Q2 2020 Pioneer Natural Resources Co Earnings Call

Welcome to pioneer natural resources second quarter conference call joining us today will be Scott, Sheffield President and Chief Executive Officer, Rich Daly Executive Vice President and Chief Financial Officer.

<unk> executive Vice President of Permian operations.

Neil Shah Vice President Investor Relations.

Hi, India has prepared Powerpoint slides to supplement their comments today. These slides can be accessed over the internet at www Dot P. Ex <unk> dot com again, the internet site to access the slides related to today's call is www dot.

He XT dot com.

The website select investors done select earnings and webcast. This call is being recorded.

Replay of the coal will be archived on the Internet site through August 31st 2020.

The company's comments today will include forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

These statements and the business prospects of pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods.

Materially from the forward looking statements.

These risks and uncertainties are described in pioneers news release on page two of the slide presentation, and then pioneers public filings made with the Securities and Exchange Commission.

This time for opening remarks, I would like to turn the call over to pioneers Vice President Investor Relations Neil Shah. Please go ahead Sir.

Thank you Shelby good morning, everyone and thank you for joining US let me briefly review the agenda for todays call.

Scott will be a first who will review and discuss our excellent second quarter results. He will also detail or framework for reinvestment that drive strong free cash flow generation and return of capital to shareholders.

After Scott concludes his remarks, Joe We will then review our strong operational performance and best in class oil production.

Rich will then update you on our strong financial position and balance sheet strength.

Got it will then return to discuss pioneers focus on sustainable practices. After that we will open up the call to your questions. Thank you so with that I'll turn it over to Scott.

Good morning, Thank you Neil I hope everyone is doing well.

In this tough environment, we've had.

Last several months.

On the start off on slide number three.

Despite the price collapse that we've had especially for the second quarter.

We're delivering 165 million or free cash flow.

During that quarter [noise].

Look at for the entire year and that's based on a strip of about a week ago. The strip has moved up a French already up to about 48 50. This morning.

We were using a strip of about 46, but estimated 2020 free cash flow about $600 million.

Also on later slide will be increasing our guidance for 2020 for production at the same time, all capex guidance remains unchanged.

With our recent bond deal will continue to reduce our cost of capital improved liquidity.

I'm also we continue to be the best in the Permian Basin in regard to.

Stats in regard to flaring intensity less than 1%.

According to ride Stat, which publishes the data from the.

Both the stage of.

Texas and new Mexico in their data.

And also continue to drive down costs pretty much at all levels, 16% decrease due our Permian lease operating expense with Jolie, we'll talk more about lighter compared to the first quarter.

Going to slide number four again.

Very good quarter, despite the price collapse in the pandemic.

We delivered 215000 barrels of all per day total be Elise 375000, again free cash flow of 165 million during the quarter, which also amazing we're getting a horizontal lease operating expense down close to $2 per be a week and again, maintaining our great balance sheet.

[noise] going to slide number five just talk a bit more detail about our cost structure. We've been focused on it for the last 18 months continuing to see lower and lower numbers were driving our all in cost of cash cost down toward that for dollar range Halloween to 17 for horizontal wells DNA.

Cash down to about $1.47, then entres continue to drive it down at 47 cents shirt for a total of $4 an 11 cents.

Going to slide number six.

Obviously, we're improving our 2020 plan maintaining our capex budget between 1.4 to 1.6 billion, we're increasing our oil production guidance up to a midpoint of 208000 from two or three range to 213000, or we don't have it on here, but our fourth quarter.

Exit rate, we're increasing that I think I said last quarter. It was 190 to 195, we're increasing it up to 200000 barrels wall per day for the fourth quarter.

In total production up 356 to 371 the range again, the rig count the Frac fleet.

Count average from second quarter to fourth quarter remains the same.

And again and in regard to our deferrals of even with the price increase we have not brought back or very little of our production that we mentioned was 7000 barrels a day curtailed. The second quarter. This is primarily or high operating cost vertical wells, which would we began a program over a year ago began to plug more and more those wells.

Overtime. So I don't expect the 6000 very little love it to come back overtime.

Again see an amazing capital efficiency gains at pretty much all levels drilling completion facilities lease operating expense DNA and interests throughout the company.

Slide number seven again this is I I knew slide.

This is our long term thesis, but also I'll talk about how it affects 2021.

Again, creating significant value for shareholders were targeting a 10% plus total return that's made up at the base dividend today, it's over 2%.

2.2% variable dividend moving forward.

We expected to have a favorable demand in any policy or put together for the year 2021 payable in 2022.

In an all growth rate of 5% plus going forward. When you look at specifically at 2021, we do intend as long as the all strip and Brent is $45 or higher we expect to begin plans for adding rigs and frac fleets going into 2021.

On to be able to grow 5%.

For the year 2021 long term, we're looking at 5% plus.

We're generating very very strong returns.

Nick This is off of the dice and as I had mentioned earlier in the previous slide of about two to all eight for the year for barrels of oil per day.

We'll be maintaining this is I would be maintaining are great balance sheet, a 0.75 or less.

Also we have a strong and growing base dividend.

Long term under that model and as I said again will be adopting that variable dividend as long as the all strip is 45 or higher for Brent.

And that will be payable in the year 2022, well have the mechanics are that worked out by early 2021, well to start started discussing that at that point in time.

Slide number eight.

We have an unmatched footprint. This is a new report by a sell side group showing the fact that we have three times our nearest competitor in regard to our inventory.

Over 10 billion barrels of oil equivalent 680000 acres and most of it contiguous breakeven price less than $30 WT I listen to dollars Henry hub.

Let me now I'll turn it over to Joe you talked about her operations.

Thanks, Scott and good morning to everybody.

At least starting off on slide nine.

As it did last quarter I want to start off by congratulating and thinking the entire pioneer team for another tremendous quarter, especially during challenging times like right now.

29, King was undoubtedly one of our best years in terms of safety performance efficiency gains and cost reductions and the teams are committed to repeating that performance and 2020.

When you look at the graphs on the left.

You can see the drilling and completions teams have already achieved 50 and 67% of their feet per day gains from 29000, respectively.

Our facilities and development teams have also made remarkable progress in reducing or time costs. When you look at these efficiency gains combined with service cost deflation in a consistent development strategy, we continue to drive down our well costs than drastically improved capital efficiency.

As you can say on the right hand side, we have reduced or well cost by approximately $1.8 million or 20% in the first two quarters of 2020.

We believe that approximately 60% of these cost reductions are sustainable.

Now moving on to slide 10.

Starting on the left once you normalize gross production for all carriers on a to strengthen basis.

Has the highest oil percentage and then moving over to the right hand side. We also have the best 24 month cumulative oil production. So suddenly in those two things together pioneer has the your Willis production mix and girls the most productive wells in the basin.

These two factors combined with our low cost structure should lead to the best margins and highest returns compared to our Permian basin peers, regardless of all price once again, congrats to everyone for another great quarter, and I'll turn it over to rich.

Thanks, Joey I'm going to start on slide 11, and good morning, everybody. A this slide really highlights one of them any benefits of our acreage position, where we have a high working interest in high net revenue interest in our all of our wells and in simple terms and you'll be basically get to keep more every barrel produced a which means that we can deliver more efficient growth.

Then.

They're just because we have this high net revenue interest.

So with that you know boils down to a that's having to drill fewer wells, which leads to you know reduces our DNA and improves our margins and also has the benefit of us drilling less wells in our inventory lasting longer.

A great benefit from our legacy acreage position.

Turning to slide 12, looking at our operating cost structure. This guy I talked about you know as Joey alluded to you know really congratulations to our field teams in supply chain teams are really know terrific job of driving down or at least offering costs by 27% over the last 18 months.

Really been driven by you know optimization of run times on wells optimizing the use of our facilities and you know revamping our chemical program and they've coupled this with doing more of our maintenance internally versus using third parties and then adding the supply chain savings on top of that so overall, you know really a great outcome over the last 18 months.

Turning to slide 13, or it's just like we've had in the past, but just reiterate you know the relative strength of our balance sheet relative to our peers. When you look on the the charted the bottom there, but also highlights and many of our peers will you need to repair their balance sheets before they can return cash to shareholders and we're being that position you know much sooner.

Her Scott outlined so overall you know we continue to believe it's important to have a pristine balance sheet with very low leverage ratios, which is why we view net debt to EBITDA of less than 0.75, as you know the target to be less than that on a long term basis.

So with that I'm going to turn it back to Scott talking about sustainability.

Thank you rich on slide number.

14 again. This these are some are slides we showed in the past quarters.

Well oral and IV study by a woodmac again, it's one of the lowest emission sources of all the various sources for oil with all sands in heavy all conventional onshore being some of these are the highest.

Turning to slide 15. This is a summers cemetery slide in the past hobbies. He noticed a we have dropped the names of the the peer companies off This chart as we have in the as we Ah first for the first time, but again, we benefited this is showing that there are reductions as Reichstag.

Those into both new Mexico I'm in Texas.

At the Permian Basin companies are striving.

To reduce their flaring intensities, it's almost every bodies on board I think this has helped in regard to.

See everybody in their stats.

Also I'm still optimistic with two new gas pipelines coming on in 2021, and the reduced activity that that amount of gas is being flared will be reduced substantially in the Permian basin down to very very low levels.

And then finally on slide 16, I'm again, we have a great program in place nothing with the fact that we have one of the best balance sheets in the industry also has the probably the best rock in the industry in the U.S.

And which leads to great returns and allows us to be able to come out earlier than most companies to start growth of 5% in 2021, and also to be able to pay a strong base dividend and get into the variable dividend to deliver a 10 plus total.

Program for our shareholders. Let me go in stop there were open up for questions.

Thank you if he would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question.

Well pause for just a few moments to allow everyone an opportunity to signal for questions.

Well take our first question from Douglas <unk> with Bank of America.

Thank you good morning, everyone on the school, it's great to a great to see or particularly very clear outlook for a whole pioneer represents in the future I go to actually a couple of questions. One is actually a runs off if I may still sort of that they've got little bit of a delay in my phone obviously you've.

Did you give us more detail on the mechanism I guess, but to the extent that you can can you walk us through how you think about the different methods of returning value to shareholders be on growth, obviously balance sheet share buybacks as well as a potential variable dividend.

Yes I.

I think I've stated in some of these past energy Comparators I think our industry.

The history has shown over the last 10 15 years that most companies have destroyed value by buying back stock into higher prices.

So we at this point time, we do not anticipate I'm using or any of our free cash flow for stock buybacks.

That's why we're going to the variable dividend model.

You know most likely the mechanics only thing I know for certain it'll be paid in arrears, because we have to go through the calculation what our free cash flow is after the base dividend in 2021, so as we start to variable dividend will be paid in or it'll be paid in the following year. After we make the calculation so 22.

Be the year that we would pay a variable dividend and most likely it'll be a quarterly but that's that's about all at this point in time. The board has not approved it at this point in time, we're in discussions I'm to discuss the policy.

Over the next several quarters, we'll get more detail in 2021 about the variable dividend structure. So again, we say, 5% plus an old production growth. Some years. It may be six some years. It may be seven we don't want to just tie to one number based on rig activity free like predict a duck activity.

Directly to activity you know, we can't hit 5% every year. So we want to flexibility some years. It may be seven eight some years, maybe for some years ago. You five so we're just saying 5% plus on production growth over the next several years, but if we get into a obviously a high all price environment say 60 to $70, we're not going to change up or down.

Okay and growth that money it will be paid out over and above the base.

And we anticipate a small growing base dividend.

But the variable dividend will be the structure that will used to pay out more and more of our free cash flow.

I hope that helps.

It does is tremendous and this I think you're leading the industry and thinking about the school as you've done for sometime.

Look I'd love to get into all the this fantastic pulled us an execution because those numbers, obviously terrific again, but I would like to ask you just have the leasing question to growth.

The company has since you came back you reset the growth floor now you've come out with us.

Full leading slot as you I think the company's built for 15% rules I guess is the way I would like freezing. So what can you talk to it was about in terms of structure pine you're going forward. The size of the company do you need to right size to adopt the organization to this year as long as you know because there. Thanks.

Yeah as you know a Doug we've already had a restructuring program last year.

And obviously coming out with a 5% plus production growth Oh, we have its under that it's under evaluation as to what size organization, we need for a 5% lost production growth.

With more details to come over time.

Okay I'll leave it there thanks so much.

Well take our next question from Air in Japan with JP Morgan.

Good morning, Scott just maybe a follow up questions I wondered if you could see yeah. I was just wondered if you could kind of walk through.

The decision to move to this but you get a long term investment framework.

And are there any analog is in the market. Today were you guys have studied Oh, the special dividend policy like this being implemented so that we could look for clues on how you plan to do this you know on a go forward basis.

Yeah, Mike I mean, it starts with being in the industry for 40 years and see an hour volatile. It is so it starts with that and you look at the past history of how much our industry as a destroyed value.

Whether a growing too fast or buying stock at very high prices. So you Gotta look at the history of the industry and what should change and you look it up and we and we have looked at a those last 12 18 months and other S&P 500 companies.

We've learned there was about a 10 companies that have a variable dividend not in our sector.

That people are giving credit to in other industries.

We've we've looked at those companies and how they pay a variable dividend, but we do have a cyclical commodity business.

One of the issues in our business as you know it's hard to predict what's commodity price is gonna be so we're spending hundreds of billions on hundreds of billions of dollars every year not knowing what our commodity is gonna be over the next five years.

And so the.

We don't have much more detailed and went auto Doug already on the mechanics are the variable dividend.

But you know we see at the end the a the main factor.

And I tried to get away from the word special I saw were Devon issued a special especially as a one time event. So when you look at $50. All strip, we will have a variable dividend every year for the next several years. So we know that.

We're going to see some years at 60 Grant we're gonna see some years at 40 brand, but let's say we averaged $50.

Variable devotee I anticipated to be much greater than our base dividend.

And so under that under that model and so I see it. So eventually I think we'll get credit for it once you have two or three years of it.

People, believing they started commodity price that we will start getting credit for that variable dividend. So I'll stop there.

Great. That's that's helpful. Scott.

My My follow up question is just.

Thinking about 2021, you mentioned in your prepared comments, how you expect the fourth quarter Oh, you know all right to be a 200 or you know KBB.

Under your framework it would appear that you're targeting call. It mid single digits growth that would put you call. It.

To 15, plus in terms of oil next to your thinking about the two old <unk> base I was wondering if he could help us think about spending next year I think you mentioned that you'd be adding a you know some really good and oh.

Frac crew activity, but just wondering if you could help us think about spending relative to the 1.4 to 1.6 billion dollar books sustaining capital number that you disclosed previously.

Yeah, we've put a range in there you know we use that 70% of forecasted cash flow now that strip was running at 45 $46 in the Brent strips already up to 48 50. So if you look at a that's holding growth right. So we are starting our growth rate of 5% next year. So we are planning to add rigs and frac fleets to begin that.

Growth rate above two away. So I would expect the a straight to take our tool eight midpoint and basically at 5% to that for the year 2021, and so we'll be adding rigs in Frac fleet as we go into the year 2021 to calculate our Capex you can use that 70.

Percent.

But that was on a 45 to 46 strip. So since the strip is continuing to move up that 70% will drop middle dropped maybe 65, maybe 60.

It all depends on where the strip is so to give you an idea where a capex will be.

But we won't give out our cap got.

Phil.

February.

Got it so they can actually just thinking about 7% reinvestment.

Dollar Brett.

Yeah exactly.

Great. Okay. Thanks, a lot Scott.

And well take our next question from John Freeman with Raymond James.

Good morning.

I just had a jalan question.

To that Scott you just mentioned, so the 70% to 80% reinvestment rate.

It's just based on on the current strip and it almost sounds like you do that is like the higher end of the reinvestment rate and that's we got into an oil environment. That's you know 50 $560 something like that you trial. It down the 70% just topics we need a range took a strip is is that right Scott exactly exactly exactly.

Not script was a week ago. So I think all the news about the vaccines in Russia, India and also in the darn, Oxford or is that I think it's got people excited with the market up and the the all strip has moved up significantly also just in the last week to 10 days so.

Since we made this run in the slide so.

Great and then or follow up question. It was kind of alludes to what what I was asking about was kinda rightsizing the organization for kind of this more.

Moderate long term growth rate y'all I'm highlighted on slide eight a massive inventory position God and kind of moving to this kind of not more moderate long term growth target I guess sort of how you all think about potential again in a more normalized commodity environment not not necessarily now they have more normalized commodity environment I don't think about maybe.

Potential acreage divestments for acreage you know you're not going to get around to maybe for very long time, but would be a lot more valuable than maybe some of your peers in need of a top top tier inventory and maybe sort of way to kind of supplement a complement the the variable dividend sort of policy.

Yeah, John I think the Mark to Mark is essentially dead right now there was no cash deals being done by any body and so we're just going to start waiting until we see some actual trades.

On deals and so Oh, we have we have sold acreage in the past, we will still language in the future, but we're not going to give it away.

So we are still due in large trades with all the various Midland basin operators that will continue.

But it's a market ever opens up a there will be some divestments overtime.

On the front are on a tier two acreage and the fringes of our of our core area.

But there was no borrowings today and private equity market as you know is essentially dead. So.

Right well, thanks, so much Scott I really appreciate it.

And we'll take our next question from Bryan singer with Goldman Sachs.

Thank you good morning.

Morning, Brian.

Well, what do you view and the impact of falling costs on your breakeven oil price to meet your return threshold you mentioned the $45 brand you've got comfort increasing rig activity in the Permian to a 5% plus growth mode and early 21, and so I just wondered if you can comment on the impact that that had and then beyond that the differences in level.

Rich and what do you see it that unique drivers of the cost reduction to pioneer versus what's more broadly occurring elsewhere.

Yeah, Hey, Brian I break, even that's really what we talked about last call as well as you know a breakeven still with the capital efficiencies of the team has done is in the you know what I'll call. The high Twentys for Brent low Thirtys for Brent on a pre dividend basis for 2020, so that really hasn't changed it's only gotten better because of the.

Efforts of the team so I don't really see that having changed from everywhere before in terms of your second question on leverage.

Maybe ask said one again, it actually X leverage what do you see as the drivers of the cost reductions that maybe you need to pioneer versus just reflective of what's going on in the rest of industry and part of the reason that I ask is you guys are willing to increase your activity in the Permian beginning next year.

Based on how you see or supply cost and I wondered whether you have expectations for for others to do that as well.

Yeah, I think it's similar to what all companies are doing I don't know that we're unique other than we've got to you know a strong focus internally you know across the board on all aspects of the cost structure and so Scott how long do whether its capital whether its l., we weathered DNA whether its interest you know were attacking all those relentlessly to make sure.

That we drive those costs costs down and so it's just to me. It's really just to focus internally of how do we move each of those costs down and you know will look whether its supply chain, whether its efficiencies whether it's.

Doing things differently, you know the all those things are getting reviewed.

Leveled for everybody internally microscopic level to make sure that we can drive those cost lower and lower overtime.

And Brian I'll I'll add you know, we're starting earlier simply for one primary reason, we have a great balance sheet. So.

That's the reason we're starting earlier the most for appears I think it's obvious that the peers are gonna have to spend two or three years de leveraging their company because the equity markets are closed.

And so they're not to use excess cash flow to de lever to whatever their new that targets are we have maintained our great debt to EBITDA 0.6, lessen 0.75, and that's the reason or the returns returns are good for everybody, but people just can return to or any type of growth rate next year, except for maybe.

One or two or three companies in the U.S.

Great. Thanks, and then when you think about the variable dividend model and returning more cash shareholders and managing that growth in the 5% plus how do you think about the importance of hedging should we expect that pioneer would hedge to a greater degree than others or not necessarily because the balance sheet that you highlighted.

Does have a lot of flexibility within the framework of less than 0.75, and so there's commodity price risk that an ability for for the company to take on.

Yeah, I think are [laughter] due to the fact that we've had three major downturns Oh nine Oh 14, 15, and then this period or hedging has to be continue to be important part of our planning policy or even pioneer was affected with our great balance sheet going.

We ended the second quarter. So if it wasn't for Trump getting involved and calling on put in and MBS or we could still have 20 $25 oil today. So even pioneer would have been affected by 2025 dollar all for several months.

And so we just can't depend on OPEC long term.

We've seen OPEC affect our business model for the entire industry worldwide. Both in 2014 15, and this year and so it's an issue we want to do with one thing everybody is gonna have to run a lower price case.

And I think I'm more and more companies, you're gonna have to 'em hedge.

And but we're still going to look at Costless collars.

Still look at swaps and still look at three way. So we'll continue to have hedging as an important part now it does move up about a dollar per year on the next several years. So it's still in contango I would anticipate once it gets to a certain price said it'll go into backwardation I don't know when that is but but hedging will still be important part of our of our policy rugs.

Artists of our balance sheet.

Great. Thank you.

And we'll take our next question from Matt Portillo with TPH.

Good morning, all.

Matt.

A quick question around the common dividend obviously, the variable is gonna be a big component of growth going forward. Just curious how you think about the progression of the common dividend.

You might like to grow that overtime or is the variable really going to take over as the primary driver of excess free cash flow.

Yes, the obviously today with over 2% base dividend, a which is about the average little bit above the average of the S&P 500, it's still a a very strong base, we intend anticipate growing that slightly each year over the next several years I think it's important to show that the base will continue to grow.

But the primary driver will be the variable dividend. So I would anticipate the variable dividend significantly exceed the a pay out of the base dividend overtime.

Great and then as a follow up question.

Discuss the five plus percent Roes for crude oil over time, just curious in a higher crude price environment as you talked about being able to recycle more and more free cash flow to shareholder returns.

Is there a limit to kind of the growth rate you would expect to see if we were in a 50 to $60 commodity price environment as you try to balance all the moving pieces.

No I don't see us like I said, even if it gets to 70 or 80, I just don't see as changing our policy I mean that we'd have to have a such an extreme shortage of crude all in the world, which I just don't see the next three to five years, but we could have a scenario where were you. So short of crude oil that the Permian basin may be the.

The swing factor to actually add supply that's the only type scenario I just don't see it for the next several years that scenario to happen for us to increase.

Pass a five 5% plus growth right. So so we're not going to change our policy overtime.

And just to clarify on that should we kind of think about it as a a 5% to 7% growth rate I think you mentioned, 6% to 7% or is it really going to be a function of just the cash flow reinvestment at that 70% to 80% range.

No, it's really a function of us set of <unk> at when we add rigs when we add frac fleets are duck bank all that plays into I, just don't want a promise to exact 5%. So we're saying 5% plus so the rig. The addition of the rigs the timing of those rigs the timing of the Frac fleets are going to govern.

And Oh, we want efficiency.

In the adding of those rigs in Frac fleets, we don't want to be stuck to one single numbers. So that's why we're saying 5% plus.

Thank you very much really appreciate it.

Well take our next question from Charles Meade with Johnson Rice.

Well, it's got to you and your whole team there, so oh apologize sugar [laughter] I'll apologize in advance for one more question about the this 5% growth, but it's one of the things that.

Are there are the variable dividend [laughter] I won't ask about that.

But its one of the things that you know maybe it's a subtle distinction that your that your your different from from other Theres a big it's not so subtle but what is one of things that a you know it's not it's not a huge numbers certainly compared to what we've been dealing with in the past, but but it is different I wanted to ask though so I think you you are I really appreciate your already pointed out one of the.

Big Differentiators that that puts you know a 5% growth on the map for you guys.

It's not for most people is because of your balance sheet that you don't have to duty bound she repair, but I'm wondering if if you could elaborate a little bit on on Youre thinking if somebody other conditions that there may be put that put that 5% growth.

Into your plan and I think part of it could be you've already highlighted that the depth of your quality inventory that that's a distinguishing factor for you versus other companies, but but also maybe that there's there's still have you guys have internally.

You know growth is part of the turned you give to sure doors and I think you said as much. So can you can you tell us where that that growth.

Sits in your framework your mental framework about how you deliver value.

Yeah, [laughter] as you know.

The company was growing 20% to 25% or when I came back we lowered into about 15% and I I stated for about a period of about 12 months that.

At the whole point is to deliver a significant free cash flow and and and actually the 15% growth rate actually delivers more free cash flow, then a 5% growth right, 5% growth rate delivers maybe for a couple of years or more free cash flow, but 15% growth ray delivers indefinitely more.

Free cash flow under our model and it still does today. The issue is is that everybody else is growing 15% or higher and we can you can have the Permian into U.S. shell that add one in one half million barrels a day in a glutted market worldwide.

Is going to take a good two to three years to get the world imbalance reduce the inventories and so this is the best framework of picking a growth right out we think it's still important to grow EBITDA.

Most industries or grow EBITDA.

But it's important to grow EBITDA and so we've chosen that 5% production growth rate is something that we can do be very efficient at it and then provide all excess cash flow basically to deliver in form of a base and a variable dividend. The reason we're not just to go in base is because too many companies that.

I have increased their base and then they get in trouble during a down cycle and then they have to cut their dividend as we have seen happened throughout the S&P 500, especially with the oil and gas industry in other industries.

And so that's why the variable works in our cyclical nature. So.

I hope that helps that that does help and [laughter] and a appreciate you connected it back to the variable dividend and then one or the question. Perhaps this is this is for Joe are you guys mentioned the improved capital efficiency in the we certainly see that from from the outside looking in it but I was wondering if you could share.

Your estimate of how much capital efficiency has has improved or how much it should improve in the back half of the year versus what you thought coming into the year and then and you know whether you. All you have the could you guys are our lead on this but the whole industry has become a lot more efficient than we thought.

Possibly even your 18 to 24 months ago, and just any opinion on you have on whether we're at a kind of a peak of capital efficiency or if you can keep driving it.

Better.

So good morning, Charles and thanks for the question.

[noise] if you remember last quarter, we actually had dotted lines on slide nine the indicated what we expected to achieving 2020, and we had already exceeded those expectations in Q1, and it's continued to go up in Q2. So we just continue to see efficiencies continue to go forward I still see some odd.

Opportunity on the drilling from whenever I look at drilling best wells are still far better than our average well. So we want to continue to Joe Torre Oliver Wells, our best wells on the completions front, it's a little bit of a mixed bag because we're already you know in some cases.

Pumping 90% of the time on location, which means we're almost to a technical limit on how much faster we can pop a jobs will be only opportunities. There are two a pump at a higher rate or go to something like a summer fracking those are things that we're looking out so there's still opportunity there as well.

But having said that our completions teams continue to pull rabbits out of there has been whenever you look at the cost savings that we've seen and 2019, so far 45% of those outcome from the completions team. So it just continues to move for the other things that you know, we're getting innovative and is contracting strategy.

He is we don't want to just go out and NASCAR contractors for no onetime pricing relief, we want to build partnerships and and have a long term strategy to make that happen.

And we'll continue to look at a other technologies so.

You know you know frankly, if I would have if he would have asked me. This question two quarters ago I wouldn't have expected us to be where we are.

But as you can see the trajectory keeps going up so we're going to just be relentless. It's part of our DNA to focus on K P eyes and continuous improvement.

Technology management, the one thing I would tell you isn't when you go about two quarters ago or waterfall charts of cost savings were in big chunks, an hour waterfall charts are made up of a dozen items things that were whittling away. So you know, it's a never ending journey and we're going to continue to focus on it and I still have hopes in the future that we'll continue that.

Forever cost structure down.

Thanks for those comments Joe.

And we'll take our next question from Derrick Whitfield with stifle.

Thanks, Good morning to all.

Perhaps for Scott in light of your new investment framework and growth rates, how should we think about your non DNC capital run rate over the next several years.

Non begins to yell at all it rich asked and answered that question. Yeah. Dairy gets you know we haven't forecasted in the plan, but its you know it's continued to come down and so it's fairly nominal when do you think about the non DNC and well you know all say DCNS. So things are outside of that to the in years past its been.

Our water infrastructure has been the primary one with the Midland facility getting close to being done yeah. We would expect that capital to continue to come down to a smaller levels going forward.

Great and for my thoughts others, you saw this year with 100 million dollar. So it's you know, it's clearly less than a $100 million are you going forward substantially less than that.

Thanks, Rich and for my follow up I'd like to shift over to your curtailments or are the remaining curtailed volumes purely price decision and for the volumes you have restored where there any notable challenges in bringing those back on line.

Oh no challenges in the ones, we brought back on so far and you are correct that they're really it's a well by well you know positive cash flow economic outlook that will cause those to come back on and as Guy mentioned you know some may never come back on but you know as prices continue to move up or continue to bring some back on very broad.

Fair amount or some of the ones that we had last quarter on and we'll continue to look at it well by well and add when it makes sense and Derek I'll just add we're keenly aware of the challenges associated with bringing back on vertical wells after they've been shut down and our teams have done a great job of preparing those wells for shutdown in until.

The person and bringing them back so we don't anticipate any challenges with.

Thanks, guys great update.

Thanks, and we'll take our next question from Michael Hall, with Heikkinen Energy Advisors.

Thanks follow up a little bit or some of the prior questions, but a little differently. He gets put on a pretty tremendous number of wells in the quarter. I guess I was just curious is there anything different in the way you're producing those wells are completing those wells.

That we should keep in mind as we just think about a I guess calibrating models going forward.

Yeah, Michael [noise], one thing you know having done this a couple of times starting back in my.

Ladies and they will for you know there's kind of the front end of these developments where people are focused on just getting these wells open in flooring known as the size they possibly can.

You know and so everybody's initially focused on well performance and sometimes it comes at a cost you know over building infrastructure, putting in temporary facilities, maybe getting aggressive on artificial lift, but now that we've shifted our focus to capital efficiency and leveraging our existing facilities, which sometimes when it's on water production.

You know we my in some instances joke somebody's wells back maybe take a little bit less of an aggressive bent towards a artificial lift and sort of EUR wells.

In like I said, you know the lower commodity prices change that calculus on artificial lift because that does come at a cost. So I think that's the long answer the short answer is yes [laughter] nitrogen.

This is you know I can help you from a modeling perspective, if you think about the pop cadence for the remainder of the year No Q1.

From our pop perspective at 85 would've been the highest of the year really benefiting from increased activity and the second half 2019 Pops are of course, a a lagging indicator on the capital that was spend the previous quarter. So you saw the 75 Q2 parts really reflected the fact that we had a lot of pre covert activity for research.

<unk> ramping down or activity, we of course decreased our frac fleets as we stated in may down to one so you'll see Q3 pops materially stepped down a vis-a-vis Q2 now as we are we're currently running three rigs Oh excuse me seven rigs in three frac fleets, you're going to see Q4 Pops rebound from the from the lower Q3 levels so that should.

<unk> hopefully calibrate center models I guess kinda begs the question what is the total pill or pop count that we should be I guess orienting towards for the full year now.

Yeah. So you know we provided initial comp guidance when we had the initial budget because of code that 19, and the disarray in terms of there the thick the quick reduction in activity the strict policy count to production to well count really makes it more difficult. So we kind of pull that back suffice to say, we gave production guidance we.

Gave a capital guidance, so that should really help hopefully if you take that and then you take the waterfall, how I discussed how a the cadence and pops progress throughout the year that'll be able to you'd be able to calibrate that in your models.

And I guess, if I could kinda related follow up on a more on the maybe on the completion side of things, though because if you know continued to materially reduced well costs I'm. Just curious is there anything changing in the in the completion recipe you know or be a number of stages proppant loads wateraid to anything beyond.

Just the efficiency gains that have been discussed that are driving the.

The structural reduction and well costs.

Yeah, we continue to tweak our completion recipes you know, but I wouldn't say there's been significant changes the one area of focus that we're we're focusing on to reduce cost, but making sure. It doesn't have a material impact on well performances stage length.

So if we can increase or stage lengths and where you can obviously reduced the number of stages, we pump and get our costs down. So that's the primary thing we're doing some tweaking on our Wolfcamp b wells, but for the most part were relatively consistent on or completion recipes.

[laughter] completions on in isolation, I guess, we wouldn't expect those to reduce lets say production per foot.

Or productivity per foot.

And then finally Fannie material enough to change that.

That's correct, we're focused on getting the sign production for a lower cost.

Okay.

I appreciate it thanks guys.

Well take our next question from Paul Cheng with Scotiabank.

Thank you good money out Scott with Us. So look we'll play it looked like you also lets see empty lanes and to grow Craig it's going to be slower in the future. So how does that change the way you opposed to most just like side on the pipeline commitments going forward.

Changed the pipeline here the last part the pipeline talk a pipe.

[noise] damage in check my commitment that how that would be change.

Yeah, I know those commitments are locked in at this point in they grow so, but we have plenty of access to barrels in the Midland market. So well continue to evaluate it but there's no concern about being able to to get too old to manage those pipeline commitment to the extent that they are higher than our production level. So we'll continue to monitor.

Sure and watch it and manage it.

But at some point that you all 5% girl you make which are in excess of your commitment had at that point I'd be going to again, when you see all commitment or what that do we feel more comfortable that you could be Nick the shop on the Honda quite nice Seth.

Yeah, I don't really see us, adding any more commitment to this point yeah. We have commitments that will cover you know our equity production. So I really would be a case of we'll stick with what we have today and that'll be it and if we have excess wheel, we can buy those barrels in the Midland market.

Okay, Oh, the hedging program and whether you gentlemen thing about two years on mechanical parts that might be quota.

I will be hatching, Oh, maybe say 12 to 18 months.

And we've done that's on the pricing they sent to eliminate won't take away a human emotion no factor into hedging program.

I would say Paul it's something we're going to continue to monitor and it'll be something that we manage going through so I don't see it is a.

Mechanical me I think we have a long term history of hedging in advance of the production coming on of which Scott alluded to earlier and talked about the well continue to do that but you know I think we'll look for times, where we think it's the ideal time to put those hedges on versus just doing it yeah, we systematically.

I'd say I find the one for me with the new locomotives.

I think Scott already mentioned that you guys. We've continued to do trade.

But that just to its bad weather on the going forward with he says Oh somebody divestment program you become far more aggressive than previously has been doing and also what that will impact the y'all spacing decisions going forward.

No no Paul I think the a the trades I think we're still doing trades with all the Midland Basin. Operator, So we wanted really 10000 or 11000 were 12000 foot lateral.

As long as we can so we're trading 5000 foot areas to add another 5000 or 6000 feet. So so that will continue.

On so I couldn't tell if that's what you were leading to but well continue back when the market that.

Scott sorry that I'm actually return, yeah that whether with the snow look low weight that yet. Okay. You can do you have a tremendous Ah Ah given tray pack law on that one day, Oh God. So that's how and you may not be at all so what that to put them on the full but that you'd become far more.

Steve Yeah sounding offset in the future band you historically has been.

Yes.

As I said earlier, Paul the market is dead right now there is no cash deals nobody has.

Any cash to be able to them by inventory at decent prices, but I wouldnt expect the market to improve over the next two or three years and we'll continue to.

To them sell off areas, what I call tier two acreage.

As that market opens up but right now the market is dead.

There's no private equity companies had no cash.

And companies are gonna be leveraging for the next two to three years.

Oh sure how about this same thing a they say something is that in any shape up on being in pet.

No actually if you remember our past slides.

We started a wide spacing back in 2014, so oh, we have not been down spacing at all over the last six years like a lot of our peers that have less inventory.

Thank you.

Well take our next question from Bob Brackett with Bernstein Research.

I had thought quite again, thank you for a defining that investment thesis both the level of detail and also the direction that it's going again I'm wondering if you've had conversations with the board yet around realigning management incentives could be aligned with this new strategy.

Yes.

We've had lots of discussions in regard to in fact in fact, one of the big changes.

That I made this year I'm personally on my long term incentive plan I think I'm the only C. O now it's 100% based on performance. We've also increased our management team manager committees on performance level up from last year have been so we think stockholder return again is one of the key measures.

And I basically went to a 100% so if I'm in the bottom quartile of my peer group I get paid nothing for instance.

So it's all its 100% related so that those are some of the changes that we're making and we're looking at or other changes overtime or in regard as you as you already know that.

We're one of the few companies that it has reduced I'm salaries already this year.

Energy companies in regard to them pandemic, we also reduced our bonuses to zero. So again, we're one of the few companies to take immediate action.

I hope that helps bye.

That does a quick follow up since no one's asked it we're heading into an election cycle any thoughts or whether there will be any regulatory changes in how they might impact pioneer going into 2021.

Yes.

Right now it looks like the.

Biden is lady it's obvious unless something happens, we'll probably be elect this country could elect biden.

And there will be some significant changes I think most of that will be on federal lands.

There was discussion about banning on fracking I don't know what the end result will be.

But as we have noted we have zero lands on federal lands end, so should be unaffected.

I would expect pipeline infrastructure will be significantly delayed on crossing state lines again.

All of our acreage is in Texas, and we move our oil and gas to the Gulf Coast. So anticipate no issues there.

Uh huh.

And we'll take our last question from Paul Sankey, What Sankey research.

Thank you very much everybody and kudos for the very clear outline of the.

Strategy its greatly appreciated clearly you've got them to have visibility on new grows school I did want to on the fly the census that would imply flights to some increases to the regular dividend.

On the oil price variability side.

You've been capture though with the variable dividends.

Point would be why wouldn't you school hedging because.

That's it cost you got the business model that doesn't need it you've clearly showed that the balance sheet can handle the minus 37 go to quota.

And additionally, it makes to reporting very complex or at least appear complex I just wondered if you would consider dumping, though secondly on dumping hedging.

Secondly, a on buybacks they'd be the dissolved the because people do them at the wrong time.

If the stock is undervalued.

I believe that you know that essentially.

Buyback would be a good way to overall increase long term dividends and generate value. Thanks.

Yeah Paul.

If we had zero debt in about 2 billion a cash on the balance sheet.

Oh, Yeah may consider I'm dropping hedging, but due to the fact that we've had three down I had three downturns in my first 30 years in the history the business not bad Threeg in the last 11 years I anticipate we'll have more overtime and so I don't see a point in time, maybe we can get there, but I'm not sure. It's the right strategy to put.

2 billion in cash on the balance sheet and have zero debt.

And so.

[laughter].

If it wasn't as I've said earlier, if it wasn't for the president Colin potent in MBS Ah, we still but probably have 20 $25 oil today, just there's still be a battle going on and so.

We're heavily dependent on Opex, we been depended upon opex for a long time most of my career.

We can't continue to have confidence in OPEC and that's why I think it's important to continue hedging we did three ways primarily to give us upside the thing we learn from this downturn is at three ways didn't protect us.

And so we're we're continuing to look at very different instruments.

There may be helpful, but well have to continue to hedge and less we moved to a a balance sheet with no debt and several billion on the on the balance sheet.

So that's what your second question was more toward whatnot critics and throw that was just a point in there about 5% volume growth might imply five person.

Oh I see no. We haven't yeah, we haven't stated what our base dividend growth will be at this point in time, but we'll evaluate it overtime got it.

Yeah, and then on the buyback I mean, if the scope Stokes fundamentally undervalued writes about.

Yeah, I mean, I wish I mean, what sat is that we did not we had one of the best balance sheets and the industry and we couldn't even afford to buy our stock when it hit $55 in April I guess, it was April or May, but we had a bottom of 55 and so I knew him a hard at it.

I was a great time to buy the stock, but we had we had to one of the best balance sheets and the business and we couldn't afford to do it so like I said again.

Does that mean I should go to a balance sheet of zero debt in 2 billion in cash.

To really ensure when volatile situation happened like you know nine ofourteen, maybe but we're just not moving there at this point in time.

We have no more cleansing asphalt.

Okay.

We have no more questions again, we want okay.

Thank you.

Again, we want to thank everyone I hope everybody stay safe well look forward to the next quarter and hopefully we can all loosen up and start seeing each other at some point time. So I look forward to that day, everybody take care and stay safe.

Thank you. This concludes today's call. Thank you for your participation you may now disconnect.

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