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Parsley Energy Inc (PE) Q2 2019 Earnings Call Transcript

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Parsley Energy Inc (NYSE: PE)
Q2 2019 Earnings Call
Aug 7, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to Parsley Energy's Second Quarter 2019 Earnings Call. My name is Tim and I will be your operator today. [Operator Instructions]. And now, I'm pleased to turn the call over to Kyle Rhodes Parsley Energy's Vice President of Investor Relations.

Kyle Rhodes -- Director of Investor Relations

Thank you, operator and good morning everyone. With me on the call this morning are President and CEO, Matt Gallagher; Chief Operating Officer, David Dell'Osso; Senior Vice President of Land and Marketing Stephanie Reed and Chief Financial Officer Ryan Dalton. Our remarks today may contain forward-looking statements, so please see our earnings release for a discussion of these statements and associated risks, including the fact that actual results may differ materially from our expectations. We also make reference to non-GAAP measures, so, please see the reconciliations in the earnings release.

During this call, we'll refer to an investor presentation that can be found on our website and our prepared remarks, we are going to reference to Slide 4 of that presentation. After our prepared remarks, we'll be happy to take your questions.

And with that, I'll turn the call over to Matt.

Matt Gallagher -- President and Chief Executive Officer

Thanks, Kyle actions continue to speak much louder than words in this challenging market environment. So as we eclipsed the halfway mark, I want to start my comments by checking in on the scorecard for our 2019 action plan. As a reminder, our returns focused 2019 action plan was designed to take a step forward to sustainable free cash flow while delivering a step change improvement in capital efficiency. As you can see in the far right column, we are delivering on these initiatives. Truly a positive progress report across the board. In fact, we have made enough headway on our capital efficiency target to raise the bar and we are positioned to cross the threshold to sustainable free cash flow for the remainder of the year and beyond.

We are also tightening our 2019 capital budget range, lowering our unit cost guidance and increasing our production guidance. I'm proud of the tangible strides we have made so far this year. And I do want to acknowledge the high level of execution being delivered across our organization day in and day out. I also want to reiterate that 6 months do not make one year and we will remain just as focused on execution in the second half of 2019 and beyond.

With that, let's turn to Slide 5 and dig deeper on how some of the key objectives of our 2019 action plan are playing out. When we unveiled our returns focused approach. Earlier this year, one of the key corporate level outcomes we envisioned with a meaningful year-over-year improvement in capital efficiency or, said another way, we are aiming to add more barrels of oil for fewer developmental dollars. We had initially targeted an 8% to 10% plus improvement driven by the combination of lower well cost, high graded activity and optimized completions. This breakdown of our original target is depicted in the graph on the left. As you can see, our teams have been diligently working on both the numerator and the denominator of this capital efficiency equation. And with 6 months behind us, we have seen enough to raise the bar on our capital efficiency improvement target to 12% to 14% plus.

capex savings are coming in better than expected, thanks largely to continued operational efficiency gains, cycle time improvements and deflationary trends on some consumables like sand and steel. Initial productivity gains are validating our shift in development approach. David will provide more details, but needless to say I am excited Parsley has made such measurable strides on these key objectives in such a short timeframe.

Moving on to Slide 6, the second key outcome our returns focused approach set out to accomplish was an acceleration of our timeline to sustainable free cash flow. As I mentioned, we are right of that inflection point and we currently expect to generate free cash flow for the remainder of the year quarterly. Our strategy is yielding fruit ahead of schedule. This is an exciting step in our corporate evolution. One that we have been organically building toward for a while. However, our pathway to free cash flow is not meant to simply be a short excursion, sustainable is the operative word. And Parsley possesses a handful of competitive advantages that will help keep us on a trajectory toward a growing free cash flow profile over time. Ultimately, increasing visibility for the return of capital to shareholders.

These relative advantages can be divided into three main categories. The first of these I would classify as scale and inventory durability. In other words, as a company have the scale needed to allocate capital efficiently and the inventory life needed to sustain that capital allocation over time. In recent earnings calls we have discussed, our view on optimal scale in the shale game in our long reinvestment runway of high return projects. These are fundamental ingredients in a sustainable free cash flow profile. And if you aren't as familiar with Parsley's competitive strengths on these fronts, I encourage you to review of our supplementary slides for more details.

The second category is what I'll call margin installation and expansion. In essence, not all barrels in the industry are created equal. This encompasses Parsley's advantage marketing position, our stringent cost control and our sizable minerals ownership position. Stephanie and Ryan will delve into these particular competitive strengths a little later on. The final category and the focus of Slide 6 is asset base maturation. On the heels of our strategic ramp for scale in the basin in 2017, our production base was largely comprised of newer wells with a steeper decline profile in aggregates. As you can see in the graph on the left of the 8 largest and most active Permian operators, Parsley's horizontal wells rank as the youngest, on average. And despite this younger asset base, Parsley is still poised to turn the corner to free cash flow in the back half of this year.

But now there is a flip side to that coin. A side which we get to enjoy point forward. With a disciplined 2019 action plan in place, Pparsley's base decline is moderating as shown in the top graph on the right hand side of this page. In effect, our treadmill is slowing down, making it easier to convert cash flow into free cash flow. This helps support the sustainability of our free cash flow profile. Meanwhile, some of our largest peers will likely see the speed of their respective treadmills dial-up as their activity ramps take home from late last year. We believe we have a relative tailwinds at our back. But we are not just resting on our roles. We are also focused on moderating our base decline where possible through data-driven, decision making in engineering and our field operations.

With that, I'll turn it over to David to discuss some of the positive developments and trends we've seen on the operational front.

David Dell'Osso -- Executive Vice President, Chief Operating Officer

Thanks, Matt. Let's turn to Slide 7, another one of the goals we laid out in our 2019 action plan was to build upon the operational efficiency gains we captured during 2018. As shown in the graph, we are delivering on this target, we're drilling completion efficiencies both up double-digits versus 2018 averages. On the drilling side, we recorded an 8% sequential quarter-to-quarter improvement in drilled footage per day per rig, which enabled us to drop from 12 to 11 development rigs in mid June. Faster cycle times, not only allow for lower equipment levels but can also help reduce well costs. So while we are now generating more footage with less equipment, we're also committing to a tightened capital budget range. This translates to a more capital-efficient program this year which Matt touched on earlier.

On the completion side we retained a healthy pace during the second quarter. It's important to note that the solid execution includes a larger percentage of upsized fracs and compressed stage tests which, by design, take a little more time to complete. For the remainder of the year we expect to run a maximum of 11 rigs and 3 to 4 frac crews while targeting a consistent capital investment pace. Managing our development schedule on weighted minimizes friction costs and allows us to carry operational momentum into next year continues to be a key priority for the team. On Slide 8, we zoom in on our up in County area to shed a little more light on what we're seeing from a returns focused strategy so far this year.

Our 2019 action plan called for a step up and open activity. And in fact, it has been our most active area with 25 wells turned to production through June. And I think these recent wells provide a nice proxy for our broader 2019 strategy as most includes some combination of upsized proppant loading, wider spacing and/or compressed stages. As shown in the graph on the left, our 2019 UPTON wells are delivering encouraging early results and have outperformed comparable 2018 wells by nearly 10% in the aggregate.

Simply put, we expected to generate a productivity uplift with our 2019 action plan and we are seeing that borne out in the early data. We highlight a few noteworthy pads in the map on the right and this illustrates that our recent open up and activities that broadly distributed across our footprint. Although it is still early, our 2019 results are validating our strategic shift in approach that we unveiled earlier this year.

And now I'll pass it over to Stephanie to touch on our advantaged marketing positions.

Stephanie Reed -- SVP, Land & Marketing

Thanks, David. Flipping to Slide 9, I want to start by circling back to the second competitive advantage Matt referenced, margin inflation and expansion. Our advantaged marketing position feeds into this corporate strength. Ultimately, we're in the business of generating cash flow so it's important that our oil flows at a favorable price. We have a strong track record on this front, registering peer leading oil price realizations during a period of tight takeaway as shown in the graph on the bottom left.

End market diversification was a key differentiator for us in the past and it will help us maintain our advantage position in the future. Looking ahead, our sales contracts provide us exposure to the Magellan East Houston, Brent and Midland benchmark and a broad portfolio of physical pipe, mitigating the risk associated with the localized pipeline disruption for port congestion.

And as you can see in the map on the right, our acreage tends to sit in that API gravity sweet spot with our weighted average barrel of production registering 41 degree. Importantly, our sales volumes are not subject to any discount applied to higher API gravity crudes like West Texas light which is recently traded at a more than $2 per barrel discount to WTI Midland prices. In an environment where every extra dollar of margin will have a meaningful impact on free cash flow, possessing a favorable crude quality is a nice inherent advantage.

And now I'll pass it over to Ryan to discuss Parsley's other margin enhancing effort and walk through our improved 2019 outlook.

Ryan Dalton -- Executive Vice President, Chief Financial Officer

Thanks, Stephanie. Turning to Slide 10. Our teams are working tirelessly to control the controllables. In practice, this means compressing costs to expand margins. Our execution yield was evident again this quarter as the team delivered a company record low LOE per BOE. We also registered company record low G&A per BOE as cost cutting initiatives take hold. Again, these margin enhancements help smooth the path of sustainable free cash flow in the future.

Moving to Slide 11, Parsley's Merrill ownership provides another relative hedge when it comes to sustainable free cash flow. Our mineral position is shaded in blue on the map and it effectively generates high margin production without any associated capex or operating expenses. The fact that Parsley operates the vast majority of this mineral position makes for a cleaner line of sight on development cash flow timing. After some recent capital markets activity, there are now additional public valuation markers for this asset class .

Thirdly, some of these mineral companies who have comparable net oil production and net royalty acreage counts to Parsley's mineral position as depicted in the left-hand graph. Said another way, embedded within Parsley's current valuation is a minerals business of similar scale and size to stand-alone publicly traded peers.

Turning to Slide 12. As we get that to enter the next phase of our corporate lifecycle, we are doing so from a sound financial footing. Our liquidity sits at an ample $1 billion. Our leverage profile is also healthy with our leverage ratio sitting at a comfortable 1.6 times over the trailing 12 months. We continue to protect our cash flow stream and balance sheet through methodical hedging program. In recent weeks , we have added to our 2020 positions, including new Brent contracts that further align our hedge position with our regional price exposure. I'd encourage you to review our latest hedge position in the supplementary slides.

Turning to Slide 13. I am excited to walk through what is a truly positive guidance update across the board. When we set our course for 2019, we prioritized improved capital efficiency, disciplined oil growth and progress toward sustainable free cash flow by the end of the year. At the halfway mark, we are solidly executing on this game plan. The numbers in the guidance they will really speak for themselves, net footage out and capital budget range tightened. Oil production up and unit operating cost down. All of this adds up to better capital efficiency and the progression to free cash flow for the remainder of the year.

Next, I wanted to provide a little more detail on our activity plans in the back half of the year. As David mentioned in his comments, efficiency gains are delivering more footage with less equipment allowing us to drop from 12 rigs to 11 rigs and mid-June. We plan to run a maximum of 11 rigs and 3 to 4 frac spreads, through the balance of the year. As implied by our tightened budget range, our quarterly capex spending will step down from second quarter levels in the back half of the year. And to echo what David said earlier, we expect a consistent activity cadence to minimize purchasing cost and carry operational momentum into 2020.

I will note that we have also increased our expected working interest for the year as a result of trades and a few opportunistic scheduling decisions. Importantly, this higher interest in high return projects is all still captured within our tightened capital budget range. Turning to the third quarter, we are guiding to oil production of 87 barrels to 90,000 barrels per day, representing 2% sequential growth at the midpoint. We expect to turn 32 to 34 gross horizontal wells in production, the vast majority of which will be in the Midland Basin.

Working interest on our 3Q'19 wells is expected to average roughly 90%. And to conclude, 2019 is about high level of execution, and we are delivering on our action plan. Our work is not done and we will remain just as focused on execution in the second half of 2019 and beyond.

With that, we'll be happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from the line of Scott Handle [Phonetic] of RBC Capital Markets. Please proceed with your question .

Unidentified Participant

Thanks, good morning, Matt, you obviously have a senior company now, it sounds like inflect to free cash flow neutral to positive. Can you give us a general sense of how you envision 2020 playing out. I mean, obviously, that 11 rig counts, the rest is you're pretty much seems set in stone at this point. But as you look into 2020, how do you think about like activity in free cash flow in shareholder returns?

Matt Gallagher -- President and Chief Executive Officer

Sure, Scott. First is to walk you through our thought process here. We're just laser focused on returns driving capital allocation approach and execution and what that's going to deliver and we're seeing it right now is free cash flow inflection and growth in free cash flow, which drives exactly to your next point of returns to shareholders. And if I could smell it last quarter I can tell you that this quarter so we're very close to meaningful return to shareholders, and it's a very exciting time for the company and the pivotal quarter for results for us and we're very excited going forward. Formal 2020 will be budget process kicks off in September throughout the rest of the year, but directionally that's how we're thinking about things.

Unidentified Participant

Okay. I guess, just follow-up on then just turn it down a little bit more. I mean, it sounds like obviously you want to stay above free cash flow and obviously we'll wait for that 2020 budget, but when you talk about like feeling very close to meaningful returns to shareholders, in your view, obviously a lot of the equities here in E&P been down quite a bit like how do you see priorities for returning the cash to shareholders right now? And how big does it have to be too -- when can we expect that? Is this early 2020 could we expect something? And what are the priorities is a dividends, buybacks? Can you give us a sense?

Matt Gallagher -- President and Chief Executive Officer

As far as priorities I think we're trying to build a durable sustainable business, a great business model here. So when we look at the business model, the priority is going to be on dividends. That's our approach, that's something sustainable over the long run that you put into your capital allocation process. That's the next step for us as we evaluate things and we have said early 2020 in the past, but as you can see with this capital efficiency improvement, we're pulling forward our inflection sooner than we would have thought at the end of last year. So that supports us at that time frame, at a minimum.

Unidentified Participant

Understood. I appreciate it, thanks .

Operator

Our next question comes from the line of Brian Singer of Goldman Sachs. Please proceed with your question.

Brian Singer -- Goldman Sachs -- Analyst

Thank you. Good morning. In your comments you highlighted some of the reasons for better capital efficiency on Slide 5, better well performance and Upton County on Slide 7. I wanted to focus a little bit on the drivers of the higher production, higher production guidance. And I wanted to see if you could give a little bit more color on segmenting those drivers into what would come from the well performance that would represent higher EURs with a wider applicability to the rest of inventory versus other drivers like high grading, spacing and completion enhancements that may just deplete wells more quickly?

Matt Gallagher -- President and Chief Executive Officer

Sure, Brian. I'll start off with a high level approach and the completion, the mix of projects that you see here is what we see going forward versus same old basis for years to come. So that component of it is baseline, and is the new normal. We have obviously at the end of last year we quantified our up-spacing approach in our inventory counts in our donut hole slides. So that is the new normal for capital allocation going forward as far as well mix component. And I'll let David go into some of the things we're testing on completion designs and what component that contributed which would be positive for the remaining results there.

David Dell'Osso -- Executive Vice President, Chief Operating Officer

Good morning, Brian. You mentioned Slide 5. If you look at where we split that out, this is a directionally indicative slide. We've lumped together the upsized fracs, wider spacing in compressed stage tests largely because it's going to take more data and more time to really be able to kind of tighten up the difference between some of those things in that bucket. You see that broadly though where our expectations have been exceeded. So you can see that that piece of it has grown a bit. So we are seeing the performance uplift we do highlight up in, and as far as the broader program in and our used guidance, the timing, there's been a factor to the tighter cycle times have driven some more production into 2019. We expect to continue that going forward.

Brian Singer -- Goldman Sachs -- Analyst

Great, thank you. And then my follow up is with regards to the minerals and water businesses within Parsley you highlighted on Slide 11 on the mineral side. Can you just talk about your latest thoughts on what you see if any moves may be warranted or opportunistic to bring value to those businesses versus the benefits of having them continue to be cash flow contributors to Parsley overall?

Ryan Dalton -- Executive Vice President, Chief Financial Officer

Yes, Brian, this is Ryan. As it pertains to the water, there is no real updates since the last quarter. Process is still ongoing, we're working with our advisors, hope to have a decision by the end of year. But I'd say we're very encouraged by the level of interest in that specific asset. And then minerals, we did highlighted that's not that anything is coming, it's really just given that there are new public valuation markers out there, we think the assets it's probably being overlooked a bit by the market, that is being consolidated within Parsley Energy's. So we feel if you're an investor and you want exposure to minerals, you've got that ability within our stock.

Brian Singer -- Goldman Sachs -- Analyst

Thank you.

Operator

Our next question comes from the line of John Freeman of Raymond James. Please proceed with your question.

John Freeman -- Raymond James -- Analyst

Good morning. On on Slide 7, you highlighted one of the target to sort of try to balance the operational momentum into 2020 and trying to target kind of a consistent capital investment pace. And I'm just trying to -- from a higher level perspective just long-term, the way you think about the company of trying to kind of run a more consistent capital plan where you're -- you all mentioned trying to minimize friction costs we're not constantly ramping up and down activity as the commodity environment changes. Just sort of how you do that in practice, is it, you try to get the balance sheet to a leverage perspective to where you -- regardless of kind of changes in the commodity, it allows you to kind of run a steady state plan?

Matt Gallagher -- President and Chief Executive Officer

That's right, John. We've given some directors to the planning teams about free cash flow growth and some governors and some side bars and then it's off to very detailed meetings among the team members to 12 months to 24 months out on the planning side and you have to project a stable deliverable project and sequence of projects. So just a lot of sensitivities in works in practical matters among the teams. And it's a whole corporate effort, which starts with overriding guidance of what we want to deliver. And when you look back at our guiding principles, discipline, stability and foresight stability really comes into play there. And we don't want big lumpy quarters because there is friction with that. So it's smooth ramps into project sizes and things of that nature and delivering on all fronts.

And as we mentioned on the maturation of the asset base, when you have a -- moderating corporate decline rate, all these things take hold synergistically play and it's really proving to be a good forward look model.

John Freeman -- Raymond James -- Analyst

And along those lines on the moderating based decline rate, Matt, you mentioned in the prepared remarks that some of the things you're looking at to in terms of monitoring the base decline rate some of it is through kind of data-driven decisions. And if you could just sort of elaborate on that?

Matt Gallagher -- President and Chief Executive Officer

John, I'll say we have been investing in furthering our ability to consume data and term data and information and the decisions. Everything from how we take this data in from the field to how we rationalize that data internally so we can be more reactive and also more proactive. So it's a lot of little things put together, but we wanted to make sure was understood that we're not simply waiting for our base decline to moderate. We are also elevating our engineering capabilities and operational capabilities to these actionable as possible in the field.

John Freeman -- Raymond James -- Analyst

Thanks guys. Really nice quarter.

Matt Gallagher -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Gabe Daoud of Cowen & Company. Please proceed with your question.

Gabe Daoud -- Cowen & Company -- Analyst

Hey, good morning everyone. I think kind of hit on a little bit, but just given the productivity and efficiency gains we're seeing on the back of the action plan, do you think this means you could deliver the same amount of activity next year on I guess lower capital relative to 2019? And in terms of framing 2020, should we just think about it as free cash flow being the goal here with production growth more of like an outcome? Thank you.

Matt Gallagher -- President and Chief Executive Officer

So that is exactly what capital efficiency would calculate out to. We were able to do more with less. So if we wanted to do the same, we add line of sights reducing capex, that's absolutely right; so we'll be taking that into account. Then when we go through the budget cycle and take into the macro environment, I think the bias is obviously on moderating any additional growth and focusing on returns as the main priority for the majority of your capital allocation ensuring that you have growing free cash flow profile. So yes, you captured that fairly.

Gabe Daoud -- Cowen & Company -- Analyst

And then just a follow-up, you mentioned -- you talked about LOE obviously a great, great number in 2Q. Just thoughts on how sustainable that could be and just any more color on what exactly was driving the nice beat there in 2Q?

Matt Gallagher -- President and Chief Executive Officer

I think it's a few things. For one, the entire organization has a tremendous amount of focus right now on cost and I think you're seeing that bear out in that. Additionally, having a larger denominator helps. So it's kind of a synergy effect where cost focus plus more barrels is driving that number down. And we're going to continue to have that same mindset and approach and these actionable as possible going forward forward. Obviously, at some point we'll get back into the winter. I think we've talked before about a higher proportion of ESPs in Northern Midland County. So when we think through the rest of the year and the following year, those things are all in our minds, but it certainly was a milestone quarter for us in LOE standpoint.

Operator

Our next question comes from the line of Charles Meade of Johnson Rice. Please proceed with your question.

Our next question comes from the line of Charles Meade of Johnson Rice. Please proceed with your question.

Charles Meade -- Johnson Rice -- Analyst

Good morning Matt to you and your whole team there. I wanted to ask question, you've got a lot of questions on capital efficiency appropriately, but I want to ask maybe in a different direction on what you're -- what is on your dashboard, your mental dashboard as you think about -- you've made these strides, preserving these strides. And I think that you've -- a lot of that is kind of implicit on Slide 5. But I'm wondering if you could talk about in your -- you're defend and extend gains on the defense side. What are you looking at, what can we look at in our seat that will help us see how things are evolving for you?

Matt Gallagher -- President and Chief Executive Officer

I think we have secured a lot of the defensive measures in the first half of the year and this was upgrading our approach to supply chain and getting our cost controls in line even more so, and I think we are delivering on that. So now, we don't lose focus on that but we look, and we're really understanding these enhancements that we've been able to deliver on in the first half of the year on the compressed stages, things of that nature. And then, as David mentioned, the rationalization of all the technology that we're onboarding right now and how that looks out, on a more of an offensive posture, on a go-forward basis. So, the defense is in, and we need to press on the offense internally. And then externally, really wrap our heads around the macro conditions, obviously very challenging out there, and backing into the right amount of growth and free cash flow growth, as we go into 2020 and beyond. So, those are the two things.

Charles Meade -- Johnson Rice -- Analyst

That's helpful and then my follow-up is a little bit related to that. On that, you maybe called a third of this, your better capital efficiencies about the shifted activity mix, what is your inventory, what should we be thinking about as you runway in that, I think you call it the Midland Martin Upton County, nexus there?

Matt Gallagher -- President and Chief Executive Officer

Between of these types of projects were between 10 and 15 years, in those counties. So we're quite a bit of runway at these activity levels.

Charles Meade -- Johnson Rice -- Analyst

Thanks, Matt.

Operator

Our next question comes from the line of Neal Dingmann of SunTrust. Please proceed with your question.

Neal Dingmann -- SunTrust

Good morning. And Matt and team nice work given today's decision of free cash flow, really nice job. My first question is around the optimal efficiencies and cost. I'm just wondering if you all could speak on how you plan to position the 11 rigs in the three to four frac crews for the remainder of the year? Really, what I'm trying to get at is two things. Are you really planning on focusing on one specific target area and are you planning on using multi rigs or crews on the same pad?

David Dell'Osso -- Executive Vice President, Chief Operating Officer

Yes. This is David, we have increased the average project size through the year, we'll continue to do that going forward. So, you will see a little bit more simultaneous operations as we've extended some of these efficiencies that allows us to reduce the cycle times of those bigger projects. So, really, to drive the efficiency, we're focused on equipment procedure and the way our teams work together with our service providers. The way we think about our activity levels, the three to four frac spreads, you can think about that fourth frac spread is something of a flex crew and we look at the performance of the crews at all times, to see if we need to moderate between those two numbers. We want to do it. We want to keep the momentum with the highest performing equipment and teams. We'll continue to be focused on that. As far as where, I would expect a pretty consistent mix of geographic activity through the balance of the year that you saw in the first half. Only slight difference is a little bit lower back half Delaware activity versus the first half.

Matt Gallagher -- President and Chief Executive Officer

So, we're talking a very calculated approach to project size. Yes, it's increasing, you're looking at things of 2.5 to 2.8 average wells for project, into the 3.5 and that's a smooth transition. It's very methodical.

Neal Dingmann -- SunTrust

Okay, very good. Thanks for adding there, Matt. And then, just secondly, my questions on around the gas or NGL, it's just wondering. Are you looking at more potential sales contracts, lock some things in around this like you've done the oil, or if you could just talk about how you're viewing some of the market around that?

Stephanie Reed -- SVP, Land & Marketing

Sure, this is Stephanie. On the gas side, we're still at the wellhead. And so, our downstream connections are dependent upon our purchasers. We have about 85% of our gas volumes sold to target and at each of their plans they have multiple residue and NGL connection.

Neal Dingmann -- SunTrust

Very good. Thanks, Stephanie.

Operator

Our next question comes from the line of Michael Hall of Heikkinen Energy Advisors. Please proceed with your question.

Michael Hall -- Heikkinen Energy Advisors

Hi, good morning. I was just looking at slide 13, you guys have done a great job with this kind of glide path, because this new activity level versus hard landing that we've seen with some others. I can't help to look at the rig cadence and just wondering when you will have to start tweak in that back up, to keep delivering on quarter-on-quarter growth and executing the way you have in the first half. Then, in that context, obviously you're also moderating the base decline. Like you pointed out, is there a kind of target level that you're aiming for and when would you expect to get there and what might that be?

Matt Gallagher -- President and Chief Executive Officer

It's really shocking, Mike. When you look at the types of results we've been able to deliver, we don't see a need to increase our rig count to deliver consistent quarterly growth. In fact, we think there may still be room to drop equipment levels and continue on a steady trajectory. So, we'll be evaluating that. It's just phenomenal effort by the teams and a complete turnaround and very exciting to see it unfold. On the quarter decline rate, things get easier to manage the lower you decline, as you can see on that. That's a nice glide path as well. We're not going to do anything, agreed is to just control that number and we're going to focus on the inputs, focus on the controls, as Ryan said, and deliver on execution and it has a nice downward trajectory of a couple of percent a year for the foreseeable future. Long-term, the company gets into the 30% type of corporate decline.

Michael Hall -- Heikkinen Energy Advisors

Okay, that's helpful. I was just curious on the free cash flow side, how are you thinking about the durability of free cash flow relative to oil, if you assume strip gas and NGL pricing?

Matt Gallagher -- President and Chief Executive Officer

Yes. As we look to 2020 in the future, we're here. We're at the inflection point of free cash flow positive and it's not something that we want to get there and then give back. So, we've got the ability to adjust our activity levels pretty quickly and you would see us in a lower commodity price environment, prioritize maintaining positive free cash flow.

Michael Hall -- Heikkinen Energy Advisors

Okay, thanks, I appreciate it.

Operator

Our next question comes from the line of Paul Grigel of Macquarie. Please proceed with your question.

Paul Grigel -- Macquarie

Hi, good morning. I was wondering if you could elaborate on some of the gains and working interest that you've seen in the background of the markets for trades, or maybe very slight -- I don't even want to call them bolt-ons but just kind of working interest acquisitions as you go through the program through the year.

David Dell'Osso -- Executive Vice President, Chief Operating Officer

Sure, this is David. That higher working interest is a combination of some trades that have helped bulk of that DSU acreage in line with the comments we've made in two quarters prior. We aim to do that, it's a targeted thing. And when it happens, it can help drive up working interest a little bit. Additionally, as some other companies, they run into budget issues. There's always the possibility of some additional market sense, but we've seen a little bit of that. That's certainly it and to a slight extent as well, well planning and PAT change can have slight variations on it but primarily look at the trades and then, to a lesser extent, those last two factors.

Paul Grigel -- Macquarie

That's helpful. On the margin enhancements, following up on that. What inning would we be in or how far along on that, and what could be the future part? As it relates to focus on, from a field level or from a drilling teams level, what are the incentives, does that flow through the organization on the LOE focus and returns focus all the way through, or is there a different ones at the lower level?

David Dell'Osso -- Executive Vice President, Chief Operating Officer

No, it flows all the way through, so LOE component is a large component of incentive structure for the bonus pool across the entire company, as well as proceeds. Everybody is looking at MPDF in the year but looking at efficiency across the board and keeping our unit costs in line. And we update very transparently with all employees every quarterly meeting, so everybody is on board there. As far as margin enhancements, that's -- you're constantly working on that, it's not as if they are just through on the ground that we're walking over and picking up. It's a hard drive and the teams, that's what they do get compensated for, and that's what they're working on day-in and day-out, and doing a great job of driving it out a couple of percent every year and then we see it in the quarters, those are big wins when they show up in the quarter, but I think you can see overtime on us steady tough year margins.

Paul Grigel -- Macquarie

Thank you very much.

Operator

Our next question comes from the line of Jeff Grampp of Northland Capital Markets. Please proceed with your question.

Jeff Grampp -- Northland Capital Markets -- Analyst

Morning, guys. Was curious in the commentary you guys talked about wanting to preserve operational momentum going into 2020 and at the same time having a strict focus on the budget. And I know that happened last year with some operators that can be a little bit of conflicting kind of desires there. So just kind of wondering how you guys kind of manage or get in front of balancing those two items?

Matt Gallagher -- President and Chief Executive Officer

Yes, the way we get in front of it is primarily -- looking at even KO end of the year and we've really prioritized driving these operational efficiencies in such a way that we can avoid our friction costs. So, there is a small duct-bank [Phonetic] that we've built that allows us to have the flexibility to move around our frac spreads in a more efficient manner than we had in the past. It's not large, it's just one or two wells per rig that even that alone, that can make a significant difference in the level of efficiency.

So we are aimed at that continuous glide plane of capital investment activity just to avoid some of that early disruption that could happen in the following budget here if you have to pull back in a big way.

Jeff Grampp -- Northland Capital Markets -- Analyst

Great, appreciate that. From my follow-up on the capital efficiency front. Was curious as we look into 2020, I understand you guys don't want to put any guidance on that metric into 2020 yet. But directionally, can you guys just give us a flavor of how you're thinking that trends in 2020? Can you get that double-digit type of capital efficiency again or is that going to be a tough comp just given all the success thus far? Just kind of one high level, how you guys were thinking that might look in 2020?

Matt Gallagher -- President and Chief Executive Officer

I think it would. What we see now is this type of productivity on a go forward basis for years to come. And of course, we're always working on the numerator and the denominator. But we can't promise that those are data driven results and then when we see conviction that we can budget forward and push it through. So right now we have to go in the assumption of what we're seeing, which is top tier in the industry, and we're going to continue to work it.

Jeff Grampp -- Northland Capital Markets -- Analyst

All right, understood.

Operator

Our next question comes from the line of Leo Mariani of KeyBanc Capital Markets. Please proceed with your question.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Hi guys, just wanted to follow up on the cost reduction side here. Certainly had a really nice move down in G&A in the second quarter here. Just trying to get a sense -- a sort of all the reductions that you guys have made on the G&A side. Is that kind of baked into the second quarter numbers or could we see some further reductions later this year or next year as result of maybe some of the staff reductions there?

Ryan Dalton -- Executive Vice President, Chief Financial Officer

Yes, Leo. It's Ryan. G&A has been a very high focus areas of both the Board and the Management team and the success of Q2 is really the result of the whole company buying in to kind of costs. The guide for the rest of the year is a bit higher, we think there's still some more work to do across the board, but we are accounting for a couple of things that may hit in the back half of the year. For example, if we do transact on water, for example, our advisors there. So we've looked a little bit of cushion there something that may come through. It's been a great focus area as I mentioned, and it's going to continue to be.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Okay, that's helpful. And I guess just wanted to touch on the lower working interest here that you guys are seeing. I guess you guys reported a 99% second quarter working interest, you're talking about going into 90% in the third quarter. I just wanted to get a sense of why that's sort of coming down a fair bit there and what's kind of your typical line of sight? Can you kind of see partner participation out -- kind of for 3 months to 6 months, which helps you kind of judge that little bit better? I just want to get a sense of how you guys are able to see that.

David Dell'Osso -- Executive Vice President, Chief Operating Officer

Yes, Leo, this is David. We can see that with pretty good clarity in that time horizon you mentioned. It is where we're drilling and we do know who our partners are in the back half of the year. We've had dialog with some of those partners and we have-- in cases where those partners are large, and we have a good line of sight on their desire to participate and their budget availability. We have a high confidence that they will participate, so that all goes and we're thinking and we plan. Now, this year has been a volatile one for the sector and so there have been a couple of evolutions and surprise along the way where somebody may have exhausted a budget or declined a well but by and large we have a pretty good line of sight on that piece of it.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Okay, thank you.

Operator

Our next question comes from the line of Mike Scialla of Stifel. Please proceed with your question.

Mike Scialla -- Stifel -- Analyst

Yes, good morning everybody. Your head on your efficiency targets, even though it looks like your completion efficiencies decline a little bit in the second quarter from the first. Just curious, was that due to more upsized fracs in the second quarter or is something else going on there?

David Dell'Osso -- Executive Vice President, Chief Operating Officer

Yes, this is David. That's exactly what it was. We had a higher proportion in the second quarter of upsized fracs, compressed stages -- excuse me. And so with compressed stages you got more wireline runs for plugs and guns and that takes a little bit extra time. And then on the upsized fracs, your pumping tends to be longer if you're pumping in similar profit concentrations. So those things manifested due to a higher proportion of that in 2Q versus 1Q. But by large, even with that step down, we consider that a continuation of the efficiencies that we saw in the first quarter.

Mike Scialla -- Stifel -- Analyst

Yes, agree. And then you had good success with the higher rate of return focus development with the wider spacing in bigger fracs. You talked about that David. It looks like most Upton County are most of your acreage. And Upton County, have you tested that design in other areas, and I want to get your thoughts on the Western side of the basin too. It looks like you have strong preference for the Eastern. Is it just due to the higher GOR of the West or do you think the new frac design could help that side of the basin as well?

David Dell'Osso -- Executive Vice President, Chief Operating Officer

Yes, I'd say we're seeing it across the Midland really. We focus on one operational area, usually as a spotlight per quarter and Upton was what we highlighted this quarter. But we have been taking this approach pretty broadly across the Midland basin. So I wouldn't say necessarily Eastern Counties as much as the mix of primarily Martin Midland and Upton, that's where the bulk of our Midland program is and that will continue to be the case going forward. And in all those areas, we have tested some of these same concepts and we're seeing encouragement in those areas as well.

Mike Scialla -- Stifel -- Analyst

Great, thank you.

Operator

Our next question comes from the line of Brian Downey of Citigroup. Please proceed with your question.

Brian Downey -- Citigroup -- Analyst

Great, thanks for taking the question. A quick one on sand. I believe you completed your second Delaware local sand test in June. Curious your thoughts there. And what that could imply for potential well cost savings in the Delaware as we enter 2020?

David Dell'Osso -- Executive Vice President, Chief Operating Officer

Yes, Brian. This is David again. So that was a pretty recent test. We put that well on and it popped in the third quarter. So it's still pretty early on. The first one we talked about -- we talked about in our last quarterly call is still performing well. Is about 150-day market past 200-day now and we're still encouraged by it. Is just a little too early to call, we want to build more data, it's not just about the very early time performance. We want to look at the decline rate, how that changes. So before we make a call there, we're going to let that mature a little bit. As far as the cost, I'd say -- just reiterate what we said last call, which is a $0.5 million plus potential savings for using RBS, a regional brown sand in the Delaware.

Brian Downey -- Citigroup -- Analyst

And do you think you'll have enough data on the second one, sort of make that decision once you're budgeting season later this year for think about next year?

David Dell'Osso -- Executive Vice President, Chief Operating Officer

Yes, it's going to be nice having more data on the second test -- the first step. I think is getting to the point where we feel an increasing degree of confidence, that is going to remain in line. So I would say the 2019 is not over yet so we still got some potential to learn more from additional tests in 2019. But 2020 and beyond is that Horizon where we're looking at, making more conclusive strides on regional sand in the Delaware.

Brian Downey -- Citigroup -- Analyst

All right. I appreciate it. Thank you.

Operator

[Operator Closing Remarks].

Duration: 50 minutes

Call participants:

Kyle Rhodes -- Director of Investor Relations

Matt Gallagher -- President and Chief Executive Officer

David Dell'Osso -- Executive Vice President, Chief Operating Officer

Stephanie Reed -- SVP, Land & Marketing

Ryan Dalton -- Executive Vice President, Chief Financial Officer

Unidentified Participant

Brian Singer -- Goldman Sachs -- Analyst

John Freeman -- Raymond James -- Analyst

Gabe Daoud -- Cowen & Company -- Analyst

Charles Meade -- Johnson Rice -- Analyst

Neal Dingmann -- SunTrust

Michael Hall -- Heikkinen Energy Advisors

Paul Grigel -- Macquarie

Jeff Grampp -- Northland Capital Markets -- Analyst

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Mike Scialla -- Stifel -- Analyst

Brian Downey -- Citigroup -- Analyst


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