Q2 2019 Earnings Call
This call please and here at least 10 three number followed by the pound key.
Welcome to chorus call. Please NTT or at least 10, three number followed by the pound key.
[noise].
Your passcode is not valid.
Welcome to chorus call. Please ante or at least 10, three number followed by the pound key.
Invalid response.
Welcome to the chorus call. Please hold for a conference specialist.
Morning, Correspondents conference I would like to join.
Good morning, Collyn petroleum.
Thanks Carl.
Rachel Smit.
For the year with.
Our euro we let start with that.
Yes. Please.
Hey, I.E.R.A.
On the call.
Thank you.
[noise].
System, we used over 1.6 million barrels of treated volumes during completion operations greatly enhancing the economics of projects like this in the Delaware, while also significantly reducing our environmental impact related to salt water sourcing and disposal.
This recycling system has recently been upgraded to handle up to 60000 barrels of produced water per day.
Effectively doubling the capacity of our current operations in the area.
You can see on the top of slide five that our drilling program, which started the year running six rigs has provided us with a significant backlog of radius to complete locations, which we will begin to work through in the second half of the year.
With our one dedicated crew and a second temporary crew having completed the Delaware Mega pad. The second crew has been released and our single dedicated crew is now working on a series of seven wells in the Midland Basin that will be placed on production later in the third quarter.
We still have four rigs running very efficiently across various asset areas.
And while we work through some of our DUC backlog in the second half we will enter 2020 with plenty of inventory on that front.
Our capital spending was below forecast, primarily due to our solid operational efficiency gains from larger project concepts and sustained utilization of a dedicated completion crew.
As a result.
Previous expectations of a second quarter operational capex spend similar to the first quarter level of $155 million or handily beat in the second quarter by over $20 million.
This sets up so this sets us up to remain at or below our capital budget range for 2019.
With activity levels stepping down in the second half of the year after building out the DUC backlog in the first half of 2019.
On the bottom chart, you can see our steady progress to corporate free cash flow generation that is still on track to occur in the second half on a callon standalone basis, as our structural capital reductions and strong cash margins combined to highlight and efficient development model.
Model that will be enhanced and expanded in use with our combination with cruiser.
Slide six provides a good backdrop to revisit the goals, we laid out back in February and how our recently announced transaction with Creo advances each of those initiatives in 2020 and beyond.
We started the year by focusing on four key areas that we firmly believe will create significant value for investors over time.
Improving our cash return on capital invested generating sustainable free cash flow.
Using that free cash flow to reduce our leverage and focusing on the optimization of our core portfolio with a development mental model that optimizes the value of our multi zone inventory.
The combination of our two high quality asset bases and complimentary teams provides a foundation of improved scale and scope to deliver on these goals for many years to come.
Both companies have sector, leading operating margins, which coupled with a model of consistent larger scale development will contribute to improve returns on capital invested.
To that point, we see a clear path to a cash return on capital invested in excess of 15% and 2020 comparing favorably to other industries.
Utilizing the more mature Eagle Ford asset base to organically fund Permian operations under a maintenance capital mode will support the continued advancement of Seim ops and full field development concepts across the combined core Delaware position in a broader Permian footprint.
This framework for capital allocation will direct more investment to an efficient Permian development machine, reducing our cash flow breakeven price to roughly $50 in 2020 with increasing strong cash flow generation in 2021 and beyond.
As we have consistently stated.
Our immediate use of free cash flow will be to advance our deleveraging efforts.
This accelerated organic free cash flow, coupled with a greatly expanded opportunity set for noncore acreage monetization efforts in a meaningful water infrastructure monetization opportunity will clear path to an improved capital structure in the near future.
As part of the dramatically improved free cash flow outlook. We will also be positioned to evaluate other returns of shareholder capital on a on a shorter timeline after achieving our deleveraging goals.
One final point on our pending acquisition of Credo and one of the most important aspects of the transaction is the ability to optimize the long term development value of our combined inventory.
By merging these two companies we are creating a vehicle that can effectively compete in a lower commodity price environment without the need to high grade near term targets zones at the expense of other zones that are left behind for less efficient future development. After the passage of time.
By broadly employing simultaneous development operations on a consistent basis across the portfolio, we will reduce cycle times and costs and drive our free cash flow breakeven price below $50. As we also preserve the quality of our inventory life for multiple zones.
Slide seven provides a high level view of the combined entity and our focus activity areas. We will enjoy the benefit of a strong base of production and cash flow, which is currently above 100000 Boe per day with a black oil contribution approaching 70%.
This robust base of maturing production will underpin double digit growth targets and reduce capital intensity.
Despite this well established position in two Premier Us shale regions. The current enterprise of the company on a pro forma basis is only 10% above the combined SEC PV 10 reserve value for just PDP reserves at year end 2018.
One of the critical elements that drives the intrinsic value of the combination is the breadth of high return drilling inventory that both companies bring to the table.
On the top of slide eight we've shown the full complement of all well locations with IR ours above 25% fully loaded for drilling completion and infrastructure costs.
But without factoring and cost reductions from the operational synergies we've discussed.
The key takeaway here is that each of the core core areas within the portfolio contribute solid economics and compete for capital.
In addition, both callon inquiries or have delineated multiple zones within the Permian to understand the complexity in requirements to best maximize value from these areas.
Turning to slide nine we have seen wide variations in the assessment of well results in acreage quality in the southern Delaware Basin.
Due to differences in data sources in varying well vintages and landing zone picks.
We've put together a very clear and concise picture using publicly available data from reference sources to show an apples to apples comparison of well productivity in the southern Delaware Basin in close proximity to our combined footprint.
You can see in the map on the left so we focused on Wolfcamp a results since most operators currently regard this as their primary zone in this part of the basin.
This group of well results as shown on both a cumulative distribution plot as well as in a summary chart in the bottom right quadrant, which is still the information from the distribution plot down to the P. 50 result for each operator.
The analysis excludes prior operator results, which often are mistakenly ascribed to current acreage owners and typically were completed using older completion designs.
After plotting the P. 50 results you can see that both Curry zone Cowen had been amongst the top operators in this region over the past two years competing favorably relative to some of the more prominent names in the industry.
The summary of public data results aligned well with our own extensive diligence work that incorporates proprietary data providing us with a high level of comfort. We are combining two well established areas into a cohesive core Delaware position.
At this point I will like to turn the call over to Jeff.
Thanks, Joe.
In our previous acquisition presentation, we outlined a number of areas that we believe will contribute significant upside to our shareholders in the form of highly achievable synergies.
On slide 10, we've tried to simplify some of these concepts into clear examples that should eliminate the viability of the goals we have set for ourselves.
We quantified our annual run rate for total synergies at a $100 million to $125 million, we don't give ourselves credit for achieving all of this in year one.
From our perspective, we feel comfortable with targeting somewhere between 50 and 75% of that annual goal for operational synergies in 2020.
And we broke out exactly how we calculate those numbers within the ranges and what drives this specific synergy achievement in the first year of that combination.
On a DNA front, achieving $35 million in savings, which is at the low end of our targeted annual run rate denotes a roughly 20% cut to the combined total GMV name.
From a drilling and completion perspective, we are targeting a 5% improvement in Delaware development costs.
Under a sustained use of the new development model.
Additionally.
We are accounting for a 1% improvement in uptime for production from our Permian assets.
As we focus the operations on larger pad developments. This reduces HBP activity, a mitigates the effects of broader scale offset frac impacts and shortens recovery times to restore production.
As I'll cover shortly we see higher synergy potential and both of these areas as our development model is expanded across the Permian.
Flipping to slide Slide 11, you can see that our target DNC cost for Delaware development to achieve these those previously stated synergies has already been surpassed in our very first mega pad that we recently completed using simultaneous operations.
It's worth noting that we accomplished this with one of the two completion crews being activated just for this project. We believe there would have been incremental upside to the efficiency benefits. If we've been able to utilize a second dedicated crew consistently throughout 2019.
You've heard us talk about the level of operational efficiency that you gained from consistent deployment and activity levels as seen in the upper right hand chart. In this most recent achievement on the Rag run pad is indicative of the viability of DNC synergies and our prospective plan for 2020.
Much of this efficiency and cost savings comes from shipping to larger project development and you can see in the lower left hand chart that our program is expected to shift measurably and 2020, and 2021, which we expect will drive continued improvements in cost reduction and consistency.
While DNC savings are going to be a significant driver of value the ability to reduce production downtime across our asset base will be another structural uplift from larger project sizes.
A 1% increase in Permian field, uptime, which is accomplished through reduced offset frac impacts by concentrating activity with larger projects in a single geographic location, rather than moving about with smaller pad projects across an asset area can generate roughly $10 million in incremental value in the first year.
We expect to see this increase over time, increasing the incremental production impact a 1% to 2% of our total Permian production.
The ultimate cash flow impact of this operational synergy is enhanced due to the leading operating margins that will be preserved and the combined company.
And with that I'd like to hand, the call over to Jim.
Thanks, Jeff.
As we move forward, our philosophy of protecting cash flow has not changed we continue to use price point diversification, coupled with appropriate hedging strategies to ensure that commodity realizations and the underlying business value of those cash flows is adequately safeguarded.
Thus far we have employed a combination of swaps and three way collars in 2020, the cover 12000 barrels a day with a floor of around $65 a barrel.
As we have in the past, we will continue to add hedges as the year progresses with the expectation of locking in positions that account for roughly 40% to 60% of oil production.
As part of our continued strategy to diversify our oil pricing and control our physical oil flows. We have added a new agreement to cover 5000 incremental gross barrels, which will see first delivery in the second quarter of 2021.
Much like our other agreements these volumes do not rely upon export markets for movement, but are being sold into local refinery complexes.
Page 14, you can see that we have continued to manage the business in a manner that will allow our shareholders to reap the benefits of seeing the business shift to organic and sustainable free cash flow generation along with these operational initiatives, we have advanced our strategic goals by continuing to monetize noncore assets like our Ranger property in the southern Midland Basin.
And applying those proceeds towards debt reduction, while also opportunistically, reducing our financing costs as we did with the redemption of our 10% preferred stock.
We expect to continue leverage reduction credit enhancing activities in 2020, and see a meaningful opportunity to monetize additional non core assets from the combined footprint.
We have also seen the credit agencies recognize our progress and were recently upgraded by Moodys and placed on positive credit watch by S&P.
So our credit metrics, improving we will look for opportunities to reduce our longer term cost of debt capital, which will ultimately benefit our combined shareholder base.
As we look forward to 2020 and beyond.
And see our cash flow breakevens dropping below $50 per WT barrel, our prospects for meaningful capital structure transformation become a very tangible reality.
With that I'd like to turn the call back to Bill.
Thanks, Jim.
Like to Iridium granite reiterate for everyone. The goals that we shared at the beginning of the year prior to the announcement of our combination with Creo that remain the guidepost for our management team.
Optimizing our asset development to maximize returns is a critical driver for our business model working to sustainably generate a growing level free cash flow that can organically reduced leverage is paramount and building a sustainable business in this sector.
Rationalizing corporate costs and monetizing assets that don't meaningfully contribute to the achievement of our other goals is a necessity.
And as the shale industry matures. It is critical to be a low cost provider supply and not the marginal cost of supply.
Our combination clearly advances each of these mandates and creates a differentiated investment in the smid cap oil and gas sector.
With that that's going to conclude our prepared remarks, operator would you. Please open the line for questions.
We will now begin the question and answer session.
To ask a question. Please press Star then one on your question.
If you're using the speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two we kindly ask that you limit yourself to one question and one follow up and they may re queue for additional questions and at this time, we will pause momentarily to assemble the roster.
And our first question today comes from Gabe Daoud with Cowen. Please go ahead.
Hey, good morning, Joe and good morning, everyone.
Okay I guess.
Joe maybe just starting with.
The Ron just kind of bodes well for.
Potentially capturing the synergies you've laid out related to the original transaction transaction could you I guess, maybe just talk a little bit about how that shapes your confidence in attaining those synergies and I guess, how much if at all if at all there could be some upside to the initial synergy targets that you laid out on the DNC side.
Yes ill start out with that gave and I'll turn it over to Jeff get it get his views but.
Yes, we are certainly encouraged by this.
And bodes extremely well for the plan, we put together in the underlying thesis with Accredo transaction, but.
If you remember we've seen this before right weve employed simultaneous operations in the Midland Basin now that was a little bit less of a capital intensive endeavor. So its little bit of a different animal in the Delaware, but by the same token the prize you're unlocking by getting more efficient on more capital intensive businesses is very meaningful so.
We're very pleased as Jeff will talk about it I think we even see some some additional upside from from where we are on that first mega pad in the Delaware.
Absolutely.
I was very encouraged with the with the results both operationally.
From a timing perspective, and also on the financial savings that we were able to achieve in they go hand in hand of course.
The nice thing about that that overall development is it's consistent with the program that we have of of coming out and being thoughtful and getting the majority of the resource covered.
Initially so from a development perspective as opposed to kind of drilling individually trying to hit the home run wells and suffering the consequences of coming back.
The ragged on pad was indicative of the type of development program.
That we have scheduled out independently within Cowen and then we'll be even enhanced more significantly with the addition of the credo assets. So so top to bottom.
I'm extremely happy with the performance so far with with that set of.
Thanks, Jeff that's great color and then just.
Follow up maybe just thinking about talent Standalone can you guys, maybe just give us a sense of.
I guess the back half of 2019 trajectory in terms of production and Capex, how should we think about that split for Threeq and fourq.
Yes, I gave out I'll give you some high level thoughts on that.
Going into the third quarter, obviously, we're losing close to 4000 Boe per day from the Ranger asset sale.
Which was relatively mature production as you recall.
And we really were starting off in July with really no wells online until very late in the month, given that rag Ron focus but.
What we're seeing now is turning towards a locking the the program we've been building towards right. This large scale development in the Delaware and the broader Permian is really starting to kick in in mid third quarter. So you add all that up.
The third quarter on a daily basis.
Taken out the Ranger impacts and some of the back ended activity, probably close on a Boe basis down close to 10%.
On an oil relative to second quarter on an oil basis, we'll be doing a couple percentage points better than that right because the ranger assets were 50% or so gas.
We do see a strong growth profile coming late in the third quarter with the Rag, Ron pad continuing to ramp up and the Midland pads, we talked about those seven wells towards the back end of third quarter, what that does set us up for in the fourth quarter as it was a very strong quarter.
Moving back to production levels that we had seen in the second quarter, but with a higher oil cut.
Great. Thanks, So thats helpful. Thanks, guys good job.
Thanks.
And our next question comes from Derrick Whitfield with Stifel. Please go ahead.
Hi, good morning, all and congrats on a strong quarter and update.
Thanks.
Perhaps for Joe referencing your free cash flow to comments on page six how much of your improvement cash flow breakeven few attribute to lower base decline versus cost synergies.
Yes, we are picking up.
A bit of an improvement on the combined PDP decline profile as you know as we sit here at Callon Standalone.
And we've talked about post Ranger, just around 40%, we'll do a little bit better than that on the combined asset base.
But.
As we look at it the majority of is going to come from.
The cost synergies, but the PDP component and.
A more mature asset base overall is not an.
Small part of that as well.
Got it makes sense and then perhaps for for yourself, Joe or Jeff.
As I recall back from your acquisition.
Marketing deck.
You have about 400000 barrels permitted salt water disposal capacity in the Delaware on a pro forma basis.
Assuming a reasonable price environment and activity level, how much of that is required to support your operations over there over the foreseeable future.
And if I could tack on one additional question.
If the excess is approaching what you are highlighted on page four of your Powerpoint would you consider monetizing some of that given the valuation of those assets at present.
Yeah.
In terms of.
What we have in terms of capacity.
Without getting a lot of specifics because there will be some ups and downs, depending on the cadence of bringing on some larger pads and we got to be mindful of the peak water volumes that.
We will be utilized by the system, but that being said there is going to be.
A fair amount of unused or latent capacity in the system that we think does present, a great opportunity to monetize as we've talked about though we spent a lot of money. The last couple of years to building a system that is reliable, having redundancy, allowing us to control our own destiny to move water volumes and that's only going to be enhanced with a combined footprint in terms of what critical brings to the table and as we interconnect those those systems.
So while we are looking at the monetization route we do want to make sure that we are preserving.
A level of operational control.
That's going to allow us to run the business.
No were not water business, but we do have an investment that we think there is significant value unlock and simply put that value potential and opportunity to get people's attention is only to be increased with the combined footprint.
That makes sense very helpful. Thanks for your time.
Thanks Tyler.
And our next question comes from Neal Dingmann with Suntrust. Please go ahead.
Ill.
Joe My first question I think for you or Jeff just curious to know Theres a lot of scrutiny. These days on the tighter spacing and just.
Around the Permian. So my question is around.
If your view of the multi zone potentially relatively titers pads.
Has changed in this environment not only we just with investor.
Comments, but with the lower pricing.
Yes. This is Jeff generally speaking we're aligned in what we've done in the past what we're currently doing and what we're doing in the future is pretty is pretty well aligned with some of the comments that you've seen from from other companies.
I really like our spacing in our thoughtful approach and where we're at we kind of use the.
660 would be a good starting point.
There are areas, where I think.
The geology is really good and your value drivers suggest that that you could squeeze in a little bit more if you're only going to a say a single target for instance, or or one zone is.
Significantly better than than.
Overlaying or underlying zones, you might think about going a little bit tighter.
Theres going to be areas in the Permian, where 660 might be too tight and you might be a little bit more.
On 800, plus range and I think you've seen companies.
Make those realizations.
Our acreage position is set up very well to be able to do that.
On a continual basis going forward, so while we still maintain the opportunity to do some some variable testing on spacing and stacking and of course, then there is that.
The time variable that comes in when you are coming in and setting in child wells next to apparent well.
Generally speaking I am and we are very much aligned with the.
The majority of the spacing comments that have come out.
Okay, Great detail, Jeff and then just my question I think I know the answer is one of just double check.
In regards to the operational plans in next few months, just wondering until the acquisition closes any any thoughts Joe as far as.
Anything you might do differently is far as these larger pads, you're bringing in multi rigs or spreads.
Just want to how you're sort of playing out or is it just more or less business as normal.
Yes, now we're going to continue to block and tackle for the rest of the year.
Very good thanks, guys.
And our next question comes from Brian Downey with Citigroup. Please go ahead.
Good morning, Thanks for taking the questions I was wondering on the Delaware optimization projects. If you have any additional color on what you found versus original expectations heading into that project and then how you see that impacting production costs throughout the remainder of the year. It seemed like that really help elderly in the second quarter.
It did get that project has been completed I'm very satisfied with the operational consistency that weve been able to achieve.
Spot on relative to the impact and we are transparent and declared that.
Hands off to the field teams in the contract partnerships that we were able to to bring into to methodically work too.
All those projects. So it's we're in very good shape right now thanks for bringing that up it's a it's a feather in our cap and a shout out to the operational teams in the field.
Great and then I'm curious if you see any similar potential on the tree so assets how that correlates with the production uptime synergies that you quoted in the deck is that simply scalar or do you see other production optimization potential I guess, what I'm getting at is could you maybe give us some guide posts of what you're looking for differentiating the quoted at 1% uptime production uplift synergies versus the.
Potential to expand that to 2% for the down the road equal.
Yes, those numbers, Brian the one or 2% are really from a structural benefit of.
Using frac bashing and downtime in recovery time, so we have not outlined any.
Incremental.
Or quantified any incremental benefits from.
Other optimization around combined program and.
Taking best practices around artificial lift and things like that they are not in there. We certainly would expect that they're going to be opportunities. When we put together our collective heads to do things like that but there is nothing.
Specific in that 1% to 2% uplift Thats just again very simple primary synergy around structural change in how we develop the asset base.
That's helpful. Thanks Sara.
And the next question comes from William Thompson with Barclays. Please go ahead.
Hey, good morning, guys. So maybe for Jeff regarding the production uplift synergy targets can you give us.
Ballpark of how much of your developed reserves is not producing at any given point due to try to mitigating offset frac kits and looking at your reserve report in the 10-K. It shows about 4% of your developed proved oil was classified as non producing so I believe some of this might be related to wells being completed but not turn in line. So just trying to get a sense on where we are today and where the opportunity yes.
Hey will this is Bart.
They have been Jeff Kauffman there so.
The real quick the PD, one PD stuff is not downtime stuff thats stuff, that's waiting to be completed behind pipe. When we look at this certainly.
There's always a certain percentage of the available proto productive portfolio that is off line simply in need of Workover or.
The field maintenance whatever it is.
So a portion of that obviously is attributable to what is either been.
Proactively shut ins to protect against Frac bashing or what is lately affected by frac activity hours or offset partners and thus has to be restored. So as we talk about tightening up into larger concentrated projects rather than having a more dispersed program with the smaller pads hitting multiple areas. We believe that from the aerial extent, we're going to have less impact and also from a planning perspective be able to reduce the time necessary to get those either proactively or affected wells back online. In addition.
We're going to have the opportunity set because of the tighter cycle times to reduce the the time component of how long that productivity you shut it.
Okay Thats helpful Mark Thanks.
And then maybe to make sure we're thinking about it correctly can you spend some time and I could spend a minute going through the mechanics of Sim ops.
Sounds like you're running two fracs per pad.
Two fleet, sorry, excuse me per pad and I assume you're doing zipper fracs. It seems like you benefit from having dedicated crews versus spot crews and be able to deliver on simops any color there would be helpful.
Great Yeah, that's a that's a fantastic question and something that I'm I'm very proud of with the team that we've got and I've been through this my entire career.
And so it's something that.
Is critical to the success of the operations coming forward, starting with the safety aspect of it and you'll find that.
The logistics of having multiple crews on location, whether its rigs or frac crews are drilling crews, even coming down to the traffic patterns and who is in charge and whats the emergency plan.
Those are our terrific items to address upfront to get in place.
Generally speaking what what you we could outline is for instance, if we're going to do.
A system six wells on a pad basis, we would come in with two independent.
Drilling rigs.
They're relatively side by side kind of if you've got a good army could hit them with baseball.
And they're drilling fairly similar wells.
One would be drilling on the east side, one would be drilling on the west side.
We tend to.
Stage, the wells out so that any operational learnings that we have from one rig are literally word of mouth.
At the at the coffee.
Discussions in the morning, our kick off meetings every morning, our drillers can get together and share learnings on the side on what.
Bit words, what our mud systems are.
Where we're signing.
Shallow water flows anything that we have and.
In consideration.
So.
Those are enhance on the drilling side and you'll see almost across the board better operational performance.
When rigs are side by side than when they're doing independent drilling.
Then you also get the benefits of being on location where that rig.
His drilling multiple wells off the same location everybody knows we're going to show up to work the next morning.
You're doing repetitive tasks as opposed to moving locations, starting up again and drilling a different well.
When the rigs are finished with their drilling.
We move off we bring in two Frac crews and again, if you had a chance to be out on location. It's impressive when you run multiple frac crews at the same time and it's the exact same thing.
Generally speaking you are going to be in better shape. If you have dedicated frac crews that are used to working with each other understand the setup have been onboarded fully on the safety and operational protocols that we have in place.
That being said on the Reg Ron pad.
Sticking with slumber today of course, we brought in a second true.
That we're familiar with but they came in and did a very solid job for us and again I think it's it's a testament to the safety protocols and taking your time and working through exactly what you need to be done.
If they were working their full time with US all the time, which you will see in the pro forma company going forward much more often we would absolutely believed that we would have additional synergies and.
Increased efficiencies.
And we do zipper frac that sets an excellent point, we think it creates a more complex competing fracture system.
And then when the Fracs are finished move off bring in multiple drilling crews depending upon.
Where the wellhead locations are and how far apart they are notionally you'd bring in at least two drill accrues to come in knock out the plugs. The facilities are already preset. So we just tie everything in a couple of days and get the flowback ready to go.
But that's a reasonable out outline of how we performed simultaneous operations.
It's helpful. Thank you.
And our next question comes from Kashy Harrison with Simmons Energy. Please go ahead.
Good morning, everyone and thank you for taking my questions.
Hi, Good morning, So maybe a question for you maybe for Joe.
So just looking at the broader macro right now it feels like a very uncertain time, just given the concerns around.
The global economy trade policy tweets and what have you.
And so I was just wondering how you you guys are thinking about risk management and the hedging strategy associated with the Courier acquisition.
Just in case crude price what are you going to do crude prices go down and how are you are you going to protect.
How are you going to protect the asset in the event of a downturn.
Yes, let me start with that I'll turn it over to Jim but from a high level perspective, we talk about risk management hedging and both from a.
Financial standpoint, as well as physical.
Risk management, but from an overall perspective risk management starts with the asset base and the quality of assets you have in the operational flexibility have within that so the combined portfolio gives us a lot of optionality across different.
Commodities as well as.
In terms of cycle times and things like that there's a lot more optionality that we have as a combined entity, but specific to your question I'll, let Jim talk about how we think about risk management.
I think Joe.
Kind of laid most of it out I would just.
Come behind and say listen, we'll we'll be somewhere.
In the 40% to 60% range as I mentioned earlier as I look at it right now on a pro forma basis were at the lower end of that range, which is about which you would expect for this time of year, we'll be looking to increase that over the coming months couple of weeks ago. We did a 3000 barrel a day swap at $56 a barrel and we will continue to layer in that position.
The primary goal of the risk management is to support the business objectives, we have and one of the most important things we've been talking about is the free cash flow the sustainable free cash flow over over the coming months. So we'll continue to look at it very closely we'll look at it on a benchmark basis, we'll look at it on an individual.
Differential basis, and we will put together a cohesive program that will continue to help us mitigate that risk.
Got it that's that's helpful.
And then my my follow up question on page seven you highlight the pro forma proved developed valuation, but just at a higher FCC FCC price deck.
I was wondering if you just help us think through what that GDP evaluation would look like at more conservative prices say.
The 55, if you have that sensitivity available.
I don't have that there, but I would point out while the.
The benchmark pricing is higher if you look back at 18, the differential from Midland embedded in that was $8. So if you look at it on a realized price basis, we're not too far off I don't have it.
Probably fine tuning from there to take that realized price versus where we are today.
But.
Again that is it.
You have to be careful with just looking at the benchmark Thai versus what the realized prices and obviously Midland differentials are now switching to a positive versus that mine site.
That's very helpful. Thank you that's it for me.
And our next question comes from Sameer Panjwani with Tudor Pickering Holt.
Please go ahead.
Hey, guys good morning.
As management.
You talked a little bit about upside to synergies and well cost reductions and one of the things. Some of your peers have been using electric Frac fleets have you started using these or have any plans to test on the near term.
We have not use them yet they are certainly interesting we have.
Been investigating them.
I think with the pro forma company the size of the company that we will become.
Makes that more.
Of an opportunity simply because of the upfront investment and the longevity needed to maintain that partnership.
But it's certainly something that we are taking a look at.
Okay. Okay. That's helpful. And then circling back to I guess, there was an earlier question about how things have looked at lower commodity prices and I'm just trying to get a sense of how you think about prioritizing growth versus free cash flow as than the preliminary budget. You put out is that fair to use down to $50 a barrel, even there'd be no free cash flow or should we expect you to generate free cash flow lower activity levels should prices move lower.
Yes, certainly driving that breakeven price down to 50 and below is.
Is a big focal point for us right as I said in a.
Maturing.
Landscape being the low cost provider is critical so thats, obviously something that we benefit from in a very meaningful way very tangible ways as a combined entity in terms of the free cash flow versus growth.
Well I think we've already spoken volumes about how we think about that count on a standalone basis, obviously, we had a.
Bit of a higher trajectory, but these combined entities we are.
Complement what we're giving up a little bit of production for free cash flow and that is something as we move forward to navigate through pricing cycles that.
We'll continue to see from us.
Okay. Thank you.
And our next question comes from no parks with Coker and Palmer. Please go ahead.
Okay.
Okay hear me.
Yes, we can hear you know please go ahead, okay great.
I was wondering did you have any participation and ER and increase our operated drilling over the past year or two prior to our starting on the deal.
Nothing of note no.
Okay and I was also interested with the combined position.
Are there going to be any any changes I guess positive or negative as far as.
Looking at land swaps other other consolidation of of acreage on your positions is that does that get easier with the deal significantly.
Well certainly with it.
Expanded footprint, our opportunity set for either monetizations or trades and continuing to core up like we've done on our footprint has expanded tremendously.
In.
Eastern Reeves and through War County.
We have a substantial.
Contiguous footprint that will continue to core up around.
The prospective areas that we think.
Our most beneficial but yes, there is going to be more opportunities to.
Do trades do some noncore monetizations and it's not necessarily because it's not good acreage. It's because if you think about.
The thesis here is overlaying a more efficient larger development model and so if you had a single section here or there that might be integrate area.
Putting a large model on that might not be the right model for us and get the right Bang for our Buck so.
Overall, we should see continued.
Upgrade optimizing pruning of our asset base as well as some trades to continue to core up and lengthen laterals.
Okay, great and.
Is there.
I guess looking at the.
The just the housekeeping question looking at the accounting going forward.
You mean decision whether the combine companies are going to.
Use to scream accounting versus three stream for the product mix.
What I would say is we are making very good progress moving down that path.
And I would hope to be back in the near future with what our ultimate decision is.
And this concludes our question and answer session I'd like to turn the conference back over to Joe got to for any closing remarks.
Thank you and again, thanks, everyone for joining in I know Theres a lot of calls going on this morning. So please reach out and any follow up questions, but again.
I appreciate the time and look forward to updates as we move along.
In the course of the year. Thanks again.
The conference is now concluded a replay of this event will be available for one year on the company website.
Thank you for attending today's presentation. You may now disconnect. Your lines at this time and have a wonderful day.