Pioneer Natural Resources Company - Q1 2019
May 7, 2019
Transcript
Speaker 0
to Pioneer Dental Resources First Quarter Conference Call. Joining us today will be Scott Sheffield, President and Chief Executive Officer Rich Daley, Executive Vice President and Chief Financial Officer Joey Hall, Executive Vice President at Permian Operations and Neil Shah, 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 June 1, 2019. 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 2 of the slide presentation and in Pioneer's public filings made with Securities and Exchange Commission. At this time, for opening remarks, I would like to turn the call over to Pioneer's Vice President, Investor Relations, Neil Shah. Please go ahead, sir.
Speaker 1
Thank you, Anna. Good morning, everyone, and thank you for joining us. Let me briefly review the agenda for today's call. Scott will begin by discussing our strong Q1 results and our solid execution, including our positive outlook for the remainder of the year. Scott will then comment on the many initiatives in progress to enhance shareholder value.
Further, Scott will review our strong performance in the Permian Basin, specifically our best in class oil production and the benefits of our low cost basis acreage. After Scott concludes his remarks, Joey will update you on our strong horizontal Permian well performance, and Rich will then review the benefits of our firm transportation commitments to the Gulf Coast. Scott will then return with a brief recap and commentary. After that, we will open up the call for your questions. Thank you.
So with that, I'll turn it
Speaker 2
over to Scott. Good morning. Thank you, Neil. It will probably take me a couple of quarters to get back in practice, but I think I told a lot of you this already, but I spent the 1st 100 days interviewing and listening to over 150 employees and investors. I did have on the investor tour, we did listening tour.
I did have Ken Thompson, our Non Executive Chairman and several outside directors attend several of the meetings. And a practice we're going to continue to do an annual meeting like that where I invite the non executive Chairman and some of our outside directors to listen to what investors are thinking and what they are saying. There's something that definitely has not changed since the two and a half years since I've been gone, and that's the company has great people and great assets. This slide, I've been impressed with when Neil came out with it last quarter. It's updated, but you can spend the entire presentation really on this first slide, the importance of it.
I think several of the key points here is that the company is achieving free cash flow now as we speak, over $800,000,000 estimated for 2019 based on the strip prices. In addition and that is a primary focus of the company over the next several years. Also, the company has moved toward we've increased our dividend. It will be officially approved in August, record date to be late September. We are semiannually, but the Board has improved the intent to move to a 1% yield, so about a 2 60% increase.
Long term goal is to move toward the midpoint of our peers in regard to that dividend. Also key drivers, improving capital efficiency. The company has already achieved over $300,000,000 from 2018 to 2019. We're focused now on achieving another $400,000,000 of capital reductions, including G and A, which break down about $150,000,000 midstream, up to $100,000,000 in facilities, a full year of sand. If you remember, we're not achieving all the sand and gel savings for 2019, but that's another $75,000,000 dollars And then we're targeting up to $100,000,000 of G and A savings.
So that's how we get to the other $400,000,000 So when you look at a total of about $700,000,000 dollars that's over it's about $2,500,000 per well when you look at assuming that we pop 300 wells per year. It's a little bit less this year, but going forward, it will be about 300, going forward. And so it's about $2,500,000 per well savings. In regard to ROCE, it's a main focus of the company. The company over a year ago put it in regard to one of the key focuses for the management team here and the company going forward.
We are peer leading based on the results in 2018. We're targeting to hit 15% within the next 5 years at $60 Brent flat. If you look at strip pricing, we're targeting getting up 20% and over the next 5 years. In regard to buying back shares, the company had already started a practice of buying back shares, an average price of $136 per share. I wish I could have bought some after I returned.
I was restricted by the company for two reasons. 1, the Eagle Ford negotiations were in full steam negotiations and then the G and A restructuring, which I started fairly quickly. So we were able not to buy shares after a high return. We will continue to seriously look at it, especially when we get to those tight prices and buying back future shares. Going to the next page on solid execution.
I think the main point of this slide is the fact that we've had a 6% increase from Q4 and the fact we are the top end on both oil and BOEs from the Permian. We did have a great uplift, which Rich will talk more about on a project we started probably about 6, 7 years ago to be able to export crude from the Gulf Coast. Permian horizontal LOE, still one of the lowest in the industry below $3 and we still are left with probably the best balance sheet among all the public independents in the U. S. Going to the next slide, 2019 outlook.
I think the most important thing here is that the capital is on track. This is the first time in over 2 years the company underspent capital for the Q1 for the first time in over a 2 year time period. We're 100 percent committed to spend within budget between the $2,800,000,000 and 3,100,000,000 dollars and the capital obviously will trend down the rest of the year before we go into 2020. On the $3,750,000,000 estimated cash flow, Rich will talk a little bit more about it, but we did put on some more hedges since I returned the three way we call them 3 way collars, dollars 55 by $65 by $80 Brent. So we're up to 80 percent I mean 20% hedged for 2019.
Next slide on improving capital efficiency, probably one of the more important slides. Again, I summarized it on the first slide, but we've already achieved a little over $300,000,000 in savings going from 2018 to 2019, primarily on the completion side. We're at achieving another $400,000,000 in savings going from 2019 to 2020. And again, I summarized it already, but it's made up between a full year of sand and gel savings, up to $100,000,000 a year in facilities, dollars 150,000,000 a year in midstream facilities and $100,000,000 up to $100,000,000 in G and A savings. Going into Slide 7, the reorganization.
After listening to a lot of the employees and getting with the management team, the first thing we did, we asked 30% of the officers to retire. We promoted 6 persons to the management committee in their early 40s, so bringing up younger talent into the management committee. And now we're over 35% female on the management committee, which is something I'm proud of. We basically had an organization that was dealing with our assets all over the world and all over the U. S.
That was the structure that we've had over the last several years. Simply, we're going to a very simple structure, flat in the organization, less managers, more functional, going back to a functional organization. And simply the main focus is adding capital. The company had weekly reports on production, one of the things I found out, but they were not focused over the last 2 years on the capital side of the business. And so now we're focusing at something that we have started and the company is already doing a great job as shown in the Q1 in regard to focusing on capital.
So capital focusing on that is just as important as delivering on the production side of the business. Going to strategic direction slide. These are the 4 critical things. It's about execution. Execution, essentially, we had to add capital to that.
You have to be able to execute both on production and capital. Obviously, focusing on free cash flow going forward with a competitive dividend and opportunistic share repurchases. Again, we have the best balance sheet in business, and we'll continue to build on that as we deliver free cash flow 2019, 2020, 2021. We'll just continue to build up the balance sheet. And then as we see downturns like we've had over the last several years, we will use that as an opportunity to either drill through the cycle or buy shares cheap during those time frames.
If you notice, we have removed the 1.10 dollars But one thing just to let you know that I strongly believe our rock will deliver over 1,000,000 BOEs over the next several years. It's just no longer a focus, especially with the commitment to 1,000,000 or the time frame. Going to next Slide 9, strengthening our value proposition. This is a table of contents. I'll be a little bit more specific about G and A expense, optimizing our cash flow through monetization midstream, assessing field facilities and water infrastructure and talk about accelerating value on our long dated inventory.
Obviously, the focus is return on capital. Next slide on improving cost structure of G and A per BOE. You can see we moved from a little bit above the middle of the peers to the top quartile. So up to $100,000,000 probably takes about $1 per BOE off of our G and A per BOE. Long term goal of the next 2 to 3 years is get below $2 An interesting report I looked at yesterday, if you remember Jim Parkman, who was partners with Tom Petrie, he had put out an interesting report yesterday.
He took the 76 public companies and basically put out a report showing the cash G and A and the cash interest. But I know that we have the best balance sheet among all those 76 companies. We did not have the best G and A. Now we're peer leading G and A. When you put both items together, we're probably peer leading number 1 or number 2.
What's interesting, the 76 companies, he mentioned that over half will either merge or go bankrupt over the next several years. And that's the 2 drivers. They're too high on their cash G and A and their cash interest. In regard to the monetizing the assets, we will be opening up a data room shortly for our 27% interest in the Targa operated Midland gas processing infrastructure. You can see the current throughput is about 1.8 Bcf a day.
Capital budget, we're spending about $150,000,000 a year. We have been with our share of building 2 new plants. And you can see the EBITDA, and you can just take that and make your own estimates on what our proceeds will be. Then regard to the field facilities, as I mentioned already, we're targeting going into 2020 up to about $100,000,000 a year savings there. In regard to water infrastructure, we are evaluating what's available out there.
We're not 100% sure. We are going to divest the water infrastructure. We're just evaluating opportunities. There's been some interesting deals that are being done out there. We are going to be reducing that capital significantly.
That $150,000,000 a year drops down below $100,000,000 next year and gets down to $50,000,000 So at the end of the day, the $300,000,000 that we've been spending on water and infrastructure will essentially be disappearing over the next 2 to 3 years, probably over the next 2 years. And so it's something that a lot of our peers did not have to spend on. So in regard to the Eagle Ford, you mentioned we closed the sale of Eagle Ford yesterday. I've read a lot of the analyst reports, and I'm surprised about the comments coming from Eagle Ford. We look at it as a great opportunity to divest of an asset that really did not achieve the returns that we saw.
It's taken us a while, but we're receiving up to potentially up to $475,000,000 in proceeds contingent on future commodity prices. I sort of look like this as a rounding error. I'm famous for using the rounding error syndrome inside Pioneer over the last several years. A simple way to look at this is that at current commodity prices of WTI between $60,000,000 $65,000,000 will receive somewhere between $275,000,000 to $475,000,000 You need to deduct somewhere between $200,000,000 $250,000,000 for MPCs, and that's all dependent upon the drilling activity. The company we sold to will be starting up drilling activity fairly soon, and they'll be accelerating that.
And so it's a net positive for the company. We're moving a very low margin property. When you look at back at the tables, it's about a $12 margin per BOE and a very high operating cost of about $14 So we look at it as a very big plus to move this asset out of Pioneer. Accelerating value of long dated inventory. As most of you all know, we probably have a substantial amount of locations, very throughout the entire play in the middle of basin.
Since Oneoneeighteen, the cash market has been very weak. We're starting to see it come back some. In addition, we're looking at acreage that will probably we won't get to between that 10 15 year range. We feel like it through a DrillCo structure, we'll be able to monetize it at somewhere between $25,000 $301,000 per acre, and we expect to have something in place by the end of 2019. I didn't mention on the midstream asset sale, we do expect that to close by the end of also 2019.
Slide number 13, enhancing shareholder value. Again, I won't go over detail, but this is our obviously, we're focused on returns. We're focused on capital discipline, both on capital and production. Return on capital, obviously, seeing significant improvement. Still have a great balance sheet.
It will probably get better with time, especially as we deliver free cash flow. And again, we have the inventory of low risk, high return wells to support our organic growth. I've got 2 or 3 more slides before I turn it over to Joey, but these are some slides we used on our investor tour over the last few weeks. This first slide just emphasize the fact that we have the lowest cost acreage among all the players in the Permian Basin due to the fact that we acquired most of this acreage back in the '80s '90s. And average cost is about $500 per acre.
We averaged the last 3 years of recent Permian transactions. They averaged about $38,000 per acre. And I've already seen some what's interesting, I've already seen some analyst reports that are backing out what Chevron and Oxy are looking at from the Delaware Basin standpoint. And it looks like that they are paying somewhere between $50,060,000 per acre depending on the premiums that they're offering at Anadarko for something in the Delaware. Next slide.
We obviously are asked this a lot about the parent child relationship. We had downspaced early on back in 2014 since we drilled the first wells in the main play of the Midland Basin in Martin and Midland and Upton Counties that we did go down to about 600 feet or less down in the northern part of Upton County and realized we did have interference starting in 2015, we went to 850 feet. We've been there since then. And you can see the performance of our wells. So essentially, with our number of locations we have and our footprint, we're not forced like a lot of our peers to down space because they're running out of inventory.
It will be a long time before Pioneer runs out of inventory. Next slide, 16, delivering best in class oil production. You can see this is using drilling info information on the oil mix. It's a key slide that we have the best oil mix of any one of the peers in the Permian Basin on a 2 string basis. All of our peers are listed below.
And when you look at just oil production itself, that we are the leading company among all those companies. What's it this is just an interesting factoid, but all three of the companies what's interesting, if you look at paying $50,000 to $60,000 per acre for something in the Delaware, all three of the companies involved in the recent announcement with Anadarko, including Anadarko, are in the middle of that pact. So just an interesting factoid. I'm going to now turn it over to Joey Hall to give you an operations update.
Speaker 3
All right. Thanks, Scott. Good morning to everybody. I'm going to be starting off on Slide 17. So last quarter, we updated you on the strong well results from our 2nd Stackberry test in Midland County.
And now we've had very similar and encouraging results from our 3rd Stackberry test in Central Martin County. Here we had 5 wells drilled and completed as one project. The wells on this pad are currently outperforming previously drilled wells in the same area by about 24%. So we've obviously advanced our completion strategies, but the most important thing here is that we continue to deliver strong well performance in full development mode. And of course, this demonstrates our ability to implement more large scale projects going forward as we will.
We've also continued our success in the Wolfcamp D appraisal process. We popped another Wolfcamp D 2 well pad in Western Glasscock County that's had great results, and we'll also continue our Wolfcamp D appraisal process in 2019 and beyond. So in total, we brought on 71 wells in Q1. Going into Q2, it is worth noting we will continue to bring on more larger pads. And so all in all, for the Permian team, another solid quarter of execution.
And now I'm going to turn it over to Rich.
Speaker 4
Thanks, Joey, and good morning. I'm going to cover Slide 18 where you can see that we had a significant uplift this quarter from firm transportation to move our oil to the Gulf Coast, once again and where we're going to get Brent related pricing. This did increase our oil price margin by over $8 per barrel during the quarter or added $150,000,000 of incremental cash flow for the quarter. During the Q1, we moved about 90% of our oil or roughly 200,000 barrels per day to the Gulf Coast, of which we exported 75% of that with roughly 60% going to Asia and 40% to Europe. Our firm transportation volumes do increase in the Q2 in May to 205,000 barrels per day.
And based on our forecasted differentials between Midland and Brent pricing, we are forecasting a second quarter uplift from firm transportation of $50,000,000 to $110,000,000 Longer term, our firm transportation increased just over 250,000 barrels by the end of 2020, which is consistent with our forecasted production growth. As a reminder, we try to move our other products to higher priced markets as well. And today, we move about 60% of our gas out West to price it off a SoCal index. And once Gulf Coast Express comes on the Q4, we'll move about 300,000,000 cubic feet a day of gas to the Gulf Coast, where it will be priced on a Ship Channel price index. And with that, we'll have basically 0 volumes in Waha, priced off a Waha index.
As Scott mentioned, we have added to our derivative position for 2019 2020 for oil. We now have 20% of our 2019 production and 5% of our 2020 production covered with 3 ways. Those provide basically a floor Brent price of about $65 or higher. And longer term, we continue to target to be more towards a 50% hedge position depending on commodity prices. So with that, I'll turn it back to Scott for a few closing comments.
Speaker 2
Thank you, Rich. Again, the last slide is one we've already gone through, but you see the company has gone through just a key focus really on the cost side of the business. I think most people know that we have probably the best assets. We've had the best balance sheet. Now we just need to achieve from the best cost to be number 1 in regard to drilling completion facilities and G and A costs.
And that's where the key focus has been since I've returned. So I'm going to stop there and we'll open it up for questions.
Speaker 0
Thank you. We'll now take a question from Arun Jayaram with JPMorgan.
Speaker 5
Good morning. Scott, I wanted to get your perspective on Shale M and A. When you took the reins back as CEO back in February, the press release clearly stated your commitment to the role long term, suggesting there is no M and A angle to your return. In light of the situation with Oxy, Chevron, Nanodarcos, just wondering to see if you could give us your thoughts on how the Board thinks about M and A?
Speaker 2
Yes. Thanks, Arun. Obviously, I've told investors on my tour, if I didn't come back to sell the company, the stock was cheap. It's moved up, obviously, through a lot of our restructuring. I think, obviously, the industry has lost a lot.
All the energy stocks went up when the Anadarko announcement. My perception is I was surprised that Anadarko was the 1st company to be taken out. When you look at all the reports, they were probably cheap. They were trading at a very low EBITDA. And Chevron was able to go in and make a deal quickly.
Now Oxy is paying up for it, obviously. I personally don't think that there's going to be a lot of M and A over the next 1 to 2 years. Now over the next 5 years, I think the majors will definitely start running out of inventory. Things may happen, but I don't think there'll be a wave of consolidation. As I mentioned earlier, I think a lot of companies, smaller companies in the Permian are going to have to consolidate and focus on the G and A and the interest.
They've got to get better balance sheets. They got to get a better cost structure and that's what's going to be working and what's focused on.
Speaker 5
Great. And my follow-up, I did have a housekeeping question, Rich, perhaps for you, is just how the accounting will go for the retained MVCs through the Eagle Ford transaction. We did note that you did lower your other expense guidance, but just trying to understand how the MVCs will flow through the income statement and cash flow statement.
Speaker 4
Sure, Arun. So yes, we are in the Q2, we'll have 1 month of Eagle Ford deficiency fees that are included in the guidance of the $25,000,000 to $35,000,000 But starting once we close the transaction in May, we will bring our estimate of those future MVCs that we're going to share with the buyer on our balance sheet. And so it's somewhat of an estimate because we don't know how much they're going to drill. And the more they drill, the lower those future MVCs will be to us. But we'll make an estimate and bring that on our balance sheet and then think of it like debt.
So we'll make those payments on an annual basis for our share of those, and those will be paid typically in the Q1 of each subsequent year after we know the exact volumes that were delivered. So that's how it will run through the income statement will be 1 more quarter of 1 month. And then after that, it will just be a balance sheet impact and working capital changes.
Speaker 5
Will that flow through the interest expense line item if it's kind of straight like debt? Or
Speaker 4
No. It will flow through our well, the charge that we take initially will go through gainloss. And then after that, it will just be a reduction of a liability on the balance sheet. So it won't go through the P and L.
Speaker 0
We'll now take our next question from Brian Singer
Speaker 2
with Goldman Sachs.
Speaker 6
Scott, you mentioned the town halls that you're doing with your employees and as well some of the managerial changes that you've made. Can you talk about what you're emphasizing in these meetings and to the management committee that wasn't being emphasized previously? And how are you building the incentive structure to deliver the results near term, such as the 2019 capital budget that implies step downs as the year progresses and also longer term the goals that you've put in your slide deck here?
Speaker 2
Yes. I think the big change, there was really nothing wrong with the $1,010,000 when Tim came out with it. In fact, if you remember, I mentioned the 1,000,000 barrels in my last quarter call in 2016. So Tim came out in early 2017. And the focus obviously, I've been inside the company last 2 years through all the interviews was achieving that 1,000,000 barrels in 10.
And the focus was probably 90% more on the production side and less on the capital side. And so the big change is to treat capital just as important as production. And so each person that drilling will be held the drilling person over drilling will be held accountable. The person over completions will be held accountable for his capital. The person over facilities will be held accountable for theirs.
And so we're moving the accountability to each individual and up to the executive over those people. So that's probably the key driver in regard to the focus in regard to accountability. It will be tied all the way into the compensation side also on the compensation of each of those individuals. So that's probably the key driver. And what comes out of that, of course, is driving the company down to be peer leading on drilling, completion facilities and G and A.
We'll allow when you take $700,000,000 as I mentioned out of the capital side and on the G and A side, it drives what happens is that it drives up significantly free cash flow, which drives return on capital employed, which allows us to increase dividends and continue to increase dividends and give back capital to shareholders.
Speaker 7
Great. Thank you.
Speaker 8
So that helps.
Speaker 6
Yes, it does. Thank you. And then my follow-up is over the years or even over the decades, Pioneer's participated in a number of different capital structures regarding monetization of production of reserves. Can you talk to why you see or what you see as the advantage of the series of DrillCos? And then how do you think your long resource life impacts the attractiveness of Pioneer to larger companies as you consider the level and the structure of some of the divestitures in the Permian that you're talking about?
And I recognize the response you made on M and A in the last question, but I was just kind of wondering longer term.
Speaker 2
Yes. The first of all, the cash market, I mean, we're probably just as open to do a cash market versus DrillCos. The cash market has been dead since Oneoneeighteen. It's starting to come back a little bit. That's a combination of companies are probably still levered.
They can't go to the equity markets like they used to. And the private equity companies are being consolidated. Capital is being reduced there. And so there's no exit mechanism now for private equity companies. And so you've had a total change.
We were hoping that the Endeavor transaction would be your first cash transaction. I don't know the status of it. It's acreage close by Pioneers, but it's been going on for about 6 months now and nothing has happened in that regard. And so there's not really a cash market up until I've seen some of the reports you all have put out. People are putting somewhere between $50,000,000, 60, 70,000 per acre when you back out the African assets of Anadarko that both Chevron and Oxy are paying for.
So that's probably the closest thing that I've seen. So the DrillCo structures is probably the only potential structure today that can pay us the appropriate value of those assets. And so the goal is probably start with 1 and make sure it doesn't affect us executing. We would probably start with 2 rigs at the end of this year going to 2020. Very, very little capital increase, 0% to maybe 10% of a typical well.
We would get carried. It would the well would pay out in roughly a 3 to 4 year time frame. And then it would add production growth after that payout at certain returns. And so it's just another way to raise capital and not lose acreage or acreage that has the so the value of that acreage today that I was referring to is probably worth about $35,000 per acre if we drill it today. But we are drilling more better quality type assets up in Martin Midland County and Northern Upton County.
And so it's the best way to monetize the value through a DrillCo structure. If somebody would pay us close to that in a cash, we would definitely build the cash route. So that's the only reason we're focused on the DrillCo structures. Your last question, Brian, what did you want Yes.
Speaker 6
It was whether monetizing some of those longer dated reserves would impact the longer term attractiveness to pioneer larger companies, I. E, does the do you see the long reserve life as a strength?
Speaker 2
Yes. No, I see it as a strength. I don't see us about doing some drill codes here and there on some acreage that we won't get to for 10 to 15 years. I don't think it would affect what any potential acquirer has on Pioneer. I mean, because they would be picking up if they gave us the right price that the Board thought it was better to for shareholders to accept, I don't think a DrillCo structure will the company that buys it will essentially will get that upside.
So as I said, they'll get the upside anyway after payout, after 3, 4 years, they get to hold that asset for another 30, 40 years.
Speaker 6
Great. Thank you.
Speaker 0
We'll now take our next question from John Freeman with Raymond James.
Speaker 9
Good morning, guys.
Speaker 2
Good morning, John.
Speaker 9
On the G and A front, obviously, you have already made a lot of progress with on the G and A front with a pretty high percentage of the officers that were asked to retire, the junior promotions, etcetera. And I realize it will take several quarters before we probably see it in the numbers just the way that severance payments, etcetera, work. I'm just curious of the 100,000,000 dollars sort of target, how much of that do you feel like you have already achieved? Like it may not show up yet just because of the way the severance works, but how much of the $100,000,000 target has already been achieved?
Speaker 2
Yes, John, that's a good question. In fact, I forgot to mention the timing on the G and A when I went through it. All those savings will go into effect by June 1. So the organization has already been chosen. The managers have been chosen already.
So the new management team is in place throughout the organization. We had a voluntary separation program. It was the first thing we did. That's already in place. And then we're going through the involuntary.
So I can't give you any specific numbers in regard to people at this point in time, but everything will be completed by June 1. And so you'll see the savings for the Q3. So you're only going to see 1 month of savings for the Q2, but you'll see the actual run rate going into the Q3 when we give out guidance.
Speaker 9
Great. And then just my follow-up question, I just want to make sure that I heard you correctly, Scott, on the Eagle Ford deal. So on the future potential contingency payments, you said the top end of the range, the $475,000,000 was based on $65 oil roughly. And then did you say the bottom end of the range was $2.75 at $60?
Speaker 2
It's not the bottom end is $55 It will be less than I did not give the estimated proceeds from $55,000,000 but I was using current WTI prices between $60,000,000 $65,000,000 to $4.75 range.
Speaker 9
Perfect. Thanks, Scott. Appreciate it.
Speaker 0
We'll now take our next question from Jeanine Wai with Barclays.
Speaker 10
Hi, good morning everyone.
Speaker 2
Jeanine, how are you doing?
Speaker 10
I'm good. Thank you. So the release indicates that you're accelerating free cash flow generation by adjusting to a mid teens longer term growth profile versus previously you were at that 20% CAGR. And I was just wondering, can you give us a sense of the magnitude of that acceleration by gearing down? For example, are there any other operational efficiencies associated with adjusting to mid teens besides $100,000,000 of field facility savings that you mentioned in your prepared remarks?
Or maybe a hard question to answer, but how much did you compress the timeline to achieving your competitive dividend and was that something that factored into your new rate?
Speaker 2
Yes. The company had already come out with 12% to 17% production growth. And so they had already started moving down toward that. So just long term, we're changing the 20% growth rate to a mid teens production growth rate. And so some years, we may have 12% to 13%, some years, we may have 17% to 18%.
So we can't just hit 15% every year based on adding rigs, adding fleets, taking rigs off and taking fleets off. And so the $400,000,000 of additional savings is what we're focused on now. So we've achieved the $300,000,000 in savings from mostly from the completion side and steps we took last year with ProPetro, combining our assets with them. And then the next $400,000,000 is what we're focused on now that I've already gone over.
Speaker 10
Okay, great. Thank you.
Speaker 0
We'll now take our next question from Doug Leggate with Bank of America.
Speaker 7
Good morning. This is John Ipett on for Doug Leggate. Our first question is regarding the water business. If you did you already gave us an idea of how your CapEx plans are going to change over the next several years. But if you did pursue the path of divesting the business, how do we think about the potential impact to both production and well costs?
Speaker 2
Yes. My first point, John, was the water capital is coming down significantly. We'll be completing the Midland water plant here early 2021. So 2020 will be the last year, but it's coming down substantially from this year. So number 1, so it's not going to be a capital issue.
Water going forward, you'll probably see the line item disappear and just go into DC and F over the next couple of years. Number 2, there's been some deals out there that have been done primarily on saltwater disposal wells. Pioneer has been out here for a long period of time. We put it over $1,000,000,000 into water infrastructure. We probably have close to $1,000,000,000 into solar disposal and gathering lines.
And so, one of the things that I talked to investors about on my tour was one thing we don't want to do is trade dollars. We don't want to divest to this water infrastructure, lose control and all of a sudden our operating expense goes up significantly. So we got to be careful on what we do. Do we monetize it or not? But one thing we are doing, we are in regard to the new organization, and we are focused on adding 3rd party revenue since we have probably the largest water infrastructure system, probably the largest water recycling system, the largest disposal system is to turn it into a 3rd party business and start bringing in 3rd party revenue from other operators 18 to 20 I've heard of some deals being paid, if people are going to start paying 18 to 20 I heard of some deals being paid 18 to 20 times cash flow, that's a different story.
But we're not just going to trade dollars and increase operating expense.
Speaker 7
Appreciate the color there. And then the second question, in your opening remarks, you said if we got back to the levels we saw earlier in the year, you would look back at buying back shares, which raises the question about what do you do with incremental cash flow above your base plan and also with potential proceeds from divestitures? I mean, do you keep that on the balance sheet? Do you look at buybacks on an opportunistic basis? Are you open to special dividends?
How do you think about that?
Speaker 2
Yes. That was a good point. That was discussed on my listening tour with the long term investors. And I think, 1st of all, we're going to build the balance sheet and with free cash flow. Obviously, we got ProPetro shares.
We got the Targa system and we got free cash flow that's building up on our balance sheet. As I said, downturns, I've been through 7 downturns in my career. There's going to be some others over the next 10, 15 years. And you need to save capital for those downturns because that's the best time to be buying the stock. And secondly, in history, it's shown that during the downturns is the best time to be drilling wells.
And so it gives us an opportunity. If we're running 25 rigs during the downturn, but right before it, it gives us an option instead of shutting 10, 15 rigs down like most independents would have to do, We can keep running 25 rigs. We can cut 5 rigs. And so that's where and then if the share price dips low like it historically has, it's an opportunity to buy back shares at that point in time. Too many of our peer group are buying back shares at too high a price in my opinion.
That's one thing Pioneer will not do.
Speaker 7
Thank you, Scott, for taking our questions.
Speaker 0
We'll now take our next question from Paul Sankey with Mizuho.
Speaker 11
Good morning all. Scott, could you talk a little bit more about the acreage that you're planning to sell? How much are you talking about? And what kind of proceeds do you think you can get?
Speaker 2
Yes. We talked about the math on the proceeds, Paul. It's acreage that if we drill today, it's worth 35,000 to us. By going through a DrillCo type structure, it's worth somewhere between 25,301,000 per acre. A lot of it's going to be in our joint venture area with Sonnekem down in the southern portion.
So we'll have to get their approval in that regard. And so I don't think that the cash market is there, as I have mentioned already. We will start off with about 2 rigs on the DrillCo type structure. We're talking to a lot of private equity already, and we hope to put it in place by the end of the year. But it's generally acreage that we would drill, get to in that 10 to 15 year timeframe.
Yes, understood. And could you continue then
Speaker 11
to talk a little bit about the balance that you see between growth and buying back stock. You've addressed this obviously as you've been talking, but again, would we expect you to be taking more buyback and as the route forward to get the value of the stock up? And further to that, could you talk about where you think the inherent value of the stock is? I mean, you've talked about waiting for it to get cheap. But could you talk about some ranges of where you think you're undervalued versus, for example, what price you might sell the company for?
Thank you.
Speaker 2
One thing I can point we don't give out our NAV or values, but I can you can just point. You know the amount of acreage we have. You know that both Chevron and Oxy are paying somewhere between $50,000 $60,000 per acre. So most of you all can do the math on what our acreage is worth based on that price deck. And so the focus during the downturns, again, as I mentioned, is continue to build up our cash position.
So we can live for the downturns and the downturns that we can, as I said, drill through the cycle and buy back shares cheap. I think at $135,000,000 the stock is cheap.
Speaker 11
Got it. And then finally, there's been some concern about your gas cuts. Can you just talk about whether there's anything to worry about? Thanks.
Speaker 2
No. I think based on I was heavily involved in the analysis, be it an ex reservoir engineer and what happened. I've come back and looked at a lot of the data. You can see with our slide that we're the leading oil company on cut in regard to the entire Permian Basin. That's both Midland and Delaware.
And so there are essentially no issues. Over time, the gas oil ratio is going to increase. It will continue, and it's a plus. So it has not affected the oil cut at all.
Speaker 11
Thanks for that. Thanks.
Speaker 0
We'll now take our next question from David Deckelbaum with Cowen.
Speaker 12
Good morning, Scott, and welcome back to your first call back as CEO.
Speaker 11
Thanks, Dave.
Speaker 12
Just wanted to follow-up on some of the comments earlier, just so I understand. I know you kind of like hedge yourself on evaluating the water business. Is it your belief at this time that it's just not the timing is not appropriate just given the ongoing build out for the Midland plant that goes online in 2021 or that you believe that the market perhaps just not be amenable to selling right now?
Speaker 2
No, it's neither. Since over the last couple of years, I've seen 2 or 3 companies do saltwater disposal deals. I've seen water infrastructure funds being created. So my goal is to myself and the management team to understand what's out there. If we do decide to monetize, inform our Board and let them know, and we all make a decision.
But at the same time, our goal is to increase third party revenues into our system. And also, we don't really have to do anything because our capital is going down. I wanted to focus on the 300,000,000 dollars of capital on both midstream and water. It's too big a number. Our peers don't have it.
And so a lot of the of our shareholders were taking the $300,000,000 per year and divided it by the number of wells we were drilling and they're adding $1,000,000 to $1,500,000 per well versus our peers. And you can't see it through the efficiencies. It's going to take a long time to see it through the efficiency gains and also through our processing plant arrangement. And so it's best just to go ahead and evaluate moving the midstream out, like I said, by the end of the year And the water is going to come down. And so if someone is willing to come along and pay 20 times some type of cash flow, that's a different story.
But we're not just going to trade dollars and increase operating expense. So it's all about learning really.
Speaker 11
Got it. Thanks, Scott.
Speaker 12
And just had you articulated before the size of the opportunity for long dated inventory that you would be willing to put into DrillCos?
Speaker 2
Yes. The opportunity is probably in the 30,000 acre range to start off with. But as I said, I do not want to take any risk in regard to executing on the main program. And so that's why we're looking at essentially doing a 2 rig deal. And a typical rig spends somewhere between $100,000,000 $130,000,000 per rig per year.
So you're looking at $200,000,000 to $250,000,000 type deal with private equity to get it started. And then if it's successful, then we could add to it over time.
Speaker 0
We'll now take our next question from Charles Meade with Johnson Rice.
Speaker 8
Good morning, Scott, to you and your whole team there. You guys have made really a rapid series of moves to simplify your structure. I mean, the Eagle Ford assets, so you're talking about the midstream assets. And I think that's why everyone's so focused on this water, what happens with the water business. But are there any other pieces that you see or opportunities you see to further simplify or streamline your business?
Or do you feel like you're pretty close to the finish line there?
Speaker 2
No, I think by the end of the year, focusing on facilities and focusing on the midstream sale are really the last two items. And I think water, the goal is turn it into a profit center and making sure that if we keep it long term that we can convince everybody that it's worth keeping and it does lower our operating expense as compared to our peer group. So that's the focus. There's really not anything else that we have. Got
Speaker 8
it. Got it. And then, Scott, this is going back to a couple of times. I think twice you mentioned in the context of your strong balance sheet being able to drill through the cycle if we do get another downturn. And I want to explore a little bit what that means.
Does that mean that at some point if oil prices went back down, you guys would go back into an outspend mode? Or is there some other way we should interpret that, the ability, intention to drill through the cycle?
Speaker 2
No. The goal is to focus on you can take the 15% growth and see where our production grows over the next several years. But we know there's going to be a down or 2 in there. We had one already in late 2014. We have one small one late last year.
And so I think the entire I'm hopeful in regard to the changed mindset of the investor attitude with this free cash flow, more capital back, it's actually a big plus. We need to bring U. S. Shale growth down. And so we don't see the company I was told by several investors, just getting input on this tour, that if we added any rigs at all this year, they would sell the stock.
So I'd like to see that capital discipline by the investors too. So it's helping with the whole world supply demand situation.
Speaker 8
Good point. Thank you, Scott.
Speaker 0
We'll now take our next question from Ryan Todd with Simmons Energy.
Speaker 13
Good. Thanks. Maybe one follow-up first on the water business. You mentioned a focus on adding third party revenue in the water business. Once the Midland plant is up and running in 2021, how much excess capacity would you potentially have or would introducing third party volumes require additional capital investment?
Speaker 2
Yes, right now, I think we'll be moving about 400,000 barrels of water per day. And so we're going to be using all that ourselves. And so we would have to actually increase throughput to be able to offload water. So Joey or Rich, do you all have any comments?
Speaker 3
Yes. The only thing I would say is in that 400,000 barrels per day, it ebbs and flows. And so we'd be creative in how we formulated our contracts so that we could take advantage of downtimes and not affect our operations. So and it's also points of opportunity in different areas where maybe we're not as active in drilling and we've built out infrastructure. We'll have the opportunity to deliver in those areas.
So I think it's a business model we haven't quite worked through the details of, but there's certainly opportunity.
Speaker 4
And clearly, for areas that's adjacent to our existing acreage, so minimal capital to basically them connected, it'll all be adjacent.
Speaker 13
Okay. Thanks. That's helpful. And then maybe a follow-up on the dividend. On the move to a 1% yield, is that should we expect that later this year?
And then I think you mentioned in your comments, you talked about having a dividend yield at the midpoint of your peers longer term. Should we think about that as your peer group is large cap E and Ps or the broader market? And what do you think the right as you talk with investors, what do you think the right comp is in terms of positioning yourselves versus E and Ps or the broader market?
Speaker 2
The first question, I think I already stated that in August, the Board will approve the dividend increase and be a record date late September. So I've already answered that first question. Long term, the midpoint of the peers is also happens to be the same percent as the midpoint of the S and P 500. So that's the long term goal. So if we can get to the midpoint of the peers and the midpoint of the S and P 500 combined with growing mid teens, it will be a stock that everybody has to own.
Speaker 11
Okay. Thanks, Scott.
Speaker 0
We'll now take our next question from Bob Brackett with Bernstein Research.
Speaker 4
Hey, good morning. If private equity can't exit and if cash markets are dried up and if Pioneer has the best G and A and interest expense and the technology and free cash flow, would you consider consolidating the Midland?
Speaker 2
No. There's really no opportunities that would allow us to optimize our portfolio. And so the answer is no. Great.
Speaker 4
Follow-up would be this year, well, 20 eighteen's return on capital employed was 9%. Where do you think that is a year from now? And where do you think it ends up long term?
Speaker 2
Yes. Bob, I thought you answered that. But said at a flat $60 Brent price, we'll be up to mid teens, 15% within 5 years. And at strip price, we'll be up above 20%. Okay.
Appreciate it.
Speaker 0
That concludes today's question and answer session. Mr. Sheffield, I would like to turn the conference back over to you for any additional or closing remarks.
Speaker 2
Again, thanks. We look forward to the next quarter and we'll be out on the road over the next several weeks talking to more of the sell side and buy side. So again, we appreciate all your comments. Thank you.
Speaker 0
And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.