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Edited Transcript of HPR.N earnings conference call or presentation 6-Aug-19 2:00pm GMT

Q2 2019 HighPoint Resources Corp Earnings Call

Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of HighPoint Resources Corp earnings conference call or presentation Tuesday, August 6, 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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* 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

* Paul William Grigel

Macquarie Research - Analyst

* 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 Second 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 conference, Mr. Larry Busnardo, Vice President of Investor Relations. Sir, please go ahead.

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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 this morning for the Highpoint Resources Second 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 encourage you to 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 them at the end of our press release. I will now turn the call over to Scot Woodall for prepared 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 second quarter of 2019 financial and operational results. I will provide some overview comments before handing the call over to Paul and Bill for the operational and financial updates.

We continue to deliver on our operational plan and post a solid quarter that was driven by strong operational execution and financial results that came in line with our expectations. Notable accomplishments for the second quarter include successful executing the large-scale Hereford optimization program that is delivering immediate performance insights and has significantly advanced our geologic understanding of the field. All the data has been collected as all 23 wells within the program have been completed and placed on flowback.

We placed 30 wells on initial flowback during the second quarter and an additional 20 wells were placed on flowback in July. This was consistent with what we had outlined and gives us a strong confidence that we will deliver on our second half production profile while maintaining our planned capital expenditures. The significant number of wells turned online over the past several months has brought our total current net corporation production to over 37,000 BOE per day and continues to incline as new wells ramp up. This will drive an approximately 18% sequential production growth for the third quarter over the second quarter. We continue to see strong well performance from our Northeast Wattenberg asset as the initial high-fluid intensity completions are averaging approximately 20% above the base type curve expectations. We also placed online 7 wells on the Western flank of our Northeast Wattenberg acreage position that are delivering strong early performance results and are tracking above 1 million BOE-type curve for this area. Lastly, we continue to maintain a disciplined approach to capital investment and are on track to achieve our target of generating positive cash flow for the second half of the year, as you can see with a highly successful quarter and a great job of execution by our entire team.

Now I would like to provide some additional detail around our Hereford asset. Execution of well performance optimization of this asset is a top priority of the company. We initiated our optimization program with the goal to achieving increased capital efficiency, enhanced well performance and improved well economics. We are extremely pleased with the immediate performance insights gained and we'll be delivering associated well performance results that will become evident to the investment community. This program has validated our conviction and the quality and potential of this asset.

DJ Basin midstream has become a topic of discussion again. So I would like to remind everyone that during 2018, we proactively diversified our Northeast Wattenberg gas processing to multiple outlets other than DCP and continued to flow volumes with no curtailment. In addition, Summit Midstream commissioned its new gas processing plant in July, which increased Hereford gas processing capacity, providing sufficient gas processing capacity to support our upcoming development plans.

With that, I will now turn the call over to Paul to provide more details with respect to our learning and the early results we've seen at Hereford.

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

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Thank you, Scot, and good morning, everyone. First, I would like to thank our field and office personnel for delivering on our numbers safely. We're pleased by the operational results we have seen in the first half of the year and are very encouraged about our momentum into the second half of 2019. We successfully executed our Hereford development optimization program and are realizing the sustained benefits of higher fluid intensity stimulations in Northeast Wattenberg and early time Herford. I will explain on both of these in more detail in a moment. As Scott mentioned, we placed 30 gross wells on flowback during the second quarter and an additional 20 gross wells were placed on flowback in July, bringing our total current net production to over 37,000 barrels of oil equivalent per day, with most of the new wells still ramping to feed monthly production. This has us very well positioned relative to our third quarter guidance provided today.

Now moving onto operations. At Hereford, total production volume -- sales volumes for the second quarter averaged 7,145 barrels equivalent day, and current gross field production has reached a record high of over 10,000 barrels of oil equivalent per day. During the second quarter, we successfully completed the field implementation of the extensive development optimization project within DSU 11-63-16 and DSU 11-63-17. The project encompassed over 1,860 total stages evaluating every aspect of completions, including fluid loading of 30 to 60 barrels per lateral foot, sand loading of 1,000 to 2,250 pounds per lateral foot, cluster spacing of 10 to 40 feet, stage spacing of 40 to 240 feet and variable treating rates per cluster.

During this work, microseismic data was gathered from the 18 square-mile array, while well spacings of 8 to 16 wells per DSU were evaluated.

In total, this project will generate over 5 terabytes of data, which we're analyzing to enhance drilling and completion performance. Foundationally, the thermal maturity and saturation data gathered from the study confirms strong reservoir characteristics and a significant hydrocarbon resource of 30 to 40 million barrels oil in place per section, which is approximately 25% greater than our Northeast Wattenberg.

We're very pleased with the immediate performance insights gained by employing real-time fiber optic monitoring during execution of the program. This technology provided real-time observations during completions on the fiber optic wells, which we applied as optimization stages later in the job on the same well. In this way, generations of completion enhancements were accomplished in a single project instead of over several years. Recall that primary goal of project is to determine the well spacing and completion design, resulting in maximum value generation for future development. We are confident that the project is leading us to this resolution based on the design, execution and learning to date.

Specific inclusions to date include design changes in the rate, clusters and stage spacing as opportunities to materially increase the stimulator rock volume resulting from our completions. Some of these advances were products of real-time optimization during completions. Ongoing monitoring of the fibers during well flowback will quantify opportunities to further improve well economics through customized completion designs for both the Niobrara and Codell formations. Very early well results support this position.

Moving onto recent well results. 7 wells on the Eastern portion of DSU 11-63-16 were placed on flowback in June. Development included well density of 16 wells per DSU, incorporated higher intensity completions of approximately 30 barrels of fluid per lateral foot at approximately 1,500 pounds of sand per lateral foot. During early controlled flowback, the wells have achieved average cumulative production of approximately 10,000 barrels of oil, which is 92% of the equivalent 2-phased volumes per well after 30 days.

The completion and improvement design into these wells have been performing as well or better than the adjacent pad at DSU 11-63-15, which was developed on a wider density pattern of 12 well spacing. The remaining 4 wells on the western portion of the DSU 11-63-16 were placed on flowback in July.

These wells used higher fluid intensity custom completions and a density of 8 wells per DSU. Very early data on these wells indicate significantly higher initial pressures and productivity than previous Hereford DSUs. Recall that we placed 6 wells located on the western portion of the DSU 11-63-15 on flowback in April of 2019. These were the last wells to use the lower-intensity, gen 1 completion of approximately 18 barrels of fluid per lateral foot. These wells have achieved average cumulative production of approximately 30,000 barrels of oil per well, which was 88% of the total two-stream equivalent volume after 100 days. This compares favorably to the offsetting wells located on the eastern side of the DSU. We're also seeing continued improvement in our drilling execution, which supports our efforts to maximize well rates of return. Our recent well averages in Hereford are under 9 days spud to rig release and are trending downward. These successes have driven cost for the drilling portion of our wells below $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 second quarter of 2019, 12 gross wells were spudded, 10 gross wells were placed on flowback in Northeast Wattenberg. We continued to see improved well performance through high-intensity -- high-fluid-intensity completions. As the 11 initial pilot program wells have reached average cumulative production of approximately 100,000 barrels of oil after 270 days of production. These wells continue to track more than 20% above the base Northeast Wattenberg type curve. In June, we placed an additional 7 XRL wells on flowback in DSU 4-63-5 on the western edge of the Northeast Wattenberg acreage. These are the first wells in the western portion of our acreage to be completed utilizing high-fluid-intensity completions and are performing consistent with 1 million barrel oil equivalent EUR type curve. We remain highly encouraged by the results of the program as we continue to use this design as the new standard for future Northeast Wattenberg completions.

Our Northeast Wattenberg drilling program is continuing to lead the way towards robust well economic outcomes with improved drilling performance. Our most recent pad averaged under 6 days from spud to rig release, which is among the top times delivered during our entire Northeast Wattenberg development. The team also drilled several of the wells' curve sections in under 4 hours, demonstrating our focus on high-quality and efficient execution throughout the drilling process. Similar to our Hereford expectations, we're pleased to see this continuous improvement of our well results. I would also like to highlight that all of our completion cruise in the quarter averaged over 16 hours per day of pumping. HighPoint's operations team set a new company record in the quarter with over 21 hours of pumping in a single day.

To summarize, we are pleased by the operational progress made in the second quarter of 2019. We have come a very long way since the first ever fully developed DSU in Hereford came online in October of 2018. We expect a significant ramp-up of our production during the second half of the year as we benefit from the high number of wells that were placed on production over the past few months and the greater productivity of our approved completions. We are on a track to deliver HighPoint highest EUR wells ever in Northeast Wattenberg and our newest Hereford wells are demonstrating significantly increased pressures and productivity as a leading indicator of improved well performance. I will 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. Our second quarter financial results reflected our strong operational performance as we achieved production sales volume that increased 18% from the second quarter of last year. As Paul outlined, we expect a significant ramp-up in the production volumes during the second half of the year as we benefit from the high number of high-intensity fluid fracs that came on that were placed our production over the last couple of months.

July's production gives us high confidence towards achieving this growth. I will provide an update shortly on our guidance. In the second quarter, we generated EBITDAX of $71 million and delivered a basin operating margin of $30.30 per BOE, which should be amongst the highest of the DJ Basin names due to high oil cut, low WTI differentials and low operating costs.

I'd now like to touch on a few items that impacted the quarter. We continued to see weakness in NGLs as second quarter prices averaged about 16% of WTI. This is lower than prior quarters as a result of higher transport and fractionation costs. We expect to see some improvement going forward as fractionation capacity increases later in this year.

Second quarter production taxes averaged approximately 8% of revenue, which is reflective of our historical run rate and in line with our expectations. We expect production taxes to average about 8% to 9% of prehedge revenues for the remainder of the year.

Now onto the balance sheet. We completed our semiannual borrowing base review during the second quarter and our borrowing base of $500 million remained unchanged. We do not expect any changes in the fall cycle. To protect ourselves from oil price volatility, we have a strong hedge position with more than 70% of our expected oil production in the second half of 2019, and more than 50% of expected oil production in 2020 hedged, both periods at greater than $59 per barrel. This provides us with added predictability and visibility into our future cash flows and protects our capital investments. You can find a full summary of our updated hedge position in the press release or in the 10-Q.

Now an update to our guidance outlook. We anticipate total production sales volumes for the third quarter to be 3.3 to 3.4 MMBoe, with oil making up about 62% of total volumes. This represents strong sequential growth of approximately 18% at the midpoint as we benefit from the significant number of new wells that Paul mentioned. We are on track with 37,000 BOE per day in July, giving us a lot of confidence for our full year guidance. We have made some minor adjustments to our LOE and G&A guidance to account for first half actuals, which you can find in the press release. Capital expenditures for the first quarter are expected to total $70 million to $80 million as our completion activity was front-end loaded. We are committed to capital discipline and are reiterating our full year capital guidance. And as Scot mentioned, we expect to be cash flow positive in the second half of the year.

All in all, we executed on our business plan and have confidence that production will ramp up in the back half of the year as we guided. We have a very stable financial position with ample liquidity and a manageable debt profile, and we are supported by an underlying hedge position that protects the majority of our cash flow at $59 per barrel over the next several years.

With that, I'll turn it 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 Derrick Whitfield with 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 Scott or Paul. Beginning with the Hereford. How should we think about optimal DNC and spacing design for future wells based on current learnings from section 15 and 16 wells?

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William M. Crawford, HighPoint Resources Corporation - CFO [3]

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I guess what Paul said, Derrick, it's still a little early. So I think what Paul was saying in his prepared remarks, the fiber optics real-time data that we gathered enables you to kind of optimize your actual design and your stimulation treatment. The microseismic, the tilt meters and the DSP data that we collected is the one that kind of leads you to optimum spacing of the Niobrara and the Codell. And as he mentioned, all that data has been gathered and over the next month or 2, our geoscience department will be kind of analyzing all of that data and then we hope to provide a bunch of interim results over the course of the quarter, both on the flowbacks and the optimizations or simulations as well as our view of spacing going forward.

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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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That's great. And then is my follow-up. Shifting over to Northeast Wattenberg results. There's -- the improved performance of the 11-well high-fluid-intensity pilot program placed an upwards bias on your type curve or are there wells in that area you expect to be better?

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

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Two parts of that. As you go west, you have higher BOE overall capacity in that rock. And so wherever we've tested this higher-fluid-intensity completion, we've generated 20-plus percent over previous type curve wells and so that would apply to the more typical (inaudible) inventory you've seen in the central part of our acreage and it applies to that western area that you've seen specifically, on the production quoted in this call. And so we're very pleased with that and continue to use that as our standard going forward and as you heard in the prepared remarks, I think we continue to see the benefit in that, supporting our production levels.

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Operator [6]

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Our next question comes from Welles Fitzpatrick with SunTrust.

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

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It sounds like the wells on sections 15 rather have been a pretty shallow decline. I mean if I did my math on the flyer, right, from a little bit over 300 to maybe a little bit over 200, which seems pretty solid for the first 100 days. Can you tell us to the pressures there? And maybe any kind of updated understandably preliminary thoughts on where those EURs might be headed?

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

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Sure, Welles. This is Paul. As we've seen, we started off with that section 14. And so as we moved west to 15, 16 and then 17, with the implementation of the pressure wall and then the higher fluid volume completions, we think we've been able to dramatically increase the stimulation intensity on that rock as we move west. And those are part of the -- I think the generations of completion improvements that we've talked about. And so how do we see that real-time going forward? We've tried to give some indication of that kind of from a leading performance and productivity standpoint, is that we have seen significantly increased pressures and productivity as we move west in that row. The manifestation of that on a controlled flowback environment, you don't see that in your IP 30. We've got a very programmed response. Where you see it is exactly what you're observing it. In month 2 and 3 where you don't see the decline that you would have seen have you had a lower productivity well. And so those wells are able to maintain higher rates for longer. And then you see that you've got more of a traditional controlled flowback that we've experienced as a company. Recall the commentary earlier on the last couple of quarters, a 2- to 4-month ramp in some of those wells from controlled flowback across Northeast Wattenberg and Hereford. The very first wells in Hereford had a shorter ramp to their plateaued rate for controlled flowback. And as we are moving west, we're seeing longer ramps, higher sustained pressures and higher deliverability, and we're attributing that to the improved simulation and the improved overall completion intensity to connect a more stimulated rock volume there from our wells.

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

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Okay. No. That's great. And then I mean to your point about controlled flowback and it taking a couple of months, do you think that those section 16 wells, will they be making it into the presentation? And should we be thinking maybe a little bit later?

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

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Do you say the section 16 wells or 15? I didn't hear that.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [11]

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16.

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Paul W. Geiger, HighPoint Resources Corporation - COO [12]

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Sure. From that standpoint, those have been on very, very short period of time. As a result of the controlled flowback, it is difficult to make conclusive EUR statements in the first 30 or 60 days what -- as you pointed out earlier, the sustained higher productivity and higher pressures at a given great give us indication of increased well production capacity overall, and so we are seeing saying that. And I think as Scot mentioned, we look forward to, over the next couple of months here, talking about exactly what we've seen in Section 16 and 17 as we have -- as the higher well productivities translate into oil in the tank. I think you see early glimmers of that with the sustained production that you mentioned, even further east in Section 15, but oil in the tank will prove that and so we're -- we look forward to talking about that.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [13]

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Okay. Perfect. Makes sense. And then if I could just get one more in? Can you guys give your updated thoughts on basin level M&A? As -- I mean you've been a leader in getting down LOE and G&A per unit. Is there any desire to leverage that your operations team across the broader asset base? Or is it just not the time?

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [14]

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I would say, well, as you know, we always looked for opportunities in the past and in the future going forward. Clearly, the focus right now of the company is on Hereford, on project area that we're executing on, the data that we've collected and then the results of that. So that's probably where the focus in the near term is where the company sits right now.

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Operator [15]

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

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

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Scot, wanted to ask on the LOE side. Just it taking up in I guess the second quarter and then the guidance. Could you may be just talk about what was going on there? And is it something as you move into Hereford more? Or just kind of what we should be thinking about there?

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Paul W. Geiger, HighPoint Resources Corporation - COO [17]

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Sure, Jason. This is Paul. We had that 4 type number in Q1. We're driving down below 4 in Q2. We had some significant what I called nonrecurring in Q1 there that drove our first half up overall, associated with weather and a few other things that we had that were nonrecurring. I think as you see us move into the second half, you got 2 things -- 3 things going forward. Continue to focus on driving those numbers down, the -- those recurring blending out into the overall rate and then the significant ramp in production. And so as we see those things all combining in the second half, we're driving down to that 3 -- below 3 type number that we've talked about.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [18]

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Okay. And I think Bill mentioned, the NGL prices, it's been weak, obviously, pretty much across everywhere. But this -- does the infrastructure improvements that you guys kind of talked about not been constrained. Does that help anything there? Or maybe it even makes it worse? Or just how you think about the NGL side? I know it's not a huge portion in your stream, which is kind of what we should be thinking about from you guys and in the basin there?

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William M. Crawford, HighPoint Resources Corporation - CFO [19]

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Yes. Jason, this is Bill. Yes, obviously, being able to deliver to multiple producers gives us access to multiple pipes out of the basin and some of those do go to Conway, which also affected the pricing. As the infrastructure expands and NGLs could get towards the end of this year into more Mont Belvieu, we expect that to improve. To your point as to delivering on all the oil volumes is the most important because that's driving the economics.

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Operator [20]

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Our next question comes from Paul Grigel with Macquarie.

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Paul William Grigel, Macquarie Research - Analyst [21]

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One question on the Northeast Wattenberg and some of the newer wells on the western flank. Could you talk about what you're seeing there? And then maybe what kind of inventory or running room you would have if you wanted to kind of continue to attack that area into 2020 or beyond?

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Paul W. Geiger, HighPoint Resources Corporation - COO [22]

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Sure, Paul. This is Paul. We've been able to put together several DSUs over there. We've got early time the one we talked about and then some SRLs that we've put together over there. And so as we continue to look at our acreage, we like the way that competes. Those are very high EURs, very productive wells and excellent rock. We're happy to see the results and the productivity improvements of the higher stimulation -- higher-fluid-intensity stimulations over there. And so we do actively look for additional opportunities to put together DSUs in that. We don't have any more plant in the second half of '19. But we'll look to continue to put together drillable acreage positions over there in 2020 and beyond. As far as overall, if you see on the materials, the kind of the outline of our acreage that is not the big block portion over there, but certainly, this isn't the last of the LOE we've got to drill over there.

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Paul William Grigel, Macquarie Research - Analyst [23]

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Okay. And then maybe just as a supplement to that. What is the current environment may be more on the northeast side rather than the Herford on acreage swaps and maybe kind of dovetailing not full M&A but just on producers working the other 2 to get bigger blocks. Could you give a thought on if everyone's working together moving on that or motivated there?

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

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Sure. Absolutely. Couple of things there. Clearly, there is not large amounts of value being placed on undeveloped anywhere in the DJ today. But as we go through and try to block up, we've got that big nice blocking position in Northeast Wattenberg. As far as swaps to continue to block those things up, I think we've had good luck in doing that to trade in, to additional acreage to make up drillable DSUs and to help operators get their execution done and get out of each other's here. So we continue to see success in being able to do that with other operators in the basin.

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Operator [25]

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Thank you. And I'm not showing any further question at this time. I would now like to turn the call back over to Mr. Larry Busnardo for any closing remarks.

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Larry C. Busnardo, HighPoint Resources Corporation - VP of IR [26]

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Great. Thank you. I would like to remind you that our CEO, Scot Woodall will be presenting next Monday at the EnerCom Oil & Gas Conference here in Denver at 9:40 a.m. Mountain Time. And a copy of our updated presentation will be posted to the website prior to the start of the presentation. I know many of you will be attending and we look forward to seeing you next week. Thanks again.

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Operator [27]

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