Pioneer Natural Resources Company - Q1 2018

Transcript

Speaker 0

Good day, everyone, and welcome to Pioneer Natural Resources First Quarter Conference Call. Joining us today will be Tim Dove, President and Chief Executive Officer Rich Daley, Executive Vice President and Chief Financial Officer and Frank Hopkins, Senior Vice President, Investor Relations. 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 May 28, 2018. 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 the future periods to differ materially from the forward looking statements.

These risks and uncertainties are described in Pioneer's new release on Page 2 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, Investor Relations, Frank Hopkins. Please go ahead, sir.

Speaker 1

Thanks, April, and good day, everyone, and thank you again this quarter for joining us. I'm going to briefly review the agenda for today's call. Tim is going to be up first. He'll provide the financial and operating highlights for the Q1 of 2018 and give a quick overview of what expectations are for the remainder of the year. He's also going to highlight our continuing strong horizontal well performance in the Permian Basin and that will be followed by a review of Pioneer's template for enhancing shareholder value.

After Tim concludes his remarks, Rich will update you on our firm transportation commitments to move oil from Midland to the Gulf Coast and the financial benefits we're receiving from growing refinery and export sales in this market. He'll also discuss the agreements we have in place to assure that our gas production flows out of the Permian. Rich will also cover the Q1 financials and provide earnings guidance for the Q2. And after that, we'll open up the call for your questions. Before turning the call over to Tim, as many of you know, this is going to be my last conference call.

I'll be retiring from Pioneer at the end of May. I want to take this opportunity to say thank you to all the investors and analysts that I have had the privilege to interact with during my past 13 years at Pioneer. It's been a truly rewarding experience and I can only hope that my successor, Neil Shaw, will enjoy leading the IR team at Pioneer as much as I have. And with that, Tim, over to you.

Speaker 2

Good morning, everybody, and thanks, Frank. I'd certainly like to follow-up on your commentary by saying all of us here would like to express our sincere gratitude to you for all the years that you've been our top IR executive for 13 years. And as you join me, as we both know, and our management team on more than 50 quarterly calls on myriad, countless investor conferences and meetings over the years. And you've been the consummate professional in your craft. And for that, we're very appreciative.

You've been voted the top IR executive as cited by II in the last few years, and you can't do any better than that. Thanks, Tim. But we're very confident Neil and Schaumb will do a great job in filling Frank's footsteps. And Frank, all I can say is we'll see you often in Naples, Florida whenever the weather is bad in Dallas. So let's now turn to Slide 3 and talk about the results for the Q1.

Our Q1 results were very strong and they clearly demonstrate a highly profitable growth plan going forward, a product really that's very much a function of high return wells and increasing productivity per well. For the quarter, we reported adjusted income of $284,000,000 or $1.66 per diluted share. Our Permian Basin production for the quarter came in at the top end of the range at 2 1,000 BOE per day. That's an increase of about 9,000 BOE per day or 3% compared to the Q4 last year. Production results, of course, would have been even better had it not been for the loss of about 6,000 BOE per day due to the January freezes that we experienced.

Oil production in the Permian was solid as well, 170,000 BOE per day. We're right on target with regard to our annual expectations for POPs. We put on production 63 wells in the quarter. The overall company production was 312,000 BOE per day. We continue to maintain the strongest balance sheet in the energy sector with about $1,800,000,000 of cash on hand.

And as a result, we continue to have very low debt statistics. I'll turn now to slide 4. A hot topic among investors and analysts, as many of you know, continues to be oil and gas takeaway capacity and their impact on differentials. In particular, we've seen a pretty significant blowout when it comes to the Midland Cushing differential and also from the standpoint of gas at the Waha differentials. I can very clearly state to you that Pioneer is in excellent shape in this regard due to the fact we have extensive firm transportation agreements for both oil and gas.

Toward that end, we delivered about 160,000 barrels a day of oil to the Gulf Coast under Feet contracts during the quarter. Of that, about 87 was exported. And about 3 quarters of our gas is sold under pipelines contracts, Feet contracts into Southern California, and it's priced along the lines of that market. The balance is sold under term contracts at Waha. But what that's done is allow us to make sure that our volumes will continue to flow uninterrupted and at strong realized prices.

And Rich will have a couple more slides with some granularity on that in his section. But what it's allowed us to do also is to add value. And in this case, in the Q1, we had about $16,000,000 of incremental cash flow related to our sales to the Gulf Coast and exports. On the gas side, our realizations today are about $0.60 per Mcf higher due to the SoCal sales than they would be if we were selling all of the gas in basin. So not only is this allowing us to move volumes, but it's allowing us to add value in doing so.

We did during the quarter close on the sale of our Eagle Ford West package for $103,000,000 That's a very positive result for the company. And as promised late last year, we have included in our 2018 compensation program for our management team, in the incorporation of return on capital employed ROCE measures as well as per share production and reserve targets, and you'll see those as we progress through the year. Albeit relatively small, we also began our stock repurchase program with $17,000,000 of stock purchased in the Q1. Turning now to slide 5 and continuing the update for 2018. The plant remains very solid.

Again, it's based on a D and C program that's focused on very high rate of return wells. We continue to operate 20 rigs in the basin and we continue to have a POP schedule of 50 to 275 wells. By all third party accounts, we continue to be drilling the most productive and high rate of return wells in the basin where we operate. Cash margins are strong. IRRs continue to be strong.

In essence, our returns are excellent, especially in light of the gains we've seen in oil prices during the Q1 and into April and in early May as well. We're evaluating adding some more rigs here at the end of 20 18 as to progress our plan into 2019. We'll have more details on that as the year progresses. We're on schedule to place our 45 Version 3.0 plus completions online. These are the higher intensity completions that were planned for the year.

We have some later slides to show what the impact of 3.0 plus has done to the well results. Needless to say, the results have been stellar. And as a result, we're evaluating the concept of adding new 3.0 plus wells to our schedule in the second half of the year based on stellar results that we've already seen to date. I'll talk more about that in just a minute. In terms of the Wolfcamp B, we have now on production the 3 wells we had planned.

These wells have just been put on production and are cleaning up, but from what we've seen so far, we expect them to be excellent wells. You'll recall that our first higher intensity completion Wolfcamp D well had outstanding results and as shown on the slide, delivered 130 day cum production of 260,000 BOE per day, really an outstanding well. I think these next three could be equally as good. Finally, on the slide, we are executing on our plan to appraise the Middle Spraberry Shale, the Joe Mill and the Lower Spraberry Shale in terms of its pending future development. The idea here is to evaluate the proper spacing of the wells, the staggering and sequencing of the wells and the proper stimulations on the wells in 3 separate development areas to optimize future locations that we'll be drilling in future production.

So this is an appraisal concept that we can learn from and then optimize wells when we get out into next year with a true development plan in those three zones. Now turning to the next slide, that's Slide 6. We have made good progress in terms of our divestiture packages for both Eagle Ford and the other assets that are in that package. Bids are expected during May for the Eagle Ford package, which would be the largest of those. After all the divestitures are completed, of course, we become a pure play in the Permian Basin, in fact, the pure Midland Basin player.

And that will enhance our reported returns because, of course, our reported cash margins will increase, our cash revenue per BOE, our operating costs will be reduced per BOE and our corporate returns will also be significantly improved. So this is important for us to accomplish. I think it could easily last through the majority of this year to execute and actually complete all these sales. But suffice it to say, it's on the front burner and we're making good progress. We're continuing to forecast that Permian production will grow about 19% to 24% this year.

And based on the strong performance we saw in the Q1 and the success that I mentioned regarding our Version 3.0 plus wells, we now expect that production will be trending towards the high end of that range. Turning to capital, cash out the door for D and C was just over $800,000,000 in the quarter. Of course, we knew going into 2018 that we have somewhat of a front loaded CapEx schedule, mostly as a result of the high intensity 3.0 plus fracs that we had planned and higher majority of deeper wells in the plan as well as longer laterals being concentrated in the first half of the year. Much of our 2018 seismic work as well as well science and pad construction was also planned for the first half. Additionally, some of our capital spilled over from the Q4 into the Q1 in terms of carryovers.

So it's also the case as we look out to the future and as other Permian operators have reported, we're starting to see some early signs of inflation late in Q1 into April May. It's a product, of course, of strong industry activity levels, especially in the Permian Basin that are coupled with the high oil prices that we've seen in the high 60s. And looking forward and based on the results I mentioned and the high returns of those 3.0 plus wells that I just discussed and I'll show you a slide in a moment, It is likely we'll increase the number of these completions going into the second half. We expect these wells to add to and contribute to our ongoing capital efficiency improvements. This will be money well spent.

As I also mentioned, it's like we'll also add a couple of rigs later in the year to prepare us for the 2019 plan. And as a result of those two factors and the prospect of potential inflation that I mentioned, especially if oil prices and activity in the industry remain high, it's likely that our capital budget for this year of $2,900,000,000 will be increased. I would also I believe we'll have a better handle on that, of course, on the magnitude of the increase as we let more time pass. But probably around midyear, we'll have a much better handle on exactly where that number will land. In any case, our intent is to spend within our forecasted cash flow, which is now projected at $3,200,000,000 and to get again to that free cash flow generative model as soon as we can.

And finishing up on this slide, we did repay earlier this week our debt maturity of $450,000,000 from cash. Turning to Slide 7. This is the slide I've been referring to, which covers results from our 3.0 plus well campaign. And without going into details by zone, you can readily see on this slide that the performance of the 36 Version 3.0 plus wells we put on place put on production already, these are in various areas and zones across the basin, over the past year have been excellent. The wells, of course, utilize higher intensity completions.

In that case, we made more sand and more water. And they continue to really materially outperform Version 3.0 wells. And you can see on these graphs, it's somewhere between 30% to 40 percent at the minimum in general and in some cases up to 100%. So the designs when it comes to the higher intensity completions are paying out easily in less than a year and they're generating higher returns, not only for the incremental dollars, but they're increasing the returns on the wells in general. And as I mentioned a minute ago, additional 3.0 plus wells are likely in the second half of the year because we've just seen this impressive performance today.

I think also it's the fact that the 3.0 plus wells with the kind of results they've shown have meaningfully increased our productivity per well. And as a result of that, overall production, as shown on the next slide, Slide 8, reflects that. You can see here that it's pretty clear that 3.0 plus wells are leading us to a position where we're reaching the top end of our guidance range, not only in the Q1, but it supports our view that we're trending toward the high end of our guidance range of 24% for the year. And importantly, I would say also that the high return on these wells gives us confidence that we're on track to achieve our longer term objectives, which are further captured on the next slide, Slide 9. This is essentially reiterating our plan for enhancing shareholder value.

And 1st and foremost, it's based on long term focus on returns, both at the well level and then further to at the corporate level. In other words, strong returns on capital employed. Capital discipline and capital efficiency are important parts of that because they drive strong growth and growth within cash flow. Eventually, this kind of discipline and efficiency leads to a return of capital to shareholders, which is, of course, an important part of our plan going forward. And it's critical in association with this that we also have a very strong balance sheet and significant financial flexibility to execute the plan really in any reasonable price scenario.

And finally, the message from the Permian Basin assets is significant in the sense it's highly repeatable. It's low risk. It's process based and it's going to be many decades of drilling. And fundamentally, our assets give us an advantage in the Permian Basin on the basis that give us an opportunity to drill not only high return wells, but also increase our ability to return capital to shareholders. So now I'm going to pass this over to Rich and he's going to be discussing with you more granularity on the benefits from Feet on both oil and gas as well as his review of the financials.

Speaker 3

Good morning, and thanks, Tim. I'm going to start on Slide 10 and talk about our firm transportation of oil to the Gulf Coast. If you look at the upper left figure there, you can see the pipelines that we have firm transportation onto the Gulf Coast and we send about a third of our volumes to each of those locations being Corpus Christi, Houston and Nederland. If you look at the upper right bar chart, as Tim mentioned, we did send about 160,000 barrels a day of oil to the Gulf Coast or about 95% of our net production was there, which was all sold at Brent related pricing. Of that 160,000, 87,000 was exported during the quarter and we forecast a similar amount to be exported in the second quarter.

However, we do anticipate as we move to the second half of the year that we'll be able to export essentially 100% of our volumes once a new export facility comes online in the Houston market late this summer. As Tim mentioned, we did benefit by $16,000,000 of incremental cash flow associated with our sales to the Gulf Coast that equates after transportation to about $1 a barrel. So clearly these we are deriving benefits from our firm transportation today, but it even gets better as we move into the Q2 and especially when you think about what's happened with mid cush differentials. Just for a point of reference, MidCush differentials averaged $0.40 for the Q1. In April, they averaged $5.15 and the end of April, they were $7 So we should see a significant uplift in our cash provided by moving these volumes to the Gulf Coast in the Q2 relative to what we saw in the Q1.

Longer term, we are continuing to target to be at 90% or more of our production moving to the Gulf Coast. We've structured our firm transportation contracts such that they ramp up over the next 3 years to match our production growth profile. And so we're in good shape through 2020, early 2021. And then at that point, we'll start layering on more on top of those Feet contracts that run out to the mid-2020s. So to suffice it to say that we're essentially insulated from Mid Cush differentials and really by moving our barrels to the Gulf Coast really provide a substantial uplift to the company's cash flow going forward.

Turning to Slide 11 looking at our gas position. Similar to oil, we are well positioned with Feet contracts to move about 75% of our gas to the Southern California market, where we're selling it at a premium to Waha prices and significant as Tim mentioned, basically today about a $0.60 uplift compared to Waha where that's about equivalent to $2,000,000 to $3,000,000 per month of incremental revenues. The remaining 5% is sold at Waha under term contracts. So we do have firm contracts to sell that gas in Waha. So in total, we have basically demonstrated that we have the assurance that we can move our gas either to Southern California or that we have contracts to sell it in Waha until because we've recently taken on extra capacity on Kinder Morgan's Gulf Coast Express Pipeline that is expected to come on in late 3Q of 2019.

And that will give us access to LNG exports where we've already actually locked up some contracts, refineries, petrochemical facilities and actually be able to export into Mexico as well. So overall, we have a great shape to ensure our gas moves out of the basin into better pricing markets and that it can have flow assurance during that time period. I guess the one thing having said all that is gas revenue still is a small portion of our total revenue stream. So it's less than 5% of our forecasted Permian Basin revenue, but it is important that we have flow assurance and we think we've done a good job of positioning ourselves to make sure all our gas flows. Turning to Slide 12, earnings summary.

Net income attributable to common stockholders was $178,000,000 or $1.04 per diluted share. It did include non cash mark to market derivative losses of $106,000,000 after tax or $0.62 really related to the increase in oil prices over the quarter. So adjusting for that item, we're at $284,000,000 or $1.66 per diluted share. So really another great quarter operationally and financially. Looking at the bottom of the slide, you can see how we did relative to guidance.

On a production basis, we're at the upper end of our guidance range at 312,000 BOEs a day. On the production costs, which I'll talk more about later, the $10.36 per BOE does reflect the new revenue recognition standard that I'll talk about more in a minute. So there's $1.53 per BOE in that number associated with the new revenue recognition. Exploration and abandonments came in at $35,000,000 This is really, as Tim mentioned, our front end loaded seismic that we had going on in the first half of the year. So that's included in there where we had some 3 d seismic surveys.

And then really the rest of these items are fairly consistent with where we would have expected them to be. So I'll move to Slide 13. So Slide 13 gives an overview of our new revenue recognition standard. And so similar to what you've heard from other companies in the earnings season that we've been in, we adopted this new standard effective January 1. And for Pioneer, this is just a geography change with no impact to cash margins.

Essentially, we had gas processing fees, fractionation fees and transportation fees for NGL and gas that was netted out of revenue. Under the new rules, no longer will be netted out of revenue, but instead we will record it in production costs. So if you look at the bottom of the page on the right hand side, you can see that the impact of that for the quarter was $1.53 per BOE, increase in per BOE related to NGL sales and gas sales and $1.53 increase in production costs for no net change in our cash margins. Turning to Slide 14, we talked about price realizations. On this slide, we have adjusted to make them comparable our prior periods for NGL and gas revenues price realizations to put them on a comparable basis.

So if you look at the bar charts now, you can see that oil was up 17% quarter over quarter. As we also have seen with the oil price increase, we've participated in that. NGLs on a comparable basis were up 1%, so not much change there and gas prices were down 7% quarter over quarter from a price realization standpoint. At the bottom of the chart, you can see our derivatives impact what they would have had to our realization. So they're there for your benefit.

Turning to Slide 15 and similar to the prior slide, we have adjusted prior periods to make them comparable for the revenue recognition standard. And so adjusting for that, you'll see that production costs for the Q1 were up 13%. You'll see that each of the categories are up slightly, but the two main drivers for it was higher oil prices, which caused production taxes and had warm taxes to be higher quarter over quarter. And then we did see some increase in LOE mainly related to activity levels in the Permian Basin, so higher labor costs. And then associated with commodity price increases, higher fuel and hot oil rates.

So those 2 are the main components of the increase. Turning to Slide 16, looking at our liquidity position. Tim said it already, excellent financial condition for the company, one of the strongest balance sheets in the industry, dollars 900,000,000 of net debt at the end of the Q1, plenty of capacity into our credit facility with nothing drawn. And as Tim mentioned, we did repay our May 1 debt maturity of $450,000,000 earlier this week with cash on hand. So still in excellent financial condition.

Turning to Slide 17 and really focusing now on Q2 guidance. You can see here from a production standpoint, we're forecasting total corporate production of 312 1,000 to 322,000 BOEs per day. That does reflect all of our existing assets if we close some of these debentures, which we hope to prior to quarter end. And obviously, that would come out of our production numbers when we report them into the Q2. Permian Basin production is forecasted to 2 100 and 76,000 BOEs per day.

The rest of these items are consistent with prior quarters for the most part. So I'll leave them for you to go through. And at that point, I'll turn it back to you, April, to open up the call for

Speaker 4

questions. Thank

Speaker 0

And we'll first hear from Arun Jayaram of JPMorgan Chase.

Speaker 5

Good morning. Tim, I wanted to clarify a little bit about your comments on the guidance and CapEx. First question really relating to the guidance. You mentioned that the company is tracking towards the upper end of the 19% to 24% Permian Basin growth range. Does that just contemplate the 45 version 3.0 plus?

And I guess my follow-up is just on that. If you did increase the mix of version 3.0 plus wells, would you expect production there to be a corresponding impact to production from that?

Speaker 2

Rodney McMullen:] Yes. Thanks, Arun. I think, first of all, the production numbers we're seeing so far have been outstanding, and we continue to operate at a strong rate of growth such that I think the numbers we're reflecting today really don't yet contemplate adding additional 3.0 pluses because we haven't determined that number yet. What I'm pointing you to is the fact that we are going to increase number of 3.0 pluses. And as a result, we'll come out with production guidance at that time.

But needless to say, one of the reasons we're hitting the top end of our range is because of 3.0 plus. The more we drill, the better we're going to do.

Speaker 5

Great, great. And just to clarify your comments on CapEx. You mentioned that CapEx would likely trend higher. You update the Street kind of at the middle part of the year, but you did mention that while it could be higher than $2,900,000 Did you mention that it could be less than $3,200,000 which is your current cash flow?

Speaker 3

I just want to get

Speaker 5

a sense of what the potential magnitude of the CapEx increases related to inflation adding some rigs for 2019 growth etcetera?

Speaker 2

Determine the exact number of rigs we're going to add yet. So that number is unclear. We have not exactly finalized the 3.0 plus number of additions as well. So we don't really have a number in mind yet. And we also aren't really clear on where this inflation thing ends up.

We can point you to several categories where we can say what the current estimate it would be for inflation, but there's so many moving parts that we got to get our arms around that. So rather than saying it's going to be 3.1 or 3.2 or any particular number, you got to give us some time to really sort out what's going to happen in all these parameters.

Speaker 5

All right. Great. Thanks a lot. Good results.

Speaker 0

Next we'll hear from Doug Ligate of Bank of America Merrill Lynch.

Speaker 6

Oh my goodness. Good morning, Tim and Doug Ligate. Doug,

Speaker 2

You're now Italian, sounds like.

Speaker 6

My wife will take that all day long. Frank, it's been a real pleasure. I wish you the best of luck. I hope to see you down in April sometime. Thanks for all your help.

Tim, I guess the question that hasn't been asked in a while is the cadence of infrastructure spending. I'm just wondering if you could give us a little bit of guidance as to how we should think about that going forward as you step into this next phase of growth, especially with some of these bigger wells. Do you still anticipate the breakeven trending down to that $50 and then ultimately $40 level? But I'm really more interested in the next couple of years. And I've got a quick follow-up, please.

Speaker 2

Yes. First of all, on your question regarding the cadence of incremental spending above just D and C, we have some significant projects this year that you're familiar with. One of them is our Midland wastewater plant investment, so as to then be able to take 240,000 barrels a day of effluent water from the system. That's easily $100,000,000 plus this year we think is going to be spent later as we get into the year. In addition to which, we have regular capital needs for our pumping services fleet as well as other items corporately.

The other thing to note is we do continue to spend money at a relatively even cadence on tank batteries and saltwater disposal systems. Our estimate continues to be that by the end of this year, we'll be about 65% completed on the whole field wide implementation of that. So we do have a few more years of spending that level. Our longer term modeling is to add roughly 300,000,000 dollars per year. And we put out our 10 year plan.

That was the number we included. And it could be a combination of things. It could be gas processing. We have 2 gas processing plants coming in this year, 2 coming in next year. So this is an important part of our capital in the sense that it prepares us for the long term.

Speaker 6

I appreciate that. I just obviously, it's something that comes up periodically. We just wanted to make sure we had it baked into our numbers. My follow-up is really more about the longer term target, the impact of the asset sales on that target. And if I can risk a 3rd leg to that question, any updated thoughts on what you do with the proceeds of pending asset sales?

Because obviously, it's a fairly meaningful number. Do you stick with $1,010,000,000 Do you make up the difference with some of these bigger wells, for example? And I'm guessing you've got a lot of flexibility in there. Just if you could frame that for us, then I'll let someone else jump on.

Speaker 2

Yes, Doug. Thanks. We do have a lot of flexibility, but I would point out to you that if we were to spend no money on those assets in the next eight and a half years that remain on the plan, they would basically get to a point where they're insignificant as to their contribution. That's certainly the way we have it modeled. So therefore, in the fullness of time, even if we kept those assets and didn't spend money on them, they would be immaterial to the ultimate goal of reaching that goal in 8.5 years.

And so asset sales are really not meaningful. They would be meaningful in a quarter or 2 here and there, but not in the long term simply because they sort of asymptotically reach 0 in terms of production over the 8 years. So that's important. So I don't think the asset sales really have much

Speaker 7

to do with it. As to the use of the

Speaker 2

cash, right now we're planning on trying to execute on these sales. We don't have any particular plans for these for that cash per se. It will be part of our calculus when we try to start focusing on the 2019 plan and in particular the notion of return of capital to shareholders as we get to where we're cash flow generative.

Speaker 6

Maybe just a quick bolt on for Rich. When you sell those assets, what happens to the other expense line, Rich? Does that roll off with those assets? Or specifically, I'm talking about the MVC costs?

Speaker 3

Yes. The vast majority of it will roll off, so that once they're sold. So there should be very little left at that point.

Speaker 6

Thanks so much guys.

Speaker 2

Thanks Doug.

Speaker 0

John Freeman of Raymond James.

Speaker 4

Good morning, guys.

Speaker 2

Hi, everyone.

Speaker 4

First off, I'd also like to share my congratulations, Frank, on your retirement. It's been a pleasure working with you over the years, and I certainly wish you and Eileen all the best. My first question, as you all are now contemplating these additional rig adds, you all had previously talked about considering revamping and renovating a couple of your frac fleets. And I'm just wondering if there's been any decision made on that front?

Speaker 2

Yes, John. First of all, the fleets we have 1 or 2 fleets that probably need some refurbishing. One particular is really on ice today. And that was something we have to evaluate really for as a late 20 eighteen-twenty 19 decision. Realizing today, of course, we're using, depending upon the day, 6 or 7 of our own fleets and 1 outside fleet.

The calculus is such that we need about one fleet for every 3 rigs. So let's say, for example, we were at 24 rigs at a particular time, we would need 8 fleets. So we're sort of within the bandwidth. We might just refer 1 of ours or bring in a 3rd party. We're evaluating it's sort of a lease versus buy decision.

Going further though, we'd have to make that decision in a bigger sense. That really becomes a 2020 issue, so we have to make the decision really in 2019.

Speaker 4

Great. That's helpful. And then just my one follow-up question, just to make sure that I'm kind of thinking about the export market and what you all have done a great job on in terms of the Gulf Coast. Basically, whether the last couple of quarters, it looks like now for 2Q, you all are going to be kind of trending around that 90,000 barrel a day export number and I recognize you all are expanding the capacity to 150,000. But am I thinking about it right with the 160,000 or so right now that's going to the Gulf Coast, it's kind of almost indifferent for you all whether you export or whether you sell it to the Gulf Coast refinery.

You're basically just doing whatever is going to give you the highest value, right?

Speaker 2

That's correct. Other than some of the Gulf Coast sales are term in nature. They're not really very long term, but they might be for 3 months, for example, something like that or 6 months. The rest of the export sales as it relates to today are all spot sales. And so you have to wire around whatever you have in terms of term contracts.

But overall, you're right. Our whole objective would just send it to the highest market.

Speaker 4

Perfect. Great quarter guys. Thanks again.

Speaker 2

Thanks, John.

Speaker 0

We'll now hear from Brian Singer of Goldman Sachs.

Speaker 8

Thank you. Good morning.

Speaker 7

Hi, Brian.

Speaker 8

And Frank, congratulations again. Tim, you highlighted the return of capital to shareholders over time. At the same time, at least for now, you're talking about using the cash flow from strip prices for greater CapEx, fully recognize the benefits on the rate of return front from enhanced completions. But how do you and the Board view the near term preference for return on capital by redeploying the potentially $300,000,000 from strip prices to the drill bit versus an earlier than expected return of capital to shareholders?

Speaker 2

Yes. I think first of all, I'm very confident when I say the returns on this incremental spending are very, very high in the sense of the 3.0 plus wells. The adding of rigs really is a matter of cadence, keeping the RPMs upward and to the right as we execute on the plan. So it's just a matter of exactly what that additional capital entails. 2019, of course, is 2018, of course, is a year where we're relatively high in terms of derivatives, which have an effect of us not getting the full benefit of the high prices.

And so had it not been for had we not been as hedged as we are today, we'd actually be in that mode today. In 2019, our derivative packages were significantly lower. In 2020, we're completely unhedged. And so the numbers actually jump off the page actually when you take that into consideration. And so we have not changed our plan in any way whatsoever.

We're trying to get to cash flow generative positions as fast as we can while executing at a high rate of return on the capital invested. And this really doesn't change anything regarding our long term objectives in that regard.

Speaker 8

Great. And then with regards to the potential to add 3.0 plus completions, on one of your slides, Slide 7, show the well performance, outperformance of the 3.0 plus across different areas. Can you add a little bit more color where you would expect to be increasing relative to your initial case, the 3.0 plus? Is it disproportionately some areas versus another? And how differentiated should

Speaker 9

we expect you to be?

Speaker 2

Yes, Brian. What I'll do is I'll let Joey answer that question.

Speaker 10

Yes, this is Joey. Whenever we look at our completion recipes across the field, the way you asked the question is exactly the way the result comes out. One size definitely does not fit all as I've mentioned many times in the past. And I would say as we continue to expand the 3.0 plus completions that applies as well. And so it's going to be across the board in different areas based on what kind of stacking plan we have, what kind of frac barriers we have.

So it's going to vary. And I couldn't really characterize it geographically because it just varies so greatly across the field.

Speaker 2

Yes. The other thing to add there is, if you look at what we set out in Site 7, these wells are all over the place where we've shown you the uplift from 3.0 plus wells. I would expect that to continue. They're going to be spread throughout the field.

Speaker 11

Great. Thank you.

Speaker 0

Next we'll hear from Bob Morris of Citi.

Speaker 12

Thank you and nice quarter gentlemen. Tim, last year you added 2 rigs to build the DUC inventory as cushion as you move forward. Where does that DUC inventory build stand at this point? And going forward, is that something you just maintain for cushion going into the future? Or at some point, do you plan to draw down that inventory?

Speaker 2

Yes. I think the objective, of course, by adding the 2 rigs was to move our DUC inventory into a position where we would not be subjected to any rig induced delays. The objective is to hit a target of about 30 DUCs in the second half of this year. So we're building that direction and second quarter is an important period during which we're building the DUCs. At which point, in essence, that DUC build will have been completed.

We feel comfortable at that level. And then we just essentially are turning those rigs to production at that point.

Speaker 12

Okay. And then second question is, last quarter you moved down about 50% of your drilling program still using the 4 string casing. But I know you were looking at a deeper disposal well to the Ellenberger, you were looking at recycling, you were looking at spreading out the drilling so you wouldn't pressure up that upper zone. How is that progressing as far as continuing to move that percentage down on the 4 string casing design to then further improve the efficiencies going forward?

Speaker 2

Yes. We are now averaging, depending on the exact time period you look at, 45% to 50% for string case wells. So we're hitting our target there really well in that sense. But we have a lot of initiatives going on as well as you might expect. We're planning on 5 Ellenberger wells this year.

First well was spudded here at the end of the Q1. The anticipation also though is that we would increase substantially the amount of produced water that we used. The rates were more 5% to 10% last year. We're heading more and hopefully quickly to 15% to 20%. Ultimately, that's a very important objective because reutilizing the produced water is a significant economic benefit because we already paid for it.

Now we're just going to reuse it by cleaning it up a little bit, but also taking that water out from underneath our drilling footprint is important when it comes to this business of 4 string versus 3 string. So we've got a lot of initiatives moving forward that are all on target.

Speaker 12

Great. Thanks, Ken.

Speaker 7

Yeah.

Speaker 0

Next we'll hear from Michael Hall of Heineken Energy Advisors.

Speaker 11

Michael Hall of Heineken. So I guess just curious if you could provide some color around like sensitivities on how the cash flow benefit from your marketing arrangements looks as we move into what looks like a much wider spread in the back half of the year. Don't know if maybe just provide like what's the cost to get from Midland to the coast and then what sort of handling fees from are you paying on the export barrels from the coast to Brent, so we can work on work out a sensitivity on that?

Speaker 3

Sure, Michael. So roughly it's call it $2 to $2.50 a barrel on average to get the volumes to the Gulf Coast. And then there's usually a call it $0.50 or so between storage and getting it on the water for export. So you're all in, in that $2.50 to $3 range of transport costs per barrel. And then depending on where the Mid Cush differential is, what that uplift will ultimately be and how much incremental cash flow that is relative to what we would have gotten had we sold it in Midland is really highly dependent on where that MidCush differential is.

Generally, we've been receiving on the Brent versus WTI basis, 70% to 80% of that differential as an uplift over WTI.

Speaker 11

Okay. That's helpful. And you guys have had obviously good foresight in building out the, I guess, the portfolio you have as it relates to the marketing side of the business. Do you have any views on how sustained you think this tightness ends up being? Do you think the pipes that are planned for the back half of twenty nineteen will resolve the situation?

Or do you think this is something that will likely drag out beyond that, and that additional infrastructure builds beyond what we've seen announced will be required in 20 20 beyond?

Speaker 2

I think if you look at the numbers, we do expect to be pretty tight. This doesn't apply to us since we have Feet. But in general, new pipelines aren't expected to come on until later part of 2019. There's 3 or 4 specific pipelines heading to Corpus in particular. So it could be pretty tight between now and then.

So as a result, I would guess that you will have a wider mid cush differential during that period than you would otherwise have had if those pipelines were to end. But that said, it's simply the case that we're going to need more pipelines through time. So pretty clearly it takes 18 months, 2 years or so to build new pipelines. And it's very possible new pipelines will be announced with the idea of startup dates into 2020 2021. For our purposes, we're pretty much covered in terms of Feet ramping up into 2021 Size 22 ourselves.

So we don't really have an issue, but certainly could be tight. If you look at the gas side of the equation, it also will be tight, we feel like, in the short term, but short term means into 2019, in particular when the Gulf Coast Express Pipeline comes on with 2 BCF a day to clear out of the Permian market. Realizing Permian gas growth is substantial, it just mirrors oil growth. And so this is going to be something that has to be grappled with. But again, with our Southern California market, we're pretty much not exposed to that issue in any significant way.

Speaker 11

Okay. That's helpful. And kudos for being in front of all that. If I could, one more thing on the capital side. Just curious how much in the Q1 was spent on infrastructure?

Sorry if I missed that in the disclosures, I didn't see it. And then like what in the Q1, I guess, would you characterize as somewhat transitory or could rate down over the course of the year? And if you could, like an expected level of spending in the second quarter would be helpful?

Speaker 3

Yes. On the infrastructure spending for the Q1, it was it aggregated about $35,000,000 of our expected $250,000,000 So it was a little under our run rate. I don't have the exact numbers on the Q2 to give you, but my guess is it's probably in that $50,000,000 range or so, would be what I suspect. Okay.

Speaker 11

Yes, 2Q, I was thinking full corporate capital spending in 2Q is what I was trying to get

Speaker 7

at.

Speaker 3

Not just infrastructure.

Speaker 11

Yes.

Speaker 2

I think we haven't really got the number for you right now. But I think I would anticipate that certain things will come out of the capital budget that we're in the Q1. For instance, we had about $30,000,000 that was carried over from the Q4 into the Q1. That's an example of something we so we won't see the seismic in there. Is it a 3.0 plus completion?

That's right. We've done more 3.0 plus stock completions in the Q1 than we are in the second. So from that standpoint, yes, we had science on wells that were significant. All those things don't reoccur.

Speaker 11

Okay. Appreciate the color guys and congrats Frank.

Speaker 0

Next we'll hear from Charles Meade of Johnson Rice.

Speaker 9

Good morning, Tim, you and your team there.

Speaker 6

Hi, Charles.

Speaker 13

I wanted to ask

Speaker 9

a question about pad size. It seems like there's a trend in the industry of early or among your Permian peers to going towards bigger pads and big multi well pads. And I know in the past you guys had settled on kind of a 3 well pad as the optimum. But I wonder if you could give us an update on your thinking there and talk about what are some of the trade offs that you look at as you look at bigger moving to bigger pads?

Speaker 2

Okay. I'm going to pass that one to Joey Hall for you, Charles.

Speaker 10

Yes, Charles. We actually started instituting last year what we call the Pioneer pad, and it's a 24 well pad, which reduced our footprint to about a quarter of an acre per well, which is an 85% reduction. And the whole premise behind that is that we plan all 24 wells and all multiple benches for any particular area for the full field development so that we plan our wells smartly and we don't leave any reservoir behind by limiting our self on surface. So I would say about 50% of our program this year is on these big pads. And then of course as you start going into the Stackberry test and we have some other tests planned later this year and early next year, we'll be doing some similar multi well pad developments.

So Pioneer has been doing this for quite some time. And on these multi well pads, we're able to drill, produce and complete on the same pad. So a lot of simultaneous operations. So yes, we've been doing that since last year.

Speaker 9

Got it. Just to clarify that, Joe, you don't necessarily drill all 24 before you frac and flow back. Am I interpreting that right?

Speaker 10

Yes. To put it in perspective, and I'll give you the best example I can. For example, on a 24 well pad, we'll put in a well bay for 6 wells. And in general, what you would see us doing right now is we would come in and drill the 3 Wolfcamp Bs and then get those online. And then once they're online, we'd come back in and drill 3 Wolfcamp As.

And for the most part, that's what we're doing now. So the additional 18 wells, well base will be put in, in 6 packages each and those wells would be drilled in subsequent years.

Speaker 9

Got it. That's helpful. Thanks a lot. And then, Tim, if I could go back to that kind of takeaway question. I guess you guys have really been ahead of the curve of the industry, not just on this takeaway, but also on a lot of these kind of infrastructure or macro things.

And I'm curious, there's talk of a VLCC port going in at Corpus Christi. I'm curious, is that going to have any effect on you as a Permian producer with the Feet or is that something that's all just going to affect things downstream of you?

Speaker 2

Well, I think if you're speaking of Ingleside, for example, which is Oxy's terminal there, they can already birth VLCCs, but they can only half load them, let's say, because of the draft limitations in the bay there. And so what's being contemplated is a very significant project to do dredging to allow VLCCs to actually be not only brought into birth, but also to be fully laden. What's happening now is the VLCCs are half loaded and they're brought off into deeper water and there's additional oil that's brought out to litered out to the vehicle to load it up before it heads, for example, to Asia. So what this will do, and this is better for you to direct to Oxy, but it will reduce our costs and time significantly. And so those are all advantages, especially when you're just looking at cargo economics in terms of their deliveries into, for example, China or South Korea, what have you, that we have fundamentally lower cost basis because we don't have to fool around lightering oil out to VLCC.

Speaker 9

Got it. Thank you for the color, Tim.

Speaker 8

Yes.

Speaker 0

Next, we'll hear from Bob Brackett of Bernstein.

Speaker 7

Thanks. I appreciate that less than 5% of Permian revenue is gas. So in a sense, flow assurance is more of a strategic issue than maybe a financial one. Can you talk about what goes wrong when you lack gas flow assurance in the basin and what some of those fallback plans might look like?

Speaker 2

Well, I think one of the issue is one of the issues is that we would be limited on flaring, I feel like, in the basin, just as a general rule, certainly out of corporate conduct and doing the right thing environmentally, we would want to as an industry not be flaring gas in any significant quantity for any significant period of time. That would be something that might be an issue. What it could potentially lead to, if flaring were not to be an option for the reasons I mentioned, is shutting in some old wells that are relatively low oil producers and gassier producers that were old vertical wells for instance. So you could actually have an effect on production if in fact the situation became so acute that we were having to not we per se, but as an industry, reduce gas production from vertical wells. Now again, as you mentioned, it's not a significant or material revenue effect, but it is one of the ways to solve the issue.

Speaker 3

I have to longer term consider reinjection as well.

Speaker 7

What would re injection do to something like OpEx?

Speaker 3

It's still too early to tell. It's a lot of work has to be done on that. It depends on location is going to be important on that too.

Speaker 7

D. Moriarty:]

Speaker 2

Yes. There's other options too in terms of using gas within the facilities, using gas, for example, to run frac fleets, drilling rigs and so on. There's a lot of different options. Hopefully, we don't need we're not pressed into those solutions, however.

Speaker 7

Great. Appreciate it. Thanks.

Speaker 0

Next we'll hear from Neal Dingmann of SunTrust.

Speaker 13

Good morning, guys. Tim, my question is, you guys have been always not only about to take away in advance, but in vertical integration. I'm just wondering as you look at kind of now what's going on in the industry, are you continuing to add more on the vertical integration side either through sand or frac or perhaps even rigs? I mean anything you could talk there just what you all are doing?

Speaker 2

Yes. Thanks, Neil. I did mention earlier that the decision regarding our frac fleet in the future in terms of adding to it is simply a buy versus lease decision. And that's something under evaluation. It has to do with a lot of factors.

We are very confident that having our own frac fleets gives us a very significant advantage in terms of execution. And so that's something we'll be evaluating. Again, it's not a decision for this year. It's more of a decision for next year on my 3:one ratio argument. In terms of sand, right now, we are in fact taking our first quantities of Western sand.

It's relatively low quantity today. We're talking about ramping it up to 1,500,000 or £2,000,000 tons per year starting potentially next year. That's under consideration today. So Western sands could be significant. Now our ownership would not really be the factory.

It would just be getting processed sand at relatively low cost. So we don't see necessarily vertically integrating per se into more sand today than we currently have. When you look at things like water, our water system is critical. I mentioned the fact that this Midland contract and the Midland construction project is significant in the sense it gives us massive quantities of effluent water. That project has to move ahead.

So some areas we're evaluating, some areas are clear we're moving ahead, in particular on water. Sam, we're moving more to the western areas since they can save us considerable amounts in our well cost. So it's really a mixed bag. We are continuing to invest in gas processing with our partner, Targa. They've done a great job keeping up with the gas production growth in the basin, and I anticipate they'll continue to do so.

Speaker 13

Good. Very good. And then one just follow-up, if I could. You had success, I think it was on even in the last quarter talking about just the Wolfcamp D success you had there on that. I think it was on the Eastern Midland, if I recall.

Are you seeing advancements there when you go to the 3.0 plus just as you're seeing in the other zones? Is there now just as much plan to drill as many Wolfcamp Ds as there was or is it focused more still a bit

Speaker 2

I'll let you answer that question, Neal.

Speaker 10

Yes. Just to be clear, whenever we drilled that last Wolfcamp D well, that was an upgrade to 3.0. And so we saw a significant uptick. And the last three wells that we recently popped this quarter are also 3.0. So as we highlighted last quarter, it had been some time since we had done any Wolfcamp D wells, so our completion recipes had evolved significantly.

One of the things I would say we're most pleased about in the Wolfcamp D is that we've had great success drilling these wells and also great success completing these wells because since they are deeper, they do offer some additional challenges, but we've seen great execution on these wells.

Speaker 13

Nice. Thanks for the details guys.

Speaker 9

Yes.

Speaker 0

And our final question for today will come from Leo Mariani of Nattelian Securities.

Speaker 14

Hey, guys. Just a quick follow-up here on the asset sales. I think you guys talked in your prepared comments about potentially getting some proceeds in maybe by the end of 2Q. Just wanted to kind of get a little bit more color there. Just kind of some of the smaller dribs and drabs and is the larger Eagle Ford package more of a year end target?

Just trying to get a sense of those proceeds.

Speaker 2

Yes, Leon, sure. I think, first of all, the Eagle Ford package, as I mentioned earlier in the slides, we're anticipating bids on that during May. And now as it goes, there's time then for negotiation and discussion of who would be the purchaser we want to negotiate with. Negotiations would continue, kind of reach a point where a purchase and sale agreement would be signed and then going processing all the way to a closing. It's obviously several months away.

So it's a complex process. And as a result, I would not expect to see any proceeds on that really for months until we actually finalize it. The other two assets in question that being Raton and West Panhandle Field, those are smaller. They are such that we might be able to achieve something faster on those, but those data rooms are really in effect open and we're processing the opportunity to get bids in those pretty shortly as well. So the latter 2 pretty clearly could be faster, the first of the 3, that being HUGOFR is going to take time.

Speaker 11

All right. Thanks guys.

Speaker 2

D. Moriarty:] Well, thanks everybody for being on the call. I really appreciate it. And Frank, once again, thanks for all you've done for us. And we'll be on the road here a little bit in the next or during May June and look forward to seeing you then.

Hope everybody has a great summer and we'll be updating you when that time comes. Thanks very much.

Speaker 0

That does conclude today's conference. Thank you all for your participation. You may now disconnect.