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Edited Transcript of PE.N earnings conference call or presentation 6-Aug-20 1:00pm GMT

Q2 2020 Parsley Energy Inc Earnings Call

Midland Aug 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Parsley Energy Inc earnings conference call or presentation Thursday, August 6, 2020 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 L. Reed

Parsley Energy, Inc. - SVP of Corporate Development, Land & Midstream

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Conference Call Participants

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* Arun Jayaram

JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst

* Asit Kumar Sen

BofA Merrill Lynch, Research Division - Research Analyst

* Brian Arthur Singer

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

* Charles Arthur Meade

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

* Gabriel J. Daoud

Cowen and Company, LLC, Research Division - MD & Senior Analyst

* John Christopher Freeman

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

* Kashy Oladipo Harrison

Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P

* Leo Paul Mariani

KeyBanc Capital Markets Inc., Research Division - Analyst

* Matthew Merrel Portillo

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Exploration and Production Research

* Michael Stephen Scialla

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

* Neal David Dingmann

Truist Securities, Inc., Research Division - MD

* Scott Michael Hanold

RBC Capital Markets, Research Division - MD of Energy Research & 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 2020 Earnings Conference Call. My name is Robert, and I will be your operator today. As a reminder, this conference call is being recorded. (Operator Instructions)

And now I'm pleased to turn the call over to your host, Kyle Rhodes, Parsley Energy's Vice President of Investor Relations. Thank you. You may begin.

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

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Thank you, operator, and good morning, everyone. We are again dialing in from our respective home offices this morning. With me on the call are President and CEO, Matt Gallagher; Chief Operating Officer, David Dell'Osso; Chief Financial Officer, Ryan Dalton; and Senior Vice President of Corporate Development, Land and Midstream, Stephanie Reed.

Our remarks today may contain forward-looking statements. So please see our earnings release for a discussion of these 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 will refer to an investor presentation that can be found on our website, and our prepared remarks will begin with reference to Slide 3 of that presentation. After our prepared remarks, we will 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. I believe the sign of true professional excellence, whatever the occupation, is executing a difficult task and making it look easy. This is exactly what our team did during a challenging second quarter, and you can see some of those highlights on the left at Slide 3.

Before digging in to some of the team's accomplishments, I wanted to quickly remind those investors that might be newer to our story that our asset base is located in the core of the Texas Permian Basin, as you can see in the map on the right. And we have 0 exposure to federal lands. We consistently deliver high operating margins and have a deep bench of high working interest operated locations to prosecute in years to come. Our strategy, since early 2019, has been to extract optimum financial returns in a given market condition from our resource base, leading to increasing free cash flows and increasing returns to shareholders, all while taking a leadership position in the ESG space.

With that, let's turn to Slide 4. Corporate agility was imperative during the second quarter where oil price volatility surged. We previously mentioned that we implemented a voluntary production curtailment strategy during the month of May and plan to restore a vast majority of that production during the month of June. So that's a one-line summary conclusion you might read in the press release. But getting from point A in May to point B in June, so much work went on behind the scenes to execute this curtailment strategy safely and responsibly and ultimately help deliver a cash flow uplift. It takes integrated operations that are best in class and continue to layer on new remote capabilities. It takes collaboration and attention to detail across multiple disciplines. And our team of professionals made it look easy, with safety, environmental stewardship and cost efficiency always at the forefront of our decision-making process.

Moving on to Slide 5. From a macro standpoint, the second quarter represented an unforgiving stress test for much of our industry. While the worst may be over, we harbored no illusions to the difficulties facing our industry. And Parsley Energy remains well built for that endurance test. During this challenging second quarter, our team did not nearly run in place but instead made strides on some of our key 2020 initiatives. Corporate sustainability requires that resources be marshaled on 2 fronts. On this slide, we focus on the financial front. And specifically on our unwavering commitment to delivering sustainable free cash flow through the commodity cycles.

As shown in the bottom graph, we turned the corner to free cash flow in the third quarter of 2019, and in lockstep, initiated a regular dividend program. We've now notched 4 consecutive quarters of free cash flow generation and bumped up our return to capital program earlier this year. Even during the recent downdraft in oil prices, our dividend remains well funded by organic cash flow. As a reminder, our initial 2020 budget called for at least $200 million of free cash flow at $50 WTI oil. As oil prices dropped sharply in March and April, we quickly adapted to protect our balance sheet, prioritizing free cash flow and defending our dividend. This decisive action translated into a company-record free cash flow in the second quarter. We now expect to generate at least $350 million, and that's assuming $35 oil for the rest of the year.

And although we are still a few months away from our formal 2021 budgeting process, our mindset is that growth capital is not needed nor justifiable in a world with significant excess fair capacity. We're at over 11 million barrels a day in June and swollen global inventories with OECD crude stocks over 3.2 billion barrels. That's over 300 million barrels above seasonal norms. And COVID-related demand uncertainty ahead of us.

Let's be frank. North American E&Ps are in a battle for investment relevance not a battle for global market share, allocating growth capital into a global market with artificially constrained supply is a trap our industry has fallen into time and time again. And partially, we will avoid that trap and are committed to delivering healthy and sustainable free cash flow again in 2021. There will be a time when the world market needs growth barrels from the United States. And when that day comes, I believe Parsley will be uniquely situated to allocate efficient growth capital to meet that demand while continuing to deliver free cash flow. We have also provided a full progress report on our broader 2020 action plan in the supplementary slides, where you can see we are still on track to achieve many of our goals despite the global pandemic.

Moving to Slide 6. I now want to provide some high-level direction on our plans for the second half of 2020. As a quick reminder, with regional crude prices dipping below $20 a barrel, we shut down drilling and completion operations for most of the second quarter. In July, we reactivated 2 rigs and 2 frac spreads as oil fundamentals firmed a bit and prices consistently traded above $35, which is our baseline budget assumption. Provided market fundamentals hold up, we would anticipate moving into a stabilized activity plan with 4 to 5 rigs and 1 to 2 frac spreads deployed in the fourth quarter.

Turning now to Slide 7. The graph on this page depicts what our stabilized activity plan translates to from a production standpoint with a lighter blue wedge reflecting our current base case development cadence. As we stated last quarter, we expect that if this stabilized activity plan were maintained, we would be able to hold fourth quarter 2020 oil production flat the subsequent year at a cost of roughly $600 million. In 2021, we get a nice tailwind from the expected drill down of about 20 to 25 drilled but uncompleted wells. This is roughly a $50 million benefit. Additionally, our base decline shallows during 2021, requiring less replacement barrels in 2022. So all else equal, $600 million would also be a fair assumption for a 2022 maintenance capital program.

I'll conclude by reiterating that we expect to generate a healthy amount of free cash flow in 2020 and exit the year with a solid balance sheet, ample scale, a shallower oil-based decline and visibility to sustain free cash flow in 2021 and beyond.

With that, I'll turn it over to David for more operational details.

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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 8. This slide was inspired by conversations with some of our top shareholders over the summer. The blunt question was essentially whether U.S. operators should deploy any near-term capital against a $35 oil backdrop. The short answer for most of the U.S. E&P industry is probably not. Unhedged returns on incremental capital deployed are nonexistent and negative for most operators at $35 oil. In our view, Parsley is among the select few operators with the asset quality, cost structure and scale to make a positive unhedged return on its second half of 2020 program at $35 oil.

Let's unpack this slide a bit. When we sanction a capital program for a given year, there are 2 big underlying inputs to the building of that budget, capital efficiency and commodity prices. Capital efficiency is something we can directly influence and track. In short, is $1 of capital delivering the oil volumes we expected? On the other hand, we have minimal direct influence on oil prices, so we can control the level of conservatism based into our price deck.

Let's start with a graph on the left, which is essentially an early look back at our 2019 program. This is our pivot year to optimize returns at a resource level. Given the focus on sustainable free cash flow, we thought it would be helpful to look at this through the lens of payout duration or when do I get my money back. The gray bar is the actual capital cost of our program, the cash that went out the door. The solid blue bar is the actual unhedged cash flow our program generated after roughly 1 year. The dash blue bars are the unhedged cash flow we'd expect to receive over the next 2 years at current strip pricing of rough $40 oil. And if you look at that gray X, you can see that when we initially sanctioned this program in late 2018, we were underwriting a program-wide payback period of just over 2.5 years. That was using a $50 oil deck, which was 5% to 10% below futures prices at that time.

So how was our 2019 program performed versus our initial expectations? We delivered a better capital efficiency outcome than we forecasted, highlighted by lower-than-forecasted well costs. However, oil prices fell sharply below our base case price deck earlier this year, extending our payout duration that we expect to roughly 3 years, which is now marked by the orange X. This impact from a downdraft in commodity prices is why we methodically hedge our production and insulate our future cash flow stream.

Moving over to the graph on the right. This gets back to the original question. As a public company, it's really our investors' capital that we're allocating to the second half of 2020 program. So the question holds, when do I get my money back? On an oil price deck of $35, we are forecasting this reactivated capital program will pay out in less than 2.5 years. At the current strip price of around $40 oil, it would pay in a little under 2 years. In short, this is why we are reactivating capital in the back half of this year.

Turning to Slide 9. As I just mentioned, capital costs are a foundational piece of an E&P's capital allocation framework and budgeting process, our team delivered strong drilling and completions efficiency gains, which led to lower-and-budgeted well costs in the first half of 2020. With modest development activity reactivated in July, we expect capital costs to take another step lower in the second half of 2020, as in-hand service cost deflation flows through our well cost. Additionally, the Parsley team made use of the time afforded by our activity shutdown in May and June to accelerate some of our operational technology capabilities. We now successfully deployed 24/7 real-time remote monitoring capabilities for both drilling and completions operations and have added to our 24/7 remote production monitoring capabilities. These strategic capability can help us target further improvement in operational performance and capital efficiency.

Moving on to Slide 10. As our industry adjusts to a lower commodity price environment in the near term, low-cost operators, like Parsley, will continue to differentiate themselves. In the second quarter that was anything but normal, our team executed both an efficient production curtailment and restoration without incurring any material incremental operating costs. Our team also continues to focus on integrating and automating key workflows to optimize lease operator effectiveness and help reduce downtime.

We will also continue to tighten our cost structure with regards to G&A expense. During the activity slowdown, members of our team have been adaptive and willing to shift roles to help reduce our third-party contractor expenses. I also want to highlight that the rapid integration of Jagged Peak accelerated our time line for G&A synergy capture.

In summary, despite lower production volumes than we had initially budgeted for, we've managed to reduce our forecasted per unit operating cost. This is a testament to our team's dedicated focus to control those costs that are within our control and to do it safely, efficiently in an environmentally responsible manner.

And now I'll pass it over to Stephanie to review the progress we made on one of our key ESG initiatives this year.

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Stephanie L. Reed, Parsley Energy, Inc. - SVP of Corporate Development, Land & Midstream [5]

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Thanks, David. Flipping to Slide 11. Matt mentioned earlier that corporate sustainability requires attention on 2 front, and he and David both detailed our strategy on the financial front. I now want to zoom in on the environmental front and provide a progress report on one of our key ESG initiatives this year, natural gas flaring.

In January, we took over Jagged Peak properties that had collectively flared more than 20% of production over the course of 2019. At the time of our acquisition, we committed to reduce flaring on these acquired properties to below 5% by year-end 2020. Over the past 6 months, we have delivered a steady reduction in flaring through a variety of midstream solutions and mitigation efforts. Flaring was also a key criteria in applied-to-well selection during our voluntary curtailment efforts in the second quarter. Overall, we've reduced flared volumes on JAG locations by nearly 90% since January. While this is the feed-in itself, it's also important to note that our flaring mitigation efforts are not confined to the newly acquired properties. In recent months, partially improved legacy Midland Basin facilities to lessen the risk of intermittent flaring going forward. Mitigating flaring has been a long-standing priority for Parsley. And earlier this year, we included a quantifiable corporate-wide flaring mitigation target in our 2020 incentive plans for all Parsley employees. The goal was to fold Jagged Peak into the mix and push corporate-wide flaring back down below 2.5% by year-end. Thanks to the efforts and priorities of our team and midstream partners, we've made significant strides to eliminate routine flaring entirely from our operations.

And as you can see on the right side of the graph, we eclipsed our flaring reduction target 6 months ahead of schedule, prompting us to reduce our year-end target to below 2%. I am very proud of our team's desire to take a meaningful and proactive stance on this critical issue. Accountability is critical to us corporately and delivering such tangible progress in such a short time on this key environmental issues peaks volumes.

And now I'll pass it over to Ryan to discuss Parsley's sound financial position.

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

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Thanks, Stephanie. Now on to Slide 12. Despite a challenging macro backdrop in the second quarter, our leverage profile and liquidity position remain healthy. With a healthy free cash flow target in 2020 and visibility for sustained free cash flow in 2021, we will continue to prioritize paying down debt, returning capital to shareholders through our dividend program and further strengthen our financial position. Finally, I will note that Parsley continues to protect its cash flow through an active hedging strategy, and we have now initiated a small hedge position in 2022. You can view our full hedge position in the supplementary slides.

Turning to Slide 13. We are now budgeting at $35 oil for the remainder of 2020. In this context, we are tightening our corresponding capital budget to $650 million to $700 million, with more than 60% of that spending having already occurred in the first half of the year. Following strong operating cost control in the second quarter, Parsley is reinstating full year 2020 guidance on unit cost.

As David mentioned earlier, despite low production volumes that we had initially budgeted for, we have managed to reduce our forecasted controllable operating cost on a per unit basis. Finally, given ongoing uncertainty caused by COVID-19, we have not elected to reinstate detailed guidance for production and activity. That said, the light blue stabilized activity wedge and graphics below is an illustrative view of our base case plans at this point in time.

To wrap things up, despite some macro headwinds, we continue to advance our key corporate sustainability efforts on multiple fronts, and we will continue to do what is necessary to protect long-term shareholder value.

And now 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 John Freeman with Raymond James.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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I'm trying to get a sense, Matt, of when we think about the 4 to 5 rigs sort of stabilized case that you all are comfortable with at the $35 oil price. And then looking at -- which is obviously conservative relative to the strip that at least now is kind of over $44 for next year. And I'm trying to get a sense of on the last call, you mentioned, like, around a $50 oil price that your bias would be sort of high single-digit growth. But it sounds like we're just at least in the current kind of uncertainty around COVID with demand, et cetera, that maybe it would require a higher price than that. I'm just trying to get a sense of how much of the conservatism the way you all think about 2021 is driven by the uncertainty around COVID versus maybe how you all would act in a more post-COVID kind of world?

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

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That's a great question, John. And it really -- you have to take it all into consideration. The model can definitely deliver high single digits and free cash flow. But if we look at the macro environment, a quick flash in the price can be fleeting. When we have this type of spare capacity of over 11 million barrels in June, of course, OPEC has a choice to adhere to their 2 million barrel a day increase. They're going to be at 9 million barrels a day of spare capacity here shortly. That's still historic spare capacity.

So we don't see a need or a call for domestic growth there. And the industry has fallen into that trap for over 40 years, a quick flash in the oil price and the re-ramp growth. So we want to see the fundamentals truly firm up. We obviously have a lot of risk associated globally with COVID reactivations. People are coming back to school, but also our field workers going to endure throughout this reactivation.

So if there's a time for conservatism in this industry, it is now. And we feel really good with the maintenance case for 2021. As you see that spare capacity get down below 5 million barrels, that will probably be mid-2021, and you start to see the global inventories reduced. That would be a signal that the demand destruction due to COVID has recovered and stabilized. I think that's a good time to talk growth. And our model is more uniquely positioned to deliver that in the lowest recycle ratio in the industry, relatively low declines for the shale sector at that point and lower leverage ratio at that point as well. So taking all that in consideration, given the low recycle ratios, we're really focused on the maintenance cap coming into 2021.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

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Great. And then my follow-up question. Yesterday, there was a lot of discussion with companies about variable dividends. Just sort of your thoughts just on a longer-term basis, kind of how you all view variable dividends as a potential another lever to kind of return capital to shareholders?

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

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Yes. We've demonstrated increased returns to shareholders this year. After initiating a dividend last year, we increased our dividend this year. We'd anticipate the strategy, the model allows for increased dividends over time. So the base dependable dividend is our focus. And over time, we're going to have -- assuming things unfold that strip and obviously, we're running maintenance for 2021 and then evaluating the macro situation, we'll have a large amount of free cash flow, and returns to shareholders will be a priority. So we'll look at all conditions, but the focus is increasing our base dividend. We really want to see if that has the impact of amplifying volatility for an investor or not, we want to deliver steady returns to shareholders. So that's something we will be watching over time, focus is on growing the base dividend in the near term.

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Operator [6]

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Next question comes from Gabe Daoud with Cowen.

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Gabriel J. Daoud, Cowen and Company, LLC, Research Division - MD & Senior Analyst [7]

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Thanks for the prepared remarks so far. I guess, Matt, maybe starting with the second half of this year. Obviously, oil price's stabilizing. Activity was starting as planned, and you guys have some pretty good visibility to free cash flow. So I guess kind of curious, why don't I go ahead and do official volume guidance, which would, I guess, be the missing piece of that equation. And I guess, should we still expect around 110,000 barrels as the exit rate for this year?

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

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Very fair question there, Gabe. I think we thought the cartoon in the chart that hasn't changed since our last flag that is pretty straightforward. We are in the stabilize case ahead. And yes, the 110,000 barrels is our exit rate based on that chart. So we have to tighten and reduce the CapEx range in there. But as we just ensure that there's no further ramifications from COVID, I guess, not in the field operations really be able to solidify that shortly. But yes, we think you can lean on that chart for our views on volumes.

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Gabriel J. Daoud, Cowen and Company, LLC, Research Division - MD & Senior Analyst [9]

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Awesome. And then I guess just as a follow-up, focusing on the maintenance capital number. It looks like maybe there is a bit of questions over that number and sustainability over that number, if I just kind of look at where Street estimates are for 2021. So can you maybe just remise the D&C per foot assumptions behind that number? And then maybe elaborate a bit on the pieces that keeps that $600 million number flat into '22?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [10]

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Sure. This is David. Yes, I'd remind that the capital assumptions that we put in per foot DCE (sic) [DC&E] for the second half of 2020 are the $900 and $700 for Delaware and Midland, respectively. For 2021, we recognize that the service cost side of things is going to be dependent on activity levels. I think other operators are starting to signal their plans very increasingly more on the kind of maintenance approach. So that's probably indicative that runaway inflation is highly unlikely next year. But that $700 and $900 for Midland and Delaware, respectively, is something that even in the case of some slight inflation next year, it doesn't change our view for '21. As you get into 2022, you lose the DUC drawdown lever that we'll pull in 2021. But what counteracts that in 2022 is the shallow and the base decline rate. And so those 2 things that kind of offset. So we do view that maintenance cap rate as durable even past 2021.

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Operator [11]

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Our next question comes from Asit Sen with Bank of America.

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Asit Kumar Sen, BofA Merrill Lynch, Research Division - Research Analyst [12]

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Just following up on the maintenance capital program that you defined through 2022, which is very helpful. Within that scenario conceptually, can you discuss the activity breakdown between Delaware and Midland? How did that shift? Is it fairly static? What would drive more allocation of capital of Midland East? Is this a rate of return process at the well level?

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [13]

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Sure. It is a rate of return allocation of capital, I would say, 80%, 90% of that is driving 80%, 90% of our capital allocations within the company. And based on that, with our mineral ownership in portions of the Delaware Basin, you'd see roughly a 30% capital allocation towards the Delaware in maintenance cap a year. As you roll forward into 2022, you probably keep that absolute amount, very similar additional growth may come from the Midland Basin, if you look at it that way. And we're looking around, based on the cycle times we see today, 100 wells -- 90 to 100 wells a year, gets you into that -- delivers that maintenance cap volume.

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Asit Kumar Sen, BofA Merrill Lynch, Research Division - Research Analyst [14]

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Matt, a question for you. You've used $35 WTI as a defining number in your base case planning process, it turns out to be a pretty good number. Appreciate your thoughts on the macro earlier, but how are you thinking about an upside case scenario for WTI? And at what point do you reinstate your suspended guidance?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [15]

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I think on volume guidance, as we come into the August time frame and put a sharp pen to the 2021 budget, there's a pretty wide range. There are $100 million range on the maintenance capital, that will tighten no doubt as you come into a formal budget cycle. So that will be a time frame coming into the end of the year, as we put a pencil to that.

And then first part of your question, I'm sorry, Asit?

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Asit Kumar Sen, BofA Merrill Lynch, Research Division - Research Analyst [16]

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On an upside scenario, planning scenario, your $35 scenario is pretty good?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [17]

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Yes. That's just additional free cash flow for the company and prepared to -- we have a $450 million tranche that comes up without penality at some point pay that off organically and then increase shareholder returns.

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Operator [18]

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Our next question comes from Scott Hanold with RBC Capital Markets.

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Scott Michael Hanold, RBC Capital Markets, Research Division - MD of Energy Research & Analyst [19]

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Matt, you talked about trying to gain relevancy from investors here. How does an E&P as yours do that? How do you think you can compete versus some of your larger peers with greater free cash flow or even other sectors? Obviously you've got the dividend, but to be -- really be competitive, where do you think you need to get?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [20]

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I think it comes down to financial fundamentals. When you look at our ROCE, we're going to be exceeding almost all peers on a ROCE front going forward. We -- and our CROCE is very competitive. So it's a competitive business model across multiple industries, and that's using the $35 base case. So obviously, in this industry, we have a robust hedging position to protect the downside and investor gets, I call -- that option call to increase oil prices down the road. And then you need to ramp up your returns to shareholders over time, as you mentioned. And I think over time, that may need to be at a minimum equal to the S&P 500 yields, but probably a little bit higher. So that's what we're working for -- working towards building that cushion in the model.

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Scott Michael Hanold, RBC Capital Markets, Research Division - MD of Energy Research & Analyst [21]

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Okay. Understood. And then turning to flaring a little bit. Obviously, you guys have made a lot of progress. And I guess some of that's obviously in organic efforts, others on it, I think, are tailing some of the Jagged Peak volumes. And can you discuss that? It looks like your target would imply that you might see some of that come back online as you bring some production back on. But when you step back and look at your targets, would you all curtail production in areas where you would have flaring just to limit the flaring? Is that the plan going forward?

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Stephanie L. Reed, Parsley Energy, Inc. - SVP of Corporate Development, Land & Midstream [22]

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Sure, Scott. This is Stephanie. On the flaring front, as you mentioned, I'm really proud of our team across our field operations, gas measurement team, marketing team. We've really turned over a lot of stones. So we've evaluated marketing contracts and then opportunities just to improve infrastructure that's in the field. You mentioned curtailed volume, we did prioritize those curtailed volumes. In fact, when we went through our curtailment time period in the second quarter. And it honestly really allowed us to bridge the gap to more permanent solutions. So as we brought production back online in June and more so in July, we did see that increase. And I think that read through to the number that we posted for the the second quarter. We absolutely believe that below 2% is sustainable long term. And as a corporation, we're really focused on fully eliminating our routine planned infields.

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Operator [23]

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Our next question comes from Leo Mariani with KeyBanc.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [24]

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Certainly appreciate the comments that you made just with respect to industries practices in the past, ramping volumes into an oversupplied market. Just want to kind of get a sense, if we do see that normalization, you certainly indicated that could be some growth in the second half of '21. I just wanted to get a sense other than sort of having the right signals in terms of lower OpEx spare capacity and lower global inventories. Is there also sort of a leverage governor that you look at? I know you're going to planning on operating with free cash flow no matter what. But is there sort of a certain balance sheet level in terms of leverage that you kind of want to be at before you can kind of start to maybe resume a little bit more growth? And what do you think the right leverage is, say, at $45 oil for Parsley?

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Ryan Dalton, Parsley Energy, Inc. - Executive VP & CFO [25]

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Leo, this is Ryan. So with increased uncertainty commodity volatility, we think investors want to take risk out of the system. Lower leverage is definitely part of this. I think long term, we want to be, let's say, 1.5x. The key for us when we look at our model indiscernible] 45 is that -- it is deleveraging. So we have a path to get there. And so we can get there organically over the next 12 to 18 months. So I'd say mid 1s would be a comfortable spot for us.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [26]

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Okay. That's helpful for sure. And I guess you guys certainly talked a little bit about reducing the DUCs 20 to 25 in 21. Just wanted to get a sense, do you blow that down kind of ratably during the year in '21? Or is that kind of more happen in sort of first half where you just kind of take that low-hanging fruit and get all those wells sort of online? Just trying to get a sense of how that plays out.

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [27]

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Leo, I mean, it's a little early, given that we're still putting the formal budget together, but probably more ratable than a very early surge of slowdown. So the frac utilization that we have planned throughout the year in 2021, probably in that 2-ish range. So the idea of bringing it on, you'd have to bring on a bunch of spot spreads early in the year to probably aggressively pull down part of that. It's not our plan. We intend to do something a little more stable, which would lean more towards the ratable side. But we'll -- as we put the pens and paper in a more formal way on our 2021 budget, that will come into further for us.

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Operator [28]

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Our next question comes from Charles Meade with Johnson Rice.

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Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [29]

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Matt, I wondered if you could give us a sense. You picked up a couple of rigs here in July. You're going to pick up a couple more in October. Outside of the D&C cost per lateral foot, which is kind of -- I think kind of a trailing indicator. Can you give us a sense of what you are really going to be focused on as you ramp back up activity to make sure that you're delivering on the capital efficiency gains that you guys captured in the first half of this year and that you're actually able to duplicate and replicate that through your program?

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

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Sure, Charles. Step one is health and safety of our employees and our contractors and vendor partners out in the field. So lots of work going through backup plans, after backup plans of what happens if a whole fleet gets impacted by COVID and how do we quarantine properly, how do we bring in a backup personnel. And so that's step one. Step two is, as we say, just defending and extending our efficiency gains. So we have to make sure we come out of the gate strong, which we have. We just set a company record, maybe industry record for a 3-mile lateral in the Delaware Basin, and it was actually our quickest well TD regardless of length, 2-mile or 3 miles. So 3 miler outpacing our 2 milers something for the teams to really pat themselves on the back over. And is that a one-off event? We don't know. So it's first out of the gates coming up strong. So those are the things we're looking at efficiencies across the board.

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Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [31]

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Got it. Those are helpful little anecdotes. And then this may seem a little far off at this point, but I'd like to get your thoughts or your outlook on the landscape for M&A or A&D, however you want to term it, it doesn't seem like that's top -- it doesn't seem like it's on your first -- at the top of your list of priorities right now. But one would think, at some point, there will be some opportunities that emerge. So could you give your thoughts on the landscape and your appetite?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [32]

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Well, you're right. They're on priority list, Charles. The inward model is so we think is helping a good rate of change, both on the leverage reduction and the financial returns we can deliver, that we want to really focus on full cycle, ROCE and CROCE. When we look at a lot of the chessboard and the landscape, we're not necessarily certain that there's a lot of accretive inventory out there. So we're not going to be looking at companies based off trading value. It's got to be accretive on a rock basis to keep this Permian pure-play at the top of the list. And we don't see a lot of opportunity there anyways. So then our focus is internally executing on our model and our financial drivers.

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Operator [33]

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Our next question comes from Neal Dingmann with SunTrust.

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Neal David Dingmann, Truist Securities, Inc., Research Division - MD [34]

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Matt, my question is, you continue -- you had the right call to be quite conservative early this year. But my question is, again, given the great efficiency, you have low cost, hedges, et cetera, all that, that you have is sort of that go forward where you are right now, that conservatism, I would call it, that you still have now, is that more just based on macro beliefs? Or certainly, the returns are there, given your upside. So I'm just wondering still what's driving that sort of strategically.

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

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Yes. I think back in February, I gave a speech called the Shale New Deal. I talked about perception. I talked about pollution that our industry needs to address and talks about delivering on profit. So we had to deliver on the financial side, and something has been broken for the last 15, 20 years. And part of that is getting out over our skis as an industry. So I think it comes from that. And I think we just really have to stay steadfast, have some patience and deliver on execution and get that industry reputation back and prove the perception in our profits.

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Neal David Dingmann, Truist Securities, Inc., Research Division - MD [36]

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So. No, I think that makes sense. I guess just as a follow-up then. I forget when that long ago you all had kind of that minimum kind of shareholder return. Is that what you think, Matt, is probably needed to -- I don't know, guarantee is probably too strong a word, but the shale investors that there is that sort of combination. I know that you all have put together when you look at growth and shareholder return kind of the bare minimum that you're confident. Is that something you think then that's needed to bring investors back to our group?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [37]

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Yes. That framework has to be delivered on consistently. That's right, Neal. And there's multiple things that go into that framework. And the cash flow deliverance and the associated yield that's a part of it is going to be one very attractive thing here through volatile times and then have to deliver on actual hard returns to shareholders as well. So yes, I would say the framework still holds.

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Operator [38]

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Our next question comes from Matt Portillo with Tudor, Pickering and Holt.

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Matthew Merrel Portillo, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Exploration and Production Research [39]

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Just a quick question on long-term capital allocation. Philosophically, as you look at the long-term growth rate for Parsley and kind of where the industry seems to be shaking out around that kind of a 5% CAGR over the medium to long term. I'm curious how you guys think about that in the context of your portfolio and your balance of moderate growth versus returning additional cash flow to shareholders?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [40]

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Yes, coming off a framework type of question. I think you get into kind of a reinvestment rate discussion when you look at that. And if you're looking at, there's a lot of discussion around the 70% to 80% reinvestment rate. We have to really moderate our growth at that -- or watcher growth at that type of reinvestment rate. So our maintenance cap is far below the 70% reinvestment rate, really opening up a lot of opportunities and flexibility. So we'd probably be at that 70% number, the low end of that range, the 70% to 80% range for the long term is what our model can deliver. And we think it's healthy and meets the nice call on what's going to be needed out of U.S. shale over time.

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Matthew Merrel Portillo, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Exploration and Production Research [41]

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And maybe just a follow-up to that. If crude prices do recover over the next 12 to 24 months, one of the things that you've mentioned is kind of industry growth over the last 5-or-so years has really been an impediment to equity price performance. I'm just curious if there's kind of a cap on the growth rate that you would like to kind of put in place over the medium-term in order to recycle all that excess free cash flow back to shareholders via some of the things you discussed on the common dividend or share buybacks or variable dividend over time?

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

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Yes. I think it will be single digits. And then where in that single digits, we have some time to -- obviously 2021 to review and assess the macro landscape, these other big announcements, the BPD announcement going from 2.6 million barrels a day down to 1.5 million and granted that some of that's going to be divestiture. 50% or so is going to be natural organics the other Europeans and majors going to follow. So I think there's a lot to be watching on the global supply and demand dynamic, but we like that single digit long-term growth rate as a moderator right now.

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Operator [43]

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Next question comes from Mick Scialla (sic) [Mike Scialla] with Stifel.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [44]

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I guess aside from operational issues. Matt, you mentioned like a frac [crugin] in COVID. I just wanted to kind of a sense how durable that stabilized activity plan is? What would cause you to deviate from that case? Would it be just simply prices below $35? Or is it something lower than that?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [45]

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No. We have to see a pullback. We have some flexibility around that price when we pay on a base-case budget. So we have to see probably below $30. We didn't go into curtailment -- voluntary curtailment, which uplifted our what we see about $20 million uplift by producing those barrels later in those months, but we don't do that until we saw basin realizations in the $20 range. So I would say, below $30.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [46]

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Okay. Good. And I know you don't have any federal acreage, but wanted to see if you -- if we anticipate -- I've seen -- or if you would anticipate any regulatory changes, if we get a new administration that could impact you? And anything you can do to mitigate those potential changes?

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

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We view ourselves as pretty isolated against multiple different administrations. We've thrived in vastly different administrations in the past. We are -- we like to stay out in front and consider license to operate as an honor and try to be best and agreed on operating requirements. So I think there's an opportunity to work with either regulatory environment going forward, especially given our geography of our assets.

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Operator [48]

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Our next question comes from Kashy Harrison with Simmons Energy.

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Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [49]

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So just 2 -- yes, just 2 related ones for me. Matt, so let's say we do get back to an environment you feel good about spare capacity, you feel good about the global economy, crude is sustainably $50 or higher. Maybe 2022, 2023, or whenever. Would you, for a lack of a better phrase, low-grade activity towards the productivity from the 2019 capital program in order to take advantage of the entirety of your inventory backlog? And then if you are back to that 2019 productivity level, how long do you think you can maintain a low mid-single-digit growth rate for? I know in the past, you had kind of thought about inventory in terms of 10 to 15 years, but just trying to get a sense of where inventory might be in a low-growth mode moving forward?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [50]

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Yes. I do want to kind of clarify, when I say single digits (inaudible), it's hard with the type of base decline shallowing we have, once we get back on it, you're looking at high single digits, even with just a little bit of additional activity and still being able to meet that -- low end of the reinvestment rate. So it's just the nature of the assets that we have and the productivity. That 2019 program could go on. When we were running 15 rigs, it was a decade of runway of the 2019 productivity levels. So to deliver high single-digit growth, we're going to be nowhere near 15 rigs, probably sub-10 if you fast forward a couple of years. So a long time.

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Operator [51]

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Our next question comes from Chris Purdue with Goldman Sachs.

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Brian Arthur Singer, Goldman Sachs Group, Inc., Research Division - MD & Senior Equity Research Analyst [52]

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It's actually Brian Singer here. I wanted to follow up on a couple of things that you mentioned earlier, really on the -- what are the pricing points and balance sheet points at which you would commit more capital to shareholders and then also to activity levels? And I appreciate the level of specificity that you provided with a number of data points here on this call. And I think you mentioned from the perspective of returning cash to shareholders, you want to see your balance sheet down to -- and I think it was 1.5 turns. And then I think you made a comment with regards to having enough cash for some level of maturities, but I wondered if you could clarify that. And then assuming you've reached that objective in the 5 million barrels a day of spare capacity, is that essentially then the lever at which you would consider adding activity?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [53]

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Yes. Thanks, Brian, for the opportunity to clarify there. So we -- in that -- in our declining leverage model, we anticipate room for growing shareholder returns along the way. So as we approach that 1.5 target, we are baking in assumptions of growing shareholder returns. It's not a wait and tell. It's a delivery along the way in the form of dividends current plan. And then yes, that's a good -- that's 5 million barrel of spare capacity and lowering global inventories is definitely a good framework for us to evaluate additional rigs, which would probably push the growth into 2022.

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Brian Arthur Singer, Goldman Sachs Group, Inc., Research Division - MD & Senior Equity Research Analyst [54]

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Got it. And then you had mentioned earlier the expectations for your decline rates to decline as the activity levels have fallen. And then I wondered if you could provide a little bit more color on where that decline rate goes and whether your own internal expectations for how base declines are trending has changed here over the last few months?

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Kyle Rhodes, Parsley Energy, Inc. - VP of IR [55]

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Brian, this is Kyle. So the expectation for us is still to exit this year or fourth quarter '20 at a 33% kind of 1-year oil decline rolling into fourth quarter '21. If you fast forward to fourth quarter '21, again, assuming kind of an extension of that stabilized activity case, around 110,000 barrels a day, that base decline would kind of continue to shallow out by 2 or 3 percentage points the next year. So that's the offset Dave was referring to earlier, that's helping maintain that maintenance cap around that $600 million in 2022 as well.

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Operator [56]

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Our next question is from Arun Jayaram with JPMorgan.

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Arun Jayaram, JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst [57]

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Matt, one of the key themes from some of your peers in the earnings season has been, call it, a shift back the Midland Basin from the Delaware, see some operations putting some rigs back at maybe range in a, call it, 70-30 split from another of your peers. How do you see Parsley's capital allocation between the Midland and Delaware shaking out over the next, call it, 12 to 18 months?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [58]

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Yes, Arun, very similar, 70-30 capital allocation split and as we do have mineral position on large chunk of our Delaware portfolio that always helps in realizations. And then as we talk about this framework of 2022 and beyond, maybe the growth -- additional growth, if it's in this price world would still come from the Midland Basin. And we'll just have to -- but it's going to be based on rates of return, capital allocation to be based on rate return on capital.

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Arun Jayaram, JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst [59]

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Got you. Got you. That's helpful. My second question is just kind of looking at sustaining CapEx. And we do appreciate the figures on the decline rate. But as we understand it, to keep your fourth quarter oil production flat, call it, around 110,000 barrels a day, that $600 million. It does look very favorable relative to the peer group. So I just wondering about what do you think is leading to, call it, a better capital efficiency number in '21 and thoughts about that on kind of a go-forward basis?

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [60]

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I didn't want to clarify. You say it doesn't look favorable compared to -- oh it does, yes, because we saw the lowest recycle ratio almost in the industry.

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David Dell'Osso, Parsley Energy, Inc. - Executive VP & COO [61]

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Yes, Arun, I'd say the things that Matt mentioned the asset quality earlier, that's clearly a big piece of it. But even compared to some other Permian operators, the pace of efficiency gains that we've had. We feel those are sticky. A lot of the technological capabilities that we put into place, give us confidence that we can keep hold of build and push even potentially further, Matt mentioned in the Delaware results. So really, the combination of material improvements and efficiencies, the fact that we still have scale to the command very favorable OFS cost, and the fact that going forward, the asset quality, particularly with the capital allocation, we have planned for the near-term, is just a superior combination. So that's what drives the returns even at these lower prices. And we think that's what differentiates us from many others and even in the basin.

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Matthew Gallagher, Parsley Energy, Inc. - President, CEO & Director [62]

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Slide 19, there's a...

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Operator [63]

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We have reached the end of the question-and-answer session. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.