that Theres still pockets, where you're going to see some pricing pressure.
Moving to a point Jackman earlier, you know our capital strategy has been to try to slow down and level out over the course of this year or our production base. It seems like some of our peers has a bit more of a dramatic DVD, where they cut activity and so.
It seems like some of them again, this earning season will be pretty helpful. In terms of getting some insight into how they're thinking about it but I do think we will see some modest level that from peers come back in the back half of this year as they try and kind of.
Level out maybe a deeper via production decrease.
I appreciate it guys.
Your next question comes from the line of Charles Meade with Johnson Rice.
Good morning can't Jakone will your whole crew. There you guys have gone through a whole lot of Oh recovered a lot of ground here, but I just wanted to ask one other question kind of along the same lines, but from a different angle. If if you guys six months from now we're able to <unk>.
Swapping another big chunk of your production and Oh, you know enough in the high Fortys W. T I kind of along the lines of those swaps you already have in place.
Would that be sufficient for you guys to want to add to that.
Eight rig and four rig or for completion crew pace.
Thanks Charles.
This is Jack.
Just on the hedging piece first off you know, we're pretty mechanical about the way we go about that and so we won't be waiting for any particular price too.
To add hedges, we will continue quarterly to it to look at that and kind of plan around what the future looks like.
But I think as Tim and I really all of the civil alluded to here on the reinvestment its we need to be more mindful of all the things going on in the world in the signals that we're getting and right now.
Adding a lot of production in activity doesn't seem to be the signal.
That's helpful. Jack I appreciate some of that and that's it for me.
Thank you.
Your next question on line of Gail Nicholson Steven.
Good morning.
Look at your current cycle kind of improvement that you achieved over the last 12 month, what do you think is the most.
In precedent.
Yeah.
[laughter], there's a lot of and really I think you have to say that getting to where we are today.
Is that condition of a lots of small gains as opposed to any one individual piece. So I'm a little challenge to pick one other than just to say I think the teams are focused on the right thing and are having good success.
When you look at it depends on incremental.
Do you think that there was one area that there's more proving that could be achieved.
Oh, no I think I think probably one of the big challenges are focuses will be if activity.
In the basin does increase holding the game holding the quality crews and rigs that we've got and so that probably be a big point of focus if you see some increased activity in the back half of the or.
Okay. Thank you.
Thank you thanks.
Next question comes from the line a bit more with Wells Fargo.
Good morning, and thank him for taking my question a lot of my question I've been asked for ready, but one topic that I guess husband that dressed as the cost the L.E. this quarter was.
Quite low sequentially I think you you defer some workovers and maintenance activity.
How should we think about absolutely I think your guidance for the rest of the your big setting, but how should we think about it long term is at the 450 or so number for Halloween.
And she will target in 2021 or is it should we stick with somewhere between five to 550.
Right that's will.
We were at kind of 550 in the first quarter and rounded to 450.
Second quarter, and and if you if you try and look and see what drove that pretty dramatic improvement.
It's a combination of things, including just kind of process improvement. Some of these things we're doing around water around power generation and getting off of generators in the the fees and other things we're doing it on artificial lift for those those gains should be sustainable and that's probably about half of the improvement the other.
Half as you referenced kind of came from.
An unnatural basically stopping or Workover program in conjunction with trying to manage through the curtailment period. There in the second quarter. So that's that piece is not sustainable. So I think kind of half that gain isn't have not that that helps you dial it down.
Oh, that's that's very helpful.
That's really it that I have thanks, guys. Thank you.
Your next question comes on the line of Nicolas Pope with Seaport Global.
Hey, guys can you hear me.
Hey, Nick.
Are you doing I had a question.
On the emissions and yes, GE slide that you provided I'm just curious it go you kind of highlighted that you brought.
Flaring down to 1% on the year and I'm.
I Hope you could talk just real quick about kind of how your.
Are you all been achieving that reduction I I just wonder how much is based on kind of lower activity versus kind of capturing processing the gas reinject into gas, whereas the gas go in that I guess was being flared and how sustainable do you all think that 1% kinda number is and kind of pushing that lower because it's a great I mean.
Great trend that you guys have been on what that a mission side of things.
Nick It will come and take a shot of data that has been a major focal point.
In our company here for a couple of years and.
Really.
You got to give the operational team and especially the guys. The feel a lot of credit for doing that.
A big he is not having any flaring around new well hookups and so there has been great coordination with making with our midstream partners, making sure that we have the.
Gas pipe there when you're ready to go into production side, and also frankly and getting down to the numbers we're in.
Being unwilling to produce your oil unless you have that gas hookup.
So that that has.
Barrel impact from a production standpoint, and we as an organization and decided that that's that's worth it to to achieve the goals around flaring. The rest of it. What's left is really around the typical plant upsets and things that happened in the field on a daily basis, you definitely have more benign operating environment here in the second quarter.
Just as activity was coming off generally.
Got it and do you think that's sustainable is as activity in the basin and is your own activity ramps back up.
Do you think the numbers, where you're at right now are sustainable longer term from that.
Our goal is to keep grinding and lower.
Got it okay.
Okay. That's all I had thanks guys.
Yeah.
At this time I would like to turn the call back over to management.
Okay. Thank you for.
Being interested in our company dialing in I know this is at the beginning of the busy earnings season.
Once again I'm very proud of the performance of the company in the second quarter and look forward to talking to the next quarter. Thank you very much.
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