U.S. Markets closed

Edited Transcript of CXO earnings conference call or presentation 20-Feb-19 2:00pm GMT

Q4 2018 Concho Resources Inc Earnings Call

MIDLAND Feb 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Concho Resources Inc earnings conference call or presentation Wednesday, February 20, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* C. William Giraud

Concho Resources Inc. - Executive VP & COO

* Jack F. Harper

Concho Resources Inc. - President & CFO

* Megan P. Hays

Concho Resources Inc. - VP of IR & Public Affairs

* Timothy A. Leach

Concho Resources Inc. - Chairman of the Board & CEO

================================================================================

Conference Call Participants

================================================================================

* Arun Jayaram

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Brian Arthur Singer

Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst

* Charles Arthur Meade

Johnson Rice & Company, L.L.C., Research Division - Analyst

* David Adam Deckelbaum

Cowen and Company, LLC, Research Division - Senior Analyst

* Derrick Lee Whitfield

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst

* Jeanine Wai

Barclays Bank PLC, Research Division - Research Analyst

* Jeffrey Leon Campbell

Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services

* John Christopher Freeman

Raymond James & Associates, Inc., Research Division - Research Analyst

* Leo Paul Mariani

KeyBanc Capital Markets Inc., Research Division - Analyst

* Michael Anthony Hall

Heikkinen Energy Advisors, LLC - Partner and Senior Exploration and Production Research Analyst

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Nitin Kumar

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Paul Benedict Sankey

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Phillip J. Jungwirth

BMO Capital Markets Equity Research - Equity Analyst

* Richard Merlin Tullis

Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production

* Robert Alan Brackett

Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst

* Robert S Morris

Citigroup Inc, Research Division - MD and Senior U.S. Oil and Gas Exploration and Production Analyst

* Ryan M. Todd

Simmons & Company International, Research Division - MD, Head of Exploration & Production Research and Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Concho Resources' Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Megan Hays. Ma'am, you may begin.

--------------------------------------------------------------------------------

Megan P. Hays, Concho Resources Inc. - VP of IR & Public Affairs [2]

--------------------------------------------------------------------------------

Great. Thank you, Daniel. Good morning, and welcome to Concho's Fourth Quarter 2018 Earnings Call. Our earnings release and corporate presentation are available on our website, and we plan to file our annual report on Form 10-K today after market close. Participants on today's call will make forward-looking statements based on current expectations. They are subject to risks and uncertainties. Forward-looking statement and other disclaimers are provided in the earnings release and presentation. Our comments today may also reference non-GAAP measures. You'll find the appropriate reconciliations in our earnings materials.

I'm joined today, in Midland, by Tim Leach, our Chairman and CEO, along with President, Jack Harper; Executive Vice President and Chief Operating Officer, Will Giraud; and members of the Concho senior management team.

During today's call, we will discuss fourth quarter and full 2000 (sic) [2018] operational and financial results and will update you on our 2019 outlook. Following our prepared remarks, we will host a question-and-answer session. Please limit yourself to 1 question and 1 follow-up.

Now let me turn the call over to Tim.

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [3]

--------------------------------------------------------------------------------

Thanks, Megan. Good morning. This was a transformational year for Concho. We started the year communicating the importance of our strategy, execution strength and capital discipline.

During 2018, we delivered on each of these and achieved strong results while running one of the largest development programs in the Permian. Our biggest milestone in '18 was the acquisition of RSP. Based on our track record in the Permian, RSP checked all the boxes. The transaction enhanced our long-term strategy and the scale of our growth platform. As we fold this premium inventory into our development machine, we're extremely pleased with the assets and the team that joined us. The portfolio that we've created is a competitive advantage, and we're focused on high-grading it and blocking up acreage for drilling long laterals and project development. To that end, in 2018, we executed 15 asset trades, covering 60,000 net acres in aggregate. We also sold noncore assets for proceeds of about $360 million and received a $160 million distribution from our investment in the Oryx regional gathering system.

Through portfolio high-grading, development and delineation during 2018, we increased our horizontal resource to 12 billion barrels of oil equivalent, roughly 2/3 of this resource is considered premium and achieves a rate of return greater than 35% at $60 oil. The average rate of return of this premium resource is 68%, and we have 40 years of runway at our current pace. Our capital program in '19 is directed to these locations. We also delivered solid operational performance. We increased production 36% year-over-year, driven by a 41% increase in oil volume. Our teams are leading the transition to large-scale, manufacturing-style development, and well performance for the projects completed in 2018 is strong.

Free cash flow has been a practice, not a concept. And we again executed a disciplined program that highlighted the quality of our assets. We invested a total of $2.5 billion in our drilling and completion program and generated around $2.6 billion of cash flow, marking the third consecutive year for cash flow to exceed our capital investments, excluding acquisitions. And our track record for free cash flow and outlook for the business enables us to initiate a dividend this quarter. We ended the year with investment-grade credit ratings from the 3 top rating agencies and a strong balance sheet. We're working to deliver a value proposition in our industry that competes for capital across the broader market, and in 2018, we made significant progress in achieving this goal. While supportive market conditions and higher oil prices are welcome, our returns-focused game plan means we find opportunity, especially in times of volatility.

There's been a lot of conversation about service cost. Historically, if a slowdown materializes, there's typically a 3 or 4-month delay before activity levels and service cost respond to market realities.

We expect this to be the case in 2019. Against this backdrop, we're continuing to focus on free cash flow growth and maintaining balance sheet strength. Because of this we're calibrating the 2019 program around lower commodity prices. And even at lower prices, the efficiency of our machine and the compelling benefits of the RSP transaction are apparent.

We talked last quarter about the evolution of the E&P business model. Our model will build excess cash flow and maximize returns on and of capital. At a time of broad industry change, our strategy combined with the best team, assets and balance sheet will deliver in a way and in a time frame very few in our industry can. We have carefully and thoughtfully pursued our plan, developing a platform more capable and better positioned than at any other time in our history. And 2019 sets up an incredible trajectory for our company, one that reinforces the investment case for Concho.

With that, I'll turn it over to Jack.

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [4]

--------------------------------------------------------------------------------

Thank you, Tim. Our performance enacted in 2018 contributed to one of the most strategically important years in our history. We invested in high-value growth projects, controlled cash costs, executed a disciplined capital program and strengthened our portfolio. In short, it was another year of good offense and delivering on what we say we're going to do.

I'll start with a recap of fourth quarter and full year 2018 results before reviewing our updated outlook for 2019. Fourth quarter production averaged 370,000 BOEs per day, in line with our guidance range. Oil volumes averaged 199,000 barrels per day and now make up 65% of production volumes compared to 62% during the fourth quarter last year. Controllable cash costs look good, but we continue to focus on improvement. Adjusted earnings per share was 94%, and adjusted EBITDAX totaled $751 million, a 46% increase as compared to the fourth quarter of '17.

For 2018, production volumes were 263,000 BOEs per day. This includes a partial year contribution from RSP, which we acquired in mid-July. Controllable cash cost per unit improved, down 4% compared to 2017. Full year adjusted earnings per share was $4.60, and adjusted EBITDAX totaled $2.8 billion. As Tim mentioned, we invested $2.5 billion in our capital program while generating $2.6 billion in operating cash flow and received proceeds of approximately $520 million from divestitures and our strategic investment in Oryx. Our disciplined capital program and prudent portfolio management continued to be used to strengthen the balance sheet. Long-term debt ended the year at $4.2 billion, and our annualized leverage ratio stood at 1.4x. Clearly, the backdrop for oil prices was different last quarter. Companies were poised to increase activity and inflation winds were not in our favor. The steep drop in crude prices at the end of the year illustrates how fast this business can change. A strong financial position is a core value and a competitive advantage, and our balance sheet and cash flows are well protected.

Based on our guidance range, approximately 70% of our oil is hedged and roughly 60% is covered with basis swaps. Operationally, things are proceeding as planned. During the fourth quarter, we ran 34 rigs, one of the largest programs in the basin. We continued to advance our style of returns-centric development, which focuses on large-scale and multi-well projects across our asset base.

Our project results continued to demonstrate the prudence of this approach, which mitigates parent-child impacts, drives operational efficiencies and maximizes the long-term value of our investments. As the competition to supply the most efficient barrel intensifies, technology is increasingly important. Our move to manufacturing-style development, combined with the team's use of technology, is accelerating innovation, improving productivity and optimizing program economics.

In 2018, more capital was directed to large-scale projects than ever before. And our well performance on an absolute and lateral-adjusted basis increased 21% to an average peak 30-day rate of more than 1,400 BOE per day, while the average lateral length was relatively consistent year-over-year. In addition to creating value through how we build, develop and operate our assets, we're also looking to capture most value with how we market the oil and gas we produce.

Since the beginning of 2019, the Midland-Cushing discount has narrowed significantly as Plains' Sunrise system ramps up and anticipated line conversions come to fruition. The scenario around takeaway capacity and regional pricing has played out largely as we expected and communicated. I'm glad we were patient and didn't sacrifice long-term value for short-term transportation arrangements. We're not aware of a single Permian barrel that didn't clear the Midland market. Importantly, we're now in a strong position to begin diversifying our pricing and market exposure, and we're making progress on this strategy.

During the first quarter of '19, we entered into a firm sales agreement with a third-party purchaser that will provide an integrated transportation and marketing solution, including ample buy capacity. This agreement ramps to 50,000 barrels of oil per day when Plains' Cactus II pipeline comes online. The barrels sold under this arrangement will receive waterborne pricing.

The energy sector space get a myriad of headwinds, including big swings in oil prices and investor frustration. With this backdrop, we're redoubling our focus on cost control, capital discipline and growing free cash flow in the returns. While others in the sector are talking about a new strategy, our actions and track record uniquely position us to deliver differentiated performance.

Our updated 2019 capital program is based on our view that volatility will continue to challenge this sector. The program includes a capital spend of $2.8 billion to $3 billion, which represents a 17% reduction compared with our previous guidance. This level of capital supports volumes with less investment and sets up a strong and sustainable free cash flow growth trajectory, with an oil production growth rate of 15% in the fourth quarter of '19 versus the fourth quarter of '18. We continue to highlight the 2019 exit rate because 4Q '18 includes a full quarter of RSP activity.

Looking ahead to 2020, our base plan calls for a similar investment level as '19, resulting in substantial free cash flow growth. We will respond to the price environment guided by the capital allocation framework laid out last quarter. This framework places an increased emphasis on returns of capital when we have excess free cash and still gives us the flexibility to opportunistically deploy additional capital.

Our focus will remain on growing free cash flow over the long term, more so than in any individual quarter. We started the year with 34 rigs and 10 completion crews, which is our peak level for the year. As a result, we expect 1Q capital of $825 million to $875 million, which will moderate as we move through the balance of '19. Production for the quarter is expected to be in the range of 300,000 to 306,000 BOE per day, which reflects the timing of our move to more project-style development across the asset base and the ramp of wealth placed on production in the second and third quarters. We have the team and assets to deliver differentiated value. Our scale advantage, execution strength and strong financial position allow us to deliver one of the most competitive barrels in the world.

We'll now open up the call to your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Arun Jayaram with JPMorgan.

--------------------------------------------------------------------------------

Arun Jayaram, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [2]

--------------------------------------------------------------------------------

First question, pretty sizable change in the 2019, 2020 guide versus what you articulated last quarter. You mentioned volatility, but I was wondering if you could maybe give us some thoughts on how your thinking has evolved since that time in terms of the guide, and what do you see as the benefits of the new operating plan, which does seem to indicate more capital efficiency versus your old plan.

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [3]

--------------------------------------------------------------------------------

Yes, Arun, I guess when we put this plan together, the thinking is really very similar to what we were thinking in November, is that we were trying to be conservative and generate free cash flow. And so with the oil prices declining in the fourth quarter, we thought we were being conservative back in November with how we were deploying capital at that time. This reduction just is at a pace that will give us additional free cash flow, also gives us substantial growth of production. So I think it will allow us to demonstrate that we can generate growing amounts of free cash flow and grow the company.

--------------------------------------------------------------------------------

Arun Jayaram, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [4]

--------------------------------------------------------------------------------

Fair enough. And Tim, just a follow-up on the free cash flow characteristics of the new plan, any way you could give us a sense of your thoughts on, call it, between a $50 to $60 per barrel number in '19 and '20, what the free cash flow would look like and your thoughts on prioritizing that free cash flow in terms of cash return, the balance sheet or reinvesting in your portfolio?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [5]

--------------------------------------------------------------------------------

Yes, I'm going to give you directionally how I think about it, and then I'm going to let Jack kind of clean up the mess and give you more specifics, I think. I think between $50 and $60, there's a big change in the amount of free cash flow that we can generate, but I think as you look into the future, that range of pricing is very good for us. And I think that we can demonstrate that we can grow the company at exceptional growth rates and start to generate a free cash yield that competes kind of across all industries. And that's really what I'm focused on doing is growing our free cash flow yield to a level that generalist investors can get excited about.

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [6]

--------------------------------------------------------------------------------

Yes, and Arun, just to add a little bit color to that. I think this level, this capital level reflects a pace and an amount that allows us to cover our dividend and our capital budget in the low-50s this year. But we see an inflection point on free cash flow next year at an even lower price than that. And when you think about a price like $60, that amount of free cash approaches $1 billion in 2020. And in terms of priorities... Go ahead, I'm sorry.

--------------------------------------------------------------------------------

Arun Jayaram, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [7]

--------------------------------------------------------------------------------

Those are $1 billion in 2020?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [8]

--------------------------------------------------------------------------------

That's correct. And I also wanted to make sure we talked about -- you asked about priorities. Most certainly, balance sheet strength is a huge priority for us. We have a strong balance sheet, but I think we believe it can be stronger and like to see it gravitate more towards the lower end of the range we've stated of 1 to 1.5x. So making sure we achieve that. And then having the optionality for additional returns to shareholders or to run our business, depending on the set of circumstances that are at that moment in time.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

And our next question comes from Brian Singer with Goldman Sachs.

--------------------------------------------------------------------------------

Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [10]

--------------------------------------------------------------------------------

Following up on -- a little bit on the free cash flow point. You talked about having that big free cash flow number potentially if oil prices stay strong in '20 -- in 2020, but I wondered if you can talk a little bit about M&A. You mentioned earlier and you highlighted in your slide presentation you have 40 years of premium inventory, that seems like a lot of premium inventory. Can you talk to the interest or disinterest in further consolidation on a net basis? And whether that is a potential use of free cash flow or whether the free cash flow would be more thought of for debt pay down and return and returned to shareholders, as you mentioned?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [11]

--------------------------------------------------------------------------------

Well, this is Tim. I think that consolidation and leadership in the Permian Basin is something that we will always be a player in. And I mentioned how many trades we've done to try to continue to block up our assets. So continuing to high-grade this portfolio of assets, I think you're going to see the entire industry working on that. And we want to be at the forefront of that. The free cash flow that we generate from our business, though, doesn't need to go into consolidation. The free cash flow is kind of what runs our business, runs our capital program and provides cash flow to shareholders. So I wouldn't -- I think about those 2 things separately.

--------------------------------------------------------------------------------

Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [12]

--------------------------------------------------------------------------------

Great. And then my follow-up is with regards to oil mix, oil production and the percent of the total. Your guidance would appear to imply an increase in oil as a percent of the total, both in 2019 and in 2020 versus recent quarters. Can you just talk to the dynamics and drivers of this? And whether on the natural gas side you see any constraints, i.e., flaring or reinjection that are being assumed or expected?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [13]

--------------------------------------------------------------------------------

Yes, Brian, this is Jack. The increase in oil percentage, which is accurate, is a reflection of capital mix and the projects that we have planned for in the budget, which do have an increasingly oily mix. And it's the timing and the cadence that bring on those projects. As to the gas constraints, we do not anticipate any meaningful constraints in our business. The increase in oil is really more driven by capital allocation.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

And our next question comes from Phillip Jungwirth with BMO.

--------------------------------------------------------------------------------

Phillip J. Jungwirth, BMO Capital Markets Equity Research - Equity Analyst [15]

--------------------------------------------------------------------------------

Based on the 2019, 2020 guidance as your outlook is currently laid out, how would you say you're tracking versus the original $2 billion RSP synergies? And which synergy areas would you say you're outperforming, either the development efficiency, the asset optimization, shared infrastructure or corporate-level saving?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [16]

--------------------------------------------------------------------------------

As I've said before, I think the synergy part of it we've achieved in terms of interest-cost savings and G&A reduction. Those things are done. The real value-creation opportunity on the RSP assets was manufacturing-style development, which now 70% of the development going on in '19 on the RSP assets are long laterals and manufacturing styles. So that is a value creation on the RSP assets, and we'll continue on now as we develop those over many years. So I am very pleased with the value that I think is being created out of RSP.

--------------------------------------------------------------------------------

Phillip J. Jungwirth, BMO Capital Markets Equity Research - Equity Analyst [17]

--------------------------------------------------------------------------------

Great. And then on the upcoming dominator development, the 23 wells there, how are you looking to measure success of the project in terms of operational efficiency, leveraging facilities, productivity per well? And then how would you expect to communicate results from this project?

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [18]

--------------------------------------------------------------------------------

Sure, Philip, it's Will. We're obviously bringing that project on right now. I think it's something we would be speaking to in more detail next quarter, but I would say we would measure it in the same way we measure any other drilling project in terms of the returns we receive versus the investment. And also, that's a bit of a unique project just given its size. And as we've said before, we're trying to see how far we can push the efficiencies as you make these projects larger and larger. And also there's elements of spacing, testing and other things going on in that project. So there is a lot in that, but I'm not sure there's anything unique about it versus any of the other big projects we're doing.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

And our next question comes from Neal Dingmann with SunTrust.

--------------------------------------------------------------------------------

Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

--------------------------------------------------------------------------------

My first question just on your sort of '19 and '20 plan. It looks like you talk about, Jack, and a very nice capital cut for '19 as you and Tim just pointed out. But then it looks like what I think, if I'm reading that right, year-over-year CapEx for '19 into 2020 you assume is relatively flat. Does that mean in latter part of '19 or some time in '20, you would put some rigs up? I'm just trying to sort of balance those 2 years.

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [21]

--------------------------------------------------------------------------------

Yes, we average, for this year, 27 rigs. And to get there, we obviously are declining over the year. But it's a similar level of rigs next year in that plan, so yes, I would anticipate a bit of a ramp some time during 2020, but not much.

--------------------------------------------------------------------------------

Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [22]

--------------------------------------------------------------------------------

Okay. And then lastly, just looking to Slide 11 where you show some of your key projects. It looks like you continue to be pretty diversified as far as kind of about 78 wells in that Delaware Basin with those key projects and about 67 in Midland. Is that cadence-wise -- and I guess, you still feel equally as good about the 2 areas as judged by kind of the diversified plan?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [23]

--------------------------------------------------------------------------------

Absolutely. We like the diversity of the Delaware and Midland Basin. And when you look at our capital allocation this year, it's about a 60-40 mix with the 60 going to the Delaware.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

And our next question comes from Leo Mariani with KeyBanc.

--------------------------------------------------------------------------------

Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [25]

--------------------------------------------------------------------------------

I was hoping you could expand a little bit on the 2019 activity and then CapEx plan. Just kind of looking into the full year guidance, obviously you've got first quarter projection -- I'm sorry, first quarter CapEx certainly is kind of above the full year run rate. Can you give us a little bit color around how you guys kind of plan to reduce activity if it's kind of -- do a lot of these rigs start to roll-off as we work our way into the second quarter? As first quarter kind of your high-CapEx quarter for the year, what can you kind of tell us about the activity in spending pace throughout '19?

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [26]

--------------------------------------------------------------------------------

Definitely, Leo. There's a really helpful slide back on the very last slide in our deck around the guidance where we actually show you the 2019 rig cadence. And so we're averaging 32 rigs in the first quarter going to 26 in the second and then back half of the year averaging 24. So there's definitely a front-end loaded aspect as we come off the high of 35 rigs we ended the year with.

--------------------------------------------------------------------------------

Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [27]

--------------------------------------------------------------------------------

Okay. That's helpful for sure. And I guess, just in terms of asset sales, which you guys obviously focused on a little bit in selling off some of the noncore pieces in 2018, what can you kind of tell us about the plans for 2019? Are you guys going to kind of continue to prune and should we expect decent proceeds and asset sales here in '19?

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [28]

--------------------------------------------------------------------------------

That's a little hard to predict. We will definitely be very active on the portfolio management side. As Tim mentioned, we're most focused on the trades. That's kind of the preferred use of our noncore acreage to use them as currency and a trade. But you saw us peel off a noncore asset package or 2 in 2018, and that's certainly something we look at for 2019. When you look at the map, the goal is to end up with very large blocks of acreage in the best parts of the Permian. And so when you look at our map, the Northern Delaware kind of jumps off the page at you as an area that we still have a relatively scattered position. We like it, but it's certainly a focal point for trades and an opportunity for noncore asset sales.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

And our next question comes from Bob Brackett with Bernstein Research.

--------------------------------------------------------------------------------

Robert Alan Brackett, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [30]

--------------------------------------------------------------------------------

Yes, I had a question about some of the development efficiencies. I saw that big jump in lateral lengths from 8,000 to 9,700. You were able to achieve that in -- with a mix of Delaware and Midland acreage?

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [31]

--------------------------------------------------------------------------------

That's right. That really goes back to that conversation around those trades and swaps. That's been a big enabler for pushing lateral lengths, especially in the Delaware Basin.

--------------------------------------------------------------------------------

Robert Alan Brackett, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [32]

--------------------------------------------------------------------------------

And then expanding on that, can you talk about the fine-tuning of completions? You dropped stage count last year but improved the wells. Can you talk about where stage count goes in '19? And also maybe sand per foot, if there's any relevant change there.

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [33]

--------------------------------------------------------------------------------

Certainly. I think we should, if you look at the program year-to-year, one evolution as you noticed was staged spacing, but then also the intensity of the completions has backed off a bit. We continue to work on an evolving completion strategy for all the different zones and also kind of applications of -- it's not just the pounds per foot, there's a lot around lateral targeting and other aspects of the completion. So I would expect to continue to see that change over the future. But I think that's a driver in increased well performance over time as well.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

And our next question comes from Drew Venker with Morgan Stanley.

--------------------------------------------------------------------------------

Unidentified Analyst, [35]

--------------------------------------------------------------------------------

It's one to follow up on the last question on well performance improvements, can you speak to how much you think the well performance improvements have come from optimizing spacing and well design aside from -- and things targeting on the reservoir as opposed to just completion design modifications?

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [36]

--------------------------------------------------------------------------------

Hold it, that's a little hard to describe in a brief way. But certainly, I think what we're pleased by is that as we moved into this large-scale project development, we're seeing the results we expect, and it's enabling us to do some pretty interesting things from testing and continuing to understand the best way to do it.

--------------------------------------------------------------------------------

Unidentified Analyst, [37]

--------------------------------------------------------------------------------

Understood. Maybe if you all could give a little bit more color on how you think spending maybe would flex in the higher price environments like $60 or $70 price environment. That'll be helpful, I guess, for both for '19 and '20.

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [38]

--------------------------------------------------------------------------------

Yes, I would say that we run a flexible business, but I really think that higher oil prices would just generate bigger cash yields for us, free cash flow. So -- and I think that's how we can differentiate ourselves, that we can show growth and really strong free cash flow.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

And our next question comes from Michael Hall with Heikkinen Energy.

--------------------------------------------------------------------------------

Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration and Production Research Analyst [40]

--------------------------------------------------------------------------------

I guess I wanted to just kind of come back to the evolution of your thinking on -- as you thought the E&P business model. I'm just kind of curious on kind of what would you say are your guiding principles behind the why in the evolution of this E&P business model? It's kind of taking the other side on some level. Concho has got probably one of the deepest inventories in the business, low-cost structure, differentials are narrowing, costs are falling cyclically. So one could ask why slow now? Why not just kind of push through? I'm just curious to what extent that was discussed or debated and kind of what are the guiding principles behind, I guess, the why in this evolution?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [41]

--------------------------------------------------------------------------------

Well, I mean, we've been talking for some quarters now about a compelling business model for our industry. And the one thing to remember about Concho is that while I think we're one of the leaders in the shale revolution, we're -- this company was only started 12 years ago. And so -- as I talk to my shareholders that were investors on the IPO of this company, they invested -- our shareholders have stayed with us through the discovery of the biggest oil field in the world. They've stayed with us while we were delineating it and trying to figure out how to best drill it and now it's kind of time for a payday. And so when you think about what does the payday look like for those long-term investors, I think it's a model that competes with any other kind of industrial model in the world where you can grow and generate enough free cash flow to redistribute to shareholders that it's a new kind of oil and gas model.

--------------------------------------------------------------------------------

Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration and Production Research Analyst [42]

--------------------------------------------------------------------------------

Okay. That's helpful. I appreciate the color. And I guess, it kind of segues to my next question, which was the payday, I guess, the dividend. How are you guys thinking about target yields on that, if you have one? And what sort of time frame should we think about for the pace of growing the dividend?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [43]

--------------------------------------------------------------------------------

I mean, this quarter we just initiated our first dividend ever, so it's kind of earlier gain. But I would say that I think what we're thinking about more is being able to demonstrate increasing cash yields. And then talk about, after your balance sheet is right where you want it and what form is the best way to get capital back to shareholders.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

And our next question comes from Bob Morris with Citi.

--------------------------------------------------------------------------------

Robert S Morris, Citigroup Inc, Research Division - MD and Senior U.S. Oil and Gas Exploration and Production Analyst [45]

--------------------------------------------------------------------------------

Tim, you mentioned earlier that when there's a slowdown, there is typically a 3 or 4-month lag on seeing oil field service cost inflation or deflation. But at this point, we're a little bit into that. With the slowdown by you and a lot of your peers in the Permian Basin, what are you expecting or seeing today as far as oil field service cost deflation on the year?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [46]

--------------------------------------------------------------------------------

Let me say, in general, that if everybody lives within their cash flow, we don't need 500 rigs running in the Permian Basin. So we are thinking that the back half of the year ought to be less expensive than it is today. But do you want to talk about how...

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [47]

--------------------------------------------------------------------------------

I would just add to that, that we have -- our plan is based on costs as we see them today. And so to the extent they do come down, that would be incrementally beneficial.

--------------------------------------------------------------------------------

Robert S Morris, Citigroup Inc, Research Division - MD and Senior U.S. Oil and Gas Exploration and Production Analyst [48]

--------------------------------------------------------------------------------

Okay. And then, Tim, just curious, with the slowdown in activity now, how does this impact the economics on the price you paid for RSP? Or is the bulk of the slowdown really on the legacy Concho assets? How do you think about that with regard to RSP?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [49]

--------------------------------------------------------------------------------

No, we have combined this. We've successfully put 2 businesses together. RSP was a thriving business that was generating its own cash flow. If you look at how the capital is being distributed in '19, there's just about as much capital going back to the RSP assets as they represented in the whole combination. So I think about it as taking 2 businesses and combining them into 1 better business. But -- so the capital efficiency is gained from the way that we are drilling the RSP assets.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

And our next question comes from Paul Sankey with Mizuho.

--------------------------------------------------------------------------------

Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [51]

--------------------------------------------------------------------------------

Appreciate your comments about doing what shareholders want. Things have changed, obviously, in the time that you have been IPO'd and then run the company. Are you now really going to more cash -- I guess, the point is you're going to a more cash return-oriented strategy. And the big idea, I think 2 or 3 years ago, maybe longer, was that you would sell the company. Is the idea now to run it hard for cash return?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [52]

--------------------------------------------------------------------------------

That wasn't my big idea, Paul, I don't know it may have been your big idea.

--------------------------------------------------------------------------------

Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [53]

--------------------------------------------------------------------------------

I thought you told me that.

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [54]

--------------------------------------------------------------------------------

No, you were talking to the other Tim, I think. But my big idea is to create a business model that hasn't ever existed before, one that attracts capital across all industries because of the growth and capital return to create something that's really compelling for investors. And that's what gets our blood pumping is to see if we can, through the right sets of assets and capital allocation, create something that's a compelling investment.

--------------------------------------------------------------------------------

Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [55]

--------------------------------------------------------------------------------

And so the idea is rapid cash return growth, I guess, right now? Or I mean, you have such a big growth opportunity in volume's terms.

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [56]

--------------------------------------------------------------------------------

Yes, well, I mean, I still think we're growing pretty substantially, even in a reduced capital scenario. From a pretty big base, I would say, too.

--------------------------------------------------------------------------------

Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [57]

--------------------------------------------------------------------------------

Sure. Yes, that's kind of the idea because, I guess, you're getting too big to sell yourselves, right?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [58]

--------------------------------------------------------------------------------

I don't know -- Go on to your next topic.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

And our next question comes from Jeffrey Campbell with Tuohy Brothers.

--------------------------------------------------------------------------------

Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [60]

--------------------------------------------------------------------------------

Earlier in the call, you said 2020 outlook is using a lower than 2019's low-50s benchmark. What are the variables to elevate the year-over-year free cash in 2020, bearing in mind a flattish year-over-year spend and a lower commodity assumption?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [61]

--------------------------------------------------------------------------------

Yes, just to clarify, what we said earlier is that our 2019 dividend and capital program can be funded in the low 50. And that as we look into 2020 at a lower price like $50, we can cover all of those things and have additional cash flow. And if we see a price somewhere at the level the strip is currently or even approaching $60, we see free cash approaching $1 billion.

--------------------------------------------------------------------------------

Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [62]

--------------------------------------------------------------------------------

Okay. And -- but I guess, what I'm asking is what is it about 2020 that's going to make that performance even if the commodity assumption is lower? Is it just this continued push towards bigger and bigger projects and longer laterals, sort of just what are some of the variables there?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [63]

--------------------------------------------------------------------------------

Sure. I mean, the -- our focus will be on the most efficient deployment of our capital under any circumstance, and that is further highlighted the lower the commodity prices. And I think it's actually an opportunity for us to differentiate ourselves. But you're right, it's making our investment better through large project development, lateral placement within the zones, well spacing, all of the small knobs that can now be turned to increase efficiency.

--------------------------------------------------------------------------------

Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [64]

--------------------------------------------------------------------------------

Okay. That was helpful. And I was also just wondering just from looking at the map of what you've been doing recently, I'm just wondering how is your Reeves County acreage competing for capital with the New Mexico, Delaware Basin and the core Midland Basin acreage. And I was wondering if any of the large-scale projects that you've detailed on Slide 11 are located in the Reeves area.

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [65]

--------------------------------------------------------------------------------

Sure. This is Will. There are large-scale projects in the Reeves area. I mean, if you look on Slide 9, I think they do a good job of showing where all of our wells are located. So I think you can see. Granted that's just the fourth quarter. But you can see a pretty broad dispersion of development across all of our assets now. And if you looked at on an annual basis, I think you would see it across almost the entire portfolio.

--------------------------------------------------------------------------------

Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [66]

--------------------------------------------------------------------------------

Okay. So none of the projects that were named on Slide 11 are in Reeves, but Reeves is bringing in some projects.

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [67]

--------------------------------------------------------------------------------

Yes, I think the Jack project is in Reeves. And then there's one other significant project, and there's also -- the Tempest well, there it is.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

And our next question comes from Ryan Todd with Simmons Energy.

--------------------------------------------------------------------------------

Ryan M. Todd, Simmons & Company International, Research Division - MD, Head of Exploration & Production Research and Senior Research Analyst [69]

--------------------------------------------------------------------------------

Maybe just a question on the large-scale projects. You've seen strong results to date on the various projects that you developed. Can you provide any additional color on takeaways that you're seeing from these projects, whether regarding proper development of multiple horizons, efficiency gains, potential impact of parent-child dynamics and well productivity, things like this?

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [70]

--------------------------------------------------------------------------------

Sure. I mean, while it's still early, it's been a slow evolution for us into these larger and larger project sizes. I'll just say we're obviously very pleased with what we're seeing and what we're expecting to see. I think we also doubled down on the necessity of doing it this way if this is the better way to do it. I'm modestly optimistic with over measured in periods and years, we will continue to find more efficiencies out of doing it that way, in addition to just the base reasons to do it around mitigating parent-child impacts, things like that.

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [71]

--------------------------------------------------------------------------------

I would also add that when you look at the Permian Basin map having big blocky acreage, once again, it becomes apparent to us that, that's the way you can mitigate parent-child relationship and also frac hits from neighbors and things like that. So we're very pleased with the way our acreage is configured and the trades and the way we've continued to block up big chunky blocks of the best parts of the Permian.

--------------------------------------------------------------------------------

Ryan M. Todd, Simmons & Company International, Research Division - MD, Head of Exploration & Production Research and Senior Research Analyst [72]

--------------------------------------------------------------------------------

And are you -- I mean, are you trending towards a time where you increasingly develop full sections in terms of all of the developable horizons at the same time? Or do you think that you focus on 1 or 2 or 2 or 3 of the primary target horizons first, and then go back at a later time and do secondary horizons?

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [73]

--------------------------------------------------------------------------------

No, we think it's a 3-dimensional problem. So you need to do all horizons simultaneously. So one of the big questions, and you can kind of see it if you look at our list of projects on Slide 11, one of the big questions is what's the optimal project size, and the answer is a little bit different, depending upon where you are in the Permian and your lateral length. But we think it's important to do -- we're typically doing half-mile fairways. It's kind of a way we think about it is developing the entire -- all of the horizontal targets in a half-mile fairway at one time.

--------------------------------------------------------------------------------

Ryan M. Todd, Simmons & Company International, Research Division - MD, Head of Exploration & Production Research and Senior Research Analyst [74]

--------------------------------------------------------------------------------

That's helpful. And maybe just a quick one on the fourth quarter. 4Q CapEx was probably a little bit higher than expectations. Was that just tightness towards the end of the quarter? Was there any particular driver of that?

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [75]

--------------------------------------------------------------------------------

I mean, we were clearly ramping activity into an anticipated activity level in '19. So there's a little bit of that. There's a whole bunch of little things. But I'll just point you to the fact that 2018 capital came at the high end of our guidance range. So I don't think it was really outside of our expectation.

--------------------------------------------------------------------------------

Operator [76]

--------------------------------------------------------------------------------

And our next question comes from John Freeman with Raymond James.

--------------------------------------------------------------------------------

John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [77]

--------------------------------------------------------------------------------

The Slide 11, which shows the breakdown of activity this year is really helpful. Would it be possible to get the 1Q wells that are anticipated to pop in 1Q? I'm just trying to get to see what the percentage of those kind of really large pads in the Delaware that come out at the very end of 1Q is sort of out of the total in 1Q.

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [78]

--------------------------------------------------------------------------------

Yes, we're guiding your pretty clearly there. On the far right side of that page, there's a lot of wells coming on in the back half of the first -- probably in the neighborhood of 70 in 1Q.

--------------------------------------------------------------------------------

John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [79]

--------------------------------------------------------------------------------

Perfect. And then when I look at -- you've got the rig cadence as it goes through '19. In 4Q, you had the 34 rigs and the 7 frac crews. Is that sort of ratio of rigs to frac crews, does that sort of hold through the year? Or just maybe how we should think about that.

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [80]

--------------------------------------------------------------------------------

It's probably in the range of 7 completion crews throughout the year in '19. And it'll bounce around a little bit as we -- one of the big things we've been working with on these projects is trying to compress the time from spud to first sales on the project, and the way we do that if we will both hit it with multiple rigs at the same time and also multiple completion crews. So the completion number may have bounced around from month-to-month, but I think the average is in that 7 to 8 number.

--------------------------------------------------------------------------------

Operator [81]

--------------------------------------------------------------------------------

Our next question comes from Charles Meade with Johnson Rice.

--------------------------------------------------------------------------------

Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [82]

--------------------------------------------------------------------------------

I wanted to go back to some of the earlier questions around the 2019 and the 2020 guide. It looks like you guys are appointed to a pretty steady quarter-over-quarter growth through '19 and on into '20. But if you just looked at the rig count going from 34 down to 24 in capital spending trend you announced through the back half of the year, that wouldn't -- you wouldn't guess that there would be steady growth. So what are some of the other -- what's missing from that picture that helps you guys continue that steady growth despite the reduced spending in rig rates?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [83]

--------------------------------------------------------------------------------

Sure. I think it's good to look at the bottom left of the Slide 11. And while the drilling and completions match up for the year, we do have more wells being placed on production during the year, and it's the cadence of those wells being put on production and being able to start completing all of the large projects that we invested in last year and were not producing last year.

--------------------------------------------------------------------------------

Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [84]

--------------------------------------------------------------------------------

So it's just kind of the delay through completions and the size of pads to bring on those wells to production?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [85]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [86]

--------------------------------------------------------------------------------

Okay. And then, Will, perhaps this is a question for you. I kind of -- just talking about assets, it's a different way earlier, but you mentioned about those -- the way you're developing different zones across the pad. And I wondered if you could talk a little bit about those -- the 2 of the pads that you guys talked about, the Gettysburg pad and the Square Bill pad, they've both kind of been in the same neck of the woods there and Southeast New Mexico. But I was noticing that one of them was just Third Bone Springs and the other one was Third Bone Springs and Wolfcamp A. And I wondered if you could talk about if -- what's the reason that you targeted just one zone in one and 2 on the other, and what's more indicative of the way you guys are going to operate going forward?

--------------------------------------------------------------------------------

C. William Giraud, Concho Resources Inc. - Executive VP & COO [87]

--------------------------------------------------------------------------------

Yes, I mean, I said the -- I should have probably clarified. So the ideal is to be doing half-mile fairways, where you're attacking all of them. You think back to when these projects were started, this is on that evolutionary continuum. And so as we've been doing -- we've been testing both horizontal spacing within an individual zone, which that -- Gettysburg is an example of that. And we've also been testing the interaction between different landings, which the Square Bill is an example of that. So it's just part of that evolution to this large-scale model where you're truly developing all of the zones simultaneously.

--------------------------------------------------------------------------------

Operator [88]

--------------------------------------------------------------------------------

And our next question comes from Jeanine Wai with Barclays.

--------------------------------------------------------------------------------

Jeanine Wai, Barclays Bank PLC, Research Division - Research Analyst [89]

--------------------------------------------------------------------------------

I just wanted to follow up on some of the prior free cash flow questions. The release indicates that moderating activity really enhances Concho's free cash flow outlook and capital efficiency. And I think you mentioned earlier on the call that the updated outlook generates $1 billion of free cash flow in 2020 at $60 WTI. So I'm just wondering how much higher is that number versus the prior outlook at the same oil price?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [90]

--------------------------------------------------------------------------------

That's -- it's hard to compare with the different capital spend levels, but I think relative to where we are today, really, I think the most important focus is kind of lowering the bar in terms of the base level of commodity to set the capital budget. And the efficiency gains we are able to see by high-grading the budget. And so I'd just focus more on where we are today, and I think it's in terms of dollars invested and yields gained, it's at least as good if not better than before.

--------------------------------------------------------------------------------

Jeanine Wai, Barclays Bank PLC, Research Division - Research Analyst [91]

--------------------------------------------------------------------------------

Okay, great. And then, I guess, my second question is just more general one. You mentioned building a company that hasn't existed before. Can you discuss how you benchmark yourself versus peers in both the near term and the medium term? And I know you've mentioned a bunch of things on the call already, but any specific numbers that you can provide on the metrics would be great.

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [92]

--------------------------------------------------------------------------------

Sure. We track certain metrics that we think correlate the most closely with share price appreciation, but ultimately our share price itself is the report card that it is most important.

--------------------------------------------------------------------------------

Operator [93]

--------------------------------------------------------------------------------

And our next question comes from David Deckelbaum with Cowen.

--------------------------------------------------------------------------------

David Adam Deckelbaum, Cowen and Company, LLC, Research Division - Senior Analyst [94]

--------------------------------------------------------------------------------

You've talked a lot about the focus on free cash. I'm curious as you look at your program in '19 and '20 and perhaps beyond, you also alluded to Jack and his team working on a lot of things to cut costs. When you look at the large projects, how do you balance the desire to create sort of an annual free cash yield versus sort of the cash recycle periods associated with large pads? And I guess, if you thought about where you are in optimizing that process, do you still feel like it's early innings and that there's a lot of efficiency gains to be had in '20 and '21?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [95]

--------------------------------------------------------------------------------

Well, I'll start with the efficiency gains. And yes, I do think they are there to be had. They're -- as we mentioned before, they're not going to be as obvious as they have been up to now, which is lateral length, stage benching and sand loading. It's spacing within the zone, spacing -- I'm sorry, placement within the zone is spacing of wells in the large projects. And so I think there are incremental gains to be had. Speaking of the large project developments, though, and the first part of your question. As we've ramped up, last year was the biggest ramp, and we were going further in terms of percentage of capital spent on those kind of projects now. And so now we're starting to get into a mode where we will roughly equal out the number of wells that come in and go out uncompleted. And so that I think you're able to see that efficiency of that type of development starting this year and enhancing next year.

--------------------------------------------------------------------------------

David Adam Deckelbaum, Cowen and Company, LLC, Research Division - Senior Analyst [96]

--------------------------------------------------------------------------------

Okay. So that kind of smoothens out that cadence then over the next couple of years?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [97]

--------------------------------------------------------------------------------

Yes, I think the fourth quarter to first quarter should the shallowest or flattest production cadence this year. And I wouldn't say that, that will never happen again in the future because it very well may. But as we look out over the next year, it should -- the trajectory should be up.

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [98]

--------------------------------------------------------------------------------

I would add also that one of the things about continuing our business in this way and at the pace that we're doing it, it flattens that PDP decline curve. And the flattening of the PDP decline curve really helps us run our business and generate more free cash flows.

--------------------------------------------------------------------------------

David Adam Deckelbaum, Cowen and Company, LLC, Research Division - Senior Analyst [99]

--------------------------------------------------------------------------------

That makes sense. So I suppose even as you get to 2021, if there's a need to add rigs, like Jack was talking about, at the end of '20, based on whatever your targets are, you've still lowered your PDP decline to a point where you're still lowering that free cash breakeven over time?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [100]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

David Adam Deckelbaum, Cowen and Company, LLC, Research Division - Senior Analyst [101]

--------------------------------------------------------------------------------

Okay. And if I could just ask one quick follow-up. You talked about the firm sales agreement getting down to the Gulf. As you've waited, you alluded to earlier -- I appreciate that you didn't act too irrationally before. As you've waited for the market to clear a bit, did you see sort of a natural opportunity to be able to mark more of your barrels to Brent with favorable terms? And is there sort of a philosophical balance or mix that you'd like to have exposed to Brent versus Midlands?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [102]

--------------------------------------------------------------------------------

Sure, David. We like the idea and have described the desire to have a mix of pricing between Midland and some Gulf and beyond related price. However, we like Midland as a place to price barrels. And so I think even though we'll build out this diversity, Midland will more than likely always make up the majority of where our barrels are priced.

--------------------------------------------------------------------------------

Operator [103]

--------------------------------------------------------------------------------

And our next question comes from Nitin Kumar with Wells Fargo.

--------------------------------------------------------------------------------

Nitin Kumar, Wells Fargo Securities, LLC, Research Division - Senior Analyst [104]

--------------------------------------------------------------------------------

Just maybe referring back to something you said at the beginning of the call, you've got activity here by 17% within the quarter. You mentioned it takes about 3 or 4 months to get that. You also talked about prioritizing some of your extra free cash flow to growth. What are your markers over the next 2 years towards additional activity? I know you just got activity, but I'm just kind of curious, what are your markers to adding activity at this point?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [105]

--------------------------------------------------------------------------------

Sure. We value running a steady shift as we've described in the past. And so I think that's what you see us talking about when we lay out '19 and a base plan for '20. And so as our cash flow grows and the production base grows, you should expect to see over activity levels grow as well. And it will be -- we'll have to see what the circumstances look like at that point in time. But I think you should expect a -- the same things. It should be growth of balance with increasing cash yield.

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [106]

--------------------------------------------------------------------------------

And I would also say, the second half of this year and into next year, if we see lower service cost, we can get more done with the same dollars. So that might lead to more activity and more efficiency at lower service cost.

--------------------------------------------------------------------------------

Nitin Kumar, Wells Fargo Securities, LLC, Research Division - Senior Analyst [107]

--------------------------------------------------------------------------------

And the other one was just your gas and NGL pricing, for the year, you modeled a 10% discount versus Henry Hub, but traditionally it's been around a 15% to 20% premium. When do you expect that to come back to kind of more normalized level? Or is that the go-forward normal for the basin?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [108]

--------------------------------------------------------------------------------

Well, it'll be highly driven by the NGL pricing. And so when we see ethane and propane recover to higher levels like we saw in the third quarter, that would be the main driver of that gas realization for us.

--------------------------------------------------------------------------------

Operator [109]

--------------------------------------------------------------------------------

And our next question comes from Richard Tullis from Capital One Securities.

--------------------------------------------------------------------------------

Richard Merlin Tullis, Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production [110]

--------------------------------------------------------------------------------

So Tim, Concho has a fairly long history drilling the Northwest shelf. How does that area compare on returns today, given the generally lower well cost? And I guess, we've been seeing some solid well results from industry drilling in Abo and Yeso recently. So how are you looking at that area these days?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [111]

--------------------------------------------------------------------------------

Sure. I mean, we still like the Northwest shale. The returns, as you referenced, are still very attractive. The challenge has always been for us, as we've gotten bigger, is just it doesn't drive the growth for the company. And so it has become a smaller and smaller piece of our capital budget over time, not because we disfavored, it's been a great flywheel asset over the years and really funded the growth of the Delaware Basin for a long time.

--------------------------------------------------------------------------------

Richard Merlin Tullis, Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production [112]

--------------------------------------------------------------------------------

Okay. And then just lastly, I guess, more of a macro question for Tim or anyone on the team. What is the next leg in the Permian consolidation process? And does the consolidation slow at least from an M&A viewpoint with oil, let's say, at $55, $60 oil?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [113]

--------------------------------------------------------------------------------

Well, oil volatility has always been the enemy of consolidation, it seems like. And everybody has been saying for several years that consolidation is going to start next quarter, and it never has. So I mean, yet last year was a pretty active year, though, in deals in the Permian. So I think you're going to see a steady stream of the map resolving itself to who the final players are going to be that can really execute with the scale. And I also mentioned blocky assets are very critical. So I think it will take years of work, I think, for the picture to resolve itself.

--------------------------------------------------------------------------------

Operator [114]

--------------------------------------------------------------------------------

And our last question comes from Derrick Whitfield with Stifel.

--------------------------------------------------------------------------------

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [115]

--------------------------------------------------------------------------------

Certainly, I want to applaud you guys on your capital discipline outlook...

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [116]

--------------------------------------------------------------------------------

A question [of stock] .

--------------------------------------------------------------------------------

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [117]

--------------------------------------------------------------------------------

Perhaps for Tim or Jack, the capital efficiency implied in your 2019 and 2020 outlooks relative to consensus is quite impressive. Building on an earlier question and your earlier PDP decline comment, Tim, as you slow growth, to what degree does your base decline decrease at year-end '19 and year-end 2020?

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [118]

--------------------------------------------------------------------------------

It's such a big base right now, it only moves a couple of points in the near term, but a couple of points is a big number of barrels. So -- but over the long term, that's an important factor to keep an eye on.

--------------------------------------------------------------------------------

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [119]

--------------------------------------------------------------------------------

Completely agree. And then referencing Page 8 of the PowerPoint, you guys posted a material growth in your premium resource category. Are there specific areas or intervals that accounted for that significant amount of growth?

--------------------------------------------------------------------------------

Jack F. Harper, Concho Resources Inc. - President & CFO [120]

--------------------------------------------------------------------------------

Derrick, it was -- it's really representative of the areas that you've seen us focusing on and talking about over the last 12 to 18 months. So it's driven by Northern Midland Basin, Delaware Basin. And so it really is representative of the portfolio, and we'll continue to high-grade that and attempt to move more resource into that category.

--------------------------------------------------------------------------------

Operator [121]

--------------------------------------------------------------------------------

And that concludes our question-and-answer session for today's call. I would now like to turn the call back over to Tim Leach for any further remarks.

--------------------------------------------------------------------------------

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [122]

--------------------------------------------------------------------------------

Thank you for your attention. I know there's a lot of earnings coming in today and lots of calls. But I appreciate your interest in Concho, and look forward to talking to you in the next quarter. Thank you very much.

--------------------------------------------------------------------------------

Operator [123]

--------------------------------------------------------------------------------

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