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Edited Transcript of XEC earnings conference call or presentation 20-Feb-20 4:00pm GMT

·58 mins read

Q4 2019 Cimarex Energy Co Earnings Call DENVER Feb 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Cimarex Energy Co earnings conference call or presentation Thursday, February 20, 2020 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * G. Mark Burford Cimarex Energy Co. - Senior VP & CFO * Joseph R. Albi Cimarex Energy Co. - Executive VP, COO & Director * Karen Acierno Cimarex Energy Co. - VP of IR * Thomas E. Jorden Cimarex Energy Co. - Chairman, CEO & President ================================================================================ Conference Call Participants ================================================================================ * Arun Jayaram JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst * Douglas George Blyth Leggate BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research * Gabriel J. Daoud Cowen and Company, LLC, Research Division - Senior Analyst * Jeanine Wai Barclays Bank PLC, Research Division - Research Analyst * Jeffrey Leon Campbell Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services * Joseph David Allman Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Michael Anthony Hall Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst * Michael Stephen Scialla Stifel, Nicolaus & Company, Incorporated, Research Division - MD * Neal David Dingmann SunTrust Robinson Humphrey, Inc., Research Division - MD * Wei Jiang Crédit Suisse AG, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, and welcome to the Cimarex Energy Company XEC 4Q '19 Earnings Release Conference call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations, Karen Acierno. Please go ahead. -------------------------------------------------------------------------------- Karen Acierno, Cimarex Energy Co. - VP of IR [2] -------------------------------------------------------------------------------- Thank you, Ian. Good morning, everyone, and welcome to our fourth quarter and full year 2019 conference call. An updated presentation was posted to our website yesterday afternoon, and we may reference that presentation on our call today. Just a reminder, our discussion will contain forward-looking statements. A number of actions could cause the actual results to differ materially from what we discussed. You should read our disclosures on forward-looking statements in our news release and in our latest 10-K for the year ended December 31, 2018, for risk factors associated with our business. We plan to file our 10-K for the year ended December 31, 2019, by the end of next week. We will begin our prepared remarks with an overview from our CEO, Tom Jorden; then Joe Albi, our COO, will update you on operations, including production and well costs. CFO, Mark Burford, is here to help answer any questions, along with [Blake Sirgo], VP of Operations Resources. (Operator Instructions) With that, I'll turn the call over to Tom. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [3] -------------------------------------------------------------------------------- Thank you, Karen, and thank you all for joining us on the call this morning. I will briefly discuss our operational highlights and focus, followed by our COO, Joe Albi, who will provide a more detailed breakdown on the quarterly details. Despite the challenging macro environment, Cimarex had a solid fourth quarter and solid results for the full year 2019. Our oil production came in above the midpoint of our guidance range and was up almost 3% sequentially, led by Permian oil volumes, which grew 5% sequentially. Permian oil growth is projected to continue into 2020, with Permian volumes up 14% at midpoint, leading estimated total company oil growth of 9% at the midpoint of our guidance. Capital for 2019 was well below our guidance range. This was driven by significantly lower completion costs in the fourth quarter, coupled with the incorporation of changes to frac designs that we tested during the quarter. The result was total capital investment for the year of $1.32 billion, including our midstream investment. Guidance was $1.37 billion to $1.47 billion, including midstream. Commodity prices continue to be a challenging headwind, particularly for natural gas and natural gas liquids. In spite of these headwinds, we were able to generate free cash flow in excess of our dividend and had $95 million in cash at year-end. Our outlook for 2020 and beyond looks quite good. We are using a $50 WTI price and $2.25 NYMEX gas price in our capital planning over the next 3 years. With activities similar to that in 2019, we expect to generate similar results of approximately 10% oil growth per year and grow our free cash flow year-over-year. We are quite pleased with the organizational progress we're making on several fronts. Last year, we identified 5 major pillars upon which we are focusing our organization. Our goals are simple: to improve our performance; create enduring value; and better position Cimarex for the future. These pillars are: one, better short- and long-range planning; two, better cost control; three, effective exploration and smart risk-taking; four, digital innovation; and five, a reinvigoration of our commitment to be a leader in environmental stewardship. Our organization has made tremendous progress on all these fronts. I would like to walk you through these pillars and the work that's underway. First, let's discuss planning. Our new slide deck, which is posted on our website, shows an updated 3-year plan. The plan is based on real locations, real working interest, actual costs and actual well performance. We have the locations, the development schedule and the wherewithal to execute this plan and deliver the indicated result. This is a result of our focus on capital discipline and effective project management. This outlook results in significant free cash generation. I know that many of you are wondering what we will do with this cash. First off, I need to say that we would like to generate the cash before we get too drawn into speculation on what we'll do with it. Future commodity pricing is the single biggest variable that drives our multiyear outlook and the amount of free cash that we will generate. That said, we manage the company for our owners and make long-term decisions with their interest in mind. We intend to increase our dividend over time. Balance sheet health is a top priority. And to that end, we keep a close eye on the financial markets. We do not have any near-term debt maturities. Our next maturity is $750 million due in 2024. When we generate free cash as planned, debt retirement will be a high priority. Share buybacks will be an additional option on the table. We analyze this on an ongoing basis and see this as a viable option for our free cash. Now on to costs. Costs have decreased significantly, driven by a combination of lower service and material costs and value engineering. Our operational team has done an outstanding job of optimizing our field operations. Our reservoir and completion engineers continue to optimize our completions, spending less and getting more. Our facilities group has continued to develop fit-for-purpose production facilities, implement state-of-the-art automation and safety systems and deliver them at lower cost. Total well cost, measured by dollars per lateral length, decreased 24% from 2018 to 2019. We expect to drive those costs down further in 2020. We had a great fourth quarter, with total well costs below $1,000 per foot. This was driven by a combination of value engineering of our completions and outstanding field execution and reduced cycle time. Exploration. Exploration on and off our existing footprint is an ongoing priority for us. One of the most effective ways to generate great returns is to have a low entry cost. Exploration is ultimately about risk and whether it means testing a new concept, testing a new landing zone or experimenting with new technology, it is a critical part of value creation. We successfully tested some new landing zones in 2019 that will offer significant potential for us in the years ahead. We look forward to further delineation and hope to be discussing them later this year. We are testing some new ideas and modestly leasing on a couple of emerging ideas. We also hope to discuss them in the future. They are not without risk, but smart risk-taking is a key to low entry cost. Digital innovation. We are focusing on digital innovation and building tools to provide better real-time data to our decision makers. We are redesigning our databases to allow for more effective data management and data delivery. We have a major effort underway to increase field-wide automation, which is a critical element of smart production management, effective safety systems and real-time monitoring of our environmental footprint. We have major projects underway on machine learning and are seeing results that are causing us to revisit some long-held assumptions. We have field tests of these emerging concepts on our 2020 schedule. It's about getting better. Finally, I'd like to make a few comments on our environmental efforts. We, like so many of you, have followed the climate discussion with great interest and with amazement on how fast the conversation is evolving. Although the rhetoric can be a bit extreme, our industry must demonstrate real commitment to a cleaner future if we're to be taken seriously in energy policy discussions. The world needs the products that our industry produces. This is obvious to all of us on this call. Demand for our products is on the increase and is expected to continue to increase for decades to come. Underinvestment in our sector will lead to long-term bad consequences for our country and for our world, but we should never underestimate our ability to make terrible public policy. In order for our industry to participate in setting energy policy, we need to earn a seat at the table through our actions on reducing emissions. Our organization is rising to the challenge to reduce our emissions, reduce flaring, increase water recycling, increase electrification and further improve our safety record. Our Board has approved 2020 corporate goals that set numerical targets to reduce our emissions and the incidence of flaring. Our performance on these goals will directly impact executive team compensation. We willingly embrace this challenge. These 5 pillars: planning, costs, exploration, digital innovation and emissions reduction are guiding our organization to improve our business and deliver consistent top-tier results. Now I'll turn the call over to Joe Albi to discuss our operations in more detail. -------------------------------------------------------------------------------- Joseph R. Albi, Cimarex Energy Co. - Executive VP, COO & Director [4] -------------------------------------------------------------------------------- Well, thank you, Tom, and thank you all for joining us on our call today. I'll touch on our fourth quarter and full year production, our Q1 and full year 2020 production guidance, and then I'll follow up with a few comments on LOE and service costs. Looking at Q4, with continued strong execution, we posted another company record during Q4, with our net oil volume coming in at 92,000 barrels per day, beating the midpoint of our guidance by 3,000 barrels per day and putting us up 3% and 15% over our Q3 '19 and Q4 '18 postings, respectively. The Permian drove the increase, with our Q4 Permian oil volume of 78,400 barrels a day, up 5% over Q3 '19 and 27% over a year ago in Q4 '18. With that, the Permian now accounts for 85% of our total company oil production. Completion timing played a role in our beat, with 12 net wells previously slated for sales in early 2020 coming online in mid- to late December, which added approximately 1,200 barrels a day to the quarter. Our Permian activity also boosted our Q4 net equivalent production, which came in at 293,000 barrels equivalent per day, beating the top end of our guidance and setting a new record for the company. As far as capital is concerned for '19, with increased operational efficiencies and lower service costs, our full year 2019 total capital came in at $1.315 billion. That's 7% below the midpoint of our previously issued guidance, and Tom touched on that to some degree in his discussion. Looking forward into 2020, our forecasted production model reflects our focus on the Permian and is all predicated on the $50 per barrel WTI and $2.25 Henry Hub pricing that we've just mentioned. Our 2020 total capital guidance is $1.25 billion to $1.35 billion, which includes $950 million to $1.05 billion for drilling and completion activity, $100 million for midstream and saltwater disposal infrastructure and $200 million for other capital. At the midpoint, we expect our total 2020 capital to be down 1% from 2019. Approximately 90% of our projected drilling and completion capital is targeting the Permian, a little bit more than this past year, and incorporates the operating efficiency and marketing -- and market cost savings we've discussed last call, particularly on the completion side. With an emphasis on longer-lateral, multi-well development projects, we're projecting our Permian all-in 2020 total well cost dollar-per-foot metric to come in between $1,025 and $1,125 per foot. That's down approximately 4% and 27% at the midpoint from our 2019 and 2018 averages, respectively. I want to mention again that this estimate includes all necessary costs to bring a well online. That's drilling, completion, stimulation, facility and flowback costs. Over the year, we expect to bring 90 net wells online, 77 in the Permian and 13 in the Mid-Continent. Although we're forecasting a fairly even capital spread during the year, our projected completion activity is skewed slightly to the second half of the year, with 60% of our completions forecasted to occur in Q3 and Q4. With our activity, we anticipate increasing our inventory of net wells in progress by 16 to a total of 54 wells in progress at the end of 2020. With our modeled completion cadence, we're projecting our 2020 oil growth to really begin in Q3, with the resulting 2020 full year net oil guidance range of 91,000 to 97,000 barrels a day. That's up 6% to 13% over our 2019 average of 86,000 barrels a day. With limited capital directed to the Mid-Continent and the strong likelihood of ethane rejection during the year, we're projecting that our 2020 net equivalent volumes will fall in the range of 270,000 to 286,000 BOEs per day, which puts the midpoint, basically, in essence, flat to 2019. Bottom line, with projected flat equivalent production as compared to 2019, we're projecting our oil volumes to increase 6% to 13%. For Q1, we're projecting our net oil volume to be in the range of 87,500 to 91,500 barrels per day and our net equivalent volume to average 272,000 to 288,000 barrel equivalents per day, both down slightly from Q4 '19, but up significantly from a year ago, with our projected Q1 oil and equivalent volumes up 10% to 15% and 5% to 11% versus Q1 '19, respectively. Jumping to Opex. We had a great quarter again for our lifting cost in Q4, with a posting of $3.07 per BOE. We were down 10% from Q3. And it put our year-to-date lifting cost of $3.34 per BOE just slightly above the low end of the guidance range we issued last call, $3.30 to $3.55, and it represented a drop of 9% from our 2018 average of $3.66 per BOE. Looking forward into '20, with our 2020 Permian focus and our forecasted range for 2020 equivalent production being relatively flat, we're projecting our full year 2020 lifting cost to be in the range of $3.10 to $3.60 per BOE. And lastly, some comments on drilling and completion costs. With the exception of a slight drop in the cost per tubulars, the majority of all our drilling and completion cost components have held relatively flat over the last few months. That said, our ops team has done a great job capitalizing on the Q4 service cost reductions, operating efficiencies and program design cost reductions that we achieved in late Q4 and early Q1, again particularly on the completion side. We're now executing on those total cost estimates, the same ones that we provided last call, with our generic Reeves County 2-mile Wolfcamp A AFE running $9.3 million to $11.8 million, depending on facility design and frac logistics, and our shallower Wolfcamp A well in Culberson County, running about $500,000 less with an AFE of $8.8 million to $11.1 million. As we've stated before, the efficiency gains that we derive through our multi-well development drilling projects really put our average development project per well cost at the low end of the guidance ranges I just gave you. Both of those AFEs that I mentioned reflect costs which are down approximately $700,000 per well from Q4 '19, $1.1 million from early 2 19 -- or 2019 and down $1.6 million from where we were in Q4 '18. And in the Mid-Continent, our current 2-mile Meramec AFE is running $8.5 million to $10 million. That's down $1 million from late Q4 of last year, $1.5 million from earlier in '19 and $3 million from the costs that we quoted in 2018. We've made tremendous progress on our well costs and our ops team is fully committed to maintain the progress that we've made to reduce these costs. In addition to working with our service providers to capture further efficiency gains, we stay focused on the operations which ultimately will lower our total cost per lateral foot. That's multi-well pad drilling and batteries, it's water recycling, it's zipper fracking and the optimal use of our midstream and saltwater disposal infrastructure. Our goal is to push our 2020 Permian program all-in well cost to the low end of the $1,025 to $1,125 per-foot range that I just mentioned. In closing, we had another great quarter in Q4. With guidance speeds, we set new company records for net oil and equivalent production. We closed the 2019 books with 27% and 25% year-over-year gain in oil and equivalent production. We're capitalizing on the low development and operating cost structures that we worked so hard to achieve, and we're well positioned to execute on the capital activity and production plan that we've laid out for us here in 2020. With that, I'll turn the call over to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Arun Jayaram of JPMorgan. Our next question comes from Gabe Daoud of Cowen. -------------------------------------------------------------------------------- Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [2] -------------------------------------------------------------------------------- I was hoping we could start maybe on the free cash flow guide for '20 in the outlook. I guess if gas prices were to stay where they are today, alongside, I guess, NGL prices also staying relatively stable from here, how much flexibility is built into the program this year in order to allow you guys to cover the dividend? Would you think about potentially deferring that Mid-Con rig or a third crew in the Permian? Just any thoughts around flexibility would be helpful. -------------------------------------------------------------------------------- G. Mark Burford, Cimarex Energy Co. - Senior VP & CFO [3] -------------------------------------------------------------------------------- Yes, Gabe, in the free cash flow we projected for 2020 in the $50 price deck, we're only assuming out a $0.05 realization, which doesn't bet a negative price for the second quarter of this year for our realization in the Permian. If prices were to be more significantly lower than that, we would be evaluating always, as we always do, our capital allocation. We do have flexibility in our plans and we would think about it, but I think that Permian gas price alone is probably not a factor in which we would make major changes. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [4] -------------------------------------------------------------------------------- Yes, Gabe, this is Tom. Yes, we do have tremendous flexibility in that we don't have services under contract. But Mark's answer is the right one that we've baked in a pretty draconian estimate of differentials. -------------------------------------------------------------------------------- Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [5] -------------------------------------------------------------------------------- Understood. And then I guess just as a follow-up, could you maybe talk a little bit about the decision to allocate some capital to the Mid-Con in '20? Is there anything different going on there that you guys are doing to perhaps increase returns versus the legacy program? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [6] -------------------------------------------------------------------------------- Well, the -- we've always said, we've got some great opportunities in the Mid-Continent. And so we decided to advance a couple of projects. One major project is Meramec development that looks just fantastic on all fronts. I mean it competes heads up with the Permian on rate of return and in all fronts. It was ready to go. It fit nicely in our capital plan. And it does take some of the operational pressure off our Permian group as well. So it was a pretty easy decision based on return on capital and capital allocation. -------------------------------------------------------------------------------- G. Mark Burford, Cimarex Energy Co. - Senior VP & CFO [7] -------------------------------------------------------------------------------- And I would mention also that the reductions that we've seen in our well cost really helped to put a little momentum in that project. -------------------------------------------------------------------------------- Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [8] -------------------------------------------------------------------------------- Understood. That makes sense. And sorry, guys, just a quick clarification. Your 2020 Permian AFE per-foot guide, does that assume the legacy completion or the new value-engineered completion that you tested in 4Q? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [9] -------------------------------------------------------------------------------- Well, it actually has a fairly conservative completion design, but that's the one we're going with. We're not sandbagging. We're doing a lot of experimentation. We're looking at flowback. And we're just not quite ready to commit to a lower cost. That said, I'm going to tell you, I think we're going to hit that. We're really challenging our group to be innovative, to look at cost as a critical component, to make sure that we get the most valuable well and not necessarily the most productive well. I mean there are situations where your value increases if you -- that the cost savings can override any production reduction. So we're seeing a lot of encouragement. But as we go into 2020, I will tell you that our plan, our base completion, is probably on the conservative side on expenditure. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Our next question comes from Arun Jayaram of JPMorgan. -------------------------------------------------------------------------------- Arun Jayaram, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [11] -------------------------------------------------------------------------------- Can you hear me? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [12] -------------------------------------------------------------------------------- Yes. Welcome back, Arun. -------------------------------------------------------------------------------- Arun Jayaram, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [13] -------------------------------------------------------------------------------- All right. Second time's a charm. Tom, I was wondering if you could give us more insights into the 3-year plan. In particular, just wondering what type of rigor went into the analysis. Is this a top-down view or more bottoms-up, involving, call it, sticks on the map, identified projects, et cetera? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [14] -------------------------------------------------------------------------------- Yes. Well, Arun, I think I had mentioned that in my opening remarks. This is very much bottom-up. We have -- our focus on planning involves our entire organization, from the operations team up to the C-suite. And if there's any lesson that we've learned in the last few years, it's that you need your operations people intimately involved in crafting the plan because they're the ones that are going to have to execute it. They understand the logistics and difficulties of a complex plan. And so that plan that we announced this morning is real. It's sticks on a map. There's a commitment for our organization to execute it. But I also want to reiterate, the single most important variable in that plan is our cash flow, which is driven by commodity pricing. But given the parameters we outlined, we're going to execute that plan. -------------------------------------------------------------------------------- Arun Jayaram, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [15] -------------------------------------------------------------------------------- Got it. And when you made the comment, Tom, about ratable activity levels, I was just wondering if you could maybe provide a little bit more color around that kind of comment. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [16] -------------------------------------------------------------------------------- So that wasn't my word, but Mark, do you want to comment on that? -------------------------------------------------------------------------------- G. Mark Burford, Cimarex Energy Co. - Senior VP & CFO [17] -------------------------------------------------------------------------------- Yes. Arun, we're talking in terms of ratable activity certainly in our rig and completion cadence in the rig levels in our capital deployment and certainly also around our frac crew cadence. We're not [op leading] our frac crew cadence and are still in development. All of that is being in the plans built out on a ratable, consistent basis to be the most operationally efficient. But there is still always some element of our production profile. Even as Joe mentioned this year with some of the production profile still not considered as ratable, that's also a reflection of the timing of the completions of the different infill developments. And even with a consistent operational cadence, depending on the timing of the different infill developments, you would all still see some variability in the production cadence. -------------------------------------------------------------------------------- Karen Acierno, Cimarex Energy Co. - VP of IR [18] -------------------------------------------------------------------------------- And I would also add that we talked about activity versus capital. When we did this -- put this plan out a year ago, we locked down capital to be $1.5 billion every year. This year, our capital is really more tied around the $50 and $2.25 that we're using to budget from. So -- and then, you know what, we have a goal of basically growing kind of 10% as a minimum. So there you go. So we're not tied to a specific level of capital every year. In fact, in '20, we're spending a little bit less than '19. So... -------------------------------------------------------------------------------- Arun Jayaram, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [19] -------------------------------------------------------------------------------- Great. Great. And just my follow-up. Tom, I was wondering if you could provide us maybe a little bit more color on these less intense frac designs that you've been testing, particularly in the fourth quarter. Is this -- could you give us a sense of fewer stages? Or what exactly have you been testing? And perhaps what type of cost savings on a dollar-per-foot basis are you yielding on these -- under these new frac designs? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [20] -------------------------------------------------------------------------------- Arun, you're going to have to forgive me if I decline to discuss the specifics of what we're testing. I mean obviously, there are many variables that go into frac design. There's cluster spacing, there are clusters per stage, there's perforation style, there's pump rate, there's fluid and sand per cluster, there's composition of type of sand and any other additives, either diverters, surfactants, and many other variables that go into that. Probably, the -- I will just, in general, tell you that one of the variables that has the largest impact can be stage length because that tells me how fast you can get on and off the job. And that's certainly a significant variable. We did see fairly significant cost reduction in our simulations quarter-over-quarter. We're not committing to that going forward. Joe, do you want to comment on the cost reduction? -------------------------------------------------------------------------------- Joseph R. Albi, Cimarex Energy Co. - Executive VP, COO & Director [21] -------------------------------------------------------------------------------- Yes. As I'm hearing you guys talk, it's -- underneath the hood here, there's so many things that work. It's the cost of the products and then your efficiency is pumping the job. The longer stage length that Tom mentioned says, "Hey, I don't need to pump as many stages for that well." But what we've been able to do over the last year, Arun, is pretty remarkable in my opinion. We've cut through our efficiencies alone. We've cut the number of days to frac a 2-mile Wolfcamp well from about 9.9 to 6.5 on the average. And that's a 30-some-odd, what, 30-ish percent reduction in time while you're charged for that time, right? And so when we look at the overall reduction on the completion side, I would say the overwhelming element to that reduction has been our ability to take advantage of the market and our efficiencies to create the cost reductions that we're seeing. These additional design changes are only going to sweeten the pot, if they make sense, when we go to complete the well and we see the results that we get. But all-in, this thing, in that dollar-per-foot number, there are so many elements to this. And what I love about it, it's going to focus our -- intense-focus our business units to look where they can drill longer laterals, to look where they can drill multi-well pads, where they can add to existing multi-well batteries, where they can recycle, where they can zipper frac. The bottom line is the whole thing added up is creating these dollar-per-foot metrics that we love challenging the organization with to optimize the overall program. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [22] -------------------------------------------------------------------------------- Let me just make one last comment. Cost is a critical element, but it's not a driving element. The driving element for us is value-created. And so there are a lot of elements that we look at when we look at completion design. Certainly, cost and well productivity are critical elements. But what's also a critical element is the impact that it may have on well spacing, the impact it may have on well interference, the impact it may have on full section development. We're trying to maximize value. And costs, commodity pricing, well productivity, those are outputs from a focus on value, and that's the way we view this problem. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question comes from Betty Jiang of Crédit Suisse. -------------------------------------------------------------------------------- Wei Jiang, Crédit Suisse AG, Research Division - Research Analyst [24] -------------------------------------------------------------------------------- I have a question on New Mexico. Like from what I can tell, Cimarex New Mexico performance has been sort of some of the best in the portfolio in 2019. So 2 parts. First, is it fair to say that you have determined the best optimal development approach in terms of targeting and spacing for that area, I guess, specifically Lea County? And then second, is there room for New Mexico to be an even greater percentage of capital allocation over 3 years beyond where you already increased the 2 for this year? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [25] -------------------------------------------------------------------------------- Yes, Betty. Certainly, we have not optimized to the point where we're satisfied. Now we're never satisfied. We've made a lot of progress, but I will not say that we think we found the secret sauce and the formula will be unchanged. We think we have progress to make in New Mexico and throughout our portfolio, and we are hyper-focused on that right now. I'm really glad you asked about New Mexico because New Mexico carries into our discussion on costs. Our returns in New Mexico are fantastic, but we also see some shorter laterals in New Mexico. They're not all 2-mile long. And so the way we view cost is we ask our organization to put the program together that generates the most value, and then we look at that program and on that, we take a cost target. So we don't want to discourage them from drilling 1- or 1.5-mile laterals because the cost target comes first. And really, that whole emphasis on what I just described is driven by New Mexico because we love New Mexico, and we would never want an arbitrary cost target to discourage some of the incredibly profitable activity in New Mexico. We do think we can increase activity in New Mexico, to your latter question. Now New Mexico has some unique issues that Texas doesn't. We're generally on state and federal leases. Our permit time can be long. We have environmental constraints with some species protection. You hear us talk about the prairie chicken, the hornshell mussel and the sand dunes lizard. I mean these are all things that limit your ability to just turn a crank up at will. New Mexico takes great planning. And again, I'm going to come back to that pillar on planning. This organization has made a tremendous amount of progress, but we're very, very high on our New Mexico asset and the potential over the next few years. -------------------------------------------------------------------------------- Wei Jiang, Crédit Suisse AG, Research Division - Research Analyst [26] -------------------------------------------------------------------------------- Great. It's helpful. And then I also just want to sort of clarify the 3-year outlook. Maybe I'm reading a bit too much into what you say in the press release, but you sort of talked about, based on this ratable level of activity at a minimum, we could see similar production growth with increasing free cash flow. I guess just on that minimal standpoint, are there -- what gives the confidence level that things could be in line to be better than what's showing in the slide deck? And then also, just when we look at 2021 and 2022, is it fair to assume that those 2 years have a fairly similar profile instead of -- in terms of growth and free cash flow? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [27] -------------------------------------------------------------------------------- Yes. I'll kick it off, then I'm going to turn it over to Mark. I think we have tremendous upside within that capital plan. We have cost upside, we have execution upside, we have well performance upside. So I'm incredibly optimistic right now about our ability to just, flat out, get better at our business. And that will show up in a better performance with the same capital investment. But Mark, I'm going to let you handle the remainder of that. -------------------------------------------------------------------------------- G. Mark Burford, Cimarex Energy Co. - Senior VP & CFO [28] -------------------------------------------------------------------------------- Yes. Betty, just to clarify. So you're concerned about the ratable activity leaves that 10% growth, that based on your question, what -- is that what you're trying to understand? -------------------------------------------------------------------------------- Wei Jiang, Crédit Suisse AG, Research Division - Research Analyst [29] -------------------------------------------------------------------------------- Yes. I'm trying to understand sort of when that free cash flow and that growth shows up over that 3-year time frame. And we know 2020, but what 2021 and 2022 generate -- both of them generate a similar level of growth and free cash flow in each of those years. -------------------------------------------------------------------------------- G. Mark Burford, Cimarex Energy Co. - Senior VP & CFO [30] -------------------------------------------------------------------------------- Yes, Betty. So yes, so the 3 years actually, for '21 and '22, we personally don't have visibility individually for. Our growth in oil is as strong or stronger than what I would say that we're experiencing in '19. And on equivalents, we actually see the equivalent portion of our volumes growing more consistently in the '21 and '22 time periods as well. Our capital is fairly consistent around that $1.3 billion. And there's a little variability between the years. But that's just, again, timing of our projects, where we have existing cadence, and just the capital hitting depending on the rig schedule. We have built up rig schedules and completion schedules for all these plans and just some variability in those schedules. But we see a growing cash flow in each year, and actually, in 2022, one thing to point out in all of our analysis, even on the flat sensitivities, we do use 4 gas differentials as the basis for our valuation relative to NYMEX. So in '21 and '22, with some of the improving basis differentials, we do get that benefit. We're building that into our forecast. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Our next question comes from Doug Leggate of Bank of America. -------------------------------------------------------------------------------- Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [32] -------------------------------------------------------------------------------- I think the previous question, we have actually touched on something I wanted to ask, and it's visually on Slide 10 and 11 of your book. I just want to make sure I'm reading this correctly. The gas price assumption has been there. I think you just said you're using strip differentials, if I read that correctly. Is that right? That wasn't actually my main question, but I just wanted to check out the point you were making. -------------------------------------------------------------------------------- G. Mark Burford, Cimarex Energy Co. - Senior VP & CFO [33] -------------------------------------------------------------------------------- Yes, Doug, that's correct. So when we look at the flat NYMEX price of $2.25, we still use the 4 differentials to embed against that NYMEX price. And we use the ratio because, like right now, the NYMEX price is slightly lower than $2.25 in '19, but slightly better than that in '20. But we use the ratio of the differentials to that NYMEX price to come up with the basis price in those flat price cases. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [34] -------------------------------------------------------------------------------- Hey, Doug. This is -- that's true of all of our capital planning. We really want to level our capital plans to the actual well received price. So not that we're pressured in getting it right looking ahead, but we're certainly trying to have the most realistic look. -------------------------------------------------------------------------------- Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [35] -------------------------------------------------------------------------------- Right. So the real root of my question was, and I hate to do this, Tom, you did say that you didn't want to get pressed too much on use of cash because you want to generate the cash first, but let's assume the Street's base case is probably around $55 TI. If I'm looking at this chart right up on Slide 11, it's implying about a 1 -- I guess $1.1 billion of free cash after dividends in 2021 and 2022. Is that the message or am I reading that wrong? Because if I'm not reading it wrong, that's better than a 10% free cash flow yield after dividends. And my question, I guess, would be why wouldn't you buy back your stock in that scenario? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [36] -------------------------------------------------------------------------------- Well, I have no good answer for that. I mean, as I said in my remarks, a share buyback is very much something that we discuss. Now I want to repeat what I said. We're also really trying to manage our balance sheet, and we're carefully looking at the debt markets, and they open and close. And so retiring debt is also in that list of priorities. Certainly, I listed 3 things: increasing dividend, debt retirement and share buyback. And all of those are things that we are deeply interested in. -------------------------------------------------------------------------------- Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [37] -------------------------------------------------------------------------------- Okay. I appreciate that. So my second question -- that was actually my first question. So my second question is really more I want to get back to pricing and inventory. And specifically, I want to touch on the NGL assumption you guys are using and what your economic inventory depth looks like at the current pace. And I guess my -- maybe really the big delta here is what are you -- how confident or comfortable are you with the assumptions you're making around NGLs, given there's a lot of new infrastructure and so on? But that's obviously a pretty big factor in determining the economic inventory, and I'll leave it there. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [38] -------------------------------------------------------------------------------- Well, I'll just take your last point first. How confident are we on future pricing? Not confident at all. And anybody on the call that wants to help us out there, please press your button. Yes, we -- that's why we manage with a healthy balance sheet. That's why we do a lot of downside sensitivity. Every investment we make, we look at it at many different price files, and we always want to make sure that it's a good investment even in our most conservative case. But of all the things I worry about, Doug, I will tell you that, as I sit on this call today, economic inventory is almost off my list. We have seen our inventory increase, looking forward to talking about some of these new landing zones we've tested. We have never been more bullish on our economic inventory. And I'll just leave it there. It's just not on my worry list. And I spend a lot of time worrying. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Our next question comes from Mike Scialla of Stifel. -------------------------------------------------------------------------------- Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [40] -------------------------------------------------------------------------------- Tom, I want to see if you could give any more detail on the things you're doing on the automation and machine learning front. You had said it caused you to revisit some long-held assumptions. Any color you can add to that comment? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [41] -------------------------------------------------------------------------------- Well, only in the most broadest sense because we're not ready to talk about it. But I will tell you that we embarked on a machine learning project that looked at our completion methods. And imagine all the hundreds of decisions that we've made over the last few years on how to complete our wells. Each individual decision has been made with an economic plan, but each individual decision has led us down a particular path. And we're very pleased with where we are, but the power of machine learning is it lets us throw in every one of those decisions and goes through millions of simultaneous solutions to try to find what other paths we didn't contemplate might have been taken to lead to a different answer. And I'm just going to leave it by saying we have some results that are challenging our conventional wisdom, and we're really, really excited about that. We're very committed to this, and we'll be field-testing this week. No -- excuse me, this year. As far as automation goes, our organization has really emphasized automation, and it does so much for us. It gives us the ability to be real-time monitoring our facilities. It gives us the ability to use data analytics to predict. It gives us the ability to see very quickly when we have upset events and we're flaring, so we can very quickly address it. It gives us the ability to have safety shutdown systems so that if we have any field event or a failure in our system, our system automatically shuts down and we avoid field interruptions. It's -- automation is the way of the future. In fact, many industries are well ahead of us, and we're catching up. But we have a great team deploying this. We're really excited by the illumination it offers to see our assets in real-time and make really good operational decision. -------------------------------------------------------------------------------- Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [42] -------------------------------------------------------------------------------- And you said you were not ready really to talk about the new completion design in detail, but just broadly speaking, is it fair to say that you're looking at a less intense completion? And do you have any data to suggest how well performance with the new completion stacks up against your prior completion designs? And I recognize there's all kinds of different areas and different designs everywhere, but just broadly speaking, I want to get your thoughts on that. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [43] -------------------------------------------------------------------------------- Well, I'll be broad and sufficiently vague that you all know what I'm talking about. But I mean, I will say no. We don't have specific field tests yet, although that's just because we haven't gotten to it yet. We will be trying some things on existing wells. But broadly, what I would say in an ideal world, what would you hope for? You would hope for a completion design that adds more value at significantly less cost. And that's kind of where we're leaning and that's what we're testing. But I just thought, just let me say, we're always excited about technology. We like to talk about results. But I want to give you a flavor of what we're doing internally. This organization is active, alive, and across our platform, we're getting better at the business. And this is one area I'm particularly excited about. But I get excited about a lot of things that don't ultimately work. And we really look forward to talking to you about results. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Our next question comes from Jeff Campbell with Tuohy Brothers Investment. -------------------------------------------------------------------------------- Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [45] -------------------------------------------------------------------------------- Thanks for all the wealth of guidance over the 3-year period. And I'll just say, personally, I'm really excited by this faster-than-I-expected turn of significant free cash out of the operation. It doesn't seem that long ago that you were -- you had a different attitude, and it's really quite impressive. On Slide 13, I was just wondering, you have the 4 counties laid out for the Permian. I was just wondering, could you identify what the primary zone or zones are that you're going to go after in each one of those areas. I'm just kind of wondering if it's Wolfcamp B versus A, that kind of thing? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [46] -------------------------------------------------------------------------------- Well, first off, I want to share your excitement. This organization -- and it's not -- it's a tribute to our organization throughout our hallways and the field. We really have a focused organization and are focused around the right thing. But referring to Slide 13. I mean certainly, our major topic or our major target is Upper Wolfcamp. I mean throughout the 4 counties, you're going to see Upper Wolfcamp be a really important part of that program. Now in Lea County, there's a fair amount of Bone Spring. And there's a little bit of Bone Spring everywhere, but I would generally, if I had to just really be broad brush, I would say it's generally dominated by Upper Wolfcamp, with the second being Bone Spring. -------------------------------------------------------------------------------- Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [47] -------------------------------------------------------------------------------- Okay. Great. I appreciate that. And looking at Slide 24, it lays out a number of sales agreements that -- for oil and nat gas that are described as through 2020. But I also see a lot of long-term agreements identified as well. So just kind of wondering, are these -- when I look at this slide, are these agreements essentially set in stone, or is there some flexibility there beyond 2020? -------------------------------------------------------------------------------- Joseph R. Albi, Cimarex Energy Co. - Executive VP, COO & Director [48] -------------------------------------------------------------------------------- Yes, this is Joe. These agreements are the ones that we currently have in place. The end game for us on the gas side, residue takeaway side, is ensure flow -- ensure product flow. So that's the basis for our commitment to Whistler. We're also looking at other projects. And ultimately, where we're going with this is not only to ensure product takeaway out of the basin, but it's to give us a little bit more diversification with different end markets and get a little bit more Gulf Coast exposure. On the oil side, we feel very comfortable that there's enough capacity to get out of the basin. And on the NGL side, all of our -- as we've talked about before, all of our contracts are tied to processors that do have the pipe out of the basin. So it's all about ensuring flow and trying to diversify the end market where we can take advantage of each geographic price metric. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Our next question comes from Michael Hall of Heikkinen Energy Advisors. -------------------------------------------------------------------------------- Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [50] -------------------------------------------------------------------------------- I guess just a couple of quick ones on my end. A lot have been addressed. The increase in wells in progress over the course of the year, what's the thought process and driving force behind that? And then how has that played out over the course of the next -- the rest of the 3-year plan? Is that drawn down? Or is that just basically a kind of normal, stable operating backlog? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [51] -------------------------------------------------------------------------------- Well, I'll kick it off and then turn it over to Joe. I will say that Cimarex has typically not had a big DUC inventory, drilled uncompleted wells, and I could talk for the next 30 minutes on why that's the case. And we still would love to complete a well and bring it on immediately. But we find that, that limits our flexibility in the field, and then having a certain number of drilled and uncompleted wells in our inventory is a really nice thing for our field people and our flexibility in operations if we have some interruption and interruption can mean a lot of things. There might be an offset operator that's drilling a well and we decide, "Oh, my goodness, we don't want to be fracking during that operation." There might be a restriction in our ability to get water. There might be a delay in a land issue. And so when you're cutting it with no slack, it can really challenge our field people. They behave valiantly. But having a few, and not a lot, but having some inventory of wells that are waiting to be completed is really pretty good project management. -------------------------------------------------------------------------------- Joseph R. Albi, Cimarex Energy Co. - Executive VP, COO & Director [52] -------------------------------------------------------------------------------- Yes, I'll just follow up with that. The benefit is truly flexibility. Our completions guys love the idea. I mentioned the time savings that we're seeing to pump our wells, where our frac crews are catching up with our rigs. And if we ever get to the point where they're waiting on the rigs, then we got a little bit of an issue. So having those wells available for us at the end of the year is truly beneficial there, both the operations and logistics aspect of the field. What I like about it too is it can help us get away from some of these start-stop-type production cadence levels that we see as in this year, where we have a lot larger production growth in the second half of the year versus the first half. We can smooth that out a little bit if we had some DUCs in our hip pocket. -------------------------------------------------------------------------------- Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [53] -------------------------------------------------------------------------------- That's helpful. It makes sense. And I guess in the context of that, as it played out through the course of '19, we did see quite a few additional wells in the fourth quarter, which was addressed a bit earlier. But I just want to make sure and be clear. Any expected capital associated with those wells that we should be mindful of as we think about the first quarter of this year? Or was that really all accounted for? -------------------------------------------------------------------------------- G. Mark Burford, Cimarex Energy Co. - Senior VP & CFO [54] -------------------------------------------------------------------------------- Yes, Michael. We -- that was accounted for in '19, and those wells are coming on production in a matter of weeks early. There's more of the production accounting of those wells. The capital had been scheduled for those wells in that period. It's always -- it's the fair timing of when we complete activity completion or ended. In our first pod date, we have some rules that we use to try to determine when the first pod will occur post completion. The capital is scheduled, timing of the production did come in a bit quicker, but this capital is already scheduled in '19. And just a further point on the wells waiting on completion or wells in progress. At the end of '19, with those 12 wells, would have been about 49 wells in progress. But technically, we were kind of remodeling those, would be coming on in the first quarter. It did come on a few weeks early. It reduced our in-progress at the end of '19. As we step forward into '20, the 54 we've described or so, those are pretty stable out in the '21 and '22, your earlier part of your question. And it just comes back, as Tom mentioned. We try to have a pretty stable plan and have a ratable frac or activity relative to rigs. So with our rig level around 10 rigs in the Permian, 2 frac crews going to 3, that kind of in-progress is just kind of a natural outcome of our cadence. -------------------------------------------------------------------------------- Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [55] -------------------------------------------------------------------------------- Okay. That's super helpful. And then, I guess, last on my end would be the Slide 14 was super helpful as it relates to additional granularity on the projects this year in the Permian. It seems like there is also some not included on that. And in terms of the activity not included on that slide, on a net basis, is that mostly just non-op or -- I mean how should we think about that? And are there any particular counties or areas where that's concentrated? Just trying to think about how it's dispersed throughout the Permian footprint. -------------------------------------------------------------------------------- Karen Acierno, Cimarex Energy Co. - VP of IR [56] -------------------------------------------------------------------------------- Well, the slide is meant to show development. So there are multiple well projects. That's the first response to it, you're saying because the number of wells doesn't total -- Bone Spring... -------------------------------------------------------------------------------- Joseph R. Albi, Cimarex Energy Co. - Executive VP, COO & Director [57] -------------------------------------------------------------------------------- Right. Yes. When you look deeper into the plan, these are the larger well projects. So these are touching -- looking at the slide, you got 1 2-well project that carried back. But there's a number of other smaller projects that we have throughout the year that might be 2- to 3-well type projects that aren't on that slide. -------------------------------------------------------------------------------- Karen Acierno, Cimarex Energy Co. - VP of IR [58] -------------------------------------------------------------------------------- I don't think the Bone Spring was accounted for either, right? So -- yes. -------------------------------------------------------------------------------- Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [59] -------------------------------------------------------------------------------- Okay. So -- okay. That's helpful. So it's not necessarily non-op or anything along those lines. It's just smaller projects that didn't make the "development cut"? -------------------------------------------------------------------------------- Joseph R. Albi, Cimarex Energy Co. - Executive VP, COO & Director [60] -------------------------------------------------------------------------------- When I looked at it in prep for the call, there's like 22, what I'll call, projects, and there's only 15 on this slide. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [61] -------------------------------------------------------------------------------- There's supposed to be a highlights real. But we didn't really... -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- Our next question comes from Neal Dingmann of SunTrust. -------------------------------------------------------------------------------- Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [63] -------------------------------------------------------------------------------- My first question centers on the capital discipline. I know you've talked a bit about this, but I just want to make sure I understand. You all were one of the few to slightly sequentially increase the D&C spending this year, what with that announcing the higher-than-peer average sequential production growth guidance. So again, while I believe you made the appropriate call, I'm just curious as to how you weigh sort of when looking at growth versus just a pure capital discipline? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [64] -------------------------------------------------------------------------------- Well, we look at it a lot of ways. I mean first and foremost, we ask ourselves, is this capital well deployed. We're absolutely confident that we're creating value with that capital. We're not driven by growth targets, we're driven by value. But we also looked at the components of our revenue, the components of our cash flow. And we have some great results. We're really firing on all cylinders. And we saw '20 as an opportunity to step it up on our oil growth. And so we're really looking to maximize our profitability, maximize our out-year cash flow, and we have the wherewithal to do it. We didn't really spend too much angst looking at our capital level in '19 as a marker, and we didn't have too much angst on whether we were slightly above or slightly below. We think our capital for 2020 is the right number, and we're off to the races to execute. -------------------------------------------------------------------------------- Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [65] -------------------------------------------------------------------------------- Got it. And then my second question centers on Slide 7, where you will lay out the -- your wells by quarter. I'm just wondering, you talked a bit about this already, too. Could you just give details, if you could, in regards to how you -- just what working interest are on some of these upcoming wells for the first half of the year? I know there was some kind of chatter on the prior wells about that. I just want to make sure I'm sort of sure on kind of -- a little more cadence on what type of wells and around the working interest of those coming on here shortly. -------------------------------------------------------------------------------- Karen Acierno, Cimarex Energy Co. - VP of IR [66] -------------------------------------------------------------------------------- Those are net wells, Neal, that are coming on. I mean we could go through the individual projects if you want. Maybe we could do that off-line. I would be happy to give them to you. But we just don't have it at our fingertips. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [67] -------------------------------------------------------------------------------- But the critical point is those are net wells. So implicitly, our working interest is 100% on every one of those. But our working interest still is very high. -------------------------------------------------------------------------------- Joseph R. Albi, Cimarex Energy Co. - Executive VP, COO & Director [68] -------------------------------------------------------------------------------- When you look closer at it at a high level, first half of the year, we've got 40 gross wells, 29.4 net; second half, 58 gross wells, 39.2. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- Our next question comes from Jeanine Wai of Barclays. -------------------------------------------------------------------------------- Jeanine Wai, Barclays Bank PLC, Research Division - Research Analyst [70] -------------------------------------------------------------------------------- My first question is on your 3-year free cash flow outlook and just following up on some of Betty's questions. You anticipate free cash flow in 2020, and Slide 11 suggests that it compounds from there. So can you discuss the assumptions that are embedded in your bottoms-up 3-year outlook? You're very encouraged on the upside to the business. It sounds like things are going really well. So any color on trends in well productivity or efficiencies that you envision in that year 2 or 3 would be really helpful. -------------------------------------------------------------------------------- G. Mark Burford, Cimarex Energy Co. - Senior VP & CFO [71] -------------------------------------------------------------------------------- Yes, Jeanine, as far as the productivity improvements, we are not baking in additional productivity improvements than what we've already have captured and the cost structure is consistent with what we're forecasting for this year. We're not making adjustments to those components of our 3-year plan. As I touched on, there is some benefit in the outer periods with the improving gas price differentials. We do definitely see those helping us in those future '21 and '22 periods as we've got some additional pipeline takeaway, improving outlook in the forward differential. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [72] -------------------------------------------------------------------------------- Yes, Jeanine, I just want to reinforce what Mark just said. When we look at plans, we don't bake in hope. So they're anchored on actual cost, actual well results, actual cycle time. And anything we can do that's to the upside and operational improvement, well productivity, that's all to the upside. -------------------------------------------------------------------------------- Jeanine Wai, Barclays Bank PLC, Research Division - Research Analyst [73] -------------------------------------------------------------------------------- Okay. It sounds like there could be some good things to look forward to there. My second question is on inventory additions. And it's just how are you thinking about the cost of adding Tier 1 inventory? I know that you said that you don't stay awake at night thinking about lack of inventory. But specifically, how do you think about the cost of moving current inventory into the Tier 1 bucket through testing and appraisal, which can be costly depending on how it goes, versus adding locations via exploration that you mentioned during your prepared remarks versus, I guess lastly, the option is inorganic additions through M&A, given what you're seeing in the market? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [74] -------------------------------------------------------------------------------- Well, I think a lot about that. And in my experience, and we just yesterday reviewed our annual look-back at our history of investing, what's worked, what hasn't, what do we want to emphasize, what do we want to correct. So a lot of this is very fresh in my mind. There's no governor in our business that controls our profitability stronger than your entry cost. If we -- you asked about acquisitions. Acquisitions are great from a top line, but you're typically buying your discount rate down to a point where, however wonderful the asset, it's a low-return project because you had to prepay for your returns in order to acquire that asset. The thing about exploration is you have a proprietary advantage. In the acquisition market, there's very few proprietary advantages. Everybody has got lots of money and everybody's going to be bidding. So being the high bidder in auction isn't our value-creation strategy. We want to find proprietary ideas and capture that value for our shareholders. And that's a low entry cost. So the way I think about inventory is we're always trying to find more profitable things. Of course, the easiest is a new landing zone in our existing footprint. There's no incremental land cost and it just -- it's often a landing zone that can be codeveloped with your existing activity. So that's -- if you ask me what do I hope for, it's that people walk into my office and tell me we have twice the number of targets on a given asset we already control. But we do also explore off our footprint. We look very carefully at our entry cost, both on a per-acre basis, but also what percent of our total capital. We really want to have that be a very small and manageable part of our total capital. And so we have our own philosophy there. It's all about value creation, and it's all about entry cost. -------------------------------------------------------------------------------- Operator [75] -------------------------------------------------------------------------------- And the last question comes from Joe Allman of Baird. -------------------------------------------------------------------------------- Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [76] -------------------------------------------------------------------------------- Tom, is there a strategic shift happening at Cimarex, or is there a tactical shift happening at Cimarex? And what's driving that? And the reason why I ask is because I'm hearing different language, I'm hearing about the 5 pillars, and so that's making me ask that question. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [77] -------------------------------------------------------------------------------- Well, the first time we talked publicly about our pillars, I could tell you everybody in our organization is tired to hear about it because I talk about it constantly, and introduced that in the middle of last year. Joe, these are tough times. I mean although I find myself incredibly optimistic about this company, we have really difficult headwinds, and you know it better than I do. And so these pillars are attempts to focus our organization on things we can control. You've heard me say in past down cycles that we're not shipwreck victims. Cimarex is not an organization that's dead in the water, waiting for the rescue boat. We are going to control our own destiny. We are going to use this climate to reform ourselves and get fundamentally better in our business. That's what these quarterly results are about, that's what our 3-year outlook is about, and it's absolutely what our pillars are about. Whether it's planning, whether it's cost control, whether it's finding new assets, whether it's using information technology in a way to make ourselves more effective or whether it's responding to this conversation around environmental impact, Cimarex is a company on the move. We're getting better. And we are a much better company than we were a year ago. I'm excited to be able to say that publicly and will be a much better company a year from now. -------------------------------------------------------------------------------- Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [78] -------------------------------------------------------------------------------- That's very helpful, Tom. And my follow-up and last question is, in terms of natural gas and NGLs and oil, I know that ensuring flow is one of the key drivers that you try to guarantee. But what are you doing to maximize the value? Are there some key things to look for in terms of contracts or agreements that we can look forward to over the next year or 2 that will help you beyond just the next 3 years, even longer term? -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [79] -------------------------------------------------------------------------------- Yes. Go ahead. No. -------------------------------------------------------------------------------- Joseph R. Albi, Cimarex Energy Co. - Executive VP, COO & Director [80] -------------------------------------------------------------------------------- Well, Joe, if you think about the maturity of the Permian, years back, there was hardly any processing infrastructure and not a heck of a lot of pipe that came out of there. So those contracts that we entered into back then were probably a little bit more onerous than you get today. So we're in the process now of either renegotiating those contracts and/or when we renew them, there's a heck of a lot better contract terms associated with them. So it's kind of "you build it and they will come" kind of thing happened out there, and it's creating competition. And we're seeing it. We've seen it on the processing side. We've seen it on the NGL side. And we've seen it on the oil and the residue side. We've improved our oil netback dramatically. Right now, we're about $2.70-some-odd cents off with the Midland-Cush differential. That number wasn't that number 4 or 5 years ago. So there -- I think the market by itself is creating more opportunity for us to get a better netback. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [81] -------------------------------------------------------------------------------- But Joe, let me just add something to that. Our focus on planning really ties into your question because we're in a business where we're a high-decline business, and so commitments to long-haul pipeline, if your assets are in high decline, that's really a commitment to future capital because you need to drill new wells to achieve and meet those volume commitments. And so we've always been reluctant to do that because we're in a cyclic business, where our cash flow can rise and fall unpredictably. But with our focus on planning, we're getting much, much better at understanding our level of activity around long-term price band and we're getting more confident to make commitments that give our marketing group the ability to get those netbacks Joe is talking about. So I think you're going to see a different posture out of us going forward. Still conservative, still really embracing flexibility, but willing to backstop our increased planning capability with some commitment. -------------------------------------------------------------------------------- Operator [82] -------------------------------------------------------------------------------- The conference is now -- this concludes our question-and-answer session. I would now like to turn the conference back over to Cimarex for any closing remarks. -------------------------------------------------------------------------------- Thomas E. Jorden, Cimarex Energy Co. - Chairman, CEO & President [83] -------------------------------------------------------------------------------- Yes, I just want to thank everybody for your energy on the call. We've had some great questions, I really appreciate fleshing out. You focused on the right things. We're very excited about the data we've announced this morning. We're very excited about the plans. And we look forward to delivering future results. And thank you again. -------------------------------------------------------------------------------- Operator [84] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.