Q2 2020 Parsley Energy Inc Earnings Call
[music] good morning, ladies and gentlemen, welcomed parsley energy second quarter.
2020 earnings Conference call My name is Robert and that'll be your operator today.
As a reminder, this conference calls being recorded at this time all participants are gonna listen only mode. A question and answer session will follow the formal presentation.
And now I'm pleased to turn a call over to your host call roads, partially energies Vice president of Investor Relations.
Thank you you may begin.
Thank you operator, and good morning, everyone. We are again dialing in from our respective home offices. This morning.
With me on the call, our President and CEO, Madagascar, Chief Operating Officer, David <unk>, Chief Financial Officer, Ryan them, and senior Vice President of corporate development land in midstream Stephanie Reed.
[noise] remarks today may contain forward looking statements. So please see all earnings released boy discussion that'd be statements and associated risks, including the fact that actual results may differ materially from our expectations.
We also make reference to non got measures. So please see the reconciliations and the earnings release.
During this call people referred to an investor presentation that can be found on our website and are prepared remarks are we getting the preferences slide three a bad presentation.
After all prepared remarks, you'll be happy to take your questions and with that I'll turn to call over to that.
Thanks Kyle.
I believe the sign of true professional excellent whatever the occupation executing a difficult task and making it look easy.
That is exactly what our team did during a challenging second quarter and you can see some of those highlights on the left slide three.
Before digging into some of the teams accomplishments I wanted to quickly remind those investors that might be new or do you are so worried that are asset basis located in the corner of the Texas Permian basic as you can see in the map on the right.
And we have zero exposure to federal lands.
We consistently deliver high operating margins and have a deep bench of high working interest operated locations to prosecute in years to come.
Our strategy since early 2019 has been to extract optimum financial returned in a given market condition from our resource base.
Leading to increasing free cash flows and increasing returns to shareholders. All all taking a leadership position N E. S G space.
With that let's turn to slide for.
Corporate agility was imperative during a second quarter, where oil price volatility searched.
We previously mentioned that we implemented a voluntary production curtailment strategy during the month of May and plan to restore a vast majority of that production during the month of June.
So that's the one line summary conclusion, you might read in the press release.
They're getting from point, a and may to point be in June. So much work went on behind the scenes to execute this curtailment strategy safely and responsibly and ultimately helped deliver the cash flow upload.
It takes integrated operations that her bedroom class and continue to layer on new remote capabilities. It takes collaboration and attention to detail across multiple disciplines.
And our team of professional made up milk easy.
With safety environmental stewardship and cost efficiency always at the forefront of our decision making process.
Moving onto the slide five.
From a macro standpoint, the second quarter represented and unforgiving stress tests for much of our industry.
The worst maybe over we harbor no illusions to the difficulties facing our industry and partially energy remains well built for that endurance test.
During this challenging second quarter, our team did not nearly run in place, but instead made strides on some of our T 2020 initiatives <unk>.
Corporate sustainability requires that resources be marshaled on two fronts.
On this slide we focus on the financial front and specifically on our unwavering commitment to delivering sustainable free cash flow through the commodity cycles.
As Sean and the bottom graph, we turned the corner to free cash flow and a third quarter of 2019 and in lockstep initiated a regular dividend program. We have now notched four consecutive quarters umbrae cash flow generation and bumped up a return a capital program earlier.
This year.
Even during the recent downdraft, an oil prices are dividend remains well funded by organic cash flow.
As a reminder, our initial 2020 budget called for at least 200 million a free cash flow at 50 dollar W. T I O.
As oil prices have dropped sharply in March and April we quickly adapted to protect our balance sheet prioritizing free cash flow and defending our dividend. This decisive action translated into a company records free cash flow and the second quarter.
We know expect to generate at least 350 million and that's assuming 35 dollar oil for the rest of the year.
And although we are still a few months away from our formal 2021 budgeting process are mindset is that growth capital is not needed.
Nor justifiable in a world with significant excess spare capacity.
Where at over 11 million barrels of day in June.
And swollen global inventories with OECD Kreutz dogs.
Over 3.2 billion barrels that's over 300 million barrels above seasonal norms.
In cobin related demand uncertainty ahead of us let's be Frank.
North American E. M. P. S are in a battle for investment relevant not a battle for global market share.
[noise] allocating drove capital into a global market with artificially constrained supply is a trap our industry has fallen into time and time again at parsley, we will avoid that trip and are committed to delivering healthy and sustainable free cash flow again in 2021.
There will be a time when the world market needs gross barrels from the United States.
And when that day comes I believe partially will be uniquely situated to allocate obsession <unk> capital to meet that demand.
While continuing to deliver free cash flow.
We have also provided a full progress report on our brought her 2020 action plan and the supplementary slides, where you can see we are still on track to achieve many of our goals. Despite the global pandemic.
Living to slide six.
And I want to provide some high level direction on our plans for the second happened 2020.
Is it quick reminder, with regional crude prices dipping below $20 a barrel, we shut down drilling incompletion operations for most of the second quarter.
In July we reactivated two rigs and two cracks red as oil fundamentals affirmed a bit and prices consistently trade it above $35, which is our baseline budget assumption.
Provided market fundamentals holdup, we would anticipate moving into a stabilize activity plan with four to five rigs and wanted to crack spreads deployed and the fourth quarter.
Turning now just slide seven.
The graph on this page depicts what are stabilize activity play them translates to from a production standpoint, with a lighter blue wedge, reflecting our current base case development cadence.
As we stated Lask order, we expect that it's this stabilized activity plan, where maintain we would be able to hold fourth quarter 2020 oil production flat. The subsequent year at a cost of roughly $600 million.
In 2021, we get a nice tailwind from the expected drawdown them about 20 to 25, grilled, but uncompleted wells.
This is roughly a 50 million dollar benefits.
Additionally are basically climbed shallows during 2021, requiring less replacement barrels in 2022.
So all L E equals 600 million would also be a fair assumption.
Alright, 2022 maintenance capital program.
I'll conclude by reiterating that we expect to generate a healthy amount for free cash flow in 2020 and exited the year with a solid balance sheet ample scale, a shower oil based decline and visibility two sustained free cash flow and 2021 and beyond with that I'll turn it over to David.
For more operational details.
Thanks Man.
Let's turn to slide eight.
It's like I was inspired by conversations with some of our top shareholders over the summer.
One question was essentially whether you S. Operator should deploy any near term capital against the 35 dollar oil backdrop.
The short answer for most of the U S E N P industry is probably not.
Unhedged returns on the incremental capital deployed or nonexistent a negative for most operators at 35 dollar oil.
And I'll review, partially is amongst select few operators would be asset quality cost structure and scale to make a positive unhedged return on it's second half of 2020 program at 35 dollar oil.
So, let's unpack this slide a bit.
Well, we sanction a capital program for giving year, there too big underlying inputs to the building Oh that budget.
Capital efficiency Incommodity prices.
Oh fishing see if something we can directly influence in track in short is a dollar a capital delivering your oil bodies, we expected.
On the other hand, we are minimal direct influence on oil prices. So we can control the level of conservatism based indoor price day.
Let's start with a grabbed on the left.
[noise] is essentially an early look back at our 2019 program.
This is our pitted year to optimize returns at a resource level.
Given the focus on sustainable free cash flow, we thought it would be helpful to look at this the the lenses pay out duration or when do I get my money back.
The gray bars, the actual capital cost of our program the catch it went out the door.
The solid blue bar, the actual unhedged cashflow, our program generated after roughly one year.
The dash blue bars, or the unhedged cashflow, we'd expect to receive over the next two years that current stripped pricing of roughly 40 dollar oil.
And if you look at that Gray X you can see that when we initially snakes in this program. The late 2018, we were underwriting a program wide payback period of just over two and a half years.
That was using a 50 dollar welbeck, which is 5% to 10% below futures prices at that time.
So how is our 2019 program perform versus artificial expectations.
[noise] delivered a better capital efficiency outcome, only forecasted highlighted by lower than four cats the Wildcats.
<unk> oil prices spell sharply blow our base case price that earlier this year extending or pay out duration, we expect to roughly three years now marked by the Orange X.
This impact from a down dropping commodity prices is why we methodically hedge our production in insulator future Cashflow Street.
Moving over to the graph on there right.
This gets back in the original question as a public company, it's really are investors capital, but we're allocating to the 20th at the second half of 2020 program.
So the question holds when do I get my money back.
On an oil price like a $35. We're forecasting this reactivated capital program will pay out in less than two and a half years.
At the current strip price of around 40 dollar oil it would pay out in a little under two years.
Sure. This is why we were reactivating capital in the back after this year.
Turning to slide night.
Cause I just mentioned capital costs are foundational pieces in Emp's capital allocation framework and budgeting process.
Our team delivered strong drilling incompletions efficiency gains, which led to lower than budgeted well costs and the first half of 2020.
With modest development activity reactivated in July we expect capital costs to take another step lower the second half of 2020 at in hand service cost inflation blow zero Wildcats.
<unk> the parsley team they use of the time afforded by our activities shut down in May and June to accelerate some of our operational technology capabilities.
We now successfully deployed 24, seven realtime remote monitoring capabilities for both thrilling Incompletions operations and I've added for 24, seven the remote production monitoring capabilities.
The strategic capabilities can help us target further improvement and operational performance capital efficiency.
Living on the Sly pin.
Our industry adjust to a lower commodity price environment in the near term low cost operators like parsley will continue to differentiate themselves.
And a second quarter that was anything but normal our team executed both Fisher production curtailment N restoration without incurring any material incremental operating costs.
Our team also continues to focus on integrating and automating key workflows to optimize lease operator effectiveness can help reduce downtime.
We will also continue to tightened our cost structure with the guards G&A accident.
During the activity slow down members of our team had been adaptive I'm willing to shift rolls to help reduce our third party contractor expenses.
I also want to highlight that the rapid integration of jagged peak accelerated are timeline, Virginia and Asynergy captured.
In summary, despite lower production volumes and we had initially budgeted for we've managed to reduce our forecasted per unit operating costs.
[noise] Testament to our team's dedicated focus to control those carpet or within our control. If you do it safely efficiently and an environmentally responsible manner and now I'll pass it over to Stephanie to review the progress we've made for one of our key E. S. T initiated this year.
Thanks, David flipping a slight 11, not mentioned earlier that corporate sustainability requires attention on to France.
And he and David both detailed our strategy I'm just needing some time and now I want to do that on the environmental front provided progress report on one of our key yesterday initiative fishy or natural gas Larry.
In January we took over jagged Pete property, you said, he collectively flurried more than 20 per cent of production over the course of 2019.
At the kind of our acquisition, we committed to reduce flaring on these acquired properties too below five per cent Ah you're in 2020.
Over the past six months when you deliberate gonna study reduction in flaring through a variety of midstream solutions and mitigation accurate.
He was also a key criterion applied to while selection during our voluntary curtailment African the second corner.
Overall, we've reduced flared volume on Jag location I nearly 90 per cent interesting anyway.
Wow. This is the feeding it sounds it's also important to know that aren't flaring mitigation effort are not confined to these newly acquired property.
In recent months, partially <unk> legacy Midland Nathan facility to lessen, Nebraska, and the Internet and flaring going forward <unk>.
Maybe getting flaring has been a long standing priority for parsley an earlier. This year. We include any quantifiable corporate wide flaring mitigation target in our 20th 20th centered plans for all types of the employees.
The goal, which to fall Jaggy peek into the next and pushed corporate line flaring back down below 2.5% by ear and <unk>.
[noise] to the African priorities of our team in midstream partners, we've made significant strides to eliminate routine flaring entirely from our operation.
And if you can see on the right side of the grass, we equipped aren't flaring redaction target six months ahead of schedule, prompting us to reduce our year and target to below two per cent.
I'm very proud of our team to die or to take a meaningful and Prolapsus fan and it's critical here.
Accountability is critical to that Corporately and delivering touch tangible progress in such a short time on your key environmental issues speaks volumes and now I'll pass it over to Ryan to discuss personally sound Penny and she'll position.
Thank you definitely now on the slide 12th despite the challenging macro backdrop and the second quarter are lovebirds profile and liquidity position remain healthy.
With a healthy free cash flow target in 2020 and visibility for sustained free cash flow and 2021.
We will continue to prioritize paying down debt.
Returning capital to shareholders through our dividends program and further strengthen our financial position.
Finally, I will note that partially continues to protect it's cash flow through an active hedging strategy. We have now initiated a small hedge position and 2022.
You can view are cool hedge position and a supplementary slides.
Turning to slide 13th Weird now budgeting at 35 dollar oil for the remainder of 2020.
Context, weird tightening are corresponding capital budget to 650 million to $700 million with more than 60 per cent of that spending habit, having already occurred in the first half of the year.
Following strong operating pulse control and a second quarter.
Sweet as reinstating full year 2020 guidance on you can call.
[noise] is David mentioned earlier, despite lower production volumes, but we had initially budgeted for.
We have managed to reduce our forecasted controllable operating costs on a per unit basis.
Finally give an ongoing uncertainty caused by cobin, 19th we have not elected to reinstate detailed guidance on production in activity.
That said the light blue stabilized activity wedge in the graphic below isn't illustrative U a R base case plans at this point in time.
To wrap things up despite some macro headwinds we can send you to advance arkie corporate sustainability efforts on multiple friends and we will continue to do what is necessary to protect longterm shareholder value.
And now we'll be happy to take your questions.
Thank you at this time, what would be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
As a reminder, we ask that you please limit to one question and one follow up.
And confirmation tome indicate your line isn't the questions here you May press star too if you'd like to remove your question from the cute.
[noise] participants using speaker appointment it may be necessary to pick up your handset before pressing the star keys, one moment. Please while we pull up the question.
My first question comes from John Freeman with Raymond James. Please proceed with your question.
Good morning, everyone.
Hey, John.
I'm trying to get a sense Ah mad.
<unk>, what do you think about the the four to five regs sort of stabilize case that y'all are comfortable with it the 35 dollar oil price.
And then you know looking at which is obviously conservative relatives district at least now it's kind of over 44 for for next year and I'm trying to get a sense on the last call you mentioned like around a 50 dollar one oh price that your bias would be sort of high single digit growers, but it sounds like we're just at least in the current.
Kind of uncertainty around Colorado would demand et cetera.
It would require you know a higher price than that I'm, just trying to get a sense of how much of the conservatives on the way you I'll think about 2021 is determined by the uncertainty of October at Hearst is made me, how Y'all would act and a more you know how is covered kind of world.
That's a great question, John and it was really you have to take it all into consideration tomato can definitely deliver hi single digits and three cashflow, but we we look at the macro environment, a quick flash and the fries can be leaving when we got this type of spare capacity.
11 million barrels in June of course, Okay kind of a choice do it here to their Tuesday barely the increase that you're gonna be at 9 million burgers today extra capacity here shortly that's still get sore extra capacity so.
We we don't see a need for a call for domestic roseberry, let's see in the industry is orange that transfer over 40 years quick flashing the oil price and they reran gross so we want we want to see the fundamentals truly berm up we obviously have lots of rescues.
So shaded globally.
[noise] reactivation people are going back to.
To school, but also our our our steelworkers going through and zero zero. This reactivation. So if there's any type of conservatism Ah in this industry. It is now and we do have really good with a maintenance K 420 21.
Z that.
Spare capacity you get down below 5 million barrels that would probably be mid 2021, and you start to see.
He started to see the global inventories redo, so it'd be a signal that.
The demand instruction due to go over this is recovered stabilize I think that's a good time to to talk road.
And our motto is where do you usually position to to deliver that than most of the lowest recycle ratio in the industry.
Relatively low declines for the show sector got that one.
Lowered letter Jewish you at that point as well, so taking all that into consideration.
Give me a little recycle ratios, we're we're really.
Focused on a maintenance cat.
2021.
Great and then my my follow up question, you know yesterday, there was a lot of discussion with companies about variable dividends just sort of your thoughts on a longer term basis kind of how you all of your variable dividends as a as a potential another lever to kind of return capital in the shareholders.
Yeah, we've demonstrated increased returns to shareholders. This year at your initiating a dividend last few rate increase our debit and this year. We didn't anticipate the strategy. The model allows for increased dividends over time, so that the basics of animal dividends are is R.
Coke is and over time, you know, we're gonna have assuming things uncle that strict and obviously we're running.
Maintenance for 2021, and then and then evaluating the macro situation will have a large amount of free cash flow and returned to shareholders would be a priority. So we will look at all all conditions that focus is.
Increasing that base dividend, we we really want to see if that has the impact of amplifying volatility Ah.
For an investor or not we wanted we wanted to deliver a study room germs two shareholder. So there's something we will be watching overtime focuses on drawing the base dividend in the near Sir.
Thanks, Matt I appreciate it.
Sure.
My next question cause some Gabe does with Cowan. Please proceed with your question.
Hey, the morning, everyone thinks for the prepared remarks, so far I guess that maybe starting with the second after this year, obviously oil prices prices stabilizing activity restarting as planned and you guys have some pretty good visibility to a free cash also so I guess.
<unk> why don't I go ahead, and do official volume Guy and so it should just be the missing missing piece of the of that equation and I guess, you know shall we still expect around 110000 barrels of the extra right for this year.
Very good question. There gave I think we've got the the cartoon a chart hasn't changed since our last glad that like it's pretty straightforward. We are in the stabilized case.
Yes.
Thousand girls is R. As our extra great based on that on that sure. So we have the tightened reduce the Catholics Ranger there.
But we just to ensure that there's.
No farther further ramifications from go with it I guess grilled operations really be able to solidify that.
Shortly but but yeah, it's weird Thanksgiving lean on that sure for for abuse voice.
Awesome. Thanks, Matt and then I guess, just as a follow up focusing on the maintenance capital number it looks like maybe there is a bit of.
Questions over that number and sustainability over that number if I just kind of look at worst Street estimates are for 2021. So can you maybe just reminders the the the D N C for foot assumption behind that number and then maybe elaborated on the on the pieces that keep it keeps at 600 million dollar number flat into 20.
Thanks, guys [noise].
Sure. This is David.
Yeah, I I'm reminded the capital assumptions that we put in Brooklyn, DCE for the second half of 2020, or the 907 hundred for Delaware and Missouri, respectively. For 2021, we recognize it the the service cost side of things is gonna be dependent on activity levels I think other operators.
Starting to signal, they're plans, but increasingly more on the the kind of maintenance approach. So that's probably.
Picketed the runaway inflation is highly unlikely next year, but.
797 hundred and 900 for Midland in Delaware or should I could please.
Something that even if even in the case. So I'd inflation next year, you know to change our our view for 21 that you should get into 2022, you lose the duck drawn out whenever they will call in 2021, but what counter accident in 2022 is the shallow and get a base decline right and so those two things that I'm all set we do view that.
Maintenance cap Raiders is durable you didn't past 2021.
Our next question comes from sits N with the Bank of America. Please proceed with your question.
Thanks. Good morning, just following up on the maintenance Scalpel program that you define 220, 22, which is very helpful. Within that scenario conceptually can you discuss the activity baked breakdown between Delaware in Midland How does that shift is it fairly static what would drive more allocation of <unk>.
Is this a right of return processed is about level.
Sure. It's it has a right of return allocation capital I would say 80 90 per cent of.
Is that a driving 80 90 per cent of our capital allocation within the company.
And based on with our minimum ownership in and portions of the Delaware Basin, you see roughly a 30 per cent capital allocation towards the Delaware.
And a maintenance kept beer yeah.
As you can go forward in into 2022, you'd probably keep the absolute amount.
Similar additional grilled me from the Midland Basin. If you look at it that way and <unk> were looking around based on the second times with you today.
Wells 90, do 100 miles a year issue into the make deliveries maintenance carefully.
Thanks Mad a question for you you'll be used 35 dollar W. T I a as a defining number and you basically is planning process turns out to be a pretty good number appreciate your thoughts on the macro earlier, but how are you thinking about an upside case scenario for W. T. I N at what point do you reinstate you suspended guidance.
I think volume guidance as we come in to the August time frame and put a sharp into the 20th 21 budget you know there's pretty wide range there.
R 100 million dollar range on the on a maintenance capital that was typing Ah no doubt does it come into a four O, but it cycle. So that would be the time frame are trying to the end of the years, we we put a vessel to that.
And the first part of your question I'm, Sorry, you said.
Oh, no upside scenario planning scenario 35 dogs scenario, it's pretty good yeah.
That's just additional three cashless for the company and prepare to that we have $450 million Toronto that comes up without <unk> at some point pay that off organically and then increase shareholder research.
Our next question comes from Scott handled but RBC capital markets. Please proceed with your question.
[noise] [noise] excuse me thinks <unk> met you you'd talked about you know trying to gain relevancy you know <unk> you know from from investors your.
<unk>, how does any M. P. As is yours, you know do that how how do you teach you can compete versus you know some of your larger peers, you know with with you know greater free cash or even other sectors. You know obviously, you've got the dividend, but no to be really be competitive where where do you think you need to get.
Yeah, I think it comes down to financial fundamentals when you look at our roshi.
We're going to be exceeding almost all appears roshi Bronco for you can look at our groceries very competitive so.
Competitive business model across multiple industries and that's that's using the 35 dollar base K. So obviously this industry.
We have we have a robust hedging physician to protect the downsides.
That's where it is you know that call that option call to to increase oil prices down the road and then he needed wrap up your returns to shareholders over time as you mentioned and I think over time that may need to be.
At a minimum equal to.
500 yields, but probably a little bit higher so that's what we're working for working towards building that cushy in tomorrow.
Okay Ah understood and and then.
Turning to flaring, a little bit obviously, you guys had made a lot of progress.
And you know I guess <unk> some of that is obviously, an organic efforts others on on it I think are killing some of the Jagan peak volumes and can can you discuss that you know it looks like your target would imply that you know you might see some of that come back online is is you bring some production back on but you know when you step back and look at your targets <unk> would you all.
You know curtailed production in in areas, where you would have blaring just the limit. The flaring is is that a plane going forward.
Extra sauce.
Stephanie on the French Fry and.
I'm really hierarchy and.
I feel not reason gatson Internet T. Martin M E. We really kind of her lifestyle. So we've been <unk>.
Marketing contract.
Do you need your T V Crazy infrastructure P O.
<unk> <unk>, let me get high work Huh that's <unk>.
Not really my screen, <unk> hungry and an extra order and I agree really allow us to bridge the gap tomorrow.
So and we brought from actually back online.
More scared of July.
P. I N crisman, I think that'd be three cheese, a number of that.
Thank you for the cheeseburger.
We absolutely believe that's a lot cheaper sappy angel long-term.
Corporation, where I'm really sorry for your time for your lemonade or routine brand New York.
[noise]. Our next question comes some laoh marijuana with Keybank. Please proceed with your question.
Hey, guys Uhm certainly appreciate the comments that you made Ah just with respect to industries practices in the past ramping volumes into an oversupply market I just wanted to kind of get a sense. You know if if we do see that normalization you certainly indicated that it could be some growth and and the second half of <unk>.
21.
I just wanted to get a sense other than sort of having the the right signals in terms of lower OPEC spare capacity lower global inventories cause they're also sort of a leverage governor that you look at and you're gonna planning on operating and but the free cashflow no matter, what but it's just sort of a certain balance sheet level in terms of leverage that you kinda wanna be at before you can kind of start tomato resumed.
A little bit more growth and you know what do you think the right leverage is you know say at 45 dollar oil for parsley.
This is Ryan.
Joke with increased uncertainty Montreal silly.
You know <unk> do you think investors Wanna take.
Root thousands of them.
Florida leverage definitely part of this I think you know longterm do you Wanna be that's a.
Five five.
Yeah. He brought him looked at all extra for using three five is that.
It is deleveraging so we have a path to get there.
So yeah.
We can get their organically you over the next Oh 12, 18 months, So let's say mid mid one would be.
Alright.
Okay. That's that's helpful for sure and I guess you guys certainly talk about about you know reducing.
The Ducks 20 to 25 and 21 I just wanted to get a sense D. Do you blow that down kind of ratably during the year and 21 or is that kind of more happened and.
The first half or you just kind of take that low hanging fruit and you know get all those well sort of online just trying to get a sense of how that plays out [noise].
Maybe I'll need a little early given that we're still put in the form of budget together, but probably more ratable. Then then a very early Serge blow down so.
<unk> and that we have planned throughout the year is 2021, probably and that that that Jewish range. So the the idea of bringing on you'd have to bring on a bunch of spot.
Spot spreads early in the year to probably aggressively pull it out harder than it not our plan, we intend to do something a little more stable, which which would lean more towards your animal sidewalk as we put pen to paper you know more formal way on or 2021 budget that'll that'll come at even further bogus.
[noise]. Our next question comes from Charles made with Johnson right. Please proceed with your question.
Good morning that to you and your whole team there.
Charles.
I'm wondering if if you could give [noise] give us a sense you <unk> you picked up a couple of Riggs here in July you Gotta pick up a couple more in October you know outside of the the D. N C cost per lateral foot, which is kind of I think kind of a trailing indicator could you give us a sense of.
What you really gonna be focused on as you as you read it back up activity to make sure that your.
Delivering on the on the capital efficiency games that you guys you know capture didn't in.
The first half of this year and that you're actually able to.
You know duplicate and replicate that through your program.
Sure Charles step wanted the health and safety, our employees and or contractors in Zinner partners Alpha field. So lots of work going through you know backup plans that tobacco friends of you know what happens if there's a whole police gets.
<unk> diet Coke with and how do we quarantine properly how do we bring in the background.
Personnel and so that's that's the one so too is.
As I say, just depending an extended power efficiency games. So we'd have to make sure we come out of the great strong Wishy have we just Saturday.
Company record, maybe industry record for a three mile lateral and the Delaware Basin and there was actually are the quickest well T V, regardless like two mile or or three miles, so three mile or outpacing or two milers something for the teams to.
Really.
[noise] themselves on the back over and is that a one off of that we don't know so first out of the <unk> coming out strong. So those are the things you were looking at efficiencies across the border.
Got it <unk> those are hopeful little anecdotes and then you did this may seem a little far off at this point, but I'd like to get your thoughts or your your I'll look on the.
The landscape for for you know M&A R. A N D. However, you want to terminate you know it it it doesn't seem like that's top.
You know it doesn't seem like it's on your first.
At the top of your list of priorities right now, but one would think it at some point.
There'll be some opportunities that emerge so could you give me your thoughts on the landscaping and your appetite.
Oh, you're right there on priority list Charles the N word motto. So what we think is helping and has a good way to change both on the leverage reduction.
[noise] financial returns, we can deliver no we wouldn't really focus on cool cycled roshi and groceries when we look at it a lot of the chessboard in the landscape.
You know, we're we're not necessarily certain that there's a lot of accretive inventory out there. So we're not gonna be looking at.
Companies based off the trading values gotta be accreted on on a rocket basis. He this from you if you play Ah.
Talk to the list and we don't see a lot of opportunity there anyways.
So then you know are bogus is entirely executing on our model and our financial drivers.
Our next question comes some Neil dangling with Suntrust's. Please proceed with your question.
I'm going to help not my question is you know you continue named had the right call to be quite Conservative you know early this year, but my questions you know getting given the great efficiency you see I have low cost you know hedges et cetera, all that do you have.
Is sort of that go for where you are right now that conservatism I would call. It that you still have now is that more just based on back or beliefs or you know cause. They certainly the returns are there are given you know your upside. So I'm just wanted to still what's drive and that sort of strategically.
Yeah, I think back in February I gave a speech 12, the shell new deal with Doctor Pepper reception. It talks about pollution that our industry needs to address and then it talks about delivery non-profits. So.
We have to deliver on the financial side and something has been broken for the last 15 20 years and part of that is is getting a overseas or an industry. So I think it I think it comes from that yeah. I think we we we just really have to stay steadfast have some patients and.
Later on an execution.
Get the industry reputation back improve their red perception.
So no I think that makes sense, then I guess just as a follow up then you know like I forget when not long ago. You all had kind of that minimum kind of shareholder returned is that what you think that is probably needed too I don't know guarantees probably too strong word but to show in best or is that there is that sort of you know combination I know that y'all.
[noise] when you look at growth in Sherrill, the return kind of that.
[noise] minimum that you did you have coffee is that something you think then that's that's needed to spring investors back to our group.
Yeah. That's the framework has to be delivered on consistently that's that's right in your own you know, there's there's multiple things that go in to the framework and you know the cash flow.
Deliverance and the associate yield as part of it is gonna be one very interesting thing here.
Well, sometimes has been and have to deliver an actual hard returns to to shareholders as well. So yes, I would say the framework shovels right.
Our next question comes from Matt Portela with two to pick a ring and <unk>. Please proceed with your question.
Good morning I'll.
Just a quick question a long-term capital allocation philosophically as you look at the longterm grocery some parsley and kind of where the industry seems to be shaking at around kind of a five per cent CAGR. It with a medium to long term I'm curious how you guys think about that in the car.
[noise] text of your portfolio and your balance of moderate Grove versus returning additional cash flow to shareholders.
Yeah cause I'm going off of a framework type of question I think you know when you get in Chicago reinvestment Great discussion when you look at that and Ah you know if you're looking there's a lotta discussion around 70 to 80 per cent reinvestment great. You know we'd have to really moderator of growth.
That or watch aren't road.
That type of reimbursement rates are maintenance cat, but as far below 70 per cent reinvestment right really opening up a lot of opportunities and flexibility.
So we probably because that's 70 per cent number the low end of that range. The 70 80 per cent rash for the for the long term is is what are all kinda liver and then we think as healthy as.
Nice nice call Oh, what's gonna be needed. It out are you a show overtime.
Maybe just a follow up Tonight.
If crude prices do recover over the next 12 to 24 months one of the things that you've mentioned is.
And the industry grass over the last five or so years has really been an impediment to equity price performance I'm. Just curious if there's kind of a cap on on the groceries that you would like to kind of put in place.
With a medium term and or two recycle all that excess free cash flow back to shareholders. The some of the things you can discuss some of the common dividend or sure buybacks variable living in overtime.
Yeah I think.
Thank you it will be single Davis.
And then we're in that single did this you know we we have some time to obviously 2021 to review it says the the macro landscape you know these other big announcements the V. Vietnam Smith go on from 2.6 million barrels of day.
1.5, and granted that's something that's gonna be the best for sure, but you know 50 per cent of so I was gonna be natural organics or the other Europeans.
Major is going to follow so I think there's a lot to be watching them on the global some vitamins dynamic, but but we like a single digit long-term grove radios as a moderator right now.
The next question comes from mixed together Skalla with steeple. Please proceed with your question.
[noise], Yeah, hi, the morning.
Aside from operational issues, Matt you mentioned like a friend, who getting Cove. It just wanted to kind of get a sense out durable that stabilized activity.
Planned is what what caused me deviate from that case would it be just simply prices below 35 or is that something lower than that.
No we we'd have to see a call back you know we have some flexibility around that around that price.
Okay. What are we base case budget, so we'd have to see.
Probably blow $30.
We didn't go into curtailment.
Voluntary curtailed language chocolate shake or what we see about a 20 million dollar up with it but producing those barrels later than and those months, but we didn't go onto that until we saw basin.
<unk> and the 20 dollar range, so I would say below 30.
[noise], Okay. Good and I know you don't have any federal acreage, but I wanted to see if you know if you.
If we anticipate I've seen it or if you would anticipated any regulatory changes you know if we get a new administration that could impact you and anything can do to mitigate those potential changed.
With yourself.
Is pretty interrelated against multiple different the administration's we've we've been drugged and definitely different administrations in the past.
E R. We'd like to stay out in front and consider you know the license to operate ticket.
As a as in honor and try to try to be that's been great an an operator operating requirements.
So I think.
Think there's.
An opportunity to.
To work with either a regulatory environment going forward, especially get our our.
Geography of our packages.
Our next question comes from Kashi Harrison with Simmons Energy. Please proceed with your question.
Oh, good morning, everyone and thank you for taking my questions.
Just to.
Yeah, just two related ones for me you know, Matt. So so let's say, we do get back to an environment. You know you feel good about spare capacity you feel good about the global economy. You know crude is sustainably 50 or higher maybe 2022, 20th 23 whenever would you for like a a better phrase you know low grade activity.
<unk> towards the productivity from the 2019 capital program in order to take advantage of you know what the entirety of your inventory backlog and then if if you are back to that you know 2019 productivity level you know how how long do you think you could maintain a low low mid single digit grilled three or four I know in the past you would kind of.
Thought about inventory in terms of 10 to 15 years, but just trying to get a sense of where inventory might be in in <unk> in the lower gross mode. You know moving forward.
Yeah, I do want to.
I didn't want to kind of clarify that you know what I'd say single digits as a governor it's hard with the type of basic client shallow and we have I mean, once we get back on it you're looking at high school <unk> email or just a little bit of additional activity and still being able to meet the greens loaded into the reinvestment right. So.
It's just the nature of.
It's we have is productivity.
2019 program could go on you know and we're running 15 rigged. It was it was a decade runaway the 20th 19 productivity levels.
A liver high single digit growth, we're gonna be nowhere near 15 risks probably subtend. If you best for a couple of years, so a long time.
[laughter] God God, that's it for me Thank you [noise].
Our next question comes from Chris Purdue with Goldman Sachs. Please proceed with your question.
Good morning.
Oh of course.
It's actually Bryan singer hair, Barbara and good morning, I I wanted to follow up on a couple of things that you. You you mentioned earlier really on the what are the pricing points and balance sheet points that when she would commit more capital to shareholders and then all set to activity levels and I appreciate the level of specificity that you'd <unk>.
<unk> with a number of data points here on this call and I think you mentioned from the perspective of returning cash to shareholders you want to see your balance sheet down to and I think it was one and a half turns and then I think you've made a comment with regards to having enough cash for some level of maturities, but I'm wondering if you could clarify that and then.
Assuming you've reached that objective 5 million barrels a day of spare capacity.
Is that essentially then the lever which he would.
[noise] consider alright, adding activity.
Yeah, Thanks, Brian for the opportunity to clarify there. So so we in that and are declining leverage model, we anticipate room for growing shareholder returns along the way. So as we approached at 1.5 target we are baking in assumptions of.
Growing shareholder returns, it's not it's not a wait until.
River, along the way and form of inform dividends current plan.
And then and then yes, that's it that's a good try a million Burger I'll spare capacity.
And lowering global inventories is definitely a good framework for us to evaluate.
Additional riggs.
Which which would probably push the growth into 2022.
Got it huh.
Yeah. Thank you and then you you you had mentioned earlier the the expectations for your decline rates to decline as the activity level, followed him and I wondered if you could provide a little bit more color on where that decliner, it goes and whether your own internal expectations.
Four how base declines are trending has has changed here over the last few months.
Hey, Brian is Kyle so yeah. The expectation breath is still <unk> this year for fourthquarter 20th of 33%.
You know kind of one year oil decline willing to fourthquarter 21 cause you fast forward to the fourth quarter of 21 again, assuming kind of an extension of that Stabilised activity case around 110000 bear all of the day that based upon what kind of get you need a shallow out by two or three percentage points. The next year. So that's.
Yeah. That's how he also date was referred you earlier.
This is helping maintain yep.
[noise] around there at 620 22 as well.
[noise]. Our next question is from ruined Jarrod EM with J P. Morgan. Please proceed with your question.
Yeah. Good morning, the Matt one of the key themes from some of your peers and earning season has been.
Oh, the shift back so the Midland basin from the Delaware.
Get some operated but some red cause back it may be ranch and I called a 70 30 split.
Another your peers.
How do you see.
Partially is capital allocation.
Between the Midland in Delaware shaking out over the next called 12 to 18 months.
Hey round, yeah, very very similar 73.
Capital allocation split and as yeah, we do mineral physician on a large chunk of our Delaware portfolio, So that Oh, it helps and realizations and.
And then.
We talked about this framework of 2022 and beyond maybe you know the growth additional growth they're gonna send this you know price.
It was still come from a missing basin.
And we'll just have to but it's gonna be based on Richard return capital.
Okay, She's gonna be based on race returned it.
Gotcha Gotcha that's helpful.
My second question is just kind of looking at.
Sustaining capex and we do appreciate the.
The figures on on the decline right.
But if we understand that stick to keep your your fourth quarter or.
Boyle production flat called it around 110000 barrels a day that that's that's 600 million.
It does look you know very favorable relative to the peer groups. I was just wondering about what do you think is leading to call today.
Better capital efficiency number and 21 and and and thoughts about you know.
That kind of Ah go forward basis.
I didn't want to let everybody you say it doesn't look favorable compared to Oh gosh, yes, we still have the lowest recycle ratio it all up in the industry.
Yeah, I I'd say the thing yeah, I actually asked that quality earlier that is currently a big big pieces.
There to some other Permian operators.
<unk> the efficiency games and we've had we feel those are those are stinky a lot of it <unk>.
Technological capabilities that we put into place give us confidence that yeah. We can keep keep hold a L. As in Pushy, then essentially burger manage and you have the Delaware resolved so really the combination of.
Material improvements and efficiencies. The fact that we still have the scale the command very favorable Oh best Cock.
And the fact that.
You know going forward, the asset quality, particularly with a capital a vacation we have plan for the near term is is just a superior combination. So that's that's what drive to the returns even if these lower prices and you think that's what differentiates us root for many others, even though they.
So nine okay.
Yeah.
Yep Yep. Thank you thanks for that.
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Three.
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