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Edited Transcript of ROSE earnings conference call or presentation 8-Nov-19 4:00pm GMT

Q3 2019 Rosehill Resources Inc Earnings Call

NEW YORK Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Rosehill Resources Inc earnings conference call or presentation Friday, November 8, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian K. Ayers

Rosehill Resources Inc. - SVP of Geology

* Bryan Freeman

Rosehill Resources Inc. - SVP of Drilling, Completions & Production

* David Lawrence French

Rosehill Resources Inc. - President, CEO & Director

* John Crain

Rosehill Resources Inc. - Director of IR

* Robert Craig Owen

Rosehill Resources Inc. - Senior VP & CFO

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Conference Call Participants

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* Michael Stephen Scialla

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

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Rosehill Resources third quarter conference call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. John Crain, Director of IR. Sir, please go ahead.

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John Crain, Rosehill Resources Inc. - Director of IR [2]

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Thank you, Marjolin. Good morning, everyone, and welcome to today's conference call to review Rosehill Resources' third quarter 2019 operating and Financial performance. After I cover the forward-looking statements, Dave French, our President and Chief Executive Officer, will provide opening comments and key highlights for the quarter. Following Dave, providing additional details on our operational and financial results will be Bryan Freeman, Senior Vice President of Operations; Brian Ayers, Senior Vice President of Geology; and Craig Owen, Chief Financial Officer. We will then have a question-and-answer session, and Dave will close the call with some brief comments. Also joining us today on the call is David Mora, Vice President of Commercial and Reserves.

I'd like to remind you that today's call includes forward-looking statements and certain non-GAAP financial measures. We believe our expectations are based on reasonable assumptions. However, a number of factors could cause results to differ materially from what we discuss. We encourage you to read our full disclosure on forward-looking statements in our SEC filings and the GAAP reconciliations included in yesterday's earnings release.

With that, I will now turn the call over to Dave.

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [3]

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Thank you, John, and thank you to everyone for attending Rosehill's third quarter 2019 earnings call today. [As given] in the comments in last night's earnings release, we were pleased with the execution in our third quarter, which was highlighted by a resumption of drilling activity and a return to production growth. We provided an early view of these operational results in September, we've built upon that performance with a strong finish to the quarter.

Total September production was over 23,000 BOEs per day. During that month, we achieved a company record for total daily production as we work through our completions backlog, providing nice momentum as we finish the year. We're very active on technical efforts for both our Northern and Southern Delaware assets, as Brian Ayers will talk more about in a few moments. On the financial front, we achieved a meaningful enhancement to our liquidity profile, and Craig will give those details in the financial review.

Moving to the update. The third quarter of 2018 was characterized by returning to volume growth. Our production increase was driven by a strong pace of completions in Northern Delaware, supplemented by a few in the Southern Delaware. We also returned to several simultaneous operations, or SIMOPs, shut-in wells in the North back to production, and expanded gathering capacity in Loving County at the Kyle 26.

Turning to our plans for the remainder of the year. We recently elected to continue a 1-rig drilling program through the end of the year by adding up to 6 drilling targets. These wells are currently planned for second Bone Spring sand formation in the South and won't be completed until early 2020. We think this is a prudent step that allows us to add end-of-year drilled uncompleted inventory and hit the ground running in 2020. Keeping a rig going makes practical sense operationally for crew continuity, and we are opportunistically taking advantage of following total well costs, which have come down high single digits from the first half of 2019 alone. These new wells are not fully offset by cost reductions compared to our previous plan. So we've made the necessary small adjustments to our full year guidance.

You also noticed we are modestly lowering full year adjusted EBITDAX driven by the challenging markets for gas and natural gas liquids, or NGLs. In the third quarter, NGL pricing was over 70% lower than this time last year, and I'm sure everyone's familiar with the lower negative gas price situation in the Permian.

Before turning the call over to Bryan Freeman, I'll provide a brief update on our planning around 2020. We're continuing to work to finer points of our plan that I can preview that our early work indicates a more measured and continuous capital plan throughout the year, targeting cash flow neutrality or better. I look forward to providing a more formal update near mid-December, similar to last year's timing.

With that, I'll now turn the call over to Bryan Freeman for a review of our operational performance for the third quarter.

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Bryan Freeman, Rosehill Resources Inc. - SVP of Drilling, Completions & Production [4]

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Thank you, Dave. The operations team was very active in the third quarter, mostly from a completion standpoint as we work through our DUC backlog, although we completed 12 wells in the quarter comprised of 9 wells in the Northern Delaware area and 3 wells in our Southern Delaware area. We resumed drilling operations around halfway through the quarter and plan to continue drilling through the end of the year in order to rebuild our DUC inventory for a spring-loaded start of 2020. Overall, I'm very pleased with the restart of our drilling activity in the quarter with our first wells exhibiting similar efficiencies as those drilled just before pausing our work.

As Dave mentioned, the return to production growth in the quarter was a function of replacing or -- I'm sorry, of placing roughly 12 wells online, mostly in the North. We provided results in a press release for several of these wells, with the most impressive set being Kyle 26 3-well pad with average per well IP30s of 1,470 BOE per day producing from the Lower Wolfcamp A formation. We also placed several wells online in the second Bone Spring formation with impressive initial results. We've been impressed with the second Bone Spring sand formation, especially with extended well results. As noted, the IP180 we provided on the Z&T 20 E006 well, which only declined 14% from IP30 levels. Based on this success, we decided to target this formation for the additional drilling we plan in the fourth quarter that Dave mentioned in his comments.

In our Southern Delaware area, we brought online 3 wells in the quarter, completing a 4-well program in the Section 14 and 16 near the southern border of our acreage. The results of these wells, along with extended results of the Neal Lethco 1210 2-mile lateral is included in our release. Overall, we continue to be encouraged by the results we're seeing and are continuing our technical review around all aspects of optimizing future results in this area, which Brian Ayers will talk more about in a few moments.

Moving to current operations. Our completion crew is wrapping up a 2-well pad in the North, targeting the Wolfcamp B formation before moving the completion crew down to the South to complete a 2-mile lateral. The drilling program is focused on the additional wells we mentioned earlier, it was expected to be the case through the remainder of the year. Other than D&C activities, our field personnel have been active in ensuring an adequate power supply in both our operating areas. These efforts resulted in additional lease operating expense in quarter, mostly due to the need to rent natural gas generators, which we hope to reduce in the future through area upgrades or installation of commercial power. In summary, you can see we've had a very productive third quarter and now have a newly revised drilling plan that will keep us busy through the end of the year.

With that, I'll now turn the call over to Brian Ayers for a review of the ongoing technical work.

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Brian K. Ayers, Rosehill Resources Inc. - SVP of Geology [5]

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Well, thanks, Bryan. I'm going to provide a brief update on the work we're currently focused on across our operating areas. As most of you are aware, geoscience has always been an essential foundation of Rosehill's model. And a key goal of ours is to stay on top of the latest advancements to ensure we're developing our assets as effectively and efficiently as we can. That theme is alive and well, and I'm pleased to share some additional details on those efforts.

In the South, we've learned a great deal about this asset since we first began development around the middle of last year. Compared to the North, the South is shallower, has somewhat lower pore pressure and is slightly less mature, hence a lower ratio of gas to oil. We've also confirmed that the South is highly naturally fractured, much more so than the North. This is generally very positive and is a trait associated with many world-class source rocks, but it also presents a challenge with regards to where we land and how we complete or frac our wells. We're very quick to implement changes into our operational approach from new data, and we've experienced general improvement in our results with each new tranche of drilling.

Our latest work involves the building of a 3D geomechanical model using sophisticated software, 3D seismic and a wide array of subsurface and drilling data. The goals of this are threefold: one, establish an ideal landing target; two, develop an engineered approach to completions based upon rock type; and three, model drainage areas to determine optimal well spacing and to help lessen or avoid future parent-child impact. Along with our models, we've engaged a major oilfield service firm to conduct a completion study and potentially implement the results into our upcoming work.

In the north, we use the same tools to determine optimal spacing and landing targets, but with a short-term focus now on the Wolfcamp B. We see a tremendous potential in this target based on our own historical results but also because of some recent offset wells. In general, given our footprint in the north, it's imperative that we have a well thought out approach to our plan to avoid adverse parent-child impact, and we're confident the work we're doing will go a long way to avoid this. We look forward to providing results around our recent work B wells once we've had a chance to place these wells online in the very near future.

With that, I'll turn the call over to Craig for a financial review of the quarter.

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Robert Craig Owen, Rosehill Resources Inc. - Senior VP & CFO [6]

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Thank you, Brian. I'm pleased to report on our strong financial results for the quarter. Third quarter revenues were $76.3 million and production totaled 20,576 barrels of oil equivalent per day, comprised of 74% crude oil, 14% NGLs and 12% natural gas. For the third quarter of 2019, Rosehill reported net income of $20.9 million or $0.88 per diluted share, which included a $41.9 million noncash pretax gain on commodity derivative instruments. We generated adjusted EBITDAX of $49.1 million for the third quarter, a decrease of 13% compared to the third quarter of 2018, driven primarily by lower commodity prices and increased lease operating expenses.

Our average realized price -- oil price for the second quarter is $52.90 per barrel, and total equivalent realized price was $40.28 per BOE, both on an unhedged basis. For natural gas, the current transportation constraints experienced in the Permian Basin continue to impact us on the pricing front, resulting in a third quarter realized natural gas price of $0.27 per Mcf. This price was significantly impacted by Waha and EP Permian pricing points, and is inclusive of processing costs and some gathering costs. NGL pricing continued to be challenged during the quarter with Mont Belvieu prices remaining low, which is mainly a function of increased domestic supply and tight export capacity. Our average realized NGL price for the third quarter was $8.10 per barrel, a 71% decrease as compared to the third quarter of 2018. We have a very strong hedge book, protecting our downside commodity risk, while also providing exposure to upside price movements. We have the vast majority of fourth quarter 2019 expected oil production hedged in the high-50s per barrel. For both 2020 and 2021, we're hedged at approximately 80% of production using the midpoint of our 2019 production guidance, with both years hedged at 4 levels of approximately $60 per barrel. All of these positions provide us with exposure to upside price movements.

At the end of the quarter, our commodity hedge book value was $62 million net.

Turning to cost. Total cash operating expenses were $23.8 million or $12.56 per BOE, which consisted of $12.2 million in direct lease operating expense or $6.45 per BOE, $7.2 million in cash G&A expense or $3.78 per BOE, $900,000 in gathering and transportation expense or $0.47 per BOE, and $3.5 million in production taxes or $1.86 per BOE. As [Bryan] alluded to, our costs in the quarter were impacted by several items, including unscheduled workover activities and generated rentals required due to intermittent commercial power availability. We are working to reduce these costs going forward by pursuing various commercial power solutions, along with operating plans requiring fewer and less expensive workover activities. During the quarter, we closed the fall redetermination of our borrowing base under our revolving credit facility, which resulted in an increase to our borrowing base, moving from $300 million to its current size of $340 million.

Total liquidity as of September 30 was $74 million, made up of cash on hand and availability under the revolving credit facility. And as we head into 2020, we feel very comfortable with our liquidity levels and expect to close out 2019 with strong operating cash flow and our moderate level of capital investment.

Lastly, I'd like to provide a brief update on the potential sale of our water midstream assets in the Northern Delaware area. As we said earlier in the year, the overarching themes for our plan was to look for a way to potentially realize the attractive value for these assets with the right partner. At this time, in the current market, we believe the right path forward is for Rosehill to continue to own and operate these assets and realize the associated cost savings. We will continue to be open to entertaining a smart transaction should an opportunity present itself.

And with that, Marjolin, we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Neal Dingmann from SunTrust.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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My first question is just around -- realizing you don't have full 2020 guidance out there yet, but I'm just wondering, given the DUC build that you'll have now at the year-end with that little bit of increase you mentioned in CapEx, just wondering how should we think about the trajectory as we start 2020 or maybe for the year overall, just what kind of growth we should be thinking? It seems like that's really going to help the year not only earlier but throughout. So I'm just wondering your thoughts there?

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [3]

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Yes, Neal, this is Dave. I would think part of the reason to put those DUCs into the 4Q is to give us momentum hitting to the first part of next year. I think I would -- as I kind of alluded to with some simple words. I think we expect a plan that's fairly similar in terms of activity, certainly continuous through the year. I think we had kind of high first quarter, high third quarter, so you'll see that spend profile look more moderated throughout the year. And I also think we're going to focus on certainly being cash flow neutral, if not, trying to improve off that. So I think our perspective would be live within our means probably in many ways, probably generate some cash and do so with a continuous spending profile from a CapEx standpoint throughout the year.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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Okay, great answer. And then just one follow-up. Given you have a strong asset base, really now developing the southern and given kind of what's going out there in the environment that'll continue to be challenging. And I'm just wondering now when you see opportunities going forward, I'm just wondering, I don't know, maybe this is too black and white, but do you all view yourselves as more acquiree, acquirer? I mean I'm just trying to get a sense, I guess, maybe just a broad M&A, anything you could add on that, Dave?

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [5]

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Yes, Neal, I think we're obviously, opportunistically, we like the assets that we're sitting on. We like the acreage we have got. And I think Brian Ayers talked a little bit about the technical things being done, both in the south and, honestly, in the north, to continue to sharpen our pencils on what our development profile looks like. I think we are certainly open to continuing to expand our footprint. I think we have enough right now to say grace over in terms of volume and size. So you'll see us focus next year. Really, that blend will be combinations of north and the south. If there was acreage that made sense for us to pick up, we certainly, as we talked about in previous quarters, we're always interested in trying to get to where the -- a 2-mile lateral is probably in our case the direction we want to go to. So to the extent there's acreage that allows for drilling longer, that would be our focus. I don't think we're in a broad-based view that says we're needful of something material. So I think we'll focus on the things we have and especially make sure that we've got the technical edge to deliver best in industry in terms of the well performance.

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Operator [6]

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

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [7]

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David, just a follow-up on your 2020 comments. You said you want to target free cash flow neutrality or better and you're going to go about it with a little more measured pace. I am just wondering, does that imply you would not go back to the 2-rig and full-time crew at some point next year? And if you don't, can you talk about the efficiencies that you can achieve with that? It seems like in order to keep a crew busy full-time, you need probably 2 rigs. So just wondering if you're going to see some -- or if you're worried at all about seeing any efficiency slip next year if you go at a little slower pace?

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [8]

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So I'll probably take 2 parts of this, and I'll probably hand it over to Bryan as well. This is, I guess, Mike, my view would be, we'll definitely think of drilling continuously. So the operational improvements would be we intend to hold a rig throughout the year. I think where we see needs to supplement, we would probably think about bringing in a second rig, if necessary. But I think our view would be continuous capital plan throughout the year. Run one rig throughout. So you'll have similar well profile. I certainly see the advantage which you're talking to and that is that maintaining crews and rig continuity allows you to get to shorter days for the same targets. We've seen tremendous improvements in terms of the number of wells, and our well costs going down by holding that crew with us. So they learn the way we do work, learn the way we target, learn the way we deliver the wells. So there's -- I certainly would second that. I know, Bryan, anything to add in terms of your thoughts on the plans next year?

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Bryan Freeman, Rosehill Resources Inc. - SVP of Drilling, Completions & Production [9]

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Dave, I think you hit it spot on, and Mike, thanks for that question. But the 1 rig that we have partnered with H&P, we are -- our efficiencies that we have with 1 rig, 2 rigs is a little much for the budget that we have, in the time frame keeping everything efficient. But the 1 rig, we should be able to stay ahead since we have an early start with the DUCs coming into 2020.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [10]

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Very good. And Brian, you talked about some of the things you've learned so far since you started developing the Southern Delaware Basin. Just wondered if anything there's surprised you? It sounds like maybe the natural fracturing or the early extent of the natural fracturing might have been a surprise. And if so, anything that you -- maybe a little more detail on what you plan to do in terms of drilling or completion design on future wells to hopefully take advantage of that?

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Brian K. Ayers, Rosehill Resources Inc. - SVP of Geology [11]

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Yes, Mike, I expected that because of where we fell on the deep bump, we would have a more fractured Wolfcamp and Bone Spring interval than the Trees ranch area to the north or the south of us, where FANG is drilling. And we found out that, that's the case. The Wolfcamp A there is an extremely good source rock. And we found that it's the most highly fractured with an interval, pretty much in that end of the play and far more so than in our Northern core. It does have an impact on how we frac wells. It has an impact on how we land wells, and we're still learning the secret sauce, if you will, to effectively complete rock that's broken. How you connect up the fractures, how you prop those fractures, how many perfs per stage, stage length and all that is something that is different in rock that's that cracked. And we've come a long way in that. In fact, the next well that we're about to complete, our State Neal Lethco 1210 H1, is going to have a customized frac plan based upon rock types, fractures. We're going to complete it differently than wells we have prior to this. And we -- and of course, each tranche of wells we've drilled and fracked out here has gotten better. I think we're going to see a big step-up with this next well.

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Operator [12]

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(Operator Instructions) You have a question from Mike of Stifel.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [13]

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Yes, I guess I'll keep going here. Maybe to follow up, Brian, it looks like that Silow 14 well may have been your best so far in the Southern Delaware Basin. Anything you did differently there with the drilling and completion? Or is that maybe just a function of the geology being a little different at that location?

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Brian K. Ayers, Rosehill Resources Inc. - SVP of Geology [14]

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Well, the rocks do vary from north to south and actually from east to west there. That well is actually not in what I would consider to be the sweet spot of the play, to be honest. But again, what we've done is we have implemented changes in how we complete the wells and also where specifically we land them with each new well. We landed that well in very good rock, based upon results of wells we've drilled prior, and we didn't quite frac at the same as we did the last ones, and it turned out to be, I think, very, very good, good well. And Bryan, would you like to add anything to that or?

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Bryan Freeman, Rosehill Resources Inc. - SVP of Drilling, Completions & Production [15]

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No. Like I said, everything we've been learning every well, applying new -- what we have this latest technology, we have, I'm looking very forward to this next well coming up here in the next couple of weeks.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [16]

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Very good. And then just wanted to see where the build-out of the infrastructure stands now? And it sounds like you're doing some things differently with compression. Maybe if you could give a little more detail on that.

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Brian K. Ayers, Rosehill Resources Inc. - SVP of Geology [17]

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Yes, Mike. Our compression, we started out probably last year, building that out, spreading it out in the north quite well. We're up with additional capacity for the 2020 plan. The facility build out in the south is complete. So we're ready for multi-well pads. There will be no holdup in our [SWD] system. We have plenty of capacity booked in there.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [18]

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And then just the last one. Any update on -- I know at one point you're looking at potentially monetizing a portion of the midstream. Any update there? I know the market hasn't been exactly probably to your liking, but just want to see if that's still something that you anticipate maybe for 2020?

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Robert Craig Owen, Rosehill Resources Inc. - Senior VP & CFO [19]

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Mike, this is Craig. I mentioned it briefly in the prepared comments. Certainly, a great asset. We're going to hold on to that. What we indicated we'll hold on to that for now. Just given the market, we're going to realize those cost savings and the benefit within our assets and our footprint. The market has gotten softer just in general. But we're open to the right transaction at the right time, but not compelled to have to run out and do something right away or any time for that matter. So we'll still listen, but we're not having that out there as a strategic goal near term, but we'll continue to see what the market -- how it changes and moves over time.

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Operator [20]

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I'm showing no further questions at this time. I would now like to turn the conference back to Mr. David French and CEO. Sir?

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [21]

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Thank you, Marjolin. I'd like to thank everyone for joining the call today. I hope we gave everyone a good sense of our solid execution for the third quarter and a preview of our momentum heading into 2020. There's a lot to look forward to as we finish up the work of shaping of our plans for 2020, and we'll overview that plan with everyone in mid-December. To reiterate our strategy at Rosehill, we're focused on creating shareholder value through relentless and disciplined delivery of the potential of our acreage. You can expect nothing less from us. Take care, everyone, enjoy the rest of your day. This concludes our third quarter earnings call. I thank you for your interest in Rosehill, and have a great day.

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Operator [22]

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