Q4 2020 Pioneer Natural Resources Co Earnings Call
You are currently on hold for this pioneer natural resources fourth quarter conference call. At this time, we are assembling today's audience and do you plan to be underway. Shortly we appreciate your patience and please remain on the line.
[music].
Welcome to pioneer natural resources fourth quarter conference call joining us today will be Scott, Sheffield Chief Executive Officer, Rich Daly, President and Chief Operating Officer, Joey Hall, Executive Vice President of operations, and Neal Shah Senior Vice President and Chief Financial Officer.
Pioneer has prepared Powerpoint slides to supplement their comments today. These slides can be accessed over the internet at Www Dot P X P. Dot com again, the internet site to access the slides related to today's call is www Dot P X D dot com at the web.
Select investors, then select earnings and webcast.
This call is being recorded a replay of the call will be archived on the Internet site through March 22021.
The company's comments today will include forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995. These statements and the business prospects of pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward looking state.
These risks and uncertainties are described in Pioneer's news release on page two of the slide presentation and in Pioneer's public filings made with the Securities and Exchange Commission.
At this time for opening remarks, I would like to turn the call over to pioneer Senior Vice President and Chief Financial Officer Neal Shah. Please go ahead Sir.
Thank you Orlando good morning, everyone and thank you for joining us during today's conference call. We will be discussing our strong fourth quarter results. In addition to providing our 2021 outlook P challenge, our strong financial position and discussing the initiation of a variable dividend policy.
We will also include an update on the synergies we are achieving through our partially transaction and our significant ESG momentum with new goals and targets set at the end of last year.
After that we will open up the call for your questions. So with that I'll turn it over to Scott.
Thank you Neal good morning, let.
Before I start off on slide number three.
We had very very strong free cash flow generation of approximately $300 million driven by strong production low capex due to continued efficiency improvements from the operational teams at all levels.
We're now seeing a formalized long term variable dividend structure, which we have several slides will be returning up to 75 per cent of post base dividend free cash flow to shareholders and we'll give you. Some examples later on so net.
Improving return on capital to shareholders.
Well generate significant free cash flow generation.
And the $2 billion expected in 2021.
$55 WD I currently the strip is about $60 WD on so we hope to beat that driven by peer leading corporate breakeven in the high twenty's per barrel range.
Synergies from <unk>, partially acquisitions are exceeding our previous guidance, especially on a recent bond deal interest savings additional $25 million and we expect to achieve better savings on G&A as we go into the second and third quarters.
Back to the synergies there of about $100 million.
We also expect to realize our full operational synergy run rate of $150 million per year by year end 'twenty one.
Richard will talk more give more detail about debt and fully benefiting 2022 and thereafter.
We remain focused on environmentally responsible operations with new emission reduction goals announced during our fourth quarter 2000, with the release of our comprehensive sustainability report.
So on to slide number four our execution continues to remain strong.
While total production and oil production in the upper half of our guidance ranges for both fourth quarter and per full year we.
We generated $700 million on free cash flow, despite averaging $39 <unk> oil price during 2020.
In addition, we're continuing to gain on lease operating expenses, they were down 15% from 2019 levels.
So on to slide number five on.
The outlook in 2020, obviously, many e&ps experienced year on year production declines pioneer continued its trajectory of strong performance setting up a robust robust 'twenty, one, especially going into 'twenty two.
On slide five.
We're expecting to generate approximately 2 billion in free cash flow at $55 Debbie Jr. Again, the strip is about $60. So we hope to beat that.
Our 2021 production outlook was impacted by the harsh winter weather encountered across the state of Texas last week, they're left millions without power for an extended period of time on.
2021 production outlook reflects these impacts which amounts to approximately 8000 barrels of oil per day on a full year basis, a little above 2% of our total oil production.
With our announced Capex range of two four to $2 7 billion, we're expecting to produce between 307 and 322021, which includes the impacts of the winter storm and also excludes 11 days of parking production co Gen.
The force through January 11th prior to the close.
Our current project production trajectory will drive strong exit to exit growth of approximately 8%, which sets up a very highly capital efficiency 2022 and beyond.
Going into slide number six the framework for the variable dividend and discuss in more detail over the next several slides.
Top tier inventory supports a low maintenance capital breakeven price of about $29 per barrel.
And then as you look our maintenance capital is about $2 billion now with both companies combined together.
At $55 oil 2021 planned generates 2 billion of free cash flow.
<unk>.
I've said already the strip is about <unk> 60 for the rest of the year.
<unk> for substantial return of capital to our shareholders.
A base in a variable block concurrently further strengthening our balance sheet.
Go on to slide number seven.
We've been talking about this for 18 months, we've been exploring it with shareholders. Both long term on short term for about 18 months.
We're happy to announce the initiation of a variable dividend policy.
Was it significantly enhances our long term shareholder returns specifically after the base dividend is paid we expect up to 75% of the remaining annual free cash flow that'll be returned to shareholders in the form of a variable dividend, which we paid out quarter on the following year debt further strengthening paradigms pioneer's balance sheet would.
We think it's critical and has been critical long term force.
The 2022 variable pay out will be up to 50% of the 21 gross base dividend and free cash flow. We believe that our strong capital return strategy, one that encompasses a stable and growing base dividend payer with a significant variable dividend presents an attractive value proposition for our shareholders now I'm going to go into <unk>.
<unk> for 'twenty, one and 'twenty two to make sure it's clear in 'twenty, one lets assume we do generate the $2 billion of free cash flow.
We have a base of about $500 million.
We're left with $1 5 billion, we're going to split that 50 50 for 'twenty one payable in 'twenty, two so $750 million will be for the variable and 750 will go to debt reduction.
The 750, it will be split equally in our four equal payments on <unk>.
Paid.
In the quarter, each water it'll be offset the a different part of the month of that quarter. So we want each shareholder received eight checks a year from pioneer.
The estimated dividend yield based on our current stock price is about four 5% when you add the base plus the barrel, let's go to 2022 right now at the current strip, we expect to generate about 3 billion of free cash flow.
About $500 million for the base you are left with $2 5 billion and we split that 70 525, that's 1.9 billion.
A variable and 600 million for debt reduction.
That equates at the current stock price to a seven five per cent dividend yield. So we hope that as clear as we move forward in 'twenty, one 'twenty two and those examples.
Go on to slide number eight our long term thesis.
We've had this slide before it remains the same remains focused on driving free cash flow generation and creating significant value for shareholders that.
At the current strip on long term reinvestment rate is 50% to 60% of cash flow, which supports a program that delivers approximately 5% annual growth.
Adding one to two rigs per year long term.
We expect this framework to generate approximately 16 billion in free cash flow.
During 'twenty one through 26 at 50 $52 <unk>.
Which is greater than 50% of our current market capitalization.
This.
Differentiated strategy positions pioneer to be competitive across all sectors and a leader within our industry.
Let me now I'll turn it over to rich.
Thanks, Scott and good morning, I'm going to start on slide nine.
With the combination with parsley, we're the only 100% focused Permian E&P of size and scale.
See from the map that on a combined basis, we have a footprint of about 920000 net acres.
Other substantial inventory of high returning wells and importantly zero exposure to federal life.
Looking at the specifics for 2021 plan, we plan to run on average 18 to 20 drilling rigs and five to seven Frac fleets.
As you can see from the Bar chart. There we are continuing to moving towards larger pads, which helps drive efficiencies that can be applied to the partially acreage position other.
Other than the larger pad sizes in 2021, our development plan in 2020 is very similar in both lateral length and well mix compared to the 2020 program.
As Scott mentioned, the winter storm last week did impact our fourth quarter production by approximately 30000 barrel of oil per day. The vast majority of this production is back online and we expect to see the remaining production back online on the next week or so.
I would like to take this opportunity to thank all of our employees and especially our field employees supply chain team and our service company partners for all their efforts to restore production and resume drilling and completion activities. They have done a terrific job on many of them had been dealing with their own personal home repairs from being without power and having broken pipes. So on personally thank everyone for their <unk>.
Hard work and most importantly for doing it safely.
Yes.
Turning to slide 10.
And you can stay tuned we are increasing our initial partially synergy target.
From $325 million annually as Scott mentioned, the $350 million in January we completed the refinancing of the partially debt.
Savings on an annual basis $100 million of interest exceeding our target of $75 $25 million in aggregate post the refinancing this lowered pioneer as overall average coupon interest rate to approximately 2%.
We expect to realize the G&A synergies of $100 million in the first half of the year and we're well on our way towards.
On the operational synergy target of $150 million and we expect to achieve that by year end 2021, which will drive a recurring benefit beginning in 2022.
You gave a little color on the work in progress we're in the process of optimizing our field production operations given the adjacent operations in the Midland Basin, we're consolidating our supply chain activities and we're looking at further capital efficiency improvements in search with tank batteries water systems and water disposal systems just to name a few of the initiatives underway.
As Scott will discuss as well achieving these synergies as part of our 2021 compensation incentives.
If you look at the wrong side of the page you can see these synergies when coupled are coupled with our unmatched inventory of high return wells, which supports our free cash flow model.
Turning to slide 11.
Total cost of it we're continuing our journey to reduce our total cash cost you can say here with decreased 23% in 2020.
And expect you to drink decrease them another eight per cent or so in 2021.
These costs are comprised of cash interest, which I just mentioned being now to go average cash cost of 2% other.
<unk> talked components cash G&A, which we expect to be.
Around approximately $1 20 per BOE a day in 2021, and then thirdly, our industry, leading horizontal LOE cost.
And we won't stop here and we expect this trend to continue to improve through time.
On the south here and turn it over to Neal.
On Slide 12, you can see pioneer as premier asset base position positions us only E&P to have a corporate breakeven below $30 a barrel wty within our peer group, enabling pioneer to have a low reinvestment rate and drive significant free cash flow generation.
This low breakeven price reflects the quality and the resilience of pioneer's portfolio underpinning, our operational and financial strength.
In addition, our unmatched high quality asset base has no exposure to federal lands.
Turning to page 13.
To the right you can see the graphic that demonstrates our best in class breakeven price with our low leverage that's absorbed that support substantial return of capital to shareholders as well as providing pioneer both operational and financial flexibility.
We witness the benefits of our strong balance sheet during the downturn in 2020, and it was pioneer a strong financial position that facilitated the refinancing of partially debt from an average coupon of greater than 5%. So on an average coupon of less than one 5% driving our interest saving synergies of 100 million that rich discussed earlier.
With our investment framework, our net debt to EBITDA will continue to trend lower while concurrently returning significant capital to shareholders through our base and variable dividends, creating value for shareholders, while bolstering our fortress balance sheet.
With that I'll turn it over to Joey.
Thanks, Neal and good morning to everybody on going to be starting on slide 14.
We came off our best year ever in 2019, and the drilling and completions teams committed to demonstrate similar gains in 2020.
On the graph on the left shows like delivered on that promise.
The chart on the right hand side illustrates the significant progress also made on reducing our facilities cost our construction and operation teams partnered together to decrease the initial cost of subtleties by 40% since 2018.
All of this has been accomplished without compromising our commitment to safety and protecting the environment to the contrary on most importantly, we improved on all safety metrics in 2020.
These gains would not have been possible without the hard work of our entire staff supply chain team and great collaboration with our suppliers and service companies.
Add on the complexity was introduced by the pandemic and this has been a truly remarkable year by any measure.
Now moving on to slide 15 on.
Often get asked what's driving all of these improvements we're certainly very proud of the engineers and field staff that I've worked hard to make these gains possible.
So in partnership with our technology solutions and data science students.
Their expertise has allowed us to effectively use our extensive data set to make better decisions and to leverage technology.
This represents a very small subset of examples in different areas, where we have used advanced analytics and technology to employee performance. Just a few examples as I made from left to right on the slide.
By creating digital twins of our drill strings, we can use predictive analytics to push the performance envelope on reduce failures machine learning has allowed us to reduce costs by optimizing our proppant and fluids systems without compromising the deliverability of the stimulation per well performance.
Mobility projects have allowed us to put more applications in the hands of our field staff to ensure they have convenient access to the information they need to perform their jobs and minimize driving time and improve uptime.
And to further progress our best in class emissions performance, we are deploying various sensor technologies that will allow us to detect dimension events in real time and reduce cycle time for repairs.
Ultimately, we are using our vast data set and the best available technologies to create more value on improving safety and environmental performance.
Coming into 2021, our teams remain committed to keeping our people safe, reducing our environmental footprint and demonstrating top performance when compared to our peers.
Congratulations to the entire pioneer team for their contributions to our safe and efficient execution in 2020, and I'll now turn it back over to Scott. Thank.
Thank you Joey on.
Starting on slide 16.
In low emission barrels a day.
Being in the Permian basin, and the actions that we've taken as a company.
We were at the lowest one of the lowest C. O two emissions per per BOE produced worldwide. This is a interesting chart that we have found to essentially all stayed on the all companies majors large independents. So it's the largest global operators in the world, making up over 64 million barrels of hydrocarbon.
<unk> per day.
Pioneers operations produced barrels was on the lowest associated C O two emissions intensity globally on.
Our low cost low emissions barrels will continue to be desired around the world.
Jumping to slide 17, we continue to make changes in our executive compensation going forward.
One of the first things we've done when we did this last year was tie on myself the CEO for 100% on any L. Tip based on performance. So it's all based on performance. So pioneer has to perform for myself the CEO to be paid in the long term.
We started that program last year right now we're the only company that is doing this most Ceos average about 51 per cent and the S&P 500.
We added the S&P 500 index into our ESR, our peer group beginning in 2021.
We've also added some new goals and increasing goals, we increased ESG and HSE from 10% to 20%.
We have now rocchi encroaching a combined rate of 20%.
And last year, we did remove any production and reserve goals going forward.
As Richard mentioned, we do have 20% and strategic.
You mentioned net and that strategically we do have to achieve are partially synergies to make that number work on any annual incentive.
In that regard.
So on to slide number 18.
Strong focus on ESG.
Pioneer continues to hold all pillars of ESG of great importance. Our new sustainability report was released last quarter reflects our significant strides in reducing both scope, one and scope two greenhouse gas and methane emissions and incorporates emissions intensity reduction goals on both.
Inclusive of parcel with a very low flaring intensity up 7% compared to the peers average of one 4%.
We continue to promote a diverse workforce, which reflects the community in which we live and work.
Yeah.
Finally on the last slide number 19, we're committed to driving value for our shareholders and we're looking forward to finally commencing with our variable dividend structure.
Again, thank you we'll open it up now for Q&A.
Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again, everyone to ask a question. Please press star one we'll pause for just a quick moment to.
Assemble the queue.
Yeah.
And we'll take our first question from John Freeman with Raymond James. Please go ahead.
Good morning, guys.
Hey, John.
I appreciate all the extra detail Scott on the on the variable dividend policy and I just wanted to make sure just to clarify a few things. So when we think about like long term the strategy to distribute up to 75 per cent of the prior years.
Free cash flow after the pace and then that this first year it'll be basically up to 50%.
Of the 21 free cash what's the base, just maybe sort of how to think about in any given year. How you all are deciding between you know if it's.
50% or 75%, obviously your leverage metrics are really really low, but just if there's anything we should be thinking about how you all kind of come on to that conclusion.
Yeah, I think first of all John we use the word up to to give us flexibility. Our goal all along has to pay 50% for this year.
75% free.
Free cash flow for 'twenty, two and beyond we do up to simply because of the volatility nature of our industry and other commodity prices. So our intention through attention is to do 50% and 75% long term, that's our goal and at some point I didn't make this point, but if you look at the numbers over six years are.
Debt, our debt to EBITDA targets or even get better than <unk> 75, we actually after a six year time period, we get our debt essentially down to zero. So I'd point at some point the board will reopen whether or not we continue at 75 per sand, we could go higher.
Because at some point, if we have no debt no balance sheet and the reason we're doing that.
As you have heard me talk we're not a firm believer of buying back stock annually long term, but we think when you have extreme downturns like we experienced last year.
What should we have the firepower to buy a lot of stock at $50. So we'd like to have a great enough balance sheet to go into any future downturns to be able to to buy back stock.
One third of the current price and so you'll see our balance sheet and get better and better over time would you think it's better.
To have a great balance sheet due to the volatility of our industry. So I hope that helps.
That does thanks, and then just a follow up on how to think about the operational synergies, which I know it got better things I've talked about what would really occur on a second half of 2021 day.
As we think about sort of a different.
On synergies kind of levers on to say as you know, whether it's sharing the tank batteries water infrastructure somewhat contiguous acreage.
Maybe just some additional details on sort of which of those you are able to kind of realized pretty quickly versus does it maintain later on into the year or two to fully realized.
Yes, John I like the other.
Field optimization in terms of just the operational side on the production side. There are things that will capture how quickly the supply chain stuff or are things that I think we'll capture quickly in terms of just leveraging our.
Our suppliers and maximizing our best contracts.
So I think those are the easier ones I think you know as we've talked about the integration capital that we have on the budget.
<unk> the water systems getting the disposal systems are connected and optimizing the tank batteries that will take a bit longer. So those are probably more second half related and enter 2022. So I think that's really the timing of those things are working comes first and what kind of comes later.
Thanks, I appreciate it well done guys.
Thanks, Chris.
And up next we'll hear from Brian singer with Goldman Sachs. Please go ahead.
Thank you and good morning.
Hey, Brian.
My first question is with regards to the reserved before it you had a substantial upward revisions in natural gas and Ngls you had downward revisions to oil I realized there may be price adjustments driving some of this and I wondered if you could comment on the dry break eggs at the reserves report you in your revision beyond price and what implications if any there.
For planning your production mix in the area and the ratio going forward as bad debt.
That's correct right.
Okay.
Yeah, Brian Great question, I think as you mentioned clearly oil prices were a driver, which I'll get on to the NGL and gas ones, but as you know oil prices and just using the SEC pricing was down.
30% from 2019 to 2020 and start from $56 <unk> down to about $40 a W. P. I. So that's really driving the negative.
Visions on oil for the most part when you look at the positive revisions that we're seeing on.
Gas and NGL, it's really coming from a couple of things. One is just our enhanced completions continued to improve our fracture networks and so that's leading to better recoveries from the wells not only on on oil NGL and gas as well. We've also seen improved infrastructure out there and so a better capacity, which reduced line pressures.
Total add more gas to flow.
And therefore added more NGL and gas reserves. So if you kind of strip those out debt F&B that was in the low force, probably moving closer to $7 and so I think that's kind of the.
Background of what the River reserve changes work during the year.
And I think in terms of long term you're thinking in terms of long term mix you know I think we've been running in that call. It 50, 758% range on oil and we still anticipate that to be you know longer term at this lower growth rate to be the right level.
Great. Thank you and then my follow up at risk of Scott I'm asking a question that I think you've been asked a few times over the last couple of months.
When you think about where production this year its going to exit I think you said could be up there you mentioned that 8% to 8%, but something thats above the 5% threshold.
The plan when you announced it.
<unk> had some materially lower oil price view than where we're at today and I just wonder if you know.
How youre thinking about that flexibility into 2022 and the talks between growing again in the back 5% Great Britain, reducing.
Temporarily reducing activity to increase free cash flow and stick within the five per cent.
Brian.
Still our we're committed to.
But long term growth rate starting in 'twenty, two and beyond them about 5%. Some years, we may be six or seven seven years would it be three or four.
And unless we get into another extreme downturn.
We have the flexibility to go back to zero growth like we did in on 2020.
On our 'twenty, one two and so we're not going to let the growth rate a jump up if it turns out we're achieving Joey and his team continue to achieve great capital efficiency and it looks like we're going to grow 8% to 10% in 'twenty, two we're going to dial back the capital going into 'twenty two.
Great. Thank you.
Yeah.
And next we'll take a question from Jeanine Wai with Barclays. Please go ahead.
Hi, good morning, everyone. Thanks for taking our question.
I think jeanine.
Just following up on hi, good morning.
Following up on the response to John's question, you mentioned getting to net zero and I think I'm sorry.
Getting to net debt of being zero and I think you said six years and at what point do you consider the company to be under Levered is it a zero net debt is at that 0.5 0.25. So how are you thinking about that level.
I mean at this point in time seeing three downturns in 11 years Jeanine I just think it's better to have the best balance sheet in the business. It gives you so much flexibility.
We have choices like I gave one choice we have zero debt, we can buy back stock and extreme downturns. If the board wants to continue a high variable dividend per year or two even though our free cash flow may not be as strong they have that flexibility. So it gives us so many more choices.
Sticking around I mean, we thought we had a great balance sheet for 'twenty.
And we were even afraid to buyback our stock at $50. So we had no idea how long the downturn is going to occur. So I, just I've got I've gone through probably been through more.
Down turns any CEO out there and I just think it's better to have a great balance sheet and even better balance sheet. So we have the flexibility also as I said, they take the 75% up higher the board does the 80% or 90% or 95 per cent or 100%. So so we just have so many more choices when you have even a <unk>.
Other balance sheet the debt to EBITDA <unk> 75, So we don't have a stated target I prefer to have eventually at some point in time zero debt would be my ideal target.
Yeah.
Okay options are there it would be on that.
And then my follow up is just on hedges and so how does your new kind of net debt.
And how does that factor into your hedge philosophy going forward could we see less hedging because I know, we're kind of walking a fine line here in some respects, but generally.
On hedges on for Rich protection on balance sheet protection and generally we see companies with a better balance sheet, having less hedges so that reserves on more upside because you have the balance sheet for protection. So just wondering if your hedge philosophy is evolving going forward as well. Thank you.
It's still evolving.
I mean, the big change, we used to spend 100% of our capex.
Now, we're only spending 50% to 60% of our free cash flow as capex.
And so that's a big change.
We may hedge we may be limited just to protect that going forward.
We may hedge or not to protect the base dividend, but because the market is an extreme the way Saudi and OPEC is engineered this latest rise it's an extreme backwardation in the volatility and less liquidity in the market. It makes it tough to do any.
Flowers do any caller, so we used to be able to do a collar on each side of the strip.
$5 on each side or.
$10. So they give you very little upside anymore. So it's really as long as it's an extreme backwardation will probably see us do less hedging and.
And then lastly, the variable dividend is something that is going directly into the shareholder base. So we try to hedge that guess.
It is a direct reflection on what happens to that variable dividend and so how many guests long term, we're probably going to do less but the same time, we continue to see spikes on the backwardation is taken out of the market you may see us do a bit more so we're going to remain opportunistic.
Very helpful. Thank you.
Yeah.
And our next question comes from Arun <unk> with J P. Morgan. Please go ahead.
Yeah good morning.
Rich I was wondering if you could maybe help us better understand the shaping of the 2021 production and Capex profile, just given some of the weather disruptions that you highlighted.
Got it.
And we're estimating based on that 8% exit rate of right around $3 35.
Before oil for <unk>. So just wonder if you could walk through the progression.
Yeah or any other.
When we look at it.
Setting aside the first quarter because of the weather impacts.
We've said that it was going to be more towards the back end just because of the rig ramp that started late last year and just takes it 180 days to kind of do that but I think as you move into the second quarter through the fourth quarter, but it is a ratable.
Increasing production over that three quarter time period, and I think your exit rate is in the ballpark it maybe slightly higher than that but it's in that Zip code.
And then on capital I think we were pretty good about getting the activity sales average rig frac fleet rates.
In January so I would think your capital is pretty ratable throughout the year.
So I think really from my.
Perspective.
Ratable on capital and you know.
Ratable Q3, or Q2 through Q4 on production.
Great great.
And just my follow up one other question is that kind of come in pioneer obviously delivered them on legacy.
Terms of the fourth quarter, but some of the parcel volume does your 8-K, a few weeks back we're a little bit light of what.
The market was thinking have you done a bit of a postmortem there any any conclusions there regarding.
So that part is really <unk> performance.
Yeah, a couple of things one you know they sold their big Tex acreage that you had about 1400 barrels a day of oil production associated with it. So that was one piece of it and then I think the other piece that it wasn't just a reduced activities. During the day activity started back up on the Frac fleet clicking up until they've had.
Limited number of Pops unit in the fourth quarter relative to what they had in the third quarter and so it really was just you know production just didn't stay at that level you know given the decline.
And so really that's our assessment of other just really driven by activity levels, but the well performance has been you know fine there's nothing that is just because activity.
Got it together and that's all baked in here.
David forecast right.
That's correct.
Okay. Thanks, a lot.
Yeah.
Sure.
And next question will come from Charles Meade with Johnson Rice. Please go ahead.
Good morning, Scott to you and the and the whole team there.
I apologize for Belaboring, this point, a little bit, but but on on again the shape of the 'twenty one kind of.
Duction curve.
But it looks to me like you guys are gonna have obviously theres going to be a big a big bounce back and it's not really a not really a valid comparison <unk> versus <unk> because of all the weather downtime, but it looks like in the back half of the year, you guys, who could be showing.
Three to a 4% sequential quarterly growth does that does that kind of close to what you guys are looking at internally.
That seems a little high to me, but just because you know I think the exit to exit as Scott talked about was you know kind of 10%. So it's in the slide but in general I mean, it's it's directionally in the right place got.
Scott I think paid for that rich and then.
And then my second question is this this isn't really a new one for you guys, but it's it's a highlighted again by.
The 5% Capex allocation to the Delaware.
The debt again, it's not new that kind of seems like it either needs to grow or or or as a percentage term or you guys would be sellers. So can you.
Offer us any kind of refresh to your thinking on on how the Delaware is going to play in.
Your asset portfolio longer term.
Yeah, I think Charles.
We've talked about before your Delaware acreage is very attractive for a number of reason that the other higher oil cut that's there we have a high NRI on we've got good infrastructure over there. So really the 5% for 2021 is really driven by the program that partially had outlined early in the year and so we're really looking at that program given the run up on oil prices you know the economics are.
Are very favorable for the Delaware and so we'll look at how do we you know back half of the year or into 2000 and trying to reallocate capital from Midland over to the Delaware. So we're still extremely.
Extremely pleased with that acreage and look forward to a developing and as you know that we get a chance to get our hands on it and move forward.
Thank you for that detail.
Perfect.
And our next question will come from Scott Gruber with Citigroup. Please go ahead.
Yes, good morning.
First question here on <unk>.
On a wooden score and says.
Any material impact on one P M.
Production normalizes, a little more.
On the two Q4 contribution contribution from parsley, how should we think about Halloween and <unk> on the second half although on the extra production costs early on as we integrate partially what's not captured on the incremental capex and if so how those rollouts.
Yeah, I think if you look at our LOE guidance for the first quarter, we did adjust that up about 25 cents or be able to just to take into accounts. The repairs that we're seeing on the minor in the Grand scheme of things, but repairs on our wells and facilities due to the storm until we did factor that into our first Gordon guidance range.
And so if you take that range and back it down.
25 cents per Boe.
For Q2 and beyond.
Give you a good guidance range.
Gotcha.
Any kind of incremental profit, we should think about kind of what would be on the incremental capex net.
The other production early on the person.
No I don't think so Scott I think that we wouldn't anticipate.
Anticipate any.
Sure.
Gotcha.
Then just a follow up here on the on final Frac on a few of your peers are getting excited about the technique and the opportunity to Gaza and other like your completion efficiency gains on pizza.
Your interest and the technique.
Gordon.
Hey, Good morning, Scott This is Joey.
We actually just finished our first time on Frac.
Right before the winter storm hit on a great success, there and we have plans to do.
Do more as the year goes on and then feather them into our operations over time.
Yeah.
Okay, and then any any cash.
On kind of breakthrough the push to improve on the savings on the deal flow.
On the first program.
Yeah from of course, we just completed it so I don't have all the assessment on the cost side.
From a time perspective, we did reduce the typical time that we would take to do a four well pad.
By about a third so significantly reduce the amount of time on location.
So we'll continue to evaluate that we'll get a look at what the cost savings, where which of course will be material and then we will continue to evolve that into our operations.
Got it appreciate the color. Thank you.
And up next we'll hear from Doug Leggate with Bank of America. Please go ahead.
Thank you and good morning, everybody I'm, Scott first of all on your desk.
With us this morning as a.
It was really pretty prescient. So congratulations on that on the framework I'm sure Mr Shah Zone.
Fingerprints all over this so congratulations guys on labor decided on.
Money.
My question was really a couple of things about the longer term on you've talked about 5% plus.
Oh.
I just wanted to make sure.
<unk>.
With the 75%.
Free cash dividends, because it's totally on market was expecting on this.
One big one.
Second four five per cent false. That's my first question on my second question is I Wonder if I could press you too.
More of US are used to talk about why your view from a comparable activity on both of them. If you could go so.
Thinking as to what that would look like in terms of Vegas Timothy M on spending because obviously you're talking about 'twenty two bucks.
Okay.
Capex on visibility along with that so two questions one on the 5% close on so on the longer term trajectory.
Yeah, Doug.
The second part of that I've talked about already but I'll go over it again, but the first part when we say, 5% plus we're just leaving the flexibility. So we can't get 5% exactly some years, where maybe six seven Samir who made three or four so our goal is really that average fee.
Five on.
On the production growth as we go through dam theory, It's I gave examples of low oil prices like we did last year.
We're gonna be flat growth and so the goal is really not to exceed five <unk>.
We do have to have the flexibility based on rig cadence.
And pop cadence to have that flexibility some years ago to six or seven but some years, we may be three or four and so I stated I think a couple of the analysts have already asked me about 'twenty two so but it looks like we're gonna be two capital efficient going into 'twenty, two and we're going to hit 8% to 10% production growth in 'twenty two.
Well reduce capital to get it back closer to five or six.
So hopefully that answers your question. So the target is really five long term.
In regards to long term I gave out some numbers.
Going out the next six years and I've seen some other projections by sales side, you know over a 10 year time period, we basically will throw off enough free cash flow that's equal to our current market cap.
And at current strip.
That 50 to 51, <unk> or $55 Brent over a six year time period at $16 billion.
And so of that 16 billion, we'll be paying out about 75 per cent of that.
As a.
Variable and 25 per cent actually goes towards that.
Debt reduction and so that's why I made some comments about our debts actions would be going down over the next six years to almost zero. After a six year time period for the reasons I gave.
I'd, rather have a much better balance sheet. It gives us more options in regard to whether we buy back stock during extreme down periods like we had last year at $50 are examples where we want to.
Pay at higher variable than our free cash flow during a given year and also is that also gave the optimism that as our debt moved towards zero debt.
Could increase to 75% up to a higher amount, obviously up to $9 95 per cent or 100% of free cash flow. So hopefully.
We're trying to give the board various options and flexibility obviously in this fluctuating commodity price market.
I apologize if I missed some of the nuances, but just to be clear I'm trying to get a big trajectory on maybe on a trajectory that goes along with that maybe that's too detailed yeah. We oh, yeah, that's one on field Gardner.
Oh, Okay, Yeah, we added but we as I said in one of my earlier statements on one of my slides that we're going to our long term is that we're adding one to two rigs per year.
So long term you can figure, adding one to two rigs per year long term.
From the current income.
Rigs.
Basically it was just under 5%.
Got it thank you okay.
So maybe just a quick follow up on Mr hedging philosophy change.
With such a robust balance sheet.
See upside risk to the oil price seems to be the growing consensus. So do you think about hedging.
Thanks.
Yeah, I mean, we're only.
Spending about 50% to 60% of our cash flow down.
So we don't need to protect our.
The capex as much as we needed to do before we do have a great balance sheet the market's an extreme backwardation.
Due to liquidity less liquidity the volatility of the market, we can't get any upside on collars or three ways anymore. So you'll probably see us do is getting less energy for that reason.
But if we see any type of spikes will probably go into the marketplace. So we're gonna be opportunistic obviously, but the market is strong I'm still a strong believer that demand is going to come back strong on both on.
Airlines and also driving around the world.
Once we get herd immunity, so and I'm confident that we can absorb the Iranian barrels into the marketplace over time and that U S. Shale is not no longer going to be a threat to OPEC and OPEC plus.
Appreciate you saw on itself price again.
Thanks.
And our next question will come from Neal Dingmann with Truest Securities. Please go ahead.
Good morning, Scott, Scott or Neal, maybe I missed this could you talk a bit around just Scott you just were talking about it you know, even though 10 year about what the potential could be on the variable.
And you've talked about I know, it's been pretty specific about the production growth can you talk about the dividend the base dividend growth kind of what you know.
Will that just continue to flow with the other overall growth I want to make sure I'm clear with how you are sort of seeing in that base dividend growth.
In conjunction with the variable.
Yeah, it'll be a.
Mall increase every year as our goal.
So it'll be minimal.
It'll be something from.
From something minimal one.
In that 1% to 3% ranges on our expectations.
Got it got it and then Scott.
Richard Jillian just one on what you saw her experience with this the outages and production downtime that you saw around the storm have you all started or will you think about or.
Thoughts about permanent structural changes or.
Anything around either I don't know if it's just infrastructure tank battery you you you sort of day, but are there things that you've started or would think about doing to you know I I know, obviously, you're hearing types of it doesn't happen to us quite often but just your thoughts about if there's things that you could do that I don't know better prevent that going forward.
Yeah, I think we'll take lessons learned from it and see what things happen, but in general it was such a.
50 year event or 100 year event, whatever you look at it.
We're still going to be capital efficient about it and so we'll have to assess that so not a no decisions today and but we'll definitely look at it just from a lessons learned but I would say that given the.
Free nature of it that you know at this point, we don't see any substantial changes that we would make.
And everything is back online now.
We're not 100%, where we've got the vast majority back on line, probably next week or so we'll get the rest of it.
Very good thank you.
Sure.
And next question will come from Derrick Whitfield with Stifel. Please go ahead.
Thanks.
Morning, all.
Perhaps for Scott or John one of your peers recently committed to a plan to offset scope one emissions through direct investments in Ccs and or renewable projects.
I'm, an ESG perspective could you comment on the company's desire to pursue something similar to this as a means to offset direct carbon emissions from your operation.
Yeah in general we're evaluating.
<unk> what companies like that and another company like Oxy is doing on carbon capture long term were assessed couples are also appears have stated they have ambitions. They use the word targets and ambitions go to net zero by 2050.
We're assessing that also so we're assessing everything everything's on the table in regard to get better and better.
So.
And then wanted to see what the Biding administration does with their their upcoming on climate. After a stimulus gets past theyre going on focused on.
The infrastructure and climate next and so we'll have to evaluate that also so everything's on the table in that regard.
Makes sense, Scott and for my follow up perhaps for Joey referencing slide nine as you think about the progression of your E&P operations with regard to pad size and lateral length.
Could you comment on where you feel the efficiency limits are today and how this slide look two to three years from now.
Hum.
Specifically on pad size.
And project size I would say that you know.
I wouldn't expect that to continue to increase but certainly.
From a consistency perspective, as we do more co developments and a full stack developments more so on more so that will continue to have on average more wells per pad.
From an efficiency gain perspective you.
You know as I said in my comments I would have never expected for us to basically achieve on 2020, what we've done in 2019.
And then continuing on my other comments that of the benefits of technology.
Are having significant improvements to the thing that I would say that's different now.
Is that there aren't there aren't very many big wins to be had simulcast <unk> may be a big one but for the most part when I look at the waterfall charts its lots of small incremental.
Wins that add up to significant improvement.
Improvement so we're.
We're certainly not a finished on that journey and we will continue to work at it relentlessly to continue to driver our cost structure lower and lower.
Sure Walt on gas.
Thanks.
And next we'll hear from Bob Brackett with Bernstein Research. Please go ahead.
Good morning quick question, then maybe a little slower when the quick question what is the timing of the decision on the variable dividend payout. So if we're sitting in one queue of 2023 is that when the decision is made about the the free cash flow payout from <unk> of 2022 for example.
Yes, Bob This is Scott we generally.
At our board meetings in late January or early February early to mid February.
And those S generally when we discuss it.
Creasing the dividend and that's when we would make the final decision at that point in time, So you're correct that the second is the.
The trade off between the variable dividend and share buyback. So you clearly expressed.
<unk> to buy back shares sitting in the middle of last year, let's say.
At some point the shares are valued to the point, where buybacks make less sense on the variable dividend makes more sense do you use an internal NAV to make that decision or is what sort of thought process would go into that.
Well first of all.
Moving to over 100 shareholders over the last 18 months and I would say 99, 9% preferred that they would add on long term they would prefer us.
To pay a variable dividend versus buying back any stock.
That's a long term and not buying stock year. After year as you know the industry has a terrible track record on buying back stock.
At the top of the market.
So people that are talking about buying stock now we're back on that close to that maybe on top of the market.
So that's the wrong time to be buying and so everybody is in favor of a great balance sheet and if you can afford it to buyback in those dips we had a chance to buy back at $50 last year, we didn't we didn't have great enough balance sheets.
That's so that's generally our feelings long term buying back on me.
During those.
<unk>.
And not buy back shares and then focused on the variable dividend is the best way to learn.
Return on capital long term.
Very clear thank you.
And up next we'll take a question from Paul Cheng with Scotiabank. Please go ahead.
Thank you alright, good morning, first Scott and the team just wanted something that you guys that Paul we assist us on patient just spend all the free cash and put some on the balance sheet I think it's the right thing for the again P industry for all companies in the things you have excess free cash flow to put into it.
The balance sheet.
At some point that debt to net zero on the net debt anyway, two questions first with the lower growth rate that you guys are pocketing now you have a quick inventory backlog.
So if that makes sense for you to look at some of the we will long day, either inventory that you may take you 20 years from now before you get to trying.
Trying to either monetize it through Southgate on that John mentioned that someone has to develop and you received the ROI T or some other form.
The second question Neal.
Yeah.
Yep.
That Scott sorry.
Okay, I generally can't remove I can't remember two questions.
So it's better to give me one question at a time on the first question about long dated inventory.
On the it's the same policy we've had.
We will continue to.
<unk> taken our tier two acreage that we have and try.
Try to.
The best of it over time, and I think with the oil price moving up there could be more opportunities will people will approaches and we've done that consistently over the last five years.
Secondly, we've entered into a drill co arrangement as we have stated back in 2019 went out and came back.
We would look at doing things like that and that that got put into place. We drilled nine wells already that is very positive and we're looking at extending that.
So those are some of the examples that we're looking at and then we'll continue to do that.
Alright.
The second question is that the Permian is curbing excess takeaway capacity and puppy that will this situation.
Situation will be here, Paul made that number yes.
So how would that impact on your marketing app on it and also.
How you deal with your existing take or pay contracts is there any way that.
To make a modified dose.
Yes, Paul it's rich I'd say, our contracts to a per firm transportation on other things that the Gulf coast.
We are we have those now and so with the lower growth rate, we have some extra capacity debt with the partially transaction as you know a number of those roll off their marketing arrangements rollout contract.
Couple of years, we'll be able to move those barrels on to that pipeline commitments.
Amendments and plus that we have plenty of barrels that we can get into Midland tank farm. So there's no concern on our part in terms of being able to get the volume and move those down and get to the higher you know what we'd hope would be a higher price market with Brent prices and the refinery markets on the Gulf Coast, I mean, clearly where differentials are now is.
Yeah, we've been slightly negative in 2020.
And so far in 'twenty, one but.
But long term, we still would think that prices on the Gulf coast and export market will be better, but what they continue to assess that and but you know given where the capacity is and you know I don't see us taking on any new commitments at this point.
But well continue to honor the ones that we have.
Thank you.
Sure.
And that concludes our Q&A session I will turn the call back over to Scott Sheffield for additional or closing remarks.
Again, thanks, everybody and hopefully we will get a chance on starting in summer late summer early fall, where we can actually has an ER visits amongst all of us as we reach herd immunity.
Here in the U S. So again, we look forward to our next quarter again. Thank you very much for tuning in to us. Thank you.
Yeah.
And this concludes today's call. We thank you for your participation you may now disconnect.
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