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Edited Transcript of WPX earnings conference call or presentation 21-Feb-19 3:00pm GMT

Q4 2018 WPX Energy Inc Earnings Call

Tulsa Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of WPX Energy Inc earnings conference call or presentation Thursday, February 21, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clay M. Gaspar

WPX Energy, Inc. - President & COO

* David Sullivan

WPX Energy, Inc. - Manager of IR

* Greg Horne

WPX Energy, Inc. - VP of Midstream & Marketing

* J. Kevin Vann

WPX Energy, Inc. - Executive VP & CFO

* Richard E. Muncrief

WPX Energy, Inc. - CEO & Chairman of the Board

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Conference Call Participants

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* Bradley Barrett Heffern

RBC Capital Markets, LLC, Research Division - Associate

* Derrick Lee Whitfield

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst

* Gabriel J. Daoud

Cowen and Company, LLC, Research Division - Senior Analyst

* Gail Amanda Nicholson Dodds

Stephens Inc., Research Division - MD & Analyst

* Irene Oiyin Haas

Imperial Capital, LLC, Research Division - MD & Senior Research Analyst

* Jeffrey Leon Campbell

Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services

* Jeffrey Scott Grampp

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

* John C. Nelson

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Kevin Moreland MacCurdy

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

* Leo Paul Mariani

KeyBanc Capital Markets Inc., Research Division - Analyst

* Michael Dugan Kelly

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

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Nitin Kumar

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Subhasish Chandra

Guggenheim Securities, LLC, Research Division - MD and Senior Equity Analyst

* William Seabury Thompson

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 WPX Energy Earnings Conference Call. (Operator Instructions) It is now my pleasure to introduce Director of Investor Relations, Mr. David Sullivan. Please go ahead, sir.

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David Sullivan, WPX Energy, Inc. - Manager of IR [2]

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Thank you. Good morning, everybody. Welcome to WPX Energy fourth quarter 2018 call. We appreciate your interest in WPX Energy. Rick Muncrief, our CEO; Clay Gaspar, our COO; and Kevin Vann, our CFO, will review the prepared slide presentation this morning. Along with Rick, Clay and Kevin, other members of the management team are available for questions after the presentation. On our website, wpxenergy.com, you will find today's presentation and press release that was issued after the market closed yesterday. Also our 10-K will be filed later today. Please review the forward-looking statement and the oil -- disclaimer on oil and gas reserves at the end of the presentation. They are important and integral to our remarks. So please review them.

So with that, Rick, I'll turn it over to you.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [3]

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Thanks, David. It's good to be here this morning, and we certainly appreciate everyone taking time to join us. It's always an honor to represent the talented team we have here at WPX, and we look forward to discussing our fourth quarter and our 2018 full year results. But before we jump ahead, let's recap how we arrived at this juncture. It really started with an effective strategy, a bias for action and numerous transactions coupled with an ongoing commitment to evolve our culture and how we run our business. We saw a new future for WPX. We rebuilt our portfolio and completely retooled our inventory. With that, we laid out a plan to increase our oil production fivefold during a 5-year period. We actually did it 2 years ahead of schedule. Today, our oil output is nearly 20% greater than the original goal.

Now the reason for this growth was very simple. We wanted to see a significant improvement in margins because in a commodity-based industry, margins really matter and will ultimately distinguish the winners from the losers. We also said we'd pay down debt and reduce our leverage by the end of 2018, and that's exactly what we did. Financially, and operationally, we now have the strength and flexibility to weather most of the volatility in commodity pricing.

This also gave us the opportunity to adjust our 2019 guidance where we recently announced we would cut our 2019 capital by more than $350 million to live within our cash flow from operations. I'm extremely proud of what our people have accomplished during 2018. Now WPX is set up nicely for consistent execution, discipline and continued value creation, which is exactly what the market expects.

Now let's turn to Page 2. Last year, we set a high bar, we challenged ourselves, and we kept our eyes focused on the future. We narrowed our operating focus to maximize our capital efficiency. We paid down nearly $500 million of long-term debt, and we also increased our revolver capacity. Our midstream joint venture in the Permian Basin brought a new gas processing plant online and is running very well. And although we've always said our production growth is an outcome of our business approach and not the only objective, our net oil volumes are now approaching 100,000 barrels per day. This puts WPX in a much stronger position from a revenue and cash flow perspective.

And with our strategic decisions and investments, we're putting about 80% of our oil in the Permian on pipe, which is key to protecting our realized prices. Now 2018 was a great year because it was such a pivotal year. I look forward to Clay and Kevin walking us through the details here in a few moments.

Let's turn to Page 3. Today, we want you to know that we're upping our game. The competition for investor dollars is more intense than it's ever been. We recognize that. Earning and maintaining credibility, trust and respect isn't enough anymore. This is about out-right relevance. There will be some winners in our sectors, but only ones who are laser focused on returning capital to shareholders in one form, fashion or another and still show some degree of growth. At WPX, we get it. And here's what we're doing. A, our 2019 capital plan is cash flow neutral at $50 oil and is positive at our current commodity prices; b, we plan to return capital to shareholders starting in 2021. This could be in the form of dividends, stock repurchases and/or debt retirement; c, we own a very attractive midstream portfolio. It continues to represent upside that we feel is not recognized and that other players simply don't have, and we've currently got a lot of flexibility with that upside.

Financially, there's something to be said for monetizations and how you successfully redeploy the proceeds. Operationally, we can leverage midstream assets to create efficiency, reduce cost, improve reliability, you name it. And it's not necessarily either or, it could be a combination of both.

Now let's turn to Page 4, and Clay is going to now walk you through what's going on in our operations.

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [4]

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Thank you, Rick, and good morning, everyone. 2018 really was a pivotal year for WPX, both operationally and financially. Operationally, we continue to gain momentum in both basins and our midstream strategy in the Delaware is beginning to create significant value. Financially, we significantly improved our debt metrics and remain on solid footing. Now we did run hot on capital in the fourth quarter. We've planned on mitigating that outspend by pushing out some of our Williston completions into January and selling off some of the nonoperated opportunities in a promoted deal structure. In the end, we elected to take advantage of favorable weather we were seeing in North Dakota in December. And with the falling oil price, the terms of the promoted nonop deal were no longer the right business decision for us. We understand that capital creep is frustrating to investors, and we're very focused on 2019 capital, hitting our quarterly and annual targets.

During 2018, in the Delaware, we continued the evolution to extended lateral, full-development drilling. We believe that we are well ahead of our Delaware peers in understanding the nuances of parent-child wells, and I'll share some of those results in the upcoming slides.

We've also gained drilling and completion efficiencies throughout the year. The run-up in activity in Permian hit everyone. You can see this in well costs as well as well timing. We've worked with our vendors very closely and reclaimed much of that efficiency. Early results in 2019 are showing much more improvement on well costs as well as what we believe will be production enhancements.

Since late 2016, we've worked on our midstream and marketing strategy in the Delaware. In 2018, that strategy became a reality with WhiteWater and Oryx II coming online and our Atmos transport capacity ramping up to 200 million cubic feet a day in the fourth quarter.

Our joint venture with Howard Energy Partners hit an important milestone with the start-up of the first 200 million a day cryogenic processing train in September and the second train is scheduled to start up in the second quarter of '19. Our oil, gas and NGL price realizations in the Delaware are a result of our proactive marketing strategy, which included basis hedges and structured downstream deals in anticipation of basin constraints. When you include the basis hedges in our Permian oil realizations, we were $1.44 under WTI in the fourth quarter.

In the Williston, we continue to deliver great well results well beyond the epicenter of our best area. We pushed the rigs to our less-developed southern portion of our acreage. These results and these tests give us great confidence that we can deliver the performance and returns that we've all come to expect in the Williston.

Now let's turn to Slide 5, and we'll talk about the Delaware Basin. The wells in the top right plot are great examples of tremendous results we're seeing in the Wolfcamp A and the Third Bone Spring. Both the Wolfcamp A and Third Bone Spring wells are averaging well above a 1.7 million BOE-type curve. That in itself is pretty exciting when you think about scaling up 1-mile, 1 million BOE-type curve to the 2-mile length these wells are. These wells are clearly beating the 1.7 scaling factor that we've seen in other plays. Also it's important to note that the Bone Spring wells are various tests of the Stateline area throughout the geography. They've also very -- they're very early in the optimization. We will continue to fine-tune the landing zone and completion designs that I expect will continue to improve the performance.

In 2019, we plan to invest about 75% of our Delaware capital on developing the Upper Wolfcamp and about 15% of our Delaware capital on the Third Bone Spring. The Third Bone Spring capital will be focused on fine-tuning landing zones, completion designs as well as starting to understanding this basin. The Wolfcamp A wells in this plot are examples of our long lateral, full development drilling. These are child wells that have enough flowback time to demonstrate how the well spacing will impact all the performance. These down-spaced wells are tracking north of a 2 million-barrel BOE-type curve. This gives us great indications that we are working towards the right development scheme.

While the top half of the page talks about well results, the bottom half is focused on cost and efficiency. In 2018, we increased lateral feet completed per day about 58% and drove normalized completion cost down 40%. The technical work on the Pecos State pad that I discussed on a previous call is paying dividends today.

Since the last call, we've modified our completion design in the Delaware, which is contributing to our anticipated reduction in total D&C for 2019.

Now let's turn to Slide 6, and let's talk about the Delaware midstream strategy. Looking at the plots on the right side of the page, you can see how our marketing strategy is creating real value today. In the fourth quarter, our realized prices were nearly in line with the posted prices that allows us -- that allowed us to gain nearly $80 million relative to floating with the Midland Waha market. As you know, in this environment, that is a very important $80 million. As you can see in the top left of this slide, the great story for 2018 marketing could even improve further in 2019. We expect approximately 80% of our Delaware crude volumes to be exposed to Gulf Coast or Brent pricing. In 2019, our midstream strategy should drive stronger well results -- stronger results as well. The second cryo processing plant will come into service providing processing capacity to WPX and third-party volumes as well. The JV is also connecting our central Reeves area, also known as Sand Lakes to our Stateline processing facility.

Let's turn to Slide 7, and I'll discuss the Williston. The Williston is a well-oiled machine that continues to deliver strong well results. As I mentioned on the third quarter call, we're testing wells in the southern portion of our acreage position. Last quarter, I discussed the very positive results of the Otter Woman pad, and this quarter you can see impressive results from 3 additional pads. The productivity of these wells are very important and are indicative of most of the drilling you will see from us for the coming years in the Williston. As you know, we've maintained our 1 million BOE-type curve with caution that this curve represents the overall expected average results for the next few years of drilling. The results we're seeing, including the more southern tests, the Howling Wolf, gives us great confidence in our ability to continue to deliver.

I know human nature forces your eye to be drawn to the bottom 2 wells that are under the type curve. I will remind you that we guide towards average performance. Also these 2 wells, in particular, were immediate offsets to a well drilled in 2013. In addition, because this area was a step out for us, we had to truck much more oil than in the other areas. This required us to choke these wells back a little more than we would have liked.

In November and December of 2018, the local pricing hub experienced an abrupt widening in differentials due to unique alignment of very significant refinery turnarounds and increased production, and also, what I would call, an overreaction to this disruption. Our Williston differentials for the quarter were WTI less $9.85. Unlike Permian, we believe that this disruption was temporary, unique and short term. The basis issues in the Williston corrected after the first of the year with January approximately minus $6 and February basis estimated at minus $2.50. You may ask if you're doing so well in the Permian, why were you not better protected in the Williston? Like the rest of the market, we didn't see this one coming. We studied the fundamentals, and we do some very simple math. I'm happy to report with our positions in Williston and in Permian, the math works very well in our favor going forward.

Now I'll turn it over to Kevin, our CFO, for the financial update.

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J. Kevin Vann, WPX Energy, Inc. - Executive VP & CFO [5]

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Thank you, Clay. Our 2-basin optionality continues to be a strength of this company. Of course, that was a strategic decision we made to give us flexibility given the sporadic challenges we see in a particular geography from time-to-time. As Clay mentioned, Williston differentials were surprisingly difficult over the last couple months of 2018, but at the same time, I will put our Permian marketing strategy up against anybody's. First, as Clay indicated, for the fourth quarter, our Delaware production realized WTI minus $1.44 inclusive of our Midland basis swaps. However, our Williston barrels were sold, as Clay indicated, at WTI less $9.85 as a result of a significant refinery outages in those markets. We have estimated that our fourth quarter earnings were negatively impacted by $20 million to $25 million, had the basis differential settled closer to October's number.

During the first quarter, as Clay indicated, we have seen those differentials come back in dramatically. But regardless of the short-term pricing conditions in Williston, both basins delivered robust production growth year-over-year. But as we've emphasized, our story isn't about increased production, it's about the improved balance sheet strength, quality of the assets and the WPX people. Back in 2016, we committed to driving our leverage below 2.5 turns. As you should expect, we kept our word. Today our leverage on a 12-month trailing basis is below the goal we established then. In fact, our leverage is right at 2 turns when you annualize our fourth quarter results. Meeting this commitment is a true reflection of how we meld our strengths at WPX to deliver on a very prescribed and intentional financial strategy. Our operations and financial teams work hand-in-hand in developing our financial and operational goals. Our WPX team collaborates, and we all understand the importance of hitting those goals. We've conquered leverage. Now the next step is to spend within cash flows and start returning capital to shareholders.

With that, let's turn to Page 9 that gives a detailed picture of what our portfolio accomplished in 2018.

For the quarter, at 96,000 barrels per day, our oil production is 49% higher than for the same period of 2017. This oil growth was fueled by a 55% increase in our Delaware production, together with the 44% growth in Williston volumes. For the full year, our oil growth -- our oil production is 57% higher than last year. Again, this growth was not achieved to just put production numbers up on the scoreboard. As we have previously discussed, these results were the outcome of the leverage goals we established for ourselves. Again, I'm pleased to say that more important than any production goal, we hit our leverage target. However, you don't always make more money just because you're producing more barrels. WPX has been and will continue to be focused on increasing our margins per barrel. That formula includes everything from how we protect our basis differentials, operate our wells and manage all of the costs across the company.

We were positioned for the growth that we have seen over the last couple of years. We have our eyes now focused on spending within cash flows and driving our leverage even lower. At nearly 205 million cubic feet per day, our natural gas production for the fourth quarter increased 67% for the same quarter of 2017 and up 77% for the full year.

Our NGL production hit over 26,000 barrels per day, up 109% versus the same quarter of 2017. For the full year, we produced over 18,000 barrels per day, which was up 84%.

At over 156,000 equivalent barrels per day, our production is 61% higher than for the fourth quarter of last year and at 127,000 barrels per day -- equivalent barrels per day, we are 64% higher on a full year basis. Again, as Rick and Clay have discussed, this year was such a pivotal year for us. We are now reaping the benefits of the Delaware acquisition we made over 3 years ago. I knew it was a big bite at that time, but we also had a vision as to where we were going with these assets and what these assets would mean for our shareholders. We stretched into our capital structure then and made all the necessary decisions to grow into it. We are there now and still have years of running room.

For the fourth quarter, we are reporting an adjusted EBITDAX of $306 million, which is $94 million higher than for the fourth quarter of 2017. The nearly $1.1 billion of EBITDAX was $511 million higher than last year and approximately $750 million on an unhedged basis. We have great assets and a great team here to execute on them. We did see some increase in our cash operating cost, inclusive of lease operating expense, gathering processing and transportation and production taxes. On a per unit basis, these costs went from $9.51 in 2017 to $11.54 per barrel this year. However, our GP&T rate increase was driven primarily by the adoption of ASC 606, which is the new revenue recognition accounting standard. The impact to GP&T for the standard was $1.11 per barrel. Many of our peer companies will not have the same impact depending on how they ultimately market and sell their production. These higher GP&T costs are offsetting revenues. As far as other costs in the system, our G&A and interest expense both went down dramatically on a per unit basis. Our interest expense was almost half of the previous year at $2.75 per barrel.

For the quarter, we are reporting an adjusted net income of $9 million versus a net loss of $12 million in 2017. The improvement was driven by the same factors impacting adjusted EBITDAX, but also impacting those numbers was $235 million of higher depreciation, depletion and amortization in 2018. The higher absolute level of DD&A was driven by the higher production volumes. However, again, our DD&A rates continue to fall as we move -- as we drill better wells at lower cost.

Our capital expenditures incurred for the fourth quarter totaled $436 million. On a year-to-date basis, our total CapEx of $1.5 billion includes $65 million of land acquisition cost, $80 million related to midstream development opportunities and $27 million related to discontinued operations that was reimbursed to us in conjunction with our San Juan sale. As Clay indicated, our CapEx was a little higher than anticipated this year. The drivers of the increase were higher-than-anticipated nonoperated activity in the Delaware resulting from higher oil prices during the year, build-out of infrastructure that will benefit future development and a slight acceleration of Williston activity while there were favorable weather conditions.

Turning to Slide 10. We released our revised plan for 2019 a few weeks ago. This new guidance was our update to the initial 2019 plan we showed during our third quarter results presentation. At that time, oil prices for 2019 were trading near $70 per barrel. We indicated that we would make the right decisions if we were to see a decline in oil prices. Our new guidance demonstrates our discipline to spend within cash flows and the strength of our assets, even in a $50 crude oil world. We reduced our capital guidance by $350 million, again managing the business to spend within cash flows and still growing our oil production at 20% year-over-year. At strip pricing, we are generating free cash flow and this is the next step in the evolution of WPX. Also, even with our strong fourth quarter 2018 oil production, our fourth quarter 2019 is expected to grow between 5% to 10% over those results. You can only accomplish these results with good execution and good assets.

So over the last couple of years, I've answered a lot of questions regarding our leverage. Not only did we guide leverage lower this past year, we reduced our senior debt by nearly $500 million and restacked our debt towers, resulting in no maturity until 2022.

With that, I will turn it back to Rick for some closing comments.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [6]

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Thanks, Kevin, nice job. I appreciate you and Clay's comments this morning. As most of you know, I care very deeply about our industry. I care about the men and women who invest their life to help our nation and others enjoy a quality of life that's unparalleled. I have a core conviction about the fundamental importance of what we do. Here at WPX, we also care about advancing our expertise, delivering the right results and fulfilling our vision. This is our mutual responsibility to all our stakeholders. And to that end, we're going to publish our ESG report online before the end of March. It will highlight the people and practices that make our energy production and development happen in a socially responsible manner. You'll hear about drones, water recycling, gender advancement, talent retention and gas capture. These are the themes that will help contribute to our continued success. It's how we delivered 57% year-over-year oil growth in the last year. It's the foundation of how we will lower cost and increase margins. It's also how this team will continue to not only maintain but even grow our credibility over time with the investment community and all stakeholders.

At this time, we can now open the lines for questions. And I'll turn it back over to you, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Derrick Whitfield with Stifel.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [2]

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Congrats on your capital disciplined outlook. In your prepared remarks, Rick, you noted the return of capital to shareholders in 2021. Would it be fair to assume that WPX will target free cash neutrality in 2020 as you look to moderate spending to further lower your base decline?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [3]

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That is absolutely true, Derrick. Yes, we are laser focused on that and we think that just can be fundamental for us being able to deliver on our goal of returning cash to shareholders in 2021. So 2019 and 2020 are important years for us, and we feel very, very good about it.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [4]

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And then perhaps for Rick or Clay, you guys have historically been ahead of your peers in navigating through bottlenecks in the Permian. As you think about your next 3 years development activity, what gives you the greatest concern as it relates to your operations?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [5]

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I don't think it's -- from my perspective, I think it's less about the midstream kind of, essentially downstream from where we we're at. I think a lot about a little bit upstream from where we're at. And I think, okay, we're sitting right there in the epicenter, we got the right plot, we got the right team, we've handled some of the midstream constraint issues, I think we're really well there. You move one step upstream from us and start thinking about service company availability, people, supply of the commodities we use like sand and water. We recently closed the deal to purchase the surface acreage over some of our most precious Stateline acreage. I can't tell you how beneficial that is to our operations. It is a forward move for us to make sure that we maintain full control of our ability to create the most value from that subsurface resource. So those are some of the moves that we're making. It's a little bit more, I think, a vertical integration in a sense, but we're moving kind of upstream from where we're at to make sure that we're protecting our ability to execute.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [6]

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I think from my perspective, we think a lot about this country, and I think we need to make sure -- I feel very good about oil export capabilities. I feel really good about our natural gas export facilities, but we just need to continue to focus on that and be able to meet the world's demand for natural gas, and I think these LNG facilities around the country will continue to be important, so have to help keep those on track.

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Operator [7]

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And our next question comes from the line of Brad Heffern with RBC Capital Markets.

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Bradley Barrett Heffern, RBC Capital Markets, LLC, Research Division - Associate [8]

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Just as a follow-on to Derrick's next question on 2021, as you said in the prepared comments, that strip you guys will be cash flow positive this year and presumably in 2020 as well, so is there potential for that target to move forward if there's commodity price upside? Or would those proceeds be reinvested in some way?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [9]

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I think we will be very thoughtful. I think there is the possibility of that, but I think at this point in time, we all had somewhat of a head fake, if you will, on commodity prices in the last 6 months. So where we sit here today, I think we're going to target 2021. We will be looking at the fundamental cash flow generation, and obviously, if we have underestimated uplift of the commodity pricing, we're not going to totally rule out that we would adjust that. But right now, I think, it's probably the most prudent thing to plan for.

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Bradley Barrett Heffern, RBC Capital Markets, LLC, Research Division - Associate [10]

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Okay. And then, I guess, any update on plans for the Howard JV post the second train being built out. I think in the past, you talked about potentially doing drops into that vehicle. Just any thoughts on the purpose it serves sort of after the near-term build-out is done?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [11]

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Yes, we continue to be real pleased with that partnership. We've got a great partner that operates the business. I think we're very aligned. We've been able to attract some third-party business as well, which is something that we always thought would be a little bit more of a struggle under the WPX flag. And so that's worked out really well for us. After the second train comes on, of course, there's plans on the drawing board for the third train, but we want to be real thoughtful about that. As we watch our growth, we are 50-50 heads-up on that capital investment. So we have direct skin in the game to make sure that we are investing prudently and looking at all the options as we attempt to attract third-party business and then, of course, grow our own equity position as well.

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Operator [12]

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Your next question comes from the line of Neal Dingmann with SunTrust.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

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Rick, Clay, my question may be a little bit of a tail on that last question. Just overall, could you talk a little bit about just the timing and magnitude remaining in your midstream around potential monetizations and all, you certainly seem to have a lot of value there, still locked up. And I don't know, how much more you can say about, is it any concern? Let's just look at '19 about potential timing or magnitude of any potential monetizations and all.

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [14]

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Neal, I think the only thing we've kind of tipped our hands on in '19 is around the Oryx equity position. Again, we don't operate that, and so we are -- we've indicated that we would follow the lead of the operator most likely. Don't have a clear expectation on the timing, but we would -- we hope that that's a potentially second half '19 event, but again, we'll have to wait and see on that one. Beyond that, everything is -- there's a lot of other things that are certainly within our control. I don't anticipate a whole lot in '19. The first thing that Kevin is always thinking about is, use of proceeds. What do we do with -- what's our motivation to do so? I think there's a -- the right time to sell that aligns with the right buyers showing up, but also the right use of proceeds. So we think about some of the other things that are kind of in our portfolio. All of the water infrastructure has tremendous interest these days, we handle over 200,000 barrels a day just in the Stateline area, water disposal wells, the gathering, the recycling, the supply. It is a very robust business. Not ready to hand that over, but we're certainly listening to a lot of discussion right now, a lot of interest. The gas gathering position inside of Stateline once again, that seems to be a natural fit with our JV partner, but we haven't made that move yet. I mentioned in my prepared remarks that our Sand Lake area that we're going to be sending that to the Stateline processing, that is a really a nice deal for us. Outside of that, we still have Rustler Breaks that we have some options around, we haven't committed to. But I think, we are considering options there. And then, of course, the Haley area was a little bit more dispersed, but we have some opportunities there as well. So we'll continue to look at the opportunities. Is it something we roll up into one bigger package? Is it something we really want to hold onto? Make sure we're watching our margins as best we can? Or is there an opportunity to partner versus an opportunity to monetize cash out? Yes, as we've shown that we have the willingness to do before, I would say, those are the options that Rick was really talking about that we're not singularly looking in one direction or another.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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Sure. And then, my follow-up just on CapEx. You mentioned and I think Kevin even gave more details on maybe why you ran a little hot for 4Q, but wondering in the '19, in your guide there, when you look at sort of those 3 things, the nonop to midstream and sort of the Bakken in general, I guess, will that normalize? Or maybe some of that, that you spend in 4Q could make maybe estimates this year a bit -- end up being a bit conservative?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [16]

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Yes. I think 2 things were at work, Neal. One, we have a really good handle on where we're at trajectory. Already the numbers that are rolling in from January give us very positive indications. And then, remember we're at a significantly different market in Delaware today than we were for most of '18. The inflationary market, I mean, things just kind of nip at us from every direction. We're always seeing those -- that momentum shift significantly. Our well costs are coming in materially different. The build-out work that we've done, Kevin alluded to, some of the infrastructure, that's fundamentally important. When you're building out a 3-mile pipe to a new well, a single well, that hits that well really, really hard. But the next 20, 30, 40 wells that benefit from that piece of pipe, essentially it's already carried into the prior capital. So as we continue to scale up our position, we move to longer laterals, more multi-well pads, to continue that things become much more efficient on a relative basis and we expect to see that throughout 2019.

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Operator [17]

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And our next question comes from the line of Leo Mariani with KeyBanc.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [18]

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Wanted to follow up a little bit on the spending trends here. Just in terms of the way 2019 plays out, should we sort of assume that your first quarter is kind of a high quarter for CapEx as you guys unwind some of the activity, and maybe start to benefit a little bit more from some service cost reductions in subsequent quarters? Can you kind of tell us about the way it's going to trend?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [19]

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Yes, I think that's a great way to say and think about it. This -- everything we're talking about today is kind of predicated on this $50 to $55 commodity price environment. We've baked our forward-look in a $50 world, cash neutrality and all of that. So assuming that is the case because I would build the caveat in there, we're back into a $70 world in 6 weeks, things change pretty abruptly. But assuming we are in that $50 to $55 world, yes, we see the numbers rolling down. We have deals in place. We're changing out vendors. We're renegotiating agreements and those don't fully materialize -- we're not fully materialized in the first quarter. So expect that there would be a step down in the first quarter and then another step down in the second and probably a leveling in third and fourth assuming, once again, a relatively stable price environment.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [20]

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Okay, that's certainly helpful on the cost perspective, but just in terms of the activity perspective, are you kind of seeing similar trendology as well on activity, not just the cost piece?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [21]

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Activity, we stepped down rig count, we've stepped down proportionately the completion rigs -- the completion crews. And so you'll see probably a little higher spend in that regard again in the first quarter. That will be fully worked through in the first quarter, and I would say, it be relatively flat from an activity basis for the remaining periods. Now how that translates into production? We actually expect kind of a reasonable -- we talk about a 5% to 10% exit to exit. I think, if you draw a relatively straight line, obviously, you get some benefit later in the year, but we should see some steady improvement in that regard throughout the year.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [22]

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Okay, that's very helpful color for sure. And just wanted to shift a little bit to the potential acreage purchase side. Obviously, you guys have sold some assets here recently with other plans to hopefully execute on Oryx II, I guess, later this year. Just wanted to get a sense of whether or not, you guys are seeing potential available bolt-on acreage out there? And you still have a mind that if you are able to get more asset sale proceeds later this year that you would use some of that for bolt-ons? What can you kind of tell us about that piece of it?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [23]

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Yes, I'd put it a kind of 3 buckets. We've talked quite a bit and bragged on our team on the trade that we've been able to do. Those are typically $0 trade opportunities. We're full speed ahead. We haven't slowed down one bit. We continue to make really good progress on that. Second category is, which you call bolt-on acquisitions. In my mind, that is essentially relatively adjacent acreage, either maybe, (inaudible), you've got it above existing acreage we already own or maybe right in line with existing infrastructure and already the economies of scale that you have running. That makes a tremendous amount of sense. Usually, we can often justify that much better than anyone else around, and we watch that very closely as those opportunities, they're rare, but when they do come up, we certainly want to be involved and aggressively consider those. The third piece. Because some people consider bolt-ons like a panther deal. I wouldn't consider that a bolt-on, that is a material piece of business. We look very often and very diligently in all those deals. Bryan Guderian's team is still in place. The team that's done this tremendous work to get our position in place, they continue to look. The challenges, the bar has continued to raise time and time again. And so you've seen us over the last couple of years, not do one of those deals. It's not because Bryan's team is on vacation. Those guys are working as hard as ever. It's just the motivation for us, and the bar is just very, very high for us to get a deal done. When you see us do a deal, it will be -- you'll know that it's met those thresholds and something we're very excited about.

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Operator [24]

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And our next question comes from the line of William Thompson with Barclays.

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William Seabury Thompson, Barclays Bank PLC, Research Division - Research Analyst [25]

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Maybe for Clay, can you talk to the main drivers of capital efficiency gains associated with being able to cut CapEx 23% whereas the November guidance was only a 6% impact on '19 production? I assume some of the production is sticky as it carries from the second half of '18, but given how E&P budgets team to be second half loaded and the relative fluid nature of service pricing agreement, how much visibility do you have in terms of well costs? Obviously, you're switch to a local sand as a meaningful structural benefit, but -- and you've highlighted the improvement in frac crew efficiencies, but hoping to just get a sense on the amount of conservatism, if any, baked in the '19 budget?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [26]

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Yes, I appreciate the question. I will put it in kind of 2 different categories. First of all, when we initially rolled out our guidance on November 1, the last call, we assumed a 5% to 7% inflation on top of the inflation that we already experienced in 2018. Remember that was a different price environment, and we wanted to make sure, because we had been hit pretty hard on inflation throughout the year that we maintained kind of an ability to stay out in front of that. So with our updated guidance, instead of inflation, we actually believe and we see the deflation start to kick into place. Also it became clear and clear throughout the year that even in a more hot activity, the hydraulic horsepower just really is generally oversupplied as is local sand. I think those are 2 of your biggest ticket items. 2018, we saw inflation. 2019, we are truly seeing a deflation in those 2 pieces of business that drive down a material part of your overall spend. As the earlier question indicated, we will step down throughout the first quarter of '19 and are probably fully materialized sometime in second quarter and fully baked in third and fourth.

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William Seabury Thompson, Barclays Bank PLC, Research Division - Research Analyst [27]

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That's helpful color. And then you guys indicated that about 80% of the Delaware oil volumes will be linked to international Gulf Coast pricing versus 55% in '18. Correct me if I'm wrong, but I think the old slide deck had indicated close to 50% of 2019 volumes will be linked to Brent and Gulf Coast pricing. I assume the lower volumes versus the November guide has skewed the mix a bit higher, but maybe you can comment if there's any new arrangements in place that help to increase your exposure with the premium benchmarks?

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Greg Horne, WPX Energy, Inc. - VP of Midstream & Marketing [28]

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This is Greg Horne. I think, one part of your question is accurate, that the lower volumes probably result in a little bit higher level of exposure to international and Gulf pricing. But the team has continued to work and to get out in front, and we do anticipate that the new P66 Gray Oak line will come on a little bit early, so that helps to clear more volumes towards those markets down the Gulf.

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Operator [29]

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And our next question comes from the line of with Gabe Daoud with Cowen.

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Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [30]

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I guess, just a little bit more on vision '21 and if you could just share some guideposts around 2020 in terms of growth and capital and costs or even just the price tag. I think you mentioned earlier it's above $50, but just any more clarity on the business through '21 would be helpful?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [31]

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I think we just laid out our 2019 guidance and you see the year-over-year 20% growth. I think that's going to -- we'll watch commodity prices real closely, I can assure you. We're hedged nicely. I think we got a good fundamental foundation, if you will, so that -- Kevin, you pitch in if you need to -- that we have protected the downside. And when I say downside, it's about ability to maintain cash flows, so we stay above our debt metrics that we have here internally. And so we feel good about our '19. As a matter of fact, we're very excited about our '19 program and what we can do. I think as we get into '20, it may be a little bit early to be giving really, really strong specifics around that. Our outlook is good. We've still got certainly double-digit type growth numbers planned. That should not be a problem based on current strip. And so the (inaudible) I think for the ability like we've announced that we'll be able to get some cash back to shareholders. So that's probably a prudent amount of clarity to provide today, and we'll see how 2019 plays out, and we're very optimistic that 2019 is going to be a tremendous year for us.

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J. Kevin Vann, WPX Energy, Inc. - Executive VP & CFO [32]

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Yes, Gabe, this is Kevin. And it's probably a little bit too early to give too many specifics around 2020, but I can say that if you look at the current strip pricing through 2020, together with even just a flat rig count, we still -- we will still see some growth in 2020. And I would say, kind of low-teens, kind of what we would be projecting now. And I'm not indicating that we're going to keep -- that's not an indication of what our capital plan will be for 2020, but when you think about the cash flows that can be generated throughout 2019 and 2020 by keeping the flat rig count, you can see how it sets us up for a potential return to capital in 2021.

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Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [33]

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That's really helpful. Just a quick follow-up and clarification, I guess, on volume trajectory throughout. 2019, I guess, maybe more specifically and it's maybe a little too focused on near term, but just how do I think about like 1Q relative to 4Q just from a volume standpoint and then, obviously, the rest of the year?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [34]

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Well, we're real pleased with the 4Q number. I think, the Street was 93,000 barrels a day, we were 96,000. We've maintained the 5% to 10% exit-to-exit expectation. We haven't given quarter-by-quarter, but I could tell you, I mean, if you just kind of draw straight line between here and there, I think it gives you a pretty good feel for where we're at. So don't expect a -- what we're really working hard to do is, keep our 2019 momentum positive such that we're setup for a really strong 2020 and beyond. What we didn't want to do was pull back on capital. You can monkey capital in a lot of different ways, front load, drop all the rigs. Capital number goes way down, and guess what, you've got a tailing production in the fourth quarter of '19 that would be detrimental to 2020. We stayed away from that. We were really thoughtful about where we put our rigs, how we aligned our rigs, and we should expect -- you should expect from us pretty steady growth throughout the year and that really sets us up quite well. One of the prior questions I forgot to answer along the way was the momentum from '18 into '19, I think, the question was dialing back the capital, the production didn't seem to impact very much. Well, we all know that year 1 production associated with year 1 capital, there's a positive correlation. But that year 2 production associated with that year 1 capital is a massive increase. And so 2019, we're still benefiting from the strong investment we made in '18. What you'll see is that as we pull down '19, we want to make sure that we didn't detrimentally effect '20. I think we have it structured in such a way that you'll see some really nice steady growth quarter-to-quarter and year-over-year as we really are thoughtful about how to craft this capital plan.

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Operator [35]

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And our next question comes from the line of Mike Kelly with Seaport Global.

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Michael Dugan Kelly, Seaport Global Securities LLC, Research Division - MD and Head of Exploration & Production Research [36]

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Rick, you mentioned in your prepared remarks that you thought the upside in your midstream assets really wasn't being recognized in the stock. I was hoping maybe you could just kind of give us your -- of what you think the Street might be missing here? And what the real opportunity set is?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [37]

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Yes, Mike, great questions. What do we think about a lot and how do we efficiently articulate that? I will say that if you talk to quite a few highly regarded third-party entities, banks or financial advisers kind of companies, most of them will tell you that their view of our midstream assets were somewhere in the $1.5 billion range. When I look at that and I look at how we're trading against some of our peers, with our multiples, I don't see that value in there. Now I know it's incumbent on this management team to continue to beat the drum and monetize or try to realize that value over time. I think most recent one was WhiteWater, where we're very pleased with how that turned out for us. That was a great investment, in that monetization was a nice deal. So it's up to us to continue to do that, but what we want to do is make sure that near-term investors don't overlook this value that we have embedded in our company. And it certainly just appears that that's the case, and when you put that, that kind of value out there, you can see on a per share basis -- dollar per share basis, that's -- there's some upside here. That's real upside.

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Michael Dugan Kelly, Seaport Global Securities LLC, Research Division - MD and Head of Exploration & Production Research [38]

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Yes. I appreciate you clarifying that. Good answer. Clay, turn it over to you on the Delaware. I was just hoping that you could just give us what well costs are at right now for an average well out there, just Wolfcamp A or Bone Spring? And where you think this could ultimately turn throughout '19?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [39]

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Sure, I'll give you a little bit of color on that. As we troughed in 2016, I will use a Stateline 1-mile Wolfcamp well as kind of a proxy. So in that trough and call it mid-2016, we were about $5 million to $5.5 million drill complete and equipped wells. So that's facilities all the way through the meter there. That peaked in 2018 about $8 million for that similar well. We're already realizing and seeing in 2019 probably about a $7 million equivalent for that 1-mile well. I think by second half of the year, I think there's upside beyond that. To scale that up into the longer laterals, our numbers for 2019 are $7 million for 1 mile, $8.5 million for 1.5 and then for 2-mile well, $10 million. And that's again state-of-the-art pushing 2,500 pounds per foot on sand really being aggressive. This is not getting chintzy on the completions.

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Operator [40]

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And our next question comes from the line of Irene Haas with Imperial Capital.

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Irene Oiyin Haas, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [41]

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Question on your Wolfcamp versus your Third Bone Spring wells. I'm noticing that these are nearly strong and oily wells. And can you give me a little color on the lithology of the Third Bone Spring? Is it a shale silt or lime? And how extensive would display extend? And are there other landing zones?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [42]

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Yes, it's a great question. It's actually -- the Third Bone Spring has a shale component, a sand component and a lime component. We think you might have noticed I referenced the Upper Wolfcamp. I was trying to articulate how I say the upper A, lower A, sometimes B and X/Y. It's 1 flow unit. So as we land the different intervals, it's different for different parts of our development area. But we are trying to make sure that we're thoughtful about the entire flow unit. What's hydraulically connected to make sure that as we land these wells and we put these wells online that they're positively benefiting from one another. Okay, as we move to the Third Bone Spring, we have tested a few of the different horizons in the Third Bone Spring, but I can tell you there are several more. I don't have an answer yet on how many landing zones, how we'll ultimately stack and stagger these wells, but that's what we're working on and that's where we're investing about 15% of our Delaware capital to really understand that. These are just typical. The last 3 2-mile wells that we've drilled, different parts of Stateline, different landing zones and they're quite phenomenal. So more information to come on that, Irene. Really good question.

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Operator [43]

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And our next question comes from the line of Kevin MacCurdy with Heikkinen Energy.

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Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [44]

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I wanted to ask specifically about the nonop CapEx. It ran high in 4Q '18, but nonop was an area you targeted for reductions in 2019. Do you see any potential knock-on effect for 4Q that could lead to higher '19 nonop spend?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [45]

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Yes, I think the -- obviously, it's directly proportional to everyone else's activity. It's one of the harder numbers to predict. We have regular dialogue with all of our main players, but it's the opportunity as an operator to change your mind throughout the year. And what we saw in late last year, we got some nonop come in pretty strong in the fourth quarter. As I mentioned in my prepared remarks, we had a promoted deal kind of in the works, that was going to be a really nice opportunity for us. Essentially, maintaining most, if not all of our value opportunity without having to fund the capital. As prices came down, that got pinched. I think there is a new opportunity kind of reset the bar on that, and I think we'll continue to look at that as a financial lever to moderate and really wash that nonop capital as it comes out.

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J. Kevin Vann, WPX Energy, Inc. - Executive VP & CFO [46]

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Yes, I think as we were working with the partners over the month of January, as they had submitted -- some of them had submitted some of their 2019 plans, and with the pullback in commodity and pullback in oil prices, we're seeing some of them start to pull back in the amount of nonoperated activity that they had originally planned for. So again, as Clay mentioned, I think it's just commensurate with the commodity price environment, and we're out a little bit ahead of maybe some of these promoted deals, if that activity were to start to pick up again.

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Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [47]

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Got you. So higher prices mean that you'll spend less on nonop because of the promoted deals?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [48]

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No, not necessarily. I think higher prices would be higher activity. Now what we do with that activity if we're able to manage it in our budget and it's the right business opportunity for us to maintain that investment, the first thing we look at is, do we want to participate or not? I can tell you the Delaware Basin and the Williston Basin where we're at, the answer is always yes. These wells are phenomenally economic. The pinch is wow we're running hot on capital, how do we maintain the capital discipline and yet not just pass on this incredibly value-creating opportunity. So we've looked to external parties to fund these and that's where -- that's what we did in the fourth quarter, that's why we've reengaged this year. How that materializes? It really depends on how the deal looks to us and what's the best option for us considering all of business objectives.

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Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [49]

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Great. Do you have an estimate of how much production in the Delaware comes from nonop versus operated activity?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [50]

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About 3,000 to 4,000 barrels a day.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [51]

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So it's less than 10% is what -- 7% or 8% of your total production?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [52]

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Yes, something like that?

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Operator [53]

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And our next question comes from the line of Jeff Grampp with Northland Capital.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [54]

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I got a question maybe for Clay in reference to the science work that you guys are doing on the Pecos State area. The press release references seeing some cost efficiencies there, but wasn't any reference to productivity improvements. So I was wondering if any of that science work is helping on the productivity side, especially in light of that strong 4-well pad that you guys announced last night?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [55]

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Yes, the direct correlation on productivity. We're trying to be real cautious about dipping our hand too much. Obviously, we spent some pretty significant investment dollars and effort and some of our brightest employees have really spent a lot of time understanding what the Pecos State information is telling us, so we don't want to necessarily give all of that away. Here's what I can tell you. We saw things real-time that immediately changed our understanding of the best ways to compete these wells. It coincided with cheaper ways and more efficient ways to complete these wells. We're not cutting sand, like we're just shutting off some of the things that we've worked hard to get to. It's a whole lot about perforation strategy and how to pump the wells. The actual pumping procedures, nuances around that, how much rate and pressure are your drivers for hydraulic horsepower just -- that's just the math and that's how we get charges through hydraulic horsepower. How we can leverage that information in renegotiating vendors as they come in, say, look, this is the recipe we're going to be using. How would you bid aggressively on this scenario? That is really where we've seen a step change, and I truly believe we'll not only see a step change in speed and cost, but also well performance.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [56]

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Got it. That was really helpful. Appreciate that. And for my follow-up, on the recycling water side, you guys referenced some pretty meaningful cost reductions in the slide deck. I was hoping to maybe get a little bit more detail on what you guys have done over the last year or so to obtain those reductions? And do you guys really view a wider implementation of that? Is that more an economic threshold decision for you guys? Or is it more operationally getting the facilities in place to facilitate a wider amount of recycling done on your asset base?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [57]

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Yes. So it's -- first and foremost, it's the right thing to do. We're always looking for that opportunity to recycle, reuse. But throughout the course of the year, we've driven so much improvement in the cost structure. It's also substantially, the economically right thing to do. So that combination really pushes us to do more. When you have the benefit of the Stateline where it's such a concise contiguous piece of acreage, that's where the economies of scale really work well. And so we've built a very significant infrastructure throughout '18 recycling ponds, storage ponds, distribution networks are piped and that will continue to benefit us in years to come. Now I should say, we're also wide open to third-party ideas. We realized we have the discipline to know that they are other smart people out there working exclusively on water, and we're in regular communications with them and want to make sense to farm some of that out. We do that as well. We have great partners in the area, and we'll continue to leverage those as opportunities present.

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Operator [58]

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And our next question comes from the line of Nitin Kumar with Wells Fargo.

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Nitin Kumar, Wells Fargo Securities, LLC, Research Division - Senior Analyst [59]

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Clay, this one is for you, really. Can you just walk us through the development strategy in the Williston right now and I'm thinking spacing zones, et cetera. Just referencing those 2 child wells that did underperform? And if you could comment on the inventory life remaining in that basin?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [60]

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Yes, sure, I think the question really coming off of a phenomenal last couple of years in Williston and exceptionally good performance in the North Sunday Island. We're always cautious, may be a little too direct on saying what guys, these are 23 wells, please don't judge the rest of our -- the balance of our inventory based on the performance of these North Sunday Island exceptional wells. I think there was a concern from the market that, is that step-off a little bit? Or is that step-off a whole lot? I think what we're showing both last quarter and this quarter is the "step-off" as you come from the North Sunday Island to essentially most of the rest of the inventory, it's still pretty damn good. I mean, it's really good. As we go from up in the northwest some of the pads that we showed all the way to the most southern acreage in Howling Wolf, I think you blend all that together. It gives you a great feel for what we're going to be doing for the next few years in the area and it stands up exceptionally well. Specific to the 2 wells. They were immediate offsets. This was a 2013 parent well, inferior completion. I'm not saying it was at all state-of-the-art, but certainly, it's had several years to impact that immediate drainage in the area. So we drove those kind of regular spacing, regular completion, knowing that they would be most likely negatively impacted by that old well. They were. We see it in pressure. We see it in rates. But I can tell you, I mean the way we've flowed those back, given the trucking constraints, I'm not at all overly disappointed. And it should be noted we don't have a whole lot of those remaining in the inventory. We typically have 1 well holding these positions typically scooted way off to one side, either east or west of that drilling spacing unit. So maybe you have 1 well out of the 6 to 9 remaining wells in that DSU. But again, we talk in terms of averages. When you average all those curves together, even just looking at the Howling Wolf, I'll take it every single day. It's a phenomenal investment opportunity for us.

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Nitin Kumar, Wells Fargo Securities, LLC, Research Division - Senior Analyst [61]

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Great. And just on the -- maybe I can roll 2 things into 1. On the marketing side, with the 80% linked to Brent and MEH, could you give us a breakout of how much of those volumes are really going to Brent market versus just the Gulf? And then just on the service cost side, I think, if I remember in 2017, you had locked in service costs for a while. You were taking advantage of some weaker pricing. Are you seeing an appetite to lock in some prices for '19 or a little bit longer as well?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [62]

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Yes. First question on the commodity. I mean, the sales mix. We don't want to go in much more detail than we already have. The follow on to the service cost -- since it's a 2-part question, completely unrelated, I like the way you're working that. I would say some areas we are very successful in locking in longer-term agreements. Think of rigs, some of the other -- more -- the businesses that are more established that way. We've tried a number of times to lock in frac fleets in various forms. And I can tell you just we've not been successful in doing so. Either, we end up too far on one side or the other, the service companies in the opposite position, and we end up having to renegotiate, just to kind of keep each other running along. Our best approach, most successful approach has been to pick companies that we know their management. We understand the professionalism of the organization. We treat them like a partner. They treat us like a partner, and we work to maintain -- to make sure that we are in line with market overtime. As long as they're in line with market, they're doing a good job. They have the right safety mindset for us. We'll continue using them and that's -- in this market, that is a huge win for them to make sure their equipment is up and running and not just parked against the fence line.

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Operator [63]

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And our next question comes from the line of Subash Chandra with Guggenheim.

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Subhasish Chandra, Guggenheim Securities, LLC, Research Division - MD and Senior Equity Analyst [64]

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Clay, probably for you. For optimal development, what do think you might need in terms of rigs in the plays?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [65]

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You're talking about both basins, Subash?

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Subhasish Chandra, Guggenheim Securities, LLC, Research Division - MD and Senior Equity Analyst [66]

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Yes, I think what is it 5 and 2 right now or soon to be?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [67]

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5 and 3 right now. That's what we're going to run in 2019. I think Williston, obviously, we could run more, but we are very transparent about our -- the amount of inventory we have. I think, optimally, it's probably 2 to 3 rigs. That gives us the right balance. The reason we elect to stay with 3 is that organization is running at such an efficient pace. The ratio of rigs to frac fleets, the scale and the people that we have in place, it just -- it works exceptionally well. They are also benefiting from being outside of the very, very hot Permian Basin, so they're not seeing some of the inflationary items and things like that. Shift over to the Permian for a second. We have seen inflation. We elected to step back a couple of rigs there. I can tell you the momentum what we are seeing on the cost structure already gives us really good indications that when the time is right to add rigs, we are ready to do that in the Permian. The original question was back to, what's the optimal rig count? Man, for the Permian, I can't give you a account. I can give you a pace. What I would say is a reasonable growth pace for rig count in the Permian for our position, I would say, is maybe a couple of rigs every 6 months. That is probably on the high end of how we would attack it. Now that -- Kevin is looking at me like what the hell are you talking about. Yes, I'm not saying we're going to do that. Let's just be real clear. The growth -- that's kind of an aggressive growth scenario. In reality, the way it would work when the time is right, Kevin says, get the greenlight and let's go make it happen. We had a couple of rigs. We watched that for 6 months and things are going really, really well. We added another rig. If things run really well, we'll do it again. In reality, we would probably pause, let those digesters rigs built our infrastructure, make sure we have our teams right. Where that peaks out optimal rig count, it's a pretty staggering number. We can handle a hell of a lot of rigs. Rick and I both run dozens of rigs easily at times. I don't see an absolute number constraint anywhere close to where we're at.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [68]

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Yes, Subash, one thing, Clay, he touched on, but I think it's also an important point, I want people to take away and that is, on the infrastructure side, if you look at our last 12 months, you would see that this -- our oil growth was phenomenal. We actually saw more gas growth and NGL growth and that is a direct result of us flaring less. We're getting more gas into the processing plants, and with the efficiencies gains that we're seeing regarding drilling times, completion times in the Permian, we felt like if we didn't watch it, we would lose that momentum of continuing to get even better and better with our gas capture. So I'm real pleased to say that our flaring continues to go down and that's a good thing. And -- but that team just needed a little bit of a breathing room, not only inflationary pressures, but I think just as important to me is the ability to flare less. And as Clay mentioned, the Bakken team is more mature in its -- their capital efficiency is incredible.

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Subhasish Chandra, Guggenheim Securities, LLC, Research Division - MD and Senior Equity Analyst [69]

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Can you just remind me the number of frac fleets you have? I assume there's 1 in the Bakken, and how many do you have in the Delaware?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [70]

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Yes, we have 3 drilling rigs in the Bakken, 1 completion crew -- frac crew running. In Permian, we have 5. Remember we were at 7 rigs, now we are headed to the 5 number. We currently have 2 frac fleets running there.

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Subhasish Chandra, Guggenheim Securities, LLC, Research Division - MD and Senior Equity Analyst [71]

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Got it. Okay. And my follow-up, I think I missed Kevin that he might have said that or used a term that you've conquered leverage. I'm wondering if that means in 2021, if we can read into it that delevering at least in terms of debt retirement is not the top priority?

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J. Kevin Vann, WPX Energy, Inc. - Executive VP & CFO [72]

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I wouldn't necessarily consider that the top priority. I think we just have to look at commodity prices at that time, where we are in relationship to the shadows in some of the -- our next debt maturity is in 2022. And when we think about returning value to shareholders, it is inclusive of paying down debt. So we'll be looking at all those opportunities. And I wouldn't say that any one of them at this point gets a higher weighting in terms of the probability in terms of how that happens. But again, all things are on the table.

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [73]

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And Subash, I'll just add a little bit. This is Clay. We were so proud to get to 2 turns because of where we've been, but don't see that as a finished line. I mean, we'll continue to drive that down. I mean, I think we have our eyes set on 1 to 1.5 turns as kind of the right eventual goal for us. So, yes, that is not mission accomplished just yet.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [74]

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We conquered our leverage goal.

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Operator [75]

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And our next question comes from the line of John Nelson with Goldman Sachs.

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John C. Nelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [76]

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All my questions have actually been answered. I just wanted to get one here. I think earlier in the call it was mentioned that the Gray Oak pipeline, you all expect to be coming on early. Just what is the timing of your all's expectation to kind of better clarify early?

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Greg Horne, WPX Energy, Inc. - VP of Midstream & Marketing [77]

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Probably towards the latter part of the year. Yes, I think it's -- we were hoping Q4 in general, but we'll have to see.

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Operator [78]

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And our next question comes from the line of Jeffrey Campbell with Tuohy Brothers.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [79]

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Rick, we've been talking a lot about future midstream monetization, but I was wondering about your thinking concerning the Reeves County and Eddy County assets going forward as Stateline continues to attract most of, if not all, of WPX' Delaware Basin capital with -- and now with additional economic zones to develop?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [80]

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Well, we really -- if you think about Reeves County, we have the Sand Lakes area. If you recall, we did monetize some of our outlying Reeves County -- Southern Reeves County acreage. We announced that a while back, and so I really like our cored up position. When you look at what we have there, it's just the inventory. And the pace of what we realistically in a disciplined approach, we'll not be able to get capital to -- we're feeling really good about that position. We do have some nonoperating small interest scattered upon the northern shelf. We'll continue to evaluate that, but it is an area that people have been pretty interested in. And obviously, with the oil cut both in Lea and Eddy County as high as it is, we kind of -- we like that acreage. So I think we'll continue to look for opportunities. Clay talked a little bit about bolt-on opportunities and land team does a good job of evaluating that. We're very well connected with industry partners and other industry participants and so we'll continue to evaluate what's the right scale for us.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [81]

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Okay. And I think this is mentioned earlier, but I just want to be clear. Are you saying that the southernly Williston Basin locations what you've been testing successfully are going to continue to attract capital over the '19, '20 time period?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [82]

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Yes, yes. Clay, I know Clay hit it on the head. When he started looking at those lower 2, people have a tendency to look at that, but I can tell you from a pad perspective, we're excited with what we're seeing down there. It is an important step-out for us, and actually exceeded our expectations from how we were looking at that area just another 12 to 24 months ago. And I think, it's -- it's really good thing. And we did mention that it is an area that will probably need a little bit more infrastructure over time. So how we develop that, the timing we get back in and do more active development down there is probably going to be a little later on, but something we're very, very pleased with the results.

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Operator [83]

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And our next question comes from the line of Gail Nicholson with Stephens.

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Gail Amanda Nicholson Dodds, Stephens Inc., Research Division - MD & Analyst [84]

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Just looking at the 2019 type well pad in the Williston of 14 months that $50 oil is very impressive. I was just curious what is the average payout time frame in the Permian '19? And how do you see that potentially improving over time?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [85]

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Gail, you caught me. I don't know that number. We don't -- I don't usually think in terms of payout. We put that kind of factoid together on the Williston just because it is quite impressive. Our overall returns are a little behind in Williston in the Permian. So I would push that out a little bit further. I would say within 2 years -- 14 months to 2 years. As I think about the cost efficiency that we are continuing to gain, the scale that we're gaining in the Permian and the immense amount of high-quality inventory we have, it just gets me really excited about the amazing business that we have and how it'll continue to pay dividends and grow substantially from there.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [86]

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Gail, it's Rick. I think that you mentioned the 14-month payout, I would think that it would be in at, as Clay mentioned that 20 to 24 months. One thing you need to remember is in 2019, we actually deployed some capital. We drilled a handful of wells and some acreage we ultimately divested down in the far Southern Reeves area. And from a capital efficiency standpoint, we pulled more of a higher percentage back to your Stateline where you get it better. So I want to guess that would -- could probably take you to that 18 to 20-month, but that's probably going to be pretty close.

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [87]

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Gail, some quick work by my planning group. It's about 18 to 20 months, Rick's got it, no doubt.

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Gail Amanda Nicholson Dodds, Stephens Inc., Research Division - MD & Analyst [88]

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Great. I appreciate that. And then just looking at these cryo facilities and the potential of maybe doing a third as well as the JV that you signed with third-party volumes to the second. Do you guys have -- when you think about that and amount of third-party volume that you want to go through the facility? Is it just -- or how we should think about that third-party volume wedge a little bit of time in the cryo?

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Clay M. Gaspar, WPX Energy, Inc. - President & COO [89]

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Yes, I think it's a great point. We talk a lot at the board level on our joint venture. It's an interesting balance. When you have the capacity, you justify it on WPX' equity position and you have an existing capacity and anything you can take as an off-load to fill that, it's almost pure profit. So it's wonderful opportunity. We have existing onload and off-load contracts and agreements with many of our surrounding players. And so we will continue to leverage that as a positive. So there's still a bit of constraint in the market. Now just finding that next $100 million to build that next train is a different proposition. Do we leverage some of those off-loads for our existing gas, our own equity gas or do we have enough critical momentum internally that we can essentially fund the project and then really make extra leverage in margins on that the third-party business? And so and then you get sometimes where a third party is willing to essentially underwrite some of that business as well. So it's a pretty dynamic conversation that we have. I can tell you I'm incredibly happy that we have one of great operators, but also to -- for us to be have a 50-50 partnership where we have continued to stay in that capital deployment, it's incredibly important for us.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [90]

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Operator, I believe that we'll wrap it up. We did go a little long today. I certainly appreciate everyone's interest, and we look forward to very exciting year, 2019, here at WPX. Thank you very much and, everyone, have a nice day.

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Operator [91]

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