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QEP Resources Inc (QEP) Q4 2018 Earnings Conference Call Transcript

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QEP Resources Inc  (NYSE: QEP)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the QEP Resources Fourth Quarter and Year-End 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. William Kent, Director of Investor Relations. Thank you. You may begin, Mr. Kent.

William Kent -- Director, Investor Relations

Thank you, and good morning, everyone. Thank you for joining us for the QEP Resources fourth quarter and year-end 2018 results conference call.

With me today are Tim Cutt, President and Chief Executive Officer; Richard Doleshek, Executive Vice President and Chief Financial Officer; Joe Redman, Vice President of the Western Region; and Jeffery Tommerup, Senior Vice President of the Eastern Region & HSE.

If you have not done so already, please go to our website, qepres.com to obtain copies of our earnings release, which contains tables with our financial results, along with the slide presentation with maps and other supporting materials.

In today's conference call, we'll use certain non-GAAP measures including EBITDA, which is referred to as adjusted EBITDA in our earnings release and SEC filings; and adjusted transportation and processing costs. These measures are reconciled to the most comparable GAAP measures in the earnings release and SEC filings.

In addition, we'll be making numerous forward-looking statements. We remind everyone that our actual results could differ materially from our forward-looking statements for a variety of reasons, many of which are beyond our control. We refer everyone to our more robust forward-looking statement disclaimer and discussion of these risks facing our business in our earnings release and SEC filings.

With that, I would like to turn the call over to Tim.

Timothy J. Cutt -- President and Chief Executive Officer

Thanks, Will, and good morning, everyone, and thanks for joining the call. This morning my focus will be on QEP strategic path forward, including detailed on the planned restart of our company's corporate cost structure and near-term capital investment plans.

I will also provide some color on your decision regarding Williston Basin transaction specifically what it means for us going forward before turning the call over to Richard to provide an update on QEP's operating and financial results.

Well, I will leave the majority of the details to Richard, I wanted to point out a few significant highlights from 2018. During the year, production in the Permian Basin increased by 94% to a record 16 million barrels of oil equivalent. Lease operating expense per BOE decreased by 26% and perhaps most importantly, we continue to make significant progress on identifying the optimum well spacing for our Permian tank-style development.

On the well spacing front, the drilling spacing units drilled at lower densities during the late 2017 and early 2018 continue to deliver as expected, which gives us great confidence as we move forward with our 2019 drilling program.

We have continued to optimize our investment in our Permian midstream infrastructure over the past several years. In 2018, we built a company owned and operated water recycling plant and can now recycle 100,000 barrels of water per day in the clean frac water for less than $0.15 a barrel much less than the current market rate of closer to $1 a barrel.

While our operating costs in the Permian were competitive with our peers. We will continue to look for opportunities to lower these costs, while maintaining our long standing focus on safety and integrity. As you know, 2018 was a year of significant transition as we sold our natural gas weighted assets and pivoted from a multi-basin, multi-commodity operation to a more focused organization.

With these assets sales behind us we entered 2019 with the renewed focus on ensuring that our cost structure is competitive with the best in the industry. We continue to evaluate our organizational needs going forward and intend to significantly reduce our G&A expense, excluding restructuring costs by approximately 45% when comparing 2018 to 2020.

We will be implementing the necessary structural changes in 2019, with the majority of the changes occurring in the first half of this year. Our ultimate goal is to establish a long-term overhead structure of less than $3 per BOE beginning in 2020, which is competitive with our peers.

I'll now spend a few minutes discussing the status of the Williston Basin transaction. As you are aware QEP and Vantage Energy signed a purchase and sale agreement for the Williston assets on November 6th, 2018 . At that time, oil was trading at $62 per barrel.

Near-term price subsequently dropped to $40 a barrel before recovering to approximately $57 a barrel today. Given the deterioration in product price and then it became unlikely that the conditions to closing would be satisfied Vantage and QEP agreed to terminate the purchase and sale agreement.

We now intend to move forward with the pace development over the remaining high return Williston inventory to maximize the value of the assets. Williston assets are well understood remain cash flow positive at current oil price for the foreseeable future and are aligned with QEP strategic focus on oil versus natural gas. With that as a backdrop, I will touch briefly on our capital guidance for 2019.

During 2018, we invested approximately $1 billion in the Permian and Williston Basins including Permian midstream infrastructure capital. Recognizing the lower price environment and focusing on value delivery versus volume growth, we have lowered our 2019 capital guidance by 39% to $640 million approximately 80% of which is planned to be spent in the Permian.

At a $55 oil price, we expect to be cash flow positive late in the second half of the year including interest expense and cash flow positive for the full year of 2020. Our planned level of investment -- at our planned level of investment, we will operate three rigs in the Permian in the first half of the year before dropping the two rigs in the second half and expect to put on 47 gross wells in the Williston. We will operate one rig for part of the year and put seven gross wells on production.

This activity level will result in a 10% decrease in total company oil production, but an 8% increase in Permian oil production. While we will remain poised to increase activity and deliver higher growth as price recovers. We currently see no reason to aggressively develop our premier drilling inventory at current prices. In an effort to further bolster our liquidity and strengthen our balance sheet in 2019, we plan to evaluate strategic alternatives around our Permian midstream assets and our non-operated business in the Williston.

We have determined that there is diminishing strategic advantage in operating our gas gathering system in the Permian and as a result, we intend to market the assets in the first half of the year. We also plan to initiate discussions with water companies to evaluate whether a partnership makes sense for our Martin County water facilities. We will lower our overall capital intensity of our business with the dual imperative of matching our activity to the current commodity price environment and reaching cash flow neutrality in 2019.

Let me wrap up my comments by discussing our strategic path forward. During the past few months, a number of companies have expressed interest in QEP from both an acquisition and merger perspective including LA's public proposal. We take this interest seriously and have reached out to many of our shareholders to determine the best path forward.

As always, our goal is to maximize value for our shareholders, and we believe the best way to accomplish this goal is to run a comprehensive process to identify potential value of these strategic alternatives whether through a strategic alternative or by continuing to develop our two premier oil assets stand-alone basis we are confident that we will be able to clearly identify the best path forward for the company.

As the strategic assessment process plays out, we will remain focused on operating the business and delivering peer-leading results while continuing to focus on improving our capital, costs and operational efficiency.

Now I'll turn the call over to Richard to provide a summary of our operating and financial results along with additional guidance.

Richard J. Doleshek -- Executive Vice President and Chief Financial Officer

Thank you, Tim. I'll give some color on the quarter and year-end results, outline our 2019 guidance we will open the call for Q&A.

In the four quarter of 2018, we generated $194 million of adjusted EBITDA compared to $326 million adjusted EBITDA during the third quarter, a $195 million in the fourth quarter of 2017. Production in the fourth quarter was 11.6 million barrels of oil equivalent, 2.8 million barrels equivalent lower than the 14.4 million BOEs we produced in the third quarter of the year.

Oil volumes were 5.75 million barrels down 891,000 barrels from the third quarter levels. Permian Basin oil volumes were down about 280,000 barrels of 3.25 million barrels, which will be 9% from the third quarter, but up 1.3 million barrels or 69% in the fourth quarter of last year.

The Permian Basin 17 wells are placed on production during the quarter, which was in line with our quarterly guidance. Williston oil volumes were 2.48 million barrels, down 487,000 barrels from third quarter. The Williston development activity in the second half of the year consisted of four refracs that came on production in November.

Natural gas volumes were 48.1 Bcf, down 10 Bcf in the third quarter. The primary contributor to the lower natural gas volumes in the quarter with the sale of the Uinta Basin assets, which produced 2.7 Bcf in the quarter. The lack of drilling or refrac activity in Haynesville, which was down about 6.8 Bcf in the third quarter. NGL volumes were 1.19 million barrels, which was down about 16% in the third quarter. We developed our guidance for 2019 taking the lower oil price environment into consideration. We are planning to have three rigs drilling in the Permian Basin in the first half of 2019. We plan to drop two rigs at mid-year.

We also plan to drill seven wells during the summer in the Williston Basin. As a result, our guidance for oil volumes for 2019 are 20.5 million barrels to 21.5 million barrels. Our guidance for natural gas volumes for 2019 is a range of 23 Bcf to 25 Bcf and it's reflective of no longer owning assets in the Uinta Basin in the Haynesville/Cotton Valley.

Our guidance for NGL volumes for 2019 soon there will be an ethane recovery all year in the locations at which we can make a recovery or rejection election to 3.7 million barrels to 4.2 million barrels. For the first quarter, our guidance for oil volumes 6.83 million to 7.26 million barrels of oil equivalent.

Please see our earnings release for additional details. QEP Energy's net realized equivalent price which includes a settlement of our commodity derivatives averaged $32.70 per BOE in the fourth quarter, which was $3.51 per BOE lower than we realized in the third quarter and $0.49 per BOE higher than we realized in the fourth quarter of 2017.

Weighted average field level equivalent price in the fourth quarter was $35.38 a barrel, which was $3.49 per BOE lower than we averaged in the third quarter. Equivalent price reflects field level crude oil prices that were $51.67 per barrel, natural gas prices that were $3.25 per Mcf and field level prices for NGLs that were $19.12 per barrel.

Field level crude oil revenues account for 72% of total field level revenues, which was about 2% higher than the third quarter. Derivative settlements were an outflow of $31 million resulting in a loss of about $2.68 per BOE in the quarter compared to an outflow of $38.4 million or a loss of $2.60 per BOE in the third quarter.

Combined lease operating and adjusted transportation expenses, including the $14.1 million of transportation expenses that are netted against revenues were $98 million in the quarter, down from $108 million in the third quarter and $122 million in the fourth quarter of 2017.

On a per unit basis, lease operating expenses were $5.11 per BOE, which is $0.62 per BOE higher than the third quarter. Adjusted transportation expense was $3.31 per BOE, which was up $0.27 per BOE in the third quarter. Our guidance for lease operating and adjusted transportation expenses for 2019 is $9 per BOE to $10 per BOE.

For calendar year 2018, if we exclude the Uinta Basin and Haynesville assets, the combined lease operating and adjusted transportation expense was about $10 per BOE. So, we expect to see continued improvement in that area.

G&A expenses were $57.5 million in the quarter, up $9.2 million in the third quarter. Included in the quarter was $24.4 million of expenses related to our strategic initiatives, which compares to $14.3 million in the third quarter.

For full year 2018, G&A expenses were $221.7 million, which included $61 million of expenses related to our strategic initiatives. Our guidance for G&A expense for 2019 is $170 million to $180 million, of which approximately $30 million with share-based compensation expense.

Our guidance includes $50 million to $55 million of expenses such as our strategic initiatives, including our employee retention and severance programs. We expect to incur significant portion of these restructuring expenses in the first half of the year.

For the fourth quarter, we reported a net loss of $629 million driving the net loss was $1.16 billion impairment expense associated with our Williston Basin assets. Offsetting the portion of that expense was $362 million gain associated with the unrealized value of our derivatives portfolio.

At December 31st, the commodity derivatives portfolio was a net asset of $123 million compared to a net liability of $239 million at September 30th. DD&A expense was $184 million, which is $50 million less than we reported in the third quarter. Capital expenditures excluding acquisitions on an accrual basis in the fourth quarter were $188.5 million, of which $163 million was directed to the Permian Basin and $24 million to the Williston Basin.

In addition, we also reported $17.3 million of acquisitions in the quarter. The majority of which was associated with the final installment of the friends and family acquisition associated with our 2017 Robertson Ranch acquisition.

For 2019, excluding acquisitions and divestiture activity, we are forecasting the midpoint for capital expending to be about $640 million, which includes about $70 million for midstream infrastructure. Permian Basin will be allocated about 80% of the 2019 capital budget, capital expenditures in the first quarter excluding acquisitions should be in the range of $200 million to $225 million.

Year-end proved reserves were 658 million barrels of oil equivalent down 4% from year-end 2017. Recall that year-end 2017, the Uinta Basin had 101 million barrels of proven reserves. So excluding Uinta Basin, reserves were up about 74 million barrels equivalent or approximately 13% from last year.

We have 76 million barrels equivalent of extensions and discoveries primarily in the Permian Basin. Higher SEC prices resulted in positive revisions of about 17 million barrels equivalent and acquisitions add about 11 million barrels of equivalent. Approximately 35% of the proved reserves have developed, 52% of the equivalent reserve -- proved reserves were oil. The SEC PV-10 of the proved reserves was $5 billion and the pre-income tax PV-10 reserves was $6.2 billion.

With regard to our balance sheet, at the end of the year, total assets were $6.1 billion and shareholder equity was about $2.75 billion. Total debt was approximately $2.53 billion, of which $439 million was debt under revolving credit facility. In January we closed the previously announced divestiture of our Haynesville assets received $605 million of cash and placed an additional $32 million of cash into an escrow account (Technical Difficulty) of defects.

With those fair comments, we're now ready to turn the call over to Q&A.

Questions and Answers:

Operator

Thank you. At this time we'll be conducting a question-and-answer session. (Operator Instructions) The first question is from Mr. Gabe Daoud, Cowen & Company. Please go ahead sir.

Gabriel Daoud -- Cowen & Company -- Analyst

Hey, good morning, everyone. I was wondering if you could just start at a high level and thinking about how the business looks, assuming the strategic review doesn't bring a transaction. In the Permian, you're going to two rigs in the second half in the Williston, obviously, on the year just seven wells. So, is that the appropriate pace to think about for 2020. And I guess just overall how do you think about pace and growth against the push for more free cash flow generation. And if you do see free cash flow in 2020, is there anyway that you could quantify that at this point?

Timothy J. Cutt -- President and Chief Executive Officer

Yeah. Thanks, Gabe. I appreciate the question. I think what I'll do is start off by giving a little bit of an overview of both the Permian and Williston. I know we had more rigs running, we dropped back, we used to look at quarter-on-quarter, but I think we need to reset the thinking a little bit around that.

So, let me start with the Permian. So, it's a very high level in the Permian Basin, once you get down to about two rigs, I think you should expect the production would stay relatively flat. This year we're going to run three rigs first half, two rigs in the second half, and that results in about an 8% increase.

If we go to three rigs as price recovers, you should expect to see about a 15% per annum growth and also a similar type of growth in EBITDA. So, we didn't make a call about how to do that. Our view is living within cash flow at lower prices is important, the prices have been very volatile you recall recently we are down to $40 a barrel.

So, living within cash I think is important. But as you say, I think, it needs to be balanced with an eye to growth in the future. And so we're taking a hard look at that. When you think about trying to model the company and getting away for some of the quarterly thinking. I'll give you a few numbers to work in your models.

So, to run a rig -- you can run a rig in the Permian Basin for about $55 million per year and deliver about 22 wells. Those 22 wells cost about $85 million to complete and then you got to add facility costs of about $35 million to hook up or about $175 million.

So, to step up from two rigs to three rigs it's about $175 million or about $8 million per well. I think the Spraberry wells were about low sevens, the Wolfcamp wells in the high eights. But I think with that you kind of think about a shift from kind of neutral on production with 15% growth with an increase of about $175 million.

So, we're watching price closely. We want to be based on our thinking we don't want to react to short-term price spikes, but as we see price recovery, we're going to want to move forward and move forward with our pace. So, we've modeled very low prices that have been prices of 55 and then higher prices in the 60 to 65 and I think we'll be poised to do that.

Switching over to the Williston Basin you know we stopped activity. We had very little activity last year and when that happens, you get on a very steep part of the hyperbolic curve, and you see pretty steep decline. We saw about 30% decline on the base, which is as expected.

And we believe with about a one rig program, we can keep that Williston Basin about flat. We have an inventory of refracs. So, we don't plan to do with these lower prices with the refracs you can grow. And then again when you get back to about two rigs, you can see the Williston Basin growing. We've got good inventory going forward. So, overall, that's how we're thinking about the company as that simple.

And it really is the balance you've asked about Gabe on kind of roddling down the growth, retaining the good inventory for the higher prices which we think is the right thing to do. We don't want to go out and borrow more. We have enough debt and we'll stay where we are today.

So, and that's a long answer to a short question, but I think it kind of sets how we're thinking about the business going forward.

Gabriel Daoud -- Cowen & Company -- Analyst

Yes, Tim. That's perfect. Thanks a lot for that. And then maybe just a follow-up two part question at the asset level in the Permian. Any color you can give on the latest batch for well results here just in terms of zones and density being tested? And then is there an EBITDA or invested capital number that you could share related to the Permian gathering and water infrastructure assets?

Timothy J. Cutt -- President and Chief Executive Officer

No. The biggest message, I think, out of the Permian is the work that was done in late 2017 and into 2018 to increase the spacing on the DSUs has been effective. Each of the DSUs and each of the different zones are now following the type curve. The wells were drilled on the tighter spacing are declining at a bit more of an exponential decline. All the rest of the world are on hyperbolic and they are following the type curve, and so we feel good about that.

It takes a long time to kind of dissect every zone, each DSU. I've spent a lot of time with the technical folks and Joe and the operating folks going through that. So, I think, those kind of questions are probably better to take offline.

We are happy to take those calls at later date and kind of takes you see that detail, but it's a, as you know from past calls, it's a pretty complex type answer there. Do you want to take, Richard?

Richard J. Doleshek -- Executive Vice President and Chief Financial Officer

Yes, with regard to the EBITDA associated with the various assets, midstream assets in the Permian Basin, we're just -- we're just not ready to talk about that yet.

Gabriel Daoud -- Cowen & Company -- Analyst

Understood. Thanks, Richard. Thanks, everyone.

Timothy J. Cutt -- President and Chief Executive Officer

That's, Gabe.

Operator

The next question is from Derrick Whitfield, Stifel. Please go ahead sir.

Derrick Whitfield -- Stifel -- Analyst

Thanks. Good morning, all.

Timothy J. Cutt -- President and Chief Executive Officer

Hi, Derrick.

Derrick Whitfield -- Stifel -- Analyst

Tim. I'll touch on where the last question was, but specifically in most recent PowerPoints, there was a lot of technical detail on spacing and views on tank-style development, while you touched on in the opening remarks. Would it be fair to assume all past views on space and tank-style development remain intact?

Timothy J. Cutt -- President and Chief Executive Officer

Could you repeat the last part of that? All what?

Derrick Whitfield -- Stifel -- Analyst

Sure. Would it be fair to assume that all of the past views on spacing and tank-style development remain intact?

Timothy J. Cutt -- President and Chief Executive Officer

Exactly. And again when I got here I spend several days with Joe and Eric and the team kind of going through each of the decline curves, each of the DSUs, each of the individual zones. I feel good about it. So, I think, now we can going to dial-in when we say we can pick up a rig and deliver a certain amount of growth, we feel confident with that.

There will be some variation across the acreage, but it's pretty consolidated acreage, and we like what we're seeing. I mean the decision on spacing is partially an economic decision as well. $100 oil, you might go to a little lower spacing. I have a little lower decline curve and make more money. Right now $55 to $65 oil, I think, we've dialed in pretty well. We've increased spacing in the different zones probably by an average of 30% to 40% by zone, and we're not seeing the inference we were seeing on the tighter spacing.

Derrick Whitfield -- Stifel -- Analyst

Perfect. Thanks for the extra detail. And then as you step back and assess the state of your Permian operations broadly, what gives you the greatest concern as it relates to your 2019, 2020 plan?

Timothy J. Cutt -- President and Chief Executive Officer

We've pulled back there to a relatively conservative plan. So, we don't have a lot of concern. I think we've got the cost well in control, but the LOE and we are very competitive on our cost all in per well. Are we satisfied with that? No. I come from a long and deep operating background with fairly conservative companies and so I'm looking at Joe and Jeff we are going to keep driving that down everyday and we're excited to go do that.

On the volume side, we've again unless we see some deviation on the wells we're drilling now, we should feel very good about being able to do that. We're going to have little fluctuations for weather and treating and different things. But, overall, I think the wells as long as they stay in their decline curve is pretty predictable and we're getting much more into that manufacturing mode now.

Derrick Whitfield -- Stifel -- Analyst

Great. And one quick follow-up question on the PV-10 value. Do you have that specifically for the Permian and Bakken at year-end?

Richard J. Doleshek -- Executive Vice President and Chief Financial Officer

No. Derrick, I think, if you just go look at the reserve breakdown, you get a pretty good idea of how it's allocated, but we've not given that number out.

Derrick Whitfield -- Stifel -- Analyst

Thanks guys. Very helpful.

Timothy J. Cutt -- President and Chief Executive Officer

All right. Thank you.

Operator

We have a question from Mr. Neal Dingmann, SunTrust. Please go ahead sir.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Good morning, guys. My question on the Bakken. How do you all see kind of based on the plan? How do you anticipate sort of maximizing the value and minimizing the decline through this year and into 2020?

Timothy J. Cutt -- President and Chief Executive Officer

Yes. So, we've got two opportunities. We have a drilling package that looks very attractive. We also I think work through the refracs last year and work through some mechanical issues and we're confident we have a quite a large inventory of refracs.

With the asset coming back into the fold, we didn't want to go too hard, too fast and we also want to live with an overall cash flow for the company. The Williston as you know delivers free cash flow both on an asset level and with the corporate overhead included. And so, we believe, picking up a rig this year drilling seven wells will basically help to decline. We're also coming lower on the hyperbolic curve on individual wells.

So, it's going to meet the decline, it's going to slow naturally by itself. And as we go forward, we have the opportunity, if we want to see some growth with increasing price we'll turn into the refracs, and then ultimately we have enough inventory to pick up probably we're going out probably a year, year and a half, pick up a second rig.

So that's -- we've got our hands on the throttle. We can move that pretty quickly. Our confidence is high on the results of the refracs especially now we've gotten through some -- few mechanical issue. So, again pretty simple outcome. It dropped pretty hard, there were no surprise. Our PDPs look great.

Our growth wedge looks really solid. And now it's really the balance that Gabe ask about is how do you throttle that backup without running through a pretty high quality inventory to quickly at lower price.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

It makes sense. And then lastly when you refer to that obviously material G&A cut. I'm just wondering is that -- will that focus be in any one area, I mean, is it in Bakken, in the Perm or just sort of broad-based? Thank you.

Timothy J. Cutt -- President and Chief Executive Officer

You know it's -- the G&A cut is the hardest thing we have to do, they impact people. We have a lot of our employees listening and it's across the board. We were a company with multiple basins and in a fairly short period of time have reduced down. So, the G&A in the past had been fairly competitive. So, we do nothing.

Our G&A going forward into '19, '20 gets up into the $5 to $6 range is unacceptable. And so we need to pull back pretty hard. So, we've taken a hard look at that. That was under way before I got here and we've accelerated certain things.

And now we're looking at we believe when I look at the benchmark data there's something at $3 or below is going to be very competitive, as we increase volumes in the Permian, you will see that $3 per barrel come down with time. I really don't think we're going to need to add a whole lot of G&A as we go forward.

So, we're trying to do a fundamental reset to what do we need. And we're going to remove everything that's kind of nice to have. And we're going to keep everything there's a need to have, and the most important thing is for all the things are going on and all the outside influences we've had and now the announcement on the strategic initiative.

The most important thing we need to do is maintain good trust and communication with our employees. We got some of the best in the industry. We are doing some of the most interesting and best things in our Permian and now back into the Williston assets.

And so that's going to be kind of our core challenge and our core focus, but it's something has to happen talk to our employees about this, and we're going to communicate more fully as we go forward over the next several days, but I hope that helps.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

That does. Thanks for the details, Tim.

Timothy J. Cutt -- President and Chief Executive Officer

Thank you.

Operator

We have a question from Mr. Tim Rezvan, Oppenheimer. Please go ahead sir.

Timothy Rezvan -- Oppenheimer -- Analyst

Hi. Good morning, folks. My first question is for Tim. Tim, I know the Board has been actively reaching out to large shareholders recently. And I imagine you've been in touch with large shareholders well since you became the CEO. As QEP lays out its sort of new plan moving forward as a two asset company. Can you talk about how much of this plan was really influenced by or is kind of consistent with comments from those large shareholders or is this new plan really kind of your initial take on the path forward as you assume the role of CEO?

Timothy J. Cutt -- President and Chief Executive Officer

Well, it's fairly a combination of things. I mean, obviously, when you have companies looking at your assets saying, we think they're worth more than that you are trading and you guys take that seriously. And that's what we're doing. I think you're going to see that we'll run a process, but in parallel my primary focus through that process is going to be, get the business even more healthy take the cost out, and be positioned when we have an answer on what the markets willing to pay for the company or through a merger deal, how does that honestly compare.

And I think that's our biggest challenge. We've got to run that hard. We got to stay focused on that. We're going to try and carve off a small subset of the company to work through the strategic assessment, and obviously I'll be working with the Board.

But you know every day, every company is going to sell and merge or continue on and you get unsolicited calls, this one is more public process. It was taken public and we're fine with that. And I think we just have to deal with that. So, I don't think it's necessarily shareholder outreach or my among particular plan, it is the circumstance we own.

We're going to take it forward, but I think you're going to hear much more from me about how do we drive -- they asked us for and how do we get our cost down and how do we show that it's very difficult for another company to do that at lower cost basis.

Timothy Rezvan -- Oppenheimer -- Analyst

Okay, OK. And then on the second question you announced a sharply lower CapEx figure for 2019. At the same time your reserve report showed PUD reserve bookings at 65% of total reserves. And I think there was a $4.3 billion cost associated with developing those reserves over the next five years. Certainly looks aggressive relative to the 2019 program and your goal of long-term free cash flow neutrality. Can you talk about the assumptions behind that and your comments like a feedback on that possibly being an aggressive sort of booking methodology?

Richard J. Doleshek -- Executive Vice President and Chief Financial Officer

Hey, Tim it's Richard. With regard to the reserve report all the PUDs are complying with SEC guidelines for five years and then capital plan that you can demonstrate that you can prosecute that development.

So, with regard to that, certainly with $640 million as the midpoint of capital guidance this year relative to your observation of $4 billion to fully develop those PUDs it's back-end loaded. When we developed the plan for this year, we were in a oil price environment that doesn't feel very good.

We clearly have the options to keep rigs running versus dropping rigs and prices recover. But I think the whole capital deployment issue is driven by the commodity price. So, certainly we feel good about the reserves are booked and the capital available and liquidity available to prosecute that five-year plan. We're just reacting to what we see today in a dynamic situation.

Timothy Rezvan -- Oppenheimer -- Analyst

Okay. So that would be consistent with free cash flow neutrality longer term that $4.3 billion number?

Richard J. Doleshek -- Executive Vice President and Chief Financial Officer

That's correct.

Timothy Rezvan -- Oppenheimer -- Analyst

Okay. All right. Thank you.

Operator

(Operator Instructions) We have a question from Mr. John Nelson from Goldman Sachs. Please go ahead.

John Nelson -- Goldman Sachs -- Analyst

Good morning and congratulations Tim on your appointment.

Timothy J. Cutt -- President and Chief Executive Officer

Thank you.

John Nelson -- Goldman Sachs -- Analyst

QEP has been a leader on the tank development practice and Tim I appreciate your comments earlier regarding kind of the petrophysical side analysis you did with the team early on. I guess my question is more of tank development can be executed efficiently on just a two-rig program?

Timothy J. Cutt -- President and Chief Executive Officer

Yeah, it's a good question, John. I think you're getting right at the edge because you're trying to build the pressure front ahead of you and we're taking advantage of that now. As you go to the two rigs and we have different assets and different places and you start splitting those up. I think you're down where you're right on the edge of that.

I think we can be effective going forward. The real optimum rig count for us is about 3.5 rigs in the Permian, because you can -- you take that one frac crew doing some more fracs and support 3.5 rigs. So, that's kind of the optimum that's probably be the optimum pace of three to four rigs in the tank-style. There's no reason to back off

I mean I think we are going to be smart, we're going to be selective, and you are just tightening your severe down into a smaller area to make sure you are taking advantage of the pressure front. So, it can be done, yes, it's overly optimum potentially not, but we also encouraged by the recovery we are seeing in price. We are not going to bid on that, but we'd be poised to kind of move back into a stronger pace of development if the price forms.

John Nelson -- Goldman Sachs -- Analyst

Do you have the ability in 2019 to draw down some of the uncompleted well inventory and to as you kind of wait for higher prices or is that not really the how the plan is set up?

Timothy J. Cutt -- President and Chief Executive Officer

I don't think we really want to. You have a certain amount of inventory. We're really focused on overall value and the overall value of the assets that we have for the longer term.

We could go out and keep the frac still running, I mean, right now when we dropped the rig the frac crew will be on and off on a sporadic basis is a fundamental decision of you preserve that value for long-term or you're going to frac it often and keep that volume growth and that's kind of a conundrum for sale as when you kind of turn the corner and power through, the confidence on price right now, the price has been a little bit too uncertain.

I think for us to say, we want to power through and keep that going. If we see something happen in OpEx, we see a big price spike. It looks like it's more sustainable and we have the fundamentals to back it up. We can always make decisions and not to drop the rig, we can make decisions to keep frac crew going, and I think that's kind of the beauty of shale as you can do that versus a lot of my history in offshore once you're committed, you're committed and then you quit the reservoir.

So, we're watching, we would say at this point, we would not want to kind of just blow down work off that inventory.

John Nelson -- Goldman Sachs -- Analyst

That makes sense. And then to hopefully just more housekeeping items. The comment earlier that you can hold Bakken production flat with one rig. Is that off of a 4Q levels or is that off the low '20s levels implied by the guidance you gave earlier?

Timothy J. Cutt -- President and Chief Executive Officer

Yes. So, I'm saying once we hit kind of the level, we've given guidance on for '19 by running one rig and drilling the seven wells and continue on into the following year, we'd be able to keep the production flat. We want to see an increase in that and we want to offset that, if we see some decline, we also have the refracs we can mobilize on pretty well.

John Nelson -- Goldman Sachs -- Analyst

Okay. And then just because volumes will be falling, I guess, over at least part of the year relative to your LOE guidance for the year. Should we expect the company to be exiting toward the high end of that range or just any color on how we should think about that LOE trajectory?

Timothy J. Cutt -- President and Chief Executive Officer

We're going to aim to the middle, but hope we get much lower. So, I mean, I don't think we've done everything possible yet to take cost out. We're going to be working on that very closely. I think just as a challenge up in the Williston with some of our cost there probably not competitive. We're going to take those cost down fairly quickly.

I'm going out with just a visit next week, then the Permian we're getting into a continuous improvement cycle where we just need every day just take a little bit more out. So, you know, hopefully, we wouldn't be ever aiming to the high side, we're going to aim to the middle and hope for the low, and we're going to every action we take is we are going to be driving it more to the low side.

John Nelson -- Goldman Sachs -- Analyst

Great. Well congrats again. Thanks.

Timothy J. Cutt -- President and Chief Executive Officer

Thank you.

Operator

Next question is from Kashy Harrison, Simmons Energy. Please go ahead.

Kashy Harrison -- Simmons Energy -- Analyst

Good morning, everyone, and thank you for taking my question. So, just one quick one from me. Earlier in the prepared remarks, I think, you mentioned that the Permian CapEx was going to be roughly 80% of the total budget during 2019. I was just wondering if you could give us a sense of what either Permian oil or total production looks like for full year '19?

Richard J. Doleshek -- Executive Vice President and Chief Financial Officer

Kashy, we are not -- this year we are not. This is Richard, we are not going to give Permian stand-alone guidance. It didn't really help us last year to give the guidance, and so we're going to kind of revert back to where we were, you can kind of just extrapolate what the first quarter guidance is, the fourth quarter exit rate was, but we are just not given the basin guidance.

Timothy J. Cutt -- President and Chief Executive Officer

Yeah, what I did say, and I think you can do the math on this is if you look at what our full year is for ends up being for '18, we expect to see a year-on-year growth of about 8% in the Permian oil.

Kashy Harrison -- Simmons Energy -- Analyst

I'm sorry, you broke up for a second, did you say 80 or 8?

Timothy J. Cutt -- President and Chief Executive Officer

8.

Kashy Harrison -- Simmons Energy -- Analyst

Okay. All right. Thank you.

Timothy J. Cutt -- President and Chief Executive Officer

Yeah, 8%. So, if you take last year's did math on that, what I had in my prepared remarks was 8% year-on-year. And again part of that is we get the three rigs, go into two. If you go to two, it's going to stay more flat. You go to three, I would say, we'd be able to see about a 15% growth that's kind of the boundaries. I think that will help you with your math.

Kashy Harrison -- Simmons Energy -- Analyst

Okay. Thank you very much.

Operator

We have a question from Raj Agarwal, Oak Hill Advisors. Please go ahead sir. Mr. Agarwal your line is open.

Rajul Aggarwal -- Oak Hill Advisors -- Analyst

Yeah, hi. Thanks for taking my question. Just one quick clarifying question. On the CapEx number, I think, you said the 80% of CapEx was going to be spent in the Permian, and I think you said average well including facilities was $8 million. Well just trying to square how 47 was in the Permian lead to that sort of number, if you can help us bridge that, that would be very helpful?

Timothy J. Cutt -- President and Chief Executive Officer

Yeah. So, if you think about this year and you took the 80%, you're talking about probably close to $500 million. And I would say for to drill complete and hook-up with one rig is about $175 million, yeah, that math up. And also we're drilling a water disposal well. We've now finished that, so we had a heavier capital. So, we had four rigs in the first quarter and then you put $70 million worth of midstream costs on top of that. If you do that math pretty quickly you get --

Rajul Aggarwal -- Oak Hill Advisors -- Analyst

Thank you.

Timothy J. Cutt -- President and Chief Executive Officer

Which is about 80% of the total, I think, maybe I'll have my math correct. All right. It sounds like we are maybe finished up with the questions. All right. So, let me just close out by making a few comments and hopefully this came out fairly clearly.

But you know overall what I'd like to say is we're committed to being cash flow neutral including corporate overhead and interest before the end of 2019 and that is at a flat $55 price, and we're using a bit of a differential there also and then cash flow positive as we say for 2020, a $55 flat. Committed to aggressively reduce in the G&A cost during the first half of 2019.

They continually improved against our LOE per BOE. We've optimized the well spacing and have confidence in delivering the forward volume plan like the Williston deal at the (inaudible) price, but we didn't see a need to go to any other place on that.

We'll test the market value of the company, but remain very confident in our ability to be a competitive developer of the assets. We've not established a time frame to complete the marketing process that process will begin immediately. We don't plan to give updates on that.

But I think most of you have kind of watched those processes move forward. There can be a pretty wide range of timing outcomes. And but ultimately just wanted you to have confidence, we're going to do whatever is in the best interest of the shareholders. So, with that, I think I'll turn it back over to Will.

William Kent -- Director, Investor Relations

Thank you very much for your interest in QEP and we'll talk to you all soon.

Operator

Ladies and gentlemen this concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.

Duration: 42 minutes

Call participants:

William Kent -- Director, Investor Relations

Timothy J. Cutt -- President and Chief Executive Officer

Richard J. Doleshek -- Executive Vice President and Chief Financial Officer

Gabriel Daoud -- Cowen & Company -- Analyst

Derrick Whitfield -- Stifel -- Analyst

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Timothy Rezvan -- Oppenheimer -- Analyst

John Nelson -- Goldman Sachs -- Analyst

Kashy Harrison -- Simmons Energy -- Analyst

Rajul Aggarwal -- Oak Hill Advisors -- Analyst

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