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Edited Transcript of PE earnings conference call or presentation 7-Aug-19 1:00pm GMT

Q2 2019 Parsley Energy Inc Earnings Call

Midland Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Parsley Energy Inc earnings conference call or presentation Wednesday, August 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Dell'Osso

Parsley Energy, Inc. - Executive VP & COO

* Kyle Rhodes

Parsley Energy, Inc. - VP of IR

* Matthew Gallagher

Parsley Energy, Inc. - President, CEO & Director

* Ryan Dalton

Parsley Energy, Inc. - Executive VP & CFO

* Stephanie Reed

Parsley Energy, Inc. - SVP of Land & Marketing

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Conference Call Participants

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* Brian Arthur Singer

Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst

* Brian Kevin Downey

Citigroup Inc, Research Division - Director

* Charles Arthur Meade

Johnson Rice & Company, L.L.C., Research Division - Analyst

* Gabriel J. Daoud

Cowen and Company, LLC, Research Division - Senior Analyst

* Jeffrey Scott Grampp

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* John Christopher Freeman

Raymond James & Associates, Inc., Research Division - Research Analyst

* Leo Paul Mariani

KeyBanc Capital Markets Inc., Research Division - Analyst

* Michael Anthony Hall

Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst

* Michael Stephen Scialla

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Paul William Grigel

Macquarie Research - Analyst

* Scott Michael Hanold

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to Parsley Energy's Second Quarter 2019 Earnings Call. My name is Tim, and I'll be your operator today. As a reminder, this call is being recorded at this time. (Operator Instructions) And now I'm pleased to turn the call over to Kyle Rhodes, Parsley Energy's Vice President of Investor Relations.

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Kyle Rhodes, Parsley Energy, Inc. - VP of IR [2]

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Thank you, operator, and good morning, everyone. With me on the call this morning are President and CEO, Matt Gallagher; Chief Operating Officer, David Dell'Osso; Senior Vice President of Land & Marketing, Stephanie Reed; and Chief Financial Officer, Ryan Dalton.

Our remarks today may contain forward-looking statements. So please see our earnings release for a discussion of those statements and associated risks, including the fact that actual results may differ materially from our expectations.

We also make reference to non-GAAP measures. So please see the reconciliations in the earnings release.

During this call, we'll refer to an investor presentation that can be found on our website, and our prepared remarks will begin with reference to Slide 4 of that presentation. After our prepared remarks, we'll be happy to take your questions.

And with that, I'll turn the call over to Matt.

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [3]

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Thanks, Kyle. Actions continue to speak much louder than words in this challenging market environment. So as we eclipse the halfway mark, I want to start my comments by checking in on the scorecard for our 2019 action plan.

As a reminder, our returns-focused 2019 action plan was designed to take a step forward to sustainable free cash flow, while delivering a step-change improvement in capital efficiency. As you can see in the far right column, we are delivering on these initiatives. Truly, a positive progress report across the board. In fact, we have made enough headway on our capital efficiency target to raise the bar, and we are positioned to cross the threshold to sustainable free cash flow for the remainder of the year and beyond. We are also tightening our 2019 capital budget range, lowering our unit cost guidance and increasing our production guidance.

I am proud of the tangible strides we have made so far this year, and I do want to acknowledge the high level of execution being delivered across our organization, day in and day out. I also want to reiterate that 6 months do not make 1 year, and we will remain just as focused on execution in the second half of 2019 and beyond.

With that, let's turn to Slide 5 and dig deeper on how some of the key objectives of our 2019 action plan are playing out. When we unveiled our returns-focused approach earlier this year, one of the key corporate-level outcomes we envisioned was a meaningful a year-over-year improvement in capital efficiency. Or said in other way, we are aiming to add more barrels of oil for fewer developmental dollars.

We had initially targeted an 8% to 10%-plus improvement, driven by the combination of lower well costs, high-graded activity and optimized completions. This breakdown of our original target is depicted in the graph on the left. As you can see, our teams have been diligently working on both the numerator and the denominator of this capital efficiency equation. And with 6 months behind us, we have seen enough to raise the bar on our capital efficiency improvement target to 12% to 14% plus.

CapEx savings are coming in better than expected, thanks largely to continued operational efficiency gains, cycle time improvements and deflationary trends on some consumables like sand and steel. Initial productivity gains are validating our shift in development approach. David will provide more details. But needless to say, I am excited that Parsley has made such measurable strides on these key objectives in such a short time frame.

Moving on to Slide 6. The second key outcome our returns-focused approach set out to accomplish was an acceleration of our time line to sustainable free cash flow. As I mentioned, we are right at that inflection point, and we currently expect to generate free cash flow for the remainder of the year quarterly. Our strategy is yield improved ahead of schedule. This is an exciting step in our corporate evolution, one that we have been organic building toward for a while. However, our pathway to free cash flow is not meant to simply be a short excursion. Sustainable is the operative word, and Parsley possesses a handful of competitive advantages that will help keep us on a trajectory toward a growing free cash flow profile over time. Ultimately, increasing visibility for the return of capital to shareholders.

These relative advantages can be divided into 3 main categories: the first of these I will classify as scale and inventory durability. In other words, does the company has the scale needed to allocate capital efficiently and the inventory life needed to sustain that capital allocation over time? In recent earnings calls, we have discussed our view on optimal scale in the shale game and our long reinvestment runway of high-return projects. These are fundamental ingredients in a sustainable free cash flow profile. And if you aren't as familiar with Parsley's competitive strengths on these fronts, I encourage you to review our supplementary slides for more details.

The second category is what I'll call margin insulation and expansion. In essence, not all barrels in the industry are created equal. This encompasses Parsley's advantaged marketing position, our stringent cost control and our sizable minerals ownership position. Stephanie and Ryan will delve into these particular competitive strengths a little later on.

The final category and the focus of Slide 6 is asset-based maturation. On the heels of our strategic ramp for scale in the basin in 2017, our production base was largely comprised of newer wells with a steeper decline profile and aggregate. As you can see in the graph on the left, of the 8 largest and most active Permian operators, Parsley's horizontal wells rank as the youngest on average. And despite this younger asset base, Parsley is still poised to turn the corner to free cash flow in the back half of this year.

But now there is a flip side to that coin, a side which we get to enjoy going forward with a disciplined 2019 action plan in place. Parsley's base decline is moderating, as shown in the top graph on the right-hand side of this page. In effect, our treadmill is slowing down, making it easier to convert cash flow into free cash flow. This helps support the sustainability of our free cash flow profile. Meanwhile, some of our largest peers will likely see the speed of their respective treadmills dial up as their activity ramps take hold from late last year. We believe we have a relative tailwind at our back, but we are not just resting on our laurels. We are also focused on moderating our base decline, where possible, through data-driven decision-making and engineering in our field operations.

With that, I'll turn it over to David to discuss some of the positive developments and trends we have seen on the operational front.

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [4]

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Thanks, Matt. Let's turn to Slide 7. Another one of the goals we laid out in our 2019 action plan was to build upon the operational efficiency gains we captured during 2018. As shown in the graph, we're delivering on this target with drilling completion efficiencies both up double digits versus 2018 averages. On the drilling side, we reported an 8% sequential quarter-to-quarter improvement in drilled footage per day per rig, which enabled us to drop from 12 to 11 development rigs in mid-June. Fracture cycle times not only allow for lower equipment levels, but can also help reduce well costs. While we are now generating more footage with less equipment, we're also committing to a tightened capital budget range. This translates to a more capital-efficient program this year, which Matt touched on earlier.

On the completion side, we retained a healthy pace during the second quarter. It's important to note that this solid execution includes a larger percentage of upsized fracs and compressed stage tests, which by design take a little more time to complete.

For the remainder of the year, we expect to run a maximum of 11 rigs and 3 to 4 frac crews, while targeting consistent capital investment pace. Managing our development schedule in a way that minimizes friction costs and allows us to carry operational momentum into next year continues to be a key priority for the team.

On Slide 8, we zoom in on our Upton County area to shed a little more light on what we're seeing from our returns-focused strategy so far this year. Our 2019 action plan called for a step-up in Upton activity. And in fact, it has been our most active area with 25 wells turned to production through June. And I think these recent wells provide a nice proxy for our broader 2019 strategy as most includes some combination of upsized proppant loading, wider spacing and/or compressed stages.

As shown in the graph on the left, our 2019 Upton wells are delivering encouraging early results, and it outperformed comparable 2018 wells by nearly 10% in the aggregate. Simply put, we expected to generate a productivity uplift with our 2019 action plan, and we are seeing that borne out in the early data.

We highlighted a few noteworthy pads in the map on the right, and this illustrates that our recent Upton activity has been broadly distributed across our footprint. Although it is still early, our 2019 results are validating our strategic shift in approach that we unveiled earlier this year.

And now I'll pass it over to Stephanie to touch on our advantaged marketing position.

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Stephanie Reed, Parsley Energy, Inc. - SVP of Land & Marketing [5]

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Thanks, David. Flipping to Slide 9, I want to start by circling back to the second competitive advantage Matt referenced: margin installation and expansion. Our advantaged marketing position feeds into this corporate strength. Ultimately, we're in the business of generating cash flow, so it's important that our oil flows at a favorable price. We have a strong track record on this front, registering peer-leading oil price realizations during a period of tight takeaway, as shown in the graph on the bottom left. End market diversification was the key differentiator for us in the past, and it will help us maintain our advantaged position in the future.

Looking ahead, our sales contracts provides us exposure to the Magellan East Houston, Brent and Midland benchmark in a broad portfolio of physical pipes, mitigating the risk associated with the localized pipeline disruption or port congestion. And as you can see in the map on the right, our acreage tends to sit in that API gravity sweet spot with our weighted average barrel of production registering 41 degrees.

Importantly, our sales volumes are not subject to any discounts applied to higher API gravity crudes, like West Texas light which has recently traded at a more than $2 per barrel discount to WTI Midland prices. In an environment where every extra dollar of margin will have a meaningful impact on free cash flow, possessing a favorable crude quality is a nice inherent advantage.

And now I'll pass it over to Ryan to discuss Parsley's other margin-enhancing effort and walk through our improved 2019 outlook.

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Ryan Dalton, Parsley Energy, Inc. - Executive VP & CFO [6]

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Thanks, Stephanie. Turning to Slide 10. Our teams are working tirelessly to control the controllables. In practice, this means compressing costs to expand margins. Our execution in the field was evidence again this quarter that the team delivered a company record low LOE per BOE. We also registered company record low G&A per BOE as cost-cutting initiatives take hold. Again, these margin enhancements help smooth the path of sustainable free cash flow in the future.

Moving to Slide 11. Parsley's mineral ownership provides another relative edge when it comes to sustainable free cash flow. Our mineral position is shaded in blue on the map, and it effectively generates high-margin production without any associated CapEx or operating expenses. And the fact that Parsley operates the vast majority of this mineral position makes for a cleaner line of sight on development and cash flow timing.

After some recent capital markets activities, there are now additional public valuation markers for this asset class. Notably, some of these mineral companies have comparable net oil production and net royalty acreage counts to Parsley's mineral position as depicted in the left-hand graph. Said in another way, embedded within Parsley's current valuation is the minerals business of similar scale and size sustainable in publicly traded peers.

Turning to Slide 12. As we get set to enter the next phase of our corporate life cycle, we are doing so from a sound financial footing. Our liquidity sits at an ample $1 billion. Our leverage profile is also healthy, with our leverage ratio sitting at a comfortable 1.6x over the trailing 12 months. We continue to protect our cash flow stream and balance sheet through methodical hedging programs. In recent weeks, we've added to our 2020 positions, including new rig contracts that further align our hedge position with our regional price exposure. I'd encourage you to review our latest hedge position in the supplementary slides.

Turning to Slide 13. I'm excited to walk through what is a truly positive guidance update across the board. When we set our course for 2019, we prioritized improved capital efficiency, disciplined oil growth and progress towards sustainable free cash flow by the end of the year. At the halfway mark, we are solidly executing on this game plan. The numbers in the guidance, they will really speak for themselves. Net footage up and capital budget rates tightened. Oil production up, and unit operating costs down. All this adds up to better capital efficiency in a progression to free cash flow for the remainder of the year.

Next, I wanted to provide a little more detail on our activity plans in the back half of the year. As David mentioned in his comments, efficiency gains are delivering more footage with less equipment, allowing us to drop from 12 rigs to 11 rigs in mid-June. We plan to run a maximum of 11 rigs and 3 to 4 frac spreads through the balance of the year. As implied by our tightened budget range, our quarterly CapEx spending will step down from second quarter levels in the back half of the year. And to echo what David said earlier, we expect a consistent activity cadence to minimize friction costs and carry operational momentum into 2020.

I will note that we have also increased our expected working interest for the year as a result of trades and a few opportunistic scheduling decisions. Importantly, this higher-interest and higher-return projects is all still captured within our tight capital budget range.

Turning to the third quarter. We are guiding to oil production of 87,000 to 90,000 barrels per day, representing 2% sequential growth at the midpoint. We expect to turn 32 to 34 gross horizontal wells to production, the vast majority of which will be in the Midland Basin. The working interest on our 3Q '19 wells is expected to average roughly 90%.

So to conclude, 2019 is about a high level of execution, and we're delivering on our action plan. Our work is not done, and we remain just as focused on execution in the second half of 2019 and beyond.

With that, we'll be happy to take your 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 the line of Scott Hanold of RBC Capital Markets.

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Scott Michael Hanold, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Matt, you obviously have seen your company. Now it sounds like an inflect to free cash flow neutral to positive. Can you give us a general sense of how you envision 2020 playing out? I mean obviously, that 11-rig count still for the rest of this year pretty much seems set in stone at this point. But as you look into 2020, how do you think about like activity and free cash flow and shareholder returns?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [3]

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Sure, Scott. First, I'll just walk you through our thought process here. We're just laser-focused on returns -- returns-driven capital allocation approach and execution. And what that's going to deliver and we're seeing right now is free cash flow inflection and growth in free cash flow, which drives exactly to your next point of returns to shareholders. And if I could smell it last quarter, I can taste it this quarter. So we're very close to meaningful return to shareholders, and it's a very exciting time for the company and pivotal quarter for -- results for us, and we're very excited going forward. Formal 2020 will be budget process kicks off in September throughout the rest of the year, but directionally, that's how we're thinking about things.

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Scott Michael Hanold, RBC Capital Markets, LLC, Research Division - Analyst [4]

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Okay. So I guess, I mean, I'll just follow up on that and just turn it down a little bit more. It sounds like, obviously, you want to stay above free cash flow and obviously we'll wait for that 2020 budget. But when you talk about, like feeling very close to meaningful returns to shareholders, like, in your view, obviously, a lot of the equities here in E&P have been down quite a bit, like -- how do you see priorities for returning the cash to shareholders right now? And how big does it have to be to -- like when can we expect that, is this -- early 2020, can we expect something and what are the priorities? Is it dividends, buybacks, can you give us a sense?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [5]

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As far as priorities, I think, we're trying to build a durable, sustainable business, a great business model here. So when we look at a business model, the priority is going to be on dividends. That's our approach. That's something sustainable over the long run that you put into your capital allocation process. That's the next step for us as we evaluate things. And we have said early 2020 in the past. But as you can see, with this capital efficiency improvement, we're pulling forward our inflection sooner than we would have thought at the end of last year so that -- that supports us at that time frame at minimum.

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Operator [6]

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Our next question comes from the line of Brian Singer of Goldman Sachs.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [7]

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In your comments, you highlighted some of the reasons for better capital efficiency on Slide 5, better well performance in Upton County on Slide 7. Wanted to focus a little bit on the drivers of the higher production, higher production guidance. And I wanted to see if you could give a little bit more color on segmenting those drivers into what would come from the well performance that would represent higher EURs with wider applicability to the rest of the inventory versus other drivers like high grading, spacing and completion enhancements that may just deplete wells more quickly?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [8]

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Sure, Brian. I'll start it off with a high-level approach. And the complexion, the mix of projects that you see here is what we see going forward for a sustainable basis for years to come. So that component of it is baseline and is the new normal. We have -- obviously, at the end of last year, we quantified our up-spacing approach in our inventory counts and our [donut-hole] slides. So that is the new normal for capital allocation going forward as far as well mix component. Then I'll let David go into some of the things we're testing on completion designs and what component that contributed, which would be positive for the remaining results there.

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [9]

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Yes. Brian, you mentioned Slide 5, if you look at the way we split that out, this is a directionally indicative slide. We've lumped together the upsized fracs, wider spacing and compressed stage tests largely because it's going to take more data and more time to really be able to kind of tighten up the difference between some of these things in that bucket. You can see that broadly though where our expectations have been seated. So you can see that, that piece of it has grown a bit. So we are seeing the performance uplift. We do highlight Upton. As far as the broader program and our year's guidance, the timing has been a factor too, to tighter cycle times, has driven some more production into 2019, and we expect to continue that going forward.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [10]

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Great. And then my follow-up is with regards to the minerals and waterside -- water businesses within Parsley. You highlighted on Slide 11 the minerals side. Can you just talk about your latest thoughts on what you see, if any moves may be oriented or opportunistic to bring value those businesses versus the benefits of having them continued to be cash flow contributors on -- to Parsley overall?

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Ryan Dalton, Parsley Energy, Inc. - Executive VP & CFO [11]

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Yes. Brian, this is Ryan. As it pertains to water, there's no real update since the last quarter. Process is still ongoing. We're working with our advisers. Both have a decision by end of the year. But I'll say, we're very encouraged by the level of interest in that specific asset. And then minerals, yes, we did highlight it. That's not a hint that anything is coming. It's really just that given that there are new public valuation markers out there, we think the asset is probably being overlooked a bit by the market. This is being consolidated within Parsley Energy, so we feel if you're an investor and you want exposure to minerals, you've got that ability within our stock.

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Operator [12]

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Our next question comes from the line of John Freeman of Raymond James.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [13]

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On Slide 7, you highlighted one of the targets to sort of trying to balance the operational momentum into 2020 and trying to target kind of a consistent capital investment pace. And I'm just trying to from a higher-level perspective just long-term the way you think about the company of trying to kind of run a more consistent capital plan where you all mentioned trying to minimize friction costs where you're not constantly ramping up and down activity as the commodity environment changes, just sort of how you do that in practice? Is it you try to get the balance sheet to a leverage perspective to where you -- regardless of kind of changes in the commodity, it allows you to kind of run a steady-state plan?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [14]

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That's right, John. We're giving some directives to the planning teams about free cash flow growth and some governors and some sidebars, and then it's off to very detailed meetings among the team members to 12 to 24 months out on the planning side and you have to project a stable deliverable project and sequence of projects. So just a lot of sensitivities in works in practical manners among the teams, and it's a whole corporate effort. But it starts with overriding guidepost of what we want to deliver. And when you look back at our guiding principles: discipline, stability and foresight, stability really comes into play there. And we don't want big lumpy quarters because there's friction with that. So it's smooth ramps into project sizes and things of that nature and delivering on all fronts. And as we mentioned on the maturation of the asset base, when you have a moderating corporate decline rate, all these things take hold synergistically, and it's really proving to be a good forward-looking model.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [15]

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And along those lines on the moderating base decline rate, Matt, you mentioned in the prepared remarks that some of the things you're looking at too in terms of moderating the base decline rate is some of it is through kind of data-driven decisions and if you could just sort of elaborate on that?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [16]

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Yes, John. I'll say, we have been investing and further -- furthering our ability to consume data and turn data into information and information into decisions. Everything from how we take data in from the field to how we rationalize that data internally, so we can be more reactive and also more proactive. So it's a lot of little things put together. But we wanted to make sure it was understood that we're not simply waiting for our base decline to moderate. We are also elevating our engineering capabilities and operational capabilities to be as actionable as possible on the field.

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Operator [17]

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Our next question comes from the line of Gabe Daoud of Cowen and Company.

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Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [18]

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I think you kind of hit on it a little bit, but just given the productivity and efficiency gains you're seeing on the back of the action plan, do you think this means you can deliver the same amount of activity next year on, I guess, lower capital relative to 2019? And then in terms of framing 2020, should we just think about it as free cash flow being the goal here with production growth as more like an outcome?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [19]

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So that's exactly what capital efficiency would calculate out to. We're able to do more with less. So if we want to do the same, we add line of sight to reducing CapEx. That's absolutely right. So we'll be taking that into account. Then when we go through the budget cycle and take into the macro environment, I think the bias is obviously on moderating any additional growth and focusing on returns as the main priority for the majority of your capital allocation ensuring that you have growing free cash flow profile. So yes, you captured that fairly.

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Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [20]

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And then just a follow-up. You mentioned -- you talked about LOE, obviously great number in 2Q, just thoughts on how sustainable that could be? And just any more color on what exactly was driving the nice beat there in 2Q?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [21]

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Yes. I think it's a few things. For one, the entire organization has a tremendous amount of focus right now on cost. And I think you're seeing that bear out in that. Additionally, having a larger denominator helps. So it's kind of a synergy effect where cost focus plus more barrels is driving that number down. And we're going to continue to have that same mindset and approach and be as actionable as possible going forward. Obviously, at some point, we'll get back into winter. I think we talked before about higher proportion of ESPs in northern Midland County. So when we think through the rest of the year and into the following year, those things are all in our mind. But it certainly was a milestone quarter for us from an LOE standpoint.

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Operator [22]

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Our next question comes from the line of Charles Meade of Johnson Rice.

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Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [23]

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Matt, I wanted to ask a question. You've got a lot of questions on capital efficiency appropriately, but I want to ask maybe in a different direction on what is on your dashboard, your mental dashboard, as you think about -- you've made these strides, preserving these strides, and I think that you've -- a lot of that is kind of implicit on Slide 5, but I wondered if you could talk about in your -- you say your defend and extend gains, on the defend side, what are you looking at? What can we look at in our seat that will help us to see how things are evolving for you?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [24]

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I think we have secured a lot of the defensive measures in the first half of the year. And this was upgrading our approach to supply chain and getting our cost controls in line even more so, and I think we're delivering on that. So now really, we don't lose focus on that, but we look and we're really understanding these enhancements that we've been able to deliver on in the first half of the year on the compressed stages, things of that nature. And then as David mentioned, the rationalization of all the technology that we're on-boarding right now and how that looks out more of an offensive posture on a go-forward basis. So the defense is in, and we need to press on the offense internally. And then externally, really wrapping our hands around the macro conditions, obviously very challenging out there and backing into the right amount of growth and free cash flow growth as we go into 2020 and beyond. So those are the 2 things.

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Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [25]

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That's helpful. And then my follow-up is a bit related to that. On that you guys save maybe call it 1/3 of this -- your better capital efficiencies about the shifted activity mix. What is your inventory? What should we be thinking about as your runway in that? I think you call it the Midland, Martin, Upton County nexus there?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [26]

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Between -- these type of projects are between 10 and 15 years in those counties. So quite a bit of runway at these activity levels.

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Operator [27]

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Our next question comes from the line of Neal Dingmann of SunTrust.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [28]

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Matt and team, nice work getting to today's position of free cash flow. Really nice job. Matt, my first question is around the optimal efficiencies and costs. I'm just wondering if you all could speak on your plan of how you position -- how you plan to position the 11 rigs and the 3 to 4 frac crews for the remainder of the year? And really, what -- I guess, what I'm trying to get is 2 things. Is that -- are you really planning on focus on one specific target area? And then planning -- are you planning on using multi-rigs or crews on the same pad?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [29]

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Yes. Neal, this is David. We have increased the average project size through the year, and we'll continue to do that going forward. So you will see a little bit more simultaneous operations as we've extended some of these efficiencies that allows us to reduce the cycle times of those bigger projects. So really to drive those efficiencies, we're focused on equipment procedure and the way our teams work together with our service providers.

And the way when we think about our activity levels, the 3 or 4 frac spreads, we're -- you can think that fourth frac spread as something of a flex crew, and we look at the performance of the crews at all times to see if we need to moderate between those 2 numbers. We want to keep the momentum with the highest-performing equipment and teams. So we'll continue to be focused on that. As far as where, I would expect a pretty consistent mix of geographic activity through the balance of the year that you saw in the first half. And only slight difference to that is a little bit lower back half Delaware activity versus the first half.

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [30]

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But we're talking a very calculated approach to project size. So yes, it's increasing. You're looking at things of 2.5 to 2.8 average wells per project into the 3.5s, and this -- that's just a smooth transition, and it's very methodical.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [31]

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Okay. Very brilliant. And then just secondly, my question is around the gas or NGL. Just wondered, are you looking at potentially more potential sales contracts or lock some things in around this like you've done in the oil? Or if you could just talk about how you're viewing some of the market around that?

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Stephanie Reed, Parsley Energy, Inc. - SVP of Land & Marketing [32]

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Certainly. Neal, this is Stephanie. On the gas side, we sell at the wellhead. And so really our downstream connections are dependent upon our purchasers. We have about 85% of our gas volumes sold to Targa. And at each of the plants, they have multiple residue and NGL connections.

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Operator [33]

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Our next question comes from the line of Michael Hall of Heikkinen Energy Advisors.

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Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [34]

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Yes, just looking at Slide 13, you guys have done a great job with this kind of glide path with this new activity level versus kind of a hard landing that we've seen with some others. And I can't help to look at the rig cadence and just wondered kind of when you will have to kind of start tweaking that back up to keep delivering on quarter-on-quarter growth and executing the way you have in the first half? And then in that context, obviously, you're also moderating the base decline like you've pointed out. Is there a kind of target level that you're aiming for and when would you expect to get there and what might that be?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [35]

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It's really shocking, Mike, when you look at the types of results we've been able to deliver. We don't see a need to increase our rig count to deliver consistent quarterly growth. In fact, we think there may still be room to drop equipment levels and continue on a steady trajectory. So we'll be evaluating that. It's just phenomenal effort by the teams in a complete turnaround and very exciting to see it unfold. On the corporate decline rate, I mean things get easier to manage the lower you decline. As you can see on that, that's a nice glide-path as well. We're not going to do anything egregious to just control that number. And we're going to focus on the inputs, focus on the controllables, as Ryan said, and deliver on execution, and it has a nice downward trajectory, a couple percent a year for the foreseeable future, and long term the company gets into the 30% type of corporate decline.

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Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [36]

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Okay. That's helpful. And then I was just curious on the free cash flow side, how you're thinking about the durability of free cash flow relative to kind of oil if you assume strip gas and NGL pricing?

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Ryan Dalton, Parsley Energy, Inc. - Executive VP & CFO [37]

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Yes. As we look to 2020 in the future, I mean, we're here. We're at the inflection point of the free cash flow positive, and it's not something that we want to get there and then get back. So we've got the ability to adjust our activity levels pretty quickly. And you would see us in a lower commodity price environment prioritize maintaining positive free cash flow.

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Operator [38]

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Our next question comes from the line of Paul Grigel of Macquarie.

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Paul William Grigel, Macquarie Research - Analyst [39]

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Just wondering if you could maybe elaborate on some of the gains and working interest that you've seen in the background of the markets for trades or maybe very slight, I don't want to call them bolt-ons, but just kind of working interest acquisitions as you go through the program through the year?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [40]

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Sure, this is David. That higher working interest is a combination of some trades that have helped bulk up the DSU acreage in line with comments we've made in the 2 quarters prior. We aim to do that as a targeted thing. And when it happens, it can help drive up work interest a little bit. Additionally as some other companies they run into budget issues, there's always a possibility of some additional [knock] in sense. But we've seen a little bit of that. But that's generally it. And to slight extent as well, well planning and package. You can have slight variations on it. But primarily look at the trades and then to a lesser extent, those last few factors.

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Paul William Grigel, Macquarie Research - Analyst [41]

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Okay. That's helpful. And then, I guess, maybe on the margin enhancements, following up on that, what inning would we be in and how far along on that and what could be kind of the future part? And then as it relates to focus on from a field level or from a drilling team level, what are the incentives, does that flow through the organization on the LOE focus and returns focus all the way through? Or is there different ones at the lower level?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [42]

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No. It flows all the way through. So LOE component is a large component of incentive structure for the bonus pool across the entire company and as well as CROCI. So everybody is looking -- and PDF in the year, but everybody is looking at efficiency across the board and keeping our unit costs in line. And we update very transparently with all employees at every quarterly meeting. So everybody is on board there.

And as far as margin enhancements, that's -- you're constantly working on that. So it's not as if there were just crude on the ground that we're walking over and picking up. It's a hard grind, and the teams, that's what they do get compensated for and that's what they're working on day in and out and doing a great job of grinding out a couple percent every year. And then we see it in the quarters those are big wins when they show up in the quarter. But I think you can see over time on us, the steady top-tier margins.

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Operator [43]

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Our next question comes from the line of Jeff Grampp of Northland Capital Markets.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [44]

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I was curious in the commentary you guys talked about wanting to preserve operational momentum going into '20 and at the same time you're having a strict focus on the budget. And I know as that happened last year with some operators, that can be a little bit of a conflicting kind of desires there. So just kind of wondering how you guys kind of manage or get in front of balancing those 2 items?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [45]

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Yes. The way we get in front of it is primarily looking at even keel end of the year. And we've really prioritized driving these operational efficiencies in such a way that we can avoid our friction costs. So there's a small DUC bank that we built that allows us to have the flexibility to move around our frac spreads in a more efficient manner than we have in the past. It's not large. It's just 1 or 2 wells per rig. But even that alone, that can make a significant difference in the level of efficiencies. So we are aimed at that continuous glide plane of capital investment activity just to avoid some of that early disruption that could happen in the following budget year if you have to pull back in a big way.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [46]

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Great. Appreciate that. And my follow-up on the capital efficiency front, I was curious as we look into '20, I understand you guys don't want to put out "guidance" on that metric into '20 yet. But directionally, can you guys just give us a flavor of how you're thinking that trends in '20? Can you get that double-digit type of capital efficiency again? Or is that going to be a tough comp, just given all the success thus far. Just kind of wondering high-level how you guys are thinking that might look in '20?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [47]

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I think what we see now is this type of productivity on a go-forward basis for years to come. And of course, we're always working on the numerator and the denominator. But we can't promise that. Those are data-driven results. And then when we see conviction that we can budget forward and push it through. So right now we have to go in the assumption of what we're seeing, which is top-tier in the industry, and we're going to continue to work it.

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Operator [48]

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Our next question comes from the line of Leo Mariani of KeyBanc Capital Markets.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [49]

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I just wanted to follow up on the cost reduction side here. Certainly, you had a really nice move down in G&A in the second quarter here. Just trying to get a sense or sort of all the reductions that you guys have made in the G&A side. Is that kind of baked in into the second quarter numbers? Or could we see some further reductions later this year or next year as a result of maybe some of the staff reductions there?

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Ryan Dalton, Parsley Energy, Inc. - Executive VP & CFO [50]

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Yes. Leo, it's Ryan. G&A has been a very high-focus area of both the Board and the management team. And the success of Q2 is really the result of the whole company buying into cutting costs. The guide for the rest of the year is a bit higher. We think there's still some more work to do across the board. We are accounting for a couple things that may hit in the back half of the year. For example, if we do transact on water, for example, paying our advisers there. So we've left a little bit of cushion there for some things that may come through. But yes, there's -- it's been a great focus area, as I mentioned, and it's going to continue to be.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [51]

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Okay. That's helpful. And I guess just wanted to touch on the lower working interest here that you guys are seeing. I guess you guys reported a 99% second quarter working interest. You're talking about going to 90% in the third quarter. Just wanted to get a sense of why that's sort of coming down a fair bit there. And what's kind of your typical line of sight? Can you kind of see partner participation out kind of for 3 to 6 months, which helps you kind of judge that a little bit better? Just want to get a sense of how you guys are able to see that?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [52]

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Yes. Leo, this is David. We can see that with pretty good clarity in that time horizon you mentioned. It is where we're drilling, and we do know who our partners are. In the back half of the year, we've had dialogue with some of those partners, and we have in cases where those partners are large and we have a good line of sight on their desire to participate, their budget availability, we have a high confidence that they will participate. So that all goes into our thinking as we plan. Now this year has been a volatile one for the sector. And so there has been a couple of evolutions and surprises along the way where somebody may have exhausted budget or declined a well, but by and large, we have a pretty good line of sight on that piece of it.

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Operator [53]

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Our next question comes from the line of Mike Scialla of Stifel.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [54]

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You're ahead on your efficiency targets even though it looks like your completion efficiencies declined a little bit in the second quarter from the first. Just curious, was that due to more upsized fracs in the second quarter or something else going on there?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [55]

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Yes. This is David. That's exactly what it was. We had a higher proportion in the second quarter of upsized fracs, compressed stages. And so with compressed stages you need to have more wireline runs for plugs and guns and that takes a little bit of extra time. And then on the upsized frac, your pumping tends to be longer if you're pumping in similar product concentrations. So those things manifested due to higher proportion of that in 2Q versus 1Q. But by and large, even with that step down, we consider that a continuation of the efficiencies that we saw in the first quarter.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [56]

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Yes. Agreed. And then you had good success with the higher rate of return focused development with the wider spacing and bigger fracs you talked about, David. It looks like most of Upton County or most of your acreage in Upton County. Have you tested that design in other areas? And I wanted to get your thoughts on the western side of the basin too. It looks like you have strong preference for the Eastern now. Is it just due to the higher GOR of the west or do you think the new frac design could help that side of the basin as well?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [57]

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Yes, what you're seeing is across the Midland really. We focus on kind of more operational area usually as a spotlight per quarter. And Upton was what we highlighted this quarter. But we have been taking this approach pretty broadly across the Midland Basin. So I wouldn't say necessarily Eastern County is as much as the mix of primarily Martin, Midland and Upton, that's where the bulk of our Midland program is, and that will continue to be the case going forward. And all those areas we have tested some of the same concepts, and we're seeing encouragement in those areas as well.

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Operator [58]

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Our next question comes from the line of Brian Downey of Citigroup.

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Brian Kevin Downey, Citigroup Inc, Research Division - Director [59]

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A quick one on sand. I believe you completed your second Delaware local sand test in June. Curious your thoughts there and what that could imply for potential well cost savings in the Delaware as we enter 2020?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [60]

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Yes. Brian, this is David again. So that was a pretty recent test. We put that well on, it popped in the third quarter. So it's still pretty early on. The first one we talked about -- we talked about in our last quarterly call is still performing well. It's about a 150-day mark. It's past 200 now, and we're still encouraged by it. The new one, it's just a little too early to call. We want to build more data. It's not just about the very early time performance. We want to look at decline rate, how that changes. So before we make a call there, we're going to let that mature a little bit. As far as the cost, I'd say we'll just reiterate what we said last call, which is it's a $0.5 million plus potential savings for using RBS, regional brown sand, in the Delaware.

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Brian Kevin Downey, Citigroup Inc, Research Division - Director [61]

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And do you think you'll have enough data on the second one to sort of make that decision once you enter budgeting season later this year for thinking about next year?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [62]

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Yes. It's going to be nice having more data on the second test. And in the first test, I think it's getting to the point where we feel an increasing degree of confidence that that's just going to remain in line. So I would say that 2019 is not over yet. So we still got some potential to learn more from additional tests in 2019. By 2020 and beyond is the horizon where we're looking at making more conclusive strides on regional sand in the Delaware.

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Operator [63]

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At this time, there are no further questions over the audio portion of the conference. This does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.