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Edited Transcript of HPR.N earnings conference call or presentation 7-May-19 2:00pm GMT

Q1 2019 HighPoint Resources Corp Earnings Call

May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of HighPoint Resources Corp earnings conference call or presentation Tuesday, May 7, 2019 at 2:00:00pm 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

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Conference Call Participants

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* David Earl Beard

Coker & Palmer Investment Securities, Inc., Research Division - Director of Research & Senior Analyst of Exploration and Production

* 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

* Michael Dugan Kelly

Seaport Global Securities LLC, Research Division - MD and Head of Exploration & Production Research

* 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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Good day, ladies and gentlemen, and welcome to the First Quarter 2019 HighPoint Resources Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's call, Mr. Larry Busnardo. Sir, you may begin.

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

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Thank you. Good morning, and thanks for joining us this morning for the HighPoint Resources First Quarter 2019 Earnings Conference Call. Joining me on the call today are Scot Woodall, Chief Executive Officer; Paul Geiger, Chief Operating Officer; and Bill Crawford, Chief Financial Officer.

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

With that, I'll turn the call over to Scot for his comments.

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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 2019 financial and operational results. I'll provide some overview commentary before handing the call over to Paul and Bill for the operational and financial updates. We are off to a good start to the year and executing nicely on our operational plan as demonstrated by our first quarter results. We delivered year-over-year growth and production sales volumes of 46%, oil volume growth of 51%, strong EBITDAX growth of 65% and basin operating margin of $30.31 per BOE.

With this strong first quarter performance, today, we are reiterating full year guidance. As previously outlined, our capital program and activity is weighted toward the first half of the year as we have maintained a 3-rig drilling pace and plan to drop to 2 rigs this quarter. This high level of drilling and completion activity resulted in a significant number of wells that will be turned online during the second quarter in both Hereford and Northeast Wattenberg. We anticipate that over 30 wells will be placed on flowback during the second quarter. This will drive a significantly higher production profile during the second half of the year along with an associated decline in spending. We are confident that we are on pace to achieve our operational goals and look forward to providing further updates.

Operationally, we continue to see strong performance from our high-fluid-intensity stimulation project in Northeast Wattenberg. In Hereford, our development optimization program is underway, which is yielding valuable drilling and completion data that will allow us to deliver optimum value from the Hereford asset. We look forward to providing further updates over the summer. The recent signing of Colorado Senate Bill 181 into law should bring certainty to the industry and our stakeholders. This bill focused on local control should not affect our highly advantaged and differentiated DJ Basin acreage position that is uniquely located within the rural and unincorporated areas of Weld County.

Implementation of this new bill requires changes at the COGCC and multiple rule-makings over a period of time. But we expect to be able to continue to execute on our future development plan and fully develop our highly prospective acreage position. Lastly, we look forward to continuing our established relationship and working in partnership with the stakeholders in our areas as we continue to safely and responsibly develop our assets.

I will now turn the call over to Paul for an operational update.

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Paul W. Geiger, HighPoint Resources Corporation - COO [4]

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Thank you, Scot, and good morning, everyone. We've had an active start to the year with record recent results as we execute our Hereford development program, and we continue to be encouraged with the results from our higher-fluid-intensity stimulations initiated in Northeast Wattenberg. I'll touch on both of these in more detail in a moment. Production for the first quarter of 2.8 million barrels of oil equivalent grew 46% over the comparable 2018 period, and oil volumes of 1.72 million barrels were up 51% over the first quarter of 2018.

First quarter production was tracking the high end of our production range before we experienced a significant snow event in March, which we estimate caused the deferral of approximately 65,000 barrels of oil equivalent. I'd like to thank Weld County for their work to clear roadways and also our company and field and office personnel, who worked diligently to resume operations safely and quickly.

Now turning to operations. At Hereford, we have seen encouraging results from the recent wells in DSU 11-63-15. As highlighted last quarter, we began implementing a buffer zone around active completion activities in Hereford to minimize interference with production and maximize completion activity -- or intend to. For reference, please see the graphic on Slide 12 of our corporate presentation.

We placed 5 wells in the eastern half of DSU 11-63-15 on flowback in February, which were successful demonstration of the pressure wall concept, with these wells ramping production aggressively without significant interference from neighboring completions. After 60 days of production, these wells have achieved average cumulative production of approximately 20,000 barrels of oil per well at a high oil cut of 87%.

The remaining wells that are on east -- western portion of this section were placed on flowback in April. These wells are still in the initial control flowback period but have the benefit of the pressure wall and have been producing without significant completion interference. If you recall from our last earnings call, we are also in the process of an extensive reservoir, geologic and operations technical study within DSU 11-63-16 and DSU 11-63-17, utilizing microseismic and fiber optic technology.

This study allows us to increase the granularity of our subsurface picture and gain a real-time assessment of our completion and production performance as we optimize development of the tremendous 30 million to 40 million barrels of oil per section of resource potential in Hereford. There is more detail regarding this integrated approach on Page 14 of the corporate update.

This technical study area consists of 23 XRL wells within 2 DSUs, incorporates fiber optic monitoring on 3 wells, well spacing of 6 -- 10 to 16 XRL wells per DSU and microseismic monitoring across the area. Today, all of the wells are drilled, including laying 3 streams of fiber optic, and we have begun to gather microseismic data with the first different group of completions.

On this first group of wells, we have increased the base stimulation intensity by 70% to over 30 barrels of fluid per lateral foot from a previous design of approximately 18 barrels a foot. This design change was made following the strong results of our high-fluid-intensity pilot project in Northeast Wattenberg.

As we move stimulation activity to the area with fiber optics, we'll be gathering data regarding the impacts of sand loading, fluid loading, cluster spacing, appropriation program and stimulation rates. This process will take place over the second quarter and will involve real-time optimization of completions during the testing. Post testing, we expect to be able to target an optimum well placement, well spacing and completions designed to generate the best rate of return from our drilling and completion program.

Supporting our efforts to maximize rate of return, we're seeing continued improvement in our drilling execution. I'd like to highlight that our most recent Hereford wells set a company record of 40.5 hours to drill the XRL lateral section. These successes have driven cost for drilling portion of our wells under $1 million. We expect this improvement to match the historical averages achieved in Northeast Wattenberg as we continue to drive execution efficiencies at Hereford.

Now turning to our legacy Northeast Wattenberg asset. For the first quarter of 2019, 15 gross wells were spud, and 7 gross wells were placed on flowback. We continue to see improved well performance through high-fluid-intensity completions as the initial pilot program wells have reached average cumulative production of approximately 96,000 barrels oil equivalent after 205 days of production.

See Slide 17 of our presentation for more detail regarding the continuous improvement from our optimized completions. These wells are tracking more than 20% above the base Northeast Wattenberg type curve, so we remain highly encouraged by the result of the program, and this completion design has been implemented as the new standard for future Northeast Wattenberg completions.

Drilling operations are currently focused on the central portion of Northeast Wattenberg in DSU 5-61-34 and 5-61-35, consisting of 14 XRL wells. The wells are anticipated to be completed during the second quarter of 2019. In addition, completion activity continues on the western portion of the field in DSU 4-63-3 on 4 standard reach lateral wells and DSU 4-63-5 with 7 XRL wells. The wells are expected to be placed on flowback in the second quarter of 2019.

Our Northeast Wattenberg drilling program is continuing to lead the way toward improved well economic outcomes with improved drilling performance. Our most recent well delivered a time of 5.5 days spud to spud, which is among the top times delivered during our entire Northeast Wattenberg development. Similar to our Hereford expectations, we are pleased to see this continuous improvement to our well results.

In summary, we're pleased by the operational progress made during the first quarter of 2019. At Northeast Wattenberg, we have continued with our higher-fluid completion design, which has led to improved well performance focused on unlocking additional value from our assets. Our Hereford wells have demonstrated high oil cuts, reduced drilling complete costs and significant productivity to drive rates of return. Lastly, we are implementing design changes, utilizing advanced technology, which we believe will significantly improve the value generation from our coming decade of Hereford development.

I'll now turn the call over to Bill.

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William M. Crawford, HighPoint Resources Corporation - CFO [5]

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Thank you, Paul, and good morning. As Scot and Paul reviewed, our operating results were generally in line or exceeded our quarterly guidance and consensus estimates. I'd now like to touch on a few specific items financially that impacted the quarter.

Our NGL price per barrel averaged approximately 24% of WTI. This is lower than prior quarters as a result of temporary third-party processing inefficiency that resulted in offset NGL due to the colder weather experienced during the quarter. An effect of this is that some of the NGLs had to be trucked to a distant market, thus lowering the realized price we received.

Production tax expense averaged $1.39 per BOE in the first quarter compared to $2.70 per BOE in the first quarter of last year. Production taxes for the first quarter of 2019 were offset by an annual adjustment of 2018 Colorado ad valorem tax and of the related Colorado severance tax credit adjustment. This is a typical occurrence during the first quarter, and we expect production taxes to average about 8% to 9% of pre-hedged revenues.

Now touching on the balance sheet. We are currently undergoing our semiannual borrowing base review and expect that our current borrowing base of $500 million will remain unchanged. We expect that the redetermination will be completed next week and this will provide us over $400 million of liquidity.

On the hedging front, we continue to take advantage of the recent strength in crude prices to layer in support for our capital program. We are well hedged into 2019 and 2020, which provide added predictability and visibility to our future cash flow. You can find a full summary of our updated hedge position in the press release or the 10-Q.

Now an update on our guidance outlook. We expect total production sales volumes for the second quarter to be 2.8 to 2.9 MMBoe, with oil making up about 62% of total volumes. Our guidance incorporates some expected downtime associated with the commissioning of the updated natural gas processing facility in Hereford.

As we have previously stated, Summit Midstream is expanding its Hereford gas processing plant from 20 MMcf per day to a 60 MMcf per day plant. The commissioning work is planned for later this quarter, during which we expect to experience some production downtime as the facility is upgraded.

Capital expenditures for the second quarter are expected to total $120 million to $130 million based on the activities Paul and Scot reviewed. In summary, our 2019 plan is on track, and we are reiterating all of our components of operating guidance, which you can find in our press release.

With that, we're ready to take questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Derrick Whitfield from Stifel.

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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 for Scot. With the recent signing of the Colorado Senate Bill 19-181, could you speak to the expected changes at COGCC and the additional rules required to implement it?

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

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Sure, can. One is the makeup of the commission in general is going to change, and there will be less industry representation on that deal and a little bit more emphasis on environmental and health and safety. And I think the overall mission of the commission kind of changes more to regulating the industry versus fostering the industry. And there will be numerous rule-makings about pipelines and about signing of wells and kind of all kinds of things over the course of the next 12 to 18 months. Kind of with all that being said though, the emphasis has really been on local control of -- giving local control to municipalities. And we're in an unincorporated portion of Weld County. So we really expect to have minimal impact to us as we think about going and executing our drilling plan.

In terms of permitting, when I met with Director Robin, he was here a couple of weeks ago, he was pretty proud of the fact that Q1 2019 permit rate was identical to the permit rate of Q1 2018. So they plan for it to be kind of business as usual, and we continue to have a fully permitted program for 2019. So I feel very confident that we can put our business plan and go meet them based on our acreage position being in the unincorporated portions and should largely be impacted the least of most people.

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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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Great. That's very helpful. And then shifting over to Hereford and specifically the Section 16 wells. Would it be fair to say that, that's really the first set of wells put on production that fully have your fingerprints on every aspect of design and flowback? And if so, how should we think about the productivity of those wells relative to the Section 15 wells?

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [5]

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I guess, the first answer is: Yes, 16 and 17 are going to be where we are really trying to implement the latest design and technology. And so you're going to see us, as Paul mentioned, start with fluid designs that are 30 barrels per foot, mimicking kind of what -- the positive results we got in Northeast Wattenberg. And you're going to see various ramp-ups from that, the fluid volumes. You're going to see ramps-up from the 1,500-pound sand volumes and the testing of different rates. Along with that, we're going to be looking at spacing between 10 and 16 wells. So there is a lot going on in 16 and 17. And I think all of those results will lead us to an optimum design as we go think about going and executing the back half of 2019 and then 2020. So when you think about how we typically would go about trying to do -- evolve our completions and drilling operations, it's kind of like you change one thing, and then you get production for 6 or 9 months, and you evaluate those results, and then you change something else.

And we're going to be able to do all of that with the latest technology of this fiber optics and microseismic. So we really think that's going to advance the learning curve going forward. So I'm excited. As Paul mentioned, we're in the middle of that execution right now. We have data flowing out of there right now. And hopefully, we have some pretty strong result and pretty strong direction about how we're going to go execute going forward.

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Operator [6]

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(Operator Instructions) Our next question comes from Jason Wangler from Imperial Capital.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [7]

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Wanted to ask on the higher-fluid completions. I mean, just kind of looking at the presentation, it looks like you may, well, see response a little bit faster maybe as well in terms of the peak rates. Is that something that you think may be a part of that? Or do you think there going to kind of continue to be a similar production kind of curve as the other wells, just perhaps at a higher rate?

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Paul W. Geiger, HighPoint Resources Corporation - COO [8]

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Hey, Jason. This is Paul. I mean, for those higher-fluid-intensity completions, as you know, we bring these wells back on controlled flowback. And so you might have a peak of our production ramp anywhere from second to fourth month as we go. As you see in the Northeast Wattenberg completions, those have continued to ramp on out into the third and fourth month. I think as you're looking at those CUM plots, understanding controlled flowback is important as well. I mean, as compared to typical wells, you got highest CUM in the first month. Whichever month's following that is significantly less than the first month. Whereas, for a controlled flowback well, our second, third and fourth months are continuing to ramp and generating a higher per month CUM. And so we do see those run all the way across -- I don't know that we see anything more quickly, to your question specifically, but we do see significantly enhanced overall production from the start and just factored up there across the curve. And so as you saw on those Northeast Wattenberg plots specifically, 20-plus percent increased performance overall.

And so as Scot mentioned, we're very excited to see that Section 16 in Hereford, which is our first opportunity to see what those higher-intensity-fluid stimulations look like at Hereford.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [9]

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Great. And maybe, Scot, for you. Just, obviously, focused on free cash flow in the second half of the year. Can you maybe talk to where you're kind of focused on those proceeds that assume obviously with the -- drawing on the credit facility? Would that be an area that you'd focus on? But just any color around that.

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [10]

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Yes. I think, for this year, that's exactly right. It would be the -- pay off the credit facility would be first. And then I think we can look at all kinds of other ways of returning value to the shareholders kind of once we get to that point.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [11]

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Okay. And if I could sneak one more in. Just obviously the front-end loaded CapEx and kind of back-end loaded production. I think that was kind of what happened last year as well. I mean, do you think that, that's kind of just the way that the years will look going forward? Or do you just think is there a size or a scale that you guys get to toward maybe smooths out further? Just curious how you kind of think about that as you guys plan for the longer term.

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [12]

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You would think eventually that it smooths out going forward. But if you recall, kind of in the first quarter is where we built that pressure wall in the Hereford field. And so we intentionally completed some wells and left them without putting them on flowback just to kind of build that pressure barrier from our existing production operations. So that kind of delayed some of the onlines in Q1. But as I referenced in my opening comments, I think we put on 12 wells in Q1, and we expect to put on more than 30 in Q2. And I think we've already exceeded putting on more than 12 wells just in the first month Q2. So clearly, we have a great line of sight of getting all those wells online. That is how we speak to such a high degree of confidence about the second half of this year's production profile.

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Operator [13]

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I'm showing no further questions at this time. I will like to turn the call back over to Larry Busnardo for closing remarks.

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Larry C. Busnardo, HighPoint Resources Corporation - VP of IR [14]

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I think we have one more question that just popped into the queue. We'll take that.

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Operator [15]

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We do have a question from Mike Kelly from Seaport Global.

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Michael Dugan Kelly, Seaport Global Securities LLC, Research Division - MD and Head of Exploration & Production Research [16]

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I apologize, I missed a part of Scot’s opening comments. So maybe you detailed this. But just wanted to dive into the CapEx a little bit more. We know where you were obviously for Q1 and now what are you expecting for Q2. But how does that trajectory look Q3 and Q4, if you wouldn't mind getting maybe a little bit more granular than you'd like to on that?

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [17]

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Sure. So I guess, 2 things. So one, we ran 3 rigs into the second quarter, which we plan on laying down one of those rigs in the quarter, so we'll be on a slower drilling pace the second half of the year. And then also, obviously, we had a lot of things going on completion-wise. And what I kind of just said is we put on 12 wells in Q1. We expect to put on more than 30 wells in Q2. We had the opportunity to bring in some additional equipment and kind of accelerate the data gathering in the [Hereford] area, and so we have additional stimulation crews in the field trying to gather that data as quickly as possible. And so that kind of leads to the spending level that you see in Q2, which also then should diminish as you move into Q3 and Q4. So really kind of everything kind of going according to plan. We are accelerating a little bit in Hereford in Q2, but I think that we're on track for both meeting the CapEx and the production targets that we've laid out.

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Michael Dugan Kelly, Seaport Global Securities LLC, Research Division - MD and Head of Exploration & Production Research [18]

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Okay. Great. And should Q3 and Q4 look pretty similar in terms of that spend? Or would there be you expect maybe a larger dropoff in Q4 in the CapEx?

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [19]

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I think it's pretty similar, but I don't have those numbers in front of me, I guess.

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Michael Dugan Kelly, Seaport Global Securities LLC, Research Division - MD and Head of Exploration & Production Research [20]

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Okay. And then, Scot, when do you think you will really be able to tell, looking at these Hereford wells, kind of the really best-in-class completions with the frac barriers, the higher-intensity fluid levels? When do we think we'll really get a good sense of what those results -- each the potential it shows?

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [21]

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All the work will be done in Q2. And so you probably would like to, one, analyze that real-time data that we capture in Q2 and probably see, at least, a little bit of production history. So probably we could speak to it, without a higher degree of confidence, maybe in Q3 would probably be my guess.

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Operator [22]

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Our next question comes from Welles Fitzpatrick from SunTrust.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [23]

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On the 5 wells in Section 15, can you talk to were those Nios and Codells fairly similar? Are those performing about in line with each other?

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Paul W. Geiger, HighPoint Resources Corporation - COO [24]

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Yes, Welles, this is Paul. Yes, they are. You got the -- that split between Nio and Codell on those wells, and we do see those performing relatively similarly. They've got the similar lower-intensity completions. They were protected by the pressure walls, and we haven't seen frac hits on flowback. But yes, as yet, we've not differentiated in the way we're stimulating Nios or Codells.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [25]

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Okay. And then just one last one. Obviously, you talked to controlled flowback. Is there any way to quantify that, either can you put pressures? Or maybe have those rates been relatively flat or even not quite peaked yet?

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Paul W. Geiger, HighPoint Resources Corporation - COO [26]

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Absolutely. I can talk a little bit about that. As we look at the controlled flowback, you've got -- our peak at Hereford. We were talking about a 2- to 3-month ramp there from what we've seen from the wells to date. We're managing that on maximizing liquids recovery through kind of management of flowing bottom wall pressure there. And so as we target that, that first month CUM is not the highest month. You're talking about the second or third month, which would be the highest monthly rate with the second and third likely being very similar. And so as we've seen those things ramp through their second and then third month, that's how we're taking a look at those from a controlled flowback standpoint.

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [27]

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Yes. And Welles, if you just remember, we kind of went through the same exercise when we first started the development in the Northeast Wattenberg. And so you remember, maybe the first handful of wells, we flowed them back pretty hard, and we didn't think that taking all that gas as a solution was the right way of producing those wells. And once the controlled flowback methodology kept the gas in solution longer, and it led to higher oil recoveries and higher EURs, and obviously, we largely check that looking at net present values and CUM production through time.

And so we're going through that same exercise here in Hereford. And we just think that there is a strong application to do it this way when you are in a lower GOR area. And so you remember, our Northeast Wattenberg position is plus or minus 50% on oil cut, and the Hereford is plus or minus an 80% oil cut. And so we think it's the right application of the technology, and that's why we're going through this process and doing the controlled flowback for these early-time couple of months.

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Operator [28]

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Our final question is from David Beard from Coker & Palmer.

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David Earl Beard, Coker & Palmer Investment Securities, Inc., Research Division - Director of Research & Senior Analyst of Exploration and Production [29]

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I had 2 questions. The first was on that Section 16, and you've answered that. So good to see the progress on those wells. Bigger picture, you talked about use of free cash flow to pay down the credit line. What's your priority after that in terms of absolute debt levels, maybe building some cash on the balance sheet or buying back stock? And how do you think about use of proceeds after the credit line is cleaned up?

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William M. Crawford, HighPoint Resources Corporation - CFO [30]

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David, this is Bill. Obviously, when we get to that situation, we'll assess all of those opportunities. It feels good to be in that position to be cash flow positive and look at that. Obviously, we like the rates of the return of the wells, but we're going to be very capital disciplined. We've got a good hedge program. And so we'll just assess that as we get into later this year and start planning out our 2020.

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Operator [31]

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I'm showing no further questions at this time. I will now like to turn the call back over to Larry Busnardo for closing remarks.

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Larry C. Busnardo, HighPoint Resources Corporation - VP of IR [32]

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Great. Thanks, again, for joining us today, and feel free to reach out if you have any additional questions over the next several days. Have a good day.

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Operator [33]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect, and have a wonderful day.