Q3 2020 WPX Energy Inc Earnings Call
At this time, all participants are in listen only mode.
It is now my pleasure to turn the conference over to todays speakers, David Lim Vice President of Investor Relations. Please go ahead.
Thank you good morning, everybody welcome to the W.P.X. Energy's third quarter two.
2020 call. We appreciate your interest in W.P. ex energy, Rick Muncrief, our chairman and CEO Clay Gaspar, our president and COO and Kevin Vann, Our CFO will review the prepared slide presentation. This morning, along with Rick Clay and Kevin other members of the management team are available for questions. After.
The presentation on our website W.P. ex energy Dot com, you'll find today's presentation and the press release that was issued after the market close yesterday also our Q will be filed later today. Please review the forward looking statement and disclaimer on oil and gas reserves at the end of the presentation. They are important and integral to our remarks. So please.
View them, so with that Rick I'll turn it over to you.
Thank you David good morning to everyone.
As always we appreciate your time today and your interest in WPS energy.
This wasn't a huge equally exciting quarter as we discussed on September 28, we have entered into a merger of equals agreement with Devon energy.
This is a milestone moment for W.P.X. as we diligently work to accelerate help quickly we can accomplish the five year vision targets, we laid out last year.
Progress on the merger is already underway.
We've organized an integration team, which is led by a combination of highly qualified individuals from both WP Exxon Devon, who know the business is inside and out.
We recognize the synergies into redundancies between the two companies Willem impact jobs, we're going to be very thoughtful and respectful of people as we move through that process.
Everyone understands realities of the different difficult macro environment. We're in and are certainly a lot to be said for the viability of combining the strengths of the companies and the attractive value it adds for shareholders.
That was turn to page two.
Let me touch on some really impressive highlights there were seen in the second half of the year. This was another strong quarter for W.P.X.. Despite the cobot overhang in the market and its impact on pricing and demand.
As you May recall last quarter, we raised expectations for free cash flow for this year to $200 million.
Thanks to our financial discipline, and how well we're executing at a very high level overhaul, we're now raising that target by 50% as we expect to generate more than 300 million of free cash flow this year.
[noise], we've already achieved our oil target of 140000 barrels a day that we had set for December 31st.
Because were capital efficiencies, we're raising our fourth quarter guidance to between 137, and 143000 barrels of crude oil per day.
Also we continue to see great trends on the cost side of our business.
We're lowering our 2020 capex by another $50 million and have improved our Ela, we go about 14%.
Finally, we are seeing some significant delineation success in the Delaware basin with promising initial results from several recent bone spring wells in our state line position.
Clay will provide more details with that shortly.
Great results and positive momentum have put us in an extremely strong position as we work toward our strategic combination with Devon.
As it stands today on a combined basis, we expect to be the fifth largest independent oil producer in the us.
Now, let's turn to page three and take another look at what that means for shareholders.
This strategic merger presents truly compelling rationale that critically delivers for the long term. This is a high impact transaction that brings together the best of WP actions Evans businesses to deliver long term value and to more readily withstand fluctuations in commodity prices.
The combined strength of WPS and Devon as evidenced by the fact that the transaction will be immediately accretive to all per share financial metrics in the first year. This includes earnings cash flow free cash flow and net asset value as well as return on invested capital.
With our enhanced free cash flow generating capabilities and our highly disciplined strategy, we will accelerate the evans transition to a business model that prioritizes returning cash to shareholders over production growth.
Additionally, the all stock transaction ensures the combined company will retain a strong balance sheet and $5 billion in liquidity.
Including $2 billion of cash on hand.
The asset portfolio will be anchored by premium acreage position in economic core of the Delaware Basin.
And as I alluded to earlier, there's still so much more to discover across the various benches and horizons.
In the basin stack pay.
Additionally, we expect really realize significant synergies from the merger to the tune of at least $575 million in annual cash flow by year end 2021.
Our teams are working to close transaction as quickly as possible in order to begin executing on these opportunities that we already know exist today.
Now, let's turn to page four.
One of the most unique aspects of this transaction is the incredible value proposition it presents to shareholders as opposed to other recent transactions our ability to influence of shape and look of the combined company includes attractive parents that only a deal like this can.
Let's start with the free cash flow potential of the combined company, which materially enhances the results of the BPX was already achieving or front.
Additionally.
This combination allows to be well positioned for multiple expansion given the pro forma metrics of the new Devon.
We look forward to competing against some larger peers and illustrating and capturing this multiple expansion will be a priority for us.
The all stock terms the transaction also allow shareholders of both WPS and Devon to benefit from cost synergies and the significant upside potential of the combined company.
With the business now scaled to consistently generate free cash flow. The combined entity will be able to support the implementation of the fixed plus variable dividend strategy that we discussed in a merger announcement.
We're taking the best of the WPS business and the best of the Devon business and are creating a company that is poised for success both in the current environment and over the long term.
Our shareholders will have a 43% ownership and the combined company, which as I've mentioned before accelerates how quickly we can achieve or five year vision targets.
Now, let's turn to page five.
I've already touched on the synergies available through the transaction, however, I'd like to reinforce how sizable they are for shareholders.
The net present value of these synergies over the next five years equates to more than $2 billion of value, let me repeat that.
The net present value of these cost synergies over the next five years equates to more than $2 billion of value.
Our integration team is starting to examine how best to extract and realize this value.
There are very well defined opportunities across the board many of which we acknowledge will impact people at both companies very personally.
The identified synergies will be derived from improvements to operating margins reductions DNA improvements to the capital budget and decreasing financial cost as we look to opportunists opportunistically reduce pro forma debt.
We will continue to work productively with Devon to close the transaction, which we expect to occur in the first quarter of 2021, if not sooner.
We will continue to keep you updated as there is news to share.
Now I'll turn to click to call over to clay Gaspar, our president COO, who will update you on our third quarter operation results. Thank.
Thanks, Rick and good morning, everyone.
Theres been quite a bit going on around here since our merger announcement call Devon in WPS have come together to form an integration team comprised of leaders from both organizations.
We've been making significant progress on that front and we'll be ready for a smooth transition on day. One we're also making important cultural organizational and process decisions that will impact the company for years into the future.
Our goals are simple one make the most out of this amazing opportunity to blend the best from both organizations as well as bringing in outside ideas, where we can further improve our collective game to build a singular world class culture that is driven by innovation entrepreneurship and open communication.
Three capture the synergies that we described related to the deal and then exceed them.
Meanwhile, both companies have continued to drive performance and make incredible operational strides I look forward to sharing just a few of those with you today.
As we restarted wells and picked up operations back in the third quarter. We added two frac crews in July one in Delaware and one in Williston then we added an additional crew in Delaware in August this allowed us to start putting wells on first sales in the back half of the third quarter.
This activity created significant momentum, which has continued into the fourth quarter and has our core current oil production exceeding 140000 barrels of oil per day.
Two months ahead of schedule.
We continue to drive down well costs.
Operating costs down and well productivity up let's.
Let's turn to slide seven and talk specifically about our monument draw activity.
Our technical team has done considerable work on well spacing landing and completion design in the monument dry acreage as you know we closed the Felix deal on March six and then quickly shut down operations due to the pandemic. The technical work did not stop but we were forced to slow down the implementation of some of the changes that we knew.
From the beginning needed to be altered.
Later in the third quarter, we started our first monument draw wells with WPS landing spacing and completions designs.
We should have initial production from those wells at the year end call on fit in February.
The diagram on this slide shows the difference in approach WPS is initiating versus Felix approach on the Mega pads that exes approach is four wells per interval space that 13, 30 to 1500 60 feet horizontally and vertically offset to maximize the rate of return Felix was trying to test horizontal.
Spacing vertical spacing and landing zones in a fashion that pushed for timely info rather than ultimate returns.
We have seen significant uplift of the wider spaced wells at Felix drill just before handing over operations, but we see significant additional upside as we fine tune landing zones, and tighten up the Geo spirit Geosteering performance.
We've also been working on operational changes that have proven to drive down costs at the same time improve the wellbore clean outs and ultimately the well returns today, our new two mile Wells for monument draw our planning for just over $700 per foot.
And we continue to see room for improvement.
This is a massive savings from what Weve underwritten the deal on and the well returns continue to improve even at depressed price environment.
Let's turn to slide eight and talk a little bit more about state line.
As you can see on this on this slide our state line area, we have very strong second and third bone spring results I've talked in prior calls about the highly economic test we have in the third bone spring.
I should add that we have now tested for landing zones in the third bone spring line and with the additional confidence in the second bone, we are adding years of premium inventory that competes with our Wolfcamp a.
As we got back operations. The team was able to see the results and the two mile second bone and third bone want lime wells, both intervals delivered strong performance with the second bone San producing a 30 day average of over 3700 Boe per day with 62% oil cut.
The four third bone lime wells averaged over 3000 Boe per day, and the first 30 days with an oil cut of 57%.
On top of the strong well results, we see our DNC costs continue to decline and state area and state line area, our average cost per foot for drilling and completion in the third quarter was $600 per foot for two model well.
These are very impressed impressive costs for two more wells that should compete with anyone out there.
Also the third bone lime and the new second bone targets will benefit from our existing state line infrastructure already in place.
This not only allow us to capture very.
Very attractive returns.
But the existing infrastructure allows us to choose development pace based on optimal returns not midstream build out timing.
Compounding the incredible work that our team has done on driving down well costs, uncovering new economic inventory and improving well performance. We're also driving down operating expense as mentioned in the release, we are materially moving down our full year Ela, we guidance on the back of this improved performance operational cost improvement dollars.
Are some of the hardest to capture but they are hugely impactful to the corporate bottom line because of the annuitized benefit they provide.
One last thing I wanted to mention before I hand, the call to Kevin.
Is that even with this incredible focus on the Permian assets, we're still driving improvements in the Williston basin.
We had several highlights for Williston this quarter and much of it in the operating expense category. The one well pad really caught by the three mile Oklahoma woman Wells, we're competing for space in the facilities and therefore curtailed, but still managed to average over 4800 barrels of oil per day.
For the first 30 days and by the way. These wells had a DNC cost of $360 per foot.
Now for the last time I'll hand over the call to my good friend, Kevin Vann, our CFO extraordinary for the financial updates. Thank you clay clear.
Clear that our operational and financial results point to a lot of momentum going into 2021, as we prepare to complete our merger with Devon.
The WPS legacy will ultimately be one of decisiveness and delivering on what we say we're going to do.
This year alone, we've already generated $241 million of free cash flow and begun to stuck stack. Some cash as we always said we would.
At the same time, we're reducing costs raising our fourth quarter production target and cutting our planned capex even further.
As I look back we've overcome a lot of hurdles over the years to reach this point, including a complete and total transformation of our portfolio covering approximately $11 billion of M&A activity I.
I would be remiss, if I didn't recognize the vast an important contributions our people have made to WP excess success, there the backbone and foundation of everything we've accomplished our people deserve their due for the cars theyve shown in the face of adversity and for their creativity and foresight to counter headwinds and keep the company charging ahead.
Even with this year's challenges WPS remains a vibrant company with a very healthy balance balance sheet that is poised for even greater things ahead, as we combine our strengths with Devon.
Let's turn to page 10, and take a closer look at our third quarter numbers.
We generated nearly 80 million of free cash flow in the quarter as clay indicated our well cost and production expenses are quite impressive and also a big driver of the of the substantial free cash flow number for the quarter.
As I mentioned, we have generated over 240 million of free cash flow for the year.
Despite the significant decrease in realized oil prices, our quarterly EBITDAX of $389 million was 28 million higher this year as compared to the third quarter of 2019.
On a year to date basis, our EBITDAX is $140 million higher than 2019, I realize we're generating generating more oil this year with our quarterly and year to date average daily production levels at over 122000 barrels per day, however realized prices decreased by 28% in this quarter alone.
As oil prices have decreased our focus on managing our production cost continues to be paramount in our ability to generate free cash flow for example on a per unit basis Ela, we has decreased by 20% as clay mentioned.
These were all cost savings that we had previously communicated at the start of the pandemic. It may get lost in the macro right now, but I'm pleased to say we are achieving those cost drug cost reductions I mentioned earlier that one of the WPS legacies will be that we did what we said we were going to do this is yet another example of it.
Our oil production is right in line with what we had expected when we communicated to you during our second quarter call. You can see from our press release that we are playing to average 137 to 143000 barrels per day for the fourth quarter Im not an engineer, but I do know that we are delivering what we anticipated months ago My.
More important than oil production and consistent with the drumbeat that is getting stronger each day and in the industry. We are focused on producing more repeatable free cash flow and becoming more capital efficient. This quarter is a prime example of it the steps we are taking to help with this mindset change can't be ignored well I guess it can be.
Nor but we are delivering on what investors say they want to see.
For the third quarter, we are reporting adjusted net income of $60 million, which has over which is over 50% higher than prior year. The increase in oil production and lower Lowi helped drive this increase together with the overall lower DDNA rate.
Capital expenditures incurred for the third quarter totaled 256 million compared to $264 million last year and again as clay mentioned, we're really proud of the team and how they continue to drive well costs down.
In conclusion I'm proud of what the WPS team has done since becoming the CFO back in 2014, it's been a privilege to be part of this team and the opportunity to help with the transformation was one of the highlights of my career. Obviously these are tough times as a matter of fact, the last six and a half years had been tough, but WPS has persevered through it all.
We have all learned a lot and demonstrated our commitment to the shareholders with that I'll turn it back over to Rick for some closing comments.
Thank you Kevin good job.
Folks as Youve heard on todays call WPS is exceptionally well positioned for success, we continue to excel strategically operationally and financially as we work toward the close of our merger with Devon once.
Once again I want to personally thank our entire organization for their dedication and tireless efforts over the past several years.
Now a new chapter is opening.
This is a high impact transaction.
Consolidating with Devon, we are improving our balance sheet strength and financial flexibility.
It positions us to continue to deliver long term value to shareholders through optimization of our combined operations as well as some significant synergy capture.
As we have shown our strength is underscored by our strong third quarter earnings and continued execution on our outstanding assets.
We'll bring the strength of the combined portfolio. Following the close of the transaction, which will in turn have an even larger impact for the shareholders of both companies.
A few days ago, Devon announced strong results and a favorable outlook.
Today, we did.
Together WP action, Devon will be able to bring out the best in both of our businesses and we will be well positioned for the long haul.
Today's investors asked for generating free cash flow.
Returning some cash to shareholders financial discipline.
And an ever improving.
Gee performance.
We look forward to delivering across the board in all of these areas and with that operator. Please open the line for any Q and I. Thank you.
Okay.
Operator, we're ready for <unk>.
Today.
Certainly ladies and gentlemen, if you have a question at this time, please press the star and the number one.
Phone.
Once again Thats star one to ask a question if you wish to remove yourself from the queue. Please press the pound key.
Our first question comes from Brian singer with Goldman Sachs. Your line is open.
Thank you good morning.
Ron.
Just have one question and that is as you look to and if you look at the success you've highlighted from a well performance perspective from the state line Wells and then.
Our planning process and monument draw how does that impact the prioritization.
Legacy WPS and then Felix acreage in a combined Devin WPS portfolio does that change how you're thinking about the prioritization of where drilling.
Drilling would take place and somewhere between maintenance to 5% growth scenario.
Yes, Brian it's great question I think the reality is we will be getting as reported or integration process and we're trying to accelerate that is to sit down with our team there the Devon team and make sure that we're really.
Looking at things.
Similar way, it's going to take some time for us to really prioritize the completion you saw the results that they announced last week very significant spillover.
Some of our state line.
Wells it that clay referred to Burberry strong monuments Raul is something we've been really wanting to sink or keep into so we are going to have to.
Given all time, let the team work and we'll be able to lay that out hopefully in our February call. Okay, and Bryan I think your question was specifically on the WPS side around stateline versus volume at draw.
Im happy to report they are getting more and more competitive everyday stateline has the benefit of lots and lots of reps and so we've been able to de risk that quite a bit as you sensed on the last couple of calls around monument draw we have move that needle very significantly, but there's still a lot of opportunity there as we bring on more wells in landing zones.
With the with the proper Geo steering the proper cost structure. Some of these new techniques were using its becoming much more competitive now the way we bake. The economics in is we anticipate some additional benefit but you have to risk that because into the day. These guys rely on us to deliver every single quarter and so you have to think about it on a risk basis.
The monument draw risk comes down it becomes much more competitive with Stateline I would anticipate as we've talked before somewhat of a balanced approach.
Between the two areas but.
That changes month to month and each area as it make these material improvements that jockeys positions, we have a very dynamic capital allocation process.
Great Thats. It from me. Thank you very much thanks, Brian.
Thank you and our next question comes from the line of Charles Meade with Johnson Rice Your line.
It is open.
Good morning, Rick can play in the whole team there.
I just wanted to well also asked about that that Delaware spacing. It specifically the I believe its slide seven you have there that Clayton over.
I think most of us when we look at the slide we focus on the B X Y plane, but but my understanding is a lot of this a lot of what you've learned about space is actually in a lung disease cash. So I'm wondering if you could.
If you could talk about your wet weather that's in fact the case in about.
How confident you are in this.
In this new spacing plan.
Plan that you've laid out.
Yes, Charles excellent excellent observation, you're right, we talk generically about spacing and we think in a two dimensional planar fashion, but you're right that third dimension that Z axis is equally critically important and one thing you'll note from that diagram is the staggering of that of that Z. plane and so when you stack wells.
Some on the left side of the page some of those show you may have 125 to 175 feet of vertical stagger and they're stacked right on top of each other and that's a recipe for disaster I just it doesn't work and so even taking that very tight vertical spacing and offsetting by a few hundred feet to 300 feet.
I can make a significant difference so we use that piece of it and then we also consider that that dimension of the Z spacing as also an incredible component as well so yes, good observation and you're spot on sounds like our diagram works.
[laughter].
Got it and then.
This is a this may be a little premature to be asking questions along this way, but picking up.
Good point your success with the second bone Springs.
This past quarter.
My impression is that Devon has actually done a lot more in the bone springs than you guys have and is up do you share that impression that and is it have you had the opportunity yet to to compare.
Development concepts, and perhaps turn up some new opportunities.
Opportunities or ideas.
Yes, I would say, it's a little early to say that.
We have a development concept, but here is what I'm excited about and David Harris on the other side shares the same excitement they have been a very significant and really the Mexico side very significant bone spring development players and then magically at that geologic fault known as the state line things flip over to the Wolfcamp and so we're sitting on the Texas.
Aside Wolfcamp developers and then you run up in the state line and then things flip back over you noticed on our coal that we highlighted the bone spring activity on the state line also note on their call. They highlighted the wolfcamp activity on the new Mexico side. So this is this is the whole reason we wanted to be part of this incredible basin is that prolif.
Make sense as landing zone after landing zone in both cases, you benefit from existing infrastructure all the synergies associated with that you don't want to build locations you get to reuse facilities. All the reuse a lot of that infrastructure compounding the incredible economics that we have so yes, we see it on both sides of the state line and there is nothing.
Magical about that Texas, New Mexico border that should change any of our development schemes.
I will stay tuned on that thanks, Scott you have.
Thank you and the next question comes from Leo Mariani with Keybanc. Your line is open.
Yes, Hey, guys.
Obviously, a significant production increase if I look at Q4 average oil 122 and getting to 140.
Well ahead of schedule here I guess call. It circa November 1st just wanted to get a sense of what was driving that or are you guys basically able to get things moving faster in the field are getting more wells turned into sales so perhaps than expected, what's kind of driving the upside in the oil production here.
Leo I think the bottom line is we got back to work late there in the third quarter and you start seeing the impact is clay talked about his prepared comments, we had great performance in both basins and so it just just a simple.
Of productivity that we're seeing from from.
The bone Springs, Wolfcamp and end up in the Bakken.
Some outstanding wells, so great great capital execution.
And then just.
Probably a little bit better than forecasted productivity, but really good news.
Okay. That's a that's good to know and I guess as a result of the kind of raised fourth quarter guidance does that in churn potentially raise the year end 20 oil exit rate for W.P. ex as well here clearly it could but the bottom line is.
The fact is we're we're sitting here at that.
$35 oil prices are so we're going to be really really thoughtful. So it's 140000 barrel a day range of kind of locked in there is probably a pretty good spot for us to be we'll see them. We do have some tremendous wells in the cuda typically.
Okay. That's a that's helpful and obviously you guys were very successful on low cost reductions here just wanted to get a sense.
Think that vast majority of these are going to be permanent or some of these disappear if commodity prices were to improve on the next year.
Yeah, what's interesting about it is on the Ela. We saw you don't see that inflation deflation correlation as much as what you do on the DMC side.
I would say what we were forced to do it really exploring just questioning everything how do we do things differently as we curtailed back into the second quarter.
One of our leaders here in the organization.
They came up with the term kind of protect our own and this was a call to arms to all the employees to figure out what are we paying other organizations to do what are Wi Fi.
Farming out that we can just we can pick up and do and it was it was really incur.
Incredible the amount of work that we were able to really capture.
Repairs rebuilds, all those kind of things that.
Typically we would have and busier times kind of farmed out maybe we got a little bit of complacency in doing so.
This call arms really allowed us to capture a lot of that back. We also looked critically at every contract in every source.
Sourcing agreement certainly there was some some pricing going in when you think about some of the supply chain, but I would say by far most of it was organizationally thinking differently about how do we do we do so to answer your original question I would say most of this we will be able to hang on to.
Are we watch the numbers of course, we see a lot more granularly than you see it and we watch the numbers dip we saw a little bit of give back and we got a lot of these wells back on production, but now weve seen several months of continued improved performance. So have a great deal of confidence that.
We will be able to hold onto the lion's share of these elderly savings and as I mentioned in my remarks.
Don't underestimate the value of that really is because that that pays every month every quarter every year as long as you can possibly hold onto it and creates tremendous value for the shareholder to the bottom line.
Thanks, guys. Thank.
Thank you.
Thank you.
Comes from.
The line.
Mitt Kumar with Wells Fargo. Your line is open.
Good morning, Thanks for taking my question.
Hey.
Rick I wanted to start that industry consolidation Ulysses started a trend there.
Since you.
Announce your merger there has been some more deals.
Some of the country has revolved around scale, and where 10 billion has to be the market cap that cancer relevance and.
I just wanted to get your thoughts on where do you see the Indy market going from here or do you see more consolidation and if there is a role for I know it might be a little bit of an unfair question, but is there a rule or the new Devon with you at the helm to play in that.
Well that's a good question you know as we.
We've been very public in our support of consolidation this basin and in this an industry modeling and Permian, but.
So we're pleased with the.
The trend that we we feel that we played a role in getting things kicked off.
The first part of your question as far as having.
A need to be a $10 billion or more market cap to be.
Investable are no CEO of make a comment I really don't.
Thats really miss or the case.
I think there's some great investments opportunities for.
Some companies a little smaller than that I do think however, the scale matters and that's that's that's going to be very very important and over time, you'll see it probably even.
Even even more important.
As far as.
The new to the new Devon, playing a big role in additional consolidation I think right now we're so focused on making sure that we get.
The integration right, we capture the synergies will always be some opportunities.
To look at to evaluate but just as we've always done and I believe Devon has always done is there's a very high bar and so we'll we'll be thoughtful about that certainly we do believe the scale matters, but I think what matters, even more is execution and doing what you say you're going to do.
I think look capturing synergies those sorts of things so lets say stay tuned but for us our focus is.
Is very much on getting the integration.
Successfully done it and get synergies capture.
Great Thats very clear answer.
My next one is for clay looking at slide seven.
Third.
Which is.
Third bone spring sand.
My knowledge of jewelry is way less than yours man, So maybe help us out here how distinct other two zones and especially as you think about you mentioned, new Mexico versus Texas, Delaware.
How much of this should we be seeing up north as you get to that acreage.
Yes, great question. Thanks for the clarification, so we talk internally about the third bone lime.
Because because it is clearly litho litho logically different than the third bone sand. So the sand sits right on top of the greater Wolfcamp, a interval and what we're doing in the X.Y. what industry is doing in the X Y 100% chance that you are getting some third bone spring sand contribution to those x.
Why wells, Okay. So we wanted to make sure and designate this as the line because it is clearly different it sits above the third bone spring sand, which is often kind of a shared resource with that upper most landing zone in the wolfcamp, sometimes you'll see other industry partners land in the third bone spring sand.
And you can kind of share that way as well, we've skipped over that interval and then the lime interval, we actually have internally we term at LS, one through Ellis seven and beyond and these are individual lime zones that we are landing in we've as I mentioned, we've landed in four of those very successfully we can.
See there's a lot more.
Barriers in that line and so you stay much more contained inside that line and what we're seeing we've tested this very very soundly in that third bone spring line, you're very you are depleting, that's the depletion interval youre not reaching into that second bone and even in the lower wells.
Not getting very deep into that third bone sand and you're certainly not getting into the wolfcamp. So we've talked in many times on these calls about kind of what is the flow unit because the last thing you want to do is go in and partially develop a flow unit and then come back a year later and realize that you kind of screwed up the rest of the development that's something we're hyper focused on.
And as we talk about this third bone line, that's something we're very thoughtful about how we develop so lots of testing on that lots of individuals a few.
Co developments a few some of the science work understanding the vertical growth of the stimulation and understanding whats depleting what.
So I can tell you I feel very confident today in the approach that we're taking we'll continue to test a little bit more on spacing both in the second and third bone line and then.
It will be able to add that inventory number.
Hopefully in the coming quarters.
Thank you next question comes from Neal Dingmann with Chris Your line is open.
Good morning, Rick and this has been asked around but I just one of a kind of a clarification I guess, Mike. It's really the first question just on this second half activity really seems you all have done just a great job of you've been maybe a bit more active than I thought you'd even be hitting.
During the 140 sort of late this year and I'm just wondering I guess this seems a bit different than the very slow growth plans at the new Devon. So I'm, just wondering why sort of push it into that.
To be so much into this merger versus maybe just.
If you'd already hit that.
Keeping those ducs and maybe reducing rate I'm, just kind of wondering how you're sort of if you're taking a different about sort of the growth versus the shareholder return prospects. These days.
Nonetheless.
I guess were add is that we did we did increase.
122, the as far as the third third quarter average up to 140 fairly rapidly, but it was a mix of some just some phenomenal well results. So.
It's not really an increase of activity just got back to work or base based activity level that we plan. So just a performance driven as much as anything and so but I think I mentioned that yeah, we could we could let it rip we've got some great.
Some great wells coming up we could we could truly increase activity, which is what I think you're saying, we're not going to do that I mean, it does make sense I think in this one 140 ish range feels pretty good could we be a little bit higher, but maybe a little bit, but it's just going to be a matter of of well productivity and so we'll see how it all plays out but what's your touch.
On his growth versus free cash flow and I think we've tried to be pretty clear that we want to we want to we want to generate free cash flow.
Okay, and then claim.
Definitely seems like is.
As these wells are getting these large large returns is this just kind of driven by stepping up it seems like you've done that you talked about the three mile more to to sort of mile is that the sort of doing these lot longer laterals board just.
What I guess, what's driving that is that more just the optimum returns that you're seeing from the U.S or just that you are able to do this because the spacing et cetera, maybe what's what sort of led us.
Yeah, Neil in the in the Permian side in Delaware particular, we really get geared up for two mile development and so that's the way we've gotten our land.
A range done a ton of trades and if you recall from the RK I acquisition kind of pre acquisition. Their average lateral length was about 3800 feet. So weve pushed that just approaching just touching 10000 feet. We consider that a huge win the three mile development. We've done we've done probably several dozen of those in and the will.
Austin Basin and those are kind of unique situations, where you have a threed up three mile development that you'd rather not do certainly a two in an individual one we feel very comfortable in our ability to drill three more wells and that plays a part there specifically the wells have mentioned and Wilson I would say the real change in improvement.
But.
In Permian both in State line ended monument draw has just been tweaking things like landing zones things like steering completion design, how do we drive that efficiency, even the flowback techniques. There has been a lot of debate on is slow back the right approach or something more aggressive we're kind of have some points in between and some things that were.
We're doing along those lines to improve wellbore clean up and at the same time on or some of the geochemical and Geo mechanical considerations downhole.
As well so.
Lot of small knobs at this point on the on the state line area. We've got some bigger knobs returning in the monument draw area and we're see that's why we're seeing such differential improvement quarter over quarter there.
Thank you guys I would like to say great job with Kevin as well thanks.
Thanks, Thanks Neil.
Thank you and our next question comes from the line of Jim Nicholson.
With Stephens your line is open.
Good morning.
Well then as you move into that one rig program.
You can do to help mitigate the decline of the Wilson at that time.
The base decline is something that I think will be especially in the new combined organization is going be such an incredible focus for the company.
A lot of things around in the production engineering World that you're always trying to fight that I would say the biggest.
The biggest needle mover is just slower activity as we move from historically, a high growth company to a low growth company the the.
Law of numbers takes over and all of sudden your base decline just flattens materially so in Williston in which you would see as a base decline for year, one will be significantly less in year, two and three.
But please know that we are we're looking every day it always trying to improve.
The day to day fight of Dr., Louis down improve well performance due in an environmentally friendly way and so that work continues but I'd say the biggest change for improving base decline is just the transition to this lower activity cadence of the new combined organization.
Great and then in the press release, you guys mentioned that there isnt Derrick outages that affected rate.
About the payment this quarter can you just clarify what those Deborah I just work.
Could you repeat that you had some back go ground boys there are.
All right the dogs are barking.
[laughter] you guys talked about severance outages affecting production and both Bhavan in the quarter I was just curious on what the beverage added just if you could provide any clarity there.
Yes. So this is midstream upsets in both basins. This is kind of just background work, but when you're concentrated to one processing facility or one gather it can certainly come into play and we happened to experience that.
In the in the quarter for both will stand and in the Delaware Basin.
In the Williston, we've gotten that all resolved.
In the Delaware Basin, we have alternative outlets and now.
Once again flaring is down and.
Production is back up so we.
We've regrouped and got that heading in the right direction I believe the impact with some were at 500 to 1000 barrels a day range impact when you. When you just put that to two of those together.
Great. Thank you. Thank you.
Okay folks well we appreciate your interest in WPS today, we are extremely excited about what the future looks like.
We do think the scale matters, what you're talking about a stronger company and we're really really excited about what the what the future holds so have a great day, and we will see you down the road.
Thank you ladies and gentlemen.
Today's today.
Well listen I'd now like to turn the conference.
Back over your speakers for further remarks.
Ladies and gentlemen, this concludes today's conference call. Thank.
You for your participation you may now disconnect everyone have a good day.
[music].
[music].
[music].
[music].