Q2 2020 Centennial Resource Development Inc Earnings Call
Now to discuss it second quarter 2020 earnings today's call is being recorded a replay of the call movie Assessable until August 18th 2020 by dialing 855.
Fivenine cheesy ran five six and entering the conference I'd number 7031, 059 or by visiting Centennial's website at Www Dot C. D E V I N C dot com.
At this time I will turn the call ever to Hayes neighborhood Centennial's director of Investor Relations for some opening remarks. Please go ahead.
Thank you Rebecca and.
Thank you all for joining us on the company's second quarter earnings call.
Presenting on the call today.
John Smith, our Chief Executive Officer.
George goodness or Chief Financial Officer.
And Matt gears or Chief operating officer.
Yesterday August 3rd.
We've got a form 8-K with an earnings release reporting second quarter earnings results for the company and operational results for our subsidiary Centennial resource production LLC.
We also posted in earnings presentation to website.
We will reference during today's call.
You can find the presentation on our website homepage, we're under presentations at Www dot see that inc. darker.
I'd like to note in many of the comments during this earnings call as forward looking statements that involve risk and uncertainties.
It could affect or actual results implants.
Many of these risk or beyond our control and are discussed in more detail and the risk factors and the forward looking statements sections and her farm ins with the FCC.
Including our form 10-Q for the quarter ended June Thirtyth 2020.
Which was also filed with the FCC yesterday.
Although we believe the expectations expressed or based on reasonable assumptions. They are not guarantees of future performance.
Actual results.
Or developments may differ materially.
They also refer to non-GAAP financial measures that help facilitate comparisons across periods and with their peers.
Pretty non-GAAP measure we use a reconciliation to the nears corresponding GAAP measure can be found in our earnings release were presentation, which are both available on our website.
With that I will turn the call over to Sean Smith, our CEO.
Thank you Hayes.
Past six months have certainly been a challenging time for the entire DMP industry, including Centennial.
In March we witnessed an unprecedented increase in global supply from OPEC plus members amid a global pandemic, which had already significantly weakened near term demand.
These events impart have caused oil prices to move significantly lower and caused widespread shut ins by the industry during the second quarter.
With this in mine I'd like to start off today's call by quickly revealing centennial's response to recent global events that have transpired over the past several months and is outlined on slide four of today's presentation.
We reacted decisively in order to protect the balance sheet and manage liquidity in May we announced plans to temporarily suspend all drilling and completion activity will materially reducing our full year capital budget by 60%.
As a result of low oil of low realized prices, we voluntarily curtailed approximately 20% of our may production in order to protect field level cash flow and economics.
The production team used our in house data analytics tool to quickly evaluate well economics to determine which well should be shut in based on actual netbacks and operating costs for each renewed individual well in the field over this time.
In early June and as oil prices increased we brought back essentially all of our shut in volumes with virtually no incremental costs or associated Workover expense.
As discussed on previous earnings call. We also took several steps in order to significantly reduce our cost structure and debt outstanding.
During the second quarter, we made the tough but necessary decision to reduce the size of our workforce in order to better align the companys organizational structure, given the current commodity price environment and subsequent activity levels.
This also included a reduction in salaries across all company employees with the largest reductions being taken at the senior management and board levels. Additionally, we executed a successful debt exchange offer which reduced our total debt outstanding by $127 million and lower future interest expense.
It is important to note we have not been standing idle during this lower commodity price environment. We've taken this opportunity to completely review, our operational procedures and practices searching for any incremental cost savings or efficiencies.
While Georgia, Matt will provide more details on their shortly I am confident that centennial will emerge from this downturn with expanded operating margins and structurally lower well costs, which will continue to benefit the company going forward.
With that I will turn the call over to George to review the financials before providing some closing remarks George.
Thank you Sean I'll first review, our Q2 financial results and then discuss the debt exchange capital structure liquidity hedge position and 2020 guidance.
Turning to our financials on slide 11 of the earnings presentation.
Net oil production for the second quarter averaged approximately 37400 barrels per day.
Which was down 13% over the prior year period and represents a 10% decrease from Q1.
Production was impacted by the voluntary curtailment of approximately 20% of May volumes.
And the significant reduction in completion activity during Q2.
Average net oil equivalent production totaled 68245 barrels per day.
Which was down 10% from the prior year period and represents a 5% reduction from Q1.
Total equivalent production declined less than oil production, because we had less flush contributions from new wells, which typically yield higher oil cut.
And we flared fewer volumes in Q2 compared to Q1.
[noise] revenues totaled approximately 90 million, which was a 53% decrease compared to Q1, primarily as a result of the significant decline in oil and NGL price realizations and lower production.
Excluding the impact of basis hedges Centennial's Q2 realizations were 77% of Wi Fi.
Were $21.47 per barrel compared to 50 $45.14 in Q1.
Lower oil realizations as a percentage of W.P.T.I. pardon, primarily driven driven by a negative cm a role adjustment, particularly during the month of May Lastly, NGL prices were down 46% to $7.72 per barrel compared to 14 30 in Q1.
Turning to costs. Despite the decline in production volumes unit costs continue to look good relative to our expectations.
Hello, we per barrel decreased by 17% from Q1 to $4 in 16 cents, primarily as a result of lower workover expense as well as continued reduction in equipment rentals and electricity.
That will provide further details on ela we shortly.
Cashing in a for Q2 was $2.21 per barrel overall, but was $1.75 when adjusted for severance costs, primarily associated with our recent workforce reduction.
DDNA decreased by 3% to $14.98 per barrel and lastly, GP interest expense increased 7% to $2.78 per barrel in part because of a significant reduction in F. T monetizations relative to prior quarters.
In Q2 rig we recorded GAAP net income attributable to our class a common stock of approximately 5 million.
Adjusted EBITDAX totaled 24 million down from approximately 113 million in Q1 due to lower commodity prices and production volumes, which were partially offset by reduced operating costs.
Shifting to Capex. During Q2, we ran essentially zero drilling rigs and did not spot any wells.
In April we completed four gross wells compared to 22 completions during the prior quarter.
As a result of lower activity and continued cost reductions Q2, DNC Capex was 21 million compared to approximately 147 million in Q1.
As Matt will describe shortly our DNC cost per well have declined quite significantly as a result of internal initiatives to improve efficiencies as well as overall service market conditions.
Facilities and infrastructure capital totaled approximately 6.5 million compared to $25 million during Q1.
Due to the lower level of completion activity in Q2 and fewer infrastructure needs.
We also incurred approximately $100000 and land capital.
Despite the de Minimis land spend we anticipate maintaining our acreage position as a result of recent swaps and trades executed by our land team.
Overall centennial incurred approximately 28 million of total capital expenditures during the second quarter compared to 175 million in Q1.
Turning to slide eight as we address briefly on the last quarterly call.
In April we launched a debt exchange that provided all bondholders the opportunity to exchange their senior unsecured notes in the second lien notes at a significant premium to the then prevailing market price.
The objective of the exchange was to reduce our total senior unsecured debt amounts into lower interest expense.
On May 22nd we completed the exchange in which holders of 254 million of senior unsecured notes across both the 2026 and 2027 tranches.
Tendered and exchange their bonds for 127 of new 8% Secondly notes due in 2025.
The net effect of the exchange was a reduction to our senior notes of 127 million and we're pleased to have close the transaction.
During a very turbulent period in the markets.
On slide nine we summarize our capital structure and liquidity position.
At the ended the quarter, we had 370 million of borrowings on our revolving credit facility.
During the quarter, we borrowed 135 million on the facility, which was an unusually high amount relative to previous quarters, particularly in light of the minimal capital spend during the second quarter.
The increased level of borrowings was primarily related to working capital changes, including a significant reduction of our accounts payables and accrued capital expenditure line items.
This occurred because second quarter working capital needs, we're still reflective of higher levels of activity from Q1, and because incoming cash for the quarter was lower due to the deteriorating commodity prices coupled with lower production.
I would note that we do not anticipate anything remotely near this level of borrowings in subsequent quarters. In fact based upon anticipated capital spending levels for the second half of the year, which you can reference on slide 10 of the presentation. We expect that expenditures will be funded through operating cash flow based upon current strip and.
Our hedge position.
As of June Thirtyth Centennial have total liquidity of approximately 300 million, which is based upon the $700 million borrowing base adjusted for the 32 million dollar availability blocker 370 million of outstanding borrowings $8 million of letters of credit outstanding and approximately seven.
<unk> million of cash.
Given that we don't anticipate a significant significant level of borrowing going forward, we expect that our liquidity position will remain quite sufficient for future activity.
Finally at June Thirtyth, Centennial's first lien debt to LTM EBITDAX was 0.9 times.
Net debt to LTM EBITDAX was 2.6 times and net debt to book capitalization was 29%.
I'll remind you that the leverage covenant currently applicable in our credit agreement is first lien debt to LTM EBITDAX, which currently has a maximum threshold of 2.7 times 2.75 times, providing plenty of cushion.
The amendment to our leverage Covenant, which was completed concurrently with the debt exchange significantly enhances our financial flexibility going forward.
Turning to hedging on slide 13.
As a result of the Q2 hedges that we established in March as oil markets were rapidly deteriorating we incurred incurred a hedging loss of approximately 7 million during Q2.
The time, we also entered into similar hedges in Q3 and will likely incur even more significant hedge losses during the third quarter.
At the time, we made the prudent decision to implement these hedges in order to protect the company against further downside risk in the event that oil prices remain at a severely depressed levels for a prolonged period of time.
Subsequently, we have initiated a more systematic hedging program to protect future cash flows which is more representative of what you'll see in the future.
Going forward, we plan to hedge of portion of our production with the goal of covering certain corporate costs, such as Gn a interest in exploration expenses, while also retaining exposure to potential upside and prices.
With this philosophy in mind, we recently entered into fixed price WT swaps for the fourth quarter of this year covering 13000 barrels per day at an average price of $38.89.
Additionally, we have costless collars in place for Q4, covering 2000 barrels per day at a floor of 39 and a cap of $44.50.
We anticipate continuing to add to our hedge program for future volumes with the primary focus on 2021.
I'd now like to touch on our updated 2020 corporate guidance on slide 12.
As you'll recall, we had largely suspended guidance with the exception of Capex back in late March as a result of the precipitous decline in oil prices and our concomitant reduction in activity.
We're now able to reissue full year guidance given that prices have stabilized to some degree and the potential for future shut ins has been drastically reduced.
As oil prices have recovered from record lows. We have commenced the completion of five ducks in new Mexico, and assuming strip pricing, we plan to add one operated rig in the fourth quarter.
Currently we expect this rig will commence drilling in Reeves County, before moving to new Mexico late in the year or it is likely to remain.
We expect the completion activity to generate mid point oil production of 35500 barrels per day for the year.
You'll also note that oil as a percentage of total production is expected to be approximately 54%, which is not surprising given the lack of flush production from new wells as compared to prior periods.
Given these planned activity levels, we estimate total capital expenditures for the year of 240 to 270 million.
Which represents a $10 million reduction at the midpoint compared to our previous guidance.
As you can see back on slide 10, total capex incurred during the first half from 2020 represents approximately 80% of our updated full year budget and was largely driven by our five rig drilling program at the beginning of the year.
This implies a much lower spend in the second half of the year compared to the Onest, which which will as I mentioned is expected to result in cash flow neutrality for the balance of the year.
To wrap up I hope you've come away with a sense for the tangible progress we've made on a number of fronts during the quarter.
We materially reduced our cost structure, particularly with regards to GSK and they'll only costs.
We were able to reduce our total debt amount of senior notes outstanding by 127 million, while lowering future interest expense and finally, we've instituted a hedging program providing protection from downside commodity risks ultimately all of these actions have better positioned the company for the future and with that I'll turn the call over to map to review operations.
Thank you George.
During challenging times, such as President we had been more focused than ever on reducing what costs. We can control across every single discipline in the company.
As many of you know from last quarter's call Centennial has implemented a number of projects in the field focused on reducing LOE costs.
And I'm pleased to share with you the progress we've made as well as detailed the positive financial impacts that they've had.
As you can see on slide five we reduced second quarter Ela, we per unit by 17% compared to last quarter, representing our third consecutive quarter of declining Lee per unit.
Even more impressive is the fact that we've been able to continue to reduce our Lee in a declining production environment.
Looked at a slightly different way total lowi decreased $16.5 million.
From the third quarter of 2019.
Even though we added over 50 wells since that time.
This considerable savings has been driven by the execution from our operation staff on a number of different fronts.
Earlier this year.
We completed phase one of our company owned electric substation in Reeves County.
Upon initial startup.
We were immediately able to reduce the number of generators from approximately 135 to 50 as seen on slide six.
The savings on rentals from this is obvious but the more reliable and consistent form of power manifest itself in significant reductions in downtime, which directly impacts the bottom line.
Additionally, we expect phases, two and three of our electric substation to be operational during the fourth quarter of this year.
Further reducing our reliance on generators and having a direct impact on our go forward Louie cost.
Staying on slide six.
You can see our transition to gas lift has been very significant effort by our production in fields teams at this time last year roughly half of our wells were reliance on SP is the primary form of artificial lift.
And only 20% utilized gas lift.
By Q2 of 20 to 20, we had added roughly 100 incremental wells to the field.
And only a third of the total wells remained on SP, while 40% utilized gas lift.
This is key because gas lift is inherently more reliable when compared to Sps.
The increased reliability of our artificial lift program has resulted in a more stable production base with lower downtime.
We've also seen our failure rates for the artificial lift dropped by 34% this year compared to 2019.
Resulting in less Workover expense.
We will continue to utilize gas lift across our assets wherever possible.
Our team has also continued to optimize our salt water disposal system in Reeves County.
Year to date, we've realized significant reduction in disposal costs through the removal of generators that are SBD sites.
In addition.
Costly trucking produced water has virtually stopped as 97% of our water is now on pipeline.
Combined these efforts have reduced our per barrel disposal costs on our operated system by 35% compared to last year.
Adding continued downward pressure to elderly and further increasing the value of our SWT system to centennial.
While this is just an update of a few of our larger cost savings initiatives.
We've continued to pursue smaller items such as equipment purchases that are at historically low prices.
With prices as low as they are in many cases purchasing equipment rather than renting just makes good business sense.
Additionally, we continue to scrutinize and bid out all of our service providers for better pricing.
Turning to well costs.
I'd like to detail some of the continued improvements that we're seeing in DNC costs, which are seen on slide seven.
We've seen a material and steady decline in our DNC costs, which have been driven by both higher efficiencies as well as structural cost reductions.
Beginning with drilling year to date, we've reduced our spud to rig release cycle times by 25% to just over 18 days on average compared to last year.
And while we are in while we are proud of these improvements overall, we believe there's still plenty of room to realize lower costs and greater efficiencies.
We have taken full advantage of our drilling hiatus to focus on every single aspect of our drilling program from pad construction through the rig release carefully evaluating every aspect of the operation.
When we when we resume activity it will be a very different look for us since much of these changes are attributable to our new Centennial 2.0 culture and a much more streamlined approach to our cost structure. We believe the majority of these lower costs will be permanent and not necessarily tied.
To potential service cost inflation in a rising oil price environment.
On the completion side, we continued to be impressed by what our team is accomplishing.
Compared to last year, we increased our average stages pumps per day year to date by roughly 35% to over eight stages per day.
Put another way we have increased the total lateral footage completed per day from 1300 50 feet in 2019 to 1700 feet per day in 2020.
With this team's track record of success, we feel confident about maintaining that high level of performance when activity resumes.
While we have also benefited from overall service cost reductions our water recycling efforts are starting to play a bigger role this year in our completion cost reduction.
For a quick background in 2019, we implemented a water recycling program with an initial focus on our new Mexico operations.
Last year, we recycled and reuse over 3 million barrels of flowback and produced water in new Mexico.
After successful implementation in the northern Delaware earlier this year Centennial initiated those same solutions for our Texas operations.
Water recycling reduces both fresh water consumption and produced water disposal volumes, which not only lowers our overall completion cost and positively impacts elderly, but also is important from an SG perspective.
Year to date, we have recycled 72% and 31% of flow back volumes in new Mexico, and Texas, respectively and plan to continue to increase our use of recycled water with the goal of using recycled water whenever practical.
To sum it up Centennial is not the same company we have been in the past our hard times that we have endured has forced us to look in every single piece of our business and consider ways that we could do it better the fruits of this labor can be seen in the graph at the top of slide seven where overall we've reduced our.
One our year to date total well costs by approximately 25% compared to early 2019.
As a reminder, since operators report these figures several different ways I would point out that the well costs, we provide our fully burdened inclusive of drilling completions facilities.
And flowback costs.
More importantly, we believe a large portion of these savings are more structural in nature.
Said another way based on current strip prices.
Along with the expected oil field service environment.
We believe that we'll be able to further reduce all in DNC costs to approximately $900 per lateral foot, assuming our average of 7500 foot lateral lengths when activity resumes later this year.
With the goal of even further reductions to the sub $900 per foot range in 2021.
Before I pass it back to Sean I want to touch on our exposure to federal leasehold as I know that this is a topic as of late.
Out of our roughly 80000 net acre position spanning both the northern and southern Delaware basins.
Centennial only has 4000 net acres or approximately 5% located on federal lands all in Lea County, New Mexico.
Though our federal land leases only represent a small portion of our total land position.
We continue to be proactive about building permit inventory such that we always have multiple years of permitted drilling locations.
With that I'll turn it over to Sean for closing remarks.
Thanks, Matt.
Having made some significant cost improvements in the business over the past several months.
I Trust you can understand why we're excited to resume activity during the second half of the year.
This is an important first step in order to moderate current declines and provide momentum heading into 2021.
I am confident that we'll be able to care for the cost reductions you've heard highlighted on todays call.
Therefore, it is key to understand that our future growth as a company will be supported by one expanded margins specifically pertaining to future LNG in a cost and to materially lower well cost.
Finally, one positive outcome, which has resulted from our reduction and activity is a significant shallowing of our corporate decline rate.
As I mentioned during last quarter's call our corporate oil decline rate was 45% to 50% at the end of March.
Including our planned activity during the second half of this year, we expect this metric to improve to the low 30% range by the end of this year.
This represents a significant reduction and we'll have multiple benefits.
The resetting of our corporate decline rate will provide a shallower based production, which for us to restart activity, helping us eventually return to modest production growth in the future.
Before we go to Q and a I'd like to leave you with five key takeaways from this morning's call.
One we have significantly lowered our DNC cost, thus driving capital efficiency and there's still more room for improvement as Matt mentioned.
Two we've been has enhanced our margins as a result of recent cost initiatives and optimization of our asset base, particularly to elderly and gionee.
Three our corporate decline rate will be materially lower than previous years, providing us with solid footing headed into 2021.
For we've reduced the total principal amount of debt outstanding and lower to future interest expense as a result of the debt exchange and five finally, we expect to essentially the cash flow neutral for the remainder of this year, helping us manage liquidity, while resuming activity.
In closing all the above will provide a solid base for centennial underpinned by a materially lower cost structure.
Let's not lose sight of effect that we have very high quality assets and an outstanding technical team to sustain and drive the future value of the company.
With these tailwinds that are back we're excited to return to modest level of activity as we close out 2020 and head into 2021.
Thanks for listening and now had acuity.
Thank you question and answer session will be conducted electronically if he would like to ask a question. Please do so by pressing star then the number one on your telephone keypad.
Since our limited to one question and one follow up question. If you would like to withdraw your question press the pound key.
And our first question comes from the line of Scott Hanold with RBC capital markets.
Thank you.
I guess my first question would be.
What is the plan going forward I mean, obviously you guys said taken off all activity when prices got low and are starting to resume now but.
As you look forward.
What strategically do you want to do is the goal to reduce gross debt to reduce leverage major matrix or metrics to a certain points to maintain production you can give us some line of sight on how you think about that and when you do start activity on more consistent basis going forward.
Going to be more weighted to the new Mexico area or to Texas.
Sure Scott I appreciate the question, there and I certainly understand the desire for everybody to get a look at 2021 as we all know the back half of this year is going to be a lot of changes and alike and happened between now and when we started talking about our full guidance for next year.
With the elections coming up we've got the vaccines relative to the pandemic, we'll see how that affects our the global economy, and then ultimately supply demand dynamics and so all of that weighs into how we're looking at next year end.
We have never given forward looking guidance. This early in the prior year, So thats not something we're going to do today, but from a managing of the company perspective take into account that we've totally reset the company from our corporate decline rate their cost structure, a balance sheet and we've really positioned ourselves to risk.
Bond to however, commodity prices look going into next year I think we've done a very good job that in the fact that were cash flow neutral the back half of the year really just shows kind of how weve.
Restructured the business. So while we don't give forward looking guidance I think what can be said is that we are going to balance both the capital spend returning to some level of activity while at the same time, managing our leverage profile. So it will be a combination of the two is how we are managing our business going for.
Forward I know thats not the maintenance Capex type of number that that people are looking for but that's that's how we're going to manage our business for the back half the year and how we look at going into 2021.
Okay, Yeah, I know I I understand the challenges that I appreciate that color.
And I guess my follow up yes. It was really let me just address that before you can ask one more follow up as Texas, Mexico I think that.
George mentioned that maybe the rig is going to start off in Texas and the moved into Mexico that is the plan. We've got it just it just we've got some very attractive leases there that we'd like to get to in Texas that can Pete very favourably with with our returns in new Mexico. So we're going to go hit a two well pad there.
Assuming we have a rig stand up in the fourth quarter, and then that rig will immediately move to new Mexico, where it will be.
In development mode on her new Mexico assets, So thats kind of our plan of activity and how we plan to attacking it at the end of this year going into first quarter next.
Okay I understand and then my follow up question is obviously.
You know the big transaction Chevron noble.
You could have some implications on your acreage and noble's vary.
Intermixed with your acreage profile could you remind us how.
You know between yourselves and noble how much of that acreage you know is from a development strategy is somewhat the contiguous or are you plan just to kind of go your separate ways or is there some push and pulls with chevron now.
Going to be taking control of that land.
I would say you know.
There is not going to be any material push and pulls with with noble and chevron going forward. We operate the majority of the nearly all of our position and so we control our own destination and won't get pulled into any material non opposition with a new operator down there I think we're in a very favorable position they are more at.
Jason to it than intermixed with us so look forward to seeing what kind of development plan that Chevron has an order for that area, but don't think that it will impact any of our operations.
Appreciate it thanks.
Your next question comes from the line of Neal Dingmann with true Securities.
What else.
Maybe a question for you.
Hi.
You mentioned.
Your upcoming.
That will be a two well pad.
My question.
Yes.
Spend outlook.
George talked about.
21.
Sort of a.
One.
Based on the thought with flat pad the time to do more just two wells are three wells.
So can you get the cost initiatives audit by doing this.
You are breaking up during that question, but I think I got it all you're really talking about pad size and cost to capital efficiency associated with our average pad size and can we continue that going forward I think is what you're getting too. So that's what I'm going to answer now and if that doesn't cover it we can again, but thats it thats it.
Going forward, we do plan on kind of two three and four well pad sizes I think thats consistent with what we've done in the past I think the efficiencies that we've seen in Q1 and even at getting into late last year will continue those efficiencies plus the continued improvement has not had mentioned.
So I don't think we'll have anything lost from.
By going from five rigs to now ramping back to one rigs and then eventually more as we go into the future.
Maybe in that alternative I'll, let our COO address anything that I may have missed there, but we'll have that I think fundamentally what Sean said.
Is correct.
With regard to our desire to drill.
Four wells on a pad kind of ours, our sweet spot is somewhere around three wells per pad, maybe a maybe a fourth well, but just by the by the way we operate.
Typically we target two and three well pads kind of on average.
That being said anytime you're standing up a rig and starting starting over theres going to be just some level of efficiency from when you were running multiple rigs for months and months on in.
Youre going to lose a little bit of some of those efficiencies as you just start to pick up activity again, so I wouldn't expect you know.
Right off the bat that we hit our stride on the very first well out the gate I think it's going to take some familiarity with the people in the field and some some communication and oversight from our guys in the office.
And then I think we'll hit our stride pretty pretty quickly because we do have lofty expectations for efficiencies.
Go forward basis.
Okay. Good detail said.
George just.
You are kind of a different situation when do you.
This year ended the second third quarter hedges I thought I guess your thoughts into 21, you'll be in a much better position, both cash and operations wise. So.
Again, just be more opportunistically add hedges or it was wondering how you think about it.
Yeah I think.
I think Neil the way, we're thinking about the hedges as I said.
Remarks is.
We think about it in terms of covering.
Big chunk of our corporate costs, whether they be gionee or interest.
And we're going to do that primarily through.
Swaps and to some extent.
Costless collars.
And.
In addition to that.
More normalized kind of operating environment part of that philosophy is you put some hedges in place to protect your cash flow.
So that you can support your capital program and your overall activity levels. So you are.
Whipsawing the number of rigs you have out of the number of completion crews.
The other thing to think about is.
How those hedges might impact your borrowing based and so there is thought to making sure that we're kind of optimizing and enhancing our borrowing base.
Levels going forward.
You also want to recognize that.
We're in that were in the depth of new world here with the global economy.
Our view is over time.
As the economy improves that oil prices will go up so we do want to give.
Our investors some upside exposure as well, so theres a bit of a balance there what I'd say as well as the strategy is evolving it's obviously something thats new to the company.
And I think you can differentiate between what we did in Q2 in Q3 versus what we've done in Q work.
We plan to do going forward.
So we don't have specific targets timing that we've put in place for we're going to hedge X percent of volumes, but that's something that we're working on internally and collect our thoughts on as we go but.
Bottom line is we will be much more active hedging standpoint to mitigate the risks associated with with the oil price environment.
Thanks, guys good detail.
Your next question comes from the line of Leo Mariani from Keybanc.
Yes.
Hi, guys just wanted to kind of get a little bit more color on the activity restart here.
You know you certainly going to the one rig case, just kind of wanted to get a sense is that a level of activity you feel pretty comfortable at.
Sort of $40 you guys had mentioned.
Potentially adding some other rigs into the future.
Is it really just kind of governed by cash flow is the plan going forward just to do you have asked to kind of spend within cash flow just trying to kind of get a sense of what.
Now the governors are on future activity changes at C. diff.
Sure. Thanks for the question and.
I do feel comfortable that we will be adding likely adding a rig in the fourth quarter, obviously, depending on what commodity prices are doing I think it's still a volatile market. It has.
Settled a bit as we've all seen it seems like $40 as a bit of a floor at least recently and that's a that's a good sign that there is support for that price and above I think well as we mentioned in the prepared remarks, assuming strip price, which is essentially $40 slightly increasing in the outward years.
That supports at least a modest level of activity. So should prices change one way or the other dramatically we may pivoted from that but I feel very comfortable that that's what we're going to see towards the back half the year, we haven't given what a rig cadence would look like for next year, but assuming prices continue to.
Improve and we think over time, they will as those prices continue to see upward momentum and support looked for us to add additional activity that being said that we'll all be balanced with our leverage being forefront in our mind, we want to position the company such that we don't get too far out over.
Skis from a leverage perspective, and so balancing between the two will be what we are doing going forward.
Okay. That's helpful. I guess just.
Following up on the on the leverage obviously, you guys had a successful debt exchange here recently.
Just trying to get there if theres other future initiatives at the company to reduce debt I guess talk about spending within cash flow in the second half of the you're obviously that kind of more maintains debt are there other things that you guys might be looking at whether its future debt exchanges or other initiatives to potentially kind of reduced that debt over.
The next couple of years.
Sure Yes, good question.
We'll always be looking for opportunity to lower our leverage profile. If there are.
Options to do so that are accretive to our metrics as you recall, we were looking at an SMB de sale earlier in the year and.
Which would have materially changed our balance sheet.
That did not go through as we all know, but the benefits of that is that we keeping that asset helped push our low cost further down. So there are there are a good things to that so we are we always are looking at.
Strategic sales of non core assets and we'll continue to do that if we're able to put a package together again of noncore.
Assets that we think we can get fair value for that will be accretive to our metrics that will help de lever. The company then we'll consider that.
Going forward.
Okay. Thank you.
Thanks Leo.
Your next question comes from the lineup will Thompson from Barclays.
Hey, good morning.
I appreciate the detailed look under the Hood and all the cost initiatives.
It clearly seems like gives us more structural in nature.
But I want to ask one of the slides indicate the Daniels an active negotiation with service providers can you just give us a little sense on how its conversations are going and whether price concessions would be upside to the 2021 cost impact versus what you are kind of bacon and per second half a 20.
Sure. Yes. This is Matt I'll go ahead and start trying to feel that question.
We we provided on slide seven a bit of historical look at our performance.
Back to 2018 really from the spud to rig release as well as our completion stages per day really kind of deliberately to show a bit of a track record of really more of the structural efficiency gains with regard to our overall costs.
And if you think about this company's activity are that the majority of our activity was in fact, almost all of our activity was in Q1 and it stopped abruptly.
In Q2, as George alluded to in his portion of the scrip and so with the with the exception of some minor spillover with regard to.
A few completions that were done in the first couple of weeks of Q2 dominantly the costs that were reflective on that slide seven.
We are indicative of more structural changes.
The negotiations with service company providers.
Obviously.
Without tipping too much we feel very good about there being some additional upside.
Potential there to realize some cost savings on top of that we we of course consider those kinds of things in a go forward.
Look at that our business.
But for the purposes of planning and for the purposes of kind of.
Just stick into the fundamentals of blocking and tackling we really like to.
Focus on all the things that we can control and the things that we can change.
With our teams is that does that help you.
Good color. Thank you, Matt and then I guess as my follow up just to clarify on the base decline the improvement from to low Thirtys is that on a Boe basis and if if it is I mean, how much dealt there would that be for oil and then maybe.
To manage expectations in context, the full year production guidance. The fair to assume Fourq you will be below threeq levels, just want to understand sort of the cadence in light of the five dr. to be completed this quarter.
Yeah I appreciate the question there as well and thank you for acknowledging that we have given us some increased level of detail in this that's intentional we're trying to be more helpful for folks to get to a better look at the company and how we operate structurally going forward relative to the corporate decline those numbers I quoted were on a Boe basis. So.
Good about that is that controlling.
The I guess, if you will or commodity for the company and so thats, how we kind of think about things, we don't give quarterly guidance and so thats not something I think.
Going to weigh in on I think if you draw a line from where we stand today to the into our midpoint of our guidance ill give you a good feel for for how we're thinking of things. So I think thats the level of detail, we can kind of provide from accordingly.
Okay. Thank you guys.
Thanks.
Your next question comes from done Mackintosh with Johnson Rice.
Werent shop.
Quick question kind of on the Opex did you guys have mentioned pretty impressive improvements and like you said despite volumes kind of coming down.
That being said yeah. It does look like based on a full year guidance comes up a little bit in the back after the year kind of what's the driver there and then.
They are kind of get to mid point it looks like levels out around kind of five bucks is that kind of a good number to think about.
Going forward as well.
Sure I'll take a I'll touch on that and if I missed anything that can jump in I think if you look at the back half the year, obviously, our activity level has slowed and so our production will then also continued to decline a little bit weve added a little bit of activity and the fact that we've got some ducs that we are currently completing and weve.
And on starting up a rig in the fourth quarter, but that's not going to be fully enough activity to offset the decline. So from a unit cost perspective, you may have some increase in l. OE, but from a total dollar number we're still working on decreases.
Right Okay. Thanks.
Most of my other questions are answered so I appreciate it.
Great. Thanks, Doug.
At this time, we have no further questions.
This does conclude today's conference call you may disconnect at this time.
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