Q2 2020 WPX Energy Inc Earnings Call
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Now I'd like to hand, the conference over to your Speaker today Mr., David Sullivan, Vice President Investor Relations. Thank you. Please go ahead Sir.
Thank you good morning, everybody welcome to the W.P. actually energy second quarter 2020 earnings call. We appreciate your interest in W.P. ex energy, Rick Muncrief, our chairman and CEO Clay Gaspar bar, President and COO and Kevin Vann, Our CFO will review the prepared a slide presentation. This morning, along with Rick Clay.
Kevin other members of the management team are available for questions. After the presentation.
On our website WPS energy Dot com, you'll find today's presentation in the press release issued after the market close yesterday.
Also our Q will be filed later today. Please review the forward looking statement and disclaimer on oil and gas reserves at the end of the presentation. They are important integral to our remarks. So please review that so about Rick I'll turn it over to you.
Thank you David Good morning, everyone on today's webcast.
Thank you for your time for your interest in W.P. X and water people continue to accomplish.
This is obviously a year unlike any other but we remain confident intercompany and our nation's ability to get through this very confident.
That's all said last quarter, we're going to need to patients for recovery to fully take hold we're not there yet, but let's face it we've seen some real progress in the last 90 days, everyone would prefer to have greater certainty and a lot more clarity around the timeline for this pandemic that we're pacing.
But there are plenty of shades of gray and volatility right now.
This demands of steady hand.
That's why risk management practices are so core to the foundation of solid companies, including W.P. ex there's an art and science when it comes to having a competence and experience to know how to navigate these rough waters.
It's truly hard to imagine that all the scenarios, we've seen play out across the globe.
And in our sector happening just a matter much but they did.
Credit our team for making sure that we were ready.
The preparation makes all the difference when things around you appear to be falling apart and positioning is exactly what separates one company from another.
You can't be disciplined either have it or you don't.
Your management philosophy, most certainly gets magnified in environment like this.
And that's where our W.P. extorre starts today.
One is defined by stability competence continuity and positive results even in such an unprecedented times.
The strength of our balance sheet.
Revolver capacity or call commodity hedges and our track record for disciplined execution continues to give us a considerable edge.
Let's not forget.
This isn't just about 2020.
The position, we're in and the thoughtful actions, we're taking or going to benefit W.P.F. shareholders in future years as well.
Because we're prudent planning we've been able to make some quick smart sensible adjustments and necessary capital goods without slamming on the brakes in such a man or the since people flying through the windshield.
I'm proud to say, we've also order commitments to the market Indoor service providers, we will continue to strive to do the right thing the right way.
The continuity, we haven't or development program. Despite the second quarter curtailments in surety and help us in so many ways, including our targeted exit rate this year and what that means for our performance going forward.
Now the desired outcome of course for any well run businesses to generate free cash flow and we have nice results there too so.
So with that let's turn to page two.
As you recall, we laid out to possible scenarios for the second half of 2020.
We have determined scenario, one or exiting this year at 140000 barrels of oil production a day is the preferred route.
Well, we now know and because of the visibility is starting to occur we reduced our capital spending by $50 million dollars for the balance 2020, you can chalk this up to efficiencies cost savings are people in the cadence of how we're managing our development plan at the same Tom we're also raising our expectation for free cash flow.
So from 150 million to 200 million for this year. This is direct result of what we achieved in the second quarter.
I know this begs a question about the Tommy for dividend financial is we could do it right now like we'd originally targeted but we also think it's also.
Appropriate excuse me appropriate and prudent to try to ascertain a little more insight into the Ford macro environment.
Recall, we want to do something as meaningful and durable. We're clearly we're gaining more clarity internally about what 2021 and 2022 could look like which will help us nailed down our decision so stay tune. Please.
We've also address some previous risks that we had going into 2021 by adding attractive hedges at $41 a barrel.
And building the revenue certainty we were we like to have to support our capital program.
As always were we remained opportunistic by proactively reshaping our debt towers at a lower interest rate. Our next significant maturity doesn't occur until 2023, which is a very manageable $242 million.
Finally, we were were resuming our completions activity in a thoughtful moderated way.
We're not going to get ahead of ourselves despite what better commodity prices, we do value. The continuity. It allows the revenue power we see the data we gained from the knobs return on our completions as well as the ability to begin realizing an incredible value from our Felix acquisition.
I'm still extremely impressed by everyone, who was associated with such a seamless transition.
It's one thing to integrate another company during a normal environment.
The whole other matter to do it in the middle of a pandemic.
Working from home, managing social dispensing and the like.
This is significant feed.
I don't want to go unnoticed or to be under appreciated great job team now, let's turn to page three.
This page shows our disciplined and how we're approaching the back half of 2020.
We've been busy bringing production back online and now our team can return to a more normal business, even as we scale back capital spending.
What do you see here is an incremental approach to address or DUC inventory.
This involves redeploying recompletion crews in the third quarter as we worked for planned exit rate of 140000 barrels of oil per day at December 31st.
This is a thoughtful plan that's backed by our industry, leading hedges for 2020 and one this supports our planning for the next couple of years.
Because of how well we're position this year, we have the ability to do this in a way that's not stressing our balance sheet or putting short term interest ahead of long term value.
Now I'll turn the call over to Clay Gaspar President and COO, who will update you on our company's operations, including some exciting well results are one of our newest Felix pads, let's turn to page four.
Thanks, Rick and good morning, everyone.
As Rick mentioned these are certainly unprecedented times and the most stressful situations basic human instinct is to defend against the most immediate risks and progressively work towards longer term risks and hopefully had the opportunity to act proactively on long term opportunities I hope you can sense from our comments today.
Exits been able to check the box on near and midterm concerns.
And we are spending a fair amount of our energy energy toward positioning and opportunities for the coming years.
The luxury of being able to consider value, creating opportunities rather than just defending against a dead collector at the door is on the back of years of work to build a strong asset base sitting on top of the rock solid financial Foundation.
Tended by a first class workforce.
And driven by values of courage results and relationships.
On the last earnings call, we laid out two scenarios that help delineate what the balance of 2020 might look like.
The first scenario was assuming a quicker oil price recovery that would allow us to bring the completion crews back in the near term and we're doing just that.
Please don't mistake. This for the mindset of full speed ahead, we're still methodically working down rig count.
Paul, Italy, and safely tending to the wells that were curtailed.
And at the same time, bringing in the completion crews to work down the backlog of Ducks.
The low 40 strip supports these actions and these actions will allow us to be very well position for this year's exit rate and more importantly, 2021.
Kevin will talk more about the maintenance capital in the free cash flow placed implications for 2021 I can tell you that our actions in the second half of this year have material benefits 21, and a healthier footing and 21 puts us in great position for 22 and beyond.
Now, let's turn to slide four and discuss some more recent well results.
First let me think the hardworking integration team from all parts of our company that is work to bring the Felix assets into the fold I can conclusively say that we are fully integrated and are now focusing on driving incremental value through cost reduction improved well performance and importantly, improving SG considerations as well.
The Felix where for no pad is a great example of this value creation.
We completed six wells by Felix that were drilled by Felix and we elected to use the standard feelings completion on four and a WPS style completion on the remaining to.
The wells were similarly spaced all two mile laterals and even use the same flowback methodology.
As you can see from the plot to the right. The Felix completions were a touch better than acquisition type curve, but the WPS completion style has significantly outperformed both curves in fact, 46% better than we baked in for the acquisition case.
Also with the same service companies on the same location. The WPS design was nearly $300000 cheaper.
I believe this is just the beginning we still have significant opportunities on improving the landing and steering opportunities on casing design and on the overall cost structure I will touch a bit more on this on the next slide.
And the fourth quarter, we will have our first production on the Felix wells that were drilled and completed by WPS I'm eager to show you. The absolute results of these wells and how they performed versus the acquisition type curve that underwrote the acquisition.
Now, let's turn to slide five and we talk about the Delaware oil dollar Delaware well cost.
First I want to give a tip of the had to the technical team who's in the midst of a nine wells CBR completion and state line.
With the first sales expected in late August.
Once again, having the ability to still focus on long term value. We are investing in some signs to better understand the very complex considerations of landing zones and spacing.
One may question, the timing of this investment, but when you consider the freed up bandwidth of our technical team as well as the low very low cost environment. This is a perfect time to gather this intel and understand the implications.
On the CBR pad the nine wells are landed in eight distinct landing zones. Each of these landing zones are proven and individually generate competitive returns even in todays pricing.
What we are studying is how the completions interact and how we maybe able to continue to tweak our completion design to cut costs and still yet improve performance.
You May recall me mentioning the Peco State project, we did back in 2018. The technical work included a contiguous 800 foot core running from the third bone Springs, all the way through the Wolfcamp B fiber optics, microseismic external pressure and temperature gauges.
The Pegas project provided real tangible evidence that changed our completion design.
Weve use these learnings to save tens of millions of dollars on subsequent wells in the Permian and also in the Williston Basin.
It's also the basis for some of the changes that were employing in the fields wells.
The CBR project is the next step and it takes a larger view up and down the column to make sure that we're making the right decisions in regards to spacing staggering and sequencing.
I've had a preview of this data earlier this week and I can tell you it's very compelling.
The data collection can be hard to appreciate from the distance, we typically don't share progress along these lines, but I thought it could be important to add some color in context of the limited state production data that's availed available publicly.
Normalizing production per foot as a necessity, but certainly doesn't account for the incredible cost savings associated with longer laterals also without having the ability to really understand the details of the spacing and the landing zones. It can be hard to discern what are the test and what is progress towards envelop development.
Core to our culture is post appraisals praises and learning from the past.
We look back at every well every pad and every new test with a critical why we also do on all inclusive annual look back on each year's capital program and present that to the board.
I can tell you with absolute certainty.
With a consistent price deck, the 2019 Permian results deliver better all inclusive returns in 2017 or 18 I also believe 2020 will outperform 19 with same methodology.
When you take time to consider the costs as well as the productivity of program you can see the steady progress, we're making on value creation.
From where I said I can also see a couple of step change improvements that will be more evident to the public in the coming quarters.
Since 2018, we've reduced reduced drilling completion and facility cost by 35%. The second half of 2020, our well costs are benefiting from some deflation, but very significant percentage of the costs are related to changes like I described related to the peco stay completion improvements.
I should also note that these well costs include drilling completions facilities as well as artificial lift which is usually about $500000 per well.
I'll also remind you that when we announced the Felix deal we assume no synergies in the purchase price the economics of the deal assume well cost of $10 million for Felix to model Wolfcamp a.
As you can see from the combined Stateline and Felix the well costs for it to model Wolfcamp, a has significantly lower than the acquisition economics. The Felix wells are projected around 8.4 million in the state line wells about 7.6 million.
Narrowing that $800000 Delta is an opportunity for us to gain material additional value from each felix well more to come on that.
Now, let's turn to slide six and I'll discuss dapple and our risk mitigation.
The July six DC Court ordered regarding dapple was very disappointing candidly people think that pushing oil away from pipes and onto trucks and trains and the name of the environment are not thinking very clearly.
The ultimate outcome of this quarter is still very unpredictable, but prudence requires us to mitigate potential downside risk.
Our marketing group continues to have in basin fixed price deals with trusted partners and also moved quickly after the ruling to secure a one year rail deal as well as transactions through additional pipe capacity. Our original 2020 guidance assumed on Wilson oil differential of five to $5 and 50.
Yes for the full year 2020, after mitigating our exposure post Apple.
The post Apple ruling the second half of 2020 oil differential should be about six to 650 in Williston on a consolidated basis. The impact of overall oil differential is approximately 50 cents in the case that dapple continues to flow, we'll be able to CLO clawback most of that incremental costs. This.
Maybe an unnecessary insurance policy, but weve shown before is protecting asymmetric downside risks can be well worth the small incremental fee.
Now I'll turn it over to Kevin Vann, our CFO for financial update thanks Clay.
And it goes without saying that Wow, what a quarter.
The operations team scrambled on both sides of the ball financial team working together with our marketing team optimize our risk management strategy and our treasury team opportunistic Opportunistically hit the bond markets Restacking, some debt towers as a WPS team as a whole remain focused on getting through the current fire without taking our eye off our long term vision.
In a quarter, where oil traded for short time at less than zero on the open market and overall realized commodity prices dramatically decline because a lot of common consistency and what we accomplished.
And that's what we're known for being able to take the Curveball without buckling earnings because we're disciplined proactive and balance sheet minded.
We believe that the market has won it and continues to want consistency. We are obviously in a commodity based business. The one thing you should expect from WPS is that we are proactive risk managers, we don't swing for the fences every quarter or every year, we do understand that the wants and desires of the investors ebbs and flows but running a good business always includes good.
Risk management practices.
It's on our resumes here WPS, you've seen it from us over the last five years, you should expect from us because we expected from ourselves risk management and extends way beyond hedging commodity prices as well.
Are we perfect at everything of course, not no company with any level of self awareness believes itself to be so we constantly evaluate how to get better what others are doing and had a modified adaptive dynamic environments that may sound, a little cliche, but think about our track record over the last five years I think we have proven it we did not just sit still.
Then hope things got better as a natural gas producer we were proactive many companies were not proactive risk managers and you are seeing and you are seeing the consequences of those decisions through this downturn in commodity prices.
We have all been hit by the macro events right now, but we pride ourselves being ready for the unexpected.
We believe that you need to manage the risk for the risk will manage.
You are seeing financial stability continuity in our development program and meaningful meaningful free cash flow of course, we have adjusted our capital program. This year, but are utilizing the benefits of being active risk managers like I just mentioned by utilizing the benefit of the shock absorbers, we've put in place long before the beginning of 2020.
We always considered the financial outcome of anything we do in the field, but there is ramping down cutting capital are starting to chip away at our DUC inventory.
Now, let's turn to slide nine we generated 166 million in free cash flow for the quarter and expect approximately 200 million for the full year.
Also despite the decrease in average realized prices for all commodities are adjusted EBITDAX increased 17% from 666 million for the first half of 2019 to 779 million. This year for the quarter adjusted EBITDAX was up 15% over the same period last year.
At 123.7 thousand barrels per day, our oil production is 26% hired in the same period of 2019. This increase is driven by the acquisition of Felix energy Inmarsat, Despite the curtailments that clay discussed previously.
Total equivalent barrels were up to 207000 barrels per day or about 30% over prior year again, driven by the acquisition of Felix.
For the second quarter, we are reporting an adjusted EBITDAX of 400 million, which is 53 million higher than the second quarter of prior year.
The record record quarterly results reflect the benefits of our risk management strategy. The steps, we took to optimize our physical barrels versus our hedge position and the efforts to drive cost down during the quarter not only did absolutely costs go slightly down this quarter the cost per BOE, He came down as well.
We're also reporting an adjusted net income of 69 million versus 37 million in 2019.
The improvement was driven by the same in same items impacting adjusted EBITDAX as we realized $21.46 per barrel of oil revenues versus 50 742. This year our last year.
But were more than offset by the higher volumes and hedge realizations at prices north of $55 per barrel.
Our capital expenditures incurred for the second quarter totaled 188 million. This amount approximately $173 million relates to drilling and completion activity for operated wells and 3 million for midstream and infrastructure.
Now, let's turn to slide 10.
During our first quarter call our plans for the balance of this year were unclear as we thought the current day fires caused by cobot and the price war on commodity prices as clay mentioned, we laid out a couple of options as to how the balance of the year might play out depending on crude pricing and the ultimate returns. We believe we can see can achieve given our well cost.
With crude pricing north of $40 for the balance of 2020 and around 43 per barrel next year were leaning into the first scenario, which has us exiting this year around 140000 barrels of oil per day.
Which will take us, which will take us approximately 1.1 billion a full year capital to get there Im pleased to say that capital numbers $50 million lower than our previous estimate and we will end the year with 35 to 40 Ducs more importantly to keep our year end production flat and 21, we estimate that it will take between 800 850 million in cash.
But.
We also believe that we can generate approximately 200 million in free cash flow at roughly a $40 WCS WTI price for 21.
As Clay said, we're not we're not only look into the capital spend this year and next what that means to our 2022 trajectory and the capital efficiency, we can achieve.
Before I turn it back over to Rick I want to say that we recognize the world is change WPS is adapting to it just like everybody else. One thing has not changed his WPS has approached proactive risk management, we didnt see the events of 2020 coming I don't think anybody did however, our balance sheet was ready for this unforeseen blow our cash flow protect.
And we had in place helped us absorbed the shock and I'm proud of how the WPS team made additional moves during the second quarter to protect the value for WPS shareholders.
I will turn it back to Rick for some closing comments.
Thank you Kevin.
I'd like to close where we started this morning simply put I believe in the future of WP ex the significance of what our sector contributes to society and the unmatched spirit that we have here in America to number back down.
The challenges ahead remain daunting and real.
But at our company, we're up to the task, we will continue to wholeheartedly embraced our responsibility socially and financially to deliver meaningful results you can see that our second quarter numbers as we've gone through you can see it in our 2020 SG report is available now our web site.
Continued bias for action.
We strive to work closely with our stakeholders and the training we provide to our employees.
As always I am honored to serve our shareholders and represent our employees. So operator, we can now open the line for today. Thank you.
As a reminder, task question you will need a press star one down your telephone.
Withdraw your question press the pound key.
And the interest of time, we ask that you. Please limit yourself to one question and one follow up please standby, while we've compiled the Q and a roster.
Our first question comes from office Sen with Bank of America. Your line is now.
Thanks, Good morning play appreciate all the color on.
On dapple and how you guys. It adapting to the situation then if I could go to slide seven.
You talked about the mitigating steps just wanted to probe a little bit on your comment on additional pipe agreements and then.
The slight there you talk about sales outlet to Cushing Clearbrook and bad five could you provide a rough breakdown.
Well I'd say some of it.
Some of the work that we've done here has been.
In building relationships over the years, we have a very good hand on the polls of of those opportunities.
We keep a real close eye on that we knew right away that where the where the gaps where where the opportunities were and we move very aggressively on that.
Some of the detailed.
I don't think we're going to get into on the call.
The nature of those individual agreements, but I can tell you just kind of rolling the numbers up we're very well protected 20 and even out into 21.
This is a thoughtful measure that.
We see is just that asymmetric risk downside protection and that's how we kind of think about these things.
I do have Greg warranty or if theres anything Greg you want to add.
A little bit more granular.
No no I think as per sufficient.
Okay, Thanks and.
Perhaps on the maintenance cap capex number or scenario of $800 million to $850 million.
Broadly how you're thinking about again its conceptual how you're thinking about the split between the two basins either on a rig basis or completion basin basis in is the midstream capex number in there and what would the European 21, DUC count be in that scenario.
The year end 20 year year, and 21 year and 21, you gave us.
So as we think about Ducs, we basically we end the year was at 25 to 35 to 40 35 to 40 year end 20.
And then during the first half of 21, we would consume what we call Ducs and remember we have everybody is a little different definition of it what we say is anything thats been online for 60 days above.
The standard cadence.
So post rig released online 60 days, we put that into a special buckets, because thats a little bit abnormal for us So just that.
That amount of wells that would be what we talked about a year in 21st half 21, we consume that.
As far as capital allocation between the two.
We're currently running two rigs in the Williston basin will be going down to one.
Later this summer and that's that's Preplanned, that's that's very logical is very.
Strategic part of our Felix acquisition as we wanted a an oilier option.
To complement the state line that's in the ballpark, a 50 50, and so the Felix being roughly 70% helps us kind of push the.
The oil numbers the way, we would like and can continue that.
Oilier overall company.
Distribution.
So anyway, I would say one rig for Williston basin and the balance in the Permian basin between Felix and state line. Its wings I can tell you. We really look at it is one big pool and there's things that we do we may end up having five rigs on on one side and then all five rigs jump to the other side.
It's close enough where that those mode costs don't don't hurt you too bad.
Thank you.
Our next question comes from Derrick Whitfield with Stifel. Your line is now.
Thanks, Good morning now.
Order there.
For my first question I wanted to focus on your capital costs updates on page six.
Perhaps for clay the last bullet under the current cost environment section suggests there is additional costs downside would it be fair to assume you're you're speaking to the benefit of operational efficiencies in a flat service price environment and if so could you speak to the areas, where you're seeing the greatest opportunities.
Yes, great question, Derek so the you're exactly right. So we didn't assume any.
Move down in commodity price, we're just looking at the strip and saying as that becomes more fully baked in some of that is deflationary I mean some of these.
The smaller pieces of the overall.
Cost equation kind of come into focus.
But some of it is operational I tell you one of the big things that we see I pointed that 800000.
GAAP is the on the Felix side, we have yet to wring out the real opportunities and if you recall at the time of the announcement, we said we're going to be very thoughtful about not just shifting over hey, This word to WPS was surely a works here and we're finding things that Felix did that were actually exporting to the state law.
One area that work better some facilities things and some of the like so before we lose that opportunity to really evaluate we're doing several of these kind of side by side test really excited about what happened with this most recent the orphan.
Results and I think it's a good head to head comparison, but we have several more of those some on the facility side. Some on the drilling side and as we bake those in you'll see continued downside.
Our downward pressure to that overall cost number in a flat commodity price environment regardless.
Great and then clay just staying on the operations on the Felix acreage. Your first two wells are overwhelmingly positive based on disclose completion design tweaks are they in your view represented of what you can obtain in the Wolfcamp a across the Felix position and are there other non completion oriented tweaks, you like to attend and that coming months.
I hesitate to redraw the type curve I know that that can be very tempting to this okay. Here's export. This on every single well, where we're big believers in experimentation we need to understand.
Everything from spacing to drilling design.
Casing designs, one of the things up one to two facilities combining some of this economies of scale as a whole lot of knobs on the completion side. This work that we're doing over in CVR in the state line right now we'll have implications to the Felix area as well Heck, we'll we'll use the same some of the same logic as we did last.
John in Williston as well so some of this kind of cross pollinate between the basins, but it takes a little time to digest some of that and we're always tweaking and trying to.
Make that next step change improvement.
Thank you. Our next question comes from Bryan singer with Goldman Sachs. Your line is now open.
Thank you good morning point Ron.
Couple of similar topics for for from my questions first on the Capex spend about $500 million in the first half of the year that would seem to imply about a 300 million dollar quarterly run rate for the second half.
Maintenance capital for next year implies about a $200 million to $215 million. So quarterly run rate can you take us through the differences in cost structure or activity.
Drive this reduction and.
Maybe to follow up sits at question earlier as the Ducks, a unique contributor to temporarily lower in the maintenance capital and 21.
Yes, Brian without question, we will benefit from the remaining ducks in early 21.
But it's the number that we disclose ballpark 35 ducks.
At year end.
We've been pretty consistent on that on that messaging.
We don't have any anything significant baked in on.
Cost structure reductions, although I would point to that as additional upside you.
[music].
The very dynamic nature of 2020 and dropping rigs.
Dropping frac crews, bringing those frac crews back make it a little bit hard to track quarter to quarter, but we're projecting into 21 is much more.
Flat.
A flat capital outlook also should be noted with the with a pullback in activity in our and our relative growth for 20 that sets us up with a little bit flat or base decline for 21, and that's something if you recall back a couple of quarters ago, we set as a as a five year objective is to flatten our.
Yes decline.
We're really really proud of the company that we've grown into on the back of some very significant growth years.
But what we didn't need to do now is mitigate as we mitigate that growth the flattening of that base decline really really helps capital efficiency, Yeah and this is Kevin as you think about the the run rate for the second half of the year being roughly 300 quarter. You also have to remember we're trying to.
Arrest the decline that we really created in the second quarter as a result, just curtailing activity.
And you know and drop and completion crews. So thats why you see a little bit and higher level quarter to quarter in the back half of this year.
Great. Thank you and then my follow up is with regards to the wells that you disclosed here on the on the Felix acres on the data for the two wells go through about 60 days I would've thought that the slow back strategy, usually would show at or lower production early days as opposed to more which is what you're shelling said the first question.
Is there an implication at the Delta well performance should actually accelerated to to your benefit in the future and then second Gen. Maybe it's a part of the question that Derek was asking earlier on trying to draw conclusions from just from just two wells are these wells.
Youre in what you would call your best acres average acres or inferior acres within the.
In the Felix block and we are within the West and East is this.
Great questions.
Before I forget Brian Good area, just mouth to me that this was actually the lowest type curve and the acquisition model. So I'll get that out there okay for the a.
And so this is I think theres upside from this but I will again same thing I said that there.
Let's not get ahead ourselves. This is not the new type curve. These are two wells were excited about it but we need to be thoughtful about.
How we extrapolate that in so your first question with regards to the Slowback technique and it's very insightful. Good good thinking on your part remember what I said as we use the same flowback strategy on both sets of wells before Felix the two WPS.
The difference because we're using the same show changes we are allowing the same kind of back pressure to happen, but whats happening what it proves is in the case of the WPS wells that fracture conductivity, we made a much more effective stimulation and your contacting have better connection to the rest.
Sure. It's the same reservoir Easer wells right side by side. So it's not a a difference in reservoir quality, but our connectivity that's that effective stimulation is just better and so what that translates into is for the same choke setting you're just getting more volume through that and so that volume step changes that you make and we're still opening these wells.
Is up 50 days in USCIS all the production. We have you just have a better it's better evidenced that youve connected to the rock.
And a more complete manner.
Thank you. Our next question comes from Neil Dingmann with Suntrust. Your line is now open.
When you don't recur clay you've got it laid out a plan that you've now being able to stick to and I think the plant now speaks while in the 21 any there'd be any notable changes if we could get it could see a change here here's something on dapple. The next week or two as well as potentially if something happens with the political regime in potentially January.
In the federal permits with anything changed you do you foresee in the plan I know you've got some slides talks about it seems like you're.
Yes, the Bakken would change a lot, but I'm, just wondering with anything but anything really materially change on the plan that we saw the sort of worst case of those two scenarios.
Non deal.
We laid it out I think pretty clearly don't see anything changing we we've assumed almost a worst case scenario we've covered that think.
Rick Warren and his team to the did a really really nice job and I think we worked peculiar what the net impact is to the company.
These 50 cent per barrel.
Total company does something here, but it could.
The plug it in their models and see that impacts us, but we're hopeful that.
Right decisions will be made but I.
I think.
Clay and Kevin's comments, just really illustrate the we relocated from a risk management standpoint in and we made some some nice.
Next decision really property, even so we minimize the impact of things so.
We'll go from there, we'll see we'll see what happens yes that onto.
The spot market, if dapple remains open the spot market will actually come down throughout for relative to where it's out and we will actually recoup a little bit of that 50 cents, along the way or maybe even most of that 50 cents, who knows how that shakes out. So it's really interesting insurance payers perspective, where.
Sort of you real if the worst case is really need the insurance spend the 50 cents, you're very very thankful to have it if you don't need the insurance you kind of recoup a little bit of that premium so to speak.
The other thing is you mentioned federal acreage remember we have 160000.
Acres in the Permian Basin, we have roughly something less than 30000 acres expose the federal lands in a fair amount of that is non operated so I think we sit in a really good position in that regard and.
It's something to consider as we think about as you roll forward and the election process.
Okay and then just one last one are you guys been even even last year. When you started about buying some stock that could different things you guys are very.
If you look at really quantitatively and Im just wondering again if prices start to go back up and you get you are able to pave and basically get.
Get down to a comfortable level.
Wondering Rick for you Clay, Kevin when you think about it with the next step be more on shareholder return in I know like this morning contract talks about potential variable dividend kind of what do you. What do you see is potential options at that point, yes, I think for US Neil the first thing will be obviously will shareholder returns and.
And I would say, we would we would lean more toward implementing the dividends as something that.
Really probably on the verge of doing that we debated quite a bit at the board level.
And just feel like the prudent thing was just give it a little bit more time.
Our cash flow certainties, and I think even since our last of board meeting we've come a long way. So so I think thats. The first thing recall that we really don't have any near term.
Debt do so mentioned 240 million to 2023.
Kevin is team did a masterful job I think in.
In placing some new debt turning around and in the reshaping symbols towers that with the reality was is that our bonds are trading thats. It.
You know really strong and.
It was into the day was not the economic decision to to spend that last hundred million are so good point time. So we'll have we'll have Seattle plays out, but that's near term.
I think dividend.
Derivative initiation and then obviously if you have some helpful commodity prices are down the road.
That's something we've kicked around here internally as well is something along lines of variable dividend as well. So so I think.
Just point blank, that's that's going to where we're at.
Thank you. Our next question comes from Charles Meade with Johnson Rice. Your line is open.
Good morning, Rick you play to the rest of the team there.
Charles.
I wanted to ask a question about about the Bakken or the Wilson first off.
Appreciate that you guys have got out there.
Put your insurance and placing I like that terminology.
But I'm curious at some point.
Do you do you reach the GE reached the position, where you just the insurance or the need to buy insurance.
To continue the metaphor that just becomes too much of a nuisance in it reduces your your appetite to up to be exposed there in Q.
Presumably there is some points at which it becomes too much.
First you are that.
Right now.
I think Charles we look this is we still have got some really really nice inventory is deepest we'd like probably.
Honestly no.
But that being said this is going to generate a lot of free cash for us in for several years Goldman.
And so I think we're quite a ways away from even considering.
Something like you're you're asking about where we like the asset is it's going to generate a lot of free cash is is a mentioned it's been really somewhat core to our performance will less last few years and.
We'll see a little plays out as far as.
The insurance costs. If you will the reality is there is only about 10 rigs running in the Williston basin today and so when you start thinking about the decline of a basin.
Even with.
Some resumption of some completion activity, it's very very measured.
You're probably not going to see much of an rig increase up there until we get sustain 50 $560 a barrel and so for US we think that if you've got a nice.
Production profile coming out of a basin lock that I think theres going to be possibly some upside to that differential actually pulling pulling back in.
As a supply continued to decline if there will still it plays out.
That's a great point about the overall activity in the basin.
My follow up question is around the your your completion Cequent senior cadence in the back half of.
Of the year you guys have been really explicit and appreciate the way that you guys have laid out when those completion crews have gone back to work, but but I wonder if you could just give a little bit more color on on the one connection piece between when the cruise good work in when you actually bring the wells online and what I'm, what I'm really kind of.
Trying to get towards is.
If there was a if you've got a number of large pads. Then you don't maybe maybe even though you brought on a couple of completion crews here in July you're going to bring another one on towards the industry Q. If those are all working on big pads, we might be looking at production Troughing.
Maybe in in October.
Alternatively, if youre going to have a couple of quick hits right off the bat, maybe we're looking at a kind of production for all cleaned up.
So what kind of color can you can you added in that regard.
Yes, good question very perspective, perceptive, because the base decline is real and and any of our.
Any of the basins. These resource play basins, you stop drilling or reduce the rig count tremendously and for the production levels really start fall in and we're certainly not immune from that Weve never shied away from our base declines and when you run the math through that you stop completing that base decline takes over for a period now as we mentioned in the prepared.
Mark who brought back a completion crew in the Williston and one in the Permian both in early July.
Those the production from that really come sometime I would say second half of of August that we'll see production from both and so what we've seen up and to that point is you gave your base decline our production engineers working exceptionally hard to mitigate that base decline.
I'm doing a lot of things trying to enhance production in low cost environment, specifically in the Williston Basin, we had the curtailments that we've talked fairly thoroughly through and we're bringing those wells back online. So those guys are pretty busy bringing that production back online. So it's pretty dynamic but to answer your question pointedly for the first two.
Two frac crews there kind of they came in first half of July the production really manifest second half of August.
Thats somewhere between four and six weeks and that includes all the completions all of the drill out and in the case of the state line Frac crew. The other science that I mentioned in my prepared remarks.
Thank you. Our next question comes from Gail Nicholson with Stephens. Your line is now open.
Good morning.
I'm curious.
Your first lien looking in the second half in 2020 and more specifically how you think you really exit 2020 in what's a good run rate to use and 21 forward.
Yes, Thank you Gail the.
It's interesting when challenging times come on.
Your best teams really respond to it and Theres always another level of of engagement and another level of creativity and I think we've benefited from that we were on a downward trajectory over the last few years really working elouise, but in some some of the ways. We kind of we had stalled out on maybe.
The creativity and maybe the.
Desperation, maybe a different term.
Oil and commodity price fell as much as it did the message was deliver very effectively to the team that I meant that we need to we need to get really creative media very aggressive you saw that in the second quarter numbers I would say the only means clouding. The second quarter is at the same time, we reduced the number of Workovers so thinking about.
The third quarter, the first half of that some of the creativity around we can do this ourselves we can be more efficient some of those things were really stick and you'll see that improvement translate over the cloudy part will be that we have a normal cadence of Workover Workovers and then as we bring these wells back you have an additional level of workover.
So we may trying to parse that out in the third quarter. So you get a better run rate.
But I think the the initial guidance for the year I'm feeling very good about that.
Maybe even encouraging towards the downside for the annual run rate and then as we push forward into 21, I foresee additional improvements from there.
Great. Thank you and then.
So well cost.
Very impressive improvement on the two mile laterals.
Can you talk about the delta between two mile laterals.
Versus the wondering a half mile lateral.
And then how do you envision lateral link trending in 21.
Yeah. So it's interesting Gail that it's a number that varies over time, we're at one time we were.
On the 2018 I think it was even.
Maybe a million and a half dollars delta per half mile.
That was on the high side I think as you can press down it probably compresses to maybe a half a million dollars on the the low side when things are really really tight so if you're you're approaching say seven and a half million dollar well for two Manuel and maybe six to six and a half on the one mile well and then obviously the one and a half.
Somewhere right in between.
All those numbers start to compress, but you still have some some basic fundamental cost data that are not very that are not variable that you can't compress any further.
Thank you. Our next question comes from Leo Mariani with Keybanc. Your line is now open.
Hey, guys wanted to follow up little bit on shut ins I think you guys did it could jump quantifying around 20000 barrels a day here in the second quarter just wanted to get a sense. If you guys might be able to quantify that number in the third quarter just from your prepared comments. It sounded like there were some lingering shut ins here in July.
Yes, Leo we.
We've been very measured on bringing them back.
It's one of these things where you stack up a whole lot of work and then you bring back your best most reliable workover crews in the Companys, we prefer to work with.
And then when there's excess work above and beyond the question is how how much further do you go if we normally have a background of three or four workover rigs, we can run at five or six we're going to run at seven or eight to accelerate that quicker we've elected to kind of the five or six and so that's that's brought us back to a certain cadence I would say wow.
We're most of the way there certainly in Permian, we've we've cleaned everything backup.
In the Williston and I would say by of maybe the tail end of August we should be kind of fully back to a normal run rate, which includes normal downtime for offset wells and of course, you still have.
Pumps failing in just the normal background of operations.
That we keep up with so I would say if you think of it as.
The second quarter being the numbers, we articulated and then you kind of.
Translate that maybe halfway through the third quarter.
You got the kind of that wedge coming back.
I think that probably gets you in the right direction and maybe Dave we can work through that if you follow up with them on the call.
Okay, No that's sounds good.
Thank you guys have done a good job kind of articulating.
The maintenance case.
At $40 Debbie T.I. into next year would certainly allows you guys to have free cash flow.
I just wanted to really get a sense what would happen if we see meaningful higher prices.
Forgot to say that 45 dollar level, it's an area. We got you feel comfortable putting some gross back into the business going forward.
You know Leo it's that's a good question.
Really where we're at today I think you'd have to be closer to the a sustained $50 before we really think about.
Upping our growth just a little bit more you shipped to think about.
What we in virtually every other management team has been faced with last few years and thus we've had several head fakes, where you start seeing rising commodity prices you you get back to work and only to see it pullback for one reason the other so I think it would be very tempered.
In a very moderate approach to that lifted.
I have some have some time.
$50. If it's in that 45 dollar range will probably just hold everything Pat.
Stack, a little more free cash.
And do that it'd be in a bit a nice position you know we do have.
About 40% of or volumes hedged.
Good.
For 2021, so that leaves quite a bit of upside to.
For us in the event that you see 50, 50 Bucks $60 crude which is not not out of the rail the possibility will Seattle plays out.
I just might at one point to that.
No that's part of our our downshifting strategy is well throughout 2020 is to make sure that we didnt need to.
Reversed course very aggressively.
In the case of a quickly rebounding commodity price. It's quickly rebounded to 40 seems like it's bound some kind of some.
Hum.
Stationary movement, there and then once we see the next if it does move to 50 55, and I think we could see some overall activity kick up there will be easier for us to do from the situation from where we sit today to take that next step.
Thank you. Our next question comes from Jeff Grampp with Northland. Your line is now open.
Good morning, guys.
Right.
A question for you on on the maintenance Capex program for 21.
And specifically kind of honing in on the back end with the one rig that you'll be exiting at is that you think that's sufficient to keep production kind of flat and in other words up should we think about both basins kind of being in maintenance mode or is it more.
Some Permian growth and Bakken declined a little bit so on a corporate it's kind of man.
Yes, I think you'd be looking at.
A little bit of gross certainly report of 2021 and in the reality is with one rig and we did get caught up of over completions in certain places. We can manage all that you may start to see just a modest decline did that.
With one rig one rig.
Schedule, but we we above.
Team bria pretty talented it come and create a ways of.
Managing a base of base decline and that production sick work, but I think that's probably what the shape would look like.
Okay, great and.
Another question on on the cost I know, we've talked on that a bit already but referencing that slide six again.
Depending on how your reference point it looks like let's call it 10% to 15% plus type of reductions I'm looking at that second half number is there a way to I guess kind of quantify what of that is sticky and kind of internally driven versus just kind of service pricing concessions that might get clawed back.
Some point in time.
Well we.
We know that that commodity or excuse me service costs moves and it will have to move in a 45 50 dollar.
World.
But I think theres, a a lot of what weve, what we have moved the needle on the on the feel excited is less about service costs and much more about just that some change up changes operationally and certainly the a lot of the additional upside that we see.
For example that $800000 that we're seeing today really for the second half of the year.
Between state line and the Felix assets.
That's that's not.
Deflation that is just opportunities on how do we kind of just claw that that a little bit back.
Probably $50000 at the time and and continue to make progress there. So.
I would say that that the specific point that you referenced first half of 22nd half of 20, maybe it's one third.
Deflation and two thirds changes in operational philosophy.
Thank you. Our next question comes from will Thompson with Barclays. Your line is now.
Hey, good morning.
Obviously this has been touched upon but maybe I'll ask more directly to extend you can share how many net tails are baked in the 2021 program. It sounds like there is some pre spend in 2020 that benefit 21, but also sounds like you're stuck Harrison level docs heading to 2022 and I believe last quarter, you talked about base decline challenge to high Thirtys versus mid Fortys.
This year and I think I think where people make it struggles just you, bringing a lot of flush production. Later this year, maybe can help us understand that the base decline mix between Stateline and Wilson I guess part question sorry.
Back to back to the first question.
I want to make sure I understand that you asking about the number of a net debt.
Tilts in 2021 until such that sales okay.
In 21.
We.
Hundred 1000 20, yes.
I would recommend we'll let you circle back with Dave After this call and let's get some of that a multifaceted question you ask let's let's make sure that that we though we do some good work on that for you and you can get in your model rock and one thing I would just caution is we're talking about maintenance capital clearly thats not we're not point, we're ready to issue.
Guidance.
Directionally, we've given enough information. So that you can appreciate kind of where we're ending the year.
How the base decline flattens.
Supplementing that with some some new wells.
I think it's pretty rough numbers right now, we're probably not going to get into details of tils, even on a per quarter basis, I think thats a little bit preemptive.
So we can follow up and then quite in terms of the CBR project in the eight distinct known you highlighted.
You guys have argued that.
We have ample stateline while inventory.
And correct me, if I'm wrong, I believe WPS had pivoted to maybe three target zones Dateline, starting late 2018.
Obviously, the legacy project continues to pay dividends as we've seen in the recent Felix while results, but maybe I want to ask how do you think about how to project could change your development program and have WP ex U.S optimizing returns versus anything.
Yes, we'll I think state of the art for.
All of our areas and stay lines no different is we think about it in terms of what's hydraulically connected and what we want to make sure in do let's say.
We believe that the X.Y. upper a lower a and maybe even the b or hydraulically connected we don't want to go in and drill.
Drill up the upper AJ.
And then six months year two years three years later come back in it and try and reach that X y or that lower a because now it's partially depleted and really you're going to have very ineffective completions. So part of this study is to really understand and map the fracture growth and how it's how things are growing when you are.
When you're stimulating say the X Y how much of the third bone are you really touching.
Senior in the third bone line versus the third bone sand is their interaction there when you're in different landing zones of the third bone line, where even the second bone, what's the interaction there and so I think the most important information we're getting is a really up much better picture on what is the hydraulic connection and so when we go in we're talking.
About the three zones that were really focusing on typically that upper a lower a and X y or upper a lower a and b, depending on where you're at kind of in that and our legacy position.
But we've also talked very excitedly about the potential for third bone Springs, specifically in the line and we have we've tested now at least three landing zones. There. Another one in the sand and what we're trying to figure out is what's the right hydraulic connection there do we go in with three landing zones or is it for.
Or maybe it's too to really effectively stimulate that and not leave ourselves a partially drained.
Another landing interval that weve essentially condemned and the process. So very importantly, we're all way up into the second bone looking at an opportunity there all the way down to the D. Looking at an opportunity there and as I mentioned every one of these zones in today's commodity price actually deliver a favorable return and so what we want to understand.
Beyond the scope of the take US project, but this project is really focused on really understanding that vertical that vertical connectivity and how big a bite you take it one time.
Thank you. Our next question comes from Gabe Daoud with Cowen Your line is now.
Hi, good morning, guys. Thanks.
Through the man just a quick.
Clarification, and sorry, if I Miss it so the the 800.
50 million to.
A capital for next year did you say the in the Permian that assumes the 800 per foot.
Expected well close to the back half between 20 or does that assume the 871 personally.
The answer.
Yeah, we kept the 800 flat.
The second half of the year number all the way flat through.
Next year as well again, assuming a flat commodity price personally I think theres theres upside to that number but.
We're not we're not fine tuning that just yet it's just a directional look.
Got it thanks.
You bet.
Thank you and our last question comes from that portfolio with TPH. Your line is now open.
Good morning.
I don't have it.
This is probably a question for clay I was just curious as you've kind of.
Improved you're landing targeting and also spacing design, how that's evolved around the state line acreage and any context that you might be able to provide on some of your spaced wells around state line in 2020 versus maybe some of the tighter.
Spaced wells that you might have been running in 2019 and before that timeframe just trying to get a better sense of the rate of change on the productivity and the recovery on those wells.
Yeah, Matt I appreciate the question.
Remember as you will know the wells that come online and 19 are really kind of on the drawing board. Maybe early 18, there's probably a 12 16 month lag from when we conceptualize it too when it's actually producing just getting into Q and all so we've seen is a steady progression we have up space I'd say state of the ours, probably four or five.
Wells per landing zone in the state line area, and we're really excited about what that material uptick and those wells productivity really means.
2019, we had a mixed bag.
Some of six summit five that we were testing on it we probably had a four in there somewhere along the way maybe latter part of the year, but we're definitely seeing I mean that correlation is true and so it's an interesting knob and it it ties back to commodity price and 65 dollar World aka 2018, you might have a little different recipe to.
Optimize value optimize returns than you would.
In 2019 pricing or certainly in todays pricing. So we're trying to monitor that we've we've offered guidance to the to the technical team to think a little bit longer term about how we see commodity price not just running today's strip, but these wells. These decisions, we're making really implementing today's decisions in late two.
21.
We need to understand what's the right recipe, we're seeing that correlation we're excited about that and we're also getting a better understanding from the latest project into that the vertical connection as well which is equally important.
Thank you very much.
Thanks, Matt.
I think.
Folks we appreciate your time today, and just ask that you stay safe and stay positive take care have good week.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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