Q2 2020 Cimarex Energy Co Earnings Call
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Please note. This event is being recorded I would now like to turn the conference over to Karen I trio VP of Investor Relations. Please go ahead.
Thanks, Danielle and good morning, everyone. Once again welcome to our second quarter 2020 conference call.
David presentation was posted to our website yesterday afternoon, we may reference that presentation on our call. Today. So just as a reminder, our discussion will contain forward looking statements. The number of actions could cause actual results could differ materially from what we discussed you should return to scope disclosures on forward looking statements in our news release and in our.
It is 10-K for the year ended.
31st 2019.
Well the risk factors associated with our business.
We plan to follow file our 10-Q on Friday August seven.
Our prepared remarks will begin with an overview from our CEO, Tom Jorden, followed by a few comments from some <unk> CFO Mark Burford Lakes Jorgo VP of operations will then provide a brief operational costs update.
So first of all the call to answer questions is John land that he VP of exploration.
As always and so that we can accommodate more of your questions. During the hour we have a lot. It we'd like to ask that you limit yourself to one question and one follow up feel free to get back into queue. If you like.
With that I will turn the call over to Tom.
Thank you Karen and thanks to all of you for joining us on the call and think if you're interested sure works.
Second quarter was a wild ride.
I want to acknowledge the tremendous dedication and professionalism of organization. This was particularly evident in the second quarter during which most of our office staff worked remotely our field staff scrambled to manage production shut ins, while achieving outstanding safety performance and we scrubbed every element of our costs.
Archer to preserve cash and maximize cash flow.
We began staging our office work force back in May and currently have approximately half of our office workforce back.
We are cautiously pleased to report the we have not had a single occurrence of workplace transmission of Cobot 19. This includes office and field.
During this time with the dual challenges of a business down turn of the health crisis, our employees have given that everything they have they have responded with dr. creativity teamwork and a willingness to examine every aspect of our business or response these challenges.
I would like to acknowledge this tremendous effort I Express my personal thanks to each and every member of our team.
It has been an interesting earning season, thus far clearly most of us any independent ERP sector are bracing, the new demands of shale 3.0.
During this call you'll hear a refreshed outlook from share works.
As we look ahead to 2020 wanted to be on where setting goals for ourselves and crafting long term plans. So why was to focus on generating free cash flow growing our dividend decreasing our debt and demonstrate that our assets can sustain a financially responsible future that puts.
Our shareholders first the days of investing every bit of our cash flow for maximum growth are gone.
Our long range plan involves spending or reduced portion of our cash flow, 70% to 80% as a target and generating significant free cash our plans for 2021 and beyond our based on the assumption of 35 dollar Nymex oil and $2.50.
Nymex gas with which we can maintain our production grow our dividend and generate free cash in excess of our dividend.
Commodity pricing in excess of the $35 to 50 assumptions will allow the opportunity to accelerate our free cash generation Mark will discuss this in more detail.
We're also examining every aspect of our cost structure. This includes capital expenditures operating costs and GSK Blake will provide an update in our capital and operating costs. We have made great progress here, but we have more work to do.
During our last call we were in the merits of a curtailment of 20% of our production volumes our decisions on curtailment, where the result of detailed analyses of our fixed and variable lease operating expenses as well as a deep dive on well specific marketing netbacks.
Our technical teams analyze reservoir performance included that for the majority of our reservoirs are wells could be shut in or curtailed without damaging their long term producibility.
This freed us to make decisions solely based upon economic considerations with confidence that the production would rebound once we brought the wells back online.
We also had the luxury a few production volume commitments, so our shortfall penalties for a minimal.
We're pleased to report that our curtailed and shut in production has come back as predicted hats off to our technical team for calling us one right.
Our financial Health remains strong during the second quarter, we generated almost $50 million and free cash flow 26 million after paying our dividend.
We remain committed to our dividend and fully intend to sustain and grow it over time.
It is important norbord and important to our management team that we not cut or suspend our dividend during this downturn.
So far so good we're on track to exit 2020, having generated over 250 million and free cash flow before our dividend or 170 million in free cash flow inclusive of the dividend.
We incurred no incremental borrowings for the first half for 2020, we are committed to reduce our net debt over time.
We have no borrowings under our revolver 1.3 billion unused liquidity and no debt maturities until 2024.
Prior to our last call we had reduced start drilling program to a single rig or released all of our completion crews.
We discussed our intention of bringing some rigs back during the summer with the opposite of also bring completion crews back sometime during the late summer or fall.
Overall, we are not out of the words, yet we are sufficiently confident in the stability of the commodity markets to get back to work. We currently have three drilling rigs deployed in the Delaware Basin Ll stage of fourth rig in early September.
We plan to add to Frac crews in early September as well.
Although we're not ready to provide granularity regarding 2021 I'd like to take the opportunity to make a few directional comments our plans will generate increased capital efficiency in 2021 and beyond this is driven by three primary factors.
First we will modestly draw down our DUC inventory during 2021, this will not be a major driver of capital efficiency, but it does vary mentioning.
Secondly, our cost structure has improved and we're getting more bang for our Bucks Blake will provide additional detail here.
Third we fully expect to achieve better average well productivity going forward our program for the remainder of 2020 M.B. on will be dominated by development projects. We are relaxing our well spacing based upon recent learnings we have collected a great deal of data that has led to a war.
Working hypothesis that it is more efficient to relax well spacing compensate for it by modestly increasing completion effort. We think we can recover the same ultimately <unk> ultimate recovery out of a given drilling spacing unit with fewer wells, that's where we once modeled our.
Delaware Wolfcamp asset of eight to 10 wells per drilling spacing unit. We now think we can recover the same volumes that's seven to nine wells per drilling spacing unit. This has significant implications to our capital efficiency.
Before we leave the Delaware Basin I'd like to make a few comments regarding federal permits.
Our preliminary plans for new Mexico drilling for the next three years, that's 2021 through 2023.
Include wells on approximately 5000 that federal acres.
Federal permits are good for two years and our renewable for an additional two years. Although these extensions have been routinely granted there's no guarantee that this will be the case in the future.
We are confident in our approach to federal permitting but it would be misleading to claim and inventory beyond two years.
Cimarex is confident that the BLM will continue to grant or were new drilling permits new Mexico, but this is not without risk. Fortunately, we have the ability to pivot our Delaware Basin program door, Texas assets, which have a deep and profitable inventory life.
Don't be surprised if we modestly increase or Anadarko capital and 2021, we have some tremendous opportunities Norad Darko assets. These opportunities are well calibrated and compete heads up with our Delaware Basin program.
Although I would not expected to be more than 10% to 15% of our total drilling and completion capital our hunt for returns makes this an obvious choice.
Finally, before I turn the call over to Mark I want to offer a few quick comments on E.S.G.
We have not let up in our environmental goals for 2020, nor will we we are reducing our emissions, reducing or eliminating flaring analyzing data analytics on spills to identify systemic root causes on eliminate them and constantly reinforcing our safety culture.
Our commitment to these initiatives arises from our core values, which do not rise and fall with commodity pricing.
With that I'd like to turn the call over to Mark to give you more details our financials.
Thank you Tom.
Second quarter results demonstrate the immediate steps, we took to maintain our financial health by reducing our capital investment cutting cost and preserving cash flow.
Tom discussed by mid May be released all but one drilling rig in healthy completion activity, reducing capital investment from 284 million in second quarter down 69% from the first quarter levels.
Our total cash operating cost comprised of elderly transportation production taxes in gene a decreased 12% sequentially from $7, an 89 cents per BOE, we in the first quarter to $6 in 92 cents per BOE a day in the second quarter.
The first half 2020, Gionee cost includes severance expense of 14.5 million from clients, who elected to participate in a voluntary early retirement program offered in the first quarter. This year.
This program will result in approximately 10% reduction to our staff and help me say 25 million on an annual basis.
Also this quarter, we see hedge cash settlements of $64 million and year to date, we've received 107 million.
The first half a 2020, we generated 451 million of cash flow and 35 million of free cash flow after the dividends.
For the balance of the year with resumption of activity. We project 2020 capital will be approximately $600 million inline with our guidance assuming an operational restart.
With our completion activity starting September a multi well pads, we do not have any new operating wells coming on production in Q3.
We expect to have 10 net wells brought on in Q4, which are coming on late in the quarter and we would contribute a minimal amount of production approximately 3000 barrels of oil per day for the fourth quarter.
We do have strong momentum heading into 2021 with resumption of completion activity.
Assuming similar capital levels and 21 is 20 $35 diabetes to 50, Henry hub gas, we can generate free cash flow and access our dividend and keep annual year over year crushing flat to slightly up.
When we finalize announce or 2021 budget, we expect to targeted capital or get reinvestment rate, 70% to 80% of cash flow.
As you look out over the next several years with the strong underlying asset base and cost structure, we expect to generate free cash flow in excess of a growing dividend $35 deputy.
Flat to modestly increasing production.
At prices at prices, we expect to be at higher price expected bank significantly higher free cash flow with a clear goal of having more than sufficient cash to retire 750 million. A 2024 notes, which are is our nearest maturity.
With that I will turn the call over to Blake.
Thanks Mark.
Despite the recent improvement in oil prices, we find ourselves in a lower commodity environment than we had planned.
Cimarex is continuing our relentless focus on every piece of the value chain. There is not a dollar invested or spent that our organization is not constantly trying to optimize we're seeing the fruits of these efforts show up in our results.
Our operational environment looks much different than it did a year ago, our current drilling and completion costs are down 23% versus our full year 2019 cost on a per foot basis.
75% to 80% of this reduction is driven by lower vendor pricing. The remaining is driven by innovation reengineering.
As we are bidding out drilling rigs and Frac crews, we are seeing day rates coming in 20% to 30% lower compared to a year ago.
We're also continuing to make strides and efficiency in all parts of our operation.
Drilling days and our upper Wolfcamp program are down 17% year over year, driven by pad drilling and offline C. Ming.
Our stimulation team continues to raise the bar on performance with our 2020 completed fee per day by 33% for the same design from a year ago.
We continue to focus on every piece of our capital investments, including things like wells per pad versus directional cost central tank batteries versus flow line cost and facility sizing versus peak rates.
When we deliver a dollar per foot on a project, we're seeing the amalgamation of all those decisions and every piece of capital it to bring that development online is included.
As a result, we're anything new projects at an average of 800 $900 per foot across our Permian program.
This average includes well cost that vary by area.
For instance, in our Culberson County program, we are executing projects at 750 to $800 per foot compared to our Lea County program, which is coming in at 900 to $1000 per foot, Greece County falls right in the middle at 800 to $850 per foot.
The more axis Q2, lifting cost is down 21% from a year ago.
We have received rate reductions in services like rental compression chemical and roustabout, while also reducing our workover activity.
We're also seeing new innovations from our ops teams to reduce cost in the field.
By using automation in real time analytics, we've been able to implement a risk based pump by exception program.
This allows us to monitor our operations with closer scrutiny, but with also less manpower in short we're doing more with less.
Nowhere is this more evident in our contract labor costs, which are down 58% from year ago.
The same focus on field efficiency is showing up in our Cimarex operated midstream assets, which move 42% of our total company gas and dispose of 62% of our total company water.
Because we own and control these strategic assets, we can be flexible and control or cost in times like these versus being beholden to a contract with a big see that escalates overtime.
We had been able to release unneeded compression renegotiate compressor rental rates invest less capital and optimize manpower in the field.
These valuable assets continue to provide margin expansion and market optionality.
When we look across our value chain, we see our cost structure improving at every level, while we can't control where market pricing goes we can't control our efficiencies and execution.
Our operations team remains focused on finding new ways to reduce our cost structure and push against the status quo.
Thank you.
Daniel I think that were opened up for a question answer session.
We will now begin the question and answer session to ask the question you May Press Star then what are your telephone keypad, you're using his speakerphone. Please pick up your handset before pressing Ricky.
So withdraw your question. Please press Star then too.
At this time of pause momentarily to assemble the roster.
The first question comes from gave Dallas of Cowen. Please go ahead.
Hey, good morning, everyone. Appreciate all the remark so far I guess, Tom maybe starting with.
Slide 16 in the long term plan that you guys have kind of articulated I guess, how does the 600 million.
Capital kind of evolve past 2021, particularly as you look to spend.
70, 80% of your cash flow and you also talk about a.
Potentially mid single digit oil growth number.
Well, yes long term planning is a little difficult right now it quarter by quarter is certainly.
Unpredictable, but we're looking at a $35 flat price and how we layout our.
Long term plan in 2021.
Yes, our capital will float up and down obviously with the pricing, but our marker is that 70% of cash flow and really our strategic goal is generating maximum free cash in particular, we want to have cash on hand to retire those notes.
No we can't underscore that we're going to do that that's that's really a marker we've drawn down for ourselves and it's one that we are absolutely dedicated to achieve now. We're also dedicated to achieve a discipline, we understand loud and clear the new mandated upon us on upon our sector and so what slide 16.
And is meant to illustrate is what that discipline looks like 35 dollar price.
We don't do a very good job are predicting the price, but we do a good job of is maintaining discipline.
Mark you want to add anything to that yes, okay, but just to add to our capital as we go out into the years future years. It is what we're trying to target 70, 80% as Tom mentioned and it will fluctuate as Tom said, there is a little upper trend as you go out into the future years with that capital.
But we are staying at 70% to 80% is how we're trying to targeted.
Got it thanks guys.
Maybe just as a follow up just Tom elaborating a little bit on your.
Spacing comment I guess.
What have you seen thus far from a rough from a productivity.
Standpoint, and I guess, what does this mean for your.
Delaware Basin inventory that as you kind of Titan spacing from eight to 10 per section seven in aren't as you mentioned.
Well I'll take those are reverse order.
Yeah, we've recently done a very deep refresh our inventory and we're quite pleased with the depth of our inventory I mean, we I think it's probably no surprise that we don't view that we have an inventory problem and thats given us the luxury to focus more on financial performance rather than reservoir capture.
We tried a lot of things and and.
We've got a real science emphasis here at several Rex and we've really pushed our teams to over the last few years to focus on reservoir.
You know not leaving any wasted resources recovery and reservoir efficiency and we try we tried a lot of things. We we have a lot of successes, we make a lot of mistakes I will say those we look back on our program on 19, I think we push spacing a little too aggressively.
And probably saw more well interference then.
We think we need to achieve so and analyzing the data of our own program and the science. We've collected we have decided that the depth of our inventory gives us freedom to relax that spacing achieved greater capital efficiency and focus those assets on long term financial performance.
As opposed to long term reservoir efficiency.
Awesome. Thanks, Tom.
The next question comes from a room.
Jack Ehren from Jpmorgan. Please go.
Yes. Good morning can you hear me.
Low unclear where.
Just wanted to make sure.
I wanted to date, we can't talk a little bit about.
You know 2021 than some of the outlook comments, you kind of leftism bread crumbs around.
21.
Citing how oil production could be flat to up a little bit.
We did the math.
Assuming your 35 dollar a breakeven to cover.
Capex and the dividend.
That does we could see strips that 45, Tom today for next year.
If you produce 76000 barrels a day that would equate to call. It 28 million barrels of overall production, which would support costs today.
You know approaching 300 million to free cash flow.
First I wanted to see if my math was in the right ballpark, it and talk to us about.
How you're contemplating.
Dividend increases versus you know paying down some data as you articulated and they prepared comments.
Yes, I run else I'll start off then maybe Tom I want to finish it filling gaps, but with a 21 using the strip price and I guess, we use a strip price a few days ago like 40 high $43 trip and net to 74 gas and your statistic around 300 million of free cash. So after the dividend is.
That is very logical a room. So yes, we could be generating significantly more free cash flow at the strip is to be trusted which we've been.
Obviously become little reluctant to put too much we had on the strip really focusing on flat price cases, which we think are.
Ready dependable and Thats, where were the plant trying to plan around it's flat price cases.
Yes, and again around you know I'm always going to leave ourselves along with a room here, we haven't announced 21 capital, but but the March quoting you. The plans, we're guiding to discuss around our real plans with real assets. I mean, we've got we've got a material plan that we think we can stand behind.
But I'll take the second part of your question, what do we do with free cash.
First and foremost we would like to.
Having a free cash to call those nodes and I know that you can look at the pace of that and say well. If you can generate that much casualty given year, that's more aggressive on yada yada yada, but we'd like to get that cash cash dozens foil it'll be just fine sitting waiting for those no.
So when they are callable now as far as when that happens and as we look at the strip I would concur with your core observation that it will happen sooner than later, if the current strip holds and ill lot of contingencies, there, but we'll give you that point.
You know were we are in the business are working for our shareholders and so I think you would see us want to increase our dividend overtime and then there's been a lot of talk this season about a variable dividend.
Thats an interesting concept I will say that we haven't had chance to kicked out around the boardroom, but the concept is one that I think is very consistent with our philosophy. So I don't I don't really worry that.
Cash is going to be.
Poorly deployed I think we understand what our requirement is working for our shareholders, but first and foremost we want to generate.
Great and just my follow up Tom you mentioned.
You know a reinvestment level.
For semi Rx at a 70% to 80%.
A CFO I just wanted to see if you could provide a little bit more commentary around that is that a targeted mid cycle or how do you think about that reinvestment level, just given the vagaries in ups and downs of of the energy cycle.
Yes, I don't know what mid cycle means.
It's like what part of the roller coaster do you think was average.
We thank you know we think at at fairly anemic prices, we can live within 72% of our cash flow and obviously, we're defining 35 is a degree of anemia.
But you know I think the more important point around is that we will not return to an era of lets put the pedal to the floor and do everything we can now you might say, we'll wait a minute what if prices go to 65 or you're still going to invest 70% or cash flow.
Our goal.
No I'm going to return to our DNA here, our goal is to make prudent investments and generate great returns on invested best capital now I want to separate that from what we do with free cash flow regenerate, but our DNA has not changed we fundamentally run this company based on prudent investor.
Lance and cash flow is a consequence of good investment decisions not a primary driver, but we would like to grow our cash flow over time I mean, so if we're saying were shareholder friendly we want to return cash to our shareholders. I think it's also reasonable add on to say.
We'd like to increase our capacity to do that thing over time, and so that's where that 70, 80% kind of comes from is we're we're going to be in business for a long long time and.
We're not addition, liquidating.
Great. Thanks, a lot mark.
Yes, Thanks Aaron.
The next question comes from Ginnie way of Barclays. Please go ahead.
Hi, good morning, everyone.
Good morning today regarding.
Following up on a ruins last question. There can you talk a little bit more specifically about what's driving the range of that zero to 10% growth over the medium term is it really a matter of setting aside a certain amount per year for that debt repayment and then a certain amount for the reasonable annual dividend growth that you talked about.
And then the rest of can be directed towards growth and what does that mean in terms of capital going towards.
More towards exploration are going after new opportunities for so in the future.
Yes, it's funny, we're not really targeting to certain growth rate. That's an outcome of the planning when we're looking at what our assets can deliver based on capital range and right now again, we're still planning around that $35 Debbie.
Starting point, so we're not targeting and production growth range, we're targeting what investments, we can make and what those assets and could deliver.
So in we're really not even talking about threerd attend Janine would be kind of laid this out at $35 oil we're talking more like well is flat to slightly up is how we're mostly characterizing it or maybe low single digits, but.
But again, our goal is to our reinvestment generating free cash flow to limiting our investments to 70, 80% of our cash flow.
Okay, great. Thank you.
And then I guess, maybe pivoting to the federal discussion I thought and your size. It was really interesting about the <unk> federal versus non federal starting next year. Since there is only those 46 wells planned over the next three years can you just discussed maybe relative well productivity or relative capital efficiency between your federal.
And Nonfederal wells outside of the spacing augmentation that you talked about.
This is John I guess.
Well it goes without saying that our federal acreage is located in some of the best part of the Delaware Basin. It's in the deepest part is the most pressured part and its oil in the reservoir. So and it has some of the better water cuts. So when we compare different assets, although they all are outstanding.
By a little bit more you would say the federal acreage is very attractive to us and thus why we want to get some of that done right now.
Yes also as Tom points out very great nets, because it is federal acreage I mean, there abbey.
The second half versus 75, all that leads to better economics.
Of course, it also means there's a there's a very detailed permitting process. It takes a while to get all that put together.
But we're in a great position and I want to be clear that as much as we really like the opportunity on our federal lands, where he also very much like our opportunity say in Culberson County, where our well costs are cheaper thus the driver opex very comparable.
Hi, Thank you for taking my questions.
Thanks running.
The next question comes from Nothing Kumar. Please go ahead.
Good morning, Tom and welcome to the Shell 2.0 club.
Yes.
I mean, I guess, it's fair to say that this wasn't as big of Felipe for you as for some of your peers given your historical returns focus and dividend yield.
I guess just following up on one part of fed are you comfortable maybe talking about is there a total return target between your dividend growth and excess free cash flow that down the road you would like to get too.
I'll, let mark yes, I mean common I look at each other here net gas like you can never be too rich or two fan I don't know you're going to prolific right. Yes tell US then I think is as we mentioned right now we're really focused our priority is to have a growing dividends and reducing our debt would fit.
If it's our Rx stockholders and beyond that as we get a plan with the assets. We have improved the investing at 70, 80% of our cash so it's going allow for a significant amount of return to our owners and whether it's obviously still brea price dependent so to set a target is challenging that's why it's Tom mentioned the variable.
Given might be a good option to have a growing a regular dividend, but then assisting in private environment is much better we'd have an option to return mortar owners, maybe through the variable dividend at points in time so.
Certainly our framework, what we're trying to accomplish with limp fixing amount of capital, we reinvest and leaving a balance over for returns is I think and allow for its difficult to return to our owners.
Then just adding onto that what I really hope people take away is our commitment to an approach philosophy, we can't predict the future and there could be lots of events unforeseen.
Certainly there can be geopolitical events, there can be new policies that are implemented that have a tendency to backfire and could drive oil and gas prices significantly higher there can be lots of things that we wouldn't be forced to respond to that we currently don't anticipate and it's wonderful for me to say.
On the second quarter call because I've just define what the second quarter was all about responding to events will anticipate well what I hope people will take from US is that our commitment is real our understanding of what we owe our shareholders is real and we're going to make decisions based on the committee.
What's that we've outlined.
Okay got it.
I guess my other next question is a little bit tougher but.
In the past you focused on big projects and that has led to a little bit of I guess inconsistency between quarters, depending on timing of wells and things like that.
In this new world as you're trying to stabilize operations, you talked about a little bit wider spacing, but I know you're not given this quarterly guidance, but can I can you talk a little bit about how the cadence of your spending your cash flows should trend outside of normal commodity volatility. We all understand that exists I'm just looking at the operational cadence.
Forward.
Well I'll see that up and then I'll, let mark comment I would love to be able to answer that we'll have regular capital cadence even field operations and regular production.
Either either.
There won't be volatile I'd love to be able to say that but it really is a function of individual projects and.
I I also say.
We don't view that necessarily as a as a quarterly problem.
We really look at annual averages and we would like to see consistent performance on annual basis quarter to quarter fluctuations I know our confusing at times.
They are consequence of development projects, which is our most capital efficient approach Mark you want to add to that.
Yes, no let the development projects are now naturally have some variability quarter to quarter knit and but we are.
Definitely on a case army relative to historical where we did have more pipe backend loaded programs at times, we were bringing flexing up and down Frac crews and just kind of end market. I think we're definitely focused on having a more regular cadence, but that doesn't necessarily have exactly into a production cadence it's completely level. So.
In this environment, where efficiency is so important having that kind of regular operational speed is also part of the efficiencies we can gain.
Well. Thanks for question my questions and congratulations great quarter.
And.
The next question comes from David Heikkinen of Heikkinen Energy Advisors. Please go ahead.
Good morning, Thanks for taking my question.
I've been thinking about the space of the whole I think you all can be helpful. Because in pondering like this lower cash flow breakeven pricing, but then like what where companies will fall as far as long dated returns on capital through the cycle.
Imagine.
Exxon, having very stable base production and ability to stabilize that generating low returns on capital and I'm not trying to pick on Exxon, but as I think down the group as you invest 70% to 80% of cash flow. What do you think your corporate return on capital employed should stabilize that.
Yes, David who you know, we obviously, it's still somewhat price level dependent but if you look at the.
At a strip kind of environment.
Looking at our return on our return on capital employed.
We've been probably expected to start stabilizing in the teams it's probably.
Hi high single digits, low teens is probably would likely where we could be out on return on capital employed a croce in high twentys to low thirtys.
Yeah, David Let me just jump in here I think it bears mentioning that we.
It sounds like a broken record here, but it's all about return on investment capital and that overtime will lead to a return capital employed the corporate level at $35. We've scrubbed, our investment landscape and these opportunities generate very very nice returns now they're helped by the lower cost structure.
But thats all tied to the commodity price.
These are returned so $35 to 50 price file that we are very very happy to make and we think we're well calibrated and a very confident that we're investing prudently.
That's great. Thanks.
But thinking about.
The next question comes from does the date of Bank of America. Please go ahead.
Thanks, Good morning, everyone. Thanks for taking my questions. Also told this is all very consistent Massey from what you Hot for a long time I guess in terms of focus on the churn so.
Great to hear you on the first one nothing to freeze Shin 3.0 so.
Hi, My question I'm afraid is a clarification on the slide 16.
You've talked about single digit growth and I guess, it's about 70% to 80% reinvestment rate single digits is 1% to 9% is a pretty wide range. What are you trying to signal here.
Yes, Doug we're just trying to signal that at a flat at 35 in 250 type price environment, our assets can deliver flat to slightly up low single digits, probably would've been up maybe better turned to put in there and just single digits, but we are saying that our assets can not only.
Generate free cash flow beyond our dividend, but we also have a flat to slightly up production profile.
Yes, Doug your given us way too much credit for signaling.
Written feelings.
No what what we did is we just said all right, let's just say what if we were to hold capital flat a $35 price.
And.
We obviously look to optimize our program and we found that we could generate a little bit oil growth next year generate free cash flow after our dividend.
There really wasn't any intent to have a.
Deeper message than that and we Didnt really spent a lot of time Iterating. We just said okay. That's a good result lets just disclose that.
Thank you for that my follow up is if I may go back to your.
Comments about the interesting discussion around variable dividends and I look I think.
Karen has dealt with my questions about free cash flow in DCF and all the resident for a long time, but we lead a pretty transparent view of your volume. This morning in our North I wanted to just talk a little bit on this because it would you are laying out is a tremendous free cash will yield story on the couple of weeks ago your debt.
And then one is to grow dividend burden on the other is to buy back shares in the right now there seems to go fairly wide value gap.
I mean, what your salt represents as our free cash flow story versus where it's trading so why is buying but no part with the story. In addition to variable dividend. In addition to the base dividend growth.
Well, Doug we're certainly focused on that as we laid out on slide 16. Our initial focuses on investment and at what we think conservative price deck that would allow us to grow our increased our dividend maintain flat to slightly up production and then further to most.
Important item for US is to me is to retire those are dote notes that in 2024, you want to get back to their long history have a very low levered balance sheet, we feel our balance sheet. Some very strong cheap right now, but we'd like to even be sub one and a mid cycle price environment is whatever that means but.
1.6 times trailing 12 month that EBITDA right now paying down those notes and they're having a.
EBITDA growth of sites EBITDA growth. We think we can you should be targeting the lesson onetime debt to EBITDA. So our debt focus is primary right now and as time goes on we'll see what other avenues you want to take for free cash flow for Doug I want to be clear, we are not taking a buyback off the table I mean, that's certainly.
Within the realm of a discussion fairway. Our board has had lots of discussions on buybacks, we haven't embarked upon one until now but.
In some reasonable question I'll just leave your with its in the fairway or discussion.
Oh tremendous messaging guys and I hope you in your peers can be succeed can bring investors, but for the space. So thanks again.
Thanks, Doug.
The next question comes from Matt.
Hello.
Super Pickering Holt. Please go ahead.
Good morning.
Hey, Matt.
A quick asset specific questions wanted to see if you could flesh out a little bit more detail around the spacing design change from 2019, it sounds like you're having.
Some positive success with the wider design and completion change and just curious if you can provide any color as to how you're leading edge results are comparing versus the 19 vintage and how that's improving capital efficiency heading into 2021.
Yes, Matt This is John really as a follow up what Tom said, we are recognizing that for a good part of our acreage going forward.
We can essentially achieved the same total recoverable reserves for a particular drilling spacing unit with just less wells, which is just means relax spacing.
Or to put it another way the the amount of overlap between wells was quite frankly, greater what we originally participant anticipating when we first design those particular developments.
We got it wrong I mean that happens sometimes.
But what we recognized though is by pulling back some.
Now looking at achieving the same ultimate recoverable with far less capital and Thats, where the efficiencies come in and we feel very good about that based on some of some of our more recent results and and really where we're guiding to that's why we feel very good going forward about our expectation for for that acreage both in Reeves Culberson and.
Certainly.
No. This is only through for the Wolfcamp.
Yes, its worst sale.
We really have some amazing projects and the Woodford and there that's a totally different reservoir and it's a different conclusion, but it's fair to say, it's everything I've I was speaking to was directly related to the Wolfcamp quite frankly, when you think about other intervals even with.
In the Delaware basin, whether they be bone springs, or Avalon, we feel very good about our spacing choices there going forward and likewise as Tom said, when we do put more capital and Anadarko, we have a wealth of history behind us there that we feel very confident and our spacing decisions there as well it's been within the Wolfcamp.
That theres been a major learning over the last year and a half and we've made that now adjustment and thats, what you'll see us doing going forward.
Great. That's very helpful. And then just a second question on the asset from the rock in Culberson, obviously is extremely productive and highly capital efficient on this slide deck you provide.
Culberson results really stand out I was curious on Reeves County that is.
Fortunately heading into 2000.
How you view your results and read relative.
There's a lot of.
Given the delineation and down spacing that occurred around.
Just curious how your results compare.
Those two basins on on the drilling program for next year.
Well again this is John and I do recognize it as much as we show an average RIV result on that slide which is page 12, I can at least tell you that when we've reviewed our efforts relative to peer companies, we feel very good about our results.
But again I can tell you that when we've looked at other projects any immediate area.
We feel very good about our Frac design very good about our landing choice and very good about our go forward economics there.
Thank you very much.
Your next question comes from Michael Ella.
Please go ahead.
Hi, good morning, everybody.
You said 21 plan could probably generate 300 million plus based on strip prices and.
Lake showed the slide 11, your current well costs. The fees are those the costs that are built into that 21 plan or where do you, especially those to go directionally that's.
Yeah. This is Blake those costs are directly out of our 21 plan. So those those averages were showing those are relay Aziz those are real bids that were getting the day and thats whats plug directly into this model.
And Matt.
Michael I am I, just point out that though.
Those are real costs as Blake said, yeah, I know a lot of people talk about pacesetter costs are leading edge costs and that's a that's a really good thing to talk about but these are these are really well calibrated news are based on actual results and we're highly confident not only can we achieve novo.
We have achieved.
Very good and one of the other drivers behind the improved 21 capital efficiency you anticipate Tom you mentioned, a modest drawdown ducs just want to.
CV, putting numbers behind what you're anticipating there.
Well, we havent given any numbers, but when we because we do have a 21 plan. This is not our unwavering, but the only thing is I use that terminology is because when we look at our beginning of the ER docs versus end of year Darren.
And our current scenario theres not a huge difference so we're not doing a major drawdown.
But again, we really don't want to get more granular than that because we haven't announced or 21 plans and I'd hate to put something out there that than would be modified.
But I was just it really my point is I listed three elements of capital efficiency and I think the dark part is probably the minor.
Tradition of those three.
Great. Thank you.
The next question comes from Neal Dingmann of true Securities. Please go ahead.
According to what Tom or Mark My questions I'm, just curious as to how Youre thinking about your 21 plan, including potentially return in Anadarko and how this will alter or what's the sensitivities to gas and Ngls on this plan.
Well I'll tee it up and all Buddy the marker John fall, but the Anadarko projects that we would stage is 21 are very liquids rich really nice oil production and so on depending on how the commodity swings. They look they look as robust as our Delaware investments.
Marker John you want to follow up on the.
Yes, I'll just did mention Neil that yes, the areas in the Anadarko. We've had some areas. We've really had high regard for I can stick around loan rock and there's some returns in there that as we continue to see.
It will strengthen event gas prices NGL prices are also boost to it but they are highly liquid oil component. So those returns as we look at them. They are very competitive to the Permian and we've been really have been under lowering our investment in Anadarko, but there are certain areas there that definitely deserves some capital.
Okay makes sense and then just lastly, Ah certainly positive outlook for 21, especially on the backdrop of just the volatility we've seen it in 20, and so I'm just wondering if that expectations for kind of flattish oil without a flattish or so capex Im just wondering Tom you've hit around this a lot on that.
Call. Today is this just driven more by efficiencies are there just wondering are there other things that that are driving that are what what is really behind that that sort of 21 that you're able to do that after coming off such as such a difficult year. This year well, it's driven it's driven by.
Lower costs, certainly we're getting as I said, we're getting more out of every dollar we invest and that cost structure is across the value chain as Blake outlined our organization has been tremendously creative and scrubbing all elements of our cost structure, which shell operating expenses always seem to get a backseat. This.
Discussion, but they contribute handily tour netbacks, it's driven by asset performance.
This this plan is driven by calibrated.
Go forward results.
Yeah, we just when you have great assets grid organizational low cost structure. It shows up in with the roll up and that's what we're talking about.
Very good thanks, guys.
Thanks Neil.
The next question comes from Bryan singer of Goldman Sachs. Please go ahead.
Thank you good morning.
Right.
As you think about the best way to invest capital do you see value at this price level at current valuations in the market and pursuing acreage expansion or any kind of consolidation towards lowering the cost structure of your current assets further or is what you're addressing what the cost having come down and maybe at a slower pace at wider space.
Okay.
Yes sufficient were investing in the drilled it is and is likely to remain more competitive than.
Then M&A.
[laughter] well I.
Recycling business on anything I'd say is subject to cyclic overpressure.
But we've always preferred investing through the drill bit and that is always with us.
Associated with the low entry costs.
Besting food drill bit is a half cycle discussion and if you don't include what you paid to acquire the asset you're misleading yourself much less the investing public.
We are always interested in good ideas that have a low entry costs and I will tell you that John and his organization is hard at work finding additional good cash flow through opportunities, where we can enter cheaply.
And that's always going to be a part or business, it's probably the most challenging part of our business, it's probably the least predictable part of our business.
It's probably the one that we can lease plan around but it's always going to be part of our business.
We've got some things on our plate now that I think are testament to some outstanding work from John and his team.
That.
If we could get.
Very low entry costs, they might be a significant part of a future cash flow generation.
M&A is.
More is more episodic.
It's pretty tough to.
To predict the kind of consistent value generation through M&A that we found through drill bit growth.
Not that were not open to it not that we're not going to be opportunistic, but our core.
Strategy is built around the drill bit.
Great. Thanks, and then my follow up you've talked a few times here about the goal of getting to that $750 million of cash too.
Handle those maturities and 24.
The message that you would be or you would want to stay at the low end today.
We're at a 10% or is your at a mid single digit type.
Growth rate until that 750 million is in hand.
Or is there any kind of balance within the range.
Yes, Brian It we really an entry we haven't really emphasize importance mustain down those notes and did that that's low single digits or.
From single digit growth has not really the primary driver Brian were primary driver is reinvesting in the business retaining cash free cash flow above our cash flow.
You keep reiterating that would be targeting 70% to 80% of our cash flow for reinvestment.
So the growth rate will be at an outcome. It's never been our primary focus it's more of an outcome. When we looked in bezanson. We wrote investments were planning to make during this particular period.
I think it maybe maybe I should have a refresh should we expect the low end of a 70% can you speak more of a 70% side of 70% to 80% reinvestment until the until you until the cash in hand for the 750.
Yes, Brian I mean, there's lot of moving pieces and we're just trying to set a framework for ourselves and certainly there is a price over printing.
Doug Leggate made the comment or I guess room at $45 strip price right now that's another significant amount of free cash flow in one year. So we're trying to balance all the inputs with a framework by which we can manage to generate free cash to pay off those notes.
Thank you.
Brian.
The next question comes from Leo Mariani from Keybanc. Please go ahead.
Hey, guys wanted to follow up a little bit on spacing comment on it sounds like you guys. It's certainly done a lot of work on that just wanted to got to get a sense from you folks have what you think kinda quantitative implication is from the tighter spacing I'm sorry from the wider spacing in the Wolfcamp.
Obviously, saying throw out strip pricing call. It $45 could you maybe something like yes, we think that IR ours, or 5% better or 10% bad or any help you can kind of give us when whenever internal study done the spacing.
Well, the IRS grew more than five or 10% better.
Just as John you know put a well.
If I conclude that I can drill fewer wells and get the same reserves.
I think I'm also admitting that we've over drilled in places and so the return uplift. If you can eliminate that is tremendous.
We've done a lot of work on this and I know that a lot of our peers are in the midst of doing their own good work on this.
Not just a well spacing side the side, we've learned a tremendous amount about the vertical communication in these reservoirs and a lot of what we learn has surprised us but all you know every bit of science and every bit of learning that we do heard summer is we would one gold mine and that's increasing our returns and.
Yes, it will have a significant return uplift.
Okay. That's helpful. I, just wanted to follow up a little bit on the outlook as we look into the next couple of years.
Certainly as we've already on this call $35, maybe feels a little bit.
But in particularly on the out years at this point I'm just wanted to kind of get a sense of how you think about.
Balancing.
Dividend ground with building the $750 million cash to redeem announced yet he kind of want to have just better line of sight and more progress on the seven CDB waking start accelerating the demand is that fair way to think about it.
Well we have enjoyed.
It's a it's a happy moment Norbord room, when we increased our dividend we all come away satisfied because that's what we're here.
His work for owners.
So I don't think you necessarily need to see us wait until we had.
Huge amount of progress on that 750 million number before you saw us.
Increase or dividend.
Mark you want to no I think thats, yes, because I think those are pretty comfortable goals. Both are very important to us and I think we can manage both I think we can have a pattern across our dividend, which we historically had we been a dividend payers to tell the six than we've had a nice pattern interrupted only once during the financial for 14 to 15 Perry.
And we want to get back on that pattern of growth, that's a high priority as well as it's building cash to.
Bill to pay off the debt so both are equal high priorities to us.
Thank you.
Yes, there are no further questions I'd like to turn the conference back over to Mr. Jordan for closing remarks.
Yeah in closing I, just want to thank everybody for your attention and.
You know Cimarex has always been a company that wants to be measured by our results. We've laid out for you. Some clear goals that we have and we look forward to generating results.
Go forward talk is always a lot of fun, but we intend to be able to.
Look in hindsight and demonstrated year. We've achieved these targets we set out I also want to encourage everybody wish wish you well hopefully your organizations your families and you're all staying healthy during this very challenging time, but thank you very much for your attention and it's just been a pleasure talking this morning.
The conference has now concluded. Thank you for attending today's presentation you may now this.