Q2 2020 PDC Energy Inc Earnings Call
[music].
This conference call. It speaks recorded I would now like to turn the conference over to your host tile floor Investor Relations. Sir you may begin.
Thank you and good morning.
On today's call, we have president and CEO, Bart Brookman Executive Vice President with Walker, Chief Financial Officer, Scott Myers, Chief Operating Officer, Scott Reasoner, and senior Vice President operations, Dave low.
Yesterday afternoon, we issued a press release and posted presentation that accompanies our remarks today.
We also filed a form 10-Q.
The press release in presentation are available on the Investor Relations page of our website Www Dot P.D.C.E. dotcom.
On today's call will reference book forward looking statements and non U.S. GAAP financial measures.
He probably disclosures and reconciliations can be found on slide two in the appendix of that presentation.
With that I'll turn the call over to our CEO.
Thank you Carl and Hello, everyone.
Today I hope, we can effectively communicate our exceptional quarterly results and outlook I believe clearly differentiates ptcs.
Throughout the call.
Ill highlight a multiyear business plan capable of generating significant.
Sustainable free cash flow in this low price world.
That is called them.
By an enhanced midstream and operating environments in the DJ Basin.
Coldwater political and regulatory backdrop.
As a company, we have adapted and made the necessary.
And at times difficult changes, but we are positioned to door, because we look to the future.
As we finalize the integration of Src energy.
Our vision of improved scale inefficiencies is evident in our operating and financial results.
Some things to note as we go to the call today.
Absolutely free cash flow.
Free cash flow yield and free cash flow margins for the quarter and within our outlook.
Improved capital efficiencies and improve per well costs.
The tremendous progress and the cost structure of the company, both locally and DNA.
Strong production levels are result of Bolton merger and dramatically improve line pressures on the DCP midstream system.
And last our commitment to strengthen the balance sheet this year and as we go through 22 [laughter].
Let me hit some quarterly highlights for the quarter free cash flow from approximately $60 million that is on a capital spend of approximately $120 million.
We exited the quarter with one rig running in Wattenberg no rigs in Delaware No completion crews for the Coke.
Production for the quarter was 17.2 million barrels of oil equivalent or 190000 Boe per day.
39% improvement from the same quarter in 2019 growth primarily due to the Src merger.
From a financial standpoint, the leverage ratios at the ended the quarter stood at 1.8 and liquidity remained over $1 billion for the company.
And last on the operating cost structure lifting cost about $2 needs is could be a wi.
And combine lifting costs in January for the company came in just over $4 per Boe.
We will give a lot more detail on the capital program and the cost structure of the company animal.
No.
More information and what I consider an extraordinary out.
Let me start with an operational perspective and build to the balance sheet.
Production for 2020 is anticipated to be approximately 67 million barrels oil equivalent a day that is the midpoint of our guidance range began strong production levels due to the src merger and improve worn pressures.
Capital spending 2020 should be approximately $525 million this reduction or last update.
For next year, we anticipate flat to modest production growth on a capital spend level of $5 million to $600 million.
Combined 2020, and 2021 free cash flow is expected to exceed $550 million. This calculates to free cash flow margin of approximately 50% in an annualized free cash flow yield nearing 20%.
We expect the free cash flow over the next 18 months or used primarily to strengthen our balance sheet with anticipated year end 2020 leverage ratio under 2.0 with broke further improvement expected in 20.1.
Going forward from a cost perspective, we anticipate the company will be under $5 per barrel.
Hello, we NGL DNA combined.
I really encourage you to take time to understand these metrics as I feel they truly illustrate PTC superior performance and outlook.
Last before I turn the call over to Scott Reasoner I'd like to extend the sincere. Thank you to all of our teams, including the field operations.
Everyday to continue delivering these impressive results doing it safely from bolted cobot in operating perspective.
They are driving down our cost structure, although operating and capital where we continue to deliver value to our shareholders with that I'll turn the call over to Scott Reasoner. This is his last few call at PTC as he heads into retirement and we wish him the absolute best.
After safety operational integrity of PTC is a direct result of Scott ongoing focus his leadership and accomplished skill sets and for that we think.
Scott I'll now turn the call over to you.
Thank you borrowed it's been a real privilege and as I struggle with my emotions here to be part of a great team.
I really appreciate the opportunity and to grow in more so appreciate all of the PTC putting team put up with me. Thank you all.
I know what to echo parts appreciation for the tremendous work or team put in this quarter.
[laughter] from top to bottom in both the field in office, the second quarter offered them extremely unique set of circumstances and challenges.
I'm extremely proud of the results, we were able to deliver but more importantly, doing so in an extremely safe and efficient way.
The second quarter makes two years in the Wattenberg and Delaware Zero PTC lost time injuries.
As we turn the keys over of our operations or to Dave Loulo, we're extremely proud and rest assured knowing that our culture of safe and efficient operations will remain of utmost importance.
In terms of the quarter Bart touched on a couple of the high level numbers, but I'm going to provide a bit more detail on a few that you see here on slide eight.
First Oh, we for the quarter was extremely approach impressive at just over $2 per be away.
It's important to realize that we made multiple decisions, including delaying maintenance and adjustments to stopping that we deemed necessary in the short term, but are unsustainable moving forward.
Given that we project your full year, although we have approximately $2.65 per be a we you can see that we expect some of these costs to come back in the second half a year.
What are still pleased with the overall low cost nature of our operations, which includes drilling completion and facility well costs of approximately $400 per foot in the DJ and approximately $850 per foot in the Delaware.
From a production standpoint, it's important to remember that we entered the quarter operating two wattenberg completion crews and continued at that pace for a period of time before exiting June with no cruise, hence the relatively high level of turn in lines given our curtailment.
Yes.
Given the ratio of oil and gas pricing, specifically and maybe you can see that our curtailments in the quarter, we're a bit bias toward oil as we curtailed some approximately 15% of our oil production compared to only 10% or total production.
As it stands nearly half where you ended the quarter. We're now essentially on curtailed and that includes pulling up the turn in line of our tinman pad in the Delaware, which was done in June.
Moving to slide nine we outlined the improvement we're seeing in the Wattenberg line pressures and highlight the positive benefit. This is having both on a per well basis and overall operating environment.
As Bart mentioned this has been a major headwind over the past several years and we're extremely excited to have line of sight on improved conditions for the foreseeable future.
The line graph on the bottom left at the slides clearly shows the improvement.
In line pressures as the past six months have averaged approximately 230 p. aside.
25% improvement from the back half of 2019.
[noise], obviously, there's a benefit from curtailments factored into the recent pressure data, but generally speaking field wide activity from all operators is projected to remain relatively low and we expect an incremental 225 million cubic feet a day of capacity with the lake some to plan laid.
For this year.
All in we'd expect to see continued white space in the DCP system, which is really important and increase our volume per well further improving our capital efficiency and maintaining consistent run times.
Our team is excited to get back to testing, new completion designs and well spacing initiatives in an effort to maximize both our value per well and total value feel what.
As you can see in the bar chart on the bottom right of the slide we're already seeing an uplift in our oil productivity per well compared to prior more constrained years.
There are factors such as area of the field and flowback techniques that can play into these numbers, but the main take away is that we're once again provided the opportunity to maximize performance and returns given the improved line pressures and processing capacity in the basin.
Moving to slide 10, but staying in Colorado I want to return reiterate the recent significant developments that Bart mentioned in his opening.
Two weeks ago Governor Polish published an op, Ed, which he announced his intention to actively oppose any oil and gas related ballot initiatives in both 2020 and 2022.
Well this doesn't guarantee the operate the opposition wont attempt to gather signatures in two years. It is clearly the most public support the industry has happened the Governor's office in recent memory.
And should go a long way and limiting the outside funding and support that is necessary to run an anti industry campaign.
Additionally, you can see we expect to have over 400, combined ducks and approved permits which equates to over three years of future turn in lines.
We look forward to two working closely with the CEO GCC and its new commissioners as Senate Bill 181 is implemented and the rule, making process continues forward.
In fact, we had an additional 10 permits approved within the past two weeks that are not included in the numbers on the slide.
The takeaway here is that the recent news from the Governor's office combined with our anticipated permit and DUC count positions PTC to safely and effectively develop our position and deliver clean and affordable energy for years to come.
With that I'll turn the call over to Scott Myers to review, the quarterly financials and updated guidance.
Thanks, Scott as we go through the numbers just a quick reminder, that we're presenting both GAAP and non-GAAP metrics as well as look forward looking statements I encourage you to reference our appendix far reconciliations.
[noise] commodity price weakness, obviously impacted our realized prices and sales for the quarter as they were down 63, and 49% compared to the second quarter last year.
This outweighed the 39% increase in production between periods, primarily associated with the Src merger.
Similarly.
We saw a decrease in our net cash from operating activities and adjusted cash flow, 60% and 12% compared to the second quarter of last year.
With all that said, we exceeded our internal expectations for both Gionee per BOE, we and free cash flow for the quarter as production was less impacted by curtailments than we previously expected.
Our all in Gn, a 35 million or $2.05 per BLE includes approximately 4 million of Src integration expense related to the transition employee.
And excluding these nonrecurring expenses would have resulted in a gionee of $1.83 per BOE, we which is an impressive 40% improvement from our run rate DNA and the second quarter of last year, which excludes similar onetime expenses.
We've had to make a number of very difficult decisions, along the way, including reductions in force furloughs and salary reductions. However, achieving these DNA levels is extremely important to the success and long term health of PTC.
For the full year, excluding Src transaction costs, we expect to deliver gionee of approximately $2.05 per Boe, which implies a sub two dollar run rate for the back half of the year.
Finally, we anticipate continued reductions in an absolute basis in 2021 compared to 2020 as our initial years outlook has gn a.
At 120 to 125 million range compared to 135 to 140 million this year.
From our free cash flow perspective, 60 million generated in the second quarter exceeded our guidance of cash flow neutrality due to june's production Nymex pricing oil detox and NGL realizations, all beating our expectations.
As Bart mentioned, we've now generated free cash flow and three in the past four quarters and we continue to cover and as I will continue to cover in a minute projected free cash flow for the next six quarters, including in the neighborhood of 300 million in the back half of this year.
Moving to slide 13, they're only a couple of things I want to highlight around our liquidity and hedge.
First you can see our revolver balance at the ended June was approximately 650 million up slightly from the first quarter balance of 620.
This is simply due to the slight lag in accounts receivables and other working capital changes that somewhat magnified in periods of reduced activity.
Obviously was 60 million of free cash flow in the second quarter and over 150 million projected in the third quarter. It's only a matter of time for the balance to begin decreasing as evidenced by the fact that we are sub 600 by the end of July.
Next our hedges, you'll see that 70% of our oil production for the second half of the year and approximately 45% ever anticipated 2021 oil production are protected at $58 and 40 $45 per barrel.
At this point, we consider our 2021 hedge.
Hedges to be a pretty solid base layer of protection.
We will likely take a somewhat opportunistic approach to future hedges likely in the form of Costless collars that allow a little bit more room to run to the upside yet still protect us from the down.
Moving to slide 14, much of this has already been covered we subs that we've had a substantial increase to our free cash flow guidance.
Decreased our Capex guidance and increased both our oil production and total on total production guidance.
We provided a good visit detail around or expectations on a quarterly basis, including flat production in the third quarter compared to the second quarter and fourth quarter, averaging 170000 Boe per day and 60000 barrels.
For the fourth quarter, the fourth quarter rate represents a decrease of approximately 10% compared to the second and third quarter activity.
As we begin feeling the impact of taken three to four months off of our completions.
In terms of pricing, we once again tried to offers much transparency as possible in terms of our expectations moving forward.
The table, we presented back in may prove to be a bit conservative and we will obviously take that same outcome. This time around but as was the case. Then these are the assumptions that tied to our anticipated free cash flow estimate of more than 300 million dollar sooner.
A couple of quick items to point out.
First you can see that theres a bit of softness in our or oil realizations for the back half the year compared to historical averages. However, we continue to exceed is expect to see improvement and continuing this into 2021.
Second you can see our TGP expense moving up from this point forward. This is simply due to the structure of a couple new contracts just shifting dollars from above the line to the below the line as evidenced by our buyer overall net realized net backs realize.
Improvement over the next year.
[noise] Rolling our updated 2020 estimates into a two year outlook on slide 15 shows the anticipated sustainable free cash flow generating machine PVC has the capability of becoming.
At a modest price assumption of $40 oil to 50 gas and nine dollar NGL, we project to generate approximately 250 million of free cash flow next year.
Given the price sensitivity table provided you can see just how much potential improvement these already impressive numbers half.
For the two year total we project more than 550 million of free cash flow combined in 2020, and 2021 on capital investment of approximately 1.1 billion.
This represents an extremely competitive free cash flow margin of 50% and as a reminder, we define free cash flow margin as free cash flow divided by capital investment.
And a key it.
Free cash flow year of nearly 40% for both years.
Further we have a tremendous ability to reduce our absolute debt level and expect to maintain a debt leverage ratio of less than two times through the next six quarters again at a very fair price deck.
Given the hedge program, we just went over and the improvements to the Wattenberg operating environment covered by Scott.
Feel very good about our ability to execute on these projections as we highlighted in our press release. Our 2021 plan is relatively unchanged capital is projected to be 500 to 600 million. Our initial production range of 175 to 185000 Boe.
Per day, and 164 and 64 to 68000 barrels per day are the same as 2020 and most importantly, we expect our fourth quarter next year to represent an increase of approximately 10% for both oil and total production when compared to the fourth quarter. This.
Year, which indicates we are well positioned to continue executing this plan into 2022.
With that I'll turn the call over to Lance.
Thanks, Scott and then this final section in today's call, we want to show how ptcs impressive to your projections compare not only to our similarly sized peers, but also to the MP sector. At large. This list includes large cap MP companies many of which are.
Blue chip and investment grade.
I'd like to note that the data on slide 17, and 18 is sourced entirely from credit Suisse research for all MP company projections, including for PTC.
And run at strip prices, so you'll notice some differences in the credit Suisse projections for PTC compared to our own data presented today.
Starting with slide 17, PDC is projected to rank among the very best this approximate 25 MP company group on both a two year cumulative free cash flow yield and a two year free cash flow margin.
Starting with free cash flow yield credit Suisse estimates for PTC of 44% is four times the median of 11%.
And even further above that of the general market, which historically averages in the mid single digits.
This chart shows the extreme disconnect between our projected free cash flow generation and our current equity performance, especially given our expectation for improvements in wattenberg from both a regulatory and midstream standpoint.
The second graph at the bottom to slide 17 highlights Pdcs tremendous capital efficiency in generated in our free cash flow as estimated by credit Suisse.
As a reminder, free cash flow margin is to find this cumulative free cash flow divided by cumulative capital investments.
So for PTC credit Suisse projects that for 2020 and 2021 combined the company is estimated to generate 59 cents a free cash flow per dollar of capital spent at strip pricing.
As you can see Pdcs estimate a 59% as more than double DMP group medium.
Now moving to slide 18.
The third party estimates from credit Suisse. Once again paying a very strong picture for PTC as we're able to couple are expected industry, leading free cash flow profile with an extremely strong balance sheet at Nymex strip pricing.
In the top graph credit Suisse projects, our year end 21 leverage ratio at 1.1 times based on their input assumptions.
From a relative the standpoint, we are projected to have a leverage ratio that is half that of the medium peer group.
We're only one of six companies projected below 1.5 times.
The other companies projected to have similarly strong balance sheets on this graph include blue chip MP companies like Iannucci pioneer Concho and Conoco Phillips.
Finally, this last chart shows the estimated year end 2021 easy for EBITDAX trading multiple for each of the 25 BMP Company group also at strip pricing.
Ptcs multiple of 2.6 times as approximately 50% that of the median and approximately 1.5 turns below the next lowest multiple.
Throughout this call, we've highlighted and enhance midstream and operating environment in the DJ and improved Colorado regulatory backdrop, and a multiyear business plan capable of generating significant and sustainable free cash flow in the low price world.
This all adds up to what we believe differentiates PTC.
And makes us an extremely compelling valuation story.
Finally, the close the call we want to provide a concise overview of the positive story, you've heard today, namely that we are consistently and successfully executing on an extremely transparent financially focused strategy.
Our ability to generate both material and sustainable free cash flow at relatively modest commodity prices is due to the quality of our portfolio the strength of our teams and our continuous focus on improving cost structure and capital efficiency.
Additionally, our continued focus on maintaining and improving our strong balance sheet and liquidity our foundational to the company, we've not only demonstrate our financial discipline historically.
But we continue to prioritize further debt reduction through future projected free cash flow generation.
From an operational standpoint in Colorado, we're seeing some of the regulatory and midstream headwinds that we face in the past dissipating, allowing us to project the safe and responsible development of our high return Wattenberg asset with more clarity and certainty.
Lastly, we believe we are well positioned to be a leader in many of the MP industries key value creation metrics.
With that I'll turn the call or the operator for today.
And gentlemen, if you will like to ask a question. Please press star one on your telephone keypad again, let's start.
Ask a question.
Your first question comes from the line of Dunkin' Mackintosh from Johnson Rice.
Hi, good morning, but this is Austin on for done first I'll, just I'll say congrats on a great quarter.
Thank you.
And then on my first question is could hubs I'll provide a little more color on yells trajectory 2023, Q capex looks to be the trough with declining volumes ending for Q1, Q before I'll return to growth.
You want to provide any color around rig in completion crew activity be great and lastly.
I recognize it's too early for hard numbers on 2022.
How are you all thinking about longer term activity in the balance of growth versus debt reduction.
Yes, I can take there's a bunch questions in there so I'll take some probably throw some the Scott as well again for Capex for the next two quarters, you're going to see something around 50 million in the third quarter and around a 100 million of capex in the fourth quarter plus or minus.
Next year.
Having that five to 600 million range as we talked about with I would say more steady capex spending throughout next year compared to what we had this year obviously our summer months have a with the activity have gone down.
As far as the.
Rig cadence goes we do have the Wattenberg operating rig.
Drilling rig running right now and continued running all the way through next year. Our completion crew is coming back in late third quarter, and we have Delaware activity, starting again with a rig and completion crew at the beginning of next year. So I think overall that gives fairly good guidance and direction of how we anticipate.
Spending or Capex next year, Scott anything else you want to add to that.
You covered it Scott I think the only other question was 2022.
Well I think what I tried to in a little too is the way we have our gross set up for next year and our capex more evenly spread throughout the year. We think that 2022 is going to look very positive and continue the motion that we're creating in 2021 from the standpoint.
Thank you for the color and I guess my follow up question.
As well could be too early yells cash flow free cash flow outlook from here is not only have a bus but looks to be pretty study.
In particular as we all move in mid 2021 and that being said is there a point, which you all the consider implementing a dividend and what would be some hurdles you all we need to clear before reaching that stage.
Yes, I mean, right now that we want the message to be absolutely clear we are focused on debt reduction and for when we looked at our company long term, how we'd love to get our debt total debt balance.
At or below 1.5 billion before we consider other material ways to return capital to shareholders and Thats why Weve mentioned that our current share buyback is currently suspended right now.
So I would say that's our number one goal when we go through 2021, we'll start looking at other ways. We still have as I said, our share repurchase program outstanding that we could turn back on but right now we need to focus continuing on paying down debt and getting our balance sheet to make sure I really want.
To get a leverage ratio back under 1.5 again not that I'm uncomfortable at the level. It is now but.
I think having a graph great leverage ratio.
Really strong balance sheet with our total debt under 1.5 billion is our number one target right now.
Okay. Thank you again, congrats on a day quarter.
Thank you Austin.
Your next question comes from the line of Wells.
I'm curious.
Hi, good morning.
First of all Scott let me.
It's been a real pleasure.
Getting to know you again to work with you over these years I don't know what you plan to do and.
In retirement, the but but given the level of patients and the skillet, explaining even the most basic concept steadily over the years I hope it has something to do with.
With 18, because I know you're.
Your your above and beyond that that tough.
I appreciate that.
So you guys. Obviously, you have wonderful capital efficiency in 2021.
Can you talk to to what happens to the DUC count in 2021.
If I remember correctly it stays relatively close to that kind of 200 number but just want to check to make sure. It's not it's not a rundown of ducs, that's that's causing that efficiency.
Well this is Scott.
We're really looking at something around 210 at the end of this year and about 180 at the end of 2021, and that's the combined Wattenberg and Delaware DUC count.
That tells you know gone down 30, or so with the one rig running as Scott described and then we do have a second rig scheduled for late 2021 to start picking up and drilling wells again, so really it's really not quite.
Breakeven from me from year to year, but a little bit of a pull down.
Really as a function of also we really can't.
Drill too much faster because will outgrow our well run our completion crews by more and that doesn't really see this we really like that count BNS at 200 level, probably a bit below that if we could get it there overtime.
Okay. So it sounds like 21, if that rigs coming.
20 or.
Not going to be front half weighted for for the first time and no capex.
No it really will be front half loaded wells big bird, primarily because the completion crews in the Delaware, we'll have that crude for about a third of your 20, 30% to 35% of the year and then it will get released.
And then we'd pick it up again, the following year, but but it will be front half loaded because of that and the idea that we have.
I'm also picked up the difficulty in Wattenberg.
Okay, Perfect and then and then if I could just one follow on you guys talked to.
Midstream in basin.
That makes a ton of sense.
I know the I know the issue has been.
Perhaps spill too much inc. already but but can you talk to any potential impact from from a damper closure.
Yes, well this is lance.
Our field and the Wattenberg is really not directly impacted by the dapple closure and I know that the judge vacated that closure for some period of time this week.
There's there could be some additional barrels that make its way from the Bakken down to the wattenberg, but there's only so much incremental capacity that could come that route and in general you know every month when we do our oil marketing arrangements Theres always movement in different pipes and different volumes when the different location. So we see.
This more is just a continued you know analysis from process of finding the best price for the best barrels on an ongoing basis.
Thanks, so much.
Your next question comes from William Thompson from Barclays.
Hi, William.
Mr. Thompson. Your line is open please check to see if your muted.
Sorry about that.
You hear me now.
Yes, that's alright, part a governor posted essentially called for cooler heads to prevail by allowing Senate Bill and 81 to continue to be implemented will try to keep obviously the initiatives off the balance through 2022 can you maybe remind us what is left to be ironed out under you want anyone.
Pointed out that PDC expects to have about 400, plus docs and permits by year end equating about three years of.
Three years cost of inventory can you maybe talk about how the permitting process has changed now you have that but those tend recent permit so curious to get some color there.
Yes.
Let me just makes a couple of comments, we've got a new commission that we actually feel.
Pretty positive about based on the background of the commission the New Commissioners. We've also got Jeff Robin to we've got a very very good relationship who's Who's now chairing the commission.
He does he reports to.
To the governor and overall, the the op Ed the Governor released we felt very good about to his position is stands with the industry to to oppose any.
The industry focused ballot initiatives and and so we feel like all of this is a positive for for not just PDC, but all the operators as far as the rulemaking on new put that over to Scott.
And let him kind of cover some of the remaining rulemakings that that are out there yeah. I guess, our first pass on this was wellbore integrity, which has been completed and were feel comfortable with all of the negotiations et cetera that we along with that we're going to be able to comfortably compliant. Obviously, we didn't get everything we want but again the compliance is what we're.
Most focus on and so that'll that'll start in here in the very near future as Mark said, the professional commission seeded and we believe we're going to be able to work with them as well not so thats a real that's a real challenge up for the next couple months to see that that's the case, but we're hopeful around that and I guess the next actual rule.
Process that they're going through is really in two phases in its well, citing and mission change and there's a lot that go into each one of those but it's being done in two phases. It's really expected to be completed in October and so thats again, if if everything stays on schedule that I think the Copa does make this very difficult to stay on schedule.
But that's what we're expecting we'll get a real feel for how that how that entire relationship goes with the commission and and so on as we go through that process. The only other things that's coming up in the CDP AG.
Our partner to help is in September we have a record seven those on rules are getting updated and will be fully engaged with that as we are with all of these others as a company as we continue also combining our efforts with the rest of the industry and I think this is a this is a great point to speak towards.
Pleasure, we've enjoyed our relationship with noble, but it'll be a pleasure of chevron bore too because we are a very large company and we appreciate that.
That's helpful color and then on slide 18, clearly tried to point out the discount near multiple on Thats credit Suisse for their comp sheet.
But clearly part of the valuation overhang in the past with the Colorado regulatory uncertainty and that's obviously improving their peers are dealing with Apple in federal net exposure.
I have you trade about 18000 per flowing barrel, assuming no value to pod. It's kind of been open ended question, but I guess whats the feedback if any justified PDC trading at such a deep discount or said another way what would you would you think would relate the stock is in my view, it's probably just as execution on 22000 2021 outlook in chipping away at leverage but Q.
You get your thoughts there.
Yeah, we'll I think I think you're hitting that execution.
Continuing to communicate what we think there's an improving political and regulatory environment getting through some more these rulemakings.
You know showing our capital efficiency in our free cash flow in in this new in this new paradigm were in just showing our results quarter after quarter I believe that's that's what we have to do.
We've got.
We've had some really thorough and thoughtful reviews of our capital programs for the balance of this year in next year, even at strip with some of the cost structure per well that Scott reasoner rolled out we still have substantial returnable basins. So we've just got to we've got to continue to communicate that to you and I think.
With time, as we get permits with a weld county.
On a percent Weld county position and 181 to one the which structured to give the local communities more authority I think we'll continue to gain momentum. So leaves you want to add to this yes very very good just discontinuous some of our thoughts there yeah. Historically, William I think you're right on I mean, it's the I think the.
Hello to regulatory environment has been a bit of an overhang on the stock for some time and and I think also just just with the growth of the field itself I think.
Just getting the Wattenberg midstream capacity limitations out or the way to where we now have sufficient capacity for the for the foreseeable future that's been a rural blessing to us as well and.
DCP is going to exit this year with about 1.6 Bcf a day of capacity on their system with a lay some to a startup project.
There's there's definitely ample spare capacity on that system, you know for us going forward and I.
We've touched on all the things that we think really differentiate the company and it's driven by a financially focused business model of free cash flow top tier balance sheet.
And the focus on reducing debt so.
You know bridging the gap.
From our perspective volume is we believe as we continue to execute on our strategy quarter after quarter delivering free cash flow, reducing debt that are trading mark metrics will begin to improve.
Alright, Thank you for taking question.
Your next question comes from Brian Downey from Citigroup.
Good morning, Thanks for taking the questions. So we've heard a lot from GMP peers on mid cycle production growth and reinvestment rates. This earning season. So I'm curious, how you're thinking about that framework longer term and if that would be materially different from what you've laid out for 2021. So your guidance figures for next year suggest 250 of free cash flow.
On 550 of millions of spending at the midpoint. So you mentioned free cash flow margin, but that sort of imply slightly under 70% of your cash flow is being reinvested next year should we anticipate a similar ratio longer term or any any thoughts there.
Yes, I mean, when I just look at it again.
We feel is getting a lot of guidance on 21, and what I want to say with 22 is we think weve the ability and we set the company up to continue doing the same thing so free cash flow generation is not something that's just going to happen in 2021 is going to happen for the foreseeable future using the same.
Plan that we have.
Flat to modest growth.
Continuing to execute on our drilling plans with the permits insight in the balance of Wattenberg really having put the midstream issues behind us we think we're going to be able to depending on commodity prices continue to execute and I think 2022, you could see something similar but it all depends on what the commodity outlook looks.
Like so I don't think 21 is an aberration by any means and I would expect similar results to continue in the future.
Great and then Scott I wanted to Echo congratulations on the retirement you had you had mentioned the 850 foot well costs in the Delaware I'm trying to get a sense of where that could go next year I realize you're Delaware Basin capital program is largely complete for the year. So I'm curious if that's a reflection of work you've already done or if we could see from.
They are durable deflation in the next year and maybe if you could also touch on any deflation potential on the Wattenberg side I just want to make sure you're setting a high bar before you retire. So we can hold David to it next year [laughter] make sure Hill appreciate that long term. Thank you for the thank you for the comments I appreciate those on my retirement.
I really.
Look at both areas and say they've they've done a tremendous amount already of getting efficient I think particularly the wattenberg, though we still see.
Improvement and drill times, which some of that is associated with the spudder rig ahead of it but we believe and again, we're going to confirm all this over the next over the next 12 months or so we believe that will be.
Currency question as well that were answering yes to the end.
So that continues we we drill we don't we're drilling wells and really really short periods of time right now about big rig falling behind that smaller exploding. So we feel good about that.
Also the crews on the completion side in the Wattenberg continue to get more efficient we were right about the time, we laid that that the completion crew down the liberty team coupled with the PTC team have done a phenomenal job so.
We were at more efficient, but that that can only help and on the daily costs.
At a minimum when you're when you're running a crew I said theres always daily cost.
On the Delaware sides similar story.
The last couple wells, we drilled in the Delaware were some of the best Wells, we've drilled as a company and we havent fully baked in any of these numbers when I'm talking about these efficiencies into the future a portion of them, but not all of them. So there's still opportunity I think I'd love to hang Dave out a little bit, but I, probably won't do that because it's such a good friend.
But.
The part of that that's it that's really interesting is we're going with the smaller casing smaller hole and that's it that's led to these faster times and we do believe overtime, we'll be able to get very efficient at doing that and it will become more repetitive reducing the number of days on on the over the whole on the front pace was already pretty phenomenal.
I think it was it was improving somewhat.
As we got toward the end, but again, it's one of those things where.
Small increments from this point going forward would be the best thing to say in that way like I said I don't believe out too much going into the future.
Great I appreciate the comments.
Thanks.
Your next question comes from the line of Michael Gallo from Stifel.
Good morning, Thank you for taking my question.
That's in the quarter on the Scott on his retirement, it's actually Guillermo stepping in for Mike.
You had mentioned your DUC inventory declining throughout 21.
Would that change at different price levels.
At this point, we don't really look at that it is something that we would we would US initiated we really kind of white. The plan, we have laid out there and I will just caution you with the typical we still haven't budgeted for the year, though that will be coming up in the next couple of months. So some of this is subject to change, but right now we really.
We see obviously will pretty well use up our ducs in the Delaware in the Wattenberg.
Yes, we just don't see picking up another crude crude right now we really think word a good point I think lance's comments and barge comments around making sure we keep a keen on our spend relative to our cash flow is something that we're all very focused on and so that would that would be something I'm sure will be given some consideration, but I would.
Expect at this point the way we see as we were just over a one crew in the Wattenberg.
Okay. That's helpful. Thank you and that they put a lot.
You mentioned BCP system length pressures and declining.
Yeah.
To the current line pressures affect your decision making process of future.
I guess I'll start and last probably will pass in a couple of comments.
I think the thing that we're looking at is produce gives us an opportunity to really produce what we've been capable of and I guess, that's the thing we're looking forward to the most.
Would it change our plans I don't think so at this point again, we're back to so focus are really tremendous focus on that free cash flow.
But that'll probably be the primary look that we take.
Over over the next year or two years and Scott has got Myers described is something we're really that steady state of capital and free cash flow is something we're trying to get to and feel like we can do that effectively.
The other thing I'd add to that is that with stable line pressures in the system or with ample clear capacity in the system. It just makes it that much more clarifying for us as we projected budget going forward knowing that we've got pressures that we can see in count on.
With our well performance overtime.
Perfect. That's it from me thank Dan Congrats again on the quarter and just.
Thank you very thank you. Thank you.
At this time I would like to remind everyone. If he would like to ask a question. Please press star one on your telephone keypad.
Your next question comes from Noel Parks from Coker and Palmer.
Good morning.
No.
Hi, just about a couple of thing.
I was wondering I.
I remember from from last quarter you were.
Pretty cautious on.
Differentials.
And just how they look for the quarter and.
If I'm looking at my numbers right it seems that they.
Along with overall commodity prices to strengthening.
We're not quite as bad and but you still seen cautious looking into the future I.
I might've missed some of what you said before earlier, but.
You know improving.
The improvement on the midstream Sicher situation I assume helped but.
Looking forward, our you inclined to Jeff model sort of the more conservative than a differentials as you look into 2021 or do you think where we're sort of done with the worst of it or will be like that and.
We'll be back to more sort of normalized level.
No. That's great question, So I'm I'm referencing slide 14 here to talk and speak to this I mean, clearly in the second quarter, we had a deducted little over $9 a barrel and keep in mind. The factors that go into that are that the DJ quality.
The role and then our firm transportation contracts that that fit that deduct line item as you look at the second half the year, we're projecting four to $5 per barrel. The big improvement there is because the role in the DJ quality barrel has improved substantially over that of the second quarter. So.
That's the reason why we see that an improvement here in the second half of the year.
And then just let me touch on 21 real quick and then if you go there.
We got a midpoint of about $3 per barrel just under the deducting the Scott Myers shared in his prepared remarks, we have more and more of our weighted average barrel that's treated for accounting purposes as TGP.
Versus others revenue.
Reduction at all.
If you do look at the long term price for say, let's just say 21, the midpoint of both the deducted the realize is about $3 each for about $6 per barrel total, but any kind of go back to 2019 in those categories out up to about $5 a barrel. So we're about one dollar per barrel higher.
Going forward and there's two reasons for that one is.
So the merger, we inherited a few higher priced contracts higher debt contracts.
That will work off overtime.
That's a key part.
Part of that the second thing is is that in the second quarter. This year, our very best oil contract differential contract in Wattenberg expired. So those two things as they roll in this why we're at $6 a barrel in 2021 versus more say a $5 per barrel in 2019.
Gotcha, and actually that that a favorable contract that expired.
Is that with a particular vendor I'd just thinking about in talking about it for the future reference point.
What was that contract named or how would you describe it.
Well, so we can't go into the specifics of the contract that was there but that contract was a very favorable contract to PTC.
Big.
Complement to our marketing team that was able to.
Secure that contract and ship on that contract. So that came to an exploration that's over with and so we continue to look like we said early on a monthly basis for lots of different no outtakes. If you will for all of our oil both in basin and on various pipes to maximize the monthly netback for the company.
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Great well actually maybe better way that just asking is.
How how longer term was that contract for the couple of years five year there.
It was it was a multi year contract that was available to us that we were able to.
Get the contractual arrangement on and it was a very said very favorable to the company.
Great. Thanks, and then just nightmare that are a.
Topic I wanted to touch on his I'm, just curious I mean.
With really confined activity levels in.
In the basin. These days I don't I don't know if its a.
A big factor, but Ah I I started here a few rumblings err on the service front about.
Maybe the vendors being kind of anxious to to try to lower where customers back into drilling or completion.
On the on the 2020 side of the calendar year end instead of Oh, a lot of plans I guess being set for 2021 and I just wondering if Bobby.
You get inbound calls from vendors that there is.
At this much focus on I'm trying to get an under the wire for for the year end.
But I think you're making a great point is something that we look at constantly and it's the teams are in obviously in contact with all of the service providers try and even as we speak getting ready for the for the fall.
Budget process that type of thing and is it is it's such but.
But we're going to have substantial cost, yes, let's assume that you're correct and there's somebody wants come back in earlier, we earlier late this year before the first of the year, it's something that we would give consideration to but we don't expect cost to move a tremendous amount.
From where we finished as we laid all that equipment down.
Because it was already pretty that was already pretty tight for I think most of that most of the companies out there. So really really will be pushing obviously, but but don't expect it to move a lot I think the more important question for US. There is can we get the best crews with the best equipment combined and that's something Dave in the team will be looking at.
As a tremendous focus toward the end of the year and making sure. We do all that we can to to get that efficient operation back as quickly as possible and I think that is the part that that obviously concerned just the most is getting back to the pace that we were out as I was describing from a drilling perspective, and completion perspective and coupling all of.
That with the safety side, which crews get away from.
You can lose focus on that so that will be the focus for the for the budgeting process and for the.
For the for the operating teams to be sure they're doing a good job of preparing for that.
Great. That's what I was looking for thanks a lot.
No further questions at this time I will now turn the call back.
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Any closing remarks.
Yes. Thank you Sylvia thank you for hosting the call today.
And thanks, everyone for listening in we appreciate your time you are ongoing support to end.
We look forward to as a company continuing to deliver positive results going forward. So again, thank for the time.
This does conclude today's conference. We thank you for your participation you may now disconnect.
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