Q3 2020 Continental Resources Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Continental resources Inc. third quarter 2020, <unk> earnings Conference call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time should.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
As a reminder, this conference call is being recorded.
I would now like to turn the conference call over to Rory said Beano, Vice President of Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us today.
Welcome to today's earnings call will start today's call with remarks from Harold Hamm Executive Chairman.
Bill Barry Chief Executive Officer.
And Jack Stark, President and Chief operating Officer.
John Hart, Chief Financial Officer, and other members of management will be available during Q and a.
Today's call will contain forward looking statements that address projections assumptions and guidance.
Actual results may differ materially from those contained in forward looking statements. Please refer to the Companys FCC filings for additional information concerning these statements and risks.
In addition, continental does not undertake any obligation to update forward looking statements made on this call finally on the call well refer to certain non-GAAP financial measures for a reconciliation of these measures to generally accepted accounting principles. Please refer to the updated investor.
Her presentation, that's been posted on the company's website at Www Dot seal, our dotcom with that I will turn the call over to Mr. Hamm Harold Yeah. Thank you Lori and good morning, everyone.
Under investment in the oil and gas industry has created a huge opportunity for today's Investor group.
Crude oil and natural gas inventories have been and continue to be drawn down worldwide you had remain higher than normal levels at this time.
The industry consolidation within our sector will continue to drive capital discipline has additional supplies are not needed at this time I.
I believe the winners in our sector will produce low cost operation and the most capital efficient barrels to whoever is significant and consistent free cash flow.
We deliver on both of those and that is why would you invest in commodities casino resorts should be your number one choice.
We are undervalued and I believe we have the best value in our sector.
We have industry, leading capital efficiency and lowest cost leadership amongst your peers.
Our technological and operational expertise continues to drive these efficiencies.
We have a large production base from our high quality assets with dominant position in both the Bakken and Oklahoma.
Our assets are supportive commodity optionality and gives us the capability of pivoting quickly and nimbly as demonstrated this quarter to take advantage of higher natural gas prices and Jackson and others will talk about that we continue we grow.
Actively manager.
Business with a long term view on generating shareholder value regardless of the price environment. This will be the fifth consecutive year of positive free cash flow for our company.
We have unmatched shareholder alignment, we are always delivering innovative entrepreneurship across all of our teams and all of our operations.
There was possibly fueling a better world through E.S.G. stewardship, and our company.
Record best safety experience.
We have a seasoned leadership team are sustainable free cash flow provides a direct path to further debt reduction and return of capital to shareholders.
Despite recent volatility from demand concerns of Crystal Cove, and we remain optimistic on our ability to produce considerable sustainable shareholder value well into the future.
Also I wanted to provide an update regarding American Gulf Coast select the Ats passports continues to make great progress on technical recommendations and best practices around standardizing, a new U.S. Gulf coast financial and physical market for crude oil.
And the third quarter, we saw an important announcement from Magellan midstream partners, which allow for crude oil from third party pipelines to access Magellan's East Houston terminal, allowing for additional access to Gulf coast refineries and international waterborne market.
This is a natural evolution for the Houston crude oil.
Providing transparency reliability and liquidity required big competitive in global oil markets and there's more to come.
Finally, I want to provide my thoughts on the current state of the election.
Election process is not final and we locked you are waiting to see the results when all legal votes are counted.
Energy jobs and energy security became the center this election and motivated many voters and they swing states.
Believes that had the Democrats position to eliminate oil and gas they called fracking has that been known at the commencement of early voting the outcome would have swung further to president Trump I.
Ironically is with Joe Biden, who help craft the ill fated Cardmatch crashes energy plan and as people use active 1977, which you also voted for if you'll remember that fuel USAC mandated mandated 100% coal usage for let Christi general.
Ration.
Even as he is predicted this actress environmental damage and have prohibit the use of clean burning natural gas at the same time and some movie remember perhaps.
Perhaps the acid rain that was called.
The reality is natural gas usage has dramatically improved as you as CEO to levels over the last three decades have declined to the point, where we achieved that to 2030 pairs of core targets a decade early in 2020.
Many energy supporting Candice did wellness selection and we will have several champions back in the Senate and the house.
Congressional district, five and Oklahoma City was a Prime example of energy voting on the importance of energy to local economies I believe president Trump supportive energy jobs and focus on economic prosperity bolstered his supporters Americans care about the economy and the economic growth that will be powered by American energy.
No matter the final outcome continental is well positioned to be a leader and powering our nation's recovery, while we wait to see the final results of the presidential election, the Senate will more than likely remain in the hands Republican leadership and the house Republican representation will be strengthened this.
This should serve as a backstop playing legislation that would be harmful for us oil and gas producers I will now turn the call over to Bill Barry.
Thank you Carol and good morning, everyone.
As I share with you my prepared remarks, I wanted to preface by saying by highlighting five main takeaways.
Were seeing the best year ever for our HFC and I guess Jay performance.
We had a very strong third quarter delivering $258 million of free cash flow.
We are highly focused on free cash flow debt reduction and continued shareholder capital returns.
Currently debt reduction is our first priority.
We continue to maintain our low cost leadership position.
Our assets provide commodity optionality to position ourselves to benefit from relative movements and strip prices between oil and gas.
So let me discuss these in a little more detail.
Continental is on track to deliver outstanding HSC and it yesterday performance in 2020, we're on pace to deliver our best year on safety performance ever in spite of significant industry and pandemic disruptions.
This is attributable to the continued and exceptional efforts of our teams camp.
Okay. Thank him enough for all their work and their outstanding performance in these areas.
Our gas capture has continued to be a focus area for us and currently is an excess of 99% which is peer leading.
We're on track to deliver our fifth consecutive year of positive free cash flow.
The leadership position versus our peers.
Our culture is defined by our low cost operations in the third quarter as you can see on slide four we again delivered low cost industry leadership.
Hi, although he previously was $3.19 for the quarter below our annual guidance even.
Even as we were producing for part of the quarter at curtailed rates.
This reflects the efficient nature of our assets and operations.
Our cash DNA per BOE was also below annual initial guides and settled dollar for.
Based on these excellent results were lowering the upper range of our guidance for elderly and test you need for the year to $3.50 to 375 and $1.10 to $1.30 respectively.
We delivered lower capital expenditures in the third quarter versus second quarter as noted on slide six third quarter Capex was in line with our internal estimates and we are well positioned to deliver full year annual capex trending at about 1.2 billion guidance level.
We restored all previously deferred oil production that was curtailed during the second quarter.
Teams did an exceptional job turning all wells back online.
Our 57% oil cut in the third quarter is above the guidance. We provided you last quarter, suggesting it would be closer to 56%.
Reflecting the return of our oil wells.
Third quarter oil and total production figures both exceeded consensus estimates.
We're on track to deliver our full year 2020 production guidance of 155 to 165000 barrels of oil per day, and 800 to 820 million cubic feet per day.
We have also updated and tightened our December exit rate production to between 315 and 325000 Boe per day.
This sets us up nicely for improvements in both production and free cash flow in the second half of 2020, underscoring the strength of our assets and operations.
For 2021, we're projecting a 65% to 75% of cash flows from operations reinvestment rate.
Our sustainable shareholder value or return continues with our ability to maximize free cash flow to pay down debt.
This will be driven by capital efficiency capital discipline, low cost leadership, and the commodity optionality afforded us by our oil and gas assets.
Based on this we wanted to share with you some projections on free cash flow capex and debt targets, which you'll find on slide seven.
We're now you may have questions regarding the specific inputs of 2021 income.
Including rig counts will count et cetera, as we are still in the process of finalizing operational detail, we will provide that level of information and more at the usual time early next year.
As part of this.
We're projecting $1.2 billion to $1.3 billion of Capex and 2021, where.
We are projecting a low single digit production growth forecast year over year for 2021, with a cash flow breakeven of $32 WT.
We've talked about moderating growth for the past couple of years and we have consistently stated it is important to overproduce into an oversupplied market.
And this is even more important today.
The cornerstone of our 2021 plan is maximizing free cash flow to pay down debt.
This has been a consistent message for us for several years and we have been as we have been free cash flow positive since 2016.
We expect to deliver significant organic free cash flow and are projecting approximately 400 million at $40 and $650 million at $45 WT with free cash flow yield ranging from 8% to 14%.
We believe this will be top tier performance in the industry.
Our main priority and 2021 will be debt Paydown, we believe we will be reaching $5 billion or below of total debt by year end 2021.
This would equate to approximately two times total debt to EBITDA at $45 oil.
While our near term goal is focused on approaching $4 billion or below by year end 2022 or 2023.
Based on current commodity prices, we are ultimately projecting total debt of $2 billion to $3 billion. We believe this has to be part of a strong broad program of capital returns to shareholders.
Our remind investors that while our dividend has been suspended but not terminated both our shareholders and our board are very supportive of bringing the dividend that at the appropriate time.
After our debt is reduced.
We also wanted to highlight that our assets provide optionality to capitalize on increasing gas prices in 2021.
And we already have this benefit we have a deep rich set of both oil and gas inventory across the Bakken and Oklahoma that allows us to be nimble and responsive to changes in commodity price fundamentals.
Not only can we shift capital between the Bakken and Oklahoma, but within Oklahoma, We can shift between all air or das to your projects.
This provides an inherent advantage to continental and we are already capturing this with hedges on the strengthening gas curve next year.
We expect to capitalize on increasing gas prices in 2021, while deferring some of our strong oil projects for higher price opportunities until the back half of 2021.
As shown on slide 11, we saw this optionality in may and shifted our Oklahoma drilling rigs to gas.
We currently have 202 million cubic feet per day hedged in 2021 with two thirds, representing collars with an weighted average floor of about 267, and a weighted average ceiling price of 344.
Oklahoma gas wells can deliver over 50% rate of return at $3 Henry hub, thanks to our low cost operations.
We also have direct access to multiple premium markets from these Oklahoma assets.
We have the inventory the teams and the capabilities without transport bottlenecks to easily pursue either commodity as price fundamentals ward.
Finally, I did want to highlight the latest update regarding a potential accelerator for debt Paydown, which is a partial monetization of our water infrastructure assets.
With strategic water infrastructure cost and Bakken and Oklahoma, We believe our unique water opportunity as a differentiator.
We have executed a nonbinding term sheet with Sixthree, a 47 billion dollar global investment firm.
With a lot of experience in energy and infrastructure partnerships.
On this opportunity for a significant non controlling interest in our water infrastructure assets.
Proceeds of this pending transaction will be earmarked for accelerated debt reduction.
We are currently working with fixed rate regarding definitive documents and are targeting consummation of the transaction.
Later, this year or early 2021.
This debt reduction accelerator would be in addition to the organic debt reduction schedule outlined earlier in my comments and is not reflected in any of our slides.
We have an extremely talented and dedicated team at continental and they are absolutely confident in our ability to maximize cash flow deliver low cost operations and generate sustainable shareholder value.
Our teams will continue operating from a position of strength and we commend them for their ingenuity discipline and expertise.
The cornerstone of our 2021 plan as maximizing free cash flow driven by capital disciplined appear leading cost profile. Thanks.
Commodity optionality afforded by our assets.
The output of this program is impressive and is underscored by strong free cash flow generation.
I'd now like to turn the call over to Jack.
Thanks, Bill and good morning, everyone.
I want to start out by thanking our employees for their hard work and dedication that is established continental as a low cost leader among our oil weighted peers.
Innovations from our employees continue to be implementing every day to lower costs and increased capital efficiencies across all aspects of the business, while keeping safety job warm.
As Bill said all wells are back on production.
This includes 21 speak in 42, Bakken wells that were turned to production during the third quarter.
These third quarter wells are producing inline with expectations are moving.
I will point out that 77% of the production from new wells in Scoop was or will.
We have completed 52 wells in Oklahoma This year feeding third quarter, primarily targeting the oil and condensate windows of steep approximately 90% of these wells are Woodford producers in springboard. One is removed from the Springer to the Woodford reservoir in phase two of our redevelopment.
All total we have completed 78 Woodford producers in springboard one in this chart on slide nine illustrates the average Woodford well performance is tracking right on top when you type curve, we published one year ago.
This highlights how well our teams know their assets in Oklahoma and reinforces the fact that we deliver what we say.
The second chart on slide nine shows that we are seeing improved performance on a unit basis compared to legacy units due to continued improvements in completion design.
Combined with the 24% decrease in completed well costs achieved over the last two years okay.
Capital efficiencies from our Oklahoma operations have never been better.
Currently springboard one is approximately 50% developed.
We recently closed a very strategic acquisition in state that added approximately 19500 net acres in up to 185 high quality wells to our inventory that are oil weighted in have demonstrated returns of 35% to 50% at current strip prices.
This is a great example of the strategic bolt on acquisitions, we target in our core operating areas. Most of these properties are located in the spring one three area, where we are targeting multimillion reservoirs, including Woodford shipping more in Springer reservoirs that are all prudent.
Continental country currently controls approximately 33000 net acres in switchboard three covering an area approximately 76 square miles in size and approximately 80% of the.
The acreage is HBP.
We estimate that up to 260 operated wells to be drilled in the Sycamore and Woodford reservoirs alone and an average working interest of 70%.
No change area is oil weighted and the performance of the wells competes head to head with our springboard one into areas.
For perspective, the charts on slide 10 shows the impressive performance we've seen from four recently completed Woodford and Sycamore delineation wells in our screen door three in four areas.
These charges include two Woodford into Sycamore producers in 60% to 70% of the production is oil.
Names in locations have been withheld for competitive reasons, which you can see these are outstanding producers.
Currently Larson these wells range from about 1.5 to 2.5 million Boe per well is.
What we've seen in springboard, one our capital efficiencies will benefit greatly from the economy of scale as we develop these projects.
Let's turn to our growing Oklahoma assets is that they provide great optionality to both oil and gas is shown on slide 11, approximately 70% of our rigs were focused on oil weighted assets in 2019.
You say quarter or 2020, we strategically shifted our rigs to more gas weighted assets in anticipation of the run up in natural gas prices in supplies predictably weight.
Yes prices it almost doubled since making a decision and over the last few weeks, we've turned 20, new wells to production and combine a producing approximately 175 million cubic feet of gas per day, and 10700 barrels of oil per day on flow back.
These rates are still climbing and we expect to reach in excess of 250 million cubic feet of gas per day, as well as continuing to clean up.
These prolific gas producing wells are benefiting from today's strong gas prices and are expected to deliver 50% rates of return and $3 gas.
Given the current market dynamics, we anticipate natural gas prices will continue to strengthen in 2021 and 22, we plan to keep our Oklahoma are exposed to some gas weighted wells for the near future.
Operationally slide eight shows that efficiencies have driven our completed well cost in the Bakken and Oklahoma down 14, 24%, respectively. Since 2018.
The majority of the cost savings that occurred this year in 70% to 80% of these cost reductions are structural in nature.
The Big news for the quarter is that our Bakken drilling cost dropped below $2 million for the first time. This is 20% below our average cost in 2019 and is driven by the structural changes in techniques Indesign achieved another 3.4 days off of our drill times today, our routine spud to TD is 11 days and we believe we are unattractive.
She is $6.9 million total completed well cost in the near future.
This is an all in cost, including Kool facilities and artificial lift in Oklahoma. We are targeting similar results with an all in well cost of $8.9 million.
Looking ahead, we plan to continue drilling with two rigs in the Bakken and three rigs in Oklahoma through year end Bakken completions will resume with one stim crew in late November and two additional crews by early December.
Company wide, we expect up to 46 gross operated wells will be turned to production by year end all of which have been stimulated and are being prepared to flow now.
At year end, we expect to have approximately 140 Ducs you know 145 wells in progress.
With that we're ready to begin to accumulate section of our call and I will turn the call back over to the operator.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
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To withdraw your question. Please press Star then too.
Please limit yourself to one question and one follow up if you have further questions you may reenter the question queue.
This time, we will pause momentarily to assemble our roster.
And our first question will come from Doug <unk> of Bank of America. Please go ahead.
Okay.
Good morning. This is John added on for Doug Leggate.
Our first question is on the corporate breakeven.
And.
If we went back to your commentary during the second quarter.
Seem to cash flow breakeven was in the upper thirtys to low fortys.
When we look at your slide number seven where.
Where are you, suggesting you can generate $200 million of free cash flow of 35. It seems that youre breakeven has fallen let's say maybe to 32.
Could you explain sort of the change you know during between the second quarter in the third quarter, and it's a lower sustaining a sustainable breakeven.
Sustainable on a multiyear basis.
I mean, the breakevens of the factor of the capital you choose to invest we have a very low maintenance cost relative to peers, we have exceptionally well performing assets, where we're benefiting from a higher gas prices as well on on that portion of the streams and so we are so as we look to.
21 will come out with full formal guidance on that in February we've given you some indicators now yes.
Yes, we do see the breakeven is roughly $32 next year, Yeah, I don't think Thats too dissimilar from where we were before we were indicating kind of in the mid thirtys, but.
But it depends on the capital program at any given time, and where you're putting those assets and the productivity. Additionally, as you've seen.
We've had substantial improvement in well cost and we're projecting obviously to continue seeing more as Jack alluded to earlier. So I think we're extremely well positioned not only for next year, but for the balance of this year.
We've got a proven track history 258 million of free cash flow in the third quarters just.
Just a an appetizer.
And then for a follow up question I know recognizing that you may be limited in what you can say, it's a given that you just entered a nine non binding agreement.
Do you still believe in the 1 billion dollar value for the over 1 billion dollar value for the water business and.
And if he were to sell a portion of that how much might yourself.
And what how do you how should we think about the impact to maybe opex or to your well costs from a partial sale.
Yeah, we're not obvious reasons not able to get into the specificity of the agreement right now we're in the process of definitive definitive documentation and so that will be rolling out towards the end of the year or first of next year. What I can say is that when you look to the valuations in the past those valuations that we have described were predicated on.
On that.
$55 mid cycle oil prices and associated drilling programs. So obviously thats been attenuated somewhat anticipation is that that will grow back at that point in time at some point in time will be actually back at that kind of mid cycle pricing in mid cycle drilling activity.
So, but right now we're not not able to share with you or any of the details of the contract for obvious reasons on the operating cost impacted you asked about we've talked about that in previous quarters. So two points on that you won't notice it's within our guidance ranges and the second part of that is it means it's very low it's low says.
Angle digit pennies per BOE a day, so it it's not a dramatic impact the proceeds you'll notice because they're going to go directly to debt and that's going to be a significant it and extremely beneficial impact.
Hey, Thank you very much.
It's a good quarter.
Thank you.
Thank you.
The next question comes from Derrick Whitfield of Stifel. Please go ahead.
Thanks, and good morning all.
Derek morning.
Well probably.
Probably starting with just a kind of the strategy tidbit or slight strategy pivot into gas.
Cash flow optimization. It is certainly a great business. If you can hedge it as you are.
The biggest concern I've heard from investors is that oil could materially decline and you're 2021 outlook.
As I read and listen to your comments, it's certainly projecting more balance tone with the continued activity in the Bakken and the potential return to oil weighted activity in Oklahoma the second half.
That to us implies a modestly.
Got to modestly down well profile is that a fair read.
Yeah, we're really not given oil or gas or specific guidance at this point in time.
For the main reason is that as you as you described the gas the fundamentals are lot stronger the all the fundamentals are not what we think they ultimately we brought out a significant oil inventory that we will bring back on when the fundamental start strengthening so if that strengthening happens in beginning of the year will shift all of it starts.
Happening later in the year, we'll we'll begin on the gas is still strong we shift into the gas and so the focus you see in there is really cash flow focus and I think you can you can see that describe what Jack was highlighting yeah, we're bringing on equivalent of about over 30000, but you always have gas we intentionally did.
That by moving rigs from oil to gas. So we could have kept drilling a hole, but from a cash flow optimization from a capital efficiency is that makes no sense to do that and so what you'll see is that optionality is what we're we're talking about is really really important to this company and the differentiation of this company because with that Optionality. We can go.
Drill gas wells or we can drill more wells, depending on what the what the strip is showing us and using hedged to be able to make sure. We're assured of getting those prices.
Great and as my follow up I wanted to focus on basic fundamentals for Oklahoma and in addition to strengthening Henry hub price.
Is it also reasonable to expect tighter diffs in light of recent pipeline additions and the declining associated gas profile.
Yeah, I think you know of course, you saw that the netback prices.
Improving from Q2 Q3 from 12 cents to 98 cents and that was.
As an expectation we will continue to see that that type of strengthening rather than chasing her role as vice president of our marketing and might have Aaron comment also on the deficit in particular, yes, Derek I think for the reasons that you mentioned, we would expect a stronger differentials as we we continued throughout the end of this year and into next as production in Oklahoma continues to decline.
And we're probably 80% to 85% state wide off the peak in 2019 and you know we were we were a bit a factor of the new pipeline coming in service.
Earlier this year as well so that continued lengthened capacity relative to two supply is going to continue to remain structural for differentials.
That's great very helpful. Thanks, guys.
Thanks, Dave.
The next question comes from Brad Heffern of RBC capital markets. Please go ahead.
Hi, Good morning, everyone I'm just as another follow on question on on the water business, obviously, I don't want to be down on it too much but can you verify that.
The sort of debt target tend to walk a that you gave on slide seven do not include the potential water sale yeah.
Yeah, Thanks for bringing that up Brad I put it in the script, but also one of the I. Appreciate you are you asking the question because I do want to highlight that none of those slides none of those projections of debt.
Have included any of the contribution of water Co. assets band.
Focused on snow this in the debt level, we will as I as I stated you know.
We've earmarked those for reducing the debt.
What you're seeing in that schedule that weve highlighted where were going down to $4 billion of of total debt and then going below that.
Thats all from our organic activities none of that is from any type of a dependency on the on the water Co. and this will be an accelerator. So the proceeds we receive from Watco were reduced that even further at a more rapid pace than whether on those slides.
Okay. Thank you for that.
And then on the Bakken you know, it's been a little bit more than a year. Since you guys gave does does very wide step out results. I was wondering if you could just give an update on.
Whether you perceived more step out since then and maybe just broader commentary on how you see.
The core inventory in the Bakken shaping up at this point.
You bet Oh, we are in hand.
Completing some wells that are step outs further to the south following up to our previous successes and so we'll have some of those results to talk about here in the fourth quarter.
Thank you and then just on.
Yeah go ahead.
It's safe to say, though that.
Basically what we probably need for sort of step out.
As basically proven out across boy.
Yeah.
It's a good point Harold I'm you know we are used to me where your question. Here is are we still pleased with the results. We're seeing is in these step outs in yes, we definitely are and we see that as you know just continuing to be a growing part of our portfolio.
Okay. Thank you.
The next question comes from Neal Dingmann of true Securities. Please go ahead.
Hi, Good morning, all this it made sense and offered Neil Thanks for taking my questions.
So my first question is with regards to your latest Scoop acquisition. So it looks like the acquisition might be quite far south in the play. So I'm wondering if you could just discuss your thoughts on that part of the scoop versus a more central or northern area.
Well, yeah. It's a it's a you know you are correct in the sense, it's a little bit further south but.
What you're seeing down in this area is you know we're seeing more I guess I would say more oil weighted.
HM.
No. We did performance from the wells down in this area I think a you know goes to four wells that we showed you there.
A great example of the type of performance, you're seeing and as you get down South we're seeing that we're have multiple reservoirs.
Reservoirs, there's multiple zones within those reservoirs that we are targeting in the Sycamore we have.
A couple of targets in there that we have and also in the Woodford. It gets a we also see that movie ticketing in this area.
And had two targets in there so we do have multiple reservoirs.
With multiple targets within them.
And of course, we also see the Springer being a component in this area as well so it is a well rich very.
I guess I would say, it's an area that we're we're pleased with and working to continue to build.
Build our position there.
Great that's super helpful.
It's clear that all up I'm, just hoping you can provide your thoughts on though.
Settlements. So it seems like there was some incrementally negative press surrounding the oral arguments that took place.
Our fuels or this week. So I'm just wondering if your thoughts around the eventual outcome.
That changed at all.
And <unk>.
Unfortunately, I think you broke up just a little bit that would you mind repeating that night.
Oh, Yeah no problem. So I was just wondering if you provide your additional thoughts on the latest Dakota access development. It seems like there was negative press.
That came out so I know, where our court appeals or this week. So just wondering if your thoughts at all on that.
Yeah on the Apple Vicki.
Hopefully you would have seen the transfers comments yesterday and they came out I'm feeling very strong that there are legal cases is still appropriate they've got a strong case their position is real wall will prevail in that.
They do not expect that Apple would be shutdown.
Okay, Great I appreciate the commentary thanks, guys.
Hi, Ken.
The next question comes from.
All right of JP Morgan. Please go ahead.
Hey, good morning, gentlemen, I was wondering if you could shed a bit more of a light on on what looks to be a pretty dynamic capital allocation program as we think about next year.
And and I know, it's early you haven't given us your official guide I'm just I'm just trying to think about as we look to model next year.
How you know today, you're thinking about kind of capital allocation between the north and the south.
And you know where the.
Where some of the capital that you're using on some of the gas opportunities where.
Where's that being allocated from.
So if you look at the the capital problem, we've got going on right now, it's we've got three rigs in the south and to the north.
So no there.
There is a possibility that we may continue with that that's about the same rig pace will be spent utilizing and 2021.
We may move some things around depending on what the commodity prices are doing.
But we've been real pleased with our movement a night.
And then as you everyone or Carl I'm sure. The gas prices were in the dollar 60 range or so at that point in time, and then we ended up moving a lot of rigs into the gas area to start.
Accessing.
The what we thought was going to be a stronger fundamentals on gas that's proven out offtake for gas is there Jane mentioned earlier in the in Oklahoma is real strong we've got flexibility and access to good markets. So I know that's not a lot of specificity with what you really want to understand as far as modeling I'm you know, whether we're going to be drilling in the north.
At the South but you could almost in your models look at what's your perspective is for the stronger commodity price and.
And that's where we're going to be drilling.
Got it got it and maybe one for John Hart Yeah.
I understand that you are negotiating here and maybe not wanting to provide too many details what six street here, but what are some of the broader.
Jack is clearly debt reduction is something that you're thinking about but what are some of the the pushes and pulls as we think about you getting to the finish line and an agreement there.
Well it isn't a group it is a situation where we can't disclose anymore than than we have will you know we did give some indications of timing on that so we're looking to the future of having something in the not too distant future to announce on that more I think there are lot of factors. These are assets that are critical to our ongoing operation.
Tons and growth within the basins were assets that we can grow substantially in the value of that and so they are very important to asset pool.
Entering with someone in a fun.
Financial capacity, you know that those proceeds will be earmarked towards immediate near term a debt reduction and accelerate ration of that as compared to what we've got modeled in the strip, but we need to get across the finish line first you know once we achieve that will come out with more information for you at that time.
So rather we anticipate put all the slides together that showed the cash flow show debt reduction without taking any credit for any type of water co. transaction, because as you know in any of these things there's always possibility. They don't work out and we want to make sure that there is a path to the debt targets that we have in front of us and that's.
Why those are the slides are an important one and as John just mentioned this will be in a celebrate ill just move it more money into that and bring those debt targets ahead on our schedule, our cash flow generation and our debt reduction so without doing anything on water co. are extremely impressive numbers. This is the fifth consecutive.
This year, we've generated free cash flow, how we've given you indication to about 2021, obviously the cash flow yield on that is dramatic at the top end of a peer group I mean being the competes across industries and with or in being able to do something with water to only accelerate.
Rates and amplifies that so we're very well positioned again $258 million of free cash flow.
In the midst of a day and ongoing patent pandemic here in the third quarter I think that's very impressive a lot of companies have hopes and aspirations. We have reality low cost in strong generation capacity with a deep inventory.
And that next year free cash flow guide is what 400 million at 40 is that right.
Yeah. We gave you some ranges on that 400 million at 4600 50 million at 45 200 million at 35, a breakeven of a 32. Two we also did something we haven't done before and we gave you is actually a reinvestment a range of 65% to 75%.
So I think we've given you a lot of variables there what what we hope you glean from that is just what our capacity is and our ability our job is to generate regardless of commodity pricing and a we've got a proven history of being able to do that.
Excellent very real glad worry you can see some of those details in his figures they'd John provided on slide seven of the deck as well, yes, I did I didn't catch that.
Slide seven certainly one to focus on slide four comparing to a broader group slide five you know the the capital efficiency and cost leadership of relative and then slide seven there there's a lot in there to get your.
Hands around and you know, it's all third party data that is a very viable it's true it's very strong.
Great gentlemen, thank you for that.
Thank you Ray good to talk to you.
The next question comes from Brian singer of Goldman Sachs. Please go ahead.
Thank you good morning.
You want to run like one or two I wanted to ask on the production trajectory. Because there is I think a lot of moving pieces that are that that that you can talk to you in your press release it.
It seems like there's a big step up coming here in the fourth quarter with strong volumes that you're highlighting on the natural gas side in Oklahoma and then you also talked about mid single digits low to low single digit production growth on a year on year averaged 2021 that would appear to imply a declining trajectory on a b a day basis I'm over there.
Course of next year, but I wondered if you could just kind of comment on how you see that production trajectory for both oil and natural gas sequentially over the next few quarters.
Yeah, we will come out with a lot more on 21 in February we didn't give you indications that we're projecting a low single digit growth next year year over year.
Exit to exit we'll come out with that in February I'm, not particularly worried about a a decline or anything of that nature. A significant one is I think you said you.
You do see variability between quarter to quarter, just depending on the timing of when different projects are coming on and obviously, we focus on very sizeable projects of scale and you can bring on a lot of volume in any given period of time. So there's normal fluctuation in there I think we feel good about 21.
Particularly the cash flow generation and the depth and quality of inventory that underlies that in an old gas and condensate nature to where we've done a.
Optimized cash flows depending on whatever the particular market is so yeah, I think we're set up well for 21 yeah.
The other the other point on that 250 million that Jack talked about that we're bringing on we're wrapping into that so it's not instantaneous 250 million to go into your into your calculus there.
Great. Thanks, and then my follow up is on the inventory on the inventory side can you just talk about development and in a in the Bakken in particular since that sometimes a it is a is not necessarily has talked about that in terms of enhancing inventory either within the core.
Or pushing out beyond.
Beyond the core the core.
Yeah.
Thanks, Brian you know as we've talked about before we do have some tests going on that are you know basically confirmations outside.
In the south and the extension areas and we are.
I'm pleased with the initial results were seeing there, but you know as you know from from an inventory standpoint, maybe we just step back and take a look and just you know if you look at our inventory as a company.
You know it is capable of growing our production in a 5% to 6% compounded annual growth rate for the next 10 years and.
And the inventory that we've got schedule you know to achieve this growth through the first five years represents about a third of our inventory globally and delivers a 30% to 50% rate of return at $40 and $50 W.T.I., respectively. So you know you know in well could be over these five years right.
Now it seems like you could say beverage around 55% so.
This is a something I think really should be pointed out is that this is a well defined inventory.
Now with proven reservoirs with demonstrated well density and its not assume news you know this is our our assets are we know where else. It's well as you saw you know from just say the resulting in our springboard one area I mean, two years ago, we predicted and anticipated good performance of the Woodford wells.
And you can see our there's great follow through there. So point there is is that we really are.
Understand our assets and were not estimating that we had X density or X number of reservoirs that will produce we know these reservoirs and that is really key in probably a differentiator and a lot of ways bar inventory from others in.
And the fact that it is very well known and that's why our performance year to year over year and quarter over quarter from our assets is very very repeatable or so and predictable in our in our loan production performance guidance and also and obviously in a cash flow. So.
Anyways.
I I, just think that that maybe gives you a better broader perspective of our inventory in and you know in in in Oklahoma I have to say you know we added on this nice bolt on acquisition. We told we've always said in knees.
In times like these we find that this is an opportune time for us to grow and we'd like to do it through bolt ons and obviously, we've done that here this quarter.
We also added some smaller bolt on earlier this year, you know in over and above this.
You know this acquisition, we mentioned here of 19500, we've actually in Oklahoma, but almost that much more acreage basically doubled that.
Adding by adding almost another 20000 acres in Oklahoma This year doing it really pretty much under the radar, but getting it in core areas of our operations and so I.
I really think that this is just just know that we're continuing to build our inventory in our core areas and and we see that is just you.
You know the opportunities that are always show themselves in times like these so we're really pleased with where our inventory is and where its going and Oh.
I'll I'll leave it at that thanks.
Thank you.
The next question comes from Joseph Mackay of Wells Fargo. Please go ahead.
Hi, guys. This is Joe on for <unk>.
No we got some thoughts around the election.
Opening remarks, but could you just give a little more detail around how you're thinking about.
The outlook for the regulatory environment moving forward, given what we know right now.
Yeah, you know that's a yeah the way the damn sometimes occupied during the last mass Craig Obama administration and.
Can we.
So for DAF 5000 cuts.
We were able to survive it.
Fight them all the yeah with the.
Legislation and the whole mouth best we can.
And thank goodness, that's not provide control centers add to the house representation.
So well get that the game with the plan again.
A piano hold them at Bay so.
Yes, we will have a work cut out if it goes away and Oh, but you know we were used to play in that game and.
You know that it will be up to us again to to do that again the good thing that is.
Like I talked about earlier earlier I think everybody you know very strong support.
Turned out because.
The.
The fact that the.
Democrats, you know want to handle on gas nobody wants to do that thereby realizes that.
This is a very very important continental lucky we have very low federal exposure.
Yeah, that's the 7% or something like that and.
So yeah, we're not going to be fine in the game, but the problem like other people might be.
But anyway, that's why I say good question no. Thank you.
Got it. Thanks, and then you guys you mentioned the more constructive outlook for the natural gas market can you just provide some quick thoughts around how you see.
Yeah right.
Hi, My question was how do we see in jail. So was that the question.
Yes.
Yeah. This is Aaron Chang I think similar to the crude oil appreciation that we've seen from the second quarter. We've seen that we've seen that same appreciation or NGL pricing realizations as we move into the third quarter and would expect to continue to increase through the end of the year and into a into 2021.
More bad you know third.
NGL so what's your guess brand in Oklahoma is that correct.
That's that's our acreage position in Oklahoma is about a third condensate a third dry gas and.
Third a little earlier that condensate is a very rich condensate to the NGL uplift on that can be very significant to our cash flows and obviously the returns and et cetera. So we've got a very valuable it inventory position and we've got a lot of good commodity optionality as we talked about on the call.
Thank you.
Thanks.
The next question comes from GE Wang of Barclays. Please go ahead.
Hi, Good morning, everyone. This is Joe anyway, thanks for taking my questions.
I guess my question is really just on slide 10, and we saw the disclosure on screen born three in things like four and we're wondering maybe if you could talk a little more broadly about any quality differences between spring Barnum line and then the subsequent framework in terms of oil cut and consistent.
I see and it looks like the well results that you provided on slide 10, our very oily, but we know that it's just a limited subset. Thank you.
Right well I think what you can see there is a type curve. We've got on you know slide 10 comes directly from Spring Board, one and you can see these wasn't performing right in line actually outperforming that curve and so as far as any differences in <unk>.
Contrast between the two I mean, it we're actually seeing this area right now in these delineation wells that type the dash line. There that 1.5, that's a U curve. So you'd expect these wells needed to produce a bit more but these are really outperforming that that the unit type curve.
By a significant margin and so we're very pleased with the results and I think it has to do with.
No reservoir quality in this area and.
So like all of these areas are just I'm in a very good performing areas we have.
No concerns at all and in fact degree pleased with this one.
Please you know combined we managed to put together about 40000 additional acres. Indeed these areas are pretty much under the radar.
During the last year.
Okay, great. Thank you very much.
Thank you.
The next question comes from Noel Parks, Oh, Coker and Palmer. Please go ahead.
Good morning.
Hello.
Morning.
I was interested in hearing.
Hearing a little bit more about the there's a bolt on acquisition you you did in the Scoop Springer and.
Just curious about the the acreage that you bought.
How long have the prior owner you know bad in the play and I was just curious whether they had been actively drilling ahead.
Sort of or.
Or had starting to collect the acreage and I'm also wondering if Bob I think you said, it's right in proximity to stuff you already hold I was wondering if this is acreage that was on your radar screen way back when you were sort of building. The initial scoop position backing I guess, we're talking 2000 club that kinda branches real familiar acreage to another words.
Well I'll take that now that this is a player it's been an industry for a good while and weve dealt with them extensively [noise].
Overtime, and so that they they weren't notify and.
And so.
Anyway [noise] we've.
We've had a good relationship with them.
And and so it is.
Have they been actively working it or or had they.
Hi, capital constraints, and so forth and now they're an active buyer.
Oh, they are actually we're still an active player and I I guess I'm curious then <unk> what are the process of getting the valuation was like whether it was.
Why the easier thing is true.
Deal with upfront or did it did take a while to sort of hit the bid ask on on that.
Right.
Hi, it's done by way of del Webb longtime and and so you know normal.
No no process. Thank you.
Okay, I I guess, just what I'm trying to get a little bit as you know we've all been talking about the the obvious case for consolidation for so long so and maybe you can just talk more generally about what you're seeing in the in the scoop up I'm just trying to get at startup why now and what do you do you think seeing this.
Deal might make a few other people.
I think a little more seriously about about selling.
Well, we've been you know we've been active in the area for a while so this is a combination of acreage from there.
It's still a player with other players as well.
As Jack was highlighting so its not just one event that we've been picking up acreage in this area is something that's been going on ever since we got in the school. So you know it really gets down to understanding your your geology in understanding the geography, and then making sure you're in the right spot some.
Sometimes different people have different perspectives and so you know this is something that we've been pursuing for quite some time is continuing to increase our ownership in the area that we know is a geologically good and so it's not something that just happened over the last one since oh they merger activity.
Yeah, I agree Bill I I mean, this is just standard operating procedure for us. If we went back in time you find that we do see each year and a these are just continued bolt ons and strategic moves that we make just to continue to bolster our position in the core areas that.
We are we like and a good geologic reasons and performance reasons why would it.
Yeah, I'm I'm a below Jack Smith, just because he made a really good point. This is something that we do with the strength of the company here. We built this company on organic developments that are we are we have really capabilities in that space and so we're always looking you know with our geoscience team, where we should be going to exit or whether it's possible to what we have or maybe I outlined.
Different areas. So so that the organic growth is just part of who we are part of our DNA.
Hi, techs minimal integration to.
Make it happen.
Right It dovetails right into our existing operations they won.
This concludes our question and answer session I would like to turn the conference back over to Rory <unk> for any closing remarks.
Thank you again for everyone joining us today and please reach out to the IR team for with any additional questions I would like to turn the call over to Mr. Hamm for some closing remarks, yeah. Thanks, Rory My Hot hat is off to a bill and his team for their great execution and recurring 90, 597% of our.
Workforce to the workstation beginning in early May and.
Aligns them to perform with this very highest level [noise], taking advantage of existing opportunities. During this awful worldwide pandemic.
Thanks to all continental great workforce, I know that many of these sacrifice a lot have a good day and defend our third quarter call.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.