Q2 2019 Earnings Call
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Parsley energy earnings call.
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Thank you.
And to Parsley Energy's second quarter 2018 earnings call. My name is Tim and I will be operator today as a reminder, this call is being recorded at this time.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation and now I'm pleased to turn the call over to Kyle Rhodes Parsley Energy's Vice President of Investor Relations.
Thank you operator, and good morning, everyone with me on the call. This morning are president and CEO , Matt Gallagher, Chief Operating Officer, David Dalonzo Senior Vice President of land in marketing, Stephanie raid and Chief Financial Officer Randall.
Our remarks today may contain forward looking statements. So please see our earnings release for a discussion of those statements and associated risks, including the fact that actual results may differ materially from our expectations.
We also make reference to non-GAAP measures. So please see the reconciliations in the earnings release.
During this call we'll refer to an investor presentation that can be found on our website. Our prepared remarks, we'll begin with reference to slide four of the presentation.
After our prepared remarks, we'll be happy to take your questions and with that I will turn the call over to Matt.
Thanks Kyle.
Actions continue to speak much louder than words in this challenging market environment.
So as we close the halfway Mark I want to start my comments by checking in on the scorecard for our 2019 action plan.
As a reminder, our returns focus 2019 action plan was designed to take a step forward to sustainable free cash flow, while delivering a step change improvement in capital efficiency.
As you can see in the far right column, we are delivering on these initiatives.
Surely a positive progress report across the board in fact, we have made enough headway on our capital efficiency target to raise the bar and we are positioned to cross the threshold to sustainable free cash flow for the remainder of the year and beyond.
We're also tightening our 2019 capital budget range.
Lowering our unit cost guidance and increasing our production guidance.
I am proud of the tangible strides we have made so far this year and I do want to acknowledge the high level of execution being delivered across our organization day in and day out.
I also want to reiterate that six months do not make one year and we will remain just as focused on execution in the second half of 2019 and beyond.
With that let's turn to slide five and dig deeper on how some of the key objectives of our 2019 action plan are playing out.
And we unveiled our returns focused approach earlier this year one of the key corporate level outcomes. We envisioned was a meaningful year over year improvement in capital efficiency.
Or said another way, we are aiming to add more barrels of oil per fewer developmental dollars.
We had initially targeted an 8% to 10% plus improvement driven by a combination of lower well costs hydrated activity and optimize completions.
This breakdown of our original target as depicted in the graph on the left.
As you can see our teams have been diligently working on both the numerator and the denominator of this capital efficiency equation.
And with six months behind US we have seen enough to raise the bar on our capital efficiency improvement target to 12% to 14% plus.
Capex savings are coming in better than expected. Thanks, largely to continued operational efficiency gains cycle time improvements and deflationary trends on some consumables like sand and steel.
Initial productivity gains are validating our shift in development approach, David will provide more details, but needless to say I am excited partially has made such a measurable strides on these key objectives in such a short timeframe.
Moving on to slide six.
The second key outcome, our returns focus approach set out to accomplish was an acceleration of our timeline to sustainable free cash flow.
As I mentioned, we are right at that inflection point and we currently expect to generate free cash flow for the remainder of the year quarterly.
Our strategy is yielding fruit ahead of schedule.
This is an exciting step in our corporate evolution, one that we have been organically building toward for a while.
However, our pathway to free cash flow is not meant to simply be a short excursion sustainable is the operative word.
And partially possesses a handful competitive advantages that will help keep us on a trajectory toward a growing free cash flow profile over time.
Ultimately increasing visibility for the return of capital to shareholders.
These relative advantages can be divided into three main categories.
The first of these I will classify as scale and inventory durability.
In other words as a company has the scale needed to allocate capital efficiently and the inventory life needed to sustain that capital allocation over time.
In recent earnings calls we have discussed our view on optimal scale in the shale game in our long reinvestment runway of high return projects.
These are fundamental ingredients in a sustainable free cash flow profile and if you aren't as familiar with horses competitive strengths on these fronts I encourage you to review our supplementary slides for more details.
The second category is what I'll call margin installation and expansion.
In essence, not all barrels in the industry are created equal this encompasses parsees advantage marketing position, our stringent cost control and our sizable minerals ownership position.
Stephanie and Ryan will delve into these particular competitive strengths a little later on.
The final category and the focus of slide six.
His asset base maturation.
On the heels of our strategic ramp for scale in the basin in 2017.
Our production base was largely comprised of newer wells with a steeper decline profile in aggregate.
As you can see in the graph on the left of the eight largest and most active Permian operators, partially as horizontal wells rank as the youngest on average.
And despite this younger asset base, partially is still poised to turn the corner to free cash flow in the back half of this year.
But now there is a flip side to that coin.
Hey side, which we get to enjoy going forward.
With a disciplined 2019 action plan in place.
Partially as base decline is moderating as shown in the top graph on the right hand side of this page.
In effect, our treadmill is slowing down making it easier to convert cash flow into free cash flow.
This helps support the sustainability of our free cash flow profile.
Meanwhile, some of our largest peers will likely see the speed of their respective treadmills dial up as their activity ramps take hold from late last year.
We believe we have a relative tailwind at our back but we are not just resting on our laurels. We are also focused on moderating our base decline where possible through data driven decision, making in engineering in our field operations.
With that I will turn it over to David to discuss some of the positive developments and trends we have seen on the operational front.
Thanks, Matt, let's turn to slide seven another one of the goals we laid out in our 2019 action plan was to build upon the operational efficiency gains we captured during 2018.
As shown in the graph, we're delivering on this target with drilling completion efficiencies both up double digits versus 2018 averages.
On the drilling side, we recorded an 8% sequential quarter to quarter improvement and drilled footage per day per rig, which enabled us to drop from 12 to 11 development rigs in mid June .
Faster cycle times, not only allow for lower equipment levels, but can also help reduce well costs.
So while we are now generating more footage with less equipment. We're also committing to a Titan capital budget range.
This translates to a more capital efficient program this year, which Matt touched on earlier.
On the completion side, we retained a healthy pace during the second quarter. It's important to note that this solid execution includes a larger percentage of Upsized fracs and compress stays tests, which by design take a little more time to complete.
For the remainder of the year, we expect to run a maximum of 11 rigs in three to four frac crews, while targeting a consistent capital investment pace.
Managing our development schedule and a weighted minimizes friction costs and allows us to carry operational momentum into next year continues to be a key priority for the team.
On slide eight we zoom in on our Upping County area to shed a little more light on what we're seeing from our return focus strategy. So far this year.
Our 2019 action plan called for a step up and up and activity. It back. It has been our most active area with 25 wells turned to production through June .
And I think these recent wells provide a nice proxy for our broader 2019 strategy. As most include some combination of upsized profit loading wider spacing indoor compress stages.
As shown in the graph on the left our 2018 Upton wells are delivering encouraging early results in an outperformer comparable 2018 wells by nearly 10% in the aggregate simply put we expected to generate a productivity up lift with our 2019 action plan and we're seeing that borne out in the early data.
We highlight a few noteworthy pads in the map on the right and this illustrates that our recent up in activities that broadly distributed across our footprint.
Although it is still early our 2019 results are validating our strategic shift in approach that we unveiled earlier this year.
And now I'll pass it over to Stephanie to touch on our advantaged marketing positions.
Thanks, David flipping to slide nine I want to start by circling back to the second competitive advantage not run Frank.
Margin installation and expansion.
Hi, Dana marketing position feed management corporate strength.
Ultimately, we are in the business and generating cash flow silicon port entire oil flanagan to favorable price.
We have a strong track record on this front registering peer leading oil price realizations during a period of time take away as shown in the graph on the bottom left.
End market diversification with a key differentiator for asked in the past and it will help us maintain our advantaged position in the future.
Looking ahead, our sales contracts provide us exposure to the Magellan East Houston, Brent and Nick one benchmark and broad portfolio of physical pipe.
Mitigating the risk associated with a levelized pipeline disruption for port congestion.
And as you can see in the map on the right our acreage tend to stand in that 88 gravity sweet spot with our weighted average barrel of production registering 41 degree.
Importantly, our sales volumes are not subject to any discounts applied to higher gravity crudes like West, Texas like we just recently traded at a more than $2 per barrel discount to WGN Nippon pricing.
In an environment, where every extra dollar margin will have a meaningful impact on free cash flow is acting a favorable crude quality at a ninth inherent advantage.
And now I'll pass it over to Ryan.
To expand margins.
Our execution deal was evident again this quarter as the team delivered a company record low LOE per Boe.
We also registered company record low DNA previously as cost cutting initiatives take hold.
Again these margin enhancements help smooth the path of sustainable free cash flow in the future.
Moving to slide 11, partially as mineral ownership provides another relative edge when it comes to sustainable free cash flow.
Our mineral position the shaded in blue on the map and then effectively generates high margin production without any associated capex or operating expenses.
And the fact that partially operate the vast majority of this mineral position makes for a cleaner line of sight on development and cash flow timing.
After some recent capital markets activities. They are now additional public valuation markers for this asset class.
Notably some of these mineral companies have comparable net oil production in net royalty acreage counts to partially is mineral position as the picked it up on the left hand graph.
Said another way embedded within Parsees current valuation is the minerals business of similar scale in size the standalone publicly traded peers.
Turning to slide 12, as we get that to enter the next phase of our corporate lifecycle, we're doing so from a sound financial footing.
Our liquidity sits at an ample $1 billion.
Our leverage profile is also healthy with our leverage ratio sitting at a comfortable 1.6 times over the trailing 12 months.
We continue to protect our cash flow stream and balance sheet through methodical hedging program.
In recent weeks, we've added to our 2020 positions, including New Britain contracts that further align our hedge position with our regional price exposure.
I'd encourage you to review our latest hedge position in the supplementary slides.
Turning to slide 13, I am excited to walk through what is a truly positive guidance update across the board.
When we set our course for 2019, we prioritized improved capital efficiency disciplined oil growth and progress towards sustainable free cash flow by the end of the year.
At the halfway Mark we're solidly executing on this game plan the numbers and the guidance they will really speak for themselves.
Net footage up in capital budget range tightened.
Oil production up in unit operating costs down.
All this adds up to better capital efficiency and the progression to free cash flow for the remainder of the year.
Next I wanted to provide a little more detail on our activity plans in the back half of the year.
As David mentioned in his comments efficiency gains are delivering more footage with less equipment, allowing us to drop from 12 rigs to 11 rigs in mid June .
We plan to run a maximum of 11 rigs and three to four frac spreads through the balance of the year.
As implied by our tightened budget range, our quarterly Capex spending will step down from second quarter leverage levels in the back half of the year.
And to Echo what David said earlier, we expect a consistent activity cadence to minimize purchasing costs and carry operational momentum into 2020.
I will note that we have also increased our expected working interest for the year as a result of trades and a few opportunistic scheduling decisions.
Importantly, this higher interest in high return projects is all still captured within our tightened capital budget range.
Turning to the third quarter, we are guiding to oil production 87 to 90000 barrels per day.
Representing 2% sequential growth at the midpoint.
We expect to turn 32 to 34 gross horizontal wells and production the vast majority of which will be in the Midland Basin.
The working interest on our Three Q1 9 wells is expected to average roughly 90%.
So to conclude 2019 is about a high level of execution and we're delivering on our action plan.
Our work is not done and we will remain just as focused on execution in the second half of 2019 and beyond with that we'll be happy to take your questions.
Thank you at this time, we will be conducting a question and answer session.
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One moment, please while we pull for questions.
Before we begin the Q and a session I would like to announce level audience that we ask that you X. One initial question followed by one follow up question.
Due to time discrepancies.
Our next our first question comes from the line of Scott handle of RBC capital markets. Please proceed with your question.
Thanks, Good morning.
You know, Matt Matt you, obviously have senior company now it sounds like the inflect to free cash flow neutral pod.
Sure Scott first I'll just walk you through our.
Our thought process here, we're just laser focus on returns returns driven capital allocation approach and execution and what thats going to deliver and we're seeing right now is free cash flow inflection and growth in free cash flow, which drives.
Exactly to your next point of returns to shareholders and.
If I could smell it last quarter I can taste. It this quarter. So we're very close.
Two meaningful returns to shareholders and it's a very exciting time for the company and pivotal quarter for results for us and we're very excited going forward.
Formal 2020 will be.
Budget process kicks off in September throughout the rest of the year, but directionally, that's how we're thinking about things.
Okay. So so I guess I'll just follow up on that and just turn it down a little bit more it sounds like obviously, you want to stay above free cash flow and.
Obviously, we'll wait for that 2020 budget, but when you when you talk about like feeling very close to meaningful returns to shareholders.
I think what you eat in your view, obviously, you know a lot of the equities uranium p. been down quite a bit like how do you see priorities for returning cash to shareholders right now and how big does it have to be too you know like when can we expect that exists in early 2020 can we expect something and what are the priorities of the dividends buybacks can you give us a sense.
Well as far as priorities I think we're trying to build a durable sustainable business a great business model here. So when we look at a business model. The priority is going to be on dividends. That's our approach that something sustainable over the long run a that you put into your capital allocation process. So that's the that's the next step for US as we evaluate things and we have said early 2020 in the past, but as you can see with this capital efficiency improvement, we're pulling forward our inflection sooner than we would have thought at the end of last year so that.
That's supports us at that time frame at a minimum.
Understood I appreciate it thanks.
Our next question comes from the line of Brian singer of Goldman Sachs. Please proceed with your question.
Thank you good morning.
All right all in your comments you highlighted some of the reasons for better capital efficiency on slide five better well performance in Upton County on slide seven wanted to focus a little bit on the drivers of the higher production higher production guidance and I wanted to see if you could give a little bit more color on segmenting those drivers into what would come from the well performance that would represent higher you ours with wider applicability to the rest of inventory versus other drivers like high grading spacing and completion enhancements that may just deplete wells more quickly.
Sure, Brian I'll start off with a high level approach in the complex on the mix of projects that you see here is what we see going forward for sustainable basis for years to come so.
That component of it is a baseline and as the new normal we have obviously at the end of last year, we quantified or up spacing approach.
In our inventory accounts in our donut hole slides. So that is the new normal for capital allocation going forward as far as well mix.
On it and then I'll, let David go into some of the things we're testing on completion designs and what component that contributed which would be a positive for the remaining.
Remaining results there.
Yes. Good morning, Brian You mentioned slide five if you look at the way we split that out. This is a directionally indicative slide we we've lumped together the upsized fracs wider spacing and compress ASE test largely because it's going to take more data and more time to really be able to to kind of tighten up the difference between some of those things in that bucket you see that broadly, though we're our expectations have been exceeded so you can see that that piece of it has grown a bit. So we are seeing the oh, we are seeing the performance uplift, we do highlight upton and as far as the broader program and our our our year's guidance the timing.
He has been a factor to the tender cycle times has driven some more production into 2019, we expect to continue that going forward.
Great. Thank you and then my follow up is with regards to the minerals and waterside water businesses within parsley you highlight on slide 11. The minerals side can you just talk about your latest thoughts on what you see.
If any moves may be warranted or opportunistic to bring value to those to those businesses versus the benefits of having them continue to be cash flow contributors on a.
To to partially overall.
Yeah, Brian This is a this is ryan.
As it pertains to water Ah Theres no.
No real update since the last quarter process is still ongoing.
We're working with our advisors.
Hope to have a a decision.
By end of year, but I'll say, we're we're very encouraged by the by the level of interest.
In that specific asset.
And then minerals, yeah, we just highlighted.
That's not.
The hints that the that anything is coming its really just that.
Given that there are new public valuation markers out there, we think that that probably being overlooked.
Just by the market.
Is being consolidated within parsley energy. So we feel if you're an investor and you want exposure to minerals.
You guys had ability within our stock.
Thank you.
Our next question comes from a lot of John Freeman of Raymond James. Please proceed with your question.
Good morning.
On on on Slide seven you highlighted you know one of the.
One of the targets just sort of trying to balance I'm, just kind of the operational momentum into 2020.
And trying to target kind of a consistent capital investment pace and I'm just trying to from a higher level perspective, just long term the way you think about.
The company of trying to kind of run a more consistent capital plan. We are you know you all mentioned trying to minimize friction cost, we not constantly ramping up and down activity as the commodity environment changes just sort of how you do that in practice is that you know you try to get the balance sheet.
Total leverage perspective to where you do regardless of kind of changes in the commodity.
It allows you to kind of run the steady state plan.
That's right John well, given some directors to the planning teams about.
About free cash flow growth in some governors and some sidebars and then it's off to a very detailed.
The meetings among the team members to.
12 to 24 months out on the planning side and and you have to project to a stable deliverable project.
ER and sequence of projects so.
Just a lot of sensitivities and works in practical manners, among the teams and.
It's a it's a whole corporate effort, but when it starts with the overriding guide posts of of what we wanted to deliver and when you look back at our guiding principles disciplined stability and foresight stability really comes into play there and we don't one big lumpy quarters, because there's there's friction with that so it's it's moved the ramps into into project sizes and things of that nature and.
Delivering on all fronts and as we mentioned on the maturation of the asset base. When you have a moderating corporate decline rate. All these things take hold synergistically lead and it's really proving to be a good forward look models.
And Ana and along those lines on the moderating base decline or you know, Matt you mentioned in the prepared remarks that.
You know what some of the things you're looking at to terms of moderating the base decline or is some of it is through kind of data driven decisions and if you could just sort of elaborate on that.
Yeah, John I'll say, we've we have been investing in further furthering our ability to consume data and in turn data and information data and information into decisions.
Everything from how we take state skated data in from the field to how we rationalize that data internally. So we can be more reactive and also more proactive so with a lot of little things put together, but we wanted to make sure. It was understood. It we're not simply waiting for our base decline to moderate we're also elevating our engineering capabilities and operational capabilities to to these actionable as possible in the field.
Okay, Thanks, guys really nice quarter.
Thank you.
Our next question comes from the line of Gabe Daoud of Cowen and company. Please proceed with your question.
Hey, good morning, everyone.
They tend to kind of hit on a little bit, but just given the productivity and efficiency gains you're seeing on the back of the action plan.
Do you think this means you to deliver the same amount of activity next year.
I guess low lower capital.
Lower capital relative to 2019, and then in terms of framing 2020 should we just think about it is free cash flow being being the goal here with production growth is more of a second outcome.
Thank you.
So that's exactly what capital efficiency, we calculate out too we were able to do more with less so if we wanted to do the same we have line of sight to reducing capex. That's absolutely right. So we'll be taking that into account then when we go through the budget cycle and take into the.
The macro environment.
Thank the bias is obviously on on moderating any additional growth and focusing on returns as the as the main priority for the.
Majority of your capital allocation, ensuring that you had a growing free cash flow profile. So yes, you captured that fairly.
Thanks Todd.
And then just a follow up.
You mentioned that you talked about how well, we obviously a great great number in Twoq you just thoughts on how sustainable that to be in and just any more more color on what exactly was driving the nice beat their into Q.
Yeah, I think that's a it's a few things for one the entire organization has done a tremendous amount of focus right now on on cost and I think you're seeing that bear out and in that Additionally, having a larger denominator held so the it said it's kind of a.
[noise] synergy effect, where cost focus plus more barrels is driving that number down.
And where do you continue to have that same mindset and approach and B is actionable as possible going forward. Obviously at some point, we'll get back into a winter like we talked before about.
A higher proportion of the season, Northern Midland County, So when we think through the rest of the year and the following year. Those those things are all in our minds, but it certainly was a was a milestone quarter for us from an hour we standpoint.
Great. Thanks, guys.
Our next question comes from the line of Charles Meade of Johnson Rice. Please proceed with your question.
Good morning, Matt do you and your whole team there.
Hi, Charles.
I wanted to ask a question you've got a lot of questions on capital efficiency appropriately, but I wonder I wonder ask maybe in a different direction on.
On what's your what what is on your dashboard your mental dashboard as you.
Think about you know Youve made these strides preserving the strides and I think that you you bought a lot of that is kind of implicit on on slide five but I'm wondering if you could talk about you know in your you know you say you're dependent extend gains on the defense side. What are what are you looking to add what can we look at north sea that that'll help us up.
You can see how things are probably for you.
I think weve secured a lot of the defensive measures in the first half of the year and this was up grading our our approach to supply chain and getting our cost controls in line or even more so and I think we're delivering on that so no really where we don't lose focus on that but we look and we are really understanding these enhancements that we've been able to deliver on in the first half of the year on the compressed stages or things of that nature, and then as David mentioned the rationalization of all the technology that we're we're onboarding right now and how that looks out on a more of a offensive posture.
On a go forward basis, so I'm, the defenses and and we need to we need to press on the on the offense internally and externally or really wrap our heads around the macro conditions, obviously very challenging out there and.
Backing into the right amount of growth and free cash flow growth as we go into 2020 and beyond so those are the those are the two things.
Okay. That's helpful. And then and then my follow up is a little bit related to that on that are you guys say, but you know maybe call. It a third of this Ah you're better capital efficiency is about.
The shifted activity mix what is your what does your your inventory what should we be thinking about as your runway in that up I think you called you know the the Midland Martin Upton County Nexus there.
[noise] between are these types of projects, where between 10 and 15 years in those counties, so quite a bit of runway at these activity levels.
Thanks, Matt.
Our next question comes from the line of Neal Dingmann of Suntrust. Please proceed with your question.
Already on an amazing team nice work getting in today's mission of free cash flow really nice job.
Not my first question is around the optimal efficiencies in cost Im just wonder if you all could speak on your plan, how you position how you plan to position the Lebron rigs in the three to four frac crews for the remainder of the uterine really what I guess, what I'm trying to get as two things is that you know are you read plenty on focus on one specific targeted area and then planning are you planning on using multi you know multi rigs and crews on the same pad.
Yeah, and the only as David we have increased the average project size through the year and we'll continue to do that going forward. So you will see a little bit more a simultaneous operations as we've we've extended some of these efficiencies that allowed us to reduce the cycle times of those bigger projects.
So really to drive that.
And those efficiencies, we're focused on equipment procedures and the way our teams worked together with our service providers and Duane when we think about our activity levels. The three or four frac spreads were you can think of that Ford Frac spread is something of a helpful.
Oh Flex grew and we look at the performance of the crews at all times to see if it if we need to monitory between those two numbers, we want to do it we want to keep the momentum with the highest performing equipment and teens. So we'll continue to be focused on that as far as where I would expect a pretty pretty consistent mix of geographic activity through the balance of year that you saw in the first half and only slight difference that is a little bit lower back half Delaware activity versus the first half.
So we're talking a very calculated very calculated approach to project size. So, yes, it's increasing but you're looking at.
Things of 2.5 to 2.8 average wells for project into the three point fives or and this is just a smooth transition and it's very methodical.
Okay, great. Thanks for the AD there, Matt and then just secondly, Mike My question is on run the gas or Ngls. Just wondering you know are you looking at potentially more.
Potential sales contracts are locks and things in around this like you've done the oil or if you could just talk about a you know how you're feeling.
Some of the marketing around that.
Sure now this is Stephanie.
And on the gas side, we sell at the wellhead and so I'm really our downstream connections are dependent upon our purchasers, we have about 85% of our gas volumes sold to target.
At each of their plans they have multiple record even NGL.
Okay very good thanks Stephanie.
Our next question comes from the line of Michael Pool of high.
Hi, Hi banking.
Energy Advisors. Please proceed with your question.
Hi, good morning.
[noise] [laughter] sorry, Yeah I was just looking at slide 13, you guys have done a great job with this kind of glide path because this new.
Activity level.
Versus kind of a hard landing that we've seen with some others and.
I count, though look at that rig cadence and just wonder if kind of when you will have to kind of start tweaking that backup.
To keep delivering on.
Yes quarter on quarter growth and.
[noise] and executing the way you have in the first half.
And then in that context, you know obviously, you're also moderating the base decline like you pointed out is there a kind of target level that you're aiming for and when would you expect to get there and what might that be.
It's really shocking Mike when you look at the types of results, we've been able to deliver a we don't see a need to increase our rig count to deliver consistent quarterly growth. In fact, we think there may still be room to drop equipment levels and continue on a steady trajectory. So we'll be evaluating that its just phenomenal effort by the teams and a complete turnaround and very exciting to see it unfold.
On the corporate decline rate I mean things get easier to manage the lower year decline as you can see on that that's a nice glide path as well, we're not going to do anything.
Egregious to just control that number and we're going to focus on on the inputs focus on the controls as Ryan said and deliver on execution and it has a nice downward trajectory of a couple of percent a year for the foreseeable future and a long term the company gets into the 30% type of corporate decline.
Okay. That's helpful.
[laughter] and then I was just curious on the on the free cash flow side, how you're thinking about the durability of free cash flow relative to kind of oil see assume strip gas and NGL pricing.
Yes, as we look to 2020 in a in the future I mean, as we are here where at the inflection point of free cash flow positive and it's not something that we want to.
Get there and then.
You know get back so you know we've got the ability to.
Adjust our.
Our activity levels.
Pretty quickly and you know you would see us in a lower commodity price environment prioritize maintaining positive free cash flow.
Okay. Thanks, I appreciate it guys.
Our next <unk>. Our next question comes from the line of Paul Grigel of Macquarie. Please proceed with your question.
Hi, Good morning was wondering if you could maybe elaborate on some of the gains in working interest that you've seen in the background of the markets for for trades or you know maybe very slight.
I don't even want to call them bolt ons, but just kind of working interest acquisitions as you go through the program for the year.
Sure. This is David the.
That higher working interest is a combination of a of some trades that have helped bulk up that the s. Yoo acreage kind of in line with the comments we made in the two quarters. Prior we aim to do that it's a targeted thing when it happens in Cana.
Yeah, I can help drive a working interest a little bit. Additionally, as some other companies they run into budget issues. There's always the possibility of some additional nonconsent, but we've seen a little bit of that but that's that's generally and to slight extend as well.
Now.
Well, well planning and and patchy connect slight variations on it but it's primarily look at the trades and then to a lesser extent those last two factors.
Okay. That's helpful. And then I guess, maybe on the margin enhancements following up on that you know what what anyone would we be in or how far along are with a along on that and what could be kind of the future part and then as it relates to to focus on from a field level or from a drilling teams level. What are the incentives did that flow through the organization on the L. refocus and the returns focus all the way through or is there different ones, but the lower level.
No. It flows all the way through so Ella we component is a large component of incentive structure for the bonus pool across the entire company and as well as proceeds so everybody's looking at and PDF in D. everybody's looking at efficiency across the board and keeping our unit costs in line and we update or very transparently with with all employees at every quarterly meeting so everybody every them onboard there and as far as margin enhancement. That's a you're constantly working on that so it's not as if they were just a fruit on the ground that we're walking over and picking up is it's a hard drive and teams that's what what they do get compensated for and that's what they're working on day in day out and doing a great job of grinding it out a couple of percent.
Every year and then when he sees in the quarters. Those are those are big wins when they show up in the quarter, but I think you can see over time on us a steady or talk to your margins.
Thank you so much.
Our next question comes on the line of Jeff Grampp of Northland Capital markets. Please proceed with your question.
[noise] point, I guess I'm curious a in India and the commentary you guys talked about wanting to preserve operational momentum going into 20 at the same time, having a strict focus on the budget and I know what you know that happened last year with some operators that can be a little bit of a conflicting kinda desires. There. So just kind of wondering how you guys kind of manager or get in front of balancing those two items.
[noise] Yeah, the way we way we get in front of it is is primarily.
Now looking at it even keel ended the year and we've.
Really prioritized driving these operational efficiencies in such a way that we can avoid our friction costs. There's a there's a small duct bank that we've built that allows us to have the flexibility to move around our our frac spreads in a in a more efficient manner than we have in the past is not large it's just a one or two wells per rig, but even that alone that came out that can make a significant difference in the level of efficiency. So we are aimed at that continuous glide plane of capital investment activity just to avoid some of that early disruption that could happen in a falling by two years you have to pull back in a big way.
Great appreciate that and then my follow up on the capital efficiency front I'm just curious as we look into 20 I understand you guys don't Wanna Pony quote unquote guidance on that metric in into 20, yet, but directionally can you guys just give us a flavor of how you're thinking that trends in 20 can you can you get that double digit type of capital efficiency again or is that going to be a tough comp just given all the success. Thus far just it's kind of one high level. How you guys are thinking that might look in 2000.
Well I think what what we see now is this type of productivity on a go forward basis for years to come.
And of course, we're always working on the numerator and denominator, but we can't promise that those are those are data driven results and then when we see conviction that we can budget for input and push it through so.
Right now we have to go and the assumption of what we're seeing which is which is top tier in the industry and we're going to continue to work it.
All right understood person that I'm guessing.
Our next question comes on the line of Liana Reni.
Oh Keybanc capital markets. Please proceed with your question.
Hey, guys just wanted to follow up on the cost reduction side here certainly had a really nice move down.
In June eight in the second quarter here.
Just trying to get a sense or sort of all the reductions that you guys have made in the Genie side is that kind of baked in into the second quarter numbers or could we see some further reductions later this year or next year as a result of that maybe some of the staff reductions there.
Yes, that's right.
DNA has been a very high focus area of both the board.
And the management team and.
The success of Q2 is really the result of the whole company buying in to cutting costs.
You know the the guide for the rest of the year is a bit higher.
You know, we think there's still some more work to do across the board, but we are accounting for a couple of things that make it in the back half of the year. For example, if we do transact on the war on water. For example, the same or advisors. There. So weve looked a little bit of cushion there for some things to me that may come through so yeah. There's a you know it's been a great focus area as I mentioned and you know it's going to continue continue to be.
Okay. That's helpful and I guess just wanted to touch on the lower working interest here that you guys are seeing I guess, you guys reported a 99% second quarter working interest you're talking about going to 90%.
In the third quarter I, just wanted to get a sense is why that's just sort of coming down a fair bit there and you know what's kind of your typical line side can you kind of see partner participation out you know kind of for three to six months, which helps you kind of judge that little bit better just want to kind of get a sense. It. How you guys are able to see that.
Yeah. Leo this is David we can see that with with pretty good clarity in that time Horizon. You mentioned is where we're drilling and we we do know who our partners are in the back half year. We we've had dialogue with some of those partners and we have a in cases, where those partners are large and we have a a good line of sight on their their desire to participate in their their their budget availability, we have high confidence that they will participate so that all goes into our thinking as we plan.
This year has been a volatile one for the sector and so there have been a couple of.
Evolutions and surprises along the way, where we're somebody may have have a exhausted the budget or or decline in well, but by and large we have a pretty good line of sight on that piece of it.
Okay. Thank you.
Our next question comes from the line of Mike Cecilia of Stifel. Please proceed with your question.
[noise] yeah, good morning, everybody.
Your your head on your efficiency targets, even though it looks like your completion efficiencies decline a little bit in the second quarter from the first.
Just curious was that due to more upsize fracs in the second quarter or was something else going on there.
Yeah. This is David that's exactly what it was we had a higher proportion in the in the second quarter of.
Upsized Fracs compressed ages [laughter] excuse me and so with compressed ages, you got more wireline runs for plugs in guns and that takes a little bit extra time, and then on the Upsized Fracs, you're you know you're pumping tends to be longer if you're pumping in similar profit concentration. So those things manifested due to a higher proportion of that in Q2 versus one Q, but by and large and even with that step down we consider data we consider that a a continuation of the efficiencies we saw in the first quarter.
Yes, I agree.
And then you had good success with the higher rate of return focused development with though the wider spacing and bigger Fracs you talked about David over it looks like most to Upton County.
Most of your acreage in Upton County have you tested that design and other areas and I want to get your thoughts on the western side of the basin two it looks like you a strong preference for the Easter knows it just due to the.
Hey, or GE or the western do you think the.
The new Frac design.
Could help that side of the basin the door.
Yeah, I'd say, what you're seeing is across the Midland really we focus on kind of one operational area, usually is a spotlight per quarter and often was what we what we highlighted this quarter, but as we have been taking this approach a pretty broadly across the Midland basin. So I wouldn't say necessarily eastern counties. As much is you the mix of primarily Martin Midland and Upton, that's where the bulk of our Midland program is and that will continue to be the case going forward in all those areas. We have tested some of these same concepts and we're seeing encouragement in those areas as well.
Great. Thank you.
Our next question comes from the line of Brian Downey, Oh Citigroup. Please proceed with your question.
Great. Thanks for taking the question that quick one on sand I believe you completed your second Delaware local fan test in June curious about your thoughts there and what that could imply for perpetual well cost savings into the Delaware as we enter 2020.
Yeah, Brian This is David again, so that was a pretty recent test we put that well on an opt in third quarter. So it's it's a it's still pretty early on the first when we talk about that as we talked about in our last quarterly call is still performing wells about 150 day Mark is passed 200 now and we're still encouraged by it but it was just a little too early to call. We want to build more data. It's not just about the very early time performance. We want to look at a decline rate how that changes. So for me to call. There, we're going to we're going to let that mature a little bit [noise] as far as the cost I'd say it was just reiterate what we said last call, which is it's a half million plus potential savings for using rvs and regional brown sand in the Delaware.
How do you think you'll have enough data on on the second one to sort of make that decision once you're budgeting season. Later this year for thinking about next year.
Yeah, it's going to it's going to be nice having more data on the second test and the first test I think is getting to the point that we feel that an increasing degree of confidence that that's just going to remain.
In line.
So I.
I would say to 2019 is not over yet so we still got some potential to learn more from additional tests in 2019, but 2020 and beyond is that horizon, we're looking at making more and more conclusive strides on a regional sand in the Delaware.
All right I appreciate it thank you.
At this time there are no further questions over the audio portion of the conference.
This does conclude today's conference. Thank you for your participation you may disconnect. Your lines at this time have a wonderful rest of your day.
Okay. All we are back in private conference.
Great. Thank you [laughter] <unk>, well I'm not trying to interrupt.
Okay, great deal.