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Edited Transcript of HK earnings conference call or presentation 13-Mar-19 3:00pm GMT

Q4 2018 Halcon Resources Corp Earnings Call

TULSA Mar 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Halcon Resources Corp earnings conference call or presentation Wednesday, March 13, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James W. Christmas

Halcón Resources Corporation - Non-Executive Chairman & Lead Independent Director

* Jon C. Wright

Halcón Resources Corporation - Executive VP & COO

* Quentin R. Hicks

Halcón Resources Corporation - EVP of Finance, Capital Markets & IR

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Conference Call Participants

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* David Meats

Morningstar Inc., Research Division - Senior Equity Analyst

* Jacob Alexander Gomolinski-Ekel

Morgan Stanley, Research Division - Analyst

* Jason Gilbert

Goldman Sachs Group Inc., Research Division - MD, VP & Fixed Income Analyst

* Jason Andrew Wangler

Imperial Capital, LLC, Research Division - MD & Senior Research Analyst

* Jeffrey Leon Campbell

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

* Tarek Hamid

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the Halcón Resources Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions)

Please note, this conference is being recorded.

I will now turn the conference over to your host, Jim Christmas, Chairman of the Board. Mr. Christmas, you may begin.

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James W. Christmas, Halcón Resources Corporation - Non-Executive Chairman & Lead Independent Director [2]

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Good morning. Thank you. I was recently named Chairman of the Board of Halcón, and until we hire a new CEO, I'm effectively acting as the interim CEO.

For the record, this conference call contains forward-looking statements. A detailed description of our disclaimer, see our earnings release issued today and posted on our website.

We've also updated our investor presentation for the fourth quarter and other operational items. You can access this presentation on our website.

While I'd like to begin my comments today saying that Halcón had a good quarter, I obviously cannot. As previously announced, we've had quite a few changes in our executive team over the last few weeks. Despite these changes, our operations team is fully intact under the leadership of Jon Wright, our Chief Operating Officer. Our finance and accounting teams are in good hands with Quentin Hicks, who was recently named our Chief Financial Officer. As we reported, we're beginning the search for a new CEO but have the people in place today to continue to run our business effectively while its search is under way.

Our board and management team are focused more than ever on disciplined operations, controlling costs and maximizing our capital efficiency. We've identified significant corporate overheads savings and we also are seeing significant improvements in drilling and completion costs in the field. Jon Wright will comment further about these recent results we've had in our operations later in the call.

The board and the management team believes our assets are significantly undervalued, as reflected in our share price, and we're highly focused on realizing that value disconnect for the benefit of our shareholders. We will hire advisers to assist us in a comprehensive review of the best path forward for Halcón. This engagement will include a review of various financing alternatives as well as strategic options, including M&A. Although we're looking at M&A, asset sales and other strategic options, we may indeed find that the best way to maximize value is to continue to develop our assets in the most capital-efficient manner possible, which will allow us to gain scale and relevance in the market while, at the same time, reducing our leverage and de-risking our acreage. We are considering all options and will advise as to our path forward when appropriate. For now, though, our team is focused on cutting costs and continuing to develop and drill our acreage position in an efficient manner.

I'll now turn the call over to Quentin for some comments on the fourth quarter results and our 2019 guidance.

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [3]

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Thanks, Jim. Production for the fourth quarter averaged 17,196 barrels of oil equivalent per day comprised of 69% oil. Our overall production on a per-Boe basis was below our guidance range, but oil production was within our guidance range. Our lower gas production was primarily related to the gas takeaway constraints we saw at Monument Draw, where we've been reliant on interruptible third-party sour gas sales outlets. Fortunately, most of these issues should be in our rearview mirror as our Halcón-owned sour gas treatment plant will be operational in a few weeks. I'll let Jon discuss the progress on this plant as part of his comments later on.

Our realized fourth quarter oil differential was 83% of NYMEX, which was improved from the 79% differential we saw in the third quarter. This was largely driven by stronger Midland pricing during the quarter. Our fourth quarter natural gas differential came in at 29% of NYMEX, which was lower than previous quarters because of weak Waha pricing in the quarter. Our NGL differential for the fourth quarter was 34%. We expect our oil -- our realized oil differentials to improve in 2019, given the combination of stronger Midland pricing, in addition to our selling majority of our oil in the Gulf Coast beginning later this year.

Our adjusted operating expenses, including LOE workover in gathering, transportation and other, were elevated in the fourth quarter for a variety of reasons. First, we incurred higher-than-anticipated water disposal costs in West Quito Draw, as our first 2 Wolfcamp wells there had higher water cuts than anticipated, and we had to dispose of most of this water using third-party trucking. We expect water disposal costs in West Quito Draw to be lower going forward as we are now fully tied into the water bridge disposal system and are no longer reliant on third-party trucking.

We also had a quite -- quite a bit more workovers in Hackberry than expected during the quarter and as compared to previous quarters. We expect our workover expense to moderate going forward in Hackberry Draw, as most of our older wells have now been put on jet pump and are no longer on ESPs.

G&A expense as adjusted totaled $8 million for the fourth quarter versus $9.1 million in the third quarter. This reduction was the result of continued focus on cutting corporate overhead costs, and we expect this downward trend to continue into 2019.

Similar to the third quarter, we had a significant amount of nonrecurring expense in the fourth quarter primarily related to the well-level chemical treating of H2S and Monument Draw. As I mentioned earlier, we have our plant coming online here in the next few weeks, and we expect these costs to materially improve for the rest of the year. Somewhere around $2.25 an MCF is what we expect.

With respect to D&C capital. We incurred about

$94 million during the fourth quarter, which was in line with expectations. We spent another $41 million in the fourth quarter on infrastructure, seismic and other, with most of this spend related to the continued buildout of our sour gas handling and treatment facilities in Monument Draw.

Now looking forward, our 2019 production guidance of 19,000 to 22,000 Boe a day is intentionally wide and somewhat conservative. This is driven by 2 things. First, even though we expect our H2S treating system to work well out of the gate, it is difficult for us to predict the H2S levels we will see on future wells in Monument Draw. It's been variable in the past. Therefore, we wanted to bake in a level of conservatism.

Furthermore, we are still in the early development of our West Quito Draw asset, and we want to provide a level of cushion to account for the early-stage nature of our development there. Our D&C CapEx guidance of $190 million to $210 million is predicated on a 2-rig plant for 2019 with the split of drilling time between Monument Draw and West Quito Draw. Our infrastructure and other capital spend will be front-end loaded as we complete our buildout of the sour gas infrastructure and treating facilities in Monument Draw in the first quarter of '19. Our operating cost guidance includes the impact of higher water disposal costs associated with our recent deal with Water Bridge, and that amount equates to about $2 per Boe, higher LOE costs than we've seen historically.

I want to conclude by saying, although we are not happy about our results for the fourth quarter, we're excited about the future. Once our H2S treating plant is in place in the next few weeks, we will put 5 new wells online in Monument Draw, which is our best area. We will have 5 -- we also have 5 new wells flowing back in West Quito right now. When coupled with the other 5 wells in Monument Draw, we expect the second quarter to be a strong quarter for us. Further, we have seen real improvements in recent cost trends in the field, especially related to drilling and completion costs, which we expect to continue for the rest of the year. Jon will elaborate on that further in a moment.

We look forward to ways to continue to improve our business in an effort to maximize value for shareholders.

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

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [4]

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Thanks, Quentin. As Quentin indicated, we incurred significant nonrecurring well-level gas treating costs in the fourth quarter in Monument Draw. We anticipated these higher treating costs for the quarter, and we expect more nonrecurring treating costs in the first quarter, although they should be significantly lower than what we saw in the fourth quarter.

Fortunately, our Valkyrie liquid redox H2S treating plant is expected to be operational within the next few weeks, which would dramatically reduce our treating costs. We expect to be fully operational by the 1st of April, if not sooner. Once operational, this plant will be capable of treating all of our 2019 expected gas volumes in Monument Draw at around $2.25 per MCF. This is based on our current weighted average H2S concentration rate for the field.

As Quentin mentioned, we have 5 Wolfcamp wells, which we plan to put online in Monument Draw shortly after the Valkyrie plant is operational. This includes returning the previously shut-in 7506H well to production. This well was shut in, in early October before reaching peak IP because of high levels of H2S. We also have two 5,000-foot laterals in the southern area of our acreage and two 7,500-foot laterals in the northern area of our acreage being put online within the next few weeks.

We are excited to get back to work on drilling and completing wells in Monument Draw after more than a 6-month drilling pause in activity while we built out our sour gas infrastructure. We plan to run about 1.25 rigs here for the remainder of 2019.

In West Quito Draw, our first 2 10,000-foot operated Wolfcamp wells were put online in early November. These wells -- these 2 wells had an average peak 30-day rate of 1,525 Boe per day and a 60-day rate of 1,445 Boe per day comprised of 43% oil. It's important to note that these wells are on a managed choke during flowback, and they are still flowing approximately 1,000 barrels a day equivalent on average.

In early February, we put on 3 more 10,000-foot Wolfcamp wells and another 2 online just about a 1.5 weeks ago. These wells are still cleaning up our pressures, and early flow rates are encouraging.

We're obviously concerned about managing reservoir pressures, and we will continue to manage our chokes during flowbacks.

We are encouraged about what we're seeing early on in West Quito and, therefore, allocating 3/4 of our rig here for 2019. So in addition to the 5 wells currently flowing back in West Quito Draw right now, we will put online another 4 before year-end.

Monument Draw has been a very difficult drilling environment with a lot of geologic complexity. However, with more than 15 wells now drilled across our position and multiple shuttle logs, microseismic and lots of G&G work, we now feel confident in our understanding of how to best drill and develop this asset. This is evidenced by our most recent 4 wells in Monument Draw being drilled at costs below -- well below those that we have seen historically. In fact, on a normalized basis, these walls have averaged below $12 million for a 12 -- for a 10,000-foot lateral, which is below our budgeted cost.

Although we can't promise we will drill every well going forward here without issue, we feel that we have turned the quarter with our current drilling design targeting and should be much more capital efficient going forward. We've also seen real improvements on frac efficiency throughout the year, which has resulted in additional D&C savings in recent wells.

In fact, we are Liberty's most efficient operator in 2018 in the Permian Basin as it relates to the percentage of time pumping on multi-well pad jobs, which includes a sample set of 340 completions.

Our operations team is fired up about getting back to work in Monument Draw, as we stated earlier, and continuing to expand in West Quito Draw, with a focus on finding ways to improve efficiencies and well returns over the remainder of 2019.

With that, I will turn the call back over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Jeffrey Campbell, Tuohy Brothers.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [2]

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Back in December, we were told that a 3-rig program drilling 45 to 50 wells had better economics than a 2-rig program, and that activity was protected by hedging. So I was just wondering, what has changed since then to pull the program back from that earlier 3-rig plan?

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [3]

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Yes. I mean, Jeff, we are well hedged, and we're well hedged on a 3-rig plan. As oil fell back down into the low 50s in late 2018 and maybe even in the upper 40s, we made the decision that the well-level economics, setting aside our hedge books, just didn't justify running 3 rigs. We decided to drop down to 2. We can still, as you guys can see, we can still grow our production materially with a 2-rig program. And as we're early in West Quito and we're no longer drilling in Hackberry Draw, operationally, it just makes more sense right now to consider 2 rigs. And we did take the opportunity, because we were a little over hedged, to monetize some of our in-the-money hedges in the fourth quarter and the first quarter, given what we saw in oil prices.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [4]

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Okay, that's very helpful. I appreciate it. And you just touched on my next question. Back in December, my understanding was that Halcón intended to produce 7 or 8 results in the northern portion of Hackberry Draw during 2019. That was expected to improve the value of the asset. And today's presentation indicates that there's not going to be any 2019 Hackberry Draw drilling or whatever's been done has been suspended. So just wondering where we are in this delineation and appraisal process.

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [5]

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Yes, I would just -- I'll turn this over to Jon for his comments. But I would say that, as Jim indicated, we are 100% focused on being as capital efficient as we can in '19. And the economics in Hackberry and the returns that we see there relative to the capital we spend just don't match up or stack up with Monument Draw or West Quito Draw. So most of that acreage is held by production, so -- or at least the acreage we care about there, so we don't need to keep drilling there. Jon, do you have anything further to add on that?

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [6]

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Yes, Quentin, I'll just comment that in Hackberry Draw, our last 6 wells averaged $9.5 million. So we had some outstanding results on not only the drilling side and completion but also the production and facilities. So I think the opportunity is real in Hackberry Draw. We're just looking at maximizing our capital efficiency. And if we see commodity prices increase, it's probably a great opportunity for us to take another look at that area.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [7]

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Okay, I appreciate that. I'd like to just ask one last quick one because I'm a little bit confused or maybe I didn't hear it right. I thought -- the press release said that Halcón would run 2 operated rigs in 2019 focused on Monument Draw and West Quito Draw. But I thought I heard Jon say that the average rig count is going to be 1.25 rigs in '19 going forward. So could we just sort of nail that down? And also does it suggest any likelihood of where in the CapEx range you may be more likely to land in 2019?

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [8]

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Jon, you want to clarify?

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [9]

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Yes. Just to clarify that we'll average 2 rigs for 2019. 1.25 rigs will be dedicated to Monument Draw, and approximately 1.75 rigs will be allocated to West Quito. So Monument Draw...

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [10]

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0.75.

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [11]

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Sorry?

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [12]

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It was 0.75, not 1.75 in West Quito.

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [13]

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Yes, sorry. Yes, 0.75. Thanks.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [14]

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Okay, all right. Good. So that's like what -- yes, that was like the press release. I just misunderstood.

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Operator [15]

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Our next question comes from Jason Wangler, Imperial Capital.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [16]

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Wanted to just ask, as you turn on these wells, both at West Quito and in the other area, what are you seeing in the change in operational? Are you guys doing anything different on the completions? Or is it pretty much the same? Because it sounds like at least the operation's going a little bit smoother and maybe even a little bit cheaper. But I didn't know there was anything that maybe you guys have been changing in that situation.

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [17]

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Jon?

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [18]

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Yes, if you look back on our press release, and in 2017, '18, we're primarily focused on delineating and de-risking our acreage on single-well pads. Every one of our wells now is being drilled on a multi-well pad. And on the completions side, we're taking a large advantage on completion efficiency. In addition, since we're no longer delineating, most of our wells are -- in Monument Draw are within -- are typically infill. At this point, we can make some tweaks and some changes, evolve our completion design that have also helped not only the efficiency but also the cost side.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [19]

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Okay, appreciate it. And Quentin, you mentioned obviously the infrastructure spend probably a little front-end loaded this year. As you think about maybe later in this year or even in 2020 or beyond, what is a more normalized spend on the infrastructure side as you continue to build that out?

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [20]

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If we look forward to like 2020, with a 2 or 3 -- let's just say a 3-rig plan, probably $10 million to $15 million a year.

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Operator [21]

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Our next question comes from Tarek Hamid, JPMorgan Chase.

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Tarek Hamid, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [22]

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As we sort of finish out the infrastructure at Monument Draw, can you maybe sort of give us your expectations about what the sour gas impact looks like in 1Q? Is it sort of similar to 4Q? Or should we start to see some benefit during the quarter?

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [23]

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Yes. It should moderate some from the fourth quarter. It's going to be highly dependent on, obviously, as soon as we can get this plan up and operational, will come down. We're already in mid-March, so -- but because of the natural decline of the wells there, and we haven't put any new wells online in the first quarter, just as a result of lower volumes of gas, the treating costs will come down. And we've also -- recently, we put -- we had a new sour gas line come online with EPC, which has helped to moderate that expense as well. So I don't have a good number to give you, but it should be meaningfully lower in the first quarter than it was in the fourth quarter.

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Tarek Hamid, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [24]

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That's helpful. And then I guess, just thinking about liquidity, kind of any early thoughts around how the ABL borrowing base redetermination process looks this spring?

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [25]

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We really haven't kicked that off yet. It'll be starting here in the next several weeks. We have strong liquidity as we sit here today. As Jim mentioned, we -- as part of the engagement of the advisers, we're going to be looking at financing options in addition to other strategic options. And we'll report more on that as we have more color.

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Tarek Hamid, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [26]

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Understood. I guess last one for me. Just philosophically, as you think about the capital structure, sort of how do you think about the value of having an ABL and sort of the relative ease of hedging versus putting in kind of term debt into the top of the structure?

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [27]

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It's the cheapest form of capital we have. So we like that, of course. It's probably -- sometimes it can be a challenge for a company with our leverage profile. So we -- again, we're just considering all options on the table. We can hedge -- we'll be able to hedge regardless of what type of financing we have on a first-lien basis or ABL basis.

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Operator [28]

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Our next question comes from Jacob Gomolinski-Ekel from Morgan Stanley.

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Jacob Alexander Gomolinski-Ekel, Morgan Stanley, Research Division - Analyst [29]

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How have well costs and returns been recently on an unhedged sort of realized prices at the wellhead? And then, similarly, how do you expect well costs to change as you shift to multi-well pad development versus single-well pads?

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [30]

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Jon, you want to take that?

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [31]

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Yes, so as I mentioned earlier, our individual well costs are -- have turned out significantly lower than the -- with the recent performance. And those gains are actually shown on Slide 6 with the recent performance in the 9302H and the 9303H, which are being replicated on our current pad that's also located in Monument Draw in the north area. A lot of these gains are associated with a slim-hole casing design, some changes in our mud programs, both in the intermediate hole sections and in the horizontals as well as targeting -- and the fact that we're drilling infill wells now, we have those shuttle logs that we acquired in 2017 and '18, which will allow us to be able to access the profile of the formation across a 10,000-foot interval, which then ties back -- that data ties back into our reservoir models. So -- along with the seismic. So all those things are important to us. We've seen significant cost reductions. Our current expectation is that our wells in Monument Draw will average -- let me check the number here -- I think sub $11.9 million and then in West Quito, we're looking at sub $11.6 million. And I think that includes our first level of artificial lift installations as well.

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [32]

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And that's the 10,000-foot [level], just to be clear.

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [33]

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Yes, correct.

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Jacob Alexander Gomolinski-Ekel, Morgan Stanley, Research Division - Analyst [34]

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Okay, that's helpful. And then as you look at infill drilling, might be too soon to tell, but have you seen any sort of performance degradation just due to sort of parent-child issues as you drill those infill wells on existing pads?

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [35]

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As of this point, we haven't seen that parent-child interference. Obviously, that's something that the industry as a whole is highly focused on. And we'll continue to monitor our well results. If you take a look back into 2018 in a lot of our presentations, we acquired a lot of micro seismic. We ran a lot of tracer tests, both with the fluid systems and the proppant systems. And that technology -- that application of those technologies enabled us to give a fairly quality estimate on our frac lengths. And so as we saw in the microseismic models, we didn't see that interference from that perspective. We haven't seen that on the limited spacing tests we have thus far. It's important to note that, with early timing, the wells aren't bounded on both sides by another well. So there could be risks associated with that. We'll continue to evaluate it. The other part of it, we've also done some Reservoir Transient Analysis, or RTA analysis, on all of our areas, which indicate that our current spacing assumptions are correct. But as I mentioned, we'll continue to monitor that on a daily, weekly, monthly basis.

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Jacob Alexander Gomolinski-Ekel, Morgan Stanley, Research Division - Analyst [36]

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Okay. That's helpful. One -- 2 quick really follow-ups from Tarek's questions. One is on the H2S costs in Q1. You mentioned sort of materially lower than the $20-odd million in Q4. I'd just be curious what -- when you say materially lower, if that's something you could quantify. And just wanted to confirm that the recurring GTO expense in the guidance does not include those Q1 additional costs. And then the other just follow-up is, on the liquidity front, if there's anything you could expand. I mean, it looks like under the current program, it could get a little bit -- potentially a little bit tight on the ABL -- on the RBL exiting '19. What kind of options are you considering from a liquidity perspective?

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [37]

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Yes. On the GTO question, that is true recurring GTO going forward so that guidance doesn't include any nonrecurring onetime items in the first quarter related to H2S treating, temporary H2S treating solutions. I don't have a good number, like I said earlier. It's probably $10 million to $13 million if I were to guess, but that's purely a guess. Maybe it could be a little higher or a little lower than that. And then, again, I don't want to comment specifically on financing options. We're right in the middle of thinking through that with the help of advisers. And as appropriate, we'll talk about that if it's appropriate, when it's appropriate. Maybe we do nothing and we continue to work with the banks. We'll just have to see.

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Operator [38]

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Our next question comes from James Goldszer, Goldman Sachs.

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Jason Gilbert, Goldman Sachs Group Inc., Research Division - MD, VP & Fixed Income Analyst [39]

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It's actually Jason Gilbert for James. Just a couple asset-level questions for you. West Quito, can you talk a little bit about what's going on there? If we look at maps and offset operators, maybe we would've expected slightly better results from the initial wells. I'm just wondering, is there rock, or is it a completion thing or it's something else? It also seems a little gassier than maybe we would have thought.

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [40]

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Jon, you want to take that?

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [41]

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Yes. Our development primarily has been in our southern West Quito area, and that's an area that's a little higher on structure with regard to the well pad. It's also south of the [Grecian] Fault. And so what we've seen in that area is that along with a lot of recent results from offset operators is that, that area has a little higher GOR than what we initially expected. We haven't been able to test our northern West Quito assets yet. So we've got a number of units there that we'll hit in 2019. The GORs there are materially lower than what we have in the southern part of that acreage position. So I think it's just important to note that the area's a little different from the north part to the south part. On average, the wells are -- will perform great, certainly within our -- in line with our expectations. It's just, notably, that those 2 areas are -- there's a difference in GOR that's kind of driving that. What's, I think, encouraging about that area is our initial flowing pressures are well above 3,000 pounds than everyone else. So in addition, we also had -- we also took a shuttle log in this -- on our first pad in this area on the [operative] well. The shuttle log indicated similar rock properties to that of Monument Draw. So when you think about what makes an asset successful, well, the rock is important and having pressure's important. So we're early with the results there. We've been managing our flowbacks. We're concerned about reservoir management and, obviously, differentials. So from that perspective, we've taken a conservative approach. But as we noted earlier, the GORs in that southern position are probably a little higher than we expected.

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Jason Gilbert, Goldman Sachs Group Inc., Research Division - MD, VP & Fixed Income Analyst [42]

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That's helpful. And then shifting over to Monument Draw for a second. I think you mentioned earlier that it's a little more complicated there than you expected. I was just wondering, I want to say you have 21,000 acres there, if I remember correctly. What's the extent to which you've de-risked that position? And are you getting consistent results across the area?

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [43]

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Yes. So -- well, I wouldn't say that the area has been more complex than what we understood it to be. It is -- it does have geological highs and lows with somewhat many basins. So from a geo steering perspective, it is challenging. There's -- obviously, the closer you get to the Central Basin Platform, you see the reflows coming off of the platform. But those -- so we've got to be able to geo steer around those carbon flows. But it's also, from some -- from a different perspective, it's also a positive because those carbon debris flows actually act as seals. And so we're -- on the frac side, we think that we're -- and we've seen it from our micro seismic, is that we're very compartmentalized with regard to maintaining our frac within intervals. So that's the positive aspect of it. The results that we've seen across the acreage have been fairly consistent from the north to the south. We're seeing great results in the north. I'm not sure that we fully expected that, but the performance in the north has been just as good as the south. I would say that, including our pilot holes in the northeastern corner of the acreage, we're probably 90% delineated within that position.

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Operator [44]

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Our next question comes from David Meats, Morningstar.

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David Meats, Morningstar Inc., Research Division - Senior Equity Analyst [45]

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I want to follow up on an earlier question about parent-child infill. I'm looking at the inventory slides in your deck here, and it looks like you're assuming about 35 to 40 wells per DSU with your industry estimates. I'm just wondering if that's realistic. And in a previous question, you talked about something called RTL (sic) [RTA] analysis. I don't really know what that is. But just in general, if you can give some more color on the confidence that you have in those inventory estimates.

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [46]

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Yes. So the inventory estimates, and if we look at the slide that specifically addresses Monument Draw, the inventory summary, shows in the Wolfcamp that our spacing assumption is 660 with roughly 7 to 8 wells per DSU; and then in the Third Bone Springs, it's with -- about the same, 8 wells per DSU. I think it's important to note that in every area that we have created an inventory summary for, these are engineered. So as we look across Monument Draw, we see, as I mentioned before with the geologic highs and the many basin geologic lows, the reflows coming in, we see different intervals within each area that are productive. So in some areas, we may see 3-stacked intervals in the Wolfcamp, Third Bone Springs; in others, there's 2. So when you look at the remaining inventory, if you were just to calculate 8 wells per interval, it doesn't add up and that's the reason we're taking account from an engineering basis and a reservoir basis what's actually achievable.

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David Meats, Morningstar Inc., Research Division - Senior Equity Analyst [47]

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Well, I'm guessing you guys already -- it sounds like already tested the 660-foot that's implied with that Third Bone Spring number. But how do you know -- or maybe this is a question, a silly question -- but how do you know that there is no interference if you later try to drill the 7 wells in the Upper Wolfcamp as well, that the Wolfcamp and the Third Bone Spring are not interfering with each other?

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Jon C. Wright, Halcón Resources Corporation - Executive VP & COO [48]

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Undoubtedly, there's risk with that. And until we have more cases of infill wells with bounded results, we'll have a better idea of how that looks. Today, we're very early in our program. We're being very thoughtful in how we develop this area, taking account that -- the potential for child-parent interference.

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Operator [49]

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Our next question comes from [Marianna Kushner], Nomura Asset Management.

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Unidentified Analyst, [50]

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I just wanted to clarify a couple of things. Regarding the sour gas treating costs, you add those back for the EBITDA calculation. I'm curious if that's how -- how that expense is treated to calculate covenant compliance.

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [51]

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Yes, it's a full add-back for EBITDA for purposes of calculating our leverage under the revolver covenant.

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Unidentified Analyst, [52]

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Okay. And also curious if you could provide PV10, pretax PV10 at some sort of strip pricing and if you could particularly estimate or give some guidance on what PV10 could be at strip pricing [similar].

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [53]

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We typically do not provide that. We have it -- I think you can look at what we have in our 10-K. And on a proved basis, it was $150 million using SEC pricing -- I'm sorry, $850 million using SEC pricing. Obviously, SEC pricing is a little higher than strip right now, but that gives you a good kind of ballpark of what total proved is as of year-end.

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Unidentified Analyst, [54]

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Okay. Do you have any estimates for PD value, either SEC or -- maybe SEC pricing? Because I did not find that in the 10-K.

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [55]

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You mean PDP?

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Unidentified Analyst, [56]

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Yes, PDP. I guess PDP will be...

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [57]

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Yes, it's probably... yes, it's somewhere in the $500 million-ish range.

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Operator [58]

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Our next question comes from [Sam Goebel], private investor.

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Unidentified Participant, [59]

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A couple of simple questions. Can you -- because you're so long far into the quarter, can you estimate what revenue is going to be reported for this quarter when it's reported and then most recent daily production?

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [60]

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We will report on our first quarter sometime in early to mid-May. We wouldn't comment on where it's shaking out at this point. So it's just something we wouldn't do at this point. Production, it's highly variable. Again, as we mentioned, we are looking forward to the second quarter. It's going to be dependent on how quickly the Valkyrie unit, the H2S unit, comes online. And we can turn those wells online, how quickly they clean up and start producing oil and gas. I would just say that we feel real good about where we're headed in the second quarter onward from '19. The first quarter is going to, again, be a little bit muddied by third-party gas takeaway constraints as well as higher H2S treating costs than we expect going forward.

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Unidentified Participant, [61]

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Okay. What about liquidity then? Do you project liquidity position at the end of the quarter?

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [62]

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No. We typically do not provide that until we actually report on the quarter.

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Operator [63]

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We have reached the end of the question-and-answer session, and I will turn the call back over to Quentin Hicks for closing remarks.

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Quentin R. Hicks, Halcón Resources Corporation - EVP of Finance, Capital Markets & IR [64]

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Thank you all for your interest, and feel free to reach out to me anytime with any questions. And we look forward to the rest of '19. Thank you.

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Operator [65]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.