Q1 2021 Cimarex Energy Co Earnings Call
Good morning, and welcome to the Cimarex first quarter 2021 earnings conference call.
All participants will be in listen only mode.
And you need assistance.
Conference specialist by pressing I'm sorry.
So if I see Ralph.
After todays presentation, there will be and opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad.
Oh and your question. Please press Star then two.
Please note this event and it's been.
A recording and whatnot.
And I'd like to turn the conference over to Megan Hays, Vice President of Investor Relations. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining us today discussing <unk> results for the first quarter of 2021.
It just depends on today's call may discuss non-GAAP financial measures you will find the most directly comparable GAAP financial measures and appropriate reconciliations to GAAP metrics and our press release, which is available on our website and also as a reminder, during today's conference call. We will provide forward looking.
<unk> based on current expectations I also call your attention to the forward looking statement cautionary statements and other disclaimers that are provided in the earnings release and presentation.
Joining us on today's call will be Cimarex, President, Tom Jorden, our Chief Financial Officer, Mark Burford and our.
And our vice president of operation likes to work out.
Following their prepared remarks, we will take your questions. Please limit yourself to one question and one follow up with that I'll turn the call over to Tom.
Thank you Megan and thank you to all of you who have joined US This morning.
As you see from our release Cimarex had a solid first quarter and we're on track to meet our full year targets, we generated GAAP net income of $128 $1 million or $1 25 per share and.
Adjusting for $99 $4 million and non cash mark to market hedge losses, our adjusted net income was $203 $7 million or $1 98 per share adjusted cash flow for the quarter came in at $395 million, which.
Les exceeded capital expenditures and allowed us to generate $208 million and free cash flow after payment of our dividend.
We ended the quarter with over 500 million cash on hand, and net debt of $1 $5 billion.
Our oil volumes averaged 68.6 thousand barrels per day during the first quarter, we expect to see significant momentum and our oil production through the latter half of the year as we bring on a number of development projects. We are seeing strong results, thus far from our relaxed spacing, which will enhance.
So our capital efficiency going forward.
And as previously guided we expect our 2021 exit rate for oil production to be 30% above our 2020 exit rate for.
2020 extra rate was significantly impacted by reduced activity in 2020, our full year capital guidance is unchanged at $650 million to $750 million.
Our Permian total cost per foot for our development programs is tracking nicely within our guidance range of 800 to $850 per foot.
We operate within a wide geographic range and the Delaware Basin and this can impose variability and our project costs. These differences include depth pressure water cut lateral length and production facility costs.
And though we quote program average costs the individual projects within this average vary between $725 per foot and $1000 per foot.
And as always when we quote development costs. We include all costs drilling completion facility, well connect and flow back.
Nick will provide more detail on this.
Our lease operating and transportation costs came in high for the quarter, mostly as a consequence of winter storm, Yuri which led to increases in fuel charges electricity and labor and importantly, we expect lease operating and transportation cost to normalize and the second quarter and importantly, our annual guide.
For lease operating remains unchanged, while our transportation guide is slightly higher to account for the transitory events in Q1, Mark will dive into this and more detail.
I'd like to comment on winter storm Euro and the impacts on Cimarex, we've all heard or read many stories of the impact of youri, both on the oilfield directly and on regional electricity generation and delivery.
The best word I can think of that describes the response of our field personnel is valeant, we saw it coming and mobilized additional field equipment in order to be ready.
In spite of our best efforts and preparation our operations were impacted by the storm and freezing temperatures in the midst of these challenges our field staff worked relentlessly to keep our production online.
Our field staff kept and unwavering focus on safety and never gave up as a result, the production impact on Cimarex from Winter Storm Youri was severe but very short lift kudos to our entire organization for the drive and dedication and demonstrated it is humbling to be part of such and now.
Outstanding operational team.
As we throttle into 2020. One are focused on environmental excellence is accelerating through detailed and innovating and innovative engineering comprehensive data analytics to dissect our emissions footprint and strong engagement with our field employees I am, particularly excited about our enhanced facility.
<unk> designs, which do not have tanks at any point in the production stream from wellhead to sales thus eliminating some of the most vexing and chronic emission defenders. Our first project utilizing this facility design as our Burger King project and Culberson County.
This design reflects the latest and and evolution of design improvements and in order to reduce emissions and we expect to leverage this approach across all of our new facilities and 2021. We're also embarking on a multiyear electrification project, which will include the transition to grid powered electric.
Tracking and compression together these initiatives will significantly reduce our emissions footprint and allow us to deliver our products safely and cleanly.
I would also like to provide and update on our thinking and our long term financial plans as we've previously discussed our goal is to have cash on hand in order to retire our $750 million and senior notes that are callable in 2024, with our improved asset performance and the recent recover.
And commodity pricing, we expect to achieve that goal in 2021.
And then what.
As we have discussed in prior calls the concept of a variable dividend is very interesting to us we're watching our competitors carefully and are debating the various models that are and advance fund.
Fundamental to our capital return strategy as one predictability and to sustainability.
This is difficult and a cyclic commodity environment. We are pleased to have a good mix of high quality assets with exposure to oil gas and natural gas liquids. We believe this is a core competitive advantage that dampens the impact of price swings.
Any single commodity <unk>.
Our experience has taught us that diversity pays and the long run.
And this view will color our thinking on any variable dividend and approach, we will and our modeling permutations and the price swings of oil gas and natural gas liquids and.
And we will adopt a strategy that accounts for dynamic commodity prices, while protecting our base business and balance sheet. This is the ultimate challenge of shale three point O U R owners want predictability.
Finally allow me to comment on the regulatory and macro environments at the state level, we are glad to see permitting resume and new Mexico at the federal level much has changed since our last call.
We read the policy proposals from Washington, and find some things that are constructive and quite frankly, some things that concern us directly and through our national trade associations. We are engaging in dialogue that we hope will drive workable and sound public policy and.
And as an industry, we need to raise the bar, we need to reduce our environmental footprint and earn credibility through transparent reporting.
This is an effort we believe is worth engaging in global demand for our products will persist for many decades to come and we're proud of our industry and I'm proud of the many men and women, who provide abundant affordable domestic energy that powers our economy.
With that I will turn the call over to Mark.
Thank you Tom.
Good morning, everyone I'll address a few items and our first quarter 2021 financial results and give some color on our outlook.
Our results this quarter benefited from strong price realizations, and all commodities, especially gas price realizations, which were higher result of February severe winter storm per unit costs were also elevated and the quarter due the impact and the winter storm, which drove up fuel costs and electricity rates and addition to lower production volumes relative to the remainder of the year.
And our cadence wells coming on line picks up we expect our per unit costs and normalized and therefore, our full year 2021 cash and cash guidance remains unchanged, except for our corporate and Q1 winter weather impact for full year 2021 and transportation cost.
Total capital investment for the quarter was $165 million, including $131 million of drilling and completion capital.
Just the cash flow from operations and the first quarter totaled $395 million generating $231 million of free cash flow or $208 million of free cash flow after the dividend.
And as result of the strong free cash flow and the quarter, we exited the quarter with net debt of $1 5 billion, a decrease of $251 million from year end 2020.
From a capital allocation perspective, our priority growth continues to be increasing our cash on hand in order to repay the 2024 $750 million notes as Tom described.
We're executing a disciplined capital program, which means we're not increasing our capital spending this year and a higher price environment, which translates directly into incremental free cash flow also as we've done through our history. We are pruning noncore assets from our property base, which and the second quarter, we expect to close sales for proceeds of approximately $115 million.
We remain focused on maintaining improving our financial position generating a free cash flow and providing cash returns to our shareholders. We are and a solid path. This year to meet our debt objectives, and a survey and work towards instituting and incremental capital return strategy that we believe will maximize value for our shareholders.
With that I'll turn the call over to Blake.
Thanks, Mike.
We had a strong start to 2021, five rigs and two frac crews running in the Permian and one rig running in the Anadarko.
Our operations were quickly challenge daily and the quarter with winter storm, Yuri impacting our operations and the Permian and Anadarko.
Despite multiple days below freezing temperatures and rolling power outages, our operations teams did what they always do and rose to the challenge.
We were able to keep a significant portion of our production online while mitigating impacts to our drilling and Frac operations.
Because of these efforts we were able to quickly regain our operational cadence and delivered strong volume and the first quarter.
We're focused on both sides of the capital efficiency equation productivity and costs.
Tom spoke earlier about them on the strong results, we are seeing and productivity with our recent big Sky and Dixie land development. We are also seeing strong performance on the cost side of the equation.
Our drilling and completion costs for the first quarter of 2021 track just below the low end of our guidance.
With higher activity levels across the Permian horsepower labor steel and fuel cost are on the rise. However, our teams are working hard to offset inflation with continued efficiency gains.
And for example, during the quarter on average we drilled 1400 feet per day, which represents a 26% increase achieved over the past four quarters.
Our leading edge performance includes the spectacular bid two H and Culberson County, which reached total depth and nine one days for a two mile lateral translating to more than 2000 feet per day.
Our operations teams continue to make strides and performance, which is keeping cost inflation and check as such we are reaffirming our full year cost guidance of 800 to $850 per foot.
Okay.
As Tom mentioned, we continue to research and leverage new technology to reduce our emissions footprint.
Taking emissions reduction seriously means we have to look at how we power our operations.
Drilling to completions and lifting.
We believe building and expanding our power grids is the future of the oil field and we're first movers to electrify our operating areas.
We are currently running two drilling rigs powered directly from our grids. These rigs has seen a 50% drop and associated emissions as well as the 23% drop and fuel costs to power each rig as.
As we move more of our operations to electricity. We believe there are high return opportunities to expand our power grid. These.
These opportunities will translate to lower emissions and better run times, and greater efficiencies and lower costs.
With that we are now happy to take any questions.
Yes.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
You are using a speakerphone please pick up your handset before pressing the case.
To withdraw your question. Please press Star then two and.
And the interest of time, we ask that you. Please limit yourself to one question and one follow up thank.
If you have further questions you may reenter the question queue.
Once again that was star then one to ask a question and at this time, we will pause momentarily to assemble our roster.
Okay.
Yeah.
And our first question will come from Arun Jr of J P. Morgan. Please go ahead.
Good morning.
Hi, Ron.
Tom I wanted to see if you could maybe expand on some of your thoughts the board's thoughts on variable dividend.
And we've seen two approaches.
Out there from some of your peers.
Devin and pioneer.
And who have kind of a formulaic type of approach you talked about.
Cimarex is call it balanced.
Our leverage to the three commodity so I was just wondering if you could talk about some other pros and cons that you and the board and see what the variable dividend and approach and if you did migrate to such approach.
How do you see this playing out in a relative to what Devin and pioneer have helped.
Thus far and communicated.
Thank you for that question and I'll Tee it up and then let mark go into detail.
Our commitment to the dividend as evidenced by the fact that we've paid a dividend since 2006 and.
And our board is very much <unk>.
Celebrates the act of returning cash to our owners.
I will say that.
I don't want to comment on.
And any specifics of what our competitors have done, but I will say that as we look at it we will model, what our cash flow looks like as swings in commodity pricing.
Model.
High medium low on both oil and gas come up with an estimate of what we think are sustainable cash flow is and then decide what percentage of that sustainable cash flow. We think will be returned to our owners.
And we probably have a bias at current on our quarterly distribution model rather than an annual model.
We just like the the way that looks and feels to us.
And then we will probably.
Discuss this with our board we have other.
Ongoing discussion with our board, but as we said in her opening remarks, our first priority is.
Calling those notes, but we're going to we think blow through that goal here by the end of the year. So I think certainly by second half of the year Youre going to see us provide clarity on a specific approach, but without mark why don't you.
Filling the gaps sure Tom I'll tell you one thing I could probably add or and is it certainly this year exiting the first quarter and 524 million and cash and we also discussed the fact that we could have a small property of 115 C. At that plus what we expect for free cash flow for the balance of year, we're going to be a very good position by the end of the year to meet our objectives.
Sufficient cash for those 2024 notes.
And have some cash and access to that for liquidity purposes that we'd want to have and are continuing cash and our balance sheet and.
And you look at the process and which Tom described and we will be very diligent and how we look at our regular dividend, we will stress test our scenarios and as we've done raising our debt a.
Our regular dividend the first quarter this year.
We will also continue to monitor that and and have empty.
On monitoring increased net regular dividend and then further on the variable dividend, which Tom described we would also expect debt. We will have a good chance to be instituting that will get more mechanics out the latter half of this year and 2022 looks like a year, we'd be in a position to start having met our debt objectives to start working on a variable.
Dividend and and where our preference is probably to look at it on a more regular cadence on a quarterly cadence is one element that.
Have a bias towards but we will be able to communicate and a more granularly second half. This year. So the mechanics were anticipating and how to calculate that.
Great that sounds.
Very intriguing.
And my follow up is.
And I was wondering if you could give us a little bit more detail on some of the initial performance at the Big Sky project, which which did feature some of your relaxed spacing as we as we also.
And some thoughts on and I know the market has been looking for.
Yeah.
Fleet, which I believe is coming near term so maybe just give us some thoughts on.
And this migration to these wider spacing patterns and maybe some thoughts on what this could mean in terms of the productivity gains yes.
Yes, John Lambert, this and the room and I'm going to let him answer the question and ill just tell you upfront debt.
We are really really encouraged by what we're seeing and feel.
And greatly confident that our prior discussions of increased capital efficiency are going to be underpinned by solid results that John.
Yes, and we actually have three developments upsize developments now on production.
We have between three to five months of production on those one of them is and Lea County.
The other two are in Reeves County, and fact that once we have the most production on is in Reeves County.
Both of those and <unk> were at about eight wells per section and as we forecast and right now as Tom said, we are very very pleased with the performance we've seen so far and as we project out ultimate recoverable for those wells.
We believe that those eight wells, we're going to achieve about the same 280 acre oil EUR as what we're achieving say two or even over the last year, which is 12 wells per section.
So in essence by drilling with four less wells, we're going to get the same oil EUR recovery, which of course and leased a phenomenal project returns and efficiency. So as Tom said, we're very pleased what we see.
I must say it is still early but we are at five months and one of them and gaining much more confidence on how those wells are performing and looking forward to more of them coming on.
And what are the names of those three projects and.
That's all I had I just wanted to get some more details on that.
Yes, the projects, our Dixieland and big Sky and and the one and Lea County is Red Hills.
Great. Thanks, a lot gents.
Just before we go on this this really ties into our variable dividend discussion because when we look at where we have this business, we feel really solid about our capital efficiency, our ability to maintain or slightly grow our production with a reduced portion of our cash flow and our free cash flow is really some.
Stable, it's not only about the quality of our assets, but the work that we've done and that John is talking about on a capital efficiency really allows us to underpin any free cash flow with a highly efficient capital program and we've probably never felt better about our business than we do now.
The next question comes from Gena Wang of Barclays. Please go ahead.
Hi, good morning, everyone and thanks for taking our questions.
Janine and good morning.
Question, maybe for Tom and Mark you've accelerated the timing of achieving your role of banking and cash for the force.
And.
And the reason divestiture it looks like Youre on track.
<unk> is free.
Cash at the end of the year.
And it appears to be a seller's market right now and.
And are there.
Are there any other assets that could be earmarked for sale. This year and is there any update on what your minimum cash balances given I think Tom that you mentioned that you definitely want to ensure predictability and sir.
Sustainability and return of capital.
Sure Ginny net.
And first part of your question on other assets potential asset sales right now we don't have anything on the drawing board for additional asset sales cycle, and we discussed and the $150 million range.
And that we have signed PSA, it's four and expect to close and the second quarter.
And as far as the.
Cash position, you're right $1 billion is very reasonable with additional cash proceeds from the <unk>.
Sales and free cash flow outlook for the year and a minimum cash balance that we would think of it would be probably and the $250 million to $350 million, which we contemplate as kind of the working capital swings, we could anticipate and some cover some portion of our capital program for some period of time those kind of factors would be entering into our mind on what we think is a minimum cash.
And position should be.
Great and we can dial that in and thank you.
And so our second question and maybe just on operations.
And so it looks like the extra rate commentary of 30% for Q2, <unk>, which is great.
And for nice operational momentum next year and.
And I just wanted to revisit how you're thinking about capital efficiency and 2022 is the goal to hold that exit rate flat for efficiencies because you've got operations going well you have really high return assets that would put you at double digit growth year over year or is the preference and pull back.
Back to lower 30 day.
Maybe stay within a similar or lower Capex range to 2000 and for anyone.
Well Jay I'll, let mark go into detail, but 2022 is a long way away. We really are very pleased that we think we're set up to enter 2022 with tremendous flexibility and options, but as we've said in past calls any capital allocation either on an absolute level.
Relative level for 2022, we're going to want to make that decision once we see what the.
Increased demand looks like what the supply picture looks like from a macro and as we've said in the past we're highly.
Unwilling to just chase the strip and have our capital will be a function of the strip, which has been a mirage and quite frankly over the last few years remark.
And if so yes, Jenny and I think what we're really focused on as Tom discussed and the capital efficiencies is the key to how we're thinking about.
Any period, including 2022, and and further the macro backdrop with the commodity price is always an element, but as you look at the capital efficiency. Just a couple of elements that obviously you'd be drilling and completion capital and a cadence of how we operate that there is an element there to being efficient with the resources, we have with drilling crews and drilling rigs and frac crews that we wanted to have.
A good cadence of goods consistent cadence that allows us to maximize the efficiency of those programs and maximize return and capital efficiency on those programs.
As Tom said, we have a lot of time between now and 'twenty to really dial that in but those will be our focus points Janina and how we think about proceeding into 'twenty two.
Great. Thank you for the time.
The next question comes from Michael <unk> of Stifel. Please go ahead.
Hey, Good morning, guys. This is Jared for Mike.
Hi, Jared.
Hey.
So looking at price realizations for the quarter you guys were real strong on Ngls and gas and we were just wondering if you have and outlook for the rest of the year.
Obviously gas was high with the winter storm, but we're just curious how you see NGL pricing for the rest of the year.
Yes, Hi, Jared the NGL prices was very nice strong and gas prices during the first quarter and we see going into the balance of the year, probably and that 40% to 50 deduct from Nymex for natural gas prices. When you bake in the forward curves for the Permian and the wall.
Paso, Permian differentials and mid Con and differentials.
And then as far as the NGL realization, we're still going were 39% realization and <unk> and the first quarter, we see that probably easing back into the low <unk> for the balance of the year.
Okay perfect. Thanks that helps and then a quick follow up.
Are you guys seeing any signs of inflation anywhere and services and do you see and the opportunities to improve efficiencies.
Yeah. This is Blake.
We have seen some mild inflation and Q1 really just with the pickup and activity across the Permian, which.
Which we expected to see it it wasn't a surprise really what we focus on is working with our service partners to maximize efficiency and reduce downtime.
And those those lead to ultimately lower cost per foot, which is what we're after and so we're going to keep driving that as hard as we can and firmly believe that will offset any inflation we might see.
Okay, perfect and that's all for me. Thank you.
Yes.
The next question comes from Doug Leggate of Bank of America. Please go ahead.
Good morning. This is John Abbott on for Doug Leggate, Hi, John.
And this is another question and sort of looking at 2022 and recognize that it's still early long along the way.
You mentioned that you were looking at the regulations for federal lands.
When you think about it any more thoughts about potentially depending on what youre seeing.
And I'll keep more activity towards the Mexico, just sort of how you're thinking about that at this point and time, just what you're seeing and does it make sense to potentially step up activity.
Well, the Mexico is a great asset of ours.
<unk> talked in the past that we did have a plan on the shelf for accelerating and new Mexico, and we still do have that and that certainly would be an option for us we are seeing.
Loosening of the permitting we're getting new permits were getting right of ways, we're getting sundries.
And Oh.
I'll also scan competitor activity and we know our peers are likewise seeing permits.
So we're feeling pretty comfortable confident perhaps is a better word that new Mexico. We can just act prudently and not have to take any extraordinary action around a threat of permit restrictions.
But that doesn't answer your question some of our best returns are and new Mexico.
Very target rich environment and as we look at 2022 I don't think you should be surprised if we have a greater proportion of activity and new Mexico than we do now debt.
But again thats not a reaction to a permanent issue. That's just a program configuration, but we haven't made those decisions for 2022 and it'll be driven by best returns on capital it'll be driven on <unk>.
Midstream and what a lot of factors drive that but new Mexico is.
Tremendous part of our portfolio and we're delighted to have it.
Thank you and then a follow up question is just what are your latest thoughts on long term sustaining capital.
And over a multiyear basis and.
And your potential oil breakeven.
Yes, John.
And thinking in terms of the near term as we reestablish our oil base this year with the resumption of our activities sales.
Oil range of the mid Eighty's type oil type forecast and seen a sustaining capital around that level, we would estimate to be somewhere in the $600 million to $650 million range of capital to sustain that kind of 84000 or mid eighties, excuse me barrels per day and with the.
Sustaining capital on equivalent basis little bit more Barry, but we think in terms of oil volume kind of sustainability.
Thank you very much for taking our questions.
Sure John.
The next question comes from Caroline and travel.
Goldman Sachs. Please go ahead.
Hi, Good morning. This is Caroline on for Neil Mehta, Thank you for taking our questions.
And I wanted to start with your other two key production guide and it was a little light relative to where expectations are coming in better as you mentioned in the prepared remarks, you still feel confident that you're on track for the 30% oil growth year over year for the fourth quarter can you just walk us through maybe it's timing of wells coming on line or other.
Factors that might just get people and more comfortable with the ramp and the fact that you are going to be able to execute on that fourth quarter exit rate.
Yes, sure. It's still the second quarter guide is impacted by the cadence of wells it within the quarter being more quarter and weighted that's having some bearing on our second quarter forecast.
And and for the full year, you will see that we have a strong cadence it again.
The third quarter, which will be really contributing that fourth quarter exit rate that we've described so the cadence of our activities. So we feel very.
Confident in and that they will hit that cadence of activity and achieved that year and production forecasts that we've established.
Thank you and then my next question is and I mean, the Permian is obviously the key area of focus for Cimarex and Neil and.
And you'll be at zero rigs and the midcon and by the end of the month and.
We are standing that you've already built and non core pieces and that assets.
But I just wanted to get your thoughts more broadly on the strategic fit for the mid con moving forward.
And I know you don't necessarily have you haven't mentioned do you have any further sales plan this year, but what do you need to see and the mid con to be able to attract capital to it and then.
Given given what you saw recently and the market with asset sales.
What are the considerations there in Kansas and potential for further.
Hey, Andy.
Well.
Finish with the conclusion and back it up and fill and the reasoning.
We really see the midcon as a sustaining ongoing part of our portfolio.
And we like the geographic diversity, we like commodity diversity, we like the market diversity.
We've never.
Chosen to be a one base and one commodity company and particularly with the demands on shale three point O that I talked about and my introductory remarks, we see the diversity of our portfolio is a key element of our sustainability of returning cash to our owners.
But the reason that we're going to zero rigs and mid continent is we've got a project that we're finishing up.
Really a seminal test of some new ideas and new completions that we are wholly excited about and we'd like to watch the flow back before we decide what next we have a strong portfolio of opportunities and the mid continent that compete heads up on a return basis with the Delaware Basin.
And don't don't misinterpret rig count for enthusiasm.
John you want to say anything about that.
The only follow up I would give is that we have been diligently working to consolidate our position to really what we consider the core.
And Anadarko and turns it best returns.
One of those is lone rock, which we're currently drilling on and we have a number of areas like that where we've been enhancing our working interest.
And quite frankly looking forward to deploy more capital there, but comps absolutely right. We do want to see this initial development come on and monitor flow back and then make the argument for more capital going in that direction.
Great. Thank you.
And next question comes from Jordan Levy of Truest. Please go ahead.
Good morning, all Jordan Levy on for Neil thing and my first question is just looking at slide five and your presentation. It looks like <unk> b.
A lot of other projects coming online will be weighted towards culberson and based on kind of the current allocation you. All have laid out just wondering if we should think about activity trending back towards brief later in the year barring nothing gets moved around and kind of the Permian asset allocation framework.
Yes, Jordan, yes, theres, a little waiting towards so that we our frac crews are running currently and that is a little weighted towards the Permian and the.
Yes.
Overall mix and the <unk>.
And the second quarter, but it'll be balanced back out and do you expect to have a balanced program between Reeves and culberson and for the full year, a little more even tilted towards reeds when you get at the end of the day with our total well count.
And so it just now most of that where the accounts are coming in for that second quarter.
Perfect and just a quick second question and I'm, just curious and there's been a lot of discussion.
On both sides of the conversation and im going to kind of the.
The laterals and the 12 to 15000 foot range and if I remember correctly you all have done some testing of that sort in the past.
Just curious how youre thinking about.
Whether you see the benefits of continuing to increase that average lateral length or you think you've reached a point of diminishing returns.
Well this is John and I know Blake will add to this.
Very confident and our first offering and our two mile 10000 foot performance and our expectation.
But that said we have great excitement for even go and longer where the land allows us to do that.
And in fact, there are parts and res, which we call River tracks, where we actually do go longer than two miles debt to Atlanta.
To accomplish that.
I am aware and Culberson, we're intending to go on a three mile development here soon and likewise, even and Anadarko. We're looking at several areas, where we want to go three miles and we do believe that the incremental uplift we would receive from doing that is much more beneficial to the costs associated with them.
And I'll, let Blake add to that.
Sure Yeah, we've drilled as much as two and a half miles and we do have some three mile wells on the schedule for later this year, we see a lot of value and the three mile units of course from a cost per foot standpoint, they look fantastic, we're blessed with really big acreage positions and our land team is hard at work trying to see how many three mile units, we can put together.
And look forward to adding more of those into the portfolio.
That's great color. Thanks, so much guys.
Okay.
And next question comes from David Heikkinen Energy.
And our day advisors. Please go ahead.
Some day, Heikkinen and there'll be pronounced simple, but thanks for taking my question.
As you talked about the moves and Washington D. C. Can you just refresh us on your thinking about cash taxes, and then really thinking about DC moves and how that would fit in their factor into your long term return of cash to shareholders thinking because it seems like the variable that.
We're going to have to address.
Yes, David Yes, certainly there is a lot of.
Different items could be changing tax landscape, certainly effective tax rate corporate rate going from 21 proposed 28% will have a bearing on our cash taxes right.
Right now the way the current tax situation, we do see our Nols, which are approximately $2 billion, preventing us from having current tax cash taxes until the latter part of 'twenty three and 24.
There is.
And <unk> tax rates that are certainly.
It would be a 28% versus 21% versus when we do become current tax payable that business it doesn't accelerate that timing of it.
The other element that Theyre being discussed is obviously has been a lot of years of intangible drilling cost deductions being items that could be eliminated for the or for the industry.
That would cause us to accelerate debt timing of our NOL utilization and faster.
Faster by year or two.
And then it depends on the rules that they put around the capitalization and deduction of those IDC and how much bearing it has on the companys and and industry, but over time they'll start to balance out as you get at years of deductions from those prior years being capitalized and they'll start to neutralize each other so certainly theres a lot of reasons.
Spect that day.
Washington, and where you were putting more of a tax burden on all industry and specifically the oil and gas, but it all has to be factored into what we are available for return to shareholders.
Alright. Thanks.
The next question comes from Steven Becker of Keybanc. Please go ahead.
Sure.
Hey, guys just wanted to see if we could get some color on the quarterly capex cadence for 'twenty one.
Yes.
Yes, sure. So as we've described and the previous calls that our capital cadence and kind of somewhat mirrors are welcomed well online cadence and it's a bit weighted towards the second and third quarters and.
And so we would expect.
A little bit more capital and second and third quarters, and a little bit of a tailing off into the fourth quarter, but.
Again, and mirrors fairly closely our wells online.
As well.
Okay, great that's it for me.
Right.
The next question comes from Mitten Kumar of Wells Fargo. Please go ahead.
Hi, good morning, and thanks for taking my questions.
I want to start on a bit of a philosophical one.
This year I think just a little bit under 50% of your oil production is hedged.
Next year and starts dropping off a little bit historically, you've participated in the hedge market and then I'm curious with the balance sheet approaching less than one times leverage.
The goal is paying off the debt, what's the role of hedging for Cimarex and shale to point out.
Well and then Thats a great question and.
And Thats, one that we need to debate at the board level there are a.
And number of years ago, we instituted our hedge policy as you know we layer and every quarter, we layer in about 10% of our anticipated future production every quarter with the goal that we would feather them and.
And not be subject to any single bed on commodity pricing will also not have long term hedges we typically.
Don't go out more than five or six quarters with the goal of having roughly 50% of our production hedged.
Yeah, we've never viewed it as a.
Attempt to our guests the market, we've never viewed it as anything other than a shock absorber and our cash flow such that if we had sudden swings in commodity pricing, we'd be able to execute on our capital plans without.
And the interruption.
Having a <unk>.
Lower debt structure, certainly does invite rethought of that.
I think that we would probably still have some degree of hedging, but we might back off that 50%.
But I'll, let mark comment on that yes, I would just echo what Tom was saying Theyre knit and it's yes.
And a practice of getting to nearly 50% hedged for 12 months forward and Thats kind of reflects what we're looking at what we have hedged through 2022, it's just starting to reach out into that time period.
And but it's absolutely right Thomas absolute right and the fact that we have that practice.
Maintaining those hedged positions for shock absorber on our capital, but if we have payoffs.
Pay off the 2024 notes and we maintain and liquidity of 250 to 350 million and cash our balance sheet does it have to be also fat should be taken to account and we look at our risk tolerance and our mark to market on the other committed commodity exposure. So it's something we'll have to continue to discuss and as we get further down and we're getting our balance sheet down to what we think is a very.
Conservative levels of leverage and net and I really.
The philosophical question, but I will just share with you. We are long term players and we've been through a number of these cycles and our career.
And when I think about the question.
Yes.
April of 2020 Guy has heard me answer that question and May of 2021, where we say great. No problem now, we can lower our garden and hedges.
And for all of 2020, Tom would be hitting me over the head of the rubber Mallet.
We do like to have a long term view and not get intoxicated by short term joy, even though it's really hard for us to.
To have discipline, we are going to be disciplined and how we think about this.
And that's exactly what I was hoping to hear Tom because salespeople and others not just.
For a quarter or two it's something that you're doing as a long term stewards of capital.
My follow up question.
I know, it's a bit of a tough flow and we've talked about federal acreage and.
Taxes on this call, but there are other regulations coming out of Washington, right now you'd alluded to a few that made sense and some perhaps not as much.
Beyond the industry dialogue, what are you doing what is the business doing too.
If you can walk us through a few things.
Operationally to make sure that you are ahead of the curve and not following regulatory rulemaking.
Well, we're certainly engaged and a number of initiatives across our platform. We have already spoken at length about emissions and that's a huge focus of ours.
Operationally engineering and from a corporate strategy standpoint, we're looking at wastewater handling we do a tremendous amount of recycling, we're very proud of that and probably should be talking about it more than we do we've got some really innovative engineering and our assets where we.
Redirect produced water on the fly and Theres times, when we're recycling tremendous amounts of water. We're also looking at alternatives to disposal of water.
There is some technology, we're exploring that.
As of <unk> of technology.
There is some rather innovative technologies out there.
Across our.
Huge focus on spills.
We're certainly focused heavily and our environmental footprint.
Blake you want to comment on any initiatives I've left out now in obviously the emissions ones are.
What we're working on it's way above and beyond what any Reg says, we're trying to limit every possible emission we can throughout our whole value chain and that that's something our operations team share as a core metric.
We design and fight for it just like we do for productivity and cost and.
And we like being on the leading edge of that and we're going to keep pushing it.
Thanks, John and thank you so much of the answers guys.
Yes.
Concludes our question and answer session I would like to turn the conference back over to Tom Jorden for any closing remarks.
Well I want to thank everybody for joining us. This morning, we are on track to deliver the year. We've promised we feel very confident and look forward to updating you on our progress as the year goes on so thank you.
The conference has now concluded thank you for attending today's presentation and UBS.
Nowadays.