Q4 2020 Cimarex Energy Co Earnings Call
Good day and welcome to the ex E C fourth quarter 2020 earnings release Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.
And to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Catarina Papa The Metropolis. Please go ahead ma'am. Thank.
Thank you Chad good morning, everyone. Thank you for joining our fourth quarter 'twenty 'twenty earnings Conference call. An updated presentation was posted to our website yesterday afternoon. We may reference on the presentation on our call today as a reminder, our discussion will contain forward looking statements of number of actions could cause actual results to differ materially from what we just got.
You should read our disclosures on forward looking statements in our news release and in our latest 10-K per the risk factors associated with our business. We plan to file the 10-K later today or a P.
Paired remarks include an overview of our CEO, Tom Jorden, followed by comments from Cimarex CFO, Mark Burford and bleak Serco Vice President of operations. We also hub, John Lambert Executive Vice President of all right.
Oh, the exploration on the line as always and so that we can accommodate more of your questions. During the hour. We have a lot of for the call we'd like to ask of you limit yourself to one question and one follow up feel free to get back into the queue. If you like with that I'll turn the call over to Tom.
Thank you Kat Arena good morning, everyone and thank you for joining us on this call I want to begin by expressing our well wishes for any of you that may have been impacted by the recent severe cold weather. We were all caught by surprise at the severity of the event and the collapse of the infrastructure that resulted from it like many of our peers are.
The operations were significantly impacted by the extreme cold weather the <unk>.
Good news is out of our organization our operations are almost back to normal after an unbelievable effort by the organization.
Mark will provide more detail on the impact of Cimarex.
Despite the tremendous challenges in 2020 and in many instances because of them.
<unk> is a much stronger company as we look ahead.
We enter 2021 with the lower cost structure better asset performance, our commitment to financial performance, our continuing focus on meeting today's ESG challenges and with our recent dividend increase of reaffirmation of our commitment to the evolving business model of shell three point out.
We generated good operating results in 'twenty and 'twenty and are optimistic about the recovery in the oil and gas demand and pricing as we look ahead.
Fourth quarter 'twenty 'twenty of oil production came in at 68000 barrels of oil per day, which was 3.5% of above our guidance midpoint.
Total capital for 2020 was $577 million, which was below our guidance of 600 million free.
We generated $279 million of free cash flow after our dividend and the exited twenty-twenty with $273 million cash on hand Blake.
Blake will comment on our cost structure and John This is all of the call the answer any questions regarding asset performance.
Delivering on our commitment to return cash to our owners, we increased our dividend of 23 per cent to an annual rate of $1.08 per share.
Although future increases will depend upon market conditions, we approved our recent increase within the analysis that included the potential downside of of $35 slug of oil price.
Our plans for 2021 reflects our commitment to financial Prudence and free cash flow generation, we expect to invest 650, the $750 million in 'twenty and 'twenty, one what's the oil production forecasted to grow 2% at the midpoint.
More importantly at $55 of oil our plan calls for us to invest less than half of our cash flow generating approximately 48 per cent of free cash flow after the dividend.
Of the $35 oil price free cash flow after the dividend is projected to be 9% of our total cash flow.
Last year, we discussed our commitment to show three point of <unk>, including our long term intention to Angelina gas 70 to 80 per cent of our cash flow.
Clearly our 'twenty 'twenty, one capital investment plan under shoots this range.
We view 'twenty 'twenty, one through the lens of caution.
Although there are many reasons for our constructive outlook on both oil and gas prices, we would like to see a robust restart of the world economy and the.
Balance of supply and demand fundamentals before we would consider the 70 to 80 per cent investment range.
At Cimarex capital planning has always been about investment returns through the cycles. Our goal is long term profitability the generation of significant free cash flow and returning cash to our owners moderating our growth in response to the supply and demand fundamentals is the best way to achieve these long term goals.
Of course.
We think that our 'twenty 'twenty, one capital investment plan is prudent balanced and will leave us well positioned with great flexibility for future years.
Cyclic commodity business flexibility as the coin of the realm.
Our 'twenty 'twenty, one plans involve a significant amount of new Mexico work most of which is on federal lands on the heels of last month's executive order, which suspended federal permit decision, making authority in regional offices, we redirected the all new Mexico activity towards Texas projects, we have a deep inventory.
At the top tier projects in Texas, and Fortunately there are rules there were several that were shovel ready.
Moving to the executive order coming out of a fortuitous time, when we were mobilizing between projects, we were able to pivot from new Mexico to Texas within 48 hours of the executive orders publication.
After further analysis, we are confident that permit activity on existing federal leases will continue relatively unabated and we have restored significant new Mexico activity into our 2021 program.
We look forward to working with the state and federal government as we develop our leasehold.
We are also continuing our emphasis on environmental excellence in 'twenty 'twenty, one and.
'twenty 'twenty, we set aggressive high pressure flaring and methane intensity goals linking executive compensation to their achievement as outlined in our investor presentation. Our organization crushed both goals. They accomplish this through diligence creative engineering and advanced data analytics, our environmental goals.
For 'twenty 'twenty, one and will continue to challenge the organization and comprise 30 per cent of the executive team of annual incentive metrics.
Before I turn the call over to Mark and Blake I wanted to comment on the tremendous challenges we faced in 2020 and acknowledge how proud we are of our organizational response.
It was easy to be humbled in 'twenty 'twenty by the hardships that so many of his face and buy the valiant effort shown by health care providers of burden see responders essential workers and educators and the time when our offices went to remote work our field personnel of Gogo, each and every morning and provided critical attention to our assets.
They kept our production flowing and continued to bring new wells on line.
They had the same health concerns for themselves and their loved ones at the rest of his head for our own but they did not have the luxury of working remotely.
Although we are deeply grateful to all of our employees, who gave it they're all the keep cimarex healthy and prosperous starting 2020, none of us deserve our gratitude as much as our field staff. They're an example of with excellence and dedication look like.
With that I'd like to invite mark to discuss our financial results and outlook.
Thank you Tom Good morning, everyone I'll first discuss our 2020 financial results and then move on to our 2021 outlook.
As Tom described Cimarex is twenty-twenty operation performance generated substantial amount of free cash flow for.
For the strengthening our investment grade financial position.
We exited 2020 with net debt of $1 73 billion of.
The decrease of $178 million from 2019.
In the fourth quarter, we also repurchased 55% of the outstanding eight and one 8% preferred stock of $43 million.
We remain focused on maintaining and improving our strong financial position generating free cash flow and providing cash in terms of our shareholders as demonstrated by the 23% increase in our regular cash dividend to an annual rate of $1 <unk> per share.
Our fourth quarter top total capital investment was $136 million.
Putting $101 million of drilling completion capital.
Full year 2020 capital investments of $577 million, which was the 56 per cent decrease compared to 2019 and 4% below our guidance range.
Our 2020 total cash operating costs comprised of the alloy Workover transportation and production taxes, and G&A totaled $7 46 per Boe.
Which decrease on a per unit basis, 8% as compared to 2019.
And on the absolute basis total cash costs in 2020 decreased 134 million or 16% as compared to 2019.
Adjusted cash flow from operation of the fourth quarter total $257 million and we generated $97 million of free cash flow after the dividend.
The full year 2020, adjusted cash flow from operation was $944 million with free cash flow of 372 million and two in incentives of the 9 million after the dividend.
Moving on to 'twenty 'twenty, one outlook, we expect 2021 total capital investment of 650, the 750 million free.
The on 73 net wells on production the.
The majority of the capital is being directed to the Permian the slightly less than 10% to be invested in the Anadarko basin.
Oil production in the first quarter of 2021 is expected to average 65 to 69000 barrels per day with total equivalent production to average 205000 225000 Boe per day.
First quarter guidance includes an estimate for the weather impact on production volumes in both Permian and mid continent regions.
We currently estimate on average our first quarter volumes are being negatively impacted by 5% to 7% and winter storms, which is around 4000 barrels of oil per day.
For full year 'twenty, one oil production is projected the average 75 to 81000 barrels per day, you spent to run two frac crews in the Permian for most of the year, resulting in a projected oil exit rate growth from fourth quarter 'twenty, the fourth quarter of 'twenty one of over 30%.
Total equivalent production of expect the average of 235250 5000 barrels of oil equivalent per day.
Looking at the 'twenty, one plans in terms of capital investment rate and potential free cash flow. We illustrate on slide five of our investor presentation, two price scenarios of $35, Debbie Ti and $55 of <unk> to give perspective on reinvestment rate and free cash flow generation.
At $35 W. T. I, we project, our total capital investment rate to be 79% of our cash flow.
At $55, <unk>, which approximate the recent force strip prices our capital against the rate is 45% with 55% free cash flow.
That would be free cash flow of approximately $850 million per the year of elixir.
The estimate exiting the year with more than 900 million of cash on our balance sheet.
At recent strip prices, we did achieve our goal this year of having sufficient cash to retire our 'twenty 'twenty four of them notes of 750 million P.
Positioning us to evaluate other options of returning cash to shareholders through further sustainable growth of our regular dividend and or instituting a variable dividend.
Our asset quality cost structuring the organization put us in a great position to generate significant returns and free cash flow for owners in 2021 and beyond.
With that I'll turn the call over to Blake.
Thanks Mark.
We ended 2020 with and are currently running five rigs and two completion crews in the Permian and one rig in the Anadarko a marked difference from the one rig and no cruise we had running last June our 'twenty 'twenty Permian basin operated D&C capital cost per lateral foot came in at $944 per foot, which was <unk>.
15% from our 2019 average.
Late 2020, D&C cost the average 800 to $850 per foot and we expect to stay within this range throughout 2021.
While we have recently seen some increases in service rates and have incorporated those into our go forward cost we expect some of the inflation to be offset by efficiency gains.
Our operations teams continue to deliver in 2020 with our average drilling feet per day of 34 per cent and completed feet per day up 29% compared to 2019.
These efficiency gains were driven by many factors, including continued multi well pad drilling offline cementing and tank battery commingling hub.
It's off to all of our operations teams, who continue to find new ways to increase efficiencies lower cost and challenge the status quo.
A new initiative. We are currently pursuing is the electrification of our D&C operations as well as field compression.
Of note, we have been working closely with Halliburton to develop electric frac pumps, driven directly from our Cimarex zone power grid.
Free grid powered frac pumps have been in operation since November of 2020, we have gathered valuable data on fuel savings and emission reduction while also absorbing the 30% to 40% increase in pump rate due to the on demand power available from our grid.
We are incorporating this data into other projects, including the electrification of drilling rigs and compression to guide development of our power grid in Culberson and Reeves County, Texas.
These large contiguous add debt that includes cimarex the owned and controlled power grid provides the scale and inventory needed for these electrification projects.
We plan to continue to invest in our power grid. During 2021 as we firmly expect these grid investments will lead to a lower cost structure and substantial emission reductions for many years to come.
Our 2020 lifting cost came in at $3 <unk> per Boe and.
And we are guiding two of 2021 lifting cost of $3 10 to $3 60 per Boe.
Our 2021 low we include the increased workover activity, along with newly instituted and maintenance programs focused on limiting emissions, reducing spills and improving asset reliability.
And lastly, a few operational comments regarding the recent storms that impacted our operations in both the Permian and Anadarko.
Almost two weeks ago, when it became clear that these storms can be significant weather events.
Our operations teams to began putting plans in place to keep our operations running during the storm.
We mobilized our entire field staff, which worked diligently and safely through extremely tough conditions.
Our teams brought in road clearing of equipment to keep drug falling obtain steamers and heaters to deal with freezing issues and work closely with our midstream partners to maximize product flowing to market.
During the storm, we did encounter of Frac downtime due to logistical issues with Dan, but our drilling rigs maintain the operations throughout the storm.
Thanks to these efforts Cimarex was able to safely keep the significant portion of our operations running throughout the storm.
This was an all hands on deck of that per Cimarex and our field staff. The efforts are truly commendable.
And with that we will now take questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please limit yourself to one question and one follow up and if you have further questions you may reenter the.
The question queue at this time, we will pause momentarily to assemble our roster.
And the first question will come from a run J P. R of men with J P. Morgan Chase. Please go ahead.
Yeah. Good morning, Arun J ran from from J P. Morgan.
Tom how are you.
Doing well run how're, you doing doing well doing well.
Yeah.
You know of.
Question here Mark in your prepared comments you talked about.
Perhaps the board evaluating a variable dividend.
Policy, we we we didn't have the of the dividend increase the could you.
Provide a little bit more meat behind the bone you know, obviously I think you said $850 million of free cash flow this year.
On your updated guide at 55, so just wanted to give some more color around that variable dividend commentary.
Yes the room.
With our current emphasis on tuning cash for having sufficient cash to retire those 2024 notes as of our first priority as we discussed.
And second party that has been going to increasing our regular dividend on a sustainable basis. So we're checking the sustainable dividend growth.
This year and we'll see how prices really do stay and you know we're very optimistic that $55 case, you ran could come true, but we've seen enough volatility in commodity prices, we're not going to make any decisions around that at this point, we will make sure we see the cash our cash flow come through in the cash came in in our balance sheet and then we'll make further decisions then.
But definitely our board has been open to discussions on our steps certainly of sustainable regular dividend growth very supportive of that and further open to discussions on a variable dividend.
Great great.
And Tom My follow up is are you you mentioned, how cimarex had been kind of a just and you know had.
It had been potentially pivoting activity between the new Mexico, and Texas just given.
Some of the rulings from the department of interior of the the temporary suspension.
I was I was just wondering.
Why are you guys were considering pivoting from new Mexico, because it was our understanding that if a project has been permitting that you could continue to operate that project, so maybe a little bit of color around.
Your discussion around that pivoting of of activity between the states.
Well sure I think in hindsight.
I would say we overreacted.
That's exactly the reaction of would've wanted us to have you know if I can go back to the ancient history of four months ago.
This was a 24 of 48 hours after the Keystone XL discussion and we had two rigs in route to drill a fairly large project and we didn't we did need additional right of way you know the the drilling permit is only one of multiple permits or approvals. The one day to execute the projects on federal lands.
The drilling permit is often issued or applied for 18 months before of the wellness, but if anything changes either of cementing program casing program fairly.
Immaterial change you need of sundry you fall of sundry of notice and you need approval and then often while the project is under way, you're still securing right of way, which involves federal permit approval even to the extent of laying water lines on the surface of your Frac job. If you cross federal lands requires federal approval.
So when they suspended all local decision making authority on permitting.
We were we were in a fortuitous position we were we were Gil.
In the middle of a project, we were about ready to mobilize rigs and the new Mexico.
Again on the heels of that Keystone XL decision. We said we are not putting 100 millions of dollars of pipe in the ground until the situation clarifies. Since then I think it has clarified that as I said in my remarks, we're very confident the existing permits on existing leases will be allowed to be developed.
But it was you know an extraordinary opportunity for sort of pivot to Texas, while we figured this out so yeah, yeah, we overreacted and Oh.
And in my opinion of bully for us for that.
Well, it's great to have the flexibility of towards Texas. The thanks, Tom for clarifying that appreciate it.
Bedroom.
Yeah.
The next question will come from Jeanine Wai with Barclays. Please go ahead.
Hi, good morning, everyone. Thanks for taking our questions.
My first question is on kind of oil trajectory.
It is more on kind of medium term growth so.
Given the timing of completions for 20, plus the freeze off in Q1 'twenty one it looks like the full year oil.
Quarter over quarter increases from Q2 onwards. So I guess first question is do you have any color on the <unk>.
Q1 of the exit rate.
Sure.
Yeah, Hi, Janine, Yes, we do expect.
The second third and fourth quarters sequential growth, we had a little bit more towards the third and fourth quarters.
The fourth quarter 'twenty, the fourth quarter 'twenty one.
Rate of growth is targeting north of 30%. So we do expect.
The significant year over year change in fourth quarter to fourth quarter growth in oil, but again, it's a fairly steady growth, but with a bit more towards the third and fourth quarter.
Okay, Great and then.
When when we do the math.
Like a higher exit rate.
It looks like you could be implying double digit year over year oil growth in 'twenty. Two if you just kind of held flat at that exit rate because it is so much higher.
A reasonable scenario I know theres, some variability on the year to year growth, but the overall medium term outlook is for a lot of single digit growth. So just wanted to maybe get some clarity on that because it kind of imply pretty good capital efficiency for 'twenty two.
How strong are entering the year.
Yes, you need sort of it certainly would that trajectory of where state coming into this year right back to the matter of just reactivating two frac crews in the Permian running the five rigs we are resuming getting back to levels more or we saw in 2020, but in 'twenty 'twenty, one and going into 2022 with day particular exit rate, we see in the fourth quarter.
<unk>.
We don't expect debt ultimately just absolutely have to maintain that fourth quarter rate will be the evaluating the 2022 plans and evaluating where we invest in the piece of the desk, but we expect to have steady.
Our rig and completion cadence going into 'twenty, two and we don't have the targeted growth rate in the 2022.
Yeah Jeanine. This is Tom let me just comment on the let me call on that if I could.
The challenge here is 'twenty 'twenty sort of such a huge disruption not only of our capital program, but also our production and so it's kind of hard to look at quarter to quarter and make any kind of influence that that would be of steady state number.
You know we are we are full of very good projects and our you know I want to reiterate what I said in my opening remarks, our long term goal is really driven by cash flow generation and not production increase but when you come off of year like we've had in 'twenty and 'twenty and we of the kind of the projects we have to say Oh my.
Goodness, you don't want of heavier quarter quarter fourth quarter increase.
Yeah, rather like asking of Thoroughbred the pull of milk truck I mean, we've got tremendous assets and it's just that's just the way the numbers well fuck fell out and given that we're investing.
Less than half of our cash flow this year.
That's the that's just provides us tremendous flexibility and we can react to the marketplace as the year goes on but when I when when when I see that Q4 to Q4 exit rate change I think while we have unbelievable flexibility both financial and operational for 2022.
Great. Thank you for the clarification, yes.
Yes, Thank you Janine.
The next question will come from Doug Leggate with Bank of America. Please go ahead.
Thank you. Thank you Tom I Wonder if I could just ask you for a little help on your comments of run your comfort of the existing leases and permits will be allowed to be the one.
I know you talked to.
Sales of models, but I was just wondering if you could offer some color as to.
What you're seeing what you're hearing what the discussions you've had the conclusion.
Well I don't know that I can offer you any inside baseball that's not already widely circulated where we have had lots of discussions with elected officials at the federal level from new Mexico a.
Both centers offices and in addition to the Governor's office.
We're confident that cooler heads will prevail and that the tremendous not just the value.
But lifeline that the oil and gas industry provides the new Mexico will be kept alive and well.
Yeah, we do expect a new regulatory environment, we expect many of the Obama era of regulations from the federal level to return and be strengthened.
And for that we're ready you know, we're a better company in every respect including environmentally than we were four of five years ago.
But.
Every indication that we have been given and then again I I I I I don't claim to be the Oracle on this but every indication we have been given has led us to be optimistic that we're going to be able to develop our assets in a very prudent manner.
Oh.
I appreciate the answer.
Tom I Wonder if I could just my follow up is really on the capital allocation share key point or more.
Moderating growth types or I mean, obviously.
Your scale you know 80000 of bonds can you give or take.
5% growth it doesn't really move the needle at the micro level.
On your free cash flow yield in our numbers of at least is getting well into the mid teens you got tons of options just to walk through the non cash in the balance sheets in great shape. So I just wonder if you can walk us through.
Where are you on the spectrum of the discussion.
Timing of accrual.
Do you return the cash available dividend and the rest of the touched on of anything of that is already kind of in a good place I'm just thinking about how the and there's a nice talking to all of the.
What are you doing ex assuming the super cycle that you've seen all of the people told me about it doesn't play out.
The well.
What what are we doing the uncertain futures and the topic of discussion for the last eight P. M.
But but you know Doug we're what we we've paid the dividend since 2006, so a culturally I think the idea of returning cash to our owners is.
Not a.
Yeah. The we don't have to blink of an eye for it to be embracing our boardroom.
But we you know of and Mark said it well at the outset, we have made.
The tactical decision that we would like to have cash on their balance sheet sufficient the call. Those notes due in 2024 now you know you could argue well that's too conservative you ought to be returning cash in some other fashion because it certainly looks like youre going to the.
Go well beyond that goal of massing the cash required to call those notes well.
Well, yes, it does but I I you know we were remarking before the call. This morning, how optimistic we worry about 2021 year ago today.
So reality has the way of intervening and right now we would like to just get that cash on our balance sheet.
Of that defensive posture quite frankly that will allow us to have the flexibility of call. Those notes and then and then and the only then if there's something to talk about as far as other avenues of returning cash to shareholders, but where we're deeply committed to it I would tell you theres not a blink of an eye in the boardroom when we talked about this.
And we're also watching some of our peers have been some creative.
Go first out there we respect very much so I'm really interested to see what other people do we're not necessarily wanting the volunteered to be the first heroes in this campaign. So we're very.
Very willing to look in the best practices.
And the marketplace Mark do you want to comment on this for the yeah. No I think your last point is very valid there too Tom I think it'll be interest to see how the market starts.
Let's turn of value some of the variable dividends and obviously you want to give some visibility to that the mechanics of it and seen how others do that in line.
Valuate in what's the best Avenue to do that I think will be important zone and then moving.
Having the first school and having the cash on our balance sheet for those notes I think gives us some time to evaluate that.
Total you've led the market in essence of comment.
My hope is that the market my competitors on junk of generally start to recognize the free cash flow visibility and that's true of January.
Appropriate cases with allocation and stuff.
The 44 of them.
Excellent I appreciate everything you're doing all of them.
No questions.
Thanks, Doug.
The next question will come from Brian singer with Goldman Sachs. Please go ahead.
Thank you and good morning.
Good morning, Brian Brian.
I wanted to further follow up bunch of needs question with regards to the implications of the production trajectory as it would relate to the end of this year and it's in and into next year, because you know going from a mean of mid sixties type production of what could be 80 to 90 plus in the second half of the of the year is pretty is pretty significant and it seemed like you raised the possibility of.
Trying to maybe stabilize next year's production at a more materially higher level than the than this year and I wondered if you can kind of talk more about maintenance capital and how you expect that to evolve all of this.
New range of production is more 82 to 90 mm of relative to the 650 of $750 million of Capex for this year.
Yes, Brian the.
Maintenance capital is obviously something that is a lot of daughter different discussions around that and what the definition of that means but as you just said if you're thinking in terms of maintenance capital of somewhere around 80000 barrels of oil per day.
The generally kind of our midpoint of our guidance for annual 2021 is 78000, and so think of in terms of that.
We're looking at probably the low end of our guidance range of six something in $650 million of slightly less for just trying to maintain that 80000 Boe per day.
Okay.
Do you think the low end of this year's guidance would be able to stabilize that 84 are in in 2022.
Yes, that's right Brian.
Got it great and then my follow up is just a quick one on the.
Use of cash because I think that's been talked about here you did spend some capital of buying back preferred shares and I just wondered if you could talk about whether that's the.
A needed further use of cash to close that out prior to the consideration of of.
Returning cash income more incrementally than what youre doing with the dividend to shareholders.
Well, yes, the preferred the eight and one 8% perpetual preferred so as we have opportunities to purchase debt and we'd want to do that just on our capital structure being fairly expensive the window for which does to do that it will lose the uncertain it'll obviously, depending a lot of an interest rate yield and other things to keep the AD opportunity purchase more the yes.
That eight and one 8% preferred in the same bucket is the having cash available for the retirement of the 2024 notes.
Great. Thank you.
Brian.
The next question will come from Michael <unk> with Stifel. Please go ahead.
Yeah, good morning, everybody.
Mark you brought up of interesting point of Bryan's question in terms of the maintenance Capex.
You know you'd be at sort of the low end of the range too.
Call It hold production flat in that 80 day whatever 84.
Bo per day range.
This year, though you didn't hold your reserves flat if I look at the reserve.
Additions relative to production or last year I should say is that.
Incineration, when you're thinking about maintenance capital as you go forward or how are you.
Think about your your reserves relative to our maintenance capex.
Yeah, Mike It certainly with the significant drop in our capital in 2020 down 56% we did see.
The 14% decrease in our proved reserves and as you look out in this current year plan and in the maintenance plan, we would view those reserve additions to be kind of paralleling or flat with kind of a turn of maintenance mode or we pursue pursue our review of our reserves as being relatively flat and this year, we expect with the kind of the current plan that we have that we will see growth in our per.
Reserves again more trailing towards the activity levels with debt.
Activity of couple of Frac crews and five rigs in the Permian that we would see our of reserves growing this year and again in a flat world. We would see our proved reserves of you maintaining flat.
Okay. Good.
And the Tom you mentioned the meeting the ESG challenges one of your competitors talked this morning about purchasing carbon credits.
And the investing in the kind of income generating projects to get the.
Carbon neutral scope one emissions just wondering if cimarex and the board has been considering anything like that.
We have not discussed that to date, we're we're pretty focused on the engineering aspects of our own assets and we have you know it's like a nicely said, we have a way of a lot of opportunity of their own assets.
I mean, I wouldn't I wouldn't.
Put carton of.
Some kind of carbon offsets off the table, but.
I can't imagine it's doing in the next few years, Yeah. We've got we've got tremendous opportunity to.
To make material progress through you know Blake mentioned electrification.
We've got certainly.
A lot of opportunity in high and low pressure of emissions and we're you know we of our best lines on this project and I am wholly confident that we're going to.
Really make tremendous progress so no, but I mean, the direct answer your question no we've not discussed the offsets.
Great. Thank you.
Thanks, Mike.
The next question will come from Leo Mariani with Keybanc. Please go ahead.
Hey, guys just looking at your 'twenty 'twenty, one capex budget.
Italy fairly decent range. There are 650 day of two $750 million and I guess, the 100 million on that as you know, let's just call. It I don't know circa 16, or so per cent range their top to bottom.
Can you just give us a little color around whats dictating the the top of net in the bottom of the range of this.
Budget potentially allowing for maybe slightly higher activity at the end of 'twenty, one to get a little bit of a head start on 2000, <unk> because they're a significant service cost component, but it might be a lot of uncertainty there of what can you kind of tell us about the range.
Yeah, I'll I'll tee it off and then hand it over the Mark yes.
Yeah, we wanted to leave ourselves a pretty wide range because the rest of lot of elasticity in things, we'd like to do this year certainly a number of things are around ESG. We have some really good opportunities to make some make some of them.
Facilities modifications of reduce our emissions of that will that will involve a little bit of capital.
I'll also say that as we reenergize or in the Mexico program, but we're not sure to the great partner participation. We're gonna have lots of projects, we do have projects, where all of our working interest of little lower than it is in Texas and so we may find ourselves with a little more working interest on projects we absolutely.
I really loved and we wanted to give all of flexibility for that but Mark why don't you give a better answer.
Yeah, Tom I think you hit on a couple of points I was going to make the we do have some variability there whether point the leaves that we our midpoint of our guidance as we typically.
The capital guidance is kind of of our current status of where we see the fees are at and we have incorporated some early time data of some for some increases related to sand as far as holding and other components there, but we have some room of hopefully in our budget that if we see some additional inflation we would also maintain.
Our current range, so really the working interest component, maybe the potential inflation and just an ESG type work to really the upper end of the range.
Got it okay. So it sounds like you're basically not really planning on kind of changing the the activity that you've laid out in the plan for 'twenty, one pretty much keep that steady and then obviously these other variables will dictate kind of where you fall just wanted to confirm you're not really looking at.
The activity late this year or anything.
Right that's right.
Okay helpful.
That's one of the follow up a little bit on the the dividend question. Obviously you guys talk about this the right in a couple of questions already here, but obviously just the you know very healthy increase this year.
The 23% very chunky, but to start the year certainly it sounds like you'll have those bonds paid off I think the plan I think it's the called them in early 2022, and then the board will still have the kind of well go out there and it's the most of them decisions about things, but is it fair to say that the.
The the preference today would be the have just had very solid long term growing base dividend is kind of the foundation for some racks over the next several years.
Well the let me just clarify one point on the yes, we do expect it.
The $5 oil of the current strip that we would have sufficient cash on the balance sheet, but those notes arent callable in 2022.
We could have some options on tendering of other things, but they're not callable until the first quarter of 2024.
So we just have to evaluate what our options are maybe chip away at those in the meantime.
But as far as the dividend increase yes, certainly we want to how the pattern of the increase in dividend, which we've had throughout our history.
Certainly one of the stress test it to make sure of sustainable and that sales we depicted in our slide five even at $35 oil that dividend only represents 12% of our cash flow and at the current strip. It's the only about 7% so in that range of somewhere around 10% of our cash flow, we feel very comfortable that day of dividend sustainable and well if you look at future increase.
We will be doing the same evaluation to make sure that whatever we raised the regular dividend by debt would be sustainable through the cycle.
Okay very helpful color. Thank you.
Let me just add to that you know the.
The way, we love our regular dividend, but as Mark very happily said.
We do want it to be sustainable and so you know the beauty of of variable dividend is a its very name it's variable and so you know we're as we said earlier, we're watching different models rollout but.
We would love to find a sustainable dividend philosophy, I'll say that and I think the combination between the ordinary variable is intriguing to us, but we were we were delighted to increase our dividend. We felt it was the right time, we wanted to do a significant increase of if for no. Other reason just to put our money where our mouth is and.
I'm sure our commitment to our owners.
Okay. Thank you for all of the color Tom.
Okay.
The next question will come from Brian Downey with Citigroup. Please go ahead.
Good morning, Thanks for taking the question is the following up on Blake's comments on your electric grid completion, and electric rig experiences any sense for the magnitude of efficiency or cost benefits of those become more wide scale I guess, what's the what's the size of the opportunity pie there both on the the subset of projects the dose could eventually be used on.
And what's the potential magnitude of of the cost and efficiency savings.
Sure Thanks, Brian the.
A lot of its dependent of course on what service rates do in the future, we're all watching that closely but I.
We've gathered enough data to think we're probably chase and 25% to 50 Bucks a foot on our cost structure, which is pretty significant and then also we have fuel savings on the opex side. When we look of compression and then you bring in some of horsepower efficiencies on top of that so.
On the capital side 25 to 50 Bucks at todays prices and then go forward on the Opex.
We'll see as we gather data, but we expect lower opex as well.
Great. That's helpful and then maybe for Tom remark on the the free cash flow scenarios you show on slide five any changes in how you're thinking about approaching your hedging program on either commodity front as you know Youre building cash of the 24 notes and and any shareholder return beyond that.
You know, Brian we had a pretty steady methodical hedging program the last several years and I have.
We've seen 2020 of that was sort of benefit as we look at our hedge position for this year as we layered in hedges to 'twenty or 'twenty, one we'll be having some cash payments, but that's the kind of a natural component of the true hedge program as you head through the cycle, but we'll continue to maintain of kind of a quarter to quarter hedge program, where we target the 10% per quarter for five quarters Board allows.
To get to about 50% hedged for the preceding for 12 months and will continue to be methodical about it and not being speculative you're optimistic, but just a sampling that Ford strip periodically every quarter through the year.
Great I appreciate it.
Alright.
Yeah.
Okay.
The next question will come from Noel Parks with Tuohy Brothers. Please go ahead.
Good morning.
Good morning, all good morning.
I'm not sure if you touched on this already but.
Have you if you could talk a little bit about.
You know where the strip is for oil and gas and just the the economics out in your.
Oklahoma project.
And and also what sort of working interest do you think you'll be looking at for the activity you have there this year.
Yeah. This is John.
We're currently the valve.
The team right.
Right now in Anadarko, one of our long haul projects, where we're drilling five wells.
We model currently that's true very very attractive returns returns that compete heads up with a number of our Permian projects, which is why we're making this investment right now.
But the reality is we need to see those results just because of it looks on paper, we'd like to actually see that the performance of the well we think it five wells per section.
We will have the kind of performance that will lead to those results.
And if we see that then that Mike's first the one or even the pro more capital of that way, but the.
Just kind of putting our toe in the water there we really want to see this development ticker come on and see what kind of results we get from it and then we'll move from there and in terms of any further investment as far as the working interest there its quite high we've done a very nice job of accumulating other interest in there I.
I mean, right now we show about 94% working interest.
Oh, Oh, Wow, that's considerably above where.
It's been for some of your attitude right well quite frankly over the last year with the.
A lot of people not not really paying much attention, we've been able to accumulate more interest in that area and it's an area of we'd really like and we think it's kind of deliver great returns, but again the proof will be in this particular development of the results we see.
And just for my follow up.
Do you just have any thoughts on.
NGL pieces of puzzle as far as just pricing and what do you think that might.
Look quite calm.
Of the wellhead and also for your your marketing.
Yes, no we with our NGL component of our realization in the fourth quarter view of 33% of <unk> seen the benefit of higher propane prices propane inventories have been very positive and we've seen well see how the exports continued to trend here going forward, but inventory levels are very reasonable.
And we're optimistic about Ngls.
Really probably the person to ask those for Ngls are marketed at the tailgate of our plants. So we don't really directly market, our ngls, but we're optimistic about overall NGL component of our our barrel of oil commodity.
Great. Thanks, a lot.
Sure.
This fall of I, just like the I just want to make a quick comment that.
The the 2020 and including the weather events like we just went through have reaffirmed in us why strategically we've always wanted to be of multi basin multi commodity type company.
There you are our marketing group has some valeant times in 'twenty 'twenty, where markets were locked up you know you all remember the tremendous pressure on wall Hall.
Having diversity of assets was a tremendous benefit to us as it was in the recent storm of that so.
You know I'm I'm, John and his team have done a phenomenal job of bringing forward some fantastic investment opportunities beyond the Oracle basin that debt are at the very top of our force ranking on returns.
And that's that strategically consistent with how we want to manage the company.
Great. Thanks, a lot.
The next question will come from Neal Dingmann with Suntrust. Please go ahead.
Ammonia.
But some of my question or I guess, maybe for you or John just looking at slide nine I liked the the new well design can you talk a bit when.
When you think of that now and is that does that essentially eliminate any of the interference between the X Y and the a universe of the previous design or maybe just talk a bit about you know the upside and what youre seeing with that that new design.
Hi, This is John I'll take a stab at it and I'm sure Tom will want to follow up I think the slide you're referring to is what we will be doing.
With our count fleet development co person and where we have relaxed or upsize of the spacing.
In terms of the well count, but as you you did point out as well as the vertical spacing between landings and again. This is just all the lessons learned from multiple developments that we've already undertaken.
We've talked about this there was clearly greater communication or what we say permeability going on between our well bore.
So then what we originally modeled active free of adjusted for that and what this slide demonstrates as we think going from 10 to seven wells per section.
We will essentially save the cost of three wells, but essentially achieve the same total recoverable reserves for that section the greater capital efficiency and higher overall project returns.
And this is being carried across all of our projects not just here in Culberson and Reeves Lee and even what I mentioned earlier in the loan Rockwood. There was the time of bone rock, we thought we'd be at eight wells per section now we're at five we see at five we do a much better job of keeping our condensate yield having less of the decline and again.
The better economics.
The.
The the spacing is going to vary across our asset for example in culberson. The map that's on slide nine youre going to see.
Six day wells per section on the western side in the eight to 10 wells per section on the eastern side, but the important thing is as John pointed out we're trying to maximize the value of that section.
And the beauty of the deep inventory as you. All know we are of very long deep inventory as we can make decisions from going from 10 wells per section of the seven wells per section.
Solely considering maximizing our value and we don't have a concern of inventory overhanging that decision and it gives us just the financial flexibility that bleeds into the financials that we report.
Okay, and then one just follow up all of sudden kind of completions I think you mentioned doing just a couple of fracs for most of the year, maybe two or three do you think is that still kind of an optimal completion you know I'm curious if you're looking at thinking about optimal completions in the Permian.
This is just even if you have a little bit reduced activity or the limited activity like that are you, losing any of these you know any of that optionality or or or.
Is it would it be more I guess my questions would be more optimal if you happen to be running.
They will run more frac spreads and you know add some sign will flex and such.
I'm a lot of Blake handle that yeah. We we've spent a lot of time modeling program of efficiencies.
And what the right mix of field assets is to maximize our efficiency what Blake you take that question.
Yeah sure we look at all kinds of efficiencies and what scale. It takes to achieve them and you know a lot of it requires.
Diamond Frac for example greatly.
Greatly limits our flexibility in certain cases, so that's not always the optimal result, when we look at debt.
So between the different size of the projects that we think really drives efficiency more than anything wells per pad is the number one driver for efficiency and we're maxing that out of every chance we get.
Very good thanks for the detailed gas.
The next question will come from Paul Cheng with Scotiabank. Please go ahead.
Thank you of the morning.
I apologize Paul My first question.
Because I think people have been nothing of that.
When I'm looking at your fourth quarter, except the weight.
A 30% growth that's about 80000 barrel per day, so even if we assume that that's going to stay flat for the next three yeah.
Yeah the 2024.
That's about 4% growth so when I look at your presentation on the pace that you say only one of them are expect to be flat to slightly up yields of it yet from 2021 to 2024.
The statements do correct.
Correct.
The intention you'll make just keep your spread support and the extent of a year or this is the he's on the assumption of commodity price per happiest less much less robust than the way we ought to be so trying to understand.
What the extended that statement means under what condition.
Yeah, Paul So yes on the slide six we were trying to depict what a.
Free cash flow of framework could look like even at a lower price case, which were the sky, you're describing there of $35 oil and certainly at that level, we would be.
Much more concerned in our capital reinvestment and we would you also be looking at the <unk>.
Debt retirements as being a very high priority and of that kind of world of $35 Debbie Ti.
And but even at 35 <unk>, we believe we would be in a position to.
Have flat and maybe maintenance capital is slightly up volumes, even at $35 oil and we believe we have sufficient cash over that time period of path of 2024 notes Thats, what youre trying to describe in that framework certainly at higher prices that R 20.
Two and beyond type World, we will have to continue to evaluate we don't.
Signaling that we would want to go to any kind of growth mode, but we will continue to evaluate our capital plans each year as the go into the year.
Looking at our capital plans based on conservative price decks.
Realistically, even well below where the current strip is kind of setting that capital plan level and looking at making sure we have 20% to 30% of free cash flow available after after our.
Capital plans and revisiting the firstly of investing 70% to 80% of our capital our cash flow and our capital. So it's a it is a mixture of kind of how we're trying to describe there with $35 oil versus again kind of an ongoing plan with the more of it more current strip pricing and current pricing involved.
And the only comment I would make is.
Yeah, I think slide six has built more with the viewpoint to where we want of land steady state and because of the huge production decline we saw in 2020.
As I said earlier, it's kind of hard to throttle back I mean, we're gonna with with any kind of even the very modest investment and I think the share of below at 50% of our cash flow you would use the word modest.
We'll see some Q4 to Q4.
Reasonable growth rates, but we're not managing over growth. That's that's not what we're doing where we're really managing around our long term financial targets.
Okay.
Hi.
Last question for me on the.
Okay.
Project tree.
Because of the number of wells you will come on stream is much less in the first quarter comparing to the remaining AR should we assume that it's going to be followed that oil is going to be pretty steady.
Yeah, Paul I'm, sorry, you're on a quarter to quarter production profile of is that what you asked that.
The Capex Capex, sorry of Capex will have a little higher capex in the second and third quarters, but it's on a relative basis is fairly steady, but we do have a little bit more completion capital in the second and third quarters.
Okay all right. Thank you.
<unk>.
This concludes our question and answer session I would like to turn the conference back over to Thomas Jorden for any closing remarks. Please go ahead Sir.
Well. Thank you I just want to thank everybody that joined US. This morning, we're very optimistic about 'twenty 'twenty. One I. Appreciate your great questions. I think we're pretty pleased with the shape of Cimarex, Suzanne and I will say as I said at the beginning we're a much better company entering 'twenty 'twenty, one than we've been and that's the <unk>.
Rest of it to the challenges we faced in the organizational response and I know we've.
We've all had some challenges in 'twenty and 'twenty hope, you're all doing well and again. Thank you. So much for your interest and your great questions. This morning. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
[music].