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Edited Transcript of HPR.N earnings conference call or presentation 5-May-20 1:00pm GMT

Q1 2020 HighPoint Resources Corp Earnings Call

Jun 25, 2020 (Thomson StreetEvents) -- Edited Transcript of HighPoint Resources Corp earnings conference call or presentation Tuesday, May 5, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Larry C. Busnardo

HighPoint Resources Corporation - VP of IR

* Paul W. Geiger

HighPoint Resources Corporation - COO

* R. Scot Woodall

HighPoint Resources Corporation - CEO, President & Director

* William M. Crawford

HighPoint Resources Corporation - CFO & Principal Accounting Officer

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Conference Call Participants

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* Derrick Lee Whitfield

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

* Jason Andrew Wangler

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

* Noel Augustus Parks

Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP's

* Welles Westfeldt Fitzpatrick

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 HighPoint Resources Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded (Operator Instructions)

I would now like to hand the conference over to your speaker for today, Mr. Larry Busnardo. Thank you. Please go ahead, sir.

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Larry C. Busnardo, HighPoint Resources Corporation - VP of IR [2]

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Good morning, and thank you for joining us today for the HighPoint Resources first quarter earnings conference call. Speaking on the call today are Scot Woodall, CEO; Bill Crawford, CFO; and Paul Geiger, COO.

Before we begin, I'd ask that you please review the disclosure statements provided within the forward-looking statements of our earnings release, which you can find on our website at hpres.com. You can also find and review these disclosures as they are referenced in other filings with the SEC or in our 10-Q, which we filed yesterday afternoon. We will also be referencing non-GAAP financial measures during the call, and a reconciliation to GAAP financial statements can be found at the end of our press release. This morning, we posted a new presentation to the Investor Relations portion of our website that we will be referencing on today's call.

With that, I'll turn the call over to Scot to begin our prepared remarks.

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [3]

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Good morning, and thank you for joining us today to discuss our first quarter 2020 financial and operational results. The COVID-19 pandemic has significantly impacted global supply and demand fundamentals, broader markets and the economy. In conjunction with the precipitous drop in oil prices, we are operating in unprecedented and uncertain times that has severely hampered the macroeconomic environment for E&P companies.

Our first priority is the health and safety of our employees. And I would like to commend them for their commitment, dedication and professionalism in maintaining the smooth functioning of our operations during these challenging times. As an organization, we responded quickly to the COVID-19 pandemic by implementing our business continuity plan. This involves the implementation of remote workforce measures in both the Denver headquarters office and at our field offices. The transition was seamless, and we have not experienced any notable challenges with respect to our operations or obtaining oil field goods and services. We also have not experienced any third party-related downstream issues up to this point.

We reacted decisively to the lower crude price environment by deferring all capital and completion activity until oil prices improve. We are committed to preserving our balance sheet and liquidity and ensuring free cash flow generation for 2020. Given the uncertainties we are facing as an industry, we will be disciplined in our consideration of future capital investment. We will continue to assess changes in the broader markets as well as current and future oil prices to determine the appropriate time to resume operations. We are cognizant of the changes required to operate efficiently and profitably in this lower commodity price environment. In this regard, we have implemented several cost-saving initiatives which enable us to better align our cost structure to the current operating environment, and we are in the process of determining future saving measures.

Now to recap the quarter. We had a good start to the year and experienced limited operational impacts. This allowed us to deliver very strong results that were highlighted by oil volumes exceeding the high end of our guidance range. We accomplished this with capital expenditures that were lower than our guidance, highlighting the efficiency of our operations.

Operationally, we delivered strong well performance from our Codell completions at Hereford and high fluid intensity completions at Northeast Wattenberg, both of which are performing materially better than earlier wells. Paul will discuss this in more detail.

Lastly, our strong first quarter results allowed us to reduce our bank borrow -- our bank debt by 32% in the first quarter.

I will now turn the call over to Bill for his comments.

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William M. Crawford, HighPoint Resources Corporation - CFO & Principal Accounting Officer [4]

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Thank you, Scot, and good morning all. As Scot mentioned, we had a good start to the year from an operating perspective as our results generally exceeded consensus estimates and our quarterly guidance. Production volumes of 2.9 MMBOE and oil volumes of 1.6 million barrels were both ahead of guidance. This was a result of the strong Codell results that Scot mentioned along with accelerated timing of our online and the quick recovery of our Hereford Section 17 area post-cleanup. Capital expenditures were $10 million below our guidance range at $70 million.

As Scot mentioned, our strong first quarter generated EBITDAX of $81 million, which was an increase of 6% from the first quarter of 2019. This included $8 million for the early termination of a small portion of our Q3, Q4 2020 hedges because we reduced the activity near term. Our remaining hedge protection -- or sorry, our remaining hedge position provides significant near-term protection from oil -- low oil prices. We have nearly all of our anticipated 2020 oil production hedged at WTI price that is greater than $57 per barrel and about half of our 2021 production hedged at about $55 per barrel. The mark-to-market value of our hedge book is about $170 million based on current WTI strip prices, providing significant near-term revenue protection. A full summary of our hedge position is in the press release.

Our strong first quarter results and focused capital discipline contributed to a $45 million or 32% reduction in bank debt during the quarter. We recently began the semiannual redetermination of our credit facility and anticipate that the review will be completed in the coming weeks. As many of you are aware, the banks have faced significant challenges with many borrowers and have become more restrictive with commitments and structures. We are not immune to these effects as our bank meeting was delayed multiple times in April, and we are still in discussion with the syndicate.

Due to lower price decks on our reserve and hedge level, we expect our borrowing base could be reduced by up to 40% and our borrowing capacity reduced a little bit further as banks are seeking stronger cushion and reduced exposure to the space. We do not expect any material structural change but maybe higher-pricing gas.

Given the uncertainties of future oil prices and the impact that broader macroeconomic effects, including the pace of economic recovery, will have on the oil sector, we are currently providing guidance for the second quarter only at this time, in which we expect capital expenditures to total about $40 million as we finished up our work in April and anticipate that production will be in the range of about 2.5 to 2.6 MMBOE, of which about 57% is oil. We expect to achieve this level of production provided we do not experience any physical downstream production constraints or shut-ins.

We are preparing for the possibility of shut-ins based on the potential for downstream physical curtailment as crude storage may fill but thus far have not seen any challenges due to our diversity of crude purchasers and markets, along with the premium API gravity of our Niobrara crude. We have proactively shut in a modest amount of production that was only marginally economic. We enjoy low lifting costs for our PDP base, and we'll constantly monitor physical and financial markets to decide if future -- if further shut-ins are warranted.

Finally, a quick note on our large net loss for the quarter. Because of all the uncertainties and current commodity prices, we recognized a noncash impairment of just over $1.2 billion related to the carrying amount of our proved and unproved oil and gas properties. We expect our future DD&A rate to be about $8 per BOE going forward.

With that, I'll turn it over to Paul for an operational update.

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Paul W. Geiger, HighPoint Resources Corporation - COO [5]

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Thank you, Bill, and good morning, everyone.

First, I would like to congratulate and commend our field and office personnel for the strong first quarter performance and for safely delivering on our targets. Our development program generated impressive results, and we're very pleased with the production performance from our initial 2020 wells in Northeast Wattenberg and at Hereford.

I'll now refer you to Slide 8 in the presentation as we look first at Northeast Wattenberg. We brought online 6 wells in our Riverside unit in DSU 4-61-5 that employed our proven higher-fluid Northeast Wattenberg Generation 4 completion design. We've been very encouraged by the results of these wells with average per well cumulative oil production tracking approximately 90% above the offset analog wells that were completed with the previous standard completion design after 50 days. These results significantly improve the economic proposition for our Northeast Wattenberg inventory.

Our initial 2 Codell wells in the Fox Creek area of the Hereford Field were completed with the larger Hereford Generation 4 designs of 50 barrels per foot and 2,000 pounds of sand per foot. These high-rate, high-volume designs are based on the observed ability of these larger jobs to increase stimulated reservoir volume during our HERDOP work. These wells were placed online late in the first quarter and are demonstrating the increased productivity that we were targeting. After the first 30 days of continually inclining oil production, these wells are each producing over 400 barrels a day. You can see on Slide 6 that this is 30% higher than the Section 16 Southeast pad, which is the analog for our Hereford reserve bookings and represents our economic baseline.

Also in the Fox Creek area, we placed 5 wells on flowback in April at DSU 12-63-34, which continue to ramp to peak production. Completion operations recently concluded on 2 wells in the Fox Creek area at DSU 12-63-33. The wells are awaiting drill-out, and it's anticipated their initial flowback will commence during the second quarter. We currently have 33 DUC opportunities in our inventory post the completion of this work.

To summarize, we are very pleased with our operational performance year-to-date in 2020. We performed well against our first quarter targets. We brought our first high-rate stimulation pad online in Northeast Wattenberg, which is outperforming all offsets. We brought our first high-rate stimulation pad online in Fox Creek area of Hereford, which is outperforming the previous best development on Section 16 Southeast pad. Our most recent performance in both assets demonstrates our best economic performance yet, which, coupled with our basin-leading margin, positions us very competitively to face the many challenges our industry is navigating.

Operator, we're now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Derrick Whitfield.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [2]

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Perhaps first, Scot, I certainly appreciate the challenges of providing quarterly guidance in the current environment. With that said, assuming your CapEx plan is currently contemplated, could you offer any color on the broad bookends on where you could exit the year with oil production?

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [3]

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I don't know, Derrick. I think we aren't really kind of trying to put out an absolute number. We are kind of looking at this thing on a quarter-by-quarter kind of basis, looking to see how much capital we're going to end up deploying in the second half of the year and couple that with also just if there's any physical limitation. So I kind of hate to even kind of put out a range right now, Derrick.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [4]

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Understood, Scot. Certainly a challenging time. Perhaps for Paul with my second question, with respect to the 5 wells at Fox Creek, could you speak to the well design and spacing for those wells more broadly and highlight the applicability of that design to the Niobrara interval? As I recall, those are Codell wells.

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Paul W. Geiger, HighPoint Resources Corporation - COO [5]

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Yes, Derrick. The first 2 were Codell wells. The next 5 would be Niobrara. And so we've got the 2 Codell wells that will follow those up. So those Niobrara designs are -- they're the -- the Generation 4 Hereford design. There's a higher fluid rate and higher fluid design of total volume completion. So we expect those to be similar to the original Codell. And then as a result of the larger job, we'll flow those back more aggressively as well to get that water off. Overall, those are about a 6-well spacing on the Niobrara, effective spacing, and without Codell development as compared to the Codells that are up there that are about 4-well spacing, as you've seen us continue to develop on in Hereford.

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Operator [6]

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Our next question comes from Welles Fitzpatrick.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [7]

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I was wondering if we could get an update on the politics in the state. Obviously, it's pretty tough to collect signatures these days. I mean can we assume that there's likely not going to be ballot initiatives targeting the industry come November?

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [8]

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It's probably early to draw that conclusion, Welles, but I think your assessment is probably right. Currently, we still require physical signatures in the state, and so that's probably going to be very difficult and very challenging to do and to meet the deadlines for early August. There's been some discussion about doing it online. But it's not getting much traction, and I'm not even sure if legally, the state can go down that path. So we hate to jump to conclusions, but it seems like it's trending that way.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [9]

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No, understood. Makes sense. And I'd have to imagine the state needs that revenue more than ever now. Can you talk a little bit to the divestitures? Am I doing the math right, that went from $27 million to $3 million? Can you -- was that just a seller's funding falling apart? And can you talk about the associated production with just the $3 million? Now if you could break that out, that would be helpful.

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Paul W. Geiger, HighPoint Resources Corporation - COO [10]

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Yes. Welles, this is Paul. Looking at those divestitures, as we progressed through the downturn, we had some of those offers kind of re-trade there. So we had multiple offers on the -- not only the package that closed but the packages that did not -- that we did not elect to transact on. The reason for that is we saw that price continued to soften and the resulting offers continued to soften. They didn't look like they were accretive opportunities for us looking forward into '20 and '21 really specifically with those 2, with the development in the Permian on that acreage and then as well as the position in Wattenberg. With the continual improvement of the wells and designs that we're seeing, we weren't really compelled to divest those at the time.

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Operator [11]

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Next question comes from Jason Wangler.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [12]

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Was just curious, as you guys talk about the borrowing base and the redetermination, obviously, you were able to pay some of the facility down in the first quarter. As you kind of go forward, you have the hedge book. Is that going to be the focus in terms of cash flows, is trying to reduce that balance sheet further? Or is there anything else we should be thinking about?

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William M. Crawford, HighPoint Resources Corporation - CFO & Principal Accounting Officer [13]

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Yes. Jason, this is Bill. Yes. I mean obviously, we needed to get through the borrowing base here in the spring to determine what levels of liquidity and, as we look out as -- through the summer, what are the best uses of our cash and how we think about using it. And so I think that's why we've made the decisions we have and have the liquidity that we have, and we'll take advantage of whatever we can.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [14]

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Okay. And Scot, I know the production side, I certainly appreciate not -- you don't want to kind of put numbers around that. But as you think about the capital spend, as you've kind of deferred everything, as you think about if you're running it ex April, I mean, is it a pretty low number that you're thinking about in terms of CapEx as you think about May and June? And if obviously this continues into the second half of this year, is it -- is there a range of numbers you'd say that's -- I don't know, wouldn't call it maintenance CapEx obviously, but a number that you guys would be spending, but -- as you move forward with that program?

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [15]

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Yes. In the beginning of Q2, we still were wrapping up some of the drilling and completion operations. And that's why you see that CapEx number of our guidance of about $40 million. Provided that we do not resume drilling and completion activities, that number probably falls to something that's more in the $10 million range per quarter or something, which is just we've got to drill out the wells and do some maintenance and do some things, but it's probably a pretty low number subsequent quarters if we do not resume activity.

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Operator [16]

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Next question comes from Noel Parks.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP's [17]

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I was interested in hearing just how you are looking at well results with the updated completions. You've now got more completion history on a bunch of them. And just as far as adherence to type curves and you're seeing roughly what you would expect given the strong IPs, just how is that looking with a little more history?

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Paul W. Geiger, HighPoint Resources Corporation - COO [18]

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Sure. Noel, this is Paul. As we look at those, you saw that the slides there in the deck on 6 and 8, we're very encouraged with those. Initially, they've got a higher flowback rate, a higher observed productivity based on the significantly larger stimulations we've put on those. And so at this point, worst case, I think that you could say that's acceleration only, in which case you still have improved your rate of return 5 points or above. But best case is you've got incremental EUR there. And that's what we really believe having put the much larger completions on them, having had the higher total fluid productivity and based on the GOR trends we're seeing. And so we're expecting that those are incremental performance, improvements overall to the EUR and of the improvements to our type curves in those areas going forward.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP's [19]

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Great, great. And talking about RORs, I'm looking at -- or what I've heard from folks about the serviced environment, and I feel like this is probably the fourth year in a row, I thought, "Well, costs can't go any cheaper than this." And then for example, we have this year's events, and it looks like they could go even cheaper. Just what are your thoughts? And do you have a sense of -- and this is, of course, assuming we get better visibility, a stronger strip that makes it more attractive to look ahead. But do you think where you would be right now if you were drilling, is this the absolute trough you think? And looking ahead, where do you think sort of costs might be on a more normalized basis assuming we, say, in 2021 have more of a $50 world again?

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Paul W. Geiger, HighPoint Resources Corporation - COO [20]

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Sure. So starting off at the top, ROR, I mean our bigger driver there is going to be this double-digit improvement in recovery per well. And so we're very pleased with that is the -- is kind of the dominant input into that system.

From a cost standpoint, we had a pretty attractive pricing coming into 2020 here, and you'll see that flow through on the capital per well. So we're very encouraged about that. From a flexibility standpoint, I think that's going to be a toss-up. I think you've got opportunity for some concessions to get back to work, but probably in this trough, you've got some service folks dropping out. And so we'll see how that plays out.

As we look at the second half, we're continuing to test the market and talk to folks on the completion side to make sure that in addition to this improved type curve that we're looking at, that we've got the best and most current costs as we contemplate decisions going forward.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP's [21]

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Great, great. And I guess just one more thing. What are you hearing from your sort of midstream partners? I'm sure you -- the visibility is not great, but I did notice in the guidance you specified that these are our numbers, this can't really incorporate anything unforeseen that could happen as far as, I guess, force majeure or other curtailments sort of beyond your control. But just what are you hearing? How does it sound? We haven't had crude go back negative again. We'll see how it looks heading into the June expiration. But yes, just any insight you can give there would be great.

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William M. Crawford, HighPoint Resources Corporation - CFO & Principal Accounting Officer [22]

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Yes. This is Bill. Yes, we sell to 3 or 4 different purchasers. And with our API gravity being mid-30s, I think it's a very desirable cut for what the refiners are looking for. And some of it stays local. Some of it goes down the Grand Mesa Pipeline. Some of it goes down to Pony Express. And we've heard that they've found home for all of our May barrels and into June barrels. So right now, we're not feeling the pinch to do anything more voluntarily given our very low lifting costs. And so -- but it's -- we're ready to act if it does come up.

And obviously, on the gas side, with all the expansions recently and people starting to cut back activity, they're taking advantage of this time to do some planned maintenance and some other stuff, but no gas or NGL issues.

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Operator [23]

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And I'm showing that there are no further questions at this time. I would now like to hand the conference back over to Larry Busnardo.

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Larry C. Busnardo, HighPoint Resources Corporation - VP of IR [24]

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All right. Well, thanks again for joining us today on the call. And we'll be around all day. If you have any questions, feel free to reach out. And we'll talk to you soon. Have a good day.

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Operator [25]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You all may now disconnect.