U.S. Markets open in 6 hrs 41 mins

Edited Transcript of CXO earnings conference call or presentation 30-Oct-19 1:00pm GMT

Q3 2019 Concho Resources Inc Earnings Call

MIDLAND Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Concho Resources Inc earnings conference call or presentation Wednesday, October 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* C. William Giraud

Concho Resources Inc. - Executive VP & COO

* Jack F. Harper

Concho Resources Inc. - President

* 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

* David Adam Deckelbaum

Cowen and Company, LLC, Research Division - MD & Senior Analyst

* Derrick Lee Whitfield

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

* Douglas George Blyth Leggate

BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research

* Gail Amanda Nicholson Dodds

Stephens Inc., Research Division - MD & Analyst

* 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 & Production Research Analyst

* Nitin Kumar

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Paul Benedict Sankey

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

* 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

* Ryan M. Todd

Piper Jaffray Companies, Research Division - Research Analyst

* Scott Michael Hanold

RBC Capital Markets, Research Division - MD of Energy Research & Analyst

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

Presentation

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

Operator [1]

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

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Concho Resources Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

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

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

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

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

Thank you. Good morning, and welcome to Concho's Third Quarter 2019 Earnings Call. Our earnings release and corporate presentation are both available on our website. Participants on today's call will make forward-looking statements based on current expectations. They are subject to risks and uncertainties. Forward-looking statements and other disclaimers are provided in the earnings release and presentation. Our comments today may also reference non-GAAP financial measures. You'll find the appropriate reconciliations in our earnings materials.

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

Following our prepared remarks, we will host a question-and-answer session. (Operator Instructions)

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. Last quarter's results undermined our consistent track record and raised concerns about our execution ability due to the performance of several spacing tests. We've course-corrected, and our priorities are to demonstrate our execution ability, highlight our asset quality and continue to show financial discipline and cost management.

Our results for the third quarter demonstrate that we're focused on these priorities and that we're making solid progress on what we set out to do. I'm confident that Concho hasn't lost our ability to execute and that our performance is sustainable over the long term.

During today's call, I hope these key messages resonate. Well cost improved dramatically. We're reducing our operating cost structure. We generated strong cash flow, which exceeded our exploration and development cost. We continue to high-grade our portfolio. We have a strong balance sheet, which we reinforce with proceeds from asset sales. And we're positioned for growth and returning capital to shareholders. We want to use our call this morning to emphasize that we're executing a clear strategy and taking steps to position the company for 2020 to provide free cash flow and growth.

An important step in improving our capital efficiency and cost structure is the sale of the New Mexico Shelf. The cash flow from this asset funded our discovery and development of other plays in the Permian. However, within our broader portfolio, it no longer competes for capital, and the sale is consistent with our ongoing effort to high-grade our assets and accelerate returns to shareholders.

We have a strong foundation for future success, and the fundamentals of our business are improving. Looking ahead to 2020, planning around a conservative commodity price, we can deliver oil growth, free cash flow and shareholder returns. At lower oil prices, our financial strength provides flexibility, and we'll manage the business within cash flow. At higher prices, we'll generate more free cash flow, which will fund more shareholder returns.

The industry has faced a lot of different challenges over time. Today, sentiment towards the sector is low and amplified by campaign promises to severely limit or regulate away oil and gas operations. This comes at a time when Concho and our peers are making significant strides in reducing our environmental footprint, all the while unlocking an energy source in our country that's provided us with more security and changed the global balance in our favor.

Since we don't know how the politics will resolve, I'll clarify that our exposure to federal acreage is about 20% of our total gross and net acreage position, and our capital allocation toward that acreage is roughly the same. We have a great deal of flexibility if we need to reallocate that capital.

In the last 5 years, WTI has averaged between $50 and $60, with frequent moves outside this range. This has provided a dynamic backdrop as we transition from delineation mode to development while also optimizing drilling and completion methods. In this new phase for U.S. shale, we were early to recognize the importance of scale. We've built a strong team and high-quality portfolio, both of which have been our biggest competitive advantages. Our results for the third quarter demonstrate our ability to leverage those advantages and create value for shareholders.

Before I hand it over, I want to say that I'm proud of the efforts of our employees. I'm thankful for your hard work and dedication to Concho.

Now here's Jack with more details on the quarter.

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

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

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

Thanks, Tim, and good morning. Operationally, we performed well in the third quarter. Production averaged 330,000 BOE per day and exceeded the high end of our guidance range. It also represented a 15% [interest] from the same period last year.

Oil volumes increased 12% year-over-year to 206,000 barrels per day. For the fourth quarter, we expect production to average between 318,000 and 325,000 BOE per day, which includes 1 month of production volumes from the shelf and compares to our pre-divestiture outlook of 334,000 to 341,000 BOE per day.

Lastly, on production. Our spacing tests are cycling through, and our guidance incorporates our expectations for those tests. In other words, we believe that we've adequately risked the volume guidance to account for the remaining tests that are coming online. And importantly, as we plan for 2020 and beyond, we will develop fewer wells per project at wider spacing.

Financially, we are focused on the things within our control. Our performance was also good. Controllable cash cost, which includes lease operating, G&A and interest expense, totaled $9.57 per BOE, which represents improvement year-over-year and sequentially. We're working to further reduce controllable cash costs to $9 per BOE by year-end 2020. With the shelf sale, we will divest 1/3 of our wellbores, which will contribute to lower lease operating expense. Also, we plan to allocate a portion of the sales proceeds to pay off our revolver balance, which will reduce interest expense.

I'm happy to report that the third quarter operating cash flow before working capital changes of $706 million exceeded exploration and development capital of $670 million. This marks an important return to free cash generation for the company primarily driven by better capital costs.

As you can see on Slide 7 in the earnings materials, third quarter well costs represent a strong rate of change, admittedly from a high starting point. Our progress this year is the culmination of a lot of work across the organization, which has resulted in efficiency gains and improving cycle times. Key initiatives include continuing to optimize drilling and completion designs.

Water is also an important part of the supply chain. And in the second quarter, we entered into a joint venture with Solaris that leverages the scale of their system to provide cost-effective water management to our operations in Eddy County.

These operating efficiencies and well cost reductions provide momentum as we come to the end of 2019 and look ahead to 2020.

(technical difficulty)

Portfolio has been a decade in the making, and our work in 2019 informs our go-forward development strategy. We are assembling a 2020 development program that incorporates everything we've learned this year, from well spacing and density to lateral placement and completion techniques. We will continue to learn and adapt but not at the expense of returns or consistent execution you expect from us.

With a sharp focus on capital efficiency and managing the leverage we control, we're well positioned to deliver on the framework for 2020 that Tim outlined: sustainable oil growth, free cash flow and shareholder returns. We plan to run a steady program in 2020. This will support predictable performance and a growing wedge of free cash, which we estimate to be $350 million at $50 WTI and $750 million at $60 oil.

Importantly, if oil prices increase, we won't chase the incremental barrel. We have a strong commitment to capital discipline because we believe it's key to maintaining a strong balance sheet and growing long-term value.

Now we'll turn the call over for Q&A.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) Our first question comes from John Freeman with Raymond James.

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

John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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

When I look at Slide 12 that you all provided, which sort of gives the guideposts on the free cash flow outlook for 2020, which looks -- it's very similar to what you all have communicated in the past about sort of steady rig adds. And then free cash flow positive at $50 (technical difficulty) billion as you get closer to $60. Should I assume that the kind of same applies with the previous commentary you all have had on production in terms of kind of double-digit kind of production growth with kind of oil production outpacing the overall growth?

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

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

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

Yes. John, I think that the way to think about 2020 is those are the sideboards, and we're going to run a steady ship within those sideboards. And so that pro forma oil growth within those sideboards is kind of that low double-digit growth, no matter if oil is $50 or $60. And if it goes above $60, then you -- we won't chase the oil up, as Jack said. If it goes below $50, we have the flexibility then to stay within cash flow.

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

John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

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

Great. And then just a follow-up for me. Can you sort of talk about kind of the decision process to draw down DUCs maybe a little earlier than anticipated and maintain sort of the steady frac crew count? Was that just mainly due to the improvements that you're seeing on the cost front?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [5]

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

John, it's Will. That's exactly it. We've seen a pretty meaningful efficiency gain and cost savings over the last quarter. And so that's going to allow us to keep running 2 frac crews that we were planning on dropping in the fourth quarter. And the result of that is a more smooth transition from the fourth quarter of '19 into the first quarter of '20 and a reduction in the year-end '19 DUC count down to roughly 70. But importantly, our 2019 capital budget guidance is unchanged.

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

Operator [6]

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

Our next question comes from Doug Leggate with Bank of America.

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

Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [7]

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

Tim, I wonder if I could go back to the guidepost for 2020 and ask what -- I know you're going to give your guidance later on, but what kind of capital goes along with that $350 million, the $375 million to $750 million free cash flow number? Because I'm guessing the CapEx is static through the year. And if I could bolt on to that, maybe this is my part 2, if you could help us with what was the cash flow given up from the sale of the shelf. I'll leave it there.

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [8]

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

Well, we haven't come out with our capital budget and communicated that for 2020, but it's -- we have said that it would be kind of steady throughout the year.

And Jack, do you want to comment on the cash?

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

Jack F. Harper, Concho Resources Inc. - President [9]

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

Yes. Sure. Yes. In previous calls, we've talked about at $60 oil, free cash approaching $1 billion. And so when you add the shelf cash flow at that level plus revert to gas prices that were -- they look more like they looked a year ago, that kind of bridges that gap.

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

Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [10]

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

That's helpful, guys. Maybe I will take a second, if I may. The cadence on the tills, I just wonder if you could -- obviously, you've stepped back up the completions again, as you pointed out, with the additional frac -- or retaining the frac crews. But it looks to us as if it is going to set you up with pretty strong momentum going into the back end of the year. I'm just wondering if you could give us some idea as to what the cadence of those completions looks like as we head into 2020. I will leave it there.

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [11]

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

Sure. I mean just for clarity's sake, what we're doing is not dropping those 2 crews. It's not that we're adding them. So the cadence ought to look pretty steady.

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

Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [12]

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

Through the quarter, Will?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [13]

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

Yes.

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

Operator [14]

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

Our next question comes from Arun Jayaram with JPMorgan.

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

Arun Jayaram, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [15]

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

First question regarding your free cash flow outlook for 2020. It looks to be, call it, $100 million above where The Street sat using a more conservative deck. I was wondering if you could give us some color on what kind of D&C cost savings that you're assuming, which is underpinning that free cash flow outlook. It looks like you did about $955 per lateral foot in the third quarter. I was wondering if you can maybe comment on what drove the declines that you saw in the third quarter, the sustainability and how are service costs factoring in to the overall D&C environment?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [16]

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

Sure. Arun, going to your first question, that outlook kind of reflects the world as we see it today from a cost standpoint. And we're showing in there on Slide 7, the costs were running high in the back half of '18, and they've been a major focus point throughout '19. The inefficiencies peaked in the first quarter, with several shorter lateral projects, negative impacts from rapidly ramping down from kind of a mid-30s rig count to the 18 we're at today. And that steady improvement in cost per foot in the second and third quarters were driven both by sustainable gains in how we drill and complete the wells, but also more cyclical benefits of an overall slowing Permian activity.

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

Arun Jayaram, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [17]

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

Great. And just my follow-up, Tim, you mentioned some thoughts on maybe a low double-digit oil growth number in 2020. Just for our modeling, could you give us what your pro forma 2019 oil number, excluding the impact from shelf volumes would be? So what the pro forma 2019 oil number, including the fourth quarter guide?

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

Jack F. Harper, Concho Resources Inc. - President [18]

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

I think we'll probably have Megan follow up with you on that. But as we've said before, the shelf was producing about 25,000 BOEs per day, and it was about...

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [19]

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

[15,000] oil.

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

Jack F. Harper, Concho Resources Inc. - President [20]

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

Yes. 57% -- 56%, 57% oil. So I think that could get you there.

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

Operator [21]

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

Our next question comes from Derrick Whitfield with Stifel.

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

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [22]

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

Congrats on a strong quarter and operations update. Perhaps for Tim, could you elaborate on the measures management can take to mitigate potential federal exposure from a frac ban? And perhaps more specifically, how fluidly can the company redeploy capital into nonfederal lands?

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [23]

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

Yes. I commented on that in my prepared remarks that we can move rigs and our capital around pretty efficiently. It's obvious that the federal lands are in New Mexico. And the permits on federal lands take longer to get, so they're more lead time. So the things that we are doing to mitigate that are -- we have quite a bit of activity on them right now. And then we've always run a program where we have properties right across the state line, where you can move rigs back and forth. So that's -- some of the beauty, too, of having assets in both the Delaware and the Midland Basin and in New Mexico and the Texas side of the Delaware Basin.

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

Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [24]

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

Great. And for my follow-up, perhaps for Jack or Will, based on our last meeting, I know management generally wants to let the results do the talking from here. Having said that, are there any qualitative or quantitative comments you can make on the performance of your Q3 wells put on production? And also, would it be safe to assume that the tighter and wider spaced wells are performing in line or better than your expectations?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [25]

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

Sure. I mean we've shown you there on Slide 8 kind of a 180-day look at a couple of different assets. And so we've -- for better or worse, we have a series of spacing tests in '19. Our guidance here in the fourth quarter bakes in kind of what we're seeing on that, and I would say it's all generally performing as we expected.

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

Operator [26]

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

Our next question comes from Michael Hall with Heikkinen Energy Advisors.

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

Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [27]

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

Congrats on the progress. I guess kind of following up a little bit on that. I mean when do you think -- so it seems like to us the capital side of the equation has very clearly been addressed and has a lot of momentum behind it. And I guess, we still see some questions around the productivity side of the concerns raised in the first half of the year. And it sounds like you're still working some of those projects through here, obviously, in the back half.

How quickly do you think you see or we see in the quarterly results the kind of improved productivity from the shift to wider spacing and smaller projects and away from the spacing test? Is that something that very quickly becomes evident, you think, in the beginning of 2020? Or is that going to take a little longer to work its way through the system?

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

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

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

Sure. Well, we began moving into the wider spacing program this summer. So while we still have a few spacing tests rattling through the back half of this year, you should see those less densely spaced projects be put on to production in the fourth quarter and then increasingly into 2020.

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

Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [29]

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

Okay. And so like, I guess, early in 2020, then it seems reasonable to start to maybe see an uplift in capital efficiency?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [30]

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

From a productivity standpoint? That's right.

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

Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [31]

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

Right. Yes. Okay. And then -- yes, I was just curious, as you think about the cost side, the substantial improvements you saw in the third quarter versus the first half. How are you thinking about the rest of the year? Like is it -- I guess how are you playing that through the guide and the commentary for next year, but then do you think it's reasonable to think we'll still see continued improvement in the fourth quarter? Or do you think you've kind of cut what you can now at this point?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [32]

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

Oh, that's a tough question. I mean there's been a lot of work that's happened this year to get us in the position we are today. There are certainly things we're continuing to work on, both from kind of a structural sustainable improvement side, which we've seen a lot of improvement there.

On the cyclical side, that's really hard to predict. I mean a big question is what happens when the calendar turns to 2020. I think it's clear that independents have gotten religion around capital discipline, and so we don't expect a meaningful pickup in activity there. But any real incremental benefit there on the cyclical side probably relies on the majors and the privates not increasing activity into 2020, which is a big unknown.

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

Operator [33]

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

Our next question comes from Brian Singer with Goldman Sachs.

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

Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [34]

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

A couple of follow-ups on similar topics. On Slide 9, you talk about decades-long inventory in a 6- to 8-well per section spacing range. To what degree would you be planning to be using the low end of that range in the 2020 program? And what do you see as the impact on productivity, i.e., what is the gain in EUR that a 6-well per section program would provide versus, say, an 8-well per section?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [35]

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

Sure. We'll get into a whole lot more detail about 2020 and the individual spacing on the projects probably next quarter. But I think the main takeaway there ought to be that regardless of the ultimate spacing density, we expect to have an inventory life measured in multiple decades.

But clearly, 2020 will move towards a more meaningfully up-spaced program than we've had in the past -- than we've had in '19.

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

Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [36]

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

Got it. Okay. And then you do have a few moving pieces that are impacting end of year into early next year production trajectory. You've got the tighter spaced wells, which have the strong first 3-month production but the greater subsequent declines. And one would think there would be an impact from wells that you've drilled in third quarter or even second quarter that are going to be seen then. You've got the mix for the wider space wells, and then you've got the DUCs that were highlighted earlier coming online.

Can you just speak to what you see as the aggregate impact on the trajectory in the first half, first quarter, second quarter next year and whether you expect ratable growth, particularly on the oil side, through the quarters or more back-end-loaded production profile?

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

Jack F. Harper, Concho Resources Inc. - President [37]

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

Yes. Brian, so I think said another way, the collection of those things and the sale of the shelf has increased our base decline a bit. However, the efficiency gains that we've seen in the Up Space program in 2020, I think, provides a pretty good offset to that. So we expect to continue the fourth quarter's momentum into 2020.

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

Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [38]

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

Got it. And can you say what the base -- what the updated base decline is? And does that come down over the course of 2020?

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

Jack F. Harper, Concho Resources Inc. - President [39]

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

Sure. Yes, the -- our overall base decline is in the high 30s, and oil is in the low 40s. And as we move through 2020 and move into 2021, we see that oil decline moving back into the 30s.

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

Operator [40]

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

Our next question comes from Vin Lovaglio with Mizuho.

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

Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [41]

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

This is Paul Sankey. The outlook for 2020 is obviously very important. We really appreciate the free cash flow parameters that you've laid down. Could we just dig in a little bit more, if possible? I know you may be reluctant to answer some of these questions.

But one, you've implied that you're using a lower gas and NGL price. Could you talk more about what you're assuming there? Could you talk a bit about non-operated activity assumed as well? And any thoughts about well cost reductions? And any other parameters that you can give us to sort of dig into that $350 million at $50 number, which is so important?

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

Jack F. Harper, Concho Resources Inc. - President [42]

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

Paul, it's Jack. I don't want to comment on the exact gas and NGL assumption other than to say it's conservative. And then on the non-op side, I think what you should expect from us year-over-year is probably a bit less activity in that area and more control over our -- a higher percentage of our capital for 2020.

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

Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [43]

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

Okay. And then a follow-up is simply, is there potential for more disposals? And can you talk a little bit more about the decision to buy back stock as opposed to, for example, raising the dividend?

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

Jack F. Harper, Concho Resources Inc. - President [44]

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

Sure. On Slide 10, we show kind of the last 4 years' worth of asset divestitures. And I think some level of that is -- should be expected. I think this year was a bit higher because of the shelf.

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [45]

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

Yes. Let me -- on the how we balance the dividend versus stock buybacks up. I would say that we've kind of laid out a framework for what we think the free cash flow could be under the different sideboards. And I think philosophically, you'll see us kind of increase the dividend more in a systematic way in a way that we can sustain forever. And then every other dollar that's available, especially at this price, I'm going to be buying stock back.

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

Operator [46]

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

Our next question comes from David Deckelbaum with Cowen.

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

David Adam Deckelbaum, Cowen and Company, LLC, Research Division - MD & Senior Analyst [47]

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

Jack, I wanted to ask a little bit more around the comments about not chasing the incremental barrel with the '20 thoughts. I guess, one, should we think about those bookends of free cash as sort of underpinning an identical rig program at the bottom and top ends of that spectrum?

And then 2, are you conceptualizing this as finding a steady-state rig program that you would then just extrapolate into '21, unless oil prices were lower than $50 so that this free cash wedge that you're targeting in '20 would grow into '21?

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

Jack F. Harper, Concho Resources Inc. - President [48]

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

Yes. Good question. As we've mentioned in the prepared remarks, we really value a steady program from here out. And so to answer your specific question, there is no rig change assumed in that different -- in those different oil price scenarios.

And then beyond 2020, we'll have to see what the landscape looks like. But combining growth with an ever-increasing free cash flow amount is what we're targeting. And so whatever rig count is appropriate to effect that is what we're targeting. But anything that -- from this point on will be steady and marked as we move up.

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

David Adam Deckelbaum, Cowen and Company, LLC, Research Division - MD & Senior Analyst [49]

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

I appreciate that. Also just curious, as you commented earlier that your gas and NGL assumption for next year is "conservative." Obviously, what's happening on the screen. Is that influencing any difference in capital allocation next year, maybe away from Delaware into Midland, that's maybe helping that oil growth a bit in the model?

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

Jack F. Harper, Concho Resources Inc. - President [50]

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

Sure. There's a lot of things impacting our allocation decisions in '20. And I really don't want to get into too much detail, but we do have a portfolio that allows us to target more oily zones, if need be. I would also remind you, we have some gas hedges in place in 2020 as well that help offset some of those declines.

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [51]

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

And the sale of the shelf is gassier than the whole company.

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

Jack F. Harper, Concho Resources Inc. - President [52]

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

Exactly.

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [53]

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

That improves it.

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

Operator [54]

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

Our next question comes from Scott Hanold with RBC Capital Markets.

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

Scott Michael Hanold, RBC Capital Markets, Research Division - MD of Energy Research & Analyst [55]

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

Nice rebound, guys. If I go back to Page 7 because I think this is, to me, an important slide. It shows certainly great progression on the cost side. Obviously, you guys came down to a very competitive level relative to the best peers this quarter already. And do you find these as generally sustainable levels? And is there more opportunity to improve as you go to these pilots that aren't as -- go to development that's not as tightly spaced as the pilots, meaning as you kind of more from the tighter spaced pilots off to your 2020 program later in the year, does that provide a little bit of a tailwind on the cost side?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [56]

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

Sure. I mean I do think the teams have done a great job getting the costs down pretty impressively over the course of the year. And I wouldn't want to predict the ability to improve from here, but certainly, that's a major focal point. I kind of talked earlier about what some of the factors are on the cyclical side that could cause it to improve potentially from here. There are definitely things -- there's a whole slew of smaller gains around how we drill and complete the wells that should allow us to shave kind of days, and, thus, costs off. But it's going to probably be a bit of a slog from here to implement those.

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [57]

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

And I would just add that we pointed out before that changing pace, there was a lot of inefficiency into the system. And that's when we slowed down in early 2019. It created a lot of inefficiency in our system as well; and as Jack has described, a more steady pace. I think just by its very nature, that steady pace will be more efficient than what we've done in '19.

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

Scott Michael Hanold, RBC Capital Markets, Research Division - MD of Energy Research & Analyst [58]

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

Okay. Perfect. And as a follow-up, and Tim, you had talked about with free cash flow priorities, certainly, the dividend is one of those. Can you give a little color on what you see as a competitive dividend for your company? Is it relative to some of your large-cap E&P peers? Do you look at the S&P 500? What is sort of that benchmark you'd like to see it at?

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [59]

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

Well, we've said for a couple of years now that we would like the dividend to be an important part of your investment decision in Concho, and so I think it has to be competitive with other peers and other industrial companies eventually. But I think the most important thing on the dividend is just the steady growth of the dividend.

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

Operator [60]

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

Our next question comes from Bob Brackett with Bernstein Research.

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

Robert Alan Brackett, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [61]

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

If we could revisit the comments you made on the federal frac ban. Could you give us any color you've had with conversations with the New Mexico government, given your important role in that state?

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [62]

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

Yes. They've become very -- an important partner to work with in the state of New Mexico because of how much of their budget comes from the oil and gas industry. And probably more than half of their lands in New Mexico, more than half of the revenues they're getting are coming from federal activity. So they're running a budget surplus right now. They understand completely that that budget surplus is coming from the activity in Lea and Eddy County, New Mexico. And so they're very much on the same page with us, interested in continuing that economic activity and understanding that that's what's going to fund schools and roads in their state.

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

Robert Alan Brackett, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [63]

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

Good. And a follow-on on a different topic. You mentioned the allocation of asset sale proceeds, this sort of 60-40 split between debt and share repurchases. How do we think about that ratio for future free cash flow? Or another way to think about it, what's the ideal sort of debt level at which you're happy with debt, and incremental cash goes to share repurchases?

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

Jack F. Harper, Concho Resources Inc. - President [64]

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

Sure. Well, post- this sale and paying down our revolver balance, we are happy with where our debt stands for now. And so incremental cash flow in the near term will be divided between our dividend and the share repurchase.

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

Operator [65]

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

Our next question comes from Leo [Marini] with KeyBanc.

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

Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [66]

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

Just wanted to conceptually follow up a little bit on the goalpost here for 2020. You guys did mention some steady rig adds throughout the year. Obviously, you guys reduced activity substantially during 2019. In the past, you guys have talked about kind of a similar level of activity in CapEx in 2020. Just trying to get a sense, does that still apply? Are we going to see similar activity? Or should we expect maybe a little bit lower activity in '20 versus '19?

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

Jack F. Harper, Concho Resources Inc. - President [67]

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

Oh, I think whatever you should expect, it will be steady and nothing drastic when we do add a rig or 2 from where we are at this moment. So we will give all those details, though, in February when we stew in the current cost at that time, our current efficiency outlook, so that's when we'll roll that out.

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

Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [68]

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

Okay. I guess just a question around your comment about low double-digit oil growth in '20 is the expectation. Just trying to get a sense, does that sort of adjust for the New Mexico Shelf sale? I guess where I'm going is, would that sort of assume you didn't have the shelf in 2019, when we do the kind of low double-digit percentage increase to get there?

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [69]

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

Yes.

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

Jack F. Harper, Concho Resources Inc. - President [70]

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

That's correct.

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

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

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

It's pro forma oil growth.

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

Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [72]

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

Okay. No, that makes sense. All right. And just a couple of questions on a few of your guidance numbers. So you guys talked about GP&T going up to about $1.40 per BoE in the fourth quarter. Just trying to get a sense if that's the right run rate we should be thinking about into 2020. And then same question on the G&A side. I guess that went down a bunch this quarter. Is that kind of the right run rate on G&A as well?

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

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

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

Sure. I'll take the GP&T piece, which is just what you're seeing there is that Gulf Coast pricing contract coming into effect in the fourth quarter. We accounted for it under GPT rather than the impact on our realized price.

I think, Jack, you want to hit the G&A?

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

Jack F. Harper, Concho Resources Inc. - President [74]

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

Yes. I think their -- when you think about G&A in the near term, roughly $2 a unit is the right way to think about that and trending down over time as we work towards that $9 controllable cash goal.

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

Operator [75]

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

Our next question comes from Ryan Todd with Piper Jaffray.

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

Ryan M. Todd, Piper Jaffray Companies, Research Division - Research Analyst [76]

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

Maybe just at a high level kind of from a philosophical point of view, I mean how do you think about the ideal pace of growth for your company over the medium to long term? I mean you've indicated low double digits for next year. Is that the right number in terms of kind of maximizing the efficiency of the organization that you have? How do you think about that relative to a mid-single or a mid-double-digit type of growth number in terms of the most efficient use of the organization?

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [77]

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

Yes. Well, I've always thought of growth being an output of good execution and efficiency, so I don't start with a targeted growth number. I think on this, and as we described in the slides, we've kind of targeted a lower commodity price that we could operate and have free cash flow or breakeven cash flow at lower oil prices. That's the starting point. And then at what we think the average oil price, as I described in my prepared remarks. The average of what it's been over the last 5 years, that gives you the sideboards of our activity level and how much free cash flow you can expect in addition to what I think double-digit growth is growth enough.

I think for our industry to start attracting capital again, we're going to have to offer an investment thesis that is different than what we've done in the past. And I think having growth and a robust amount of free cash flow that's returned to shareholders, I think we can do that. And we may be one of the few companies that can do that. And so that's what we're going to demonstrate.

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

Ryan M. Todd, Piper Jaffray Companies, Research Division - Research Analyst [78]

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

That's helpful. I appreciate the color there. And then maybe just a quick the -- on Slide 8, the production curves that you have there that show the comparison between the more tightly spaced and the wider-spaced wells. Are those wider-spaced curves there, are those based on recent developments of yours that have been at wider spacing going back a couple of years over at different projects you had, is that based on actual data? And is that kind of representative of what we should expect going forward from a well productivity point of view?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [79]

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

Yes. I mean, we've been on a relatively long evolutionary track of density testing kind of over the 8 years we've been drilling horizontal wells. And so yes, that reflects the wider spacing. We tested before we moved to the more dense space. That's really what underlines our confidence in what will happen as we revert to a wider spacing pattern.

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

Operator [80]

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

Our next question comes from Nitin Kumar with Wells Fargo.

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

Nitin Kumar, Wells Fargo Securities, LLC, Research Division - Senior Analyst [81]

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

Just want to touch base on the Slide 7 there. Obviously, very impressive defining your cost. I'm just wondering what sort of -- you had a few more closely spaced wells in the first half of this year. Was there any part of the design of those well that drove costs up? You've talked about efficiencies and other things. Or maybe said differently, could you deliver a closely spaced well for about $1,100 a foot per day?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [82]

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

That's a good question. I mean, probably not is the answer today. I mean clearly, one of the things you saw there with the higher costs in the end of '18 and the very first quarter of '19 was we found some inefficiencies as you tried to more densely develop and keep wells as you're drilling within a more tightly spaced window, for example, and so force you to slow down relative to what you can do if you don't have such a narrow window that you're targeting. So I do think there's -- some of the improvement is the decision to move to a wider spacing.

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

Nitin Kumar, Wells Fargo Securities, LLC, Research Division - Senior Analyst [83]

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

Okay. Great. And just my follow-up, at the end of the quarter, you had 85 DUCs, that's about 4.5 wells per rig. I think you've mentioned 70 DUCs by the end of this year. What's sort of normal run rate as you move to the wider spacing and shorter -- sorry, smaller projects in 2020, what's a good run rate for us to think about in terms of DUCs per rig?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [84]

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

Probably in that 2x to 3x territory or rig count.

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

Operator [85]

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

Our next question comes from Gail Nicholson with Stephens.

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

Gail Amanda Nicholson Dodds, Stephens Inc., Research Division - MD & Analyst [86]

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

In regards to the JV with Solaris, can you just talk about any potential CapEx well costs or LOE savings we should conceptualize with that agreement?

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

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

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

One of the big benefits is they have a very sizable amount of existing infrastructure. And then as part of that deal, we contribute to them in any county our water handling infrastructure as well. So it should help us mitigate the need to spend incremental capital on those types of things in the future.

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

Gail Amanda Nicholson Dodds, Stephens Inc., Research Division - MD & Analyst [88]

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

Okay. Great. And then just on the housekeeping aspect, what was the LOE for the shelf assets on a per BOE basis?

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

Jack F. Harper, Concho Resources Inc. - President [89]

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

It was substantially higher than our company average.

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

Operator [90]

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

Our last question comes from Richard Tullis with Capital One.

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

Richard Merlin Tullis, Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production [91]

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

All right. Two quick questions, one for Will. What's the planned average project size for 2020? And at a high level, what do you expect the allocation of CapEx to be between the Midland and Delaware Basins next year?

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

C. William Giraud, Concho Resources Inc. - Executive VP & COO [92]

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

Yes. Those are definitely topics we'll get into in a lot more detail here in February. But in general, I would say the average project size will be slightly smaller. And certainly, the change will be -- the very largest projects will be a lot closer to that average number.

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

Richard Merlin Tullis, Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production [93]

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

Okay. And then just lastly for Tim or Jack, just maybe more of a macro view question, what's next for the U.S. E&P sector? Are you expecting an acceleration of consolidation due to the current investor environment for free cash flow, slower growth than maybe the scale required to deliver consistent operational results?

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [94]

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

I think, yes, on both fronts. I think, first of all, more disciplined capital decisions and capital efficiency, more discipline across the industry. And then, yes, I think we've been talking about consolidation for years though, and it's just a slow process to grind out cost and inefficiency out of this industry.

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

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

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

Yes, Richard, I think this price discovery phase is -- it will single out the companies that have the scale and the capabilities to do what we're talking about over a multiple-decade period. And I think that's what will define the winners.

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

Operator [96]

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

Ladies and gentlemen, this does conclude today's Q&A portion. I'd like to turn the call back over to our hosts.

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

Timothy A. Leach, Concho Resources Inc. - Chairman of the Board & CEO [97]

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

Great. Thank you again for dialing in. This is a great conversation. Very proud, as I said, of our employees at Concho and the work they've done this quarter, and I'm very happy with the results. Look forward to talking to you in February. Thank you.

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

Operator [98]

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

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.