Pioneer Natural Resources Company

Q4 2020 Earnings Conference Call

2/18/2021

spk08: Welcome to Pioneer Natural Resources fourth quarter conference call. Joining us today will be Scott Sheffield, Chief Executive Officer, Rich Daly, President and Chief Operating Officer, Joey Hall, Executive Vice President of Operations, and Neil Shaw, Senior Vice President and Chief Financial Officer. Pioneer has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the Internet at www.pxd.com. Again, the Internet site to access the slides related to today's call is www.pxd.com. At the website, select Investors, then select Earnings and Webcasts. This call is being recorded. A replay of the call will be archived on the Internet site through March 22, 2021. The company's comments today will include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospects of Pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Pioneer's news release on page two of the slide presentation and in Pioneer's public filings made with the Securities and Exchange Commission. At this time, for opening remarks, I would like to turn the call over to Pioneer's Senior Vice President and Chief Financial Officer, Neal Shah. Please go ahead, sir.
spk04: Thank you, Orlando. Good morning, everyone, and thank you for joining us. During today's conference call, we will be discussing our strong fourth quarter results in addition to reviving our 2021 outlook, detailing our strong financial position, and discussing the initiation of our variable dividend policy. We will also include an update on the synergies we're achieving through our Parsi transaction and our significant ESG momentum with new goals and targets set at the end of last year. After that, we will open up the call for your questions. So with that, I'll turn it over to Scott.
spk03: Thank you, Neil. Good morning. We're going to start off on slide number three. We had very, very strong free cash flow generation of approximately $300 million, driven by a strong production of low-cap acts due to continued efficiency improvements from the operational teams at all levels. We're announcing our formalized long-term variable dividend structure which we have several slides, we'll be returning up to 75% of post-based dividend free cash flow to shareholders, and we'll give you some examples later on. Significantly improving return of capital to shareholders. We'll generate significant free cash flow generation of approximately $2 billion expected in 2021 at $55 WTI. Currently, the strip is about $60 WTI, so we hope to beat that, driven by peer-leading corporate breakeven in the high 20s per barrel range. Synergies from partially acquisition are exceeding previous guidance, especially on our recent bond deal, interest savings additional 25 million, and we expect to achieve better savings on GMA as we go into the second and third quarters. We expect synergies there of about 100 million. We also expect to realize our full operational synergy run rate of 150 million per year by year end 21, Rich will talk more, give more detail about that and fully benefit in 2022 and thereafter. We remain focused on environmentally responsible operations with new emission reduction goals announced during our fourth quarter of 20 with the release of our comprehensive sustainability report. Going to slide number four, our execution continues to remain strong. Both total production and oil production in the upper half of our guidance ranges for both fourth quarter and for full year. We generated $700 million in free cash flow despite averaging $39 WTO price during 2020. In addition, we're continuing to gain on lease operating expenses. They were down 15% from 2019 levels. Going to slide number five, our outlook. In 2020, obviously many EMPs experienced year-on-year production declines. Pioneer continued its trajectory of strong performance, setting up a robust 21, especially going into 22. As seen on slide 5, we're expecting to generate approximately $2 billion in free cash flow at $55 WTI. Again, the strip is about $60, so we hope to beat that. Our 2021 production outlook was impacted by the harsh winter weather encountered across the state of Texas last week. that left millions without power for an extended period of time. Our 2021 production outlook reflects these impacts, which amounts to approximately 8,000 barrels of oil per day on a full year basis, a little above 2% of our total oil production. With our announced capex range of 2.4 to 2.7 billion, we're expecting to produce between 307 and 322,021, which includes the impacts of the winter storm and also excludes 11 days of parsley production from January the 4th through January 11th prior to the close. Our current production trajectory will drive strong exit-to-exit growth of approximately 8%, which sets up a very highly capital efficiency 2022 and beyond. Going into slide number six, the framework for the variable dividend, and discuss more detail over the next several slides. Top tier inventory supports a low maintenance capital break-even price of about $29 per barrel. And as you look, our maintenance capital is about $2 billion now with both companies combined together. At $55 oil, the 2021 plan generates $2 billion of free cash flow That's WTI. As I said already, the strip is about 60 for the rest of the year, allowing for substantial return of capital to our shareholders via a base and a variable while concurrently further strengthening our balance sheet. Going to slide number seven, we've been talking about this for 18 months. We've been exploring it with shareholders, both long-term and short-term, for about 18 months. We're happy to announce The initiation of our variable dividend policy significantly enhances our long-term shareholder returns. Specifically, after the base dividend is paid, we expect up to 75% of the remaining annual free cash flow to be returned to shareholders in the form of variable dividend, which we paid out quarterly the following year. To further strengthen Pioneer's balance sheet, which we think is critical and has been critical long-term for us, The 2022 variable payout will be up to 50% of the 21 post-based dividend free cash flow. We believe that a strong capital return strategy, one that encompasses a stable and growing base dividend paired with a significant variable dividend, presents an attractive value proposition for our shareholders. Now I'm going to go into some mechanics for 21 and 22 to make sure it's clear. In 21, let's assume we do generate the $2 billion of free cash flow. We have a base of about 500 million. We're left with 1.5 billion. We're gonna split that 50-50 for 21 payable and 22. So 750 million will be for the variable and 750 will go to debt reduction. The 750 will be split equally into four equal payments paid in the quarter, each quarter. It'll be offset, it'll be a different part of the month of that quarter So we want each shareholder to receive eight checks a year from Pioneer. The estimated dividend yield based on current stock price is about 4.5% when you add the base plus the barrel. Let's go to 2022. Right now, at the current script, we expect to generate about $3 billion of free cash flow. Take away about $500 million for the base. You're left with $2.5 billion. Now we split that 75-25. That's $1.9 billion as a variable and $600 million for debt reduction. That equates at the current stock price to a 7.5% dividend yield. So we hope that is clear as we move forward in 21 and 22 in those examples. Going to slide number eight, our long-term thesis. We've had this slide before. It remains the same. Remains focused on driving free cash flow generation and creating significant value for shareholders. At the current strip, our long-term reinvestment rate is 50% to 60% of cash flow, which supports a program that delivers approximately 5% annual growth, adding one to two rigs per year long-term. We expect this framework to generate approximately $16 billion in free cash flow during 21 through 26 at $52 WTI, which is greater than 50% of our current market capitalizations. We believe this differentiated strategy positions Pioneer to be competitive across all sectors and a leader within our industry. Let me now turn it over to Rich.
spk05: Thanks, Scott, and good morning. I'm going to start on slide nine. And with the combination with Parsley, we are the only 100% focused Permian ENV of size and scale. You can see from the map that on a combined basis, we have a footprint of about 920,000 net acres. with a substantial inventory of high returning wells. And importantly, zero exposure to federal lands. Looking at the specifics for the 2021 plan, we plan to run on average 18 to 20 drilling rigs and five to seven track fleets. As you can see from the bar chart there, we are continuing to move towards larger pads, which helps drive efficiencies and can be applied to the partially acreage position. Other than the larger pad sizes in 2021, Our development plan in 2020 was very similar in both lateral length and well mix compared to the 2020 program. As Scott mentioned, the winter storm last week did impact our production by approximately 30 pounds per day. The vast majority of this production is back online, and we expect to see the remaining production back online in the next week or so. I would like to take this opportunity to thank all of our employees, and especially our field employees, supply chain team, and our service company partners for all their efforts to restore production and resume drilling and completion activities. They have done a terrific job while many of them have been dealing with their own personal home repairs from being without power and having broken pipes. So I want to personally thank everyone for the hard work and most importantly for doing it safely. Turning to slide 10, you can see we are increasing our initial parsley synergy target. from $325 million annually, as Scott mentioned, to $350 million. In January, we completed the refinancing of the parsley dead and saved, on an annual basis, $100 million of interest, exceeding our target of $75 by $25 million. In aggregate, post the refinancing, this lowered Pioneer's overall average coupon interest rate to approximately 2%. We expect to realize the G&A synergies of $100 million in the first half of the year and we're well on our way towards that. On the operational synergy target of $150 million, we expect to achieve that by year end 2021, which will drive a recurring benefit beginning in 2022. To give a little color on the work in progress, we're in the process of optimizing our field production operations given the adjacent operations in the Midland Basin. We're consolidating our supply chain activities. and we're looking at further capital efficiency improvements associated with tank batteries, water systems, and water disposal systems, just to name a few of the initiatives underway. Scott will discuss, as well, achieving these synergies as part of our 2021 compensation incentives. If you look at the right side of the page, you can see these synergies are coupled with our unmatched inventory of high return wells, which supports our free cash flow model. Turning to slide 11, And controllable costs, we are continuing our journey to reduce our controllable cash costs. And you can see here we've decreased them 23% in 2020 and expected to decrease them another 8% or so in 2021. These costs are comprised of cash interest, which I just mentioned being now at a low average cash cost of 2%. The second component is cash G&A. which we expect to be, you know, around approximately $1.20 for BOE in 2021. And then thirdly, our industry-leading horizontal LOE costs. We won't stop here, and we expect this trend to continue to improve through time. So with that, I'm going to stop here and turn it over to Neil.
spk04: On slide 12, you can see Pioneer's premier asset-based position. This is us only E&P to have a corporate break even below $30 a barrel WTI within our peer group. enabling Pioneer to have a low reinvestment rate and drive significant pre-cash flow generation. This low break-even price reflects the quality and the resilience of Pioneer's portfolio, underpinning our operational and financial strength. In addition, our unmatched high-quality asset base has no exposure to federal lands. Turning to page 13, To the right, you can see the graphic that demonstrates our best-in-class break-even price with our low leverage that supports substantial return of capital to shareholders, as well as providing Pioneer both operational and financial flexibility. We witnessed the benefits of our strong balance sheet during the downturn in 2020, and it was Pioneer's strong financial position that facilitated the refinancing of Parsley's debt from an average coupon of greater than 5% to an average coupon of less than 1.5%, driving our interest savings synergies of $100 million that Rich discussed earlier. With our investment framework, our net debt to EBITDA will continue to trend lower while concurrently returning significant capital to shareholders through our base and variable dividends, creating value for shareholders while bolstering our fortress balance sheet. With that, I'll turn it over to Joey.
spk10: Thanks, Neil, and good morning to everybody. I'm going to be starting on slide 14. We came off our best year ever in 2019 and the drilling and completions teams committed to demonstrate similar gains in 2020. And the graph on the left shows they delivered on their promise. The chart on the right hand side illustrates the significant progress also made in reducing our facilities cost. Our construction and operation teams partnered together to decrease the initial cost of our facilities by 40% since 2018. All this has been accomplished without compromising our commitment to safety and protecting the environment. To the contrary, and most importantly, we improved on all safety metrics in 2020. These gains would not have been possible without the hard work of our entire staff, supply chain team, and great collaboration with our suppliers and service companies. Add in the complexities introduced by the pandemic, and this has been a truly remarkable year by any measure. Now moving on to slide 15. often get asked what's driving all these improvements. We're certainly very proud of the engineers and field staff that have worked hard to make these gains possible, but they did so in partnership with our technology solutions and data science teams. Their expertise has allowed us to effectively use our extensive data set to make better decisions and to leverage technology. This represents a very small subset of examples in different areas where we have used advanced analytics and technology to improve performance. Just a few examples as I move from left to right on the slide. By creating digital twins of our drill strings, we can use predictive analytics to push the performance envelope and reduce failures. Machine learning has allowed us to reduce cost by optimizing our profit and fluid systems without compromising the deliverability of a stimulation or well performance. Mobility projects have allowed us to put more applications in the hands of our field staff to ensure they have convenient access to the information they need to perform their jobs and minimize driving time and improve uptime. And to further progress our best-in-class emissions performance, we are deploying various sensor technologies that will allow us to detect emission events in real time and reduce cycle time for repairs. Ultimately, we are using our vast data set and the best available technologies to create more value on improving safety and environmental performance. Coming into 2021, our teams remain committed to keeping our people safe, reducing our environmental footprint, and demonstrating top performance when compared to our peers. Congratulations to the entire Pioneer team for their contributions to our safe and efficient execution in 2020. And I'll now turn it back over to Scott. Thank you, Joey.
spk03: Starting off with slide 16, developing low-emission barrels. I think being in the Permian Basin and the actions that we have taken as a company, we are at one of the lowest CO2 emissions per BLE produced worldwide. This is an interesting chart that we have found. It's essentially all state-owned oil companies, majors, large independents. So it's the largest global operators in the world, making up over $64 million. barrels of hydrocarbon liquids per day. Pioneer's operations produce barrels with one of the lowest associated CO2 emissions globally. Our low-cost, low-emissions barrels continue to be desired around the world. Jumping to slide 17, we continue to make changes in our executive compensation going forward. One of the first things we've done, we did this last year, was tie myself, the CEO, for 100% on any LTIP based on performance. So it's all based on performance, so Pioneer has to perform for myself, the CEO, to be paid anything long-term. We started that program last year. Right now, we're the only company that is doing this. Most CEOs average about 51% in the S&P 500. We added the S&P 500 index into our PSR peer group, beginning in 2021. We've also added some new goals and increased some goals. We increased ESG and HSE from 10 to 20 percent. We have now ROCHI and CROCHI, a combined rating of 20 percent. And last year, we did remove any production and reserve goals going forward. As Rick mentioned, we do have 20 percent in strategic. He mentioned that in that strategic, we do have to achieve our partially synergies. to make that number work on any annual incentive in that regard. Going to slide number 18, strong focus on ESG. Pioneer continues to hold all pillars of ESG of great importance. Our new sustainability report was released last quarter and reflects our significant strides in reducing both scope one and scope two greenhouse gas and methane emissions. It incorporates emissions intensity reduction goals from both. Inclusive of parceling, we have a very low flaring intensity of 0.7% compared to the peers average of 1.4%. We continue to promote a diverse workforce which reflects community in which we live and work. Finally, on the last slide, number 19, we're committed to driving value for our shareholders, and we're looking forward to finally commencing with our variable dividend structure. Again, thank you. We'll open it up now for Q&A.
spk08: Thank you. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, everyone, to ask a question, please press star 1. We'll pause for just a quick moment to assemble the queue. And we'll take our first question from John Freeman with Raymond James. Please go ahead.
spk13: Good morning, guys.
spk08: Hey, John.
spk13: I appreciate all the extra detail, Scott, on the variable dividend policy. And I just wanted to make sure, just to clarify a few things. So when we think about, like, long-term, you know, the strategy to distribute up to 75% of the prior year's free cash flow after the base, And then, but this first year, it'll be basically up to 50% of the 21 free cash left to the base. Just maybe sort of how to think about in any given year, how y'all are deciding between, you know, if it's 50% and 75%, obviously your leverage metrics are already really low, but just if there's anything that we should be thinking about how y'all are kind of coming to that conclusion.
spk03: Yeah, I think, first of all, John, we use the word up to to give us flexibility. Our goal all along is to pay 50% for this year and 75% of the free cash flow for 22 and beyond. We do up to simply because of the volatility nature of our industry and of the commodity prices. So our intention, true intention, is to do 50% and 75% long term. That's our goal. And at some point, I didn't make this point, but if you look at the numbers over six years, our debt to EBITDA targets even get better than .75. We actually, after a six-year time period, we get our debt essentially down to zero. So at some point, the board will reopen whether or not we continue at 75%. We could go higher. Because at some point, if we have no debt, no balance sheet, and the reason we're doing that as you have heard me talk, we're not a firm believer of buying back stock annually long-term. But we think when you have extreme downturns like we experienced last year, I wish we had the firepower to buy a lot of stock at $50. So we'd like to have a great enough balance sheet to go into any future downturns to be able to buy back stock at one-third of the current price. And so you'll see our balance sheet get better and better over time. We just think it's better to have a great balance sheet due to the volatility of our industry. So I hope that helps.
spk13: That does. Thanks. And then just the follow-up on how to think about the operational synergies, which I know a good bit of these I've talked about would really occur in the second half of 2021. But as we think about sort of the different synergy kind of levers, let's say, of, you know, whether it's sharing the tank batteries, water infrastructure, some of the continuous acreage, maybe just some additional details on sort of which of those you're able to kind of realize pretty quickly versus those that may take later on into the year to fully realize.
spk05: Yeah, John, I think, you know, the field optimization in terms of just the operational side and the production side are things that we'll capture, you know, quickly. The supply chain stuff are things that I think we'll capture quickly in terms of just, you know, leveraging our suppliers and maximizing our best contracts. So I think those are the easier ones. I think as we've talked about the integrated capital that we have in the budget, connecting the water systems, getting the disposal systems connected and optimizing the tank batteries, those will take a bit longer. So those are probably more second half related into 2022. So I think that's really the timing of those things of what comes first and what kind of comes later.
spk13: Thanks, I appreciate it. Well done, guys.
spk08: And up next, we'll hear from Brian Singer with Goldman Sachs. Please go ahead.
spk06: Thank you. Good morning. My first question is with regards to the reserve report. You had a substantial upward revision in natural gas and NGLs. You had downward revisions to oil. I realize there may be price adjustments driving some of this, and I wondered if you could comment on the drivers of the reserve report and your revision beyond price, and what implications, if any, there are for Pioneer's production mix in the area and the ratio going forward of what get-off score is to oil growth?
spk05: Yeah, Brian, great question. I think, as you mentioned, clearly oil prices were a driver, which I'll get onto the NG on gas ones, but as you know, oil prices, just using the SEC pricing, was down 30% from 2019 to to 2020 and start from $56 WTI down to about $40 WTI. So that's really driving the negative revisions on oil for the most part. When you look at the positive revisions that we're seeing on gas and NGL, it's really coming from a couple things. One is just our enhanced completions continue to improve our fracture networks. And so that's leading to better recoveries from the wells, not only on oil, but NGLs and gas as well. We've also seen improved infrastructure out there, and so better capacity, which reduced line pressures to allow more gas to flow, and therefore added more NGL and gas reserves. So if you kind of stripped those out, that F&D that was in the low fours, probably would have been closer to $7. And so I think that's kind of the background of what the reserve changes were during the year. And I think in terms of long-term, you're thinking in terms of long-term mix, you know, I think we've been running in that, you know, call it 57%, 58% range on oil, and we still anticipate that to be, you know, longer term at this lower growth rate to be the right level.
spk06: Great. Thank you. And then my follow-up at risk of Scott of asking a question that I think you've been asked a few times over the last couple of months. When you think about where production this year is going to exit, I think you said it could be up, you might have said up about 8% to 8%, but something that's above the 5% threshold. The plan, when you announced it, you had some materially lower oil price views than where we're at today, and I just wonder if you know, how you're thinking about that flexibility in the 2022 and the torque between growing at an above 5% rate versus reducing or potentially reducing activity to increase free cash flow and stick within the 5%.
spk03: Brian, still we're committed to the long-term growth rate starting in 22 and beyond of about 5%. Some years we may be 6 or 7. Some years we may be 3 or 4. And unless we get into another extreme downturn, we have the flexibility to go back to zero growth like we did in 2020 or 21 too. And so we're not going to let the growth rate jump up. If it turns out we're achieving, if Joey and his team continue to achieve great capital efficiency and it looks like we're going to grow 8 to 10 percent in 22, we're going to dial back the capital going into 22.
spk09: Great, thank you.
spk08: And up next, we'll take a question from Janine Way with Barclays. Please go ahead.
spk01: Hi, good morning, everyone. Thanks for taking our questions. Hi, Janine. Hi, good morning. Just following up on the response to John's question, you mentioned getting to net zero and I think, or sorry, net zero, getting to net debt. of being zero, and I think you said six years, and at what point do you consider the company to be under levered? Is it at zero net debt? Is it at, you know, .5, .25? So how are you thinking about that level?
spk03: I mean, at this point in time, seeing three downturns in 11 years, Janine, I just think it's better to have the best balance sheet in the business. It gives you so much flexibility. We have choices, like I gave one choice. If we have zero debt, we can buy back stock in extreme downturns. If the board wants to continue a high variable dividend for a year or two, even though our free cash flow may not be as strong, they have that flexibility. So it gives you so many more choices. We thought we had a great balance sheet for 20, and we were even afraid to buy back our stock at $50. So we had no idea how long the downturn was going to occur. I've probably gone through more downturns than any CEO out there, and I just think it's better to have a great balance sheet, an even better balance sheet. So we have the flexibility also, as I said, to take the 75% up higher the board does to 80% or 90% or 95% or 100%. So you have so many more choices when you have even a better balance sheet than debt to EBITDA 0.75. So we don't have a stated target I prefer to have eventually at some point in time zero debt would be my ideal target.
spk01: Okay, options are good. We love that. And then my follow-up is just on hedges. And so how does your new kind of net debt projections, how does that factor into your hedge philosophy going forward? Could we see less hedging? Because I know we're kind of walking a fine line here in some respects, but generally Hedges are for risk protection, balance sheet protection, and generally we see companies with the better balance sheets having less hedges, so that reserves some more upside because you have the balance sheet for protection. So just wondering if your hedge philosophy is evolving going forward as well. Thank you.
spk03: It's still evolving. The big change, we used to spend 100% of our CapEx. Now we're only spending 50% to 60% of our cash flow. as capex. And so that's a big change. We may hedge, we may limit it just to protect that going forward. We may hedge enough to protect the base dividend. But because the market is an extreme, the way Saudi and OPEC has engineered this latest rise, it's an extreme backwardation. And the volatility and the less liquidity in the market makes it tough to do any floors, to do any collars. So when you used to be able to do a collar on each side of the strip, around $5 on each side or $10. So they give you very little upside anymore. So it's really, as long as it's in extreme backwardation, we'll probably see us do less hedging. And then lastly, the variable dividend is something that's going directly into the shareholder base. So if we try to hedge that guess, it's a direct reflection on what happens to that variable dividend. And so I'm going to guess long term we're probably going to do less. But at the same time, we continue to see spikes of the backwardation that's taken out of the market. You may see us do a little bit more. So we're going to remain opportunistic.
spk01: Very helpful. Thank you.
spk08: And our next question comes from Arun. J. Rum with J.P. Morgan. Please go ahead.
spk02: Yeah, good morning. Scott Rich, I was wondering if you could maybe help us better understand the shaping of the 2021 production and CapEx profile, just given some of the weather disruptions that you highlighted. And we're estimating based on that 8% exit rate, we've got around 335 oil per 4Q. So just wondering if you could walk through the progression.
spk05: Yeah, Arun, I think, you know, when we look at it, you know, setting aside the first quarter because of the weather impacts, you know, we'd said that it was going to be more towards the back end just because of the rig ramp that started, you know, late last year and just takes, you know, 180 days to kind of do that. But I think as you move into the second quarter through the fourth quarter, it is a rateable, you know, increase in production, you know, over that, you know, three-quarter time period. And I think your exit rate is, you know, in the ballpark. It may be slightly higher than that, but it's in that zip code. And then on capital, I think, you know, we were pretty good about getting the activity to the average rig and track fleet rates, you know, starting in January. So, you know, I would think your capital is pretty rateable throughout the year. So, you know, I think really from a perspective of that, it's rateable on capital and, you know, rateable Q2 through Q4 on production.
spk02: Great, great. And just my follow-up, one of the questions that's kind of come in, Pioneer obviously delivered on legacy in terms of the fourth quarter, but some of the parsely volumes of the 8K a few weeks back were a little bit light of what the market was thinking. Have you done a bit of a postmortem there? Any conclusions there regarding the parsely 4Q performance?
spk05: Yeah, you know, a couple things. One, you know, they sold their big text acreage that, you know, had about 1,400 barrels a day of oil production associated with it. So, you know, that was one piece of it. And then I think the other piece of it was just reduced activity. They just didn't get the activity started back up on the frack street quick enough. And so they just had a limited number of pops in the fourth quarter relative to what they had in the third quarter. And so it really was just, you know, production just didn't come, stay at that level, you know, given the decline. And so really that's, you know, our assessment of it was just really driven by activity levels. The well performance has been, you know, fine. It's nothing to do with that. It just was activity.
spk02: Got it. Got it. And that's all baked into your updated forecast, right?
spk05: That's correct, Aaron.
spk02: Okay. Thanks a lot, guys. Sure.
spk08: And next question will come from Charles Mead with Johnson Rice. Please go ahead.
spk14: Good morning, Scott, to you and the whole team there. I apologize for belaboring this point a little bit, but on, again, the shape of the 21 kind of production curve, it looks to me like you guys are going to have – obviously there's going to be a big bounce back, and it's not really a valid comparison to go 2Q versus 1Q because of all the weather downtime. But it looks like in the back half of the year you guys are going to be showing – Three to four percent sequential quarterly growth. Does that does that kind of close to what you guys are looking at internally?
spk05: It seems a little high to me, but just because you know I think the exit exits got talked about was you know kind of 10% so It would seem to be slide, but in general.
spk14: I mean it's it's directionally in the right place God, I think think of that rich and then I And then my second question, this isn't really a new one for you guys, but it's highlighted again by the 5% CapEx allocation to the Delaware. Again, it's not new. That kind of seems like it either needs to grow as a percentage term or you guys would be sellers. So can you offer us any kind of refresh to your thinking on how the Delaware is going to play in your asset portfolio longer term?
spk05: Yeah, I think, Charles, as we've talked about before, Delaware acreage is very attractive for a number of reasons. The higher oil cut that's there, we have a high NRI, and we've got good infrastructure over there. So really the 5% for 2021 is really driven by the program that Parsley had outlined early in the year. And so we were looking at that program. Given the run-up in oil prices, the economics are very favorable for Delaware. And so we'll look at How do we back half of the year or into 2022 reallocate capital from Midland over to the Delaware? So we're still extremely pleased with that acreage and look forward to developing it as we get a chance to get our hands on it and move forward. Thank you for that detail. Perfect.
spk08: And our next question will come from Scott Gruber with Citigroup. Please go ahead.
spk11: Yes, good morning. First question here on LOE. Will the storms have any material impact on 1Q LOE? And then as production normalizes into 2Q, we need a full contribution from parsley. How should we think about LOE and 2Q in the second half? Are there any extra production costs early on as we integrate parsley that's not captured in the incremental CapEx? And if so, how does it roll off?
spk05: Yeah, I think if you look at our LOE guidance for the first quarter, we did adjust that up about $0.25 a BOE just taking into account the repairs that we're seeing. They're minor in the grand scheme of things, but repairs on our wells and facilities due to the storm. And so we did factor that into our first quarter guidance range. And so if you take that range and back it down by $0.25 per BOE for the Q2 and beyond, that will give you a good guidance range.
spk11: Gotcha. Any incremental possibilities you think about, kind of rubbing down the incremental capex that landed production early on, unfortunately?
spk05: No, I don't think so, Scott. I think that we wouldn't anticipate any.
spk11: Gotcha. And then just a follow-up here on simulfrac, a few of your peers have gotten excited about the technique and the opportunity to drive another leg here, completion efficiency gains. Can you talk about your interest in the technique and potential deployment?
spk10: Hey, good morning, Scott. This is Joey. We actually just finished our first simulfrac right before the winter storm hit. A great success there, and we have plans to do more as the year goes on and then feather them into our operations over time.
spk11: Any color on rates of efficiency improvement or savings on the DMT side in your first program?
spk10: Yeah. Of course, we just completed it, so I don't have all the assessment on the cost side. But from a time perspective, we did reduce the typical time that we would take to do a four-well pad by about a third. So significantly reduced the amount of time on location. So we'll continue to evaluate that. We'll get a look at what the cost savings were, which, of course, will be material. And then we'll continue to evolve that into our operations.
spk12: Got it. Appreciate the call. Thank you.
spk08: And up next, we'll hear from Doug Leggett with Bank of America. Please go ahead.
spk02: Thank you.
spk08: Good morning, everybody.
spk02: Scott, first of all, I know you played out this morning. is really pretty prescient. So congratulations on the framework. I'm sure Mr. Shah has got his fingerprints all over this. So congratulations, guys, on laying this out. My question is really a couple of things about the longer term. You've talked about 5% plus as a growth trajectory. I just want to make sure that that hasn't changed with the 75% of the free cash beyond the dividend, because it's probably a bit more than the market is expecting. I'm just wondering what that means then for the 5% loss. That's my first question. And my second question is, I wonder if I could press you to think more about that. You used to talk about a five-year view from a capital and activity standpoint. I wonder if you can give us some thinking as to what that would look like in terms of rigidity and spending, because obviously you talk about 25. So two questions, one on the 5% plus and two on the longer term trajectory. Thanks.
spk03: Yeah, Doug, the second part I've talked about already, but I'll go over it again. But the first part, when we say 5% plus, we're just leaving the flexibility. We can't get 5% exactly. Some years we may be 6%, 7%. Some years we may be 3% or 4%. So our goal is to really average five on the production growth. If we go through down periods, I gave examples of low oil prices like we did last year, we're going to be flat growth. And so the goal is really not to exceed five. But we do have to have the flexibility based on rig cadence and pop cadence to have that flexibility some years to go to six or seven. But some years we may be three or four. And so I stated, I think a couple of the analysts have already asked me about 22. So if it looks like we're going to be too capital efficient going into 22 and we're going to hit 8% to 10% production growth in 22, we'll reduce capital to get it back closer to 5% or 6%. And I'm so hoping that answers your question. So the target is really 5% long-term. In regard to long-term, I gave out some numbers going out the next six years, and I've seen some Other projections by sell side, over a 10-year time period, we basically will throw off enough free cash flow that's equal to our current market cap and our current strip, that 52, 51 WTI or $55 Brent. Over a six-year time period, it's $16 billion. And so that $16 billion, we'll be paying out about 75% of that as a variable. And 25% actually goes toward debt reduction. And so that's why I made some comments about our debts actually going to be going down over the next six years to almost zero after a six-year time period for the reasons I gave. So I'd rather have a much better balance sheet. It gives us more options in regard to whether we buy back stock during extreme down periods like we had last year at $50 or examples where we want to... pay a higher variable than our free cash flow during a given year. And also, as I also gave the optimism that as our debt moves towards zero, that we could increase the 75% up to a higher amount, obviously, up to 90%, 95%, or 100% of free cash flow. So hopefully, we're trying to give the board various options and flexibility, obviously, in this fluctuating commodity price market.
spk02: I apologize if I missed some of the nuances, but just to be clear, I'm trying to get a rig trajectory or maybe a port trajectory that goes along with that. Maybe that's too detailed. Yeah. Okay.
spk03: Yeah, we added – I said in one of my earlier statements on one of my slides that we're going to – our long term is that we're adding one to two rigs per year. So long term, you can figure adding one to two rigs per year long term. from the current 18 to 20 rigs.
spk05: Got it, Neil.
spk02: Go ahead. Thank you. Okay, that's really helpful, guys. So maybe just a quick follow-up then. Does your hedging philosophy change with such a robust balance sheet? And let's say upside risk to the oil price seems to be the growing consensus. How do you think about hedging? Thanks.
spk03: Yeah, we're only spending about 50% to 60% of our cash flow now. So we don't need to protect the capex as much as we needed to before. We do have a great balance sheet. The market's in extreme backwardation due to liquidity, less liquidity, the volatility of the market. We can't get any upside on collars or freeways anymore. So you'll probably see us do less hedging for that reason. But if we see any type of spikes, we'll probably go into the marketplace. So we're going to be opportunistic, obviously, but The market is strong. I'm still a strong believer the demand is going to come back strong, both on airlines and also driving around the world once we get herd immunity. So I'm confident that we can assort the Iranian barrels into the marketplace over time, and that U.S. shale is no longer going to be a threat to OPEC and OPEC+.
spk09: Appreciate your comments, though. Thanks again. Thanks.
spk08: And our next question will come from Neil Dingman with Truist Securities. Please go ahead.
spk15: Good morning, all. Scott or Neil, maybe I've missed this. Could you talk a bit around just, Scott, you just were talking about, you know, even that came here about what the potential could be on the variable. And you've talked about, I know, been pretty specific about the production growth. Can you talk about the dividend, the base dividend growth, kind of what you know, will that just continue to flow with the other overall growth? I just want to make sure I'm clear with how you are sort of assuming that base dividend growth as, you know, with conjunction with the variable.
spk03: Yeah, it'll be a small increase every year is our goal. So it'll be minimal. It'll be something from something minimal one to, you know, in that one to three percent range is our expectations.
spk15: Got it. And then, Scott, you, Richard, Joey, I'm just wondering, on what you saw or experienced with this, the outages and, you know, now the production downtime that you saw around the storm, have you all started or will you think about or, you know, thoughts about permanent structural changes or, you know, anything around either, I don't know, just infrastructure, tank battery, you know, you sort of name it? are the things that you've started or would think about doing to, you know, I know obviously, you know, here in Texas doesn't happen to us quite often, but just, just your thoughts about if there's things that you could do to, I don't know, better prevent that going forward.
spk05: Yeah, I think we'll take, you know, lessons learned from it and see what things happen. But in general, it was such a, you know, 50 year event or a hundred year event, whatever you look at it, you know, we, We still want to be capital efficient about it, and so we'll have to assess that. So no decisions today, but we'll definitely look at it just from a lesson learned. But I would say that, you know, given the freak nature of it, that at this point we don't see any substantial changes that we would make.
spk15: And everything's back online now?
spk05: Not 100%. We've got the vast majority back online. Probably next week or so we'll get the rest of it. Very good. Thank you. Sure.
spk08: And next question will come from Derek Whitfield with Stiefel. Please go ahead.
spk05: Thanks, and good morning, all. Perhaps for Scott or Ryan, one of your peers recently committed to a plan to offset scope one emissions through direct investments in CCS and or renewable projects.
spk02: From an ESG perspective, could you comment on the company's desire to pursue something similar to this as a means to offset direct carbon emissions from your operations?
spk03: Yeah, in general, we're evaluating what companies like that and another company like Oxy is doing on carbon capture long-term. We're assessed. A couple of our also peers have stated they have ambitions. They use the word target and ambitions to go to net zero by 2050. So we're assessing that also. So we're assessing everything. Everything's on the table in regard to get better and better. And then we'll have to see what the Biden administration does with their upcoming climate. After the stimulus gets passed, they're going to focus on infrastructure and climate next. And so we'll have to evaluate that also. So everything's on the table in that regard.
spk05: Makes sense, Scott. And for my follow-up perhaps for Jillian, Referencing slide 9, as you think about the progression of your D&P operations with regard to pad size and lateral length, can you comment on where you feel the efficiency limits are today and how this slide could look two to three years from now?
spk10: Specifically on pad size and project size, I would say that I wouldn't expect that to continue to increase. from a consistency perspective as we do more code developments and full stack developments more so and more so that we'll continue to have on average more wells per pad. From an efficiency gain perspective, you know, as I said in my comments, I would have never expected for us to basically achieve in 2020 what we've done in 2019. And then continuing on my other comments that the benefits of technology are having significant improvements. The thing that I would say that's different now is that there aren't very many big wins to be had. Simulfrac may be a big win, but for the most part, when I look at the waterfall charts, it's lots of small incremental wins that add up to significant improvements. We're certainly not finished on that journey and we'll continue to work at it relentlessly to continue to drive our cost structure lower and lower.
spk09: Very helpful. Well done, guys.
spk08: Thanks. And next we'll hear from Bob Brackett with Bernstein Research. Please go ahead.
spk07: Good morning. Quick question, then maybe a little slower one. The quick question, what is the timing of the decision on the variable dividend payout? So if we're sitting in one queue of 2023, is that when the decision is made about the free cash flow payout from one queue of 2022, for example?
spk03: Yes. Bob, this is Scott. We generally have our board meetings in late January or early February, early to mid-February. and that's generally when we discuss increasing the dividend and that's when we would make the final decision at that point in time. So you're correct.
spk07: The second is The tradeoff between the variable dividend and share buybacks, you clearly expressed eagerness to buy back shares sitting in the middle of last year, let's say. At some point, the shares are valued to the point where buybacks make less sense and the variable dividend makes more sense. Do you use an internal NAV to make that decision, or what sort of thought process would go into that?
spk03: Well, first of all, I've talked to over 100 shareholders over the last 18 months, and I would say 99.9% preferred that they would, long-term, they would prefer us to pay a variable dividend versus buying back any stock. That's long-term and buying stock year after year. As you know, the industry has a terrible track record of buying back stock at the top of the market. And so people that are talking about buying stock now, we're back close to maybe at the top of the market. And so that's the wrong time to be buying. And so everybody's in favor of a great balance sheet if you can afford it to buy back in those dips. We had a chance to buy back at $50 last year. We didn't. We didn't have a great enough balance sheet. So that's generally our feelings long term. Buy it back only. during those downturns and not buy back shares and then focused on the variable dividend as the best way to earn return capital long term.
spk09: Very clear. Thank you.
spk08: And up next we'll take a question from Paul Chen with Scotiabank. Please go ahead.
spk02: Thank you. Good morning. First, Scott and the team just want to compliment you guys that for We see the temptation to spend all the free cash and put some on the balance sheet. I think it's the right thing for the E&P industry, for all companies when you have excess cash flow to put into the balance sheet and at some point that gets you to net zero on the net debt. Anyway, two questions. First, with the lower growth rate that you guys are targeting now, you have a great inventory backlog. So does that make sense that for you to look at some of the really long data inventory that it may take you 20 years from now before you get to trying to either monetize it to sell it or that through joint venture have someone else to develop and you receive the royalty or some of the form. The second question is that. Yeah. No. Yeah. Yeah. Go ahead. Go ahead, Scott. Sorry. Okay.
spk03: I generally can't remember two questions, so it's better to give me one question at a time. On the first question about long-dated inventory, it's the same policy we've had. We will continue to take our Tier 2 acreage that we have and try to divest of it over time. I think with the oil price moving up, there could be more opportunities where people will approach us like we've And we've done that consistently over the last five years. Secondly, we've entered into a drill coal arrangement, as we have stated back in 2019 when I came back, that we would look at doing things like that. And that got put into place. We've drilled nine wells already. It's very positive. And we're looking at extending that. So those are some of the examples that we're looking at. And we'll continue to do that.
spk02: What's your second question? The second question is that Permian is clearly in excess takeaway capacity and probably this situation will be here for maybe a number of years. So how does that impact on your marketing effort and also how you deal with your existing take-or-pay contracts? Is there any way to maybe modify those?
spk05: Yeah, Paul, Rich. I'd say our contracts for firm transportation and move things to the Gulf Coast really are, we have those now. And so with the lower growth rate, we have some extra capacity. But with the parsley transaction, a number of those roll off, their marketing arrangements roll off contract. In a couple of years, we'll be able to move those barrels onto that pipeline commitments. And plus that we have plenty of barrels that we can get in the Midland Tank Farms. So there's no concern on our part in terms of being able to get the volumes and move those down and get to what we'd hope would be a higher price market with rent prices and the refinery markets on the Gulf Coast. I mean, clearly where differentials are now is that, yeah, we've been slightly negative in 2020 and so far in 21. But long term, we still would think that prices on the Gulf Coast and export market would be better, but we'll have to continue to assess that. But given where the capacity is, I don't see us taking on any new commitments at this point, but we'll continue to honor the ones that we have.
spk02: Thank you.
spk08: And that concludes our Q&A session. I'll turn the call back over to Scott Sheffield for additional or closing remarks.
spk03: Again, thanks, everybody. Hopefully we'll get a chance starting in summer, late summer, early fall, where we can actually have some visits among all of us as we reach herd immunity here in the U.S. So, again, look forward to next quarter. Again, thank you very much for tuning in to us. Thank you.
spk08: And this concludes today's call. We thank you for your participation. You may now disconnect.
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