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Edited Transcript of WPX earnings conference call or presentation 7-May-20 2:00pm GMT

Q1 2020 WPX Energy Inc Earnings Call

Tulsa May 9, 2020 (Thomson StreetEvents) -- Edited Transcript of WPX Energy Inc earnings conference call or presentation Thursday, May 7, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clay M. Gaspar

WPX Energy, Inc. - President, COO & Director

* David Sullivan

WPX Energy, Inc. - VP 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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* Brian Arthur Singer

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

* Brian Kevin Downey

Citigroup Inc, Research Division - Director

* Derrick Lee Whitfield

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

* Gail Amanda Nicholson Dodds

Stephens Inc., Research Division - MD & Analyst

* Harry Robert Halbach

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

* Jeffrey Scott Grampp

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

* Kashy Oladipo Harrison

Piper Sandler & Co., Research Division - Research Analyst

* Leo Paul Mariani

KeyBanc Capital Markets Inc., Research Division - Analyst

* Matthew Merrel Portillo

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

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* 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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Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 WPX Energy, Inc. Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to your speaker for today, Mr. David Sullivan, Vice President of Investor Relations. Sir, you may begin your conference.

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

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Thank you. Good morning, everybody. Welcome to the WPX Energy First quarter 2020 Update. We appreciate your interest in WPX Energy.

Due to the macro environment, we are changing the presentation format this quarter. Rick Muncrief, our Chairman and CEO will present the prepared slide presentation. Clay Gaspar, our President and COO; and Kevin Vann, our CFO; and other members of the senior management team will be available for questions after the presentation. On our website, wpxenergy.com, you can find today's presentation and press release that was issued after the market closed yesterday. Also our Q will be filed later today.

Please review the forward-looking statements and the 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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Thank you, David, and good morning to everyone who's joining us today. We appreciate your interest in our company, our first quarter results and our remarks. As you all know, events in our nation and throughout the world remain very fluid due to the challenges brought into society by the COVID-19 virus. We know many of you on today's call, especially in the larger cities in the Northeast have been affected by this in some way, via your family, friends or co-workers. Our thoughts are with you. Certainly, we've all been impacted from an economic perspective. Because of this, we've stressed the need for patience as the upcoming recovery unfolds.

For WPX, our immediate game plan is pretty simple. We're protecting our people, our liquidity and our balance sheet. As we sit here today, all 3 are quite strong.

No doubt, there are near-term challenges. It's been sobering. I've seen a great deal over my 4 decades in this industry, but nothing exactly like this. We're not alone, however, as virtually every sector has been impacted.

Today, we'll discuss what we've done so far, what we're doing next and provide some color on how we're thinking about the recovery and our future. While uncertainty remains front and center, our team has responded appropriately. I'm pleased with the communication and continued execution I see throughout the organization. Realized efficiencies, cost reductions, teamwork and advancing our ESG agenda have been impressive to say the least. That being said, we, like many other companies, are suspending our formal guidance for now until more normal times return. The seriousness of the current situation is forcing producers to not only cut back on capital spending, but also to shut-in some existing production.

In all honesty, there's an upside that will come from this. I believe a transition was already beginning to happen for many E&P companies in what is referred to as Shale 2.0 or Shale 3.0, depending on your perspective.

The events of the past few months will only accelerate this ultimate transition. Over time, that will be incredibly beneficial to shareholders. The industry will look much different than it does today in a good way. Strong companies will get stronger, and the sector will be healthier as a whole.

Now let's turn to Page 2. One of the reasons our confidence remains strong in a time like this is because we've diligently worked to have the right capital structure and flexibility. We now find ourselves well positioned for the downturn we're experiencing. We finished 2019 at just over 1.5x leverage, and we have one of the strongest hedge books in the entire industry for 2020. Approximately 90% of our oil revenues for the remainder of this year are protected at around $57 per barrel. That gives us the ability to stay on track even with lower produced volumes to generate approximately $150 million of free cash flow this year and provides us with nice momentum going into 2021.

In addition, the [$2.1 billion] (corrected by company after the call) borrowing base on our credit facility was reaffirmed, along with $1.5 billion in commitments. We also bolstered our cash and revenue-generating power in the first quarter by completing a very well-received acquisition in March that boosted our base oil production by more than 35%. We also hedged a large portion of those volumes in the high $50s. We've now integrated those great assets following a successful transitions period.

And I'd like to thank our field organization, our IT staff and our measurement staff for cutting everything over onto our systems. We actually put a lot of boots on the ground from all over the company to make it happen quickly and efficiently. Those assets are going to be an important part of our story once global supply and demand comes back into balance.

Now let's turn to Page 3. In crunch time, you better have an A team that you can put on the field. This is ours: our assets, our proactive approach, our enviable financial strength and our talented workforce. When you're in the eye of the storm, it's too late to prepare for a rainy day. And WPX was and is prepared. Everything we've accomplished financially and operationally has positioned us for an attractive future. Obviously, things are in flux as we adjust our approach to how we manage our capital expenses and revenue generation, but we have a great deal of flexibility and optionality in hand right now.

Part of this comes from our midstream marketing and transactional expertise that allows us to maximize our molecules, what we sell them for, where we sell them at, how we get them there and the flow assurance we have to keep them moving. We've established a strong track record of staying one step ahead, and you can count on us to continue that legacy.

We get quite a few questions about our tactics and our plans about how we market our products. Suffice to say, we're not going to get into the intricate details as this is obviously a distinct competitive advantage. That being said, one example of our strategy is our 50-50 joint venture in the Permian Basin for gas processing and crude oil gathering. At the end of the day, this partnership and our expertise adds significant incremental value to our core business of producing oil and natural gas. When the market does turn back in our favor, we have decades of inventory to develop. And while we weather this storm, we're not under any immediate pressure with debt maturities. Our next sizable one does not occur until 2023.

We also have an experienced leadership team here at WPX, and our people know how to get things done. We systematically transformed our company in the face of 2 dramatic downturns in late 2014 and 2016. Remember, this is a team that has engineered $11 billion in transactions to radically expand our returns, margins and cash flow over the past 6 years.

Just a few weeks ago, we were producing more than 250,000 barrels of oil equivalent per day with over 150,000 barrels a day of crude oil. That puts us among the most capable and sizable independents out there. I'll bank on our team, our track record and our bias for action any day.

Now let's turn to Page 4. As our near-term environment changed, so did our plans. We've been making adjustments with the goal of cutting expenses, reducing capital and delaying well completions as well as curtailing production for a better day. They will come. We've been able to do so with very little impact to our projected full year EBITDA because we made sound and strategic decisions around price risk management in prior years. Along with our planned capital cuts, we also have other levers we can pull to cut back even more. The market will dictate if and when that's necessary.

We also haven't incurred any rig release penalties. However, if conditions deteriorate further, the cost for releasing rigs ahead of schedule would not be a deterrent. It's an option at our disposal, and clearly, we're not going to drill just to drill. Our decisions to invest capital will be predicated on the returns we can achieve given what we see in forward commodity prices.

For now, our latest projection moves our rig count from 15 in March to 6 by year-end. That's a reduction of 9 rigs this year or 60% of our rig fleet. We currently do not have any completion crews at work either after dropping all 4. With that, we plan to develop 1 to 2 quarters of DUCs, which is something that will certainly benefit us in 2021.

Near term, we have significant production curtailments underway in both basins, with roughly 45,000 barrels a day gross, 30,000 barrels a day net targeted for shut-in during the month of May. June could look similar. We will continue to weigh our opportunities in the market as we evaluate the months ahead, doing what's absolutely best for the WPX shareholder.

We will remain flexible in our approach, and we're blessed to have the optionality to do so, underpinned once again with our strong 2020 hedge position.

Let's turn to Page 5. As I mentioned earlier, it just makes sense to suspend our formal guidance. Everyone knows we're in a fluid situation, and we have to respond accordingly as we manage through the volatility. But we do want to provide some visibility on at least a couple of possible scenarios that seem reasonable and prudent for us for the time being. We know it will take time for the global economy to recover and for domestic businesses to fully reopen. That will obviously take shape in different ways and schedules across the U.S.

Now in terms of getting back to work on our completions activity, we're not going to jump the gun or do anything that would compromise the value of what we have in the ground. Discipline is a mark of a good company. So we'll just stay focused on reducing activity, maintaining our flexibility and managing the budget day-to-day based on whatever the situation demands or the opportunity upholds. Either scenario puts us in good shape for our 2021 maintenance capital, depending on what our level of production is as we exit December. We don't know if that will be our ultimate goal, but it does give you a baseline to consider.

Lastly, let's turn to Page 6. I believe our company continues to be poised for great things. It's going to take more patience than we originally expected, but that's never stopped us before. I personally relish the opportunity and responsibility to lead this company through both good and difficult days. We're here to serve our shareholders and our stakeholders. We always do what's necessary and strive to do even more. Being able to look, think and work ahead has been a hallmark of our success. Today, the requirements are more immediate and day-to-day, but it's not a matter of waiting for better days. It's a matter of being ready to take advantage of those days.

We have this perspective because I vividly recall the decade of the 1980s. After a strong up-cycle in the early '80s, 1986 and 1987 were extremely tough years, but they were also the years that helped develop my personal confidence and resolve. I've seen progress come from tough times. Today, WPX is financially strong and disciplined, and we have the benefits of experience, asset quality and a strong team on our side. I remain very optimistic about our future.

Operator, we can now open the line for Q&A. Clay, Kevin and I welcome your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Sir, your first question comes from the line of Jeff Grampp.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [2]

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I was curious just on the operational side. As we kind of look at the rig cadence that you guys kind of outlined for the -- for kind of exiting '20. Do you guys have a sense that maybe from a high level understanding, things are fluid day-to-day, but of the Delaware rigs, kind of how that might be split across the asset base?

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [3]

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Jeff, thanks for the question. This is Clay. Yes, I would say it's pretty fluid. The economics, obviously, with the rise of all commodity price, you get a little bit of swing from East to West.

Remember the Felix assets have a 70%-plus oil cut. The state line assets, for the most part, are closer to 50%. And so that comes into play, both are highly productive. I can tell you we've been working really hard on well costs, really great progress there. It really depends on the dynamic between oil and gas, how that comes into play. And against, of course, any other nuances in regards to midstream water takeaway, all those kind of things, I would say they're pretty neck and neck. All 3 of our assets, including the Williston, are pretty phenomenal. We have the advantage of a higher oil cut most days. We're pretty excited about that. I can tell you in a currently very depressed oil market, Williston suffers a little differentially. So we play that real time. We watch those numbers. We don't have any presumed favorites, but we are very dynamic with the capital, and I think our results benefit from that.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [4]

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Got it. Appreciate that. And for my follow-up, on the cost side of things, I think in a couple of the releases recently, you guys have kind of talked about potentially some service deflation. So I guess, kind of a multi-parter. One is maybe clarifying. If the -- those 2020 capital budget bands you guys provided, do those reflect any service cost reductions? And then can you just kind of talk maybe what you guys are kind of seeing in real-time in terms of the service cost reductions you're accomplishing?

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

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Yes. Thanks for that one. We appreciate the operations call the questions that's reassuring we get to talk about the heart of our business even in times like this. What we've included in our 2020, and even looking kind of tipping our hands a bit on '21, are costs that we have in hand today. If we were to spud a well today, that's the cost that we're using for the balance of '20, and we haven't assumed any additional deflation for '21. And so think of it in terms of -- we've put a rig to work today, what would that cost and then how we run that forward. Now there's always the wells that are partially up and running, say, a DUC, or a well that's already halfway drilled. Obviously, we'll honor those -- the actual costs that are rolled in the 2020 time frame.

But to answer your question, I'd tell you, on the Felix assets, we have been very, very pleased with the results. We talked a little bit about some of the concern around potentially being too tightly spaced. I can tell you it was right in line with what we planned and what we risked. And so that's worked out really well. Our inventory is intact. Real excited about what we're seeing there. The big differentiator that we didn't anticipate is how much cost reduction we're going to have. And sure, some of that comes from deflation, but I would say most of it has really been from taking the best. We talked a lot about that. The best of ideas from Felix, from the Williston Basin, from our existing Permian assets. And all of those all of those D&C costs have actually ratcheted down pretty materially in the last 4 to 6 months.

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Operator [6]

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Your next question comes from the line of Brian Downey.

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Brian Kevin Downey, Citigroup Inc, Research Division - Director [7]

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Wanted to take in a little more on the scenarios on Slide 5. I was curious what guidepost you're looking for in determining when to resume completions. Is it a particular flat price, contango level, cost deflation in your operating areas? And then for '21, the maintenance capital number. I'm curious how many of those year-end DUCs you assume -- you consume in those maintenance capital figures for next year?

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [8]

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Yes. Thank you for that. So the first question, I believe, was kind of what is the scenario that really gets us back to work. What we talk about on Slide 5 is a couple of scenarios. Conceptually, if we were to start consuming DUCs in the third quarter or the fourth quarter. What would that -- how would that manifest in capital production exit rates? And then what does that lead us into '21. So those are just scenarios. But here's what would have to happen for us to essentially exercise that scenario. Its not just today's commodity price, its more the shape of the curve that kind of help things firm up as we look out into '21.

As you well know, what activity we take late in this year all manifest -- we get the benefit in '21. And so we're really looking out kind of that firming up. We're also looking at storage. We're looking at kind of the return to work and how the supply-demand fundamentals are going. And I think that all those things come together. We see those stars aligned to give us the confidence that we're not going to get a kind of a head fake on getting rigs in -- or potentially frac crews back to work and then the curve fall out from underneath us. And so that's kind of what we're thinking about. I don't have a specific number. But just think about the well return, the full cycle well return, what does that look like, and how do we capture that for the value of the shareholders. I think there was a second question. In there, but I forgot it.

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David Sullivan, WPX Energy, Inc. - VP of IR [9]

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DUCs.

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [10]

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Oh, DUCs. David, just reminded me. So yes, the advantage of building about a quarter or 2 of DUCs, prepping for that get-back-to-work scenario, we would certainly hit those first. And so we would have a differential amount of frac crews, what we need above and beyond whatever rig cadence we're running, and we would consume those right off. Again, assuming the economic backdrop allowed us and encouraged us to do that. That is the methodology that we would pursue. And certainly, during the course, in either scenario, if you only have a quarter or 2 of DUCs, you consume those right off the bat.

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Brian Kevin Downey, Citigroup Inc, Research Division - Director [11]

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Great. That's helpful. And then as a follow-up maybe for Rick or Kevin. You had previously laid out a 5-year vision around dividend, free cash flow yield, moderating base decline, along with a few other metrics. That was understandably in a 50 to 55 WTI world. But I'm curious if we hopefully return to a more sustainable commodity price environment, how you're thinking about steady-state growth versus free cash flow and implicitly leverage going forward. Any sense for what that rate combination may look like in a Shale 2.0 or 3.0 as you described?

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J. Kevin Vann, WPX Energy, Inc. - Executive VP & CFO [12]

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Well, this is Kevin. And I'd say that we're still laser-focused on those metrics that we laid out during our third quarter call last year. Obviously, we've taken a little bit of a setback as the whole industry has -- just in regards to when we're going to get to some of those measures that we laid out. You look at and go back to the Felix acquisition and all -- the Felix acquisition itself at a $50 oil price was extremely accretive to all those metrics. And so we're still laser-focused on leverage. We were headed to almost a single turn of leverage, and we're -- obviously can't -- our leverage just like everybody else's is going to get taxed in a $30 to $35 world next year. But I like, at least, the set of cards that I get to play this year because of having $1 billion of hedge value that allow me a little bit of optionality in regards to what Clay was mentioning earlier in terms of when we start to complete some of those wells and what it ultimately does for our leverage in '21.

So I'd say we're still laser-focused on all those. It's just taken a bit of a setback. And once we reset the kind of the bar for ourselves coming out of 2020, hopefully, get to a level that's a little bit of a more normal environment. Those goals are still clearly in focus over the next 5 years.

And the one thing that I would add on to Clay's comments is that going into 2020, the well costs that we were experiencing and the returns that we're getting those well costs were quite phenomenal. But I would -- I also told you that at a $35 to $40 world, those well costs, well, there's no way we would be drilling those wells. Now as Clay mentioned, some of those deflationary costs coming into clarity, that gives us the opportunity to actually start getting back to work in the $35 to $40 to $45 world and start generating the same level of returns that we were getting in a $50 world. Still -- it's a fluid situation. And Clay's team is working really, really hard to kind of shore up some of those numbers. But I think those are the types of things that we're looking for as a management team that allow us to get back on track to those 5-year visions -- or those tenets of those 5-year vision that we laid out.

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Operator [13]

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Your next question comes from the line of Leo Mariani.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [14]

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I just wanted to get a little bit more color around how you guys are thinking about some of the returns on capital. I know it was sort of alluded to in the prior question here. But certainly, in terms of the potential outlook, I know there's no guidance for this year, but in terms of some of those goal posts, it certainly appears to me there is going to be a pretty decent free cash flow here in 2020. So just wanted to kind of get a sense as you guys kind of look at the budget? I know returns is a big, big factor, and obviously, you need price is high enough to get there. But are you guys certainly planning on managing 2020 to kind of ensure that you continue to have free cash flow here? And then in terms of uses of that free cash flow, where do you see the biggest priorities? Obviously, balance sheet is in pretty good shape. I guess you've got a little bit of revolver debt. Is that going to be a priority to pay down? And then, I guess, post that, I guess you have a pending dividend that may show up here in the third quarter. Is that something we can kind of still see here if the free cash flow appears in the second half of the year?

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [15]

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Yes. We're still laser-focused on free cash flow for 2020 as well as 2021. And again, when you think about some of the uses of that free cash flow, you're right, it will go to the balance sheet first and foremost. You look at -- we've got a little bit of a balance pulled on the revolver at the end of the first quarter that'll come down over the course of this year as we start to generate the free cash flow and as we've kind of moderated our activity levels in the second quarter.

And obviously, into the third and fourth quarter, we also have a little bit of a stub period -- or stub maturity in 2022 of about $79 million. We're laser-focused on that. I'd say the high-yield markets are getting a little bit more constructive for quality names like WPX. So -- all that stuff's really in focus just in terms of just maintaining, and as Rick mentioned in his comments, maintaining the balance sheet strength that we have now. And that is #1 priority outside of making sure our employees are remaining safe and healthy.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [16]

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Leo, as far as your question on the dividend, I think, we had originally targeted third quarter. And I think that will continue to look -- we'll see what the recovery looks like and what the future holds. We -- so we'll probably hold off on, say, an absolute one way or the other right now I think is the most prudent thing to do.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [17]

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Okay. That's helpful for sure. And I guess just with respect to the shut-ins. I know it's a very clear situation what you guys described. And you guys have to nominate the volumes a bit ahead of time as well. But if I just kind of look at where prices are today in terms of the futures, clearly, we've had a really nice move-up over the past couple of weeks. As you look into June at kind of current futures prices, would you guys not expect to see any shut-ins based on where we are today here? And then I guess just to have a -- a second part of that question. I certainly noticed you guys had hedged some incremental volumes lately as well. What do you guys kind of want to see in terms of '21 prices to maybe hedge more?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [18]

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Yes. I think as far as June, making forward statements there. I think we're going to be pretty thoughtful. We don't want to give our barrels away, worked, really, really hard for this. And I think we'll just be very thoughtful. We've got a team of marketing and legal operations. It meets 3 times a week. It's a very fluid situation. I can tell you that they are absolutely on top of it. I think just still from an industry perspective, we just quite simply have to take barrels off the market if we're going to get commodity prices back to where they belong and we handle the storage issue. So I think from a greater industry perspective, you are going to continue to see shut-ins, I think, for the next -- at least the next couple of months. We'll see.

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

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Yes. One thing I would add to that, we have the luxury of being in control and thinking about what is the right thing to do from a value perspective. We don't -- we're not required -- we're not upside down on firm transportation. We're not required by our royalty owners or in a pinch in one way or another some kind of commitment. And so it gives us a great deal of flexibility to be very objective. And I can tell you, as you well know, the market changes day-to-day. And so we've issued, I think, in our prepared remarks, kind of directionally to think about June, like May, but I can tell you, being in that conversation, it changes day-to-day. I'm real pleased that we can look out on the horizon and make sure we're thinking midterm and long term what's in the best interest of our shareholders and not just in a pinch to be forced to do something that's probably not the right thing in a longer perspective.

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Operator [20]

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Your next question comes from the line of Neal Dingmann.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [21]

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My first question had -- to the labor quite asked in a little bit different vein here, just on the 30,000 shut-ins. I'm just wondering -- Clay, I haven't heard you or most others talk about this. Do you envision any of this being a result of takeaway issues in the coming weeks, coming months or this just continue to appear like an economic decision? And I'm just wondering, secondly, how long do you think -- is it just days to bring these curtailments back when you choose to do so?

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [22]

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The first question is yes. This is all economic decisions. We have a tremendous amount of flexibility to do what we believe is the right thing. And just, again, not just for today, but thinking mid and long term about the right thing to do for the organization. As I think about kind of the return to production as we're all contemplating return to the office in many different ways. It's a myriad of things. And we will have some wells that -- I mean, it's as simple as remotely opening chokes or speeding up electric submersible pumps. We have delayed bringing some wells on. Those are all kind of normal course of business. But look, all the way through, there are things that will come up as we bring wells back on. Workovers will be required and things like that. So I would say it wouldn't be as simple as just give us a couple of days, we'll be back up running at 100%. I think anybody that -- says that they're probably shortchanging their field organization, just a [touch].

I think in reality, there's a little more to it than that. But we've been very, very thoughtful about shutting the right wells in, in the right way, so that we do preserve value when we bring these wells back on. And that value is not just the production, but it's also the cost associated with that shut-in, the restoring of that production and any potential ramifications to long-term EUR, so we're very thoughtful.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [23]

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Great details, Clay. And then my second question is just on that Slide 5, which, by the way, great details for Sully and the guys that put that together, my specific question is, you show there that if completions resume 3Q, your 2021 maintenance cap to keep, what is it, the end up '20 production flat in '21 would be less than $900 million. I'm just wondering could you talk about how you do the trajectory of that in '21, perhaps? Very broad terms, I know you don't have much out or anything out on '21, and if most of that capital would still go towards the Permian, I assume.

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [24]

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Yes. Certainly, most of it would go to Permian. When you think about the advantage you would have with the DUCs early on, you're trying to arrest any early decline that you have. So those DUCs certainly help that. And then you get the benefit in the second half of the year of actually the restoration of the rigs and the benefit there. So I would say it's somewhat level-loaded. In reality, it's always a little more complex than that. But we're not trying to gain a system where we have an average point we're throwing out and your entry to exit rate is -- shows an entirely different picture. I would say you're relatively flat.

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Operator [25]

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Your next question comes from the line of Derrick Whitfield.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [26]

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I'll certainly commend you guys and your organization on a positive update in this particularly challenging environment.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [27]

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Thank you, Derrick.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [28]

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For my first question, I wanted to focus on WTL pricing. It's become a topic of increasing investor concern over the last several weeks and remained a focus area today as one of your Midland peers are highlighting price disconnect in their presentation. While pricing certainly does not appear to be an issue in your Q1 results or for the year based on your prepared comments, could I ask you to speak to your views on WTL pricing more broadly and the impact it may have on WPX in 2020 and 2021?

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [29]

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Yes. Derrick, thanks. I'll hit it a high level. I'll go back to kind of Rick's opening remarks. This is one of those perfect examples of an issue you don't solve while you're in the midst of the storm. These are agreements that we put in place years ago, long-term fixed contracts and blending agreements in mind with what we have for the Stateline specific crude. That allows us to nullify any WTL issues. And so we are -- don't consider it an issue for us. Now that said, I see it. We watch it very closely. I like to think we have somewhat of a PhD in some of these marketing things. And so we watch all those things. We're very exposed. We give each other a little bit of a high 5 when we see something that we planned for, some insurance we put in place actually come into value. So it's -- I feel really good about our position. I hope that answers your question.

Greg, do you have anything else to add to that?

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Greg Horne, WPX Energy, Inc. - VP of Midstream & Marketing [30]

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No additional comments. You nailed it.

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Operator [31]

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Your next question comes from Kashy Harrison.

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Kashy Oladipo Harrison, Piper Sandler & Co., Research Division - Research Analyst [32]

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So maybe one for Clay. You provided some really super impressive maintenance CapEx estimates. I was wondering if you could help us think through how sustainable those estimates are over a multiyear period of time? If you, on one hand, take the onetime benefit of DUCs, but on the other hand, take the impact of decelerating base declines, just trying to think through how sustainable that could be over maybe a 2 or 3-year time period?

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [33]

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Kashy, I think that's a great question. I think you answered it in your answer, because you've got -- you hit the 2 big points: One, we get the benefit of the DUCs, which certainly help support capital efficiency; but in the following years because you're running more of a flat-type production, your base decline is really supporting those out-years. And each year that you're, again, flat, that base decline comes in even more so, so it becomes a bit easier each of the out-years. I would say directionally, we could achieve something very similar. It may be a little bit challenged in that first year because you don't have quite the benefit of the DUCs, but then you get into that -- the further out-years, your base decline becomes even more established and it becomes out much easier. We run a number of, as you can imagine, a number of these scenarios. And it's quite sustainable. Really pleased with the quality inventory that we've put in place. I can't speak highly enough about our operational ability, the well costs. I really hold that exceptionally high, when you look at it across the peer group. And that's what it's all about, I mean, really having high-quality assets that you can convert into value in a very cost-effective manner. And that's what we do very, very well every single day.

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Kashy Oladipo Harrison, Piper Sandler & Co., Research Division - Research Analyst [34]

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That's great color, Clay. And then maybe just a follow-up for you, sticking with you. You talked about costs a second ago. And then I think in earlier question, you mentioned the costs have come down meaningfully. And so I was wondering if you could give us an update on just leading edge DC&E, legacy Permian, Felix Permian and the Williston. And then if you could just guesstimate when you do eventually get back to work how much cost deflation you think you might be able to get from some of your vendors.

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [35]

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Well, first of all, a tip of my hat to my vendors, I mean, these really are our partners. It's -- this is a tough situation on the E&P companies, what we're going through right now. I don't know if it's 5x or 10x, but some serious multiple -- much harder on those guys. So I don't want to speak for them on what they will be providing as far as additional deflation. I can just tell you that -- we try and support them very, very closely. A lot of these are really good friends. And like I said, they're part of the team in many, many ways.

Back to your question on cost. I would say most of the costs that we've seen from what we ran economics-wise on Felix during the acquisition, call it, $10 million to $10.5 million per well, I would say state-of-the-art well that we're drilling today we put a bit to the ground, it's probably somewhere between $8 million, $8.5 million [for D&C] (added by company after the call). And I would say $1 million plus, maybe $1.5 million of that is not deflation. This is the -- we have seen some deflation in there before, we have really -- we've changed some of the completion design, casing design, some of the economies of scale related to supply chain. And I can tell you, guys, I'm probably more surprised about that than anyone else. We have a great admiration for the work that the Felix team did and very exceptionally well equipped and really strong team there. I think just the benefit of rolling that organization into ours and really benefiting from each other has really manifested. Because we've also seen that benefit on our state line costs coming down as well. That, again, is probably closer to the $8 million [D&C] (added by company after the call) well cost for a 2-mile well you put a bit to the ground today. Again, some of that is deflationary, but I would tell you, today, we could achieve that. That's the cost that we've used for the balance of '20 and even well into '21. I won't speculate on what the prices are going to be and therefore, what the deflationary metrics were going to be in '21, but just to give you kind of an idea of our maintenance capital. That's the base assumption we have in today.

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Kashy Oladipo Harrison, Piper Sandler & Co., Research Division - Research Analyst [36]

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And do you have a number for the Williston?

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [37]

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Somewhere between $6 million, $6.5 million [for D&C] (added by company after the call). With Williston, you've never seen as much basin inflation. That has steadily come down just time and time and time again. We didn't see the inflation in the up years. You're not going to see the deflation in the down years. It's a little more price-resilient. You think back on '18, when things kind of heated up a little bit, came down in '19, came down even further in '20. It's a lot more stable. We've probably been running about $6.5 million to $7 million. I would say that's probably $6 million to $6.5 million state-of-the-art today.

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Operator [38]

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Your next question comes from the line of Brian Singer.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [39]

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You talked a bit here about leverage in the balance sheet. Part of the 5-year vision was to get that leverage below 1x. And obviously, last quarter was a bit of a different -- last quarter's call was in a different world than today. But I wondered how you think the leverage target and what the importance of getting that leverage below 1x is and how that impacts your ability and interest in spending above maintenance capital. Is growth a driver of getting leverage over time down below the 1x? Or do you wait for the free cash flow to do it first before moving above maintenance capital?

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J. Kevin Vann, WPX Energy, Inc. - Executive VP & CFO [40]

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We're still laser-focused on generating the free cash flow. And then if you transfer that into how that impacts leverage in the balance sheet, we are less inclined to be really outspending a big maintenance CapEx number just for the sake of growth. Now if the market sends us as a signal, I think we just need to be aware of that. But first and foremost, we're still laser-focused on getting our leverage down to a level that's close to a turn. And then I think what that gives you is the opportunity to kind of ride these cycles out that we're in right now. Anybody that went into this year with over 2 turns to 2.5 turns of leverage and didn't play good risk managers going into this downturn, I can tell you by the end of 2020, they're going to be in a situation that they're really hoping for $45, $50 oil prices next year.

Obviously, we would love to see that as well. But in terms of maintaining the strength of our balance sheet, we're not nearly as reliant upon just oil prices going up in terms of being able to maintain our balance sheet stream. Again, as I said earlier, in a $30 to $35 world, obviously, you're going to see -- we just can't generate as much EBITDA in that world as we can in a $50 world. But in the same vein, our balance sheet isn't getting to some of the levels that some of our peer companies are getting to as a result of just not playing good risk management going into the situation.

So again, we'll come out of this. We're looking at the returns, how do we get back to work, how do we get that balance sheet and leverage back to the point of where it was when we were entering 2020. It may take 12, 18 months in order to get there, but at the same time, it's still a focus of ours. And again, it allows you not only to place some pretty good defense in situations like this, but affords you opportunities like it did with the Felix transaction back in December, too. So it's important to us, always has been and always will be.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [41]

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Yes. Brian, I think it's a principal level. That strategy, that strategic framework we laid out, it's still -- we're still focused on that. As Kevin mentioned, not only the balance sheet, but free cash flow generation, free cash flow yield, flatter base declines. All those things really come into play. And we've not backed off that strategy one bit.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [42]

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Great. And then my follow-up actually is an accounting question. There was an increase in the liability, I think, associated with the loss from discontinued operations. And I wondered if you could just add any clarity on how that impacts cash flow going forward.

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J. Kevin Vann, WPX Energy, Inc. - Executive VP & CFO [43]

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Yes, I will. This is Kevin again. And I won't get into the nuances of the accounting rules because just quite honestly, they get too intricate and too detailed. Just think about it in terms of whenever -- a little history. When we sold our San Juan assets back in the first quarter of 2018, we retained a performance guarantee related to some midstream agreements that the counterparty had. Because of that performance guarantee, we have assessed that on an annual basis as to whether or not we would ever be in a position that we would need to be making those payments -- we assessed that at year-end and given where crude was trading for the next 3 or 4 years, given the financial health of that counterparty, we deemed it to be a pretty low probability that we would ever have to make any of those payments. Obviously, as the market quickly deteriorated in March, we started working with them. They were running into some issues with regards to their revolver and their ability to meet some of these -- meet this payment. And I will remind people that it is an annual payment, it's a one-time a year payment. And it's related to some minimum volume commitments that this counterparty has with their midstream providers.

And so we booked a pretty large liability, but it's kind of like an impairment. You look at whatever the forward curve is trading at that point. And obviously, when the forward curve for the next 3 or 4 years is trading in the 30s, it became really difficult to see how this counterparty was going to be able to make those payments over the next 3 or 4 years. But it is a onetime-a-year payment. We made a $22 million payment in April. The next payment -- if the financial health of this counterparty does not improve, the next payment would be due a year later. And so these payments would be due onetime a year over the next 6 years. But again, I go back to -- it's a probability assessed kind of impairment. And as where the -- given where the forward curve was trading at March 31, that's a higher probability that we would end up having to make some of those payments on their behalf. As you see that crude price go up, the probability will go down, then we'll have to make those payments. So I hope that answers your question. So it's not guaranteed at this point that we will absolutely have to make those payments. We will be doing an annual redetermination as to whether or not we need to be making any further payments.

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Operator [44]

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Your next question comes from the line of Will Thompson.

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William Seabury Thompson, Barclays Bank PLC, Research Division - Research Analyst [45]

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I appreciate you providing a look in the 2021 capital efficiency. And I always appreciate a good choose-your-own adventure story. So on Slide 5, it is implied that resuming completions in 3Q will result about 25 completions during that quarter if you take the delta of the year-end and DUC count for both scenarios. Would both scenarios result in the same amount of completions in 4Q? Just curious about the cadence of completions when you -- if you go back to 4Q, on day 1 of the quarter. I appreciate this is somewhat of a hypothetical scenario, but curious on the practical aspect of redeploying crews.

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [46]

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I would say roughly, yes, the same cadence for the fourth quarter in both scenarios.

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William Seabury Thompson, Barclays Bank PLC, Research Division - Research Analyst [47]

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Okay. I guess, separately, just give a sense on oil realization expectations for 2020? I know WPX has some FT on Gray Oak has some (inaudible). I'm just curious on how you think of the balance between the challenges of the Bakken realizations versus obviously the benefit of the market arrangements you have in the Delaware?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [48]

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Go ahead.

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Greg Horne, WPX Energy, Inc. - VP of Midstream & Marketing [49]

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Yes. Okay. Yes, it's Greg Horne. Expectations for the balance of the year. Obviously, here, the last couple of months, the differentials have been pretty weak up in the Bakken. Expectation is -- and currently, right now, for June's business, they're actually looking pretty strong. So our typical expectation up there is in the range of $4 to $6 back from TI. So I'm not sure that it will look that much differently. Really kind of same thing in the Permian. We've -- we had pretty good differentials in the first 3 months of the year. And then obviously, here with everything that's occurred going into the month of May, the differentials are pretty wide. But we see those improving significantly as you kind of look June forward. So -- yes. Without getting into too many details on exactly what those differentials look like, I'd just say that the situation continues to -- as Clay mentioned and as Rick mentioned, continues to change daily, and we'll keep our eye on that.

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Operator [50]

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Your next question comes from the line of Gail Nicholson.

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Gail Amanda Nicholson Dodds, Stephens Inc., Research Division - MD & Analyst [51]

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With the deceleration of activity, can you just talk about the steps that you can implement in order to preserve the efficiency gains that you achieved in 1Q '20?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [52]

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Yes. It's something we think a lot about. And I -- it is not something we take lightly, because well, we work so hard quarter after quarter after quarter to continually get better. We're working really hard to keep that knowledge in-house. Certainly, from the employee base, that should be -- that should translate really well. You realize a lot of the people that work with us and for us are on a contractor basis, service company employees. There's always a little bit of a disruption to that. And so I think a more graceful exit out and a more graceful exit back certainly helps. But retaining that intellectual property internally by keeping our teams engaged and active, I think, is the best course to preserve those continued wins.

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Gail Amanda Nicholson Dodds, Stephens Inc., Research Division - MD & Analyst [53]

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Great. And then just on the $100 million of cost savings on the LOE and G&A side, can you just kind of give us any high-level clarity on how we should think about how that is achieved there for the remainder of the year?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [54]

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I think it's going to be a mix, Gail. If you think about LOE, we did try to weigh in things like variable cost on LOE when we have the shut-ins. So you're going to have less water to be disposed of. You're going to have probably lower expense workovers, things like that. You're also going to see lower GP&T-type taxes, production taxes -- GP&T and then production taxes as well. And then on G&A, we're looking at a lot of different things that we can pair back and trim. So really all of the above. We're going to be very focused on improving our cost structure, you have to be in these sorts of times. So a little of all of those things I mentioned.

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Operator [55]

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Your next question comes from the line of Matt Portillo.

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Matthew Merrel Portillo, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Exploration and Production Research [56]

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Just a high-level question. Looking out into 2021 and beyond, how should we think about your ability to flex above maintenance capital? I guess, specifically, what kind of crude price signal would you be looking for to return to moderate growth? And then longer term, just philosophically, have your views changed at all around growth? Obviously, balancing more towards free cash flow and shareholder returns is an important initiative for the team. So just trying to think about the medium and long-term prospects for the growth of the company?

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [57]

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Sure.

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Clay M. Gaspar, WPX Energy, Inc. - President, COO & Director [58]

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Yes. Matt, I think it's a great question. It's Clay. I think leading into this current pandemic, we had a great operational philosophy about generating free cash, the outlook of that free cash, continued growth in a very moderate fashion. We weren't driven by that production growth. We're driven by the value outcomes, the full cycle returns on our investments. I think all of that still holds. We have to work through this crazy environment that we're living through right now. There will be another side. I would -- as Kevin mentioned earlier, our tightening of all of the screws will allow us to eke out profitable returns and probably a lower cost environment than we could before. Think of it as maybe a $35-ish kind of world. But I would say back to kind of normal, you kind of get into that $45 to $55 range, the range that we were in before. We budgeted everything kind of in that mid-cycle $50 world. I think that's when things kind of really get back to normal for us for all of our -- prices will escalate in that environment as well. Let's be realistic about this. And I think we get back to that world, I think, it looks very similar to the world that we entered this crisis in.

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J. Kevin Vann, WPX Energy, Inc. - Executive VP & CFO [59]

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And then you think what was the market reward in going into this current crazy time as Clay said. It was -- we had a lot of debate and discussion with our Board back in the fall about what is the right growth rate. And again, it's -- the growth rate was more of the outcome of all the various tenants that we laid out during the third quarter call, but the growth was somewhere in that kind of high single digits to around 10%. And -- but when you looked at that, that was what the market was rewarding. That's the price signals that we're receiving. And when you lay that up against the tenets that we laid out during our third quarter call, we could check all of those boxes over the next 5 years with that type of growth profile. But again, that was the outcome more so than that was the driver of how we were coming to it.

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

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And one other thing I'll throw in, Matt, this is really for you and your peers to make the call on. But we consider ourselves on the tip of the spear as far as well quality, inventory as well as our ability to convert that inventory into value through exceptionally good cost control. So you think about the well performance, our DC&E cost to make that conversion, we should be essentially on the front end of that activity curve. If everyone's logically thinking through full cycle returns, that would make sense to me.

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Matthew Merrel Portillo, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Exploration and Production Research [61]

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And as my follow-up, as it relates to the Bakken, is there any high-level color you might be able to provide in terms of how we should be thinking about the activity levels heading into 2021 under the maintenance capital program? And then longer term, balancing the strong rates of return you see on those Bakken wells versus the inventory profile, how should we think about the longer-term capital allocation to that asset?

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

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Yes. Matt, what's great about having the Felix assets. It really sits nicely between the oil cuts of Stateline and the oil cuts of Williston. And that was one of the things in our before Felix acquisition. The portfolio management was managing the amount of inventory we had remaining in Williston and making sure that we didn't run-up to a cliff and then fall off some kind of significant oil production scenario that we would have to ramp up abnormally in Stateline. Having that Felix that sits right in between from an oil cut allows us a great deal of flexibility. As I mentioned in one of the earlier questions around what is the right value opportunity, I can say conceptually, we're thinking about 1 rig in the Williston during this maintenance capital mode. But there's nothing sacred about that. It could be 0. It could be 3. We have that flexibility to do that. And we will exercise discretion based on what the economics encourage us to do.

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Operator [63]

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Your next question comes from the line of Harry Halbach.

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Harry Robert Halbach, Raymond James & Associates, Inc., Research Division - Research Associate [64]

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I was just curious if you guys could give some commentary around where you see your base decline trending at the end of this year and how that changes based on the 140 mbbbl/d versus the lower exit rate plan.

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

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Thanks, Harry. I think entering this year, pre-COVID and everything, we're kind of -- we were ratcheting that base decline down. In the last couple of years, we've had one of the steeper base declines, but I think our ability to bring in some of the Felix assets that has more of a controlled flowback and then also the maturing of our assets, we were probably looking at kind of a 44% rough number base decline. I think now with a much more of a managed capital investment production profile, I think that will drop to probably the high 30s, call it 38% base decline as we exit 2020, and then it continues to ratchet down from there just based on if we get into a maintenance capital mode or if we're encouraged to get back into a reasonable growth.

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Richard E. Muncrief, WPX Energy, Inc. - CEO & Chairman of the Board [66]

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Well, we appreciate everybody joining us today. It has been a challenging time in our sector and really throughout society, but very pleased with how our team is responding. Appreciate Clay, you and Kevin's comments today and answers to questions and Greg. And so if you have any questions, feel free to follow-up, give Dave Sullivan a call. And thanks again for joining us. Have a nice day.

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Operator [67]

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This concludes today's conference. You may now disconnect.