U.S. Markets close in 2 hrs 36 mins

Concho Resources Inc (CXO) Q1 2019 Earnings Call Transcript

Motley Fool Transcribers, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Concho Resources Inc  (NYSE: CXO)
Q1 2019 Earnings Call
May. 01, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Concho's First Quarter 2019 Earnings Call. The company's earning release and corporate presentation are available on its website. And the company plans to file its Form 10-Q today after market close.

Participants on today's call will be (sic-make) forward-looking statements based upon current expectations. They are subject of risks -- to -- and uncertainties. Forward-looking statements and other disclaimers are provided in the earnings release and presentation.

The company's comments today also may refer to non-GAAP financial measures. The appropriate reconciliations are included in the company's earning materials.

On today's call is Tim Leach, Concho's Chairman and CEO, along with President Jack Harper; Chief Operating Officer, Will Giraud, and members of Concho's senior management team. Following prepared remarks, there will be a question-and-answer session. Please limit yourself to one question and one follow-up.

Now, let me turn the call over to Chairman and CEO, Tim Leach. Sir, please go ahead.

Timothy Leach -- Chairman and Chief Executive Officer

Thanks, Michelle, and good morning. Last quarter, we talked about the efficiency of our operations and the economic advantages of execution and scale. It seems like today the entire industry is focused on the Permian and how good execution and scale creates value. We are very familiar with this theme. For as long as you've known us, we're focused on building our execution machine and that's driven by core assets, the team that executes, prudent capital allocation, and a strong balance sheet.

Our focus paid off for us last quarter. We exceeded the high-end of our production guidance with strong oil volumes. Production for the quarter also benefited from strong early production out of our latest projects, including the Dominator, Eider and Mabee, as well as outside operated volumes.

With solid cost control and production ahead of expectations, we also delivered strong financial performance. As expected, our capital investments, which are front-end loaded this year, exceeded operating cash flow during the quarter. Importantly, we're on track to deliver on the $2.8 billion to $3 billion capital program we laid out last quarter, and we have increased our estimates for oil production in 2019.

The Permian continues to dominate global activity and represents the most economic source of supply growth in the world. The attention on the Permian, a renewed focus for some, reinforces the importance of being low cost with high quality scale, but also validates the strategic rationale for the moves we made in 2018, which included the RSP acquisition and numerous strategic trades. Our business development and asset teams are working on a new slate of trades as we continue to value owning large blocky tracks of operated acreage with high working interest.

This is one of the most exciting times in the history of Concho. The building blocks of our strategy has been validated by the entire industry. It's not surprising to me that so much attention is focused on the Permian and consolidation in the basin. We've understood from the beginning, we are stewards of our shareholders' capital, and we believe that we have built a company that will be a winner for our shareholders under any scenario.

With that, I'll turn it over to Jack and take you through the details.

Jack Harper -- President

Thank you, Tim. First quarter was a strong start and we're in a good position to take advantage of the growth platform we've worked hard to build. I'll quickly review the financial results for the quarter, followed by an update on our growth outlook for 2019, and a review of our midstream efforts. Sequentially, total production was up 7% and oil production increased 6%, driven, as Tim mentioned, by program efficiencies, on operated assets, and an increase in non-op activity.

Controllable cash costs, which included production expense, G&A and interest, totaled less than $10 a barrel and were lower compared to the fourth quarter of '18. Our adjusted earnings for the quarter were $0.72 per share and adjusted EBITDAX totaled $755 million. Exploration and development capital totaled $926 million for the quarter and included an incremental $40 million for non-op activity. Of course that capital came with increased production and investment opportunity that we're very happy with. And, as Tim just said, we plan to land our capital budget in the range we have provided. Recall that we ended 2018 building momentum and planning to spend $3.4 billion to $3.6 billion for 2019, but we modified that range and set up a very significant cash flow inflection points in 2020.

As we described last quarter, first quarter '19 capital would be the highest spend level for the year and you should expect a decreasing rig count has spend rate throughout the remainder of the year. That plan is still intact.

We've raised our annual production growth outlook to account for the outperformance in 1Q as well as continued strong performance across the portfolio. At the midpoint, we increased our full-year oil production guidance to 29%. Relative to the two-year outlook provided in February, we've clearly made a lot of progress and have a great deal of confidence in that plan.

Full-field development is an important contributor to our momentum. This approach is all about optimizing spacing, timing and drilling and completion techniques to maximize program economics and recoveries. Approximately, 80% of our capital is allocated to large-scale projects this year. And, during the first quarter, we commenced production on nine projects, many of which, including the 23-well Dominator project, were ahead of schedule.

Turning now to our midstream marketing efforts. Our midstream investments provide a competitive advantage and create an additional platform for building shareholder value. We partnered with experienced teams to build regional gathering transportation and storage systems. These system support our growth and efficiently transport our production to key markets. We've recently announced the sale of the Oryx I in the Southern Delaware and, based on our ownership, we expect net proceeds of $300 million from the sale in the second quarter.

And we recently announced that we formed a joint venture with Frontier to construct the Beta Crude Connector in the Northern Midland Basin.

Last November, I provided a framework for capital allocation. The first set of priorities is reinvesting to grow our business and support our growing dividend. We value preserving operational flexibility in a cyclical business and excess cash affords opportunity, including further strengthening the balance sheet, additional returns to shareholders, and portfolio enhancement. Our goal is to have a fortress balance sheet and with the Oryx sale we're well on our way to achieving that goal.

Our first quarter results and the outlook for our company give us great confidence in the effectiveness of our development program and the strength of our business and team.

We are now ready to take your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Arun Jayaram with JP Morgan. Your line is open. Please go ahead.

Arun Jayaram -- JP Morgan -- Analyst

Yeah. Good morning, team. Tim, Big Oil looks to be embroiled in a bidding war for Anadarko. With APC's Permian assets, it looking to be coveted. From our eyes, it looks like the major are willing to pay NAV-based valuations in terms of M&A, Concho would be seem to be a pretty good fit just given your scale, acreage quality, valuation, et cetera. So I was wondering if maybe you could think about your thoughts generally on M&A and perhaps the gap that you perceive and the current value of the stock relative to your NAV?

Timothy Leach -- Chairman and Chief Executive Officer

Yeah, Arun, Thanks. As I said in the prepared remarks, the building blocks of Concho, or what make us so attractive, are our core assets, the team that can execute, et cetera. And so, it's not surprising that as you look at the Permian Basin, Concho pops out as something that would be very attractive to everybody. I think that's kind of a validation of what we've been working on for the last 10 years.

So what we tried to lay out here is, we are a public company, so we trade every single day, we're always available for someone to acquire some ownership and as if they would like. On the other hand, for our shareholders, we've laid out a long-term strategy for how we can build value in this company through our execution. So that's kind of the nature of my comment that I think we can win under any scenario. I do think recently when you look at NAV calculations and things like that, it demonstrates that we have been building a lot of value and through our trades and through our focus on our balance sheet and things like that. So I think that also shows the value proposition in the machine we built.

Arun Jayaram -- JP Morgan -- Analyst

Great. And just my follow up is just on CapEx. Jack, you alluded to this, but the company spent 31%, 32% of its full-year budget in 1Q, it seems like the non-op CapEx and I know you partnered with some of the majors who outlined some pretty robust spending plans in the Permian. Can you give us a little bit more thoughts on the non-op CapEx and just your confidence around the overall CapEx budget this year, just given that non-op spend?

Jack Harper -- President

Sure. Yeah, we're committed to the budget we've laid out, as I just said. Our partners in the industry have transitioned their business to the -- a similar style of business that we have, so non-op capital and request come in and block your firms nowadays. Fortunately, for us, there's also a lot of ways to manage that capital through other partners as well as the extreme -- non-consent. So we plan to manage that as we go forward and land the budget.

Arun Jayaram -- JP Morgan -- Analyst

Thanks a lot.

Operator

Thank you. And our next question comes from the line of Doug Leggate with Bank of America. Your line is open. Please go ahead.

Douglas Leggate -- Bank of America Merrill Lynch -- Analyst

Thank you. Good morning, everyone, and congrats on your execution. I guess the cadence is really the question that we're all interested in as we go through the year. So I wonder if I could start with that. I understand the trajectory is going more in terms of spending, but can you give us some idea of cadence on our completion activity? I know you have those fuzzy bars that you gave us before, but any help that could clarify the trajectory will be appreciated?

William Giraud -- Executive Vice President and Chief Operating Officer

Sure. Hey, Doug, this is Will Giraud. Yeah, I mean we talked a little bit about the cadence. We averaged 33 rigs in the first quarter, we're at 29 today. We expect to be in the low-20s by this summer. So just from a high level that's the cadence. As it relates to putting wells on the production, the fuzzy bars still hold, the back half of the year still has a majority of the wells put on the production.

Douglas Leggate -- Bank of America Merrill Lynch -- Analyst

I guess (technical difficulty) directionally I think we're there. So I appreciate the clarification. Well -- maybe, well -- for my second one to you as well, if I may. And there is a long lateral target is, obviously you're executing not pretty well, it seems across all parts of the portfolio, something we haven't, I guess, never really talked about and that is the inventory of that one lateral development backlog. I'm just wondering if you could give us some kind of line of sight on that low-20s rig count activity level? What would you say is the line of sight in terms of specs on the map that give us visibility on your ability to sustain those -- that level of activity on those long-lateral wells? And I'll leave it there. Thanks.

William Giraud -- Executive Vice President and Chief Operating Officer

Sure. That's one of those things that as investors in the past, we probably would not been right. I think we have undershot -- or I would have ended up being able to drill longer laterals than we expected. So I'll give you the answer as we sit here today and that is, I think, we will continue to push in the Delaware Basin closer to that 2-mile average and I think in the Midland Basin we'll be able to push beyond 2 miles on average. One of the big wild cards is our ability to continue to get these swaps and trades are done.

For a long time, we thought we would be more buyers to shorter laterals in the Delaware Basin just given our relatively more scattered position in the Northern Delaware, but because of the good work of the teams and beat (ph) here we've been able to do on the swap front, we've been able to push that average up and my expectation is we march into the future, we'll be -- we can do more of those trades and continue to lengthen our laterals and get away from really drilling 1-mile well, so...

Douglas Leggate -- Bank of America Merrill Lynch -- Analyst

All right. Yeah. I understand. I'm sorry. I'm going to be really -- just a real quick third one, if I can, because it's something that's been -- it's been something as we've been kind of focusing on. There still seems to be a lot of comments and questions about NPVs, free cash flows seems to be the story, you guys have adopted that model for sure. Can you give us some idea of what your sustaining capital is. If you to hold exit reproduction front till the -- until the end of this year, what do you think your sustaining capital look like? So we can get an idea of what the free cash capacity of the portfolio looks like and I will leave it there. Thanks. Thanks for indulging me.

Jack Harper -- President

Sure, Doug. This is Jack. This year, we feel like we can sustain our production was roughly half of our cash flow and going forward that implies about a 15 rig cadence and we feel like we can maintain that going forward.

Douglas Leggate -- Bank of America Merrill Lynch -- Analyst

Appreciate the answers, guys. Thank you.

Operator

Thank you. And our next question comes from the line of Scott Hanold with RBC Capital Markets. Your line is open. Please go ahead.

Scott Hanold -- RBC Capital Markets -- Analyst

Yeah. Thank you. As you guys progress through these larger scale projects, can you discuss -- is there anything that you're learning from them regarding spacing or configuration or just, in general, how you go about those that have changed as you get through this? So what learning this -- have you gotten that you're going to apply going forward?

William Giraud -- Executive Vice President and Chief Operating Officer

Sure. I mean there's a lot going on. As you think about the different phases of the sales cycle, discovery, the delineation and now development, I think there is maybe a misconception that you've reached development stage and so you know the answer, and that's definitely not the case. We continue to learn from all these projects. And so using the Dominator one, just because it's a good example, that is our most extreme version of activity in a single square mile and also some of the more dense spacing we've tested. And so, yeah, the teams did a fantastic job on that, bringing that project and a couple of other large ones this quarter and putting well production actually ahead of schedule.

So we're continuing to figure out how to concentrate that much activity in one spot in the most efficient manner possible. We're continuing to play with spacing and also landing zones and we're still continue to tinker with combinations of different landing zones and to our whole completion design in them. So there is a lot to learn, but I think, at the same time, you've got a really competitive business that competes for investor capital. And so I think that's the exciting thing about what we've been able to do and are going to continue to do as -- deliver really compelling returns while continuing to learn.

Scott Hanold -- RBC Capital Markets -- Analyst

Okay. I appreciate it. And then just specifically on that. I mean, have you have problem with what you've seen on some of the initial results. I think, Dominator is in the closer space. I mean, what have you specifically seen in that compared to the wider space wells? Like, what is the most optimal?

Timothy Leach -- Chairman and Chief Executive Officer

It's going to range depending on where you are in the basin and also the zone you're drilling. On that one, we drilled at almost 50% more densely than kind of our -- where we typically look at resource booking in that zone. So we will watch -- we haven't hit for a, kind of, critical 60 days of production where we included that'll be next quarter's batch of wells to talk about, but certainly returns look pretty good for us.

Scott Hanold -- RBC Capital Markets -- Analyst

Okay. And then just one clarification on CapEx. I mean, obviously, it's a big discussion point today, but it does sound like you've got some flexibility to do -- obviously, manage the non-op piece. With your better efficiency on your operated activity to reach the budget, is there a chance that you guys would, say, dip a little bit from -- into -- cut into operated activity later the year? And if you had a comment on like what oilfield service inflation might do to that given what the industry is doing at these higher oil prices?

Timothy Leach -- Chairman and Chief Executive Officer

Sure, Scott. Well, we are already contemplating pairing back our operated activity to land that budget. The result being a little bit of a normal cadence of activity as we head into next year, but I think more importantly the plan we've laid out over the two-year period that spins roughly our cash flow or less this year and we see a big inflection to free cash flow next year remains intact and, in fact, we're more confident in that today.

Scott Hanold -- RBC Capital Markets -- Analyst

That's great. Thank you.

Operator

Thank you. And our next question comes from the line of Derrick Whitfield with Stifel. Your line is open. Please go ahead.

Derrick Whitfield -- Stifel Nicolaus -- Analyst

Good morning, all.

Timothy Leach -- Chairman and Chief Executive Officer

Good morning.

Jack Harper -- President

Good morning.

Derrick Whitfield -- Stifel Nicolaus -- Analyst

Perhaps for Tim or Jack, over the last several weeks, gassing-rise (ph) has become a topical discussion among the Permian producers in light of recent oil prices. While gas is a relatively insignificant component of your revenue stream, could you comment on how you position Concho to mitigate risk and how you might respond to face with negative netbacks where period exceeding one or two months?

Jack Harper -- President

Sure, Derrick. Just to start with, we have a slide in here that kind of shows our breakdown of our revenue and you see that natural gas, the dry gas portion is less than 5% of our revenue, but we do need to move it. And like last year when we were talking about crude and we talked about firm sales agreements with our large providers, the same holds true for gas and we are in constant communication with those large providers and feel comfortable that we will be able to move the gas. So we do not see that as a factor to slow down our plan this year.

Derrick Whitfield -- Stifel Nicolaus -- Analyst

Great, thanks. And then as my follow up, perhaps for Will, asking really a follow-up on Scott's earlier question regarding learnings and conclusions. As you guys look at optimal project size, pad size, how are you thinking about that now post-Dominator?

William Giraud -- Executive Vice President and Chief Operating Officer

Yeah. I mean, I don't think that Dominator is determining point. Like I said, if you've watched us for a long time and so you've watched as we have transitioned into this project development, where we started small, started drilling two-well pads, three-well pads and then two two-well pads into a project and so on. We've kind of highlighted that Dominator was an effort to kind of jump a couple of steps down the line and see if running seven rigs in a square mile, where do you see inefficiencies and how can you go attack those. And so, I do think that the average project size in the Delaware particularly will be something less than that. It will be for us today probably in that 8 to 10 to 12 range in the Midland Basin, maybe a little bit bigger just because of the initial rates out of those wells and try to size those facilities from an economic kind of return standpoint. But that would be kind of one of the big learnings, but there are a whole lot more.

Derrick Whitfield -- Stifel Nicolaus -- Analyst

It's very helpful. Thanks for your time.

William Giraud -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Michael Hall of Heikkinen Energy. Your line is open. Please go ahead.

Michael Hall -- Heikkinen Energy -- Analyst

Thanks. Good morning. I guess, I was just curious if you'd be willing to provide a -- maybe some additional guidance around expectations for capital in the second quarter, just given the heavier spend rate in the first quarter, I think, to the extent you'd be willing to give us something to hold onto for the second quarter could be helpful.

Jack Harper -- President

Good morning, Michael. This is Jack. Yeah, what you should expect -- Will mentioned that our rig count averaged 33 in the first quarter and we're at 29 on our way down. So it will be less, but it will certainly be the second highest quarter of capital for the year, but then tailing down throughout the rest of the year.

Michael Hall -- Heikkinen Energy -- Analyst

Okay. That's helpful on the trajectory. And then I was also curious just you had very strong first quarter results, obviously, the 2Q guidance is more in line, I'd say, with what, kind of, Street expectations has been and that you took up the fourth quarter '19 exit rate. I'm just curious, I guess, number one, what gives you confidence on the 4Q '19 exit rate increase? And then what if anything should we read into kind of the trajectory or momentum into 2020 in the context of that exit rate bump?

Jack Harper -- President

Sure. Yeah. As we laid out, we had more wells completed in the first quarter and, therefore, we will have modestly less in the second quarter, but then ticking back up in the third and fourth quarter. So that should help as we end the year as is implied by our guidance in the new fourth quarter number.

Michael Hall -- Heikkinen Energy -- Analyst

Okay. That is helpful. Appreciate it.

Jack Harper -- President

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Brian Singer with Goldman Sachs. Your line is open. Please go ahead.

Brian Singer -- Goldman Sachs -- Analyst

(technical difficulty) the rates of return from your operated activity. And given the greater non-op activity during the first quarter, are you specifically planning in both CapEx and production guidance to non-consent, non-op activity in the remainder of the year to keep the full-year budget within guidance?

Timothy Leach -- Chairman and Chief Executive Officer

Hey, Brian. I think you were on mute for the first half of your question, but I think we got the second half around kind of some of the strategies around non-op capital in the back part of the year. And the answer, I think Jack alluded to it. I mean there's a variety of ways that we're going to manage our capital. One is just it's the easiest thing to swap. It's the lowest hanging fruit on those kinds of deals. And so, I think we will -- that has been a big point of emphasis, but we'll certainly redouble our efforts on swapping that. Also, I just -- I think it's worth noting that there is a pretty sizable and growing market of private capital looking to purchase non-op well bores on kind of adjusted-time basis, that's something we will look into. And then, as you mentioned on, that's most extreme if we don't like the economics of the project is always non-consent. I hope that answered your question.

Brian Singer -- Goldman Sachs -- Analyst

Yeah. Thank you, and apologies. The first half was whether the non-op activity rates of return, how they compare to the operated rates of return?

Timothy Leach -- Chairman and Chief Executive Officer

They're all over the board. Some are very good and we like to participate in them. There are others that are not as good and those are what we're really looking hard on asset swaps and other things. But essentially non-op gives us an incredible intelligence advantage as well, because we have partners across the entire Permian. And so, it lets us get an inside look at people's actual costs and actual results, which as we sit around and benchmark our own performance is very helpful. So we've always liked non-op and having some exposure to it, but, as Jack referenced, as those partners have moved to this, more projects still in development, the capital numbers inside of an individual quarter can get bigger.

Brian Singer -- Goldman Sachs -- Analyst

Thank you. That's helpful. And I my follow-up is, as you highlighted at the outset, Permian scale and consolidation has become very front and center here and as we now reached the first anniversary of the RSP acquisition announcement, can you reflect on how your latest -- this latest experience in consolidation makes you more or less willing for consolidation to be a strategic objective for Concho? And, as well, how you see opportunities and pitfalls of Permian consolidation for others in the industry?

William Giraud -- Executive Vice President and Chief Operating Officer

Yeah. Let me take that one. I've said before on this call that we got the one we wanted. So after a year and reflecting I'm glad we did the deal we did, it folded in really well, it met all our objectives and -- but it also highlights to me how difficult it is to find anything like that in the Permian that doesn't have a bunch of hair on it. And so, as we look around at other opportunities in the Permian, I think our main focus is on this trading and that wells alluding to and because we have a huge inventory of the bar for anything is very high for us and so strategically, I think, we are where we need to be.

Brian Singer -- Goldman Sachs -- Analyst

Great. And do you see others having pitfalls as they look to consolidate their different assets, work for different companies if you look at the learnings that you've seen as a long time, long-term Permian consolidator?

William Giraud -- Executive Vice President and Chief Operating Officer

The things that we highlighted has been the strategic building blocks of our success of what I think everyone is striving for the big blocky acreage and the team that can execute. That's really, really difficult to put together. And so, I think doing it is a lot harder than talking about it. And we've said that many times before. So I think strategically we are where we need to be and I'm happy that we've been focusing on this for so long.

Brian Singer -- Goldman Sachs -- Analyst

Thank you very much.

William Giraud -- Executive Vice President and Chief Operating Officer

Yeah, thanks.

Operator

Thank you. And our next question comes from the line of Neal Dingmann with SunTrust. Your line is open. Please go ahead.

Neal Dingmann -- SunTrust Robinson Humphrey, Inc. -- Analyst

Good morning, all, and thanks for the details. My question just firstly on the oil mix. I think previously you'd mentioned I think about, sort of, seeing a steady increase, it look like -- I know that can kind of trend a bit different quarter-to-quarter, it looks like it was down 1% for the quarter and then if you could just sort of comment thoughts as you see the -- all these laid out for the rest of the year, if you see the oil trend rebound a little bit for the remainder of the year?

Timothy Leach -- Chairman and Chief Executive Officer

Sure. The short answer is, yes, we do. And, again, it always -- it depends on the mix of wells. We did see significant oil production in absolute terms, growth this quarter, but as a percentage, yeah, we expect it to be a little bit higher than it was this quarter going forward.

Neal Dingmann -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. And then just lastly, great sell obviously other than what you've realized on your return on the Oryx. My question is just on that, going forward the -- sort of terms is it -- just want to make sure, is it a longer term deal you signed up or you just talk about what was, sort of, involved and sort of how you see the contract going forward? I mean, it sounds like you didn't really lose a beat by selling that, but I'm just curious any color you can add to that?

Jack Harper -- President

Sure. Very similar to the ACC sale a year or two ago, same holds for Oryx. The commercial terms were in place, they were put in place originally with our E&P hats on and those are long-term deals that have 8 to 10 years left in both cases.

Neal Dingmann -- SunTrust Robinson Humphrey, Inc. -- Analyst

Very good. Thanks, Jack.

Jack Harper -- President

Thank you.

Operator

Thank you. Then our next question comes from the line of John Freeman with Raymond James. Your line is open. Please go ahead.

John Freeman -- Raymond James -- Analyst

Good morning, guys.

Timothy Leach -- Chairman and Chief Executive Officer

Hey, John.

Jack Harper -- President

Good morning, John.

John Freeman -- Raymond James -- Analyst

You all spent a lot of time and effort testing both the horizontal spacing within individual zones like what you did with the Gettysburg and then testing the interaction between those different landings, like, for example, the Square Bill. And I know this a difficult question to sort of answer, but we all are sort of thinking about your long-term planning, when do you anticipate you sort of reached the point where you've got sort of the optimal development plans sort of figured out?

Timothy Leach -- Chairman and Chief Executive Officer

Well, I mean, I would say, I think we know it today, but I would say that as we keep going, we continue to learn. And so, we will continue -- I mean, the Permian is not a gigantic uniform, sort of, geology. And so there are going to be changes as you move around the different parts of the basin, even within a sub-basin. And so, I expect there will be -- we will continue to play with spacing differences within the bench, but also between the benches, but I think we feel very comfortable with kind of our base resource estimate, which is generally in that 6 to 8 across in each of the benches.

John Freeman -- Raymond James -- Analyst

Great. And then just my follow up, just a quick kind of housekeeping item, does the previous oil differential guidance that you all have given, is it reflective of all the recent marketing agreements you all have done, like the 50,000 a day of production at the -- toward the end of this year that will get waterborne pricing, things like that, is that all reflected in the prior steps (ph) , guidance?

William Giraud -- Executive Vice President and Chief Operating Officer

It is John and it's reflective of all of the dynamics that are out there currently in the market.

John Freeman -- Raymond James -- Analyst

Great. I appreciate it. Well done, guys.

William Giraud -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Mike Kelly with Seaport Global. Your line is open. Please go ahead.

Michael Kelly -- Seaport Global Securities -- Analyst

Hey, guys. Good morning.

Timothy Leach -- Chairman and Chief Executive Officer

Good morning, Mike.

Michael Kelly -- Seaport Global Securities -- Analyst

Tim, you mentioned in your prepared remarks that you are in view of new slate to create opportunities. I was hoping you could just characterize these potential deals. I guess I'm interested if this is kind of standard blocking and tackling for you guys as kind of what you've done in the past or if there's maybe some larger trade opportunities out there on the horizon? Thanks.

Timothy Leach -- Chairman and Chief Executive Officer

Sure. We've built a pretty sizable team that's focused on this and it's interesting out, say, that different operators -- most operators have awaken to the importance of this, some I think are a lot better than others and we're trying to pretty hard to get those done. We did 15 trades of significance last year. I think, we've already closed 5 in the first quarter of this year, so that the cadence is picking up. But when I look at what's on the horizon, there's a lot more to do and a lot more to come, kind of getting maybe to the heart of your question there, there are one or two really significant trades last year and we're trying pretty, we've got kind of one or two more like that that we're working on, but the bulk of these are trading a section here for a section there and maybe a little bit bigger than that, which just requires a lot of attention to detail. But it's a big part of our business, but it's also a huge way to make our plans better.

Michael Kelly -- Seaport Global Securities -- Analyst

Appreciate that. And follow up, I'm just curious about to get your thoughts on kind of the current returns you're seeing, if we compare Midland versus the Delaware. We track your 60 day rates every quarter and can't help but notice that Delaware now seems to really have accelerated now almost 2x what the Midlands doing, 30 or 60-day rates at the end oil metric to look at, but just really kind of curious if Midland rates return to really -- continue to keep up the Delaware? Thanks.

Timothy Leach -- Chairman and Chief Executive Officer

Sure. I mean, it's a fair point in terms of the initial rates in the Delaware tending to be higher, but remember there's also a capital component that the Midland Basin wells tend to be less expensive and they also do not decline as fast. So we really like having both suites of assets and from a rate of return standpoint they are competitive with each other and you highlight a really, I think, important and interesting point, which is especially for operators like ourselves who have moved into this large-scale project development, 30-day rates or even 60-day rates are really not as good of an indicator of the quality of a well as they used to be, because we're being very mindful as we flow these wells back and, also, as we set the facilities to maximize the returns not just the initial 30-day rates that going to slide. So that is an issue out there.

Michael Kelly -- Seaport Global Securities -- Analyst

Thanks, guys.

Operator

Thank you. And our next question comes from the line of David Deckelbaum with Cowen. Your line is open. Please go ahead.

David Deckelbaum -- Cowen & Company -- Analyst

Good morning, Tim, Jack, and everyone. Thanks for taking my questions.

Jack Harper -- President

Good morning, David.

David Deckelbaum -- Cowen & Company -- Analyst

I'm curious and we all know there's -- the beat on production, some of that was attributed to the non-op activity, which you've discussed. Can you give a little bit more color on, sort of, the timing of beats that you've experienced relative to the initial assumptions and then considering you raised your guidance which seems to, sort of, just give credit for the 1Q beat and do you do not necessarily believe that those timelines are achievable through the rest of the year. And I guess how does that frame -- how do you think that you can being improving your efficiency as you head into 2020?

Jack Harper -- President

Sure. I'd say the beat in the first quarter, which was pretty significant, was a combination of a couple of things, the non-op that we've highlighted, also getting a couple of these very sizable project on ahead of schedule. And so, there was something a little unique to the quarter maybe in that. But, I mean, underlying all of that is, we continue to see really strong results across our portfolio. And so, I think, that's what gave us the confidence to raise the overall annual guidance.

David Deckelbaum -- Cowen & Company -- Analyst

Fair enough. I guess just more specifically what contributed to bringing those projects on earlier? It doesn't sound like it was necessarily a function of drilling days, I guess as you all allocated more time just having crews on location before time?

Timothy Leach -- Chairman and Chief Executive Officer

No. I mean, it really was a series of smaller gains that add up to something that's pretty meaningful. I think it's -- our teams are really good at executing and as we do more and more of these large-scale projects, they'd find ways to grind efficiencies that service both on costs and timing. We expect them to find more of that, we're not baking anything into that -- into our plan, of course, but I think that's really what drove getting those projects on this quarter as opposed to early in the second quarter.

David Deckelbaum -- Cowen & Company -- Analyst

I appreciate the color. And just my follow up would be, the second being my OpEx, when you look at the Midland rates on just a productivity per foot, outside of -- is there anything that would explain the decline sequentially? Is it more of a function of midstream constraints, just zones that you are targeting and longer cleanup time? Is there any color you could add there?

Timothy Leach -- Chairman and Chief Executive Officer

Sure. We've talked about that just a moment ago on the previous question. I mean there is a couple of different things that -- effectively one is just managing the flow back of a bunch of long-lateral wells coming into a single facility and having signed that facility to maximize your rate of return versus your initial 30 to 60-day rate, that's a piece of it. There's also just a sample size you're looking at relatively limited number of wells within a quarterly period. So I wouldn't read too much into it. Also just last piece, I think you kind of referenced this, is that, we continue to push lateral lengths. And as you lengthen your laterals, there is a huge pickup in the rate of return, there is generally linear increase in the EUR, but you don't see a linear increase in the initial rate, especially when you're doing 10, 12, 15 at the same time.

David Deckelbaum -- Cowen & Company -- Analyst

I appreciate it. Thanks for the responses.

Timothy Leach -- Chairman and Chief Executive Officer

Thank you.

Jack Harper -- President

Thank you.

Operator

Thank you. And our next question comes from the line of Bob Brackett with Bernstein Research. Your line is open. Please go ahead.

Robert Brackett -- Sanford C. Bernstein Research -- Analyst

A number of mine has been answered already, so if I could dig into the comment made about Permian targets having a bunch of hair on them. Could you give some color on that? What types of hair you might find on a target?

William Giraud -- Executive Vice President and Chief Operating Officer

Yeah. That was a technical term of art, I guess. It's broken up -- it all falls into buckets of the things that we look at it or components of our strategy. So the broken up assets that are contiguous, it would be not having a team that can execute, it would be not having the size and scale necessary to get the pricing that the larger companies get and then there is the integration and the mixture of cultures. The culture of execution is a rare commodity. And so, integrating cultures together is a very difficult thing. You don't see that on a spreadsheet.

Robert Brackett -- Sanford C. Bernstein Research -- Analyst

Great. I appreciate that. Thanks.

William Giraud -- Executive Vice President and Chief Operating Officer

Very well.

Operator

Thank you. And our next question comes from the line of Leo Mariani with KeyBanc. Your line is open. Please go ahead.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Hey, guys. I wanted to follow up a little bit with the comment that you made regarding, I guess, declining activity levels as the year progresses. So, clearly, I guess lower activity in the second half of the year, this year, versus the first half, just wanted to get a sense of how that can play out as we head into 2020? Do you guys expect it to kind of ramp back up a fair bit, kind of early in 2020, because I know -- I think that you'd previously kind of said that 2020 CapEx will be very similar to 2019. Maybe if you can just kind of describe that dynamic a little bit in 2020?

Jack Harper -- President

Sure. At a very high level, as we've described, we see the rig count trending down over the year, but when we look at the average rig count year-over-year, it's pretty similar. So -- but the cadence will be a little down before it moves back up, but in terms of on-average, it's very similar, maybe up a little next year.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Okay. All right. I guess just with respect to second quarter, looking at your production guidance, I guess, it's down a few percent in Q2 with the expectation versus 1Q. I know that you folks said that you brought on kind of more wells than expected in 1Q, but as I kind of looked at your slide deck, I mean, it looks like a number of those kind of came on late in the quarter, which should, I guess, benefit second quarter production. I think you guys are still putting a fair number of wells on it in the second quarter. Can you just provide, maybe, a little bit more color around why you expect the production decline to a little bit in 2Q versus 1Q?

Timothy Leach -- Chairman and Chief Executive Officer

Sure. I think, Will described it earlier. We are bringing on fewer wells in the second quarter than in any other quarter of the year. And so, it's just not enough to offset declines from the previous wells that didn't put on production, so it's timing. But you see that come back with a modestly higher fourth quarter guidance. So I think that's what you should expect.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Okay. Helpful. Thank you.

Operator

Thank you. And our next question comes from the line of Charles Meade with Johnson Rice. Your line is open. Please go ahead.

Charles Meade -- Johnson Rice -- Analyst

Yes. Good morning, Tim, to you and to your whole team there. I appreciate you guys taking up -- taking all these questions. If I could go back to this question, I think a lot of people hit on it -- of your -- your operational pace, but ask more specifically, how things are playing out versus the guidance for rig count by quarter -- you guys gave for 4Q reporting? So I would imagine that as you complete projects more quickly, like you did and bring things on earlier as you did 1Q that your rig count would actually drop more quickly than originally contemplated. But 1Q you guys averaged 33 versus 32, which you guided last quarter and right now you are at 29 versus the 26 average that you guys had laid out for 2Q. So what are the other pieces of the picture that filling those variances?

Timothy Leach -- Chairman and Chief Executive Officer

Well, Charles, I mean, on some level, I'd say, our pencil is not that sharp. But I mean I would say that the first quarter landed from a rig activity standpoint about exactly where we thought it would, to your point that we're at 29 today. I mean, it's just May. So we're still -- we're in the middle of the quarter and we're moving to low-20s pace as we move into the summer here. So, as Jack emphasized, I think, at the beginning of the call, we are going to land our budget this year. And so, we're going to maneuver as best we can to accomplish that.

Charles Meade -- Johnson Rice -- Analyst

Got it. That's helpful. And then just a quick follow-up on the Dominator to kind of help us contextualize what we're going to see with lower sales there. How many landing zones in the Wolfcamp A did you have? Did you try on for those 23 wells?

Jack Harper -- President

It's interesting if you look at a gun barrel of those things. It's actually -- you can see that the West half and East half are two very different spacing test, and so there's five landing zones kind of tested in total. If you look over in the East half, there is more of a traditional three landing zones stack over the West half.

Charles Meade -- Johnson Rice -- Analyst

Got it. That's helpful. Thank you.

Timothy Leach -- Chairman and Chief Executive Officer

Thank you.

Jack Harper -- President

Thank you.

Operator

Thank you. And our next question comes from the line of Jeanine Wai with Barclays. Your line is open. Please go ahead.

Jeanine Wai -- Barclays PLC -- Analyst

Hi. Good morning, everyone.

Timothy Leach -- Chairman and Chief Executive Officer

Good morning.

Jack Harper -- President

Good morning.

Jeanine Wai -- Barclays PLC -- Analyst

Just following up on Charles's question just now. I just wanted to clarify something. You mentioned that you are already thinking about pairing back operator activity this year to stay within budget. I just wanted to clarify that that comment was in reference to the plan your released last quarter, where you're getting down to the 24 rigs starting in the back half of this year or if it was kind of in response to how the operating environment and the efficiency that you're seeing here to-date?

Jack Harper -- President

Yeah, I'll answer that. It's -- I was comparing that to what we talked about last quarter, but the bottom line is we're going to land the budget and it's not a perfect science with different working interest and different activity from other operators, but if it requires going lower than that 24, we will be willing to do that.

Jeanine Wai -- Barclays PLC -- Analyst

Okay. And then, I guess, just digging into that a little bit more, just from the operational perspective, in terms of how you -- if you were to dip below that 24 rigs efficiencies or better, cost inflation runs ahead of schedule or whatever, does the current service environment allow you to reduce factory utilization like we heard from some other operators at the end of the year? And kind of what -- how do you envision your operational efficiency changing if you have to go below the 24 rigs? And I know there's ratio that people usually like to keep between rigs and crews, and so I guess, adding to that, does the evolution to, say, the 80% large development projects this year, does that push you more toward a bunch of the non-operational levers that you can pull? So, for example, you mentioned a bunch of transactional things like you could do just in time, well, where sales or trades and/or non-consent, just trying to see how the decision making changes this year versus prior years?

Timothy Leach -- Chairman and Chief Executive Officer

Sure. I mean you covered the waterfront of a lot of a different options we have as we work to stick the budget. But I don't expect there to be -- I think in the earlier question is, do you expect there to be some loss of operational efficiency for making these changes and the answer is no.

Jeanine Wai -- Barclays PLC -- Analyst

Okay. Thank you for taking my questions.

Timothy Leach -- Chairman and Chief Executive Officer

Thank you.

William Giraud -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Thank you. And I'm showing no further questions at this time, and I would like to turn the conference back over to Mr. Tim Leach for any further remarks.

Timothy Leach -- Chairman and Chief Executive Officer

Thank you. Once again, this is a -- as I said, is the most exciting time for Concho, as we're able to execute and deliver on all this work we've prepared over the years. So I appreciate your interest in the company. Look forward to talking to you again next quarter. Thank you.

Operator

And, ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

Duration: 49 minutes

Call participants:

Timothy Leach -- Chairman and Chief Executive Officer

Jack Harper -- President

Arun Jayaram -- JP Morgan -- Analyst

Douglas Leggate -- Bank of America Merrill Lynch -- Analyst

William Giraud -- Executive Vice President and Chief Operating Officer

Scott Hanold -- RBC Capital Markets -- Analyst

Derrick Whitfield -- Stifel Nicolaus -- Analyst

Michael Hall -- Heikkinen Energy -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

Neal Dingmann -- SunTrust Robinson Humphrey, Inc. -- Analyst

John Freeman -- Raymond James -- Analyst

Michael Kelly -- Seaport Global Securities -- Analyst

David Deckelbaum -- Cowen & Company -- Analyst

Robert Brackett -- Sanford C. Bernstein Research -- Analyst

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Charles Meade -- Johnson Rice -- Analyst

Jeanine Wai -- Barclays PLC -- Analyst

More CXO analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

More From The Motley Fool

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.