Pioneer Natural Resources Company - Q4 2020
February 24, 2021
Transcript
Speaker 0
Welcome to Pioneer Natural Resources 4th Quarter Conference Call. Joining us today will be Scott Sheffield, Chief Executive Officer Rich Daily, President and Chief Operating Officer Joey Hall, Executive Vice President of Operations and Neil Shaw, Senior Vice President and Chief Financial Officer. Pioneer has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the Internet at www.pxd.com. Again, the Internet site to access the slides related to today's call is www.pxd.com.
At the website, select Investors, then select Earnings and Webcasts. This call is being recorded. A replay of the call will be archived on the Internet site through March 22, 2021. The company's comments today will include forward looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospects of Pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward looking statements.
These risks and uncertainties are described in Pioneer's news release on Page 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 and Chief Financial Officer, Neil Shah. Please go ahead, sir.
Speaker 1
Thank you, Orlando. Good morning, everyone, and thank you for joining us. During today's conference call, we will be discussing our strong Q4 results in addition to providing our 2021 outlook, detailing our strong financial position and discussing the initiation of our variable dividend policy. We will also include an update on the synergies we are achieving through our Parsley transaction and our significant ESG momentum with new goals and targets set at the end of last year. After that, we will open up the call for your questions.
So, with that, I'll turn it over to Scott.
Speaker 2
Thank you, Neil. Good morning. We're going to start off on slide number 3. We had very, very strong free cash flow generation of approximately $300,000,000 driven by strong production low CapEx due to continued efficiency improvements from the operational teams at all levels. We're announcing our formalized long term variable dividend structure, which we have several slides, and we'll be returning up to 75% of post base dividend free cash flow to shareholders, and we'll give you some examples later on, significantly improving return of capital to shareholders.
We'll generate significant free cash flow generation of approximately $2,000,000,000 expected in 2021 at $55 WTI. Currently, the strip is about $60 WTI, so we hope to beat that, driven by peer leading corporate breakeven in the high 20s per barrel range. Synergies from Parsley acquisition are exceeding previous guidance, especially on a recent bond deal, interest savings additional $25,000,000 and we expect to achieve better savings on G and A as we go into the 2nd and third quarters. We expect the synergies there of about $100,000,000 We also expect to realize our full operational synergy run rate of $150,000,000 per year by year end 2021. Rich will talk more give more detail about that and fully benefiting 2022 and thereafter.
We remain focused on environmentally responsible operations with new emission reduction goals announced during our Q4 2020 with the release of our comprehensive sustainability report. Going to Slide number 4. Our execution continues to remain strong. Both total production and oil production in the upper half of our guidance ranges for both Q4 and for full year. We generated $700,000,000 in free cash flow despite averaging $39 WTI oil price during 2020.
In addition, we're continuing to gain on lease operating expenses. They were down 15% from 2019 levels. Going to Slide number 5, our outlook. In 2020, obviously, many E and Ps experienced year on year production declines. Pioneer continued its trajectory of strong performance, setting up a robust 'twenty one and especially going into 'twenty two.
As seen on Slide 5, we're expecting to generate approximately $2,000,000,000 in free cash flow at $55 WTI. Again, the strip is about $60 so we hope to beat that. Our 2021 production outlook was impacted by the harsh winter weather encountered across the state of Texas last week that left 1,000,000 without power for an extended period of time. Our 2021 production outlook reflects these impacts, which amounts to approximately 8,000 barrels of oil per day on a full year basis, a little above 2% of our total oil production. With our announced CapEx range of $2,400,000,000 to $2,700,000,000 we're expecting to produce between $307,000,000 $322,021,000 which includes the impacts of the winter storm and also excludes 11 days of parsley production from January 4 through January 11 prior to the close.
Our current production trajectory will drive strong exit to exit growth of approximately 8%, which sets up a very highly capital efficiency 2022 beyond. Going into Slide number 6, the framework for the variable dividend and discuss more detail over the next several slides. TopTier inventory supports a low maintenance capital breakeven price of about $29 per barrel. And as you look, our maintenance capital is about $2,000,000,000 now with both companies combined together. At $55 oil, the 2021 plan generates $2,000,000,000 of free cash flow, that's WTI.
As I said already, the strip is about $60,000,000 for the rest of the year, allowing for substantial return of capital to our shareholders via a base and a variable while concurrently further strengthening our balance sheet. Going to Slide number 7. We've been talking about this for 18 months. We've been exploring it with shareholders, both long term and short term for about 18 months. We're happy to announce the initiation of our variable dividend policy, which significantly enhances our long term shareholder returns.
Specifically, after the base dividend is paid, we expect up to 75% of the remaining annual free cash flow to be returned to shareholders in the form of variable dividend, which we paid out quarterly the following year. To further strengthening Pioneer's balance sheet, which we think is critical and has been critical long term for us, the 2022 variable payout will be up to 50% of the 2021 postpaid dividend free cash flow. We believe that a strong capital return strategy, one that encompasses a stable and growing base dividend, paired with a significant variable dividend, presents an attractive value proposition for our shareholders. Now I'm going to go into some mechanics for 'twenty one and 'twenty two to make sure it's clear. In 'twenty one, let's assume we do generate the $2,000,000,000 of free cash flow.
We have a base of about $500,000,000 We're left with $1,500,000,000 We're going to split that fifty-fifty for 'twenty one payable in 'twenty two. So 750,000,000
Speaker 3
dollars will be for the
Speaker 2
variable and $750,000,000 will go to debt reduction. The $750,000,000 will be split equally into 4 equal payments paid in the quarter each quarter. It will be offset, it will be a different part of the month of that quarter. So we want each shareholder receive 8 checks a year from Pioneer. The estimated dividend yield based on current stock price is about 4.5% when you add the base plus the barrel.
Let's go to 2022. Right now, at the current strip, we expect to generate about $3,000,000,000 of free cash flow. Take away about $500,000,000 for the base, you're left with $2,500,000,000 Now we split that $75,000,000 That's $1,900,000,000 as a variable and $600,000,000 for debt reduction. That equates to the current stock price to a 7.5% dividend yield. We hope that is clear as we move forward in 2021 and 2022 on those examples.
Going to Slide number 8, our long term thesis. We've had this slide before, it remains the same, remains focused on driving free cash flow generation and creating significant value for shareholders. At the current strip, our long term reinvestment rate is 50% to 60% of cash flow, which supports a program that delivers approximately 5% annual growth, adding 1 to 2 rigs per year long term. We expect this framework to generate approximately $16,000,000,000 of free cash flow during 'twenty one through 'twenty six at $52 WTI, which is greater than 50% of our current market capitalization. We believe this differentiated strategy positions Pioneer to be competitive across all sectors and a leader within our industry.
Let me now turn it over to Rich.
Speaker 4
Thanks, Scott, and good morning. I'm going to start on Slide 9. And with the combination with Parsley, we are the only 100% focused Permian E and P of size and scale. You can see from the map that on an underlying basis, we have a footprint of about 920,000 net acres with a substantial inventory of high returning wells and importantly, 0 exposure to federal land. Looking at the specifics for the 2021 plan, we plan to run on average 18 to 20 drilling rigs and 5 to 7 frac fleets.
As you can see in the bar chart there, we are continuing to move towards larger pads, which helps drive efficiencies and can be applied to the parts of the acreage position. Other than the larger pad sizes in 2021, our development plan in 2020 is very similar in both lateral length and well mix compared to the 2020 program. As Scott mentioned, the winter storm last week did impact our production by approximately 30,000 barrels of oil per day. The vast majority of this production is back online and we expect to see the remaining production back online in the next week or so. I would like to take this opportunity to thank all of our employees and especially our field employees, supply chain team and our service company partners for all their efforts to restore production and resume drilling and completion activities.
They have done a terrific job, while many of them have been dealing with their own personal home repairs from being without power and having broken products. So I'll personally thank everyone for the hard work and most importantly for doing it safely. Turning to Slide 10. You can see we are increasing our initial Parsley synergy target from $325,000,000 annually, as Scott mentioned, to $350,000,000 In January, we completed the refinancing of the Parsley debt and saved on an annual basis $100,000,000 of interest, exceeding our target of $75,000,000 by $25,000,000 In aggregate, post the refinancing, this lowered Pioneer's overall average coupon interest rate to approximately 2%. We expect to realize the G and A synergies of $100,000,000 in the first half of the year and we're well on our way towards that.
On the operational synergy target of $150,000,000 we expect to achieve that by year end 2021, which will drive a recurring benefit beginning in 2022. To give a little color on the work in progress, we are in the process of optimizing our field production operations given the adjacent operations in the Midland Basin. We are consolidating our supply chain activities and we're looking at further capital efficiency improvements associated with tank batteries, water systems and water disposal systems, just to name a few of the initiatives underway. And Scott will discuss as well achieving these synergies as part of our 2021 compensation incentives. If you look at the right side of the page, you can see these synergies when coupled are coupled with our unmatched inventory of high return wells, which supports our free cash flow model.
Turning to Slide 11, controllable costs. We are continuing our journey to reduce our controllable cash costs. You can see here we've decreased them 23% in 2020 and expected to decrease them another 8% or so in 2021. These costs are comprised of cash interest, which I just mentioned being now to low average cash cost of 2%. The second component is cash G and A, which we expect to be around approximately $1.20 per BOE in 2021.
And then thirdly, our industry leading horizontal LOE costs. We won't stop here and we expect this trend to continue to improve through time. So with that, I'm going to stop here and turn it over to Neil.
Speaker 1
On Slide 12, you can see Pioneer's premier asset base position positions us only E and P to have a corporate breakeven below $30 a barrel WTI within our peer group, enabling Pioneer to have a low reinvestment rate and drive significant free cash flow generation. This low breakeven price reflects the quality and the resilience of Pioneer's portfolio underpinning our operational and financial strength. In addition, our unmatched high quality asset base has no exposure to federal lands. Turning to Page 13, to the right, you can see the graphic that demonstrates our best in class breakeven price with our low leverage that supports substantial return of capital to shareholders as well as providing Pioneer both operational and financial flexibility. We witnessed the benefits of our strong balance sheet during the downturn in 2020 and it was Pioneer's strong financial position that facilitated the refinancing of Parsley's debt from an average coupon of greater than 5% to an average coupon of less than 1.5%, driving our interest savings synergies of $100,000,000 that Rich discussed earlier.
With our investment framework, our net debt to EBITDA will continue to trend lower, while concurrently returning significant capital to shareholders through our base and variable dividends, creating value for shareholders while bolstering our fortress balance sheet. With that, I'll turn
Speaker 4
it over to Joey.
Speaker 5
Thanks, Neil, and good morning to everybody. I'm going to be starting on Slide 14. We came off our best year ever in 2019 and the drilling and completions teams committed to demonstrate similar gains in 2020. And the graph on the left shows they delivered on their promise. The chart on the right hand side illustrates the significant progress also made in reducing our facilities cost.
Our construction and operation teams partnered together to decrease the initial cost of our facilities by 40% since 2018. All of this has been accomplished without compromising our commitment to safety and protecting the environment. To the contrary and most importantly, we improved on all safety metrics in 2020. These gains would not have been possible without the hard work of our entire staff, supply chain team and great collaboration with our suppliers and service companies. Add in the complexities introduced by the pandemic and this has been a truly remarkable year by any measure.
Now moving on to Slide 15. Often get asked what's driving all of these improvements. We're certainly very proud of the engineers and field staff that have worked hard to make these gains possible, but they did so in partnership with extensive data set to make better decisions and to leverage technology. This represents a very small subset of examples in different areas where we have used advanced analytics and technology to improve performance. Just a few examples as I move from left to right on the slide.
By creating digital twins of our drill strings, we can use predictive analytics to push the performance envelope and reduce failures. Machine learning has allowed us to reduce costs by optimizing our proppant and fluid systems without compromising the deliverability of a stimulation or well performance. Mobility projects have allowed us to put more applications in the hands of our field staff to ensure they have convenient access to the information they need to perform their jobs and minimize driving time and improve uptime. And to further progress our best in class emissions performance, we are deploying various sensor technologies that will allow us to detect emission events in real time and reduce cycle time for repairs. Ultimately, we are using our vast data set and the best available technologies to create more value while improving safety and environmental performance.
Coming into 2021, our teams remain committed to keeping our people safe, reducing our environmental footprint and demonstrating top performance when compared to our peers. Congratulations to the entire Pioneer team for their contributions to our safe and efficient execution in 2020. And I'll now turn it back over to Scott.
Speaker 2
Thank you, Joey. Starting off with Slide 16, developing low emission barrels. I think being in the Permian Basin and the actions that we have taken as a company, we are at the lowest, one of the lowest CO2 emissions per BOE produced worldwide. This is an interesting chart that we have found. It's essentially all state owned, all companies, majors, large independents.
So it's the largest global operators in the world making up over 64,000,000 barrels of hydrocarbon liquids per day. Pioneer's operations produced barrels with 1 of the lowest associated CO2 emission intensity globally. Our low cost, low emissions barrels continue to be desired around the world. Jumping to Slide 17. We continue to make changes in our executive compensation going forward.
One of the first things we've done, we did this last year, was tie myself, the CEO, for 100% on any LTIP based on performance. So it's all based on performance. So Pioneer has performed for myself, the CEO, to be paid anything long term. We started that program last year. Right now, we're the only company that is doing this.
Most CEOs average about 51% in the S and P 500. We added the S and P 500 index into our PSR peer group beginning in 2021. We've also added some new goals and increased some goals. We increased ESG and HSE from 10% to 20%. We have now ROCE and Croce, capacity rating of 20%.
And last year, we did remove any production and reserve goals going forward. As Rick mentioned, we do have 20% in strategic. He mentioned that in that strategic, we do have to achieve our partially synergies to make that number work on any annual incentive in that regard. Going to Slide 18, strong focus on ESG. Pioneer continues to hold all pillars of ESG of great importance.
Our new sustainability report was released last quarter and reflects our significant strides in reducing both Scope 1 and Scope 2 greenhouse gas and methane emissions. It incorporates emissions intensity reduction goals on both. Inclusive of Parson, we have a very low flaring intensity of 0.7% compared to the peers average of 1.4%. We continue to promote a diverse workforce, which reflects community in which we live and work. Finally, on the last slide, number 19, we're committed to driving value for our shareholders and we're looking forward to finally commencing with our variable dividend structure.
Again, thank you. We'll open it up now for Q and A.
Speaker 0
Thank And we'll take our first question from John Freeman with Raymond James. Please go ahead.
Speaker 6
Good morning, guys.
Speaker 2
Hey, John.
Speaker 6
I appreciate all the extra detail, Scott, on the variable dividend policy. And I just wanted to make sure just to clarify a few things. So when we think about like long term, the strategy to distribute up to 75% of the prior year's free cash flow after the base. And then, but this 1st year, it will be basically up to 50% of the 21 free cash flow to the base. Just maybe sort of how to think about in any given year, how you all are deciding between, if it's 50% or 75%, obviously your leverage metrics are already really low, but just if there's anything that we should be thinking about how you all are kind of coming to that conclusion?
Speaker 2
Yes. I think, first of all, John, we used the word up to to give us flexibility. Our goal all along is to pay 50% for this year and 75% of the free cash flow for 'twenty two and beyond. We do up to simply because of the volatility nature of our industry and of the commodity prices. So our intention, true intention, is to do 50% 75% long term.
That's our goal. And at some point, I didn't make this point, but if you look at the numbers over 6 years, our debt to EBITDA targets are even getting better than 0.75. We actually after a 6 year time period, we get our debt essentially down to 0. So at some point, the Board will reopen whether or not we continue at 75%. We could go higher because at some point, if we have no debt and no balance sheet.
And the reason we're doing that, as you have heard me talk, we're not a firm believer of buying back stock annually long term. But we think when you have extreme downturns like we experienced last year, I wish we had the firepower to buy a lot of stock at $50 So we'd like to have a great enough balance sheet to go into any future downturns to be able to buy back stock at 1 third of the current price. And so you'll see our balance sheet get better and better over time. We just think it's better to have a great balance sheet due to the volatility of our industry. So I hope that helps.
Speaker 6
That does. Thanks. And then just a follow-up on how to think about the operational synergies, which
Speaker 3
I know a good bit of these
Speaker 6
you have talked about would really occur in the second half of twenty twenty one. But as we think about sort of the different synergy kind of levers, let's say, whether it's sharing the tank batteries, water infrastructure, some of the continuous acreage, Maybe just some additional details on sort of which of those you're able to kind of realize pretty quickly versus those that may take later on into the year to fully realize?
Speaker 4
Yes, John. I think the field optimization in terms of just the operational side and the production side are things that we'll capture quickly. The supply chain stuff are things that I think we'll capture quickly in terms of just leveraging our suppliers and maximizing our best contracts. So I think those are the easier ones. I think as we've talked about the integration capital that we have in the budget, connecting the water systems, getting the disposal systems connected and optimizing the tank battery, those will take a bit longer.
So those are probably more second half related into 2022. So I think that's really the timing of those things of what comes first and what kind of comes later.
Speaker 6
Thanks. I appreciate it. Well done, guys.
Speaker 7
Thanks.
Speaker 0
And up next, we'll hear from Brian Singer with Goldman Sachs. Please go ahead.
Speaker 8
Thank you. Good morning. Good morning, Brian. My first question is with regards to the reserve report. You had a substantial upward revisions in natural gas and NGLs.
You had downward revisions to oil. I realize there may be price adjustments driving some of this. I wondered if you could comment on the drivers of the reserve report and your revisions beyond price. And what implications, if any, there are for Pioneer's production mix in the area and the ratio going forward as wet gas growth to oil growth?
Speaker 4
It? Yes, Brian, great question.
Speaker 2
I think as
Speaker 4
you mentioned, clearly oil prices were a driver, which I'll get on to the NGL and gas ones. But as you know, oil prices, I guess, using the SEC pricing was down 30% from 2019 to 2020 and start from $56 WTI down to about $40 WTI. So that's really driving the negative revisions on oil for the most part. When you look at the positive revisions that we're seeing on gas and NGL, it's really coming from a couple of things. One is just our enhanced completions continue to improve our fracture networks.
And so that's leading to better recoveries from the wells, not only on oil, but NGLs and gas as well. We've also seen improved infrastructure out there and so better capacity, which has reduced line pressures to allow more gas to flow and therefore added more NGL and gas reserves. So if you kind of strip those out, that F and D that was in the low 4s, probably even closer to $7 And so I think that's kind of the background of what the reserve changes were during the year. And I think in terms of long term, you're thinking in terms of long term mix, I think we've been running in that, call it, 57%, 58% range on oil, and we still anticipate that to be longer term at this lower growth rate to be the right level.
Speaker 8
Great. Thank you. And then my follow-up at risk of, Scott, of asking a question that I think you've been asked a few times over the last couple of months. When you think about where production this year is going to exit, I think you said it could be up you might have said up about 8% to 8%, but something that's above the 5 percent threshold. The plan when you announced it, you had some materially lower oil price views than where we're at today.
And I just wonder if how you're thinking about that flexibility into 2022 and the torque between growing at an above 5% rate versus reducing or potentially reducing activity to increase free cash flow and stick within the 5%?
Speaker 2
Brian, I still are we're committed to the long term growth rate starting in 'twenty two and beyond of about 5%. Some years we may be 6% or 7%, some years we would be 3% or 4%, and unless we get into another extreme downturn, we had the flexibility to go back to 0 growth like we did in 2020 or 2021, too. And so we're not going to let the growth rate jump up. If it turns out we're achieving, if Joey and his team continue to achieve great capital efficiencies and looks like we're going to grow 8% to 10% in 2022, we're going to dial back to capital going into 2022.
Speaker 8
Great. Thank you.
Speaker 0
And next, we'll take a question from Jeanine Wai with Barclays. Please go ahead.
Speaker 9
Hi, good morning, everyone. Thanks for taking our questions. Thank you. I think just following up on Hi, good morning. Just following up on the response to John's question, you mentioned getting to net zero and I think sorry, net zero, getting to net debt being 0 and I think you said 6 years.
And at what point do you consider the company to be under levered? Is it at 0 net debt? Is it at 0.5, 0.25? So how are you thinking about that level?
Speaker 2
I mean, at this point in time, seeing 3 downturns in 11 years, to me, I just think it's better to have the best balance sheet in the business. It gives you so much flexibility. We have choices like I gave one choice. We have 0 debt and we can buy back stock in extreme downturns. If the Board wants to continue a high variable dividend for a year or 2, even though our free cash flow may not be as strong, they have that flexibility.
So it gives you so many more choices. Sticking around, I mean, we thought we had a great balance sheet for 'twenty and we were even afraid to buy back our stock at $50 So we had no idea how long the downturn is going to occur. So I just I've gone through probably been through more downturns than any CEO out there. And I just think it's better to have a great balance sheet and even better balance sheet. So we have the flexibility also, as I said, to take the 75% up higher, the board does, to 80% or 90% or 95% or 100%.
So we just yes, so many more choices when you have even a better balance sheet than debt to EBITDA of 0.75%. So we don't have a stated target. I prefer to have eventually at some point in time, 0 debt would be my ideal target.
Speaker 9
Okay. Options are good. We like that. And then my follow-up is just on hedges. And so how does your new kind of net debt projections, how does that factor into your hedge philosophy going forward?
Could we see less hedging because I know we're kind of walking a fine line here in some respects, but generally, hedges are for risk protection, balance sheet protection. And generally, we see companies with the better balance sheets having less hedges. So that reserves some more upside because you have the balance sheet for protection. So just wondering if your hedge philosophy is evolving going forward as well. Thank you.
Speaker 4
It's still
Speaker 2
evolving. The big change, we used to spend 100% of our CapEx. Now, we're only spending 50% to 60 percent of our cash flow as CapEx. And so, that's a big change. We may hedge.
We may limit it just to protect that going forward. We may hedge enough to protect the base dividend. But because the market is an extreme, the way Saudi and OPEC has engineered this latest rise, it's an extreme backwardation. And the volatility and the less liquidity in the market makes it tough to do any floors, to do any collars. So when you used to be able to do a collar on each side of the strip, dollars 5 on each side or $10 So they give you very little upside anymore.
So it's really as long as it's in extreme backwardation, we'll probably see us do less hedging. And then lastly, the variable dividend is something that's going directly into the shareholder base. So if we try to hedge that guess, it's a direct reflection on what happens to that variable dividend. And so I'm going to guess long term, we're probably going to do less. But at the same time, we continue to see spikes or the backwardation is taken out of the market, you may see us do a little bit more.
So we're going to remain opportunistic.
Speaker 9
Very helpful. Thank you.
Speaker 0
And our next question comes from Arun Jayaram with JPMorgan. Please go ahead.
Speaker 3
Yes. Good morning. Scott, Rich, I was wondering if you could maybe help us better understand the shaping of the 2021 production and CapEx profile, just given some of the weather disruptions that you highlighted? And we're estimating based on that 8% exit rate, is that around 3.35 oil for 4Q. So just a minute, if you could walk through the progression?
Speaker 4
Yes, Arun. I think when we look at it, setting aside the Q1 because of the weather impacts, we had said that it was going to be more towards the back end just because of the rig ramp that started late last year and just takes 180 days to kind of do that. But I think as move into the Q2 through the Q4, it is a ratable increase in production over that 3 quarter time period. And I think your exit rate is in the ballpark, it may be slightly higher than that, but it's in that zip code. And then on capital, I think we were pretty good about getting the activity to eat those average rig and frac fleet rates starting in January.
So I would think your capital is pretty ratable throughout the year. So I think really from a perspective of that, it's ratable on capital and ratable Q3 or Q2 through Q4 on production.
Speaker 3
Great, great. And just my follow-up, one of the questions that's kind of come in, Pioneer obviously delivered on legacy in terms of the
Speaker 2
Q4, but some of the parsley volumes
Speaker 3
as you 8 ks a few weeks back were a little bit light of what the market was thinking. Have you done a bit of a postmortem there? Any conclusions there regarding the Parsley 4Q performance?
Speaker 4
Yes. A couple of things. 1, they sold their Big Tex acreage that had about 1400 barrels a day of oil production associated with it. So that was one piece of it. And then I think the other piece of it was just reduced activity.
They just didn't get the activity started back up on the frac fleet quick enough. And so they had a limited number of pops in the Q4 relative to what they had in Q3. And so it really was just production just didn't come stay at that level given the decline. And so really that's our assessment of it was just really driven by activity levels, but the well performance has been fine. It's nothing that didn't that.
It just was activity.
Speaker 10
Got it. Got it.
Speaker 3
And that's all baked into your updated forecast, right?
Speaker 4
That's correct, Arun.
Speaker 3
Okay. Thanks a lot, guys. Sure.
Speaker 0
And next question will come from Charles Meade with Johnson Rice. Please go ahead.
Speaker 11
Good morning, Scott, to you and the whole team there. I apologize for belaboring this point a little bit, but on again the shape of the 2021 kind of production curve, it looks to me like you guys are going to have obviously there's going to be a big bounce back and it's not really a valid comparison to go 2Q versus 1Q because of all the weather downtime. But it looks like in the back half of the year, you guys are going to be showing 3% to 4% sequential quarterly growth. Is that kind of close to what you guys are looking at internally?
Speaker 4
It seems a little high to me, but just because I think the exit to exit as Scott talked about was kind of 10%. So it seemed to be flat, but in general, I mean, it's directionally in the right place.
Speaker 3
Got
Speaker 11
it. Thank you for that, Rich. And then my second this isn't really a new one for you guys, but it's highlighted again by the 5% CapEx allocation to the Delaware. That's again, it's not new. That kind of seems like it either needs to grow or as a percentage term or you guys would be sellers.
So can you offer us any kind of refresh to your thinking on how the Delaware is going to play in your asset portfolio longer term?
Speaker 4
Yes. I think, Charles, as we've talked about before, Delaware acreage is very attractive for a number of reasons. The higher oil cuts that's there, we have a high NRI, and we've got good infrastructure over there. So really the 5% for 2021 is really driven by the program that Parsley had outlined early in the year. And so we were looking at that program.
Given the run up in oil prices, the economics are very favorable for the Delaware. And so we'll look at how do we back half of the year or into 2022 reallocate capital from Midland over to the Delaware. So we're still extremely pleased with that acreage and look forward to developing it as we get a chance to get our hands on it and move forward.
Speaker 0
And our next question will come from Scott Gruber with Citigroup.
Speaker 3
Yes, good morning. First question here on LOE. Will the storms have any material impact on 1Q LOE? And then as production normalizes in the 2Q, full contribution from Parsley. How should we think about LOE in 2Q in the second half?
Are there any extra production costs early on as you integrate Parsley that's not captured in the incremental CapEx and if so, how those roll off?
Speaker 4
Yes. I think if you look at our LOE guidance for the Q1, we did adjust that up about $0.25 a BOE just to take into account the repairs that we're seeing on they're minor in the grand scheme of things, but repairs on our wells and facilities due to the storm. And so we did factor that into our Q1 guidance range. And so if you take that range and back it down by $0.25 per BOE for the Q2 and beyond, that will give you a good guidance range.
Speaker 3
Got you. And any incremental possibility should you think about kind of rubbing beyond the incremental CapEx that landed production early on the portion?
Speaker 4
No, I don't think so, Scott. I think that we wouldn't anticipate any.
Speaker 3
Got you. And then just a follow-up here on Simulfrac. A few of your peers have gotten excited about the technique and the opportunity to drive another leg here of completion efficiency gains. Can you talk about your interest in the technique and potential deployment?
Speaker 5
Hey, good morning, Scott. This is Joey. We actually just finished our first simul frac right before the winter storm hit. Great success there, and we have plans to do more as the year goes on and then feather them into our operations over time.
Speaker 3
Got you. And any color on kind of rates of efficiency improvement or savings on the D and C side in your first program?
Speaker 5
Yes. From a of course, we just completed it, so I don't have all the assessment on the cost side. But from a time perspective, we did reduce the typical time that we would take to do a 4 well pad by about a third. So significantly reduced the amount of time on location. So we'll continue to evaluate that.
We'll get a look at what the cost savings were, which of course will be material. And then we'll continue to evolve that into our operations.
Speaker 3
Got it. Appreciate the color. Thank you.
Speaker 0
And up next, we'll hear from Doug Leggate with Bank of America. Please go ahead.
Speaker 7
Thank you. Good morning, everybody.
Speaker 12
Scott, first of all, I think
Speaker 7
what you've laid out this morning is really pretty prescient. So congratulations on the framework. I'm sure Mr. Shah has got his fingerprints all over this. So congratulations, guys, on laying this out.
My question is really a couple of things about the longer term. You've talked about 5% plus as a growth trajectory. I just want to make sure that, that hasn't changed with the 75% of the free cash beyond the dividend because it's probably a bit more than market is expecting. I'm just wondering what that means then from the 5% plus? That's my first question.
And my second question is, I wonder if I could press you to think more about that. You used to talk about a 5 year view from a capital and activity standpoint. I wonder if you can give us some thinking as to what that would look like in terms of rig activity and spending? Because obviously, you talked about 2020, but we think what the CapEx on this is probably going to be back. So 2 questions, 1 on the 5% cost and 2 on the longer term trajectory.
Thanks.
Speaker 2
Yes, Doug. The second part I've talked about already, but I'll go over it again. But the first part, when we say 5% plus, we're just leaving the flexibility. We can't get 5% exactly. Some years we may be 6%, 7%, some years we may be 3% or 4%.
So our goal is really at average 5 on the production growth. If we go through down periods, I gave examples of low oil prices like we did last year, We're going to be flat growth. And so the goal is really not to exceed 5, but we do have to have the flexibility based on rig cadence and pop cadence to have that flexibility some years to go to 6 or 7, but some years we may be 3 or 4. And so I stated, I think, a couple of the analysts have already asked me about 'twenty two. So if it looks like we're going to be too capital efficient going into 'twenty two and we're going to hit 8% to 10% production growth in 'twenty two, we'll reduce capital to get it back closer to 5% or 6%.
So hopefully that answers your question. So the target is really high for long term. In regard to long term, I gave out some numbers going out the next 6 years and I've seen some other projections by sell side. Over a 10 year time period, we basically will throw off enough free cash flow that's equal to our current market cap. At current strip, that $52,000,000 $51 WTI or $55 Brent over a 6 year time period is $16,000,000,000 dollars And so that $16,000,000,000 will be paying out about 75% of that as a variable and 25% actually goes toward debt reduction.
And so that's why I made some comments about our debts actually going to be going down over the next 6 years to almost 0 after a 6 year time period for the reasons I gave. So I'd rather have a much better balance sheet. It gives us more options in regard to whether we buy back stock during extreme down periods like we had last year at $50 are examples where we want to pay a higher variable than our free cash flow during a given year. And also, as I also gave the optimism that as our debt moves towards 0, that we could increase the 75% up to a higher amount, obviously, up to 90%, 95% or 100% of free cash flow. So hopefully, we're trying to give the Board various options and flexibility, obviously, in this fluctuating commodity price market.
Speaker 7
Yes. I apologize, Scott, if I missed some of the nuances. But just to
Speaker 10
be clear, I'm trying
Speaker 7
to get a rig trajectory or maybe a port trajectory that goes along with that.
Speaker 10
Maybe that's too detailed in the offline.
Speaker 2
Yes. We added yes. Okay. Yes, we added I said in one of my earlier statements on one of my slides that we're going to our long term is that we're adding 1 to 2 rigs per year. So long term, you can figure adding 1 to 2 rigs per year long term from the current 18 to 20 rigs.
Speaker 4
Maybe just a 5% growth.
Speaker 7
Got it, Neil. Got it. Thank you. That's really helpful, guys. So maybe just a quick follow-up then.
Does your hedging philosophy change as with such a robust balance sheet and let's say, off the rest of the oil price seems to be the growing consensus. How do you think about hedging that even there? Thanks.
Speaker 2
Yes. We're only spending about 50% to 60% of our cash flow now. So we don't need to protect the CapEx as much as we needed to before. We do have a great balance sheet. The market is in extreme backwardation due to liquidity, less liquidity, the volatility of the market.
We can't get any upside on collars or freeways anymore. So you'll probably see us do less hedging for that reason. But if we see any type of spikes, we'll probably go into the marketplace. So we're going to be opportunistic, obviously. But the market is strong.
I'm still a strong believer. The demand is going to come back strong, both on airlines and also driving around the world once we get herd immunity. So, and I'm confident that we can absorb the Iranian barrels into the marketplace over time and that U. S. Shale is no longer going to be a threat to OPEC and OPEC plus
Speaker 0
And our next question will come from Neal Dingmann with Truist Securities. Please go ahead.
Speaker 12
Good morning, Scott or Neil, maybe I missed this. Could you talk a bit around just Scott, you just were talking about even that tenure about what the potential could be on the variable. What and you've talked about, I know, been pretty specific about the production growth. Can you talk about the dividend, the base dividend growth, kind of what will that just continue to flow with the other overall growth? I just want to make sure I'm clear with how you are sort of assuming that base dividend growth as with conjunction with the variable?
Speaker 2
Yes, it will be a small increase every year is our goal. So it will be minimal. It will be something from something minimal, in that 1% to 3% range is our expectations.
Speaker 12
Got it. Got it. And then Scott, sort of you, Rick or Jillian, just wondering on what you saw or experienced with this, the outages production downtime that you saw around the storm. Have you all started or will you think about or thoughts about permanent structural changes or anything around either, I don't know, if it's just infrastructure or tank battery, you sort of name it. Are the things that you've started or would think about doing to I know obviously here in Texas doesn't happen to us quite often, but just your thoughts about if there's things that you could do to, I don't know, better prevent that going forward?
Speaker 4
Yes, I think we'll take lessons learned from it and see what things happen. But in general, it was such a 50 year event or 100 year event, whatever you look at it. We still want to be capital efficient about it. And so we'll have to assess that. So not a no decisions today, but we'll definitely look at it just from lessons learned.
But I would say that given the freak nature of it that at this point we don't see any substantial changes that we would make.
Speaker 12
And everything is back online now?
Speaker 4
Not 100%. We've got the vast majority back online. Probably in the next week or so, we'll get the rest of it.
Speaker 8
Very good. Thank you.
Speaker 3
Sure.
Speaker 0
And next question will come from Derrick Whitfield with Stifel. Please go ahead.
Speaker 1
Thanks and good morning all.
Speaker 4
Perhaps for Scott or Lars, one of your peers recently committed to a plan offset Scope 1 emissions through direct investments in CCS and or renewable projects. From an ESG perspective, could you comment on the company's desire to pursue something similar to this as a means to offset direct carbon emissions from your operations?
Speaker 2
Yes. In general, we're evaluating what companies like that and another company like Oxy is doing on carbon capture long term. We're assessed a couple of our also peers have stated they have ambitions. They use the word target and ambitions go to net 0 by 2,050. So we're assessing that also.
So we're assessing everything. Everything is on the table in regard to getting better and better. And then we'll have to see what the Biden administration does with their upcoming climate after the stimulus gets passed. They're going to focus on infrastructure and climate next. And so we'll have to evaluate that also.
So everything is on the table in that regard.
Speaker 4
Makes sense, Scott. And for my follow-up perhaps for Julie, referencing Slide 9, as you think about the progression of your D and P operations with regard to pad size and lateral length, can you comment on where you feel the efficiency limits are today and how this slide looks 2 to 3 years from now?
Speaker 5
Specifically on pad size and project size, I would say that I wouldn't expect that to continue to increase. But certainly from a consistency perspective as we do more co developments and full stack developments more so and more so that we'll continue to have on average more wells per pad. From an efficiency gain perspective, as I said in my comments, I would have never expected for us to basically achieve on 2020 what we've done in 2019. And then continuing on my other comments that the benefits of technology are having significant improvements. The thing that I would say that's different now is that there aren't very many big wins to be had.
Simulfrac may be a big win. But for the most part, when I look at the waterfall charts, it's lots of small incremental wins that add up to significant improvement. So we're certainly not finished on that journey and we'll continue to work at it relentlessly to continue to drive our cost structure lower and lower.
Speaker 4
Very helpful. Well done, guys.
Speaker 3
Thanks.
Speaker 0
And next we'll hear from Bob Brackett with Bernstein Research. Please go ahead.
Speaker 13
Quick question and then maybe a little slower one. The quick question, what is the timing of the decision on the variable dividend payout? So if we're sitting in 1Q of 2023, is that when the decision is made about the free cash flow payout from 1Q of 2020 2, for example?
Speaker 2
Yes. Bob, this is Scott. We generally have our Board meetings in late January or early February, early to mid February. And that's generally when we discuss increasing the dividend and that's when we would make the final decision at that point in time. So you're correct.
Speaker 4
Yes, that's
Speaker 13
clear. The second is, the trade off between the variable dividend and share buyback. So you clearly expressed eagerness to buy back shares sitting in the middle of last year, let's say. At some point, the shares are valued to the point where buybacks make less sense and the variable dividend makes more sense. Do you use an internal NAV to make that decision?
Or is what sort of thought process would go into that?
Speaker 2
Well, first of all, I've talked to over 100 shareholders over the last 18 months and I would say 99.9 percent preferred that they would long term, they would prefer us to pay a variable dividend versus buying back any stock. That's long term in buying stock year after year. As you know, the industry has a terrible track record of buying back stock at the top of the market. And so people that are talking about buying stock now, we're back close to maybe at top of the market. And so that's the wrong kind of me buying.
And so everybody's in favor of a great balance sheet if you can afford it to buy back in those dips. We had a chance to buy back at $50 last year. We didn't have great enough balance sheets. So that's generally our feelings long term, buy it back only during those downturns and not buy back shares and then focus on the variable dividend as the best way that we're going to return capital long term. Okay.
Very clear.
Speaker 13
Thank you.
Speaker 0
And up next, we'll take a question from Paul Chen with Scotiabank. Please go
Speaker 10
ahead. Thank you. Good morning. First, Scott and the team just want to compliment you guys that for we see the temptation just spend all the free cash and put some on the balance sheet. I think it's the right thing for the E and P industry for all companies in the when you have excess cash flow to put into the balance sheet and at some point that get you to net 0 on the net debt.
Anyway, two questions. First, with the lower growth rate that you guys are targeting now, you have a great inventory backlog. So does that make sense that for you to look at some of the really long data inventory that it may take you 20 years from now before you get to trying to either monetize it through sell it or that through joint venture at someone else to develop and you receive the royalty or some of the form? The second question is that Yes.
Speaker 7
No. Yes. Yes.
Speaker 2
Go ahead. Go ahead. Okay. I generally can't remember 2 questions. So it's better to give me one question at a time.
On the first question about long dated inventory, it's the same policy we've had. We will continue to take our Tier 2 acreage that we have and try to divest of it over time. I think with the oil price moving up, there could be more opportunities where people will approach us like we've and we've done that consistently over the last 5 years. Secondly, we've entered into a DrillCo arrangement as we have stated back in 2019 when I came back that we would look at doing things like that and that got put into place. We drilled 9 wells already.
It's very positive and we're looking at extending that. So those are some of the examples that we're looking at, and we'll continue to do that. Great. What's your second question?
Speaker 10
The second question is that Permian is clearly in excess takeaway capacity and probably that will this situation will be here for maybe a number of years. So how that impact on your marketing effort and also how you deal with your existing take or pay contracts? Is there any way that to maybe modify those?
Speaker 4
Yes, Paul, it's Rich. I'd say our contracts for firm transportation and move things to the Gulf Coast really are we have those now. And so with the lower growth rate, we have some extra capacity. But with the Parsley transaction, a number of those roll off their marketing arrangements roll off contract. In a couple of years, we'll be able to move those barrels onto that pipeline commitments.
And plus that we have plenty of barrels that we can get in the Midland tank farm. So there's no concern on our part in terms of being able to get the volumes and move those down and get to the higher what we'd hope would be a higher price market with rent prices and the refinery markets on the Gulf Coast. I mean clearly where differentials are now is that we've been slightly negative in 2020 and so far in 'twenty one. But Coast and export market will be better, but we'll have to continue to assess that. And but I think that's Coast and export market will be better, but we'll have to continue to assess that.
And given where the capacity is, I don't see us taking on any new commitments at this point, but we'll continue to honor the ones that we have.
Speaker 3
Thank you.
Speaker 0
And that concludes our Q and A session. I'll turn the call back over to Scott Sheffield for additional or closing remarks.
Speaker 2
Again, thanks, everybody. Hopefully, we'll get a chance starting in summer, late summer, early fall,
Speaker 3
where we
Speaker 2
can actually have some visits among all of us as we reach herd immunity here in the U. S. So again, look forward to next quarter. Again, thank you very much for tuning into us. Thank you.
Speaker 0
And this concludes today's call. We thank you for your participation. You may now disconnect.