Q2 2020 Continental Resources Inc Earnings Call
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Later, we will conduct a question and answer session and instructions will follow at that time.
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As a reminder, this conference call is being recorded.
I'd now like to turn the call over to Rory Sabina, Vice President of Investor Relations.
Please go ahead Sir.
Thank you Allison good morning, and thank you all for joining us on today's call.
Well start today's call with remarks from Harold Hamm Executive Chairman.
Barry Chief Executive Officer.
And John Hart, Chief Financial Officer.
Jack Stark or President Chief operating officer, as well as other members of management will be available for Q and <unk>.
Today's call will contain forward looking statements that address projections assumptions and guidance actual results may differ materially from those contained in forward looking statements.
Please refer to the company's FCC filings for additional information concerning these statements and risk.
In addition, continental does not undertake any obligation to update forward looking statements made in this call.
Finally on the call we will refer to certain non-GAAP financial measures for a reconciliation of these measures to generally accepted accounting principles. Please refer to the updated investor presentation that has been posted in the company's website at www Dot C.L.R. Dot com.
With that I'll turn the call over to Mr. have helped.
Good morning, Thank you for joining our second quarter earnings call.
I want to think are important for their hard work and dedication to this last quarter.
Over the past four months, what the adoption of that tends to <unk>.
Workplace safety protocols. They have said, so but yes. It does a very successful voluntary returned to work and 97% of order boards are back in the office or in the field.
That's where the experience remote work to labor day to day Mountain mine that's okay.
But it takes on the job collaboration to my team work and create new opportunity for the company.
At Carmel, the morale and productivity over imports is very high are important remain focused on delivered exceptional results for the to occur.
You will hear about when bill discusses our capital efficiency gains.
Hi, I'm very proud of our imported core overcoming the challenges price would go with Dod thing.
What we've guided one of the most ballpark quarters and there and it's great.
We welcome the new phase or thinking about covert 19, as a <unk> Gulf Green.
They lower modes mortality rate experienced due to better patient grade, but with more effective drugs and they also boxing thought process.
Well station to the most vulnerable popular.
The time for last call devotee I was at $24 barrel.
As we anticipated we've seen price improved to $40.
We're barrel range as economies opened up and people get back to work.
We believe we can say this emotional improvement approaches one night.
The decision to curtail that did burst out of our upgraded all volumes in May and June.
Recent global crude oil inventories data initial demand recovery and anecdotal evidence tremendous reaper, Pittsburgh suggest supply and demand our rebalancing.
I'll now has been a leader in aligning activity with market conditions the decision that.
Despite the bag.
To defer and thereby preserving our production for the future has proven to be a value enhancing strategy.
We will continue to prioritize long term shareholder interest.
Overall production growth for both sides.
Well, we may continue to say near term volatility.
I believe ongoing inventory rebalancing in the second half the year.
Position us nicely for 2021 and beyond.
Our market demand continues to recover tons of uncertainty can create substantial opportunity in fact, our our current fair price reflects us opportunity then and uncommon value.
Recent burqas demonstrate my confidence in her teams our assets.
Okay.
But denso to deliver meaningful shareholder value.
There are no management team more in line for sure overtime Continental's, well will often allied this alignment advised members remains good day was top 40 holders are incentivized to create value.
This management team has always been right alongside unfair all what's been driving toward a bright spot for future.
We're all personal invested and 100% committed to doing all the CAD to enhance value and responsible stewards alright, that's in capital.
During the second quarter, we were pleased to we lose our 2019, new Yes, do report, which can be found on our website.
This was board hotter longstanding commitment to providing a low cost defendable, Andrew source and environmentally and socially responsible manner.
In fact, the body locally to support the pinnacle energy or their social responsibility of then energy company.
We are proud of our commitment to develop.
They're developing I knew it used to interpret the oil and gas industry and we'll continue to responsibly manage your operations the power Yeah, United States in the World.
Lastly, [noise].
As part of our commitment to then there's probably an advocate for her over that is green I became without any member of the American golf Coast Select best practices passports Association or go what to establish a new competitive standard to accurately reflect the book fair market value of the American Bert.
Barrel due to global market.
The market was very broken Wendover T.I. prices fell into negative territory earlier this year.
We also see FTC to investigate and they have very.
The reported forthcoming and the county much.
They occur when he carbon as reported by blunt.
This extreme discounting of U.S. oil and gas industry led us to form a good yes.
In June two leading pricing agencies, platts and Argus establishes benchmark to more accurately and reliably wash U S light sweet crude.
Yes, there's not a replacement for diabetes.
That's a confirmation to world.
At the American Energy Renaissance is gone global and AG us will provide U.S. producers with a waterborne price barrel.
Despite headwinds prices here now is not the time to count out U.S. and better producer from being key feature genetic world crude.
I firmly believe Commonwell possession beer later in this phase or the global hydrocarbon business I'm proud of the partners made today to establish a stable market for American produce though.
I'd now like turn call over to Bill.
Thank you Harold and good morning, everyone Hope you, all well and safe.
Continental demonstrated a proactive first mover response to the unprecedented events that have shaped the global commodity landscape and 2020.
As you see on slide three where prudently respond to demand destruction attributable to covered by preserving this production for it better market environment.
The deferral of approximately 55% of operate all volumes during the second quarter is estimated to generate about $90 million and incremental future cash flows from operations at $40 WT odd.
Even after shutting in these volumes were reinstating original per unit cost guidance for the year, reflecting our low cost capital efficient assets.
Our priorities continue to be.
Protecting our balance sheet maximizing cash flow preserving our world class assets for future shareholder value and maintaining our commitment to low cost industry leadership.
As part of this we expect to see told that between 5.4 or $5.5 billion by year end 2020.
Beyond 2024, our longer term debt stewardship, we're targeting $4 billion or less over the next three to five years, assuming a 50 dollar price environment.
John will provide more details all of our expectations for these sequential reductions.
Our teams continuous improvements and ability to consistently deliver material gains in cost efficiency.
I like to congratulate them once again, all the job well done.
As evidenced on slide six we expect capital efficiencies to increase across both the block and then the south and 2020.
In the Bakken, we have achieved a 12% reduction to completed well cost from 8.2 million to $7.2 million for well in the south we've achieved a 10% reduction to our overall south completed well cost from 10.5 million to $9.5 million per well.
70% of these reductions are structural in the Bakken and 80% over these reductions are structural and the sell driven by all aspects of our operations.
Both the Bakken then sell completed well cost included drilling completion fulfill these calls including artificial lift.
These improvements are coming from drilling execution practice practices completion design optimization and improved operational efficiencies related to coiled tubing playing out.
As well as high utilization and performance of gas lift production operations.
As Harold mentioned, our employee morale enthusiasm and productivity is extremely hot in spite of these challenging times. Our employees are the foundation of our company and Weve, you're keeping our teams together as a distinct competitive advantage.
This is that part of our Dan I got it has enabled us to differentially managed and leverage our world class operations to continue our best in class performance.
As we look forward there are a number of factors positioning us for a strong second half of 2020 and beyond.
There are few key items.
First in terms of our production cadence what Paul previously when we provided guidance I by second quarter production. In June. We also highlighted July production of about 225000, 250000 Boe per day.
Actual July volumes will be in line with his guidance and we expect to bring the remaining curtailed volumes back online. This month with exception of approximately 65 million met cubic feet per day of dry gas volumes and Oklahoma, we have deferred and expectation of more favorable market conditions.
Well I would do not normally guy production on quarterly basis, we thought it was appropriate to provide some color given what has transpired here today.
We expect third quarter production to range between 280, and 300000 via weight per day.
Consequently production will increase in the second half of true 2020, and we expect to exit the year at 300 and tend to 330000 Boe per day.
Second.
We'll be cash flow positive in 2020 and project approximately $10 million a free cash flow for the full year 20, joining at $40 Liberty <unk> or $500 million in second half of 2020.
Our first party with incremental discretionary cash flow will be to continue paying down debt that we see supply and demand aligned to a more sustainable level. We have the ability to consider a managed to increase in completion activity along with additional debt reduction.
As of June Thirtyth, we'd have about 215 wells and progress I expect them a year with about 140 wells and progress.
Third as a result of the formation.
Cost defense efficiencies, our team continued to drive maintenance cap or lower.
That along with 140 wells expected to be in progress at year end will enable us to keep our 2021 production flat year over year, where the maintenance capital of 1.2 billion or lower and 2021.
Fourth with a lower level of activity, our corporate first year decline rate and 2021 will be in the low thirtys compared to the upper Thirtys and 2020.
We are well positioned to efficiently maintain production and 2021.
We will continue monitoring near term market conditions and expect to provide 2021 guidance around our usual historical timeframe early next year.
[noise]. Despite the challenges we have faced this year, we've kept our teams together just as a way of done in previous downturns. As a result, we continue to drive our well costs and operating costs lower and our unique combination of inventory depth or for stability.
Technical capabilities and management alignment will enable us to deliver future shareholder value and virtually any market environment.
I'll now turn the call over John.
Thank you Bill and good morning, everyone.
Some of you had questions on maintenance capital maintenance capital is intended to help you in calibrating your models for our capital efficiencies, but is not intended as guidance for 2021.
We will provide full guidance for 2021 in February reflecting the full extent of our plans.
Our expected multi year maintenance capital to hold production flat year over year in 2021 is 1.2 billion or below for drilling and completion.
Whether you are considering year over year or fourth quarter exit production or the level of maintenance capital. The whole these big Big there's flat in 21.
As essentially the same.
As we typically look at maintenance capital on a multi year basis I will point out that are 1.2 billion estimate includes slightly in excess of 400 million of capital that does not see first production until 2022.
Sorry, you're considering a one year maintenance capital that's below 800 million for drilling and completion.
If you like us are more interested in a multiyear look we estimate that we could hold production flat for 1.2 billion for multiple years.
[noise] these numbers reflect well cost efficiencies as previously noted in the Bakken in Oklahoma.
Our multiyear look is a 30% or more reduction from our previous estimate of 1.5 to 2 billion.
Let me review a snapshot of several key second quarter financial performance metrics.
Despite softer totaling approximately 55% of our operated oil volumes.
<unk> came in at $3.58.
Which is within our previously suspended gardens range.
Well gionee per BOE, we were slightly higher due to production volumes being curtailed in the second quarter, we expect DNA to revert lower on the balance of this year and be within <unk>. Our original guidance as production has resumed.
Even at a slightly elevated level per unit.
Our second quarter DNA trends below our broader peer said.
Our DNA highlights the lean nature of our organization and the sustainable operational efficiencies we deliver.
As part of our continued financial stewardship.
We have paid down approximately 1.4 billion of debt since the beginning of 26 team.
And our commitment to a strong balance sheet continues.
On the back of lower commodity prices and curtailed production, our net debt increased slightly in the second quarter.
Based on our current forecast we believe our total debt has peaked in July.
And should decline through the balance of 2020 and continue during 2000, 2020 2021 and beyond.
Based on current commodity strip, we expect to exit this year with debt between 5.4 billion in 5.5 billion.
Our longer term debt reduction goals remain on track and we expect total debt to approach or drop below 5 billion by year end 2021.
As Bill mentioned.
And as we've said in previous years, our ultimate debt target is to be comfortably below 4 billion.
We have a proven track record of debt pay down and financial strength and this will continue.
Well covert caused a momentary blip it is not impacted our strategy.
Our revised 2020 guidance metrics further highlight our commitment to shareholder value and cost leadership.
2020, Capex is expected to be on budget at 1.2 billion or lower.
The significant transition between first quarter Capex up 651 million.
And the second quarter of 191 million is an indication of how quickly we have adjusted to a lower level of capital activity.
Third quarter and fourth quarter are expected to be lower yet putting us on track for an annual budget of 1.2 billion or below.
We remain committed to capital discipline.
As Bill mentioned, we expect positive annual free cash flow of approximately 200 million at $40 WT.
Said more directly this means we expect positive cash flow of approximately 500 million for the second half of 2020 at current strip prices.
This is the catalyst to reduce debt this year and into 2021.
We're also reinstituting previously suspended operating expense guidance Braelow, we gionee and DDNA, reflecting continued cost controls productivity and capital efficiency from our assets.
Our guidance and expectations are a reflection of continental's exceptional capital efficiency.
And focus on value creation.
To be on track with our original guidance. After all that 2020 has brought is an accomplishment that we're particularly proud of.
With that we're ready to begin the Q in a section of our call and I'll turn it back over to the operator, Thank you everyone.
[noise]. Thank you Sir.
Well now begin the question and answer session.
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If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
Any interest of time, yes participants to limit themselves to one question and one follow up.
At this time, we pause momentarily to assemble roster.
First question today will come from dark what fuel of Stifel. Please go ahead.
Thanks, Good morning all.
Hello dirt hauling.
Perhaps for Harold <unk> or Bill how do you still have sophocles think about growth rates and reinvestment, it's clear a lower grades higher return of capital business models. The writer purge at current pricing how does that change in a 50 or 60 dollar world.
Yeah, I think back with you. So what we were doing early in the here. We know we were saying it essentially that the an early on that we should not be as an industry overproducing into an oversupplied market than we saw it and we started attenuating our growth rates at that point in time and as you look at what's going to take to to bring back activity.
You're probably in that 50 60 dollar world So until that point in time, I think the industry will be pursuing a pretty moderate growth rates. If that's what you're trying to get a feel for.
That is and then as my follow up and more specific to what you've outlined in your presentation today with regard to your 2021 maintenance capital outlook on page three could you outline the broad activity you more cost assumption assumptions embedded in that estimate.
Yeah, No, that's John or Jack to the putting Commons here as well, but in that embedded in that and you're probably looking there what type of cadence as far as drilling that's got about seven rigs.
And that a as far as a drilling program and and potentially it's not more not specify north and south because with our product as.
We'll have a little bit of flexibility built into whether we're drilling north or south, but you could start off sands got half and half.
And John or Jack do anything to add to that.
I mean, we've assumed the well cost assumptions that we've outlay do you obviously the Bakken in the south what.
Pat and our broader operating teams have done is a tremendous there that's giving us a lot of benefit. We've also given your color today on a one year versus a multiyear I think a lot of times companies just talk about what they can do from one year to the next will you know you've got to steady state going on of operations were drilling and completing and things are coming on at a later.
Her time, so we've tried to give you a lot of color than that.
With our low overhead structure and with the capital efficiencies, we garner were very well positioned.
Yeah.
Just to add to this is Jack the the inventory that we've got built in its just a top shelf inventory for the company and then.
We continue to expect a just excellent results.
Very helpful. Thanks, guys.
Thanks Derek.
Our next question today will come from Doug Leggate of Bank of America. Please go ahead.
Thanks, Good morning fell as Sunday I hope everybody is doing well there.
[noise] drawn so probably for you is if you don't mind to two questions one is qualification.
So you've been very clear, but the 1.2 billion in the 800 million of Dot is some activity in 2021, but I'm a little confused by the production guidance. So.
You exit this year 310 industries 30 is dots.
<unk> costs or actual exit I know, it's a better semantics, but but the implications. If you hold 2020 slots at two men five there there's some implied decline through the year. So can you just clarify what you meant by hold exit slot hold through your slot the numbers I'm little confused by that.
Well first of all happy anniversary to you and your wife [laughter]. Thank you.
And.
Secondly, we modeled that that maintenance capital. It is a slightly higher than that to 95, it's 300 or above so the level of.
But maintenance capital, whether you're looking at three tend to 330 or whether you're looking at 300 or little bit above you're not getting a big dollar difference and maintenance capital. So they're essentially the same.
Does that help.
When you're just to be it kinda Kenzo stone. Thank you for the.
Thank you very good wishes, but just to be clear. So we are to get the to 95. It would imply some moderate decline through 2021 is that the right way to think about it.
I would be a moderate decline up at fourth quarter exit, but again, we're not providing full 2021 guidance I'll come out in February and you're in a very narrow range of production for us you've seen us bring production on very easily in those general ranges.
Great stuff and my follow up is.
As a massive step down in sustaining capital and you know who we think about the world is what is the portfolio capable of generating by way of free cash flow. So so if you could just help us a little help me a little bit do the simple math.
As you step up your capital by cut out 1.2 billion level, what do you see is your oil breakeven.
To give us an idea of what the portfolio can do by way of free cash flow and I'll leave it there thanks on a cash flow basis.
Yes, yes for covering the 1.2 billion Capex I guess.
And you're talking about 2021 number on a full year basis.
No worries me talking about the balance of this year.
Yeah, the balance of this year for free cash flow is in the mid to low 20 dollar price we can generate a.
Neutral for free cash flow as you look out into 2021, if you're doing if you're at a full 1.2 billion it'd be somewhere in the upper Thirtys low fortys.
So a $50.
Our base case.
Thanks dollars at $50 were putting up a significant amount of free cash flow hundreds of millions.
Okay, we can take it from there thanks very much on congrats guys got you're welcome happy anniversary again.
Our next question today comp Janine way of Barclays. Please go ahead.
Hi, good morning, good afternoon, everyone.
Hello, Good morning.
Good morning, So I guess my first question, it's just back to the tiny tiny one <unk> Capex, we really appreciate all the updated detail.
<unk> for capital efficiency purposes.
I didn't see portion of it can you provide.
Or maybe how that would trend next year generally is there anything that biases that.
We pulled the Phillies and others that your markets.
Hi.
Yeah, I think it's a fair question you know there are number of components in that non DNC. So I'm just kind of break those into segments. First one is obviously, our mineral activity and that's something that we along with our Oh with Franco Nevada, We agree on that now you know from a cash flow perspective there.
Covering 80% of the expenditures so, albeit it's a gross up on our capital dollars. It's not from a net cash perspective to the same because of that carry at that they have that ultimately depends on what we see in the markets out. There currently we're not that active on the mineral side weve taken a little bit we've slowed down our level of activity.
So what we ultimately budget for that if it's in if it's in the current price environment. You know what we'll see if we continue at this lower price or if we go back to something closer to what we were before but that's you know roughly 100 million or so dollars a year and no we're not spending anywhere near that in the.
Current run rate and what we do again will depend on what we see in the markets as we go for where we're choosing to invest you know they other factors in their facilities. There. There are a component of what we're doing on the DNC side. So you know it where it at 1.2, we would probably be comparable or less.
Less than what we're at this year and leasehold and land you know the biggest part of that or you know that ABS from year to year, depending on exploration activity or renewals I'll say I don't think we have a significant amount of renewals coming due next year and beyond that it would depend on.
On.
You know new new plays or new opportunities, that's something that we'll obviously give you a lot more color on when we get around to a full guidance in February.
Okay, great. That's a lot of detail. Thank you very much I hope you can hear me, you're breaking up a little bit for me, but it might at that.
On my end with the storm here, but my second question, you're coming through that down here.
Perfect Okay.
My second question, it's just a little bit more housekeeping side, if you don't mind and it's on oil percent continental well first that was understandably low in Q2 due to the nature of the production sudden but with a sudden coming back online.
A lot of completion or as presuming completions in the box.
Can you provide any color on where the oil first.
Yes.
<unk>.
Sorry.
<unk>.
Oh.
I know that the focus is can you name it.
Huh Janine its worry you break it up a little bit on so we didn't get the less than the second part of that question. We did get the first part with regards to the oil percentage, but the second part we did not get if you could just repeat that.
Oh, it's it's all the same it was done if he can provide any color on when the oil price that might migrate historical level and understanding that you've got a lot of flexibility between oil and gas depending on where the commodity moves for each of those.
Yeah, well you know Janine this is Jack and the the oil percentage will go right back to where we weren't first quarter, we were like 56% in first quarter. So basically shut their well then well turn it back on would go right back to where we're so there's no real material change there at all.
And on top of that I'd say there has been discussion you know about will these wells come back on you know industry wide and all in and I got to tell you were saying just pretty impressive flush production coming out of these wells when they turn them back on and that's what we've experienced previously it's why we were never concerned about what how these wells would perform even though there was a lot of chatter about.
Got it.
And and I guess, there's a good example out in Montana, we shut in all of our Montana production out there and we had a shut in for about two months and we turned back on into production was.
Double of what it was a before were shut it in and so yeah. So what we saw some significant production flush production related to that whole field and so you can look I don't feel basis are you looking on a well basis bottom line is that the oil is there and a these reservoirs are performing very nicely for us.
Great. Thank you very much gentlemen.
<unk>. Thank you.
Our next question will come from our into Yara J.P. Morgan. Please go ahead.
Yeah, Harold I want to start with you I was wondering if you could give us your perspective on the surprise judges order.
In July the to potentially shut down the dapple pipeline and and your thoughts on what happens from here.
Well, we feel very good that that order will be stayed.
You know this thing as we heard a feel its a.
We feel good that yes, it would have an initial stage which would be.
You know God and we were very.
Very confident that.
This a panel.
We're also stay this thing again.
And Uh huh.
Yeah, we do feel like the you know that this pipeline will continue the.
That said as.
So the upgrade three years.
Trouble free up there so yes, that's it's a.
That's good good thing.
We feel good.
Great or any other perspective or from the team I just wanted to get some some more color.
It is an important kinda data point for.
For C.L.R. and and the end the group.
Yeah. This bill only Oh thing you might.
That is that because I'm sure you're looking at okay, Whats I plan B and those type of discussions.
At the Dapple does get shut in as Harold mentioned, Yeah, We think there's pretty strong support from a legal side than we did a thorough analysis looking as the there the risk around whether this is going to flow not flow, whether the reports were going to stay at or not and our analysis. All came the same conclusion, we looked at.
Actually outside pipeline sources were looked at other Oh rail sources, all those type of things and yeah, we actually had some prices coming in and we felt it was just economically imprudent to go in to enter 100% certainty of paying for higher cost transportation on the chance at this may not get state and so.
We're we're waiting to see we're hopeful that the courts all point there as Harold described in the end up stay in this and that will keep on producing and that's our expectation.
Right I think you know, but we've only got so I think 35 50.
Barrels a day committed those are gross barrels also as an operator, so we don't have a significant a direct.
Ah commitment on dapple.
Great. That's helpful and just as my follow up to maybe you John Hart Your ears your commentary.
The 1.2 billion.
And DNC sustaining capital would be sufficient to essentially hold the fourth quarter Runrate relatively flat.
In 21 would that be on it at the Iliad ended a little basis and what it was.
Yeah, what I've said was that we rented on a b O. We I don't think are you are b O or B O <unk>. It varies from year to year, but you know we've been in kind of the same percentage for six seven years a decade now so were.
In the basis of our inventory is consistent with that so I think it stays in a relatively mid 50, Istanbul percentage range for that and what I said on the one to a related we had questions from a number of people about is that you know when we said in the the.
Transcript a year over year, we had questions will how does it vary between year over year fourth quarter exit well the fourth quarter exit a three tend to 300 versus the annual production range, you're not you're not dealing with the big Delta. So I don't think it materially impacts the level of Capex a in either of those scenarios. So.
Yeah, I think we can hold flat in the relative range on.
Those different scenarios.
And just about just wanted to add one more quick question as John how what the capital allocation.
Kind of look like between the Bakken and the south isn't that you called that 1.2.
Billion dollar kinda number relatively consistent with what we've had.
Great. Thanks, a lot sense.
Thank you.
Our next question will come from <unk> Kumar of Wells Fargo. Please go ahead.
Good afternoon gentlemen, thank you for taking my question I want to start maybe in the same Wayne as some of the other questions but.
Your.
Indicated exiting the year with about 140 vessels in progress.
For the level of activity thing you mentioned seven rigs it seems like a lot can you give us some color of how many of those wells you expect to what's a normal run rate in terms of a ducs or by the end of 2021.
You know we're not.
Good my <unk>, we're not really giving guidance on 21, but I can tell you you know we're you know between now and year end will gone around 100 wells and most of those have already been stemmed a you know because our stem crew count in the second half the year really we don't have these cruise going really in the Bakken at that point and then Oklahoma were probably.
The average about one at best in Oklahoma right now so all these are essentially in the queue and and we're.
Planning to bring those on about a 100 wells I said in the second half the year.
In an orderly fashion the due to a basically maximize the value of those those.
Barrels and so.
You know was we get into 21 will be able to give or maybe even fourth quarter and give you little bit better clarity on on what that might look like.
Great I appreciate that.
If you go back let me just say if you go back to 2019, we were like 215 at year end. So comparatively were 140 versus 215 last year and so with a little bit increase in rig count you could probably expect more.
Got it and I appreciate that you know you can give us guidance.
Jack maybe just a quick one you mentioned you know bring develops back on and seeing some good.
I P rates or when you bought them back on any costs associated with bringing back volumes. I mean, you know curtailing, 70% affair or the production. It was it was it was a pretty big step how are you finding the costs associated with bringing back that.
Opportunity set.
Well really there's it's been very minimal cost at all you know there had been some numbers don't out there that we're you know a I think the NDRC. It put us some numbers of 20 to $25000, a well type costs and you know that that.
No I'm not sure what what were they what their numbers were based on where they're coming from from from our standpoint, we go back out attorneys on and they come to see us.
And Pat you have anything to add yeah, just a little additional color that like Jack I don't know the basis for the FDIC number, but we've looked back and and the numbers that we've calculated on an extraordinary basis.
Anything out of normal would be about a little bit less than $1500 per well.
And so.
Not much at all.
Excellent so clearly Andy as he was a little bit Oh I don't have failed. Thank you for the answers gentlemen.
I wouldn't say in left field I, just don't know the basis for their calculations. So so our calculation methodologies and techniques maybe vastly different so I.
[noise] clarity there they may be looking at a variety of different operators in our case it was minimal.
Great. Thank you thanks Didnt.
Our next question today will come from Brad Heffern of RBC capital markets. Please go ahead.
Hey, good morning, everyone.
A question sort of related to some of the ones have come so far on capital allocation I'm. Just wondering if there's a lot of moving pieces you know in the two operating regions from you know dapple and high Plains as well you know there might be some election risk in the Bakken and then in the South you have the higher the better outlook for gas and NGL. So.
Just wondering if you know any of those things with with potentially tilting away from that sort of 50 50 split more towards the south.
Yeah, I think there's a couple of parts that.
First talked about the federal acreage, which maybe what you're referring to up in the north.
If you look at companywide, we only have about 8% of our acreages federal so not a high exposure at all there as far as what's the benefits that we've got a as optionality around our product mix with between gas and and crude and we actually have seen that over the course of multiple years, including this year that sometimes it's a more prudent based on where we're seeing the guy.
As prices to maybe go after a little more gas sometimes more also so we think that that flexibility that we have with optionality between gas and all actually isn't one of the strength of the company.
Okay, and then maybe for John you had to the 500 million free cash flow number for the second half.
But it looks like the exit that number is only about 300 million lower so I was wondering what that the pick out between those numbers.
Right. It's just timing of when we look at a free cash flow. We're looking at January to December what we earn in what we incurred during that period. So we ignore working capital coming in and working capital go going out. We're looking at you know what that activity generates if you will so some of that cash will be received in January.
In February in debt will continue to trend down.
Just that just timing of working capitals all it is.
Okay. Thank you.
Absolutely.
Our next question today.
I'm curious securities. Please go ahead.
That's my first question just on your 20 in latter part of 2021 price expectations I know held in the past you all been willing to build some ducs and scenarios. We believe these prices are going to increase is that for I guess for bill, but really any for you. All it just is that part of the plan now I think you mentioned 215 and progress now to 40 potentially by the end.
The year is that because it just part of that plan and expectations at higher prices are more behind that.
No as mentioned, yeah, we're bringing back essentially all our oil production in August. So, we're we're up and running all the production than we had shut in a there is some gas shut in to address the specific point, you're talking about nail that stuff. We do think that there's a stronger market in the das and we're starting to see little that happened over the over the last few days and so.
That is part of what we're we're trying to manage his expectation where gas is going well that probably drives it more than anything as far as oil price. Yeah. We're in the $40 strip range, we think long term that's not sustainable but.
Clearly, there's still a couple of things that are driving that you know the corona bars, and what's going on with economic activity around the world, but this one from from OPEC plus as well and then there's a there's still a pretty significant overhang of inventory out there that must be worked off.
I got it okay.
Hi deal that's going to move ahead excuse me Neal This is Jack and you said 240 wells.
Ducs at year end, and it's 140 just to make sure child.
Okay right right got it takes a clarification Jack and then just a follow up you also definitely sound it sounds like you've done your due diligence confident about dapple I guess my question is if for some reason dashboard is slow down.
You know given that the minimal amount of activity you have on doubtful I'm just wondering does that.
Have you all thought about how you're gifts would be impacted or really estate would if that were to slow down.
I think and little better shape than most just due to historical pepper status. So we have a third appealed and.
And so yeah there'll be a.
Looking for those alternative for what we have on dapple.
Certainly than that.
We feel pretty confident we're dapple is that what.
The outcome going to be.
[noise] very good thanks, Harold thanks to that.
Our next question will come from Bryan singer of Goldman Sachs. Please go ahead.
Thank you Ed good morning.
My first question is a follow up on earlier, one with regards to a debt pay down and.
Capital allocation here I think at the very beginning you talked about tied continental being a leader in aligning activity with market conditions.
And then bill in John talked about the 4 billion dollar long term debt targets, if oil prices rise to the 50 dollar level or higher what type of supply response, when do you contemplate versus maintenance levels and then most importantly would you want to meet that $4 billion debt reduction objective first before ramping activity or is there a.
Yes, you could you both the same time.
Yeah, Brian Thanks for the question when you talk about 50 dollar World. Yeah, We really don't focus on a target price to be more bucket the sustainability of the fundamentals and so that's why we get into when you know, what's OPEC doing whats opaque plus doing whats grown of ours thing.
Yeah were the inventory as themselves.
You know spikes up to $50 Hill unlikely, we're going to change our behavior at all the there what what we're trying to message with with our approach is that we're.
Laser focused on free cash flow, we're focused on debt reduction and as the price moves if we see fundamental shifts out. There then yeah, we might it started engine our way back into a little bit more activity, but never compromising that the bulk of our efforts going to go toward that replacement I mean, that's why that three to five.
Your timeframe to be able to get to that $4 billion. We've done a lot of scenario analysis as to a different oil prices different gas prices a different capital problems and Dave is pretty high confidence that we'd hit that in just about any scenario that we see out there.
Great. Thank you and then my follow up is with regards to exploration and acquisition Sam Continental phone been an exploration focus company and I wondered whether this down cycle is providing any opportunities and how maybe near term impactful those opportunities could be from either an exploration perspective, or an acreage or more than acreage acquisition.
Okay.
Great Great question, Brian This is Jack and and you know our history of when in downturns in times like these we tend to find good opportunities that generally would not be available otherwise in the same holds true now we have a teams working very diligently looking.
For these unique opportunities that are in this unique window of time and and so ER and I will tell you that they are they are getting some traction and we like what we're doing.
With these being basins that you've already in or new or new areas for the company. We are opportunistic and go where the opportunity is.
Great. Thank you.
Yes.
The next question will come from Gail Nicholson of Stephens. Please go ahead.
I'm good afternoon.
Besides delta between the North and South region, and the improvement that you've achieved to date has that been concentrated in more one region than the other.
Yeah, the north the the north is little bit higher than the south to south the.
In the two range the north is around a four range, but they they both shown to strengthen and continue to show improvement. If you look back go back and look five six years, you've seen a continual improvement now low eight part of that's blending in the south of the north is.
You know improved throughout there as well so I think we'll continue to continue to see a strong performance there.
Great and then I wanted to go back it seemed that Jack that earlier, you talked about the positive benefit the volumes in Montana coming back online have shot and is that something that you expect to see across all areas that have been shut down or that you need to Montana.
No I think we see that across the field and very you know you know it's it's the nature of the reservoir. This is very low permeability reservoir and you give a time shut in you start seeing.
It did <unk> you know the reservoir basically recharge the stimulated rock volume area, we've got around the wells and so the fact is there's a lot of well out there our teams actually went in and reevaluated the Bakken for I don't know, but the Twentyth time as far as book kind of reserves there are there and quite frankly they they.
Increase the basically the reserves in place by 10% based on the knowledge Weve gained over the years and so what we're seeing here is there's a lot more oil.
In place out there and these type of responses really help support that that finding.
Great. Thank you.
Huh.
Our next question will come from no apart, so coker and Palmer. Please go ahead.
Good morning.
Hello.
I was interested in in getting your take on and service costs. As you look through the end of this year in heading into next year I'm hearing different schools of thought some folks are saying that they think.
The service cost component is about as low as it's gonna get.
And.
Others, saying that they think there's there's more to go and that Oh.
Well at least.
Sustain these these level of service cost you all the way through next year, just wondered what what your impression was on that.
Yeah I Love. This bill let me start with a couple of comments and then turn it over to Pat and he'll give you much better detail on it but as we as we mentioned, we're saying you know 70% to 80% of structural changes in our cost of that doesn't have anything to do.
So if somebody is oh, we do worry about the they wrote the service companies and the unfortunate roller coaster ride they've been on as this oil price collapse as a impact of them. Even more adversely then then ourselves and so the sustainability of good service industry is important for a broad business, but I didn't want to start with structurally.
Most of the savings that we've been talking about or in that category doesn't have anything to do with that the service companies a price book, if you will but sure <unk> little bit more color to what's going on services.
Thanks, Bill and when I think about service industry I think about it in some way I think about operators I think there's the opportunity for efficiency gains across the board. We continued to exhibit does efficiency gains from an operating perspective, we would anticipate the service industry to do the same and continue to drive their costs lower I I think you've continental is.
As exposure and so when they'll talks about structural versus market driven a we've we've managed to to avoid the risk of a market driven price increase with a structural changes we've got in place and when I think about 70% to 80% north and south structural modification Dan debt reduction in pricing.
I think we.
He.
Basically managing risk associated with upward.
Service pressure.
Okay, Great and I'm just one other question as as you look at approximately on one hand, a EUR 40 dollar ongoing oil price environment that points in more of a maintenance capital direction or hopefully some.
Rebounded to maybe getting to just 50 or about <unk>.
Looking at the the debt maturities on the Horizon I just wondering if you have any thoughts on.
Your cost of capital depending on those couple of scenarios.
Yeah. Some of the some of the rate you got worse.
So, particularly low you know back five or seven years ago sub 4% long term debt and got.
You know, but between the two scenarios do you want do you think about your cost of capital differently.
Well that's been in two parts a first of all $40 barrel. We don't believe that's going be a here long term.
Just a that's not gone sufficient to.
Oh production levels in the U.S. and and whatnot. So.
We think thats very short term situation.
Anyway.
So John mentioned them answer your second part of that sure no. No you had a pretty broad question there, but look our cost of capital has been very attractive I think it's going to continue to improve from where you are seeing or bonds trading now you've seen an exceptional improvement in those over the last month. The markets are open for us if if we chose.
To do something I think that.
The quality of credit for a company, that's putting off the significant amount of free cash flow. The next.
Six months and then continuing that into 21 and 22, we've got the ability to pay off our bonds with by generating a lot of cash flow, but with that you know if the markets continue to improve in we see some a further improve but from where they are out there certainly open for us at any given time, so that gives us a lot of flexibility in how we manage that.
Great. Thanks, a lot.
No.
The next question will come from Paul Cheng up Scotia Bank. Please go ahead.
Hi, Good morning, guys. Maybe this is a bought deal and Sean I just want to make sure I understand so he's on the way that you described by that system for the next couple of yes, Youre Capex would be a function of cash flow at a minimum to generate a did.
Then my free cash so that mix, yeah, youre that went below the five pin. It is that thing interpretation that Oh wait wait to me not to white light weight to look at yet.
Yeah, Yeah, Paul let me rephrase that make sure that though we're answering the question that you're asking yeah, I think you're asking as is our capex spend right the function of our free cash flow and the answer is yes, we're focused on the debt in 'em, we would like down under various scenarios at various oil prices in gas prices we have.
A very clear path to be able to take the that to the level that we're trying to to get it too and so it is a function of the other free cash flow I think that was your question right right and that should we interpret that news for the next two three or four years until you get yet that too that's been fortunate that would be to approach.
I think that's a long you know if you go back a few years are our focus on free cash flow goes back a number of years, we've been there.
Since 16 on and and we talked about it as far back in 2012 2013, as we were H.B. being or assets. So the generation of free cash flow and return to shareholders. That's a long term structural thing that goes beyond achieving one debt target over the next that target.
Generating free cash flows what are you got a sustainable thriving companies should be doing and it's part of our go forward strategy.
Okay. John Thank you and can I just say they are in a quick one do you have to speak on the oil curtailment in the second quarter by basin.
They trained up 10, scoop and stack and also.
And then why your second quotes on natural gas price realization so bad.
The benchmark doesn't seem science, we need that bad, but you'll cat's Pride me I'd stations, we think that.
Yeah, I'll now on the gas price you're talking about 12 cents that we had out there that was posted an oh, obviously NGL prices were falling oil prices and I don't know reported three streams. We report to stream. So the Ngls are driving law that differential that you're saying Paul.
Yeah, but feel I mean does.
Company by corn showed that Dan who they see that Topshop I mean, they also we part to screen.
Yeah, we had some areas if you look in the 10-Q, we discussed it in there we had some areas where we ended up in a negative position on some of our gas sales.
Just on the gas not the you know the total stream, where you blend in oil and other things we've talked about that in the 10-Q. It's also as you saw we shut in some gas it going forward, because we see better price environments in the future. So I don't think that's a long term thing, but with the volatility that you saw this quarter in gas is certainly back.
First off those levels significantly.
So you just had some lower gas realizations.
When you're looking at the cost above producing those wells and to build on John's comment a call that a the NGL pricing it depends on contract structure to.
As to how your end up flown it back to you and so that with different contract structures, you see different variability and that's probably why you're seeing differences between ourselves and others, but as John said, we think this is an aberration that we don't expect in the future.
Our next question will come from Josh Silverstein from Wolfe Research. Please go ahead.
Yeah. Thanks, Good afternoon, guys I'm just a quick question on the debt reduction strategy. The 1.41 0.5 over the next few years why that number relative to the 4 billion. That's maturing over the time period and it's just basically most of the continental's free cash flow or is there going to be kind of slowing in excess of.
As a mountain.
So the target I think what you're asking two parts there and one is how did we set the target than two houses cash is gonna be provided to accomplish that said that the questions Josh yes.
Right the Josh on the 4 billion, we've had that target for awhile and other number of ways. We get there one we want to get debt down below one times debt to EBITDA in a 50 dollar type price environment that certainly achieves that plus.
Two and a $40 price environment, we want to keep it where you know it stays well below two times debt to EBITDA. So that that is something that we think gives us insulation against price volatility and so we focused on that for a while weight in that remains unchanged and we'll continue to do so what was the other part of your question.
Is there a the.
That reduction basically all those continental's pretty cash flow or is that our accessory castle above this level, yes. So it's bill spoke that.
We ran that at a variety of price scenarios anywhere between $40 and 60 or a Bob so it really depends on the other commodity price I think we can you know so let's just use the midpoint of that a 50 dollar price environment, we can generate attractive growth, while achieving that goal in the timeframe that we.
The factored in.
So it's I think it's a good balance of being able to do a variety of things with the assets, but also.
Generating the attraction toward the dead improvement that we want to see.
Hi, Thanks for that and Wall Street, Harold <unk>, one of the Sq you've been involved in some of the important political decision that have impacted the energy sector.
As you can see an election here if we have in administration change you know what do you see playing out for energy and comments over the next four years is there anything that could be supportive or is everything being negative for the sector.
Let me start and say I think the crop the movie we elected and.
The numbers a certain showing that in.
It's hard to contemplate a.
Ah, yes, the politics, a cool the if biden.
The exact did that.
Yeah, he's he's backed off on a favorable negative things that he said about energy industry, but.
Who knows we would come from the were there and who knows how much he would get a.
Has to be in Congress.
Yeah the.
The is maintained in the house blips.
Two.
They did a.
Congress so.
Anyway its a.
Doc always do you do the variability that you could and net political situation.
Thanks, Josh.
Ladies and gentlemen, this will conclude our question and answer session.
At this time I'd like to turn the conference Dr. <unk> Beano for any closing remarks.
Yes. Thank you very much for joining us today. Please direct any further questions. The IR team look forward speaking with you. Thank you.
The conference has now concluded we thank you for attending today's presentation. You may now disconnect your lines.