Pioneer Natural Resources (PXD) Earnings Report: Q3 2014...
Transcript of Pioneer Natural Resources (PXD) Earnings Report: Q3 2014...
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PioneerNaturalResources(PXD)EarningsReport:Q32014ConferenceCallTranscriptThefollowingPioneerNaturalResourcesconferencecalltookplaceonNovember5,2014,10:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
FrankHopkins;PioneerNaturalResources;SVP-IRScottSheffield;PioneerNaturalResources;Chairman,CEOTimDove;PioneerNaturalResources;President,COORichDealy;PioneerNaturalResources;CFO
OtherPart icipants
DougLeggate;BankofAmerica-MerrillLynch;AnalystCharlesMeade;JohnsonRice;AnalystDaveKistler;Simmons&Company;AnalystBrianSinger;GoldmanSachs;AnalystJosephAllman;JPMorgan;AnalystMattPortillo;Tudor,Pickering,Holt;AnalystLeoMariani;RBCCapitalMarkets;AnalystEvanCalio;MorganStanley;AnalystJohnFreeman;RaymondJames;AnalystEliKantor;CanaccordGenuity;AnalystGilYang;Discern;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator:
WelcometoPioneerNaturalResourcesthirdquarterconferencecall.
JoiningustodaywillbeScottSheffield,chairmanandchiefexecutiveOfficer,TimDove,presidentandchiefoperatingofficer,RichDealy,executivevicepresidentandchieffinancialofficer,andFrankHopkins,seniorvicepresidentofInvestorRelations.
PioneerhaspreparedPowerPointslidestosupplementtheircommentstoday.TheseslidescanbeaccessedovertheInternetatwww.PXD.com.Again,theInternetsitetoaccesstheslidesrelatedtotoday'scalliswww.PXD.com.
Atthewebsite,selectinvestorsandselectearningsandwebcast.
Thiscallisbeingrecorded.AreplayofthecallwillbearchivedontheInternetsitethroughNovember30th.
Thecompany'scommentstodaywillincludeforward-lookingstatementsmadepursuanttotheSafeHarborProvisionsofthePrivateSecuritiesLitigationReformActof1995.ThesestatementsandbusinessprospectsofPioneeraresubjecttoanumberofrisksanduncertaintiesthatmaycauseactualresultsinfutureperiodstodiffermateriallyfromtheforward-lookingstatements.TheserisksanduncertaintiesaredescribedinPioneer'snewsreleaseonpage2oftheslidepresentationandinPioneer'spublicfilingsmadewiththe
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SecuritiesandExchangeCommission.
Atthistimeforopeningremarks,IwouldliketoturnthecallovertoPioneer'sseniorvicepresidentofInvestorRelations,FrankHopkins.Pleasegoahead,sir.
FrankHopkins (SVP-IR):
Thankyou,Shannon.
Goodday,everyone,andthankyouforjoiningus.
AsShannonmentioned,youcanfindtheslidesforthiscallatwww.PXD.com.Iwantyoutonotethattheversionoftheseslidesthat'sonthewebsitenowhasbeenupdatedfromtheversionthatwepostedlastnight.Itnowincludestwoslidesrelatedtoourequityoffering,whichwillbediscussedduringthiscall.Thisupdatedversionistheonethatwillbeusedontoday'scall,andthepagenumberswillbealignedtothatversion.
Withthathousekeepingmattersoutoftheway,letmebrieflygoovertheagendaforthecalltoday.Scott'sgoingtobeupfirst.He'sgoingtodiscusstherationalebehindthetransactionsthatwereannouncedlasteveningtoenhancePioneer'sbalancesheet.He'llalsoprovideoperatinghighlightsforthethirdquarter.Again,anothergreatquarterforPioneer,andonewhichhighlightsthatwearesuccessfullyexecutingthegrowthprogramwecommittedtoatthebeginningofthisyear.
AfterScottconcludeshisremarks,TimwillreviewourcontinuedstronghorizontaldrillingresultsintheSpraberry/WolfcampandEagleFordShale.He'llalsoprovidecoloronsomeofthefront-endloadedinfrastructureprojectsthatarebeingprogressedtosupportPioneer'slong-termgrowthplanfortheSpraberry/Wolfcamp.
Richwillthencoverthethirdquarterfinancialsandprovideearningsguidanceforthefourthquarter.
Withthat--orafterthat,we'llopenthecallupforyourquestions.AndnowI' llturnthecallovertoScott.
Scot t Shef f ield(Chairman,CEO):
Thanks,Frank.Goodmorning.
OnSlidenumber3,onourrationale,capitalfunding,thecombinationwassellingabillionofequitycombiningwithannouncingtheexpectedsaleofourEagleFordMidstreambusiness.ItallowsPioneertoreallyprudentlydevelopitsassetsinwhatIbelievecouldeasilybea$70to$80oilpriceenvironmentoverthenexttwoyears.
Asyouallknow,thepriceofoilhasdroppedabout$30abarrel.Itisatrilliondollarstimulusperyeartotheworld'seconomy.It'sgoingtotakeawhiletogetthedemandsideupintheworldtoday.Atthesametime,we'reinabattlewithSaudiArabiainregardtomarketshareversusUSshaleoil.
Thisallowsusinbothtransactionstobeabletohavecontinuedsuccess,asFrankmentioned,ofannualproductiongrowthof16%to21%through'16atveryattractivereturnsof40%to80%beforetax.Asfootnoted,thosereturnscouldsignificantlyimprove.
Youseeasignificantdropintherigcount,whichIexpectinfirstquarter,amongotherindustryparticipantsandvariousplaysthroughouttheUS
Inadditiontootherinitiativesthatweareinitiatingoutinthefield,anoptimizationprogram.Wewon'tdecideonourfinalrigcountuntilweannounceitinearlyFebruaryonourschedule,whetherit'szerorigs,whetherit'sfiverigsorwhetherit's10rigsaddduringtheyear.Wehavetremendousflexibilitywithourrigcontracts,
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asmostofthemareonathree-yearcontract,butwepurposelyhadthemexpiringathirdin'15,athirdin'16,athirdin'17.Italldependsonwhatoilpricesareoverthenextthreemonths.
Again,theuseofproceedsinadditiontothegrowthandcontinuedsuccessistofundfront-endloadedinfrastructure,whichwillprovidesignificantcostsavingsinthefuture.Totalofabout$1.4billionto$1.6billionoverthetwo-yearperiod.Themaincostwillbe$500millionto$700millionforourwaterdistributionsystemandnetworkcomingoutofthecityofOdessaandthecityofMidland,whichTimwillgivemoredetailon,whichwillsaveusaboutahalfamillion--overahalfamillionperwell.Whenyoulookatover20,000drillinglocations,it'sover$10billionofsavingsoverthenextseveralyears.
Inaddition,we'recontinuingtobuildoutlargehorizontaltankbatteries.Andeventually,aswegetintodevelopmentdrilling,wewon'thavetospendthemoneyonthosetankbatteries,andsaveoverahalfamillionperwell.Inaddition,we'llbe--severalnewgasprocessingfacilitieswillbecomingon.We'llbeexpandingoursandminetoalmostthreetimesfor$125million.Andwe'redoingallthisoverthenexttwoyearstomakesurewemaintainadebttobookbelow35%anddebttocashflowbelow1.5%.So,bothoftheseallowsustoprudentlydevelopourindustry-leadingposition,andprobablythelargestoilfieldintheUSandtheworld-classSpraberry/Wolfcampoilfield.
Slidenumber4,alittlebackgroundontheEagleFordMidstreamdivestiture.Pioneerowned50.1%.We'redoingitjointlywithReliance,whoowns49.9%.Pioneeristheoperator.DataroomwillopeninDecember.Bidsareexpectedshortlythereafter.Weexpecttoannounceasuccessfulsalesometimebetweenmidandlatefirstquarter.SaleproceedsbackintotheSpraberry/Wolfcampassets.
Therestofthedetailinregardtothedescription,Iwon'tgooverthatdetail.ProbablythemostimportantitemisourforecastedcashflowtoPioneerisalittlebitover$100millionfor2015.And,obviously,withtheMLPstilltradingatavery,veryrichpremium,weexpectsomesignificantoffersforthisasset.
Also,ourabilitytoexport--processcondensateremainsunaffectedbythisexpecteddivestiture.
Inaddition,wehavenoplanstodivestourEagleFordShaleupstreamassets.
Slidenumber5.Justtosummarizewhat'shappenedinPioneeroverthelastthreeyears,wehavesuccessfullytransformedourSpraberry/Wolfcampacreagefromaverticalplayintoaworld-classhorizontalplayonour825,000acres,appraisingsixhighlyrespectivestackedintervals,withstrongEURsandinternalrateofreturnswithveryhighoilcontent.
We'vegrownourresourcepotentialfrom3.1billionbarrelsoverthreetimesto9.6billionbarrelsofoilequivalent,addingsignificantnetassetvalue.
Over20,000horizontaldrillinglocations.Morethandoubleproductionfrom45,000barrelsadayequivalenttoover100,000barrelsaday.EnteredinourjointventurewithSinochem,developedaworld-classpremierepressurepumpingcompany,inadditiontoacquiringthefourthlargestsandmineintheUS,whichisonlyaboutathree-hourdriveouttoWestTexas.
Increasedourgas-processingcapacity,withourownershipbeing27%to30%fromroughly285millionadayto1Baday.Securedalong-termwatersupplytomoveawayfromfreshwateroverthenextseveralyears.Andwenegotiatedthird-partytransactionstogetpremiumpricingbymovingawayfromtheMid-Cushdifferential,andalsogettingoverhalfofourproductioneventuallywillbepricedofftheGulfCoastorLLS,minustransportation.
OnSlide6,justtoshowwherewe'vegonefromin'011to'014,from3billionto9.6billionbarrelsofoilequivalentinthelargestoilfieldintheUStoday,threetimes.
Slidenumber7.AsFranksaidearlier,again,we'reexecutingonourgrowthplanwithgreatsuccess.We'reat
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thehighendofproductionagain,asweweresecondquarter,againinthirdquarterat186,000barrelsaday,up10,000.Theoilproductionis90%ofthat,up9,000.6%comparedtosecondquarterand12%onoilproductiongrowthcomparedtosecondquarter.Again,drivenprimarilybyoursuccessintheSpraberry/Wolfcampplay.
We'renarrowingguidancetotheupperendofourrangeto18to19.We'remorethandoublethenumberofhorizontalwellsplacedonproductioninsecondhalfcomparedtothefirsthalf.Already,productioninmid-Octoberismorethan195,000barrelsadayequivalent.Ourguidanceforthequarterwillbe200,000barrelsto205,000barrelsaday.
Aslightincreaseinourcapital,roughlyabout$100millionondrillingcapital,primarilyforoptimizationinregardtoabout30wellsthatwe'reoptimizingwithmuchbiggerfracs,bothsandandfluid.Andthenalsoinaddition,someearlyexpendituresonourwaterdistributionsystem.Again,forecastingproductiongrowthinthislowerpriceenvironmentof16to21overthenexttwoyears.
Wehavegreathedgesinplacealso,probablythebesthedgesinplaceamongtheindustryin2015and2016onoil.And,again,we're100%protectedontheMid-Cushdifferential,asImentionedearlier.
Slidenumber18.Again,IthinkthemostimportantpointforthequarteristhatwehavedelineatedtheWolfcampAinterval.Ifyourememberpreviously,wehadonewellontheonegoodAwell,andweputanother11wellsintheAthroughouttheentireNorthernprogram.Alltremendouswells,over1200barrelsofoilequivalentperday.That'sanaveragelaterallengthofabout7,000feet.
EagleFordcontinuedtoshine,withbothdownspacingandtheuppertargets.Resultscontinuetobeveryencouraging,continuedtoexportcargoesaroundtheworld,bothtoEuropeandtoAsia.Ourprocessedcondensatewithsignificantimprovedpricing.We'llcontinuetoincreasethatamountofbarrelsexportedgoinginto2015.
Also,what'simportant,we'vehadmultipleindependentstudiessupportliftingtheoilexportban,inadditiontothefactthatgasolinepriceswouldactuallybeloweredifweexportedoil.
TheEIAcameoutlastweek.It'saverypositivereportinregardtosayingthatUSgasolinepricesisgovernedbyBrentoilandbyworldgasolineprices.
Wecontinuetomaintain,obviously,strongfinancialflexibilityinadditiontotheequityoffering,andalsotheexpectedsaleofEagleFordMidstream.Cashonhandof$550million.AndwedidcloseHugoton/Barnettduringthequarterfor$328millionand$150million,alltoredeploythroughtheSpraberry/Wolfcamparea.
Slidenumber9.Again,onproductiongrowth,wehadagreatquarter,186,000,69%liquids.Guidance,200,000to205,000forthefourthquarter.Andalreadyinmid-October,weareover195,000barrelsofequivalentperday.
Aswesee,wemoveupto75%liquidsby2016.
I' llnowturnitovertoTimtogooverinmoredetailsofourassets.
TimDove (President,COO):
Thanks,Scott.
Andnowthatwe'vecompletedaprettysubstantialdrillingprogramallthewayfrom2013intotheninemonthsof2014,we'vecompiledaverysubstantialsetofdataonthevariouszonesintheNorthernSpraberry/Wolfcamparea.And,infact,we'veput56wellsonproductionintheWolfcampzone,asshowninthetable,aswellasseveralinthelowerSpraberryshale,aswell.
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Youcanseeonthemapwe'vehadawidespreadareaofdrilling.Wehavesomeareaswestillhavenotdoneanydrillingon,butwillbeshortly,aswe'veneededtocomplete3Dseismicbeforebeginningdrillinginsomeofthoseareas.
Themainimportantmessagehereisthatwecontinuetoseeconsistentresultsonthesewells.TheproductioncontinuestosupportverystrongEURsandreturns.Infact,asScottalludedto,eveninthe$70to$80oilenvironment,we'relookingatreturnsintheneighborhoodof40%to80%.
IntermsoftheJoMillandtheMiddleSpraberryShale,you'llrecallinthesecondquarterwehadsomemixedcompletionissues.I'mgladtosay,lookingatthewellsweputonproductioninthethirdquarter,they'retrackingverywellandlookalotstronger,reflectingthebestwellswehadreportedoninthesecondquarter,withJoMilltrackingabout800,000BOEandtheMiddleSpraberryShale,about700,000BOE.
Dataonourstrongestindividualwellscanbeactuallyseeninyesterday'spressrelease.Butashasbeenourpracticeinthelastseveralquarters,you'llseeonSlide11dataonallthewellsthathavebeendrilled.And,infact,onSlide11,westartwithareviewofalloftheWolfcampBwells--largedatasetnow--33wellsinfourcounties.Andyoucanseeveryconsistentresultshere,showingthattheWolfcampB,webelieve,cansupportEURsfrom800,000barrelstoamillionbarrels.Andthisdatasetcontinuesto--tosupportthenotionofveryhighreturnsintheWolfcampB.
Similarly,asweturntoSlide12andthentheWolfcampA--ScottmentionedthefactweonlyhadlimitedamountofdataintheWolfcampApriortothethirdquarter,butwehaveput11morewellsonproduction.Andyoucanseetheaverageofthesewells,ofall11,intheredline.AndIwouldconsiderthesetobeverystrongresults.ItgivesusalotofconfidenceintheWolfcampA,andleadsustotheconclusionthattheEURsarealsointhat800,000toperhapsoveramillionBOEonaverage.
TurningnowonSlide13totheWolfcampD,we'vegotacouplelinesonthisgraph,andIneedtoexplainwhattheymean.Ifyoutakealookatthedarkestofthepurplelines,thisisthecaseinwhichwe'reshowingalltheTier1wellsthatweredrilled,ofwhichthereareatotalof11.
ThelighterpurplelinehastodowithacoupleofMartinCountywellsthatwedrilledthatweconsidertobeinTier2acreage.And,as--asprognosed,theydidunderperformversusthetier1wells.Weneededtodrilltheseinordertotestourgeologicmodelintofullacreage.Obviously,thisleadsustotheconclusionthatcertainareaswherewehaveTier2acreageintheD,wewillnotbedrillinginthoseareasgoingfurther.Butthemainmessageis,ourTier1drillinglooksverygood.AndwewouldcalltheEURstillinarange,but650,000to,insomecases,overamillionBOEinthe--indifferentareasofthosefourcounties.
TurningnowtoSlide14,thisisreferencingthelowerSpraberryShale.Ninewellsnowinthatdataset.Relativelyshorterlaterals,asisthecaseinsomesituationswherewehaveleaseholdconfigurationissues.Butyoualsoseeacontinuationofwhathasbeenmentionedinpriorcalls,whichisadifferenttrajectoryofproductiongrowththanyouseeintheWolfcamp,aswaterisdrawnoffthesystem.Butnonetheless,inthefullnessoftime,especiallyafterabout90days,oncethesewellshavebeenputonproduction,youshowverystrongresults.Andconsistentresults,forthatmatter,again,withEURsrangingfrom650,000BOEto,again,overamillionBOE.So,verystrongresultsinthelowerSpraberryShale,asexpected.
ThenextslideshowssomeofthenewdataregardingtherecentMiddleSpraberryShaleandJoMillwellsthatwedrilled.Remember,asImentionedearlier,thatinthesecondquarter,wehadsomecompletionissues,sowegotsomemixeddrillingresults.Butmuchbetterresultshere.Ifyoutakealookat,forexample,inthebluelines,particularlythedarkBlueline,thisistheMiddleSpraberryShale--itgoestoUptonCounty--arelativelyshortlateral.It'sinearlydaysofproduction,butisingenerallookingprettygood.
Similarly,thelighterblueistheMiddleSpraberryShale,drilledinMidlandCounty.Andit'sexhibitingover650,000barrel-typecurveatthispoint.
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TheJoMilltendstobeabitofadifferenttrajectory,showingalittlebitmorelikelowerSpraberryShale.Andthesewellsarelookingverygood,boththeredandthegreenlines,alittleover5,000-footlaterals,andshowingrangesthatcouldbe650,000BOEupto800,000BOE.
I'dconsiderthisstilltobearelativelysmalldataset.Andso,we'regoingtocontinuetoappraisethesewells.Ofcourse,theamountofappraisalwedowouldbedependinguponwhatourtotalrigcountis.Prettyclearly,we'regoingtobefocusingontheotherzonesthathavebeenmentionedpriorintermsofourfocusfor2015.
TurningtoSlide16--well,Iguesswhenyoulookatwhetherwe'vehadsuccessinexecutionornot,youshouldbelookingatproduction.AndI'mverypleasedtosay,we'veshownverystrongproductiongrowthinthequarter.Ofcourse,that'saresultofthefactthatweexpectedthat,duetothebackend-loadednatureofthecompletions.Andwiththerigcountbuildingonlyduringthemiddlepartoftheyearandgoingtopredominantlypaddrilling.Thoughwedidputon73wellsinthecombinationoftheNorthernandSouthernacreageduringthequarter.Production,103,000BOEaday,upsubstantially,withthevastmajorityofthat,asScottmentionedearlier,beingoil.Andyoucanpointthentoasignificantamountofgrowthinthefourthquarterforexactlythesamereason.
Sotome,thisgraphdepictsthefactthatwearereallyhittingonallcylindersfromanexecutionstandpoint.
TurningtoSlide17,I'mgoingtonowchangetoadiscussionsurroundingourdevelopmentcampaigninthefuture.
Itwassuchalargecampaignofdevelopmentthatwehavecomingoverthenextseveralyears,we'retakingaveryholisticapproachtothedevelopment,really,ina10-yearhorizon.
Youcanseeonthisparticularslidethevariousthingswehavetodealwithwhenitcomestoa10-yearprogramofdrilling.Inparticular,I'mgoingtotalkaboutthreeofthesethatarethesubjectofthecapitalraisingsthatScotthadmentioned,thatbeinggasprocessing,fieldinfrastructure,andwater.
Andseveraloftheseresourceswillbedealtwithwhenitcomestothiscapitalbeingraised.ButthecapitalisneededupfrontoverthenextseveralyearstopreparetobringthisPVofthistotalprojectforward,asdrillingacceleratesintothefuture.SoI' lltouchonseveraloftheseinthenextslide.
TurningtoSlide18--obviously,waterisaverysignificantneedwhenyoulookattheresourcesrequiredtodevelopthisasset.Oneofthemainobjectives,ofcourse,inourcaseistomakesurewecanbringinrelativelyattractivewaterwhenitcomestocosts,intermsofitsacquisitionandtransportation.Andalargewatersystemwillberequiredtodothat.Obviously,wewanttogettoapointwherewe'rereducingourreliance,and,infact,eliminatingourrelianceonfreshwateratsomepointinthefuture,andalsoreducetheneedfordisposalofproducedwaterthroughincreasingourrecyclingprograms.
We'reverypleasedtonotethatwehavegoodsupplysourcesintermsofeffluentwaterfromboththecityofOdessa,andwe'refinalizinganagreementwiththecityofMidlandtodeliverupwardsof360,000barrelsperdayofwater--effluentwateroverthenextthreeyearsorso.
We'vecreatedanentitywithinPioneerwithsomegreatemployeeswhoareactivelyworkingthisproject.Andwe'rereallymakinggreatstridestowardsmakingourwateravailabilitysomethingthatwouldnotbeaconcern,includingdrillingourownbrackishwaterwells,buyingbrackishwaterfromthirdsourcesandrunningseveralpilotsforrecycling.
So,we'rereally,Ithink,atastepaheadherewhenitcomestowater.Butoneimportantpartofthis,asshownonSlide19,thatis,averylargeprojectthatwe'rebeginningtospendmoneyonforthetransportationofwater,storage,utilizationandrecycling.
Asshownonthecartoonthat'sdepictedontheright,we'regoingtobebuildingabouta100-milemainline,
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principallyNorth-South,andthengoingtotheSoutheast--averylargediameterpipe.We'llalsobelayingfiberoptics,cable--fiberopticcablesinthesameditchto,inessence,createwhatwillbeastateoftheartsystemintermsofcommunicationsandintermsofcontrolwithverylimitedpeopleinthefield.Itwillbeaworld-classsystem,withoutadoubt.
We'llalsoneedtobuildfeederlinesregardingthenewwatersupplyfromOdessaandMidland,andinadditiontowhich,inthefuture,we'llbedrilling--bebuildingsubsystemsthatareoutinthefieldareastosupportdrilling.Andassociatedwiththat,fracponds--some120to150fracpondsthatarebuiltstrategicallynearwherethedrillingwillbeoccurring.
Anticipatethetotalprojectwillberoughly$800milliontoabilliondollarsspentoverthenext,say,fourtofiveyears.Andit' llbebuiltinphases,ofcourse.Thefirstphaseofwhichisthesubjectofspendingin2015and2016.It'sbasicallythemainlinesystemandthefeederlinestobringinthenewwatersources,andit'sreallythebackboneofthesystem.
Wecancontrolsubsystemsandfracpondsjustbasedonwheredrillingoccurs.Andso,itwilldependuponwherewelandintermsofthecapitalbudget.Butnonetheless,overall,we'regoingtobespendingprobablyaminimumof$250millioneachofthenexttwoyears,2015and2016,inthisinitialphaseoftheproject.
TurningtoPage20--andwereallybelieveultimatelythebenefitsofthisaresignificant.It'sobviouslycriticalfromthestandpointofthesuccessofexecutingonourplans,butitalsowillprovideusrelativelylow-costcompetitivewatertodevelopthesystem,inadditiontowhichwebelievetheeconomicsofthisprojectaregoingtobeverystrong,probablyintheneighborhoodof35%IRRs.Oneimportantthingitdoesisgetwateroutoftrucks,getstrucksofftheroads.Andifyou'vebeeninMidland,youknowwhatI'mtalkingabout.It'sadangerousplace.Andweneedtodoeverythingwecantogettrucksoffroadsoutthere.Andwe'llbeheadingmoretowardsarecyclingworldthatwillallowustoutilizeourproducedwater.
Ultimately,again,leadingtoaconclusion,we'renotusinganyfreshwaterofanysignificance.Scottmentionedthis,butthisissignificant,becauseit'sgoingtosaveus$500,000perwell.Ina20,000-wellcampaign,that'sveryimpressive.
TurningtoPage21--twoothercriticalfront-loadedcapitalrequirementsareintheformoftankbatteriesandsaltwaterdisposalontheonehandandgasprocessingontheother.WedohavetobuildverylargescalebatteriesanddisposalwellsandfacilitiesinordertodealwiththeveryhighvolumewellsintheSpraberry/Wolfcampthatrequirethatkindofvolume.In2014,forexample,wespentabout$250millionforthesekindoffacilities.
Wewillhavebuiltover30tankbatteriesandover25saltwaterdisposalfacilitiesthisyear,andexpectthatormoreoverthenextcoupleofyears.Probablywe'llbespending$300millioneachin2015and2016andsimilarexpenditures.Thiswillbegoingonforafewmoreyearsuntilwehaveallofthisbuiltout,readyforthesignificantaccelerationofdrillingwells,andwe'llhavethetankbatteriesreadyforallofthisvolume.
It'seasytocalculateingasprocessingourneedforperhapsuptoa200millioncubicfeetadaynewgasprocessingfacilityevery12to18months.Andyoucanseethatoccurringalreadythisyear.Wehavetwonewplantscomingon.Oneisalreadyonproduction,theEdwardplantwithAtlas,andanother[WGTG]plantcomingoninaboutamonthorso.
Andwehaveplans--infact,havealreadymadetheorderstobuildanotherplant,inthiscase,MartinCountywithAtlas,thatwillcomeoninthesummerof2015.Probablywillneedadditionalplantsin2016,thewayitcurrentlylooks.
So,we'reearmarkingabout$175millionofcapitalforthenexttwoyearsintotaltofundourshareofthesefacilities.
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Andthenfinally,turningtoSlide22--sandisjustanothercriticalcomponentinthelong-termplan.Andwe'rereally,reallyfortunatetohaveourBradysandminelocatedveryclosetoourfieldactivities.Ithasabout750,000tonsayearofcurrentcapacity,verysignificantreservesbehindthatof68milliontonsonaprovedandprobablebasis.We'vegotamultidecadeinventoryofsand.Andmostofthat,ofcourse,isusedonourownwellsand,infact,goinginthefuture,thevastmajoritywillbeusedonlybyPioneerwells.With[wintergrowingneeds],though,it'sveryclearweneedtogoaheadandcompletetheexpansionofthisfacility.
Wehaveaplanin2015tospend125milliontoexpandcapacityto2.1milliontons.Andthatincludesstoragefacilitiesandsomepreinvestmenttotheextentwewanttoaddanotherexpansionintwoorthreeyears.
Wecalculatethistohaveaveryfastpayout.Becausewhenyouconsiderthisvolumeofsand,theonlyalternativewewouldhavewouldbetobringitinfromtheMidwest,thatistosaywhitesand.Andthetransportationcostsandtheissuespertainingtologisticsandgettingthesanddownthereareverysignificant,sowethinkthisisaveryfastpayoutproject.
TurningtoSlide23,you'renotreallyturningawayfromPermianintoEagleFord.Youknow,wecontinuetoseethebenefitsintheEagleFordShaleofourdownspacingandstaggeringprogram.Infact,weexpecttoputabout50wellsonproductionintheuppertargetsasapartofthatdownspacingandstaggeringandaddingupperEagleFordShaletargets.About35wellsofwhichhavebeenplacedonproductionsofarthisyear,and18inthethirdquarter.Ithinkwe'repleasedjusttosaythattheupperwellsareshowingverysimilarresults,atleastwhenitcomestoearlyproduction,ascomparedtotheiroffsetlowerwells.Infact,youcanseeinthegraphtotheright,therearecases--oneshownhereinKarnesCounty--ofasituationwheretheupperwellactuallyexceedsthevolumeinthelowerwellandthatoftheparentwellnextdoor.
So,we'reverypleasedwithhowthisprogram'sgoing.Andit' llbealargepartofourprogramgoingforwardin2015andbeyond.
TurningnowtoSlide24--resultswereverygoodintheEagleFord.Infact,recordproductionofabout47,000BOEperday.You'llnoticethatwasnotupverysubstantiallyfromthesecondquarter.However,itwasanexpectednumber,simplybecauseweknewwe'dhavequitealargevolumeofwellsoffproductionduetooffsetfracsthatwerebeingperformed.Weprobablylost1,000barrelsadayduetothat.
Andalso,wehadanticipatedaback-weightedpopscheduleinthequarter,andthat'sexactlywhathappened.Andyoucanseeinourexpectationsforthefourthquarterthatproductioncontinueswithasubstanialramp-upto50,000to52,000BOEperday.
Wedidput35wellsonproduction.We'redoingagreatjobofutilizingtwo-stringcasingdesigns,andthat'ssavingussomewhereintheneighborhoodof$750,000to$1millionperwell.
Ouroptimizationprogramwe'vetalkedaboutthroughtimeisreallyworkingwell.Westillseea20%to30%increasewhenitcomestopumpingmoresand,pumpinghighervolumesoffluidsandchangingthespacingintermsofthefracs.
TheexportationoftheEagleFordcontinues.We'reexportingcurrentlyabout25%ofourvolume.Ourprocesscondensate--we'reactuallytargetingthattobealmosthalfofourproductionnextyear.We'veparticipatedinsixcargoesduringtheJuly-to-Novembertimeframe.AndweareseeingprettysubstantialincreasesinpricingrelatedtotheexportofthecondensateascomparedtoleavingitinwithaswampedUSmarket.
And,incidentally,wewillcontinuetobeabletoexportcondensateintheeventofapositivesaleofourEFSmidstreamassets.
TurningtoSlide25--thisismyfinalslide--itreferstothefactthatwestillneedalotofworktobedonehere
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tomakesurethatifwereallyareinalow-priceenvironment,we'reoptimizingourreturns.Weareactivelyworkingwithourserviceproviderstoseekcostreductionsfor2015.Allofthosecontractsarenotletyet,sowehavealotofdiscussionsgoingontoreducecostsasbestwecanfor2015andafterthat,wewill,asyoumightexpect,focusin2015intheeventweareatalowercostenvironmentononlytheverybestintervals.And,asImentionedearlier,that'sprobablyseentobefocusedontheWolfcampB,AandlowerSpraberryshale.Andprobablydeferdrillinginsomeoftheotherzonesthatarequiteexcellentintermsofhowwellthey'reperforming,butwehavelessdata.Andwemightaswellfocusonthe--thehighest-returnwellsfirstinthisenvironment.
Wealsowillbecontinuingouroptimizationtesting.You'llrecallthatwe--similartowhatwedidinSouthTexasandtheEagleFord,wemovedthatteamintotheSpraberry/Wolfcampareatobegintheprocessofoptimizationearlyinthecampaignofdrilling,andthat'sbeingimplemented.We'llcontinuedoingthat.Ofcourse,somesciencecosts,butprobably,we'lltrytolimitifwe'reinalowerpriceenvironmentin2015.
Ithinkit--itgoeswithoutsayingthat--thatcontinuousimprovementinshaleplaysisjustpartof--partoftheprogram.Andaswecontinuetobeworkingonthat,itreallyamountsto,inourcase,identifyingandimplementingDNCcostreductions.Anditcomesinalotofdifferentforms.I'mnotgoingtogothrougheverythingwe'redoing,buttheexamplewouldbethesametwo-stringdesignconceptthatwereusedinEagleFord,we'renowlookingintousing,andhavesuccessfullyusedintheSouthernWolfcamparea,wherewe'vedrilledawellasfastas12days,whichisunheardofinthepast.
Ofcourse,we'recontinuingour"sim-ops"orsimultaneous--simultaneousoperationswhenitcomestothecompletionsofwells,wherewe'reactuallyputtingwellsonproduction,andatthesametimewe'redrillingoutother--otherplugs,andsoon.Andthat'scuttingseveraldays.Insomecases,abouteightdaysoutofthetimetogetthewellscompleted.
We'vealsodonealotofworktoincreaseoursubsurfaceunderstanding,andthat'shelpingustooptimizelandingzones.Itdoesn'tjuststopintermsofcostreductiononcapital,though.WearedoingalotofworkoninitiativeswhenitcomestoreducingLOE.YoucanseeourLOEcostshavedonephenomenallywell.Hastodo,firstofall,withhigh-volumewells,butwe'realsoattentivetothesecosts.Forexample,usingplungerlifts,asopposedtogasliftorESPsorrodpumps,whicharemoreexpensivewherewecandoso.
So,you'llseeuscontinuetopursuetheseinitiatives.Wepursuetheminahigh-priceenvironmentandalow-priceenvironment,soit'sjustsomethingthatwedoasapartoftheshalegame.
So,I'mgoingtoturnitovernowto--turnthecallovertoRichforadiscussionofourthirdquarterfinancialsandfourthquarterguidance.
RichDealy(CFO):
Thanks,Tim.
I'mgoingtostartonSlide26,wherewereportnetincomeattributabletocommonstockholdersof$374million,or$2.58perdilutedshareforthequarter.Thatdidincludenoncashmark-to-marketderivativegainsof$216million,or$1.49.Thatwasprimarilyaresultofourderivative--valueofourderivativeportfoliogoingup,astheoilpricesprimarilydeclinedandsoftenedduringthequarter.
Italsoincludedalossassociatedwithdiscontinuedoperationsof$37million,or$0.26perdilutedshare.ThisisprimarilyrelatedtothesaleofourBarnettandHugotonassetsthatScottreferenced.So,adjustingforthosetwoitems,weareat$195millionofearnings,or$1.35pershare.
Lookingatthebottomoftheslidewherewelookatresultsrelativetoguidance,youcansee,asFrankmentioned,wehadanothergreatquarter,beingatthetopendofproductionguidance.Iwon'tgothroughall
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thelineitemshere,but,asTimmentioned,productioncostswerebelowtheguidance,really--andI' llmentionitlater--butaswebringonhorizontalwellsandourcostinitiatives.
TurningtoSlide27,lookingatpricerealizations,asyouguysareaware,wedidseesofteningofpricesduringthequarter,soyoustartout,oilpricesweredownabout5%,NGLsabout6%,andgaspricesdownabout12%.Thatwasoffsetsomebyourderivativeposition,whichyouseeatthebottomoftheslide,wherewedidhavepositiveresultsfromderivativesduringthequarter.
TurningtoSlide28,asTimmentioned,youknow,productioncostsaredownabout5%to$13.17forthequarterperBOE,mainlyaslowercosthorizontalwellsarebeingplacedonproduction.Thatisbringingitdown.Inaddition,wedidseewiththesofteningofcommodityprices,thatourproductiontaxesweredownforthequarter,inadditiontobaseLOE.
TurningtoSlide29--liquidityposition,netdebtattheendofthethirdquarterwas$2.1billion.Thatdidinclude$550millionofcashonthebalancesheet,sowe'reinexcellentfinancialpositionattheendofthequarter.Thatwillbefurtherstrengthenedbytheequityofferingthatwejustcompleted.AndoncetheEagleFordMidstreamtransactioniscompleted,thatwillstrengthenit,aswell.
Soexcellentfinancialpositionforthenextcoupleofyearsofinfrastructurebuildupandcapitalplansthatwehave.
TurningtoSlide30--lookingatfourthquarterguidance,we'vetalkedabouttheproductionbeingupsignificantlyinthefourthquarter,again,withourincrementaladditionofwellsinthesecondhalfoftheyear.So200,000BOEsto205,000BOEsperday.Therestoftheitemsherearegenerallyconsistentwithwhatwe'veshownforpastquarters,soI'mnotgoingtogothrougheachofthose.Butthey'rethereforyourreview.
So,withthat,Shannon,Ithinkwe'llgoaheadandopenupthecallforquestions.
QUESTIONS&ANSWERS
Operator:
Ifyou'dliketoaskaquestion,pressstaroneonyourtelephonekeypad.Ifyou(inaudible)...
We'lltakeourfirstquestionfromDougLeggateofBankofAmericaMerrillLynch.
DougLeggate (Analyst-BankofAmerica-MerrillLynch):
Oh,thankyou.Goodmorning,guys.Soundslikeyoumightbetravelingtoday,soIappreciateyoustillmakingtimeforthecall.
I--Ihavetwoquestions,ifImay.ThefirstoneontheMidstream.Clearly,thedecisiontoselltheEagleFordMidstream--youknow,itkindofbegsthequestion,withsuchalargespendinthePermian,whatareyourlonger-termplansforyourMidstreamassets?Becauseclearly,the--youknow,the--theMLPvalueissomethingtobeconsidered,Iguess.AndI'mjustthinkingaboutthescaleofinvestmentthatyou'regoingtohavetomake.WhatistheprognosisforhowyouthinkaboutMidstreamgoingforward?AndIhaveafollow-up,please.
Scot t Shef f ield(Chairman,CEO):
Yeah,Doug.Ithinkwehaveseenthebenefitofowning--we'veownedthis27%to30%forover20years.We'veseentremendouslythebenefitbyowningapieceoftheprocessing--alltheplantsintheSpraberry/Wolfcampfieldallowsustoexecute,gettiedinquicker.Andso,it'savery,veryimportantintegratedpieceofourintegratedassetsoutintheSpraberry/Wolfcamp.
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It'salwaysapossibilitywaydowntheroad,butrightnowit'sbeenatremendousbenefitforustoownapieceofeveryplanandtoeducateallofthevariousparties,justlikewedidwithAtlas.Ittookusacoupleyearstoeducatethem,togetthemtostartbuilding.Weareexcitedaboutthetargettransaction.ItleavesamuchstrongerfinanciallystrongerMLPowningtheassets.Weshouldbeabletobuildquickerandlargerplantsasweneedthem.
DougLeggate (Analyst-BankofAmerica-MerrillLynch):
Okay.Thankyouforthat.Andmyfollow-upisreallyaboutthehighgradingofthePioneercapital.Soperyourpreparedremarks,ifPioneer'sgoingtobeputtingPioneerdollars,ifyoulike,intothebetterpartsoftheplay--Imean,wesawwhatlookslikeabigstep-upinoilnextthisquarterfor--youknow,forwhatyoudiddeliverbytheirproduction.
SoI'mjustkindoftryingtofigureout,well,one,whatdoesitmeanforthe--therateablegoldstarthatyou'vegivenus,giventhatyouwouldbetargetinghigherAURs?AndifImaykindofdouble--double-borrowaquestion--whatdoesitmeanforyourthoughtsonusingthirdpartycapitaltomaintainthepotentialvalueofthenon-coreassetsthatobviouslycompanymakersforsomeoneelse,ifyouchosetogothatroute?AndI' llleaveitthere.Thankyou.
Scot t Shef f ield(Chairman,CEO):
Yeah,Doug.Obviously,we'regoingtowaitandcomeoutinearlyFebruarywithourcapitalbudgets,sowehavelotsofflexibility.ItdependsonwhathappenswiththeIraniannegotiationscomingonwithKerryNovember24,theOPECmeetingonthe27th,what'sgoingtobethepriceofcrudegoingintoourfinaldecisionsinlateJanuary,earlyFebruary.Wehaveextremeflexibility.It'sstillgoingtobewithinthat16%to21%range,whetherwekeeprigsflatorwhetherweaddfiveoradd10rigs.Sowehavelotsofflexibility.
Inregardtoyoursecondpartofyourquestion,referringto...
Unident if iedCompanyRepresentat ive :
Bringinginthirdpartycapital.
Scot t Shef f ield(Chairman,CEO):
Oh,bringingthirdpartycapital--atthispointintimeonthesweetspotinthenorth,wejustdon'tthinkatthispointintimeit'sworthdoingathirdjointventure.It'salwaysanoptionwaydowntheroad.Itmakesit--wehavefoundoutthroughtimeitmakesittoughertodivestofassetstogetpeopleattractivewhenyoudohaveajointventurepartner.Andso,wedonotseeanyofthatasanavailabilityoverthenextcoupleyears.
InourNorthernacreage--becauseit'sgradereturns--asyoucansee,we'veappraised.WehavesoldpartoftheacreagetotheNorth.Therearesmallpiecesthatwemaylookatovertimeonthefringestodivest.
DougLeggate (Analyst-BankofAmerica-MerrillLynch):
Allright,fellas.Congratsonagreatquarter.Thanksagain.
Scot t Shef f ield(Chairman,CEO):
Thankyou.
Operator:
Andwe'lltakeournextquestionfromCharlesMeadewithJohnsonRice.
CharlesMeade (Analyst-JohnsonRice):
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Goodmorning,gentlemen.IfIcouldpickupthatpointonthe--onthebiginfrastructurespend,canyoupointustoanythingeitherinyourhistoryofdevelopmentacross,youknow,acrossdifferentplays?Ormaybeinotherplacesintheindustrywhereacompanyhasledtheinfrastructuredevelopmentofaplayofthissize?Youknow,includingnotjustthetypicalMidstreamthings,butreallythekindsofthingsthatyou'refocusingon,likewaterandsand.
TimDove (President,COO):
Yeah,Charles,Ithink--firstofall,Idon'tthinktherehaseverbeenashaledevelopmentofthemagnitudewe'retalkingabout,consideringthatshaleplaysarerelativelynewintheindustry.Imean,you'dhavetolookatthekindofinfrastructurebuildoutandtherequirementsthereassomethingakintotheNorthSlopedevelopmentinthefullnessoftime.Now,theyhave--wehavedifferentneedsinshaleplaysthantheNorthSlopedevelopmentneeded,butthat'sthescopewe'retalkingabout.Andsoit'ssomethingofvery--ofsignificance.
CharlesMeade (Analyst-JohnsonRice):
Gotit,Tim.Thanks.That'sthewayitseemedtome,butIdidn'twanttopresumethatyouguyswerelookingatitthatway.Butitlookslike...
TimDove (President,COO):
Imean,itwasalot--it'salotwarmerinWestTexas,okay?
CharlesMeade (Analyst-JohnsonRice):
Nopolarbears,huh?Onalittlesmallerscale,theWolfcampA--ifIgobacktothinkaboutthewayyouguysweretalkingaboutthatmaybeayearortwoyearsago,IthinktherewasaconcerntherethatIthinkyouwereconfidentabouttheoilinplay.Yousaidthatsortofthing,buttherewasaconcernaboutbeingabletogeteffectivefraccontainmentthere.Canyoutalkabouthowthat's,youknow,withthese11wellsthatyou'veputonline,howdoyouthinkyou'vedone?Howdoyouthinkyou'vedoneonthatfront?AndareyoudoinganythingdifferentintheWolfcampAwithyourfracdesignsandwhatyou'redoingintheWolfcampB?AndIguessthenaturalfollow-ontothatis,giventhatWolfcampAisstillintheearlyinnings,andislookingsogood,is--isthere--doyouthinkthereismoreupsidethere?
Scot t Shef f ield(Chairman,CEO):
Yes.Charles,youhaveagoodmemoryfromwhatwesaidabout18months,twoyearsago.WewereconcernedatthetimeaboutfrackingupintotheDformation.Ithinkthis--bybringingon11newwells,allgreatsuccess,microseismichasshowedallthefracswerecontainedwithintheA.Sovery,verypositiveresults.TheAdoeshavealmostasmuchoilastheB,soitallowsusreallytodeveloptheAthroughoutthenorth,justasmuchastheB.Sovery,verypositiveresults,andstillgettinggreatresultsinthelowerSpraberryshale.
CharlesMeade (Analyst-JohnsonRice):
Okay.Thankyouforthatdetail,Scott.
Operator:
Andwe'llmovenexttoDaveKistlerwithSimmons&Company.
DaveKist ler(Analyst-Simmons&Company):
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Goodmorning,guys.
Scot t Shef f ield(Chairman,CEO):
Hi,Dave.
DaveKist ler(Analyst-Simmons&Company):
Realquickly,yououtlinedforuswhatyouexpectkindoftherateofreturntobefromthewaterinvestmentinyourrelease.Canyougiveuscoloronkindofmaybewhatyouexpectotherinvestmentstogenerate,ormayberefreshourmemoryintermsofhowquicklythepaybackwasonthesand--originalsandmineinvestmentortherateofreturnonthat?
TimDove (President,COO):
Yeah,Dave,Ithinkwe--whenwecalculatedtheoriginalsandmineacquisition,wewerelookingatafour-tofive-yearpayoutonthatproject.Weacquiredthatin2012,andIthinkit'sonschedule.Probablytwoorthreemoreyearstopayout,withthealternative,ofcourse,being,asImentionedearlier,evenregard--eveninregardtoourexpansions,we'dhavetobringinalot--alargequantityofwhitesandfromtheMidwest--whichhasalotofcomplication.Actually,whitesandcostsattheminearesimilartoBradyBrown,buttheproblemis,the--itcostsatleastdoubletobringitin,notwithstandingalltheinfrastructureandlogisticsthatyou'veheardaboutwithregardtotherailsystem.
So,Ithinkifwecalculatetheincrementalvaluesassociatedwiththeexpansion,theexpansionisrelativelycheaperthantheoriginalsandmine.Itjusthastodowithwe'renotacquiringreserves.We'rejustbuildingafacility.Soifwespend$125millionorsoonthat,Icalculatethepayofftobeprobablyintheneighborhoodofayearandahalf.Andso,tome,thisisareallyoutstandinginvestmentwhenyouconsiderwehavedecadesworthofsand.
DaveKist ler(Analyst-Simmons&Company):
Okay,Iappreciatethat.Andthenjustone,thinkingaboutbudgetingfornextyear--whenyoumakethatbudget,orasyougothroughthatprocessrightnow,howareyouthinkingaboutwhatkindofimprovementyouanticipateinwellcostsandEURs?Orareyougoingtobeusingcurrentwellcosts,currentEURs?Andcanyourefreshusonwhatyouthinkthoseareforthebudgetingpurposes?
Unident if iedCompanyRepresentat ive :
Yeah,Ithink,Dave,rightnow,Ithinktheplanis,we'regivinginstructiontoourteams,istousethecurrentwellcosts,usecurrentEURsandbasicallyinthatsensebeconservative.Ithinkifyoulookatthecurrentwellcosts,totheextentwe'reoutto9,000-footto10,000-footlaterals,thosewellsarecosting$9millionto$10million.SoIthinkwehavesomeabilitytocutthatbackaswecontinueouroptimization.
Youknow,we'recuttingdaysoffwells,aswespeak,ifyoulookatthisquarterversuslastquarter.Wedidn'tgiveyoualotofcoloronthat.Butyou'llseeincrementalimprovements.Ithinkthequestionis,aswegofurthertowardsnewcasingdesignsandotherthingsImentionedwithregardtohowtocompletethewellsmoreefficiently,you'llseethecostscomedown.SoIthinkwe'vegotupsidewhenitcomestothecosts.
OnEURs,wehavenotyetsetexactlywhatwillbethezonestobedrilled.Sowedon'thavetherigcountssetyet,wellcountssetyet,becauseit'ssomethingwe'reintheprocessofdoing.Won'tdiscussevenuntilFebruary.
Butthatsaid,ifwe'reinthesituationwe'reintoday,andwe'regoingtobelimitingeverythingotherthanlet'sjustsayWolfcampA,BandlowerSpraberryShale,youwouldthinkthatour--thatourreturnsandourEURs
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andourproductionrateswouldbebetteraswehigh-grade.Wejustsimplyhaven'tsimplygottenthenumberssurroundingthat.
Butasforrightnow,we'rehavingtheteamsevaluatethatandevaluatewhatarethebestareas,whatarethebestwellstodrillwhenitcomestoeconomics.
DaveKist ler(Analyst-Simmons&Company):
Great.Appreciatethat,guys.
Operator:
We'llmovenexttoBrianSingerwithGoldmanSachs.
BrianSinger(Analyst-GoldmanSachs):
Thankyou.Goodmorning.
Scot t Shef f ield(Chairman,CEO):
Hi,Brian.
BrianSinger(Analyst-GoldmanSachs):
You'vetalkedtoabouta$1.4billionto$1.6billionhereofnewinfrastructureCapExoverthenextcoupleofyears.Andinthecontextof16%to21%growthforecast,shouldwethinkaboutthisasatrulyone-off,oristhisisagoodrateofinfrastructurespending?Orshoulditbegreateroveralonger-termperiodforthesetypesofprojectsorothersthatmaycomeup?Arguably,you'llneedmorewater,you'llneedmoresand,you'llneedadditionalinfrastructureovertime.
Unident if iedCompanyRepresentat ive :
Yeah,Brian,Ithinkthemajorexpenditureofthewatersystemwillbeinthenexttwoyears.Therestofitwillbespreadoutoverthethree-orfour-yeartimeframe.So,that'smostlythemainTrunkline.Andso,that'sgoingtooccurin2015and2016.
Thesandmine--wecouldexpandit,butit'sgoingtobewaydowntheroadagain,severalyearsdowntheroad,sothemajorexpenditureofthat.
Ontheprocessingplants,Ithinkifwestayinthis$70to$80world,thatyou'regoingtoseesignificantcutbackbythirdpartiesandthatthe12to18-monthcyclecouldbepushedback.Andso,Ithinkprocessingplantswillprobablygetdelayed,nottheonesthatarecomingonin2015and2016,butthatscenariocouldeasilyplayoutthatway.Andsowe'refrontendloadingwith--what'sgoingtohappenisthat,ifrigsarecutbackinthefirsthalfoftheyear,you'renotgoingtoseeanydeclineinUSproductionuntiltowardthevery,veryendof'15.
So,IthinktheUSisgoingtocontinuetoputamillionbarrelsadayintothemarketover2015.PermianBasin'sabigchunkofit.So--so,Iwouldsayoverallthatmostofit'sgoingtobe'15to'16.Whenyougetinto'17and'18likeontankbatteries,we'llhavebuiltoutalotofourtankbatteries.Andsoyoushould--weshouldbegettingintodevelopmentdrilling.Beengoingintoexistingtankbatteries,cuttingcoststhere,too.So--so,I'dsaymoreofitisfront-endloadedin'15,'16.
BrianSinger(Analyst-GoldmanSachs):
Gotit,thanks.AndthenyoumentionedinyourpreparedremarksthatyoufoundsomelimitsoftheWolfcampDzoneinMartinCounty.Maybeyoucouldprovidemoreclarity,butitlookedlikethatwasprobablynearthe
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AndrewsCountyborder.AndIwantedtoseeifyouregardthatacreagehasbeingTier2andalimitsolelyontheWolfcampD,orwhetheryouregardthatasalimittothehorizontalopportunityacrossmultiplezones.
TimDove (President,COO):
Yeah,Brian,IthinkifyoulookattheWolfcampDmappingthatwe'vedone,andwe'veshownyouguysfromtimetotime,wehaveabout400,000acresnetthatareprospectivefortheWolfcampDonouracreage.Andonlyabout10%ofthatisTier2.Thatistosay,90%ofthat'sTier1.So,Ithinkwhatwe'rereallysayingis,we'venowwell-definedthelimits.
Wefeltlikefromourgeologicmappingthatwehadaprettygoodhandleonit,butthat'swhyyoudrillthewells--tomakesureyoucantietogeologicmapping.AndwhatIsaidinthepreparedremarksisthat,naturally,we'regoingtobefocusingonTier1drilling,butweneedtoknowthat,infact,ourmodelingwascorrect,andthatwecould--andthatwecouldalsoevaluatewheretheedgeswereof,let'ssay,Tier1versusTier2,realizingtheWolfcampDisdeeper.Soithasmorechallengestodothecosts,becauseit'sdeeper,aswell.
BrianSinger(Analyst-GoldmanSachs):
Andso,Iguess,isthatjusttheedgeoftheWolfcampD,oristhattheedgeofsomeoftheshallowerzones,aswell?
TimDove (President,COO):
No,no,no.Thosedifferentzonesareindifferentareas.WolfcampAandBarebasicallyubiquitousacrosstheacreage.Disnot--isnotasubiquitousacrosstheacreage.BecausewecalculateWolfcampAandBashaving650,000acres.AndImentionedjustamomentagothe,say,90%of400,000acreswouldbeTier1intheD.
BrianSinger(Analyst-GoldmanSachs):
Great.Thankyou.
Operator:
Andwe'llmovenexttoJosephAllmanwithJPMorgan.
JosephAllman(Analyst-JPMorgan):
Thankyou,operator.Goodmorning,everybody.
Scot t Shef f ield(Chairman,CEO):
Hi,Joe.
JosephAllman(Analyst-JPMorgan):
So,justtoclarifyonyourhighgrading--soareyouintheprocessofhighgradingyourdrillingactivitynow,intobetterformations?Orareyoujustwaitingtojudgehowlongthislowerpriceoilmarket'sgoingtolast?Andkindoffollow-uptothatis,areyouintheprocessrightnowofactuallyincreasingactivity,addingrigs,andagainyou'regoingtowaitandseehowtheoilmarketplaysouttodecideifyou'regoingtodropsomeofthose?
TimDove (President,COO):
Yeah,theanswer,Joe,onyourfirstquestion--wearenotdoingwhatIwouldcallhighgradingperse,alongthelinesofwhatyouwoulddoinalow-priceenvironmentfor2014.Our2014dealisbaked.Ourplanis
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baked.Allthoserigsarecurrentlyrunningandtheyarerunningonthewellsthatwehadscheduledfromthestandpointofseveralmonthsago.So,reallywhenwetalkabouthighgrading,it'ssomethingthat'sa2015event,aswecrankoutaforecastforrigutilizationandthenwhatwellsactuallyaregoingtobedrilled.
Intermsoftherigsituation,ofcourseScottmentioned,wehavesortofacascadingorwaterfallapproachonrigs.Wedohaveseveralnewrigscominginin2015thatarecontracted,some10newrigs.Ourevaluationwillbewhethertohavethosesimplyreplaceexistingrigsor--andletexistingrigsgo,orkeepexistingrigsandbuildtherigcount.
Sothere's--that'sthe--that'stheoptionalitysurroundingwhereweseepriceswhenwehavetoeventuallypullthetriggeronthatdecision,realizingit'snotaone-timedecision.Wedon't--havetodecideonJanuary1stregardingwhatourrigcountisfortheyear.Wehaverigscomingonandoffthroughouttheyear.And,therefore,wecanadjustourrigcountonthefly.
Obviously,wewouldratherhaveasmuchofasteadystaterigcountaswecan,justtoavoidinefficiencies.Butwe'vegotalotofbitesattheapple.Exactnumberofrigsandwellswe'regoingtodrillreallythroughoutnextyear.
JosephAllman(Analyst-JPMorgan):
That'sveryhelpful,Tim.Andthenasecondquestionisonjustcompletiondesigns.Iknowthatyouareseeingimprovementbychangingthecompletiondesigns.Couldyoudescribewhatyou'redoingversuswhatyouweredoingbefore?Andwhereareyouseeingthebiggestimpactandwhereareyoumostoptimisticaboutseeingimprovementinproductivitywithchangeinthecompletiondesigns?
TimDove (President,COO):
Well,firstofall,asImentionedtoyou--asImentionedduringthepreparedremarks,ourcompletiondesignsarereallythesubjectofstudyrightnow.We'vegotquiteafewoptimizationstudiesgoing,andquitealargenumberofwellsthatareinvolvedwiththatrightnow.
Andwedon'thave--wewon'thaveanyanswersonthatbasicallyuntilprobablywellintonextyear,asallthat'sdone.But,forexample,inMartinandMidlandCounty,weareusingsimilarconceptsthatweusedintheEagleFord.Soforexample,increasingthenumberofclustersperstagefromfourtofive,andthisactuallyreducesthenumberofstageswearepumping,whichisaverybigeconomiceffect.
Wearesubstantiallytestingtheuseofmoreprofit.Generally,wewereat1,100poundsperfoot.Now,we'rerunningitupto1,700atest.WeactuallyinthecaseofPermian,arereducingfluidvolumestotrytosavemoney.We'reactuallywhenyoudothat,pumpthesameamountofprofit,you'reincreasingyourprofitconcentration,whichwethinkcanpotentiallyleadtosubstantialimprovementsinEURsandproductionrates.
AndIthinkwe'llknowtheresultsofthisonlyinthefullnessoftimeinto2015.ButwhatIexpectis,Idon'tseeanyreasonwewouldn'tseesimilarresultsaswehaveseenintheEagleFord,wherewesawit's15%,20%,30%improvementsinEURsbyvariouscombinationsofthesetests,realizingnoteveryzonewillbeidenticalintermsofwhatwebelieveisoptimalforthatparticularzone.That'swhyit'sgoingtotakequitealongtimebeforewegettowherewereallyfeellikewe'vegotitfiguredoutineveryzone.
JosephAllman(Analyst-JPMorgan):
AndjusttofollowuponyourcommentontheEagleFord,Iknowyousaid20%to30%increase,butisthata20%to30%increaseoverwhatalreadyhadbeenanincreasebecauseofnewcompletiondesigns?Iknowit'skindofanongoingprocess.There'snoclearbeginningornoclearbaseline.Butyou'veactuallybeenkindoftweakingthingsandusingsomeofthesetechniquesforafewyears,ifIunderstandcorrectly.
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TimDove (President,COO):
That'sright.Ithinkifyoulookatit,though,whatwe'dhavetodois--thecasewherewejustkindoftestandestablishabaselinesetofwellsthatthenwecomparewith.So,allwe'resayingis,ifyoulookatthebaselinewellsthatwere,inmostcases,drilledandcompletedinthewaywewerefirstdoingitwiththeprofitconcentrationsandwiththevolumespumpandwiththestageconfigurations,wenowoffsetthatwithnewwells,utilizingthesenewtestsandtheycancalibrateandcalculatehowmuchtheyhaveimproved.
Actually,it'sthesubjectofarecentSPEpaperthatjustwentout,Ithink,lastweekinOctober,youmaywanttosearchout.Ittellsyouexactlyhowthistestingisdone.Andit'spreciselythesamekindoftestingwe'reusinginthePermian.
JosephAllman(Analyst-JPMorgan):
Allright.Veryhelpful.Thankyou.
Operator:
Okay,we'llmovetoournextquestionfromMattPortillowithTPH.
Matt Port illo (Analyst-Tudor,Pickering,Holt):
Goodmorning.
Scot t Shef f ield(Chairman,CEO):
Hi,there.
Unident if iedCompanyRepresentat ive :
Goodmorning.
Matt Port illo (Analyst-Tudor,Pickering,Holt):
Justonequickfollow-upfromyourpreparedremarks.Youmentionedservicecosts.AndIwascurioushowyouguysareseeingcurrenttrendsandpotentiallyininitiativesthatyouhaveinplacetoloweryouroverallcoststructureorservicecostsspecificallyheadinginto2015.
TimDove (President,COO):
Imentionedwewereintheinitialstagesofthat.Weletoutasubstantialnumberofcontractsforallofourservices,bothcapitalandoperatingcostservices,fortheupcomingyear.That's--thosecontractshavebeenletout.We'reevaluatingthem.Ithinkessentiallywhatwe'redoingis,we'regoingoutforaroundtwosetofbidstoincorporatethefactthatcommoditiesappeartohavefallenprettyconsiderablycomparedtowhatpeoplewerefirstenvisioning.
Andtakinganothercrackatcostreductionswithourmajorserviceprovidersacrosstheboard.SoIwouldsaywe'rekindofintheinitialstagesofthat.Itwon'tbefinalizeduntilwegetfurtherintoyear.But,nonetheless,wedoexpectsomesignificantimprovementsincosts.
Matt Port illo (Analyst-Tudor,Pickering,Holt):
Great.Thankyouverymuch.
Operator:
Andwe'lltakeournextquestionfromLeoMarianiwithRBC.
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LeoMariani(Analyst-RBCCapitalMarkets):
Hey,guys.Iknowyouhaven'tsetthebudgetyet,butyouclearlyindicatedyoustillthinkwecangettothe16%to21%growthhereoverthenextcoupleyears,Iguesscorporate-wide.Couldyouhelptomaybeputafewparametersonsortofthelowerendversusthetopend?IsthelowerendkindofthezeroincrementalNorthernMidlandrigsandthetopendcloserto10?Canyoumaybejustkindofhelpuswithsomeofthethinkingaroundthat?
Scot t Shef f ield(Chairman,CEO):
Yeah,Imean,that'stherange,Leo.I'msorry.Imean,asTimsays,onwellcosts,wedon'tknowwhat--we'regoingtoknowinacouplemonthswhatourcostsavingsaregoingtobe,whichisgoingtohave--youknow,it'sreallythat,coupledwithwhatrigcounttostarttheyearwith.Andso,thosearethebigtwounknownitems.AndwegottowaitandseewhathappenswiththesetwoeventsendofNovemberwiththeIrannegotiationsonnuclearsanctionsandsecondly,followedbytheOPECmeeting.
So,thoseareallbigevents.Wejustdon'thavethedatapointsyet.So,that'swhyyoucantakeourinfrastructureandsortofspreaditoutovertwoyears.Youknowwhatthecurrentcapitalisfor2014andthecurrentrigcount.Andsoyoucanprobablybackin,ifyoucan.
LeoMariani(Analyst-RBCCapitalMarkets):
Okay.No,that'shelpful.
TimDove (President,COO):
Thatwouldnotincorporateanyaccelerateddrillingifwewouldchoosetodothat.
Scot t Shef f ield(Chairman,CEO):
Orcostsavings.
TimDove (President,COO):
Orcostsavings.
LeoMariani(Analyst-RBCCapitalMarkets):
Okay.No,that'shelpful,forsure.AndIguessyouguystalkedabouthighgradingkindofwithintheNorthern,youknow,MidlandBasin,asapotentialoutcome,atloweroilpricesfornextyear,should.Wealsoassumethatyouguysmay,youknow,alsotryto,youknow,putahigherpercentageofactivityandsayNorthernMidlandversusEagleFordorSouthernMidland.Canyoumaybetalktothatdynamic?
TimDove (President,COO):
Ithink,Leo,everythingwe'redoingisbasedonwheretheratesofreturnareperwell.Andso,Ithinkwe'lltrytohighgradealsoessentiallyalongthelinesofreturns.It'sonethingtosaywellswherewehavethebestEURs.We'rereallysayingtoyouwe'regoingtodrillthebesteconomicwellsthatwehave.Andwehaven'treallylandedonhowmanywellsthatisinwhicharea.W
ehavequitealargenumberofeconomicwellsintoday'senvironmentintheEagleFordShale.Needlesstosay,thesameistrueinthesouthernWolfcamparea,especiallytheNorthernpartoftheSouthernWolfcamp.AndcertainlyintheNorthernWolfcamp.So--so,Ithinkthat'sreallythewholeproductofwhatwe'retalkingabouthere,whichisbasicallyacapitalallocationexercisetowardsthebestreturns.
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Unident if iedCompanyRepresentat ive :
And,Leo,justanotherfactorinthatis--andyouknowthis--we'vegotajointventurepartnerintheSouthernWolfcamp.We'vegotajointventurepartnerinEagleFord.Andthosediscussionsarejustgoingonrightnow.
LeoMariani(Analyst-RBCCapitalMarkets):
Okay,that'shelpful.AndIguessjusttokindofhoneinoneofthepreparedremarksthatyouallhadmadehere,Iknowyoutalkedaboutsaving$500,000awell,ormaybealittlebitmorethanthat,basedonyourwatersystem.DidIalsohearyouguyssaythatyoucouldpotentiallycouldsaveanother$500,000fromtheinstallationofyoursaltwaterdisposalandtankbatteries?Justwantedtoclarifythat.
Scot t Shef f ield(Chairman,CEO):
Yes.Asyouknow,weareinstallinglargertankbatteriestohandlethefirstgroupofwellsoverthenexttwoyears.Asyougetinto'17,'18drilling,Leo,youcanbasicallygobackinandtiethosedirectlyintotheexistingbatteries.It'swhat'shappeningrightnowinEagleFord.TheEagleFordcostsaredownbecausewe'regoingintoexistingCGPs.WeprettymuchhavebuiltoutalltheCGPsinEagleFord.So,it'sthesameexample,socostscomedown.
LeoMariani(Analyst-RBCCapitalMarkets):
Allright,that'shelpful.Iappreciateit,guys.Thanks.
Operator:
Andwe'llmovetoournextquestionfromEvanCaliowithMorganStanley.
EvanCalio (Analyst-MorganStanley):
Hey,goodmorning,guys.Congratulationsforleadingthewayincondensateexports.And,youknow,we'reseeingourfirstself-classifiedcondensateexportsannouncedtoday.Butwhileit'searly,doyouseeafasterpacetocrudeexports,giventhepreliminaryelectionoutcomelastnight,andkindofanyroadmaptherewiththenextkeycatalyst?AndIhaveasecondquestion.Thanks.
Scot t Shef f ield(Chairman,CEO):
Yeah.I'mpersonallygettingmoreoptimistic,spendingalotoftimeinD.C.
EvanCalio (Analyst-MorganStanley):
Yes.
Scot t Shef f ield(Chairman,CEO):
Andwe'llspendathelotoftimeoverthenextfewweeksinD.C.That'sournumberonepriority,togettheexportbanliftednextyearin2015.Andsowithwhathappenedlastnight,andsenatorMurkowskiisgoingtoruntheSenateEnergyCommittee,I'mprobablymuchmoreoptimisticthatsomethingmayhappenin'15.
WearemakingheadwaysonboththeDemocratandRepublicans,educatingthem.Sorightnow,Brentgoesto$90,$91intheoutyears.WTIstaysat$80,$81flat.Andsoifexportsarelifted,Iwouldhopethatthosetwotrendsnarrowinsteadofspreadout,liketheyare,overthenextseveralyears.AndsoUSproducerscancompetewiththerestoftheworld.Andso,IthinkyouwouldseealotofhedgingtodayifWTIhadthesamestripasBrent,goingupto$90abarrelor$91abarrelinthenextseveralyears.Sothat'sthenameofthegame.Wehopetoaccomplishitin2015.
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EvanCalio (Analyst-MorganStanley):
That'sgreat.That'sgreat.Mysecondquestion,onthelonger-terminfrastructurespend,maybejustafollow-upwith--withSinger'squestion.Youclearlymapoutamoderationofthe$700millionto$800millionperannumspendoverthenexttwoyears.Anylonger-termguidanceasyouthinkaboutthat10-yearplanonanannualspend?Andrelated,youknow,withMidstreamvaluations,Imean,whywouldn'tyoumonetizethoseinvestmentsandmakeinfrastructureself-fundingonanassetsalebasisacoupleyearsout?Thanks.
TimDove (President,COO):
Yeah.Firstofall,ifyoulookatthisyear--andyoucanusetankbatteriesasanexample--we'vespentabout$250millionontankbatteriesandsaltwaterdisposals.That'saprettyheavyload,goingtoabout300forthenextcoupleofyears.Ithinkyoucanseethatlevelgoforanothercoupleyearsafterthatandstarttocomedown.
Andoverall,we'rerealizing,asScottalreadyalludedto,wedon'thaveanothersandmineexpansiononthedocketprobablyforafewmoreyears.Wecouldaccelerateitifweneededto.
Gasplants,we'llprobablydeceleratealittlebit.So,you'reprobablygettingdown,insteadofinthis$700millionto800millionzone,probablymore$300millionorsoasyougetout,outin--or$300millionto$400million,Iwouldprobablysay,countingwaterintheyears2017,2018.Soyouprobablyhave$300millionto$400millionreduction,justbecauseyou'llhavealotofthestuffbehindyou.
EvanCalio (Analyst-MorganStanley):
Great.AndtheMidstreampiece?
TimDove (President,COO):
IthinkwhatIwouldsayaboutthat--andScottalludedtothisinhiscommentaryaminuteago--andthatis,Ithinkwe'llhavetotakealookatit.Weneedtomakesurewegetallsomestuffbuiltinordertoexecuteourplan.Butseveraloftheassetswe'retalkingaboutbuilding,thiswouldincludewaterandsandandinfrastructureandcertaingasprocessing,areMLP'ableinthefullnessoftime.So,we'llhavetojusttakealookatthatwhenthetimecomes.ItcertainlymayprovideanoptionforusfromaCapitalMarketsperspectiveontheseassets.
EvanCalio (Analyst-MorganStanley):
Great.Great,youguys.Thankyou.
Operator:
Andwe'llmovetoournextquestionfromJohnFreemanwithRaymondJames.
JohnFreeman(Analyst-RaymondJames):
Hey,guys.FirstthingIwantedtolookat,youplacedasignificantlyhighernumberofwellsonproductionatSpraberry/Wolfcampduringthequarterthanyouallhadoriginallyexpected.YoumentioneditwasabigaccelerationinthesouthernWolfcamp.
AndthenbasedontheguidanceyouallgotforPOPsinthefourthquarter,youknow,it'sgoingtobethefirsttimewe'vehadasequentialdeclineinPOPsintheSpraberry/Wolfcamp.Sojustassumingkindofbaselevel,samelevelofactivity,wouldn'tthatindicatewewouldhaveaprettydramaticincreaseinPOPsinQ1?
TimDove (President,COO):
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Yeah,John,Ithinkfirstofall,youareright.Wedidaccelerate--mostlybecauseofefficienciesintheSouthernWolfcampareawherewe'redrillingwellsfaster.Ialludedtothatinmyearliercommentary.We'veactuallyreducedthenumberofdaysonwellsandthatjustacceleratesyourpopschedule.
Andso,whatyou'veseeniswellsthatwereotherwisescheduledinthefourthquartergettingdoneinthelast,say,coupleweeksofSeptember.Soit'soneofthereasonswhyyoulookatthefourthquarterproductionintheSpraberry/Wolfcampandseeevenfurtheraccelerations,becauseyou'regoingtogetthefullbenefitofthatproductionforthewholequarterinthefourthquarter--inthefourthquarter.Butbecauseofthat,fourthquarterPOPslookedlowerasaresult,almostbydefinitionofitbeingmovedfromthefourthtothethird.
AndIthinktherealquestionforthefirstquarteris,youknow,thesamequestiondowegetmoreofthesedoneinthefourthquarterordotheyslipintothefirstquarter?SoIdon'tthinkwehavealotofcoloronthefirstquarterPOPsbeinganysignificantlydifferentreallythanthethirdorfourthquarter.
JohnFreeman(Analyst-RaymondJames):
Okay,andthenlookingattheexportinggoingfrom25%ofyourEagleFordcondensatevolumesto50%nextyear,youhadmentioned,Tim,it'saprettysubstantialdifferenceyou'reseeinghereonthepricing.Canyoujustsortofquantifythat?
TimDove (President,COO):
Well,we'rereallynotpreparedbecausethere'ssomeconfidentialissuespertainingtopricing,needlesstosay.But,youknow,ifweweretosellthisstuffintheUSmarkettodayonly,wewouldbeprobablyachieving$10.50,$11offWTI.Icantellyouwe'rewellintothesingledigitsintermsofoff--thediscounttheWTIcomparedtothat.Soit'sbeenasubstantialimprovement.
JohnFreeman(Analyst-RaymondJames):
Great.Iappreciateit,guys.Thanksalot.
Operator:
Andwe'lltakeournextquestionfromEliKantorwithCanaccordGenuity.
EliKantor(Analyst-CanaccordGenuity):
Hey,goodmorning,guys.
Unident if iedCompanyRepresentat ive :
Hi.
EliKantor(Analyst-CanaccordGenuity):
It'sbeenafewquarterssincewe'veseenyourgunbarrelslideinthePermianBasin.GiventheexcitingnatureofthestockpaypotentialinthePermian,canyoujustgiveusanupdateonthosedownspacingandstaggeredlateralpilotsinthe(hiddenfield)?Andasafollow-up,howmuchofyourupcomingPermianactivitywilltestthestaggered,orstackedlateralformat?AnddoyouseeanyvarianceincommunicationorinterferencebetweenwellsintheA,BzoneversuswellsinlowerSpraberry,JoMillandMiddleSpraberry.
TimDove (President,COO):
Yeah,Eli,wecertainlyarecontinuingourtestingofvariousspacingregimes.Ithinkifyoutakealookatit,whenwestartedwiththiswholeproject,everythingwaspredicated140-acrespacing.It'sprettycleartheresultswe'veshownsofarinourowninternaltestingwouldsaythatwecangetdowntoeasily100-acre
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spacing,maybeinsomecasesalittlelessthanthat.Sothat'sgoingwell.
Insomeoftheseareas,we'rejustnowbeginningtogetthoseresultsbecausethosearepadsthatwebegandrillingthemiddlepartoflastyear--ofthisyear,Ishouldsay.Soitwillbetheendofthisyearbeforewestartseeingalotmoreresults.We'llbetalkingmoreaboutthatinthefullnessoftimewhenwehavemoredata.
Andwhenitcomestostacking,theonethingwewanttomakesureofiswesortofoptimizetheproductionfromthesepads.Sothatmeansthatwewanttomakesurethatwehavewellsoffproduction,onlyalimitedamountoftime,whilewefracoffsetwells.Andsothatmayleadusto,incertainconfigurations,forexample,drillingasetofBwellsbeforewedrillAwells,andsoon.
SoIthinkwe'restillreallylearningaboutthattoday.We'relearningaboutwhat'soptimal.Andthemostsignificantoptionalityissurroundingmakingsurethatwelimittheamountofoffsetwellsthatareoffproductioninagiventime,aswellasmakesurethatweunderstandtheinterferencebetweenthewells.Rightnow,wethinkwecaneasilyfrackingcompleteAandBwells,though,inastaggeredsense.
EliKantor(Analyst-CanaccordGenuity):
Thanks,Tim.Andjustasafollow-up,PermianBasinhasbeenoneofthemostactiveareasforonshoreUSEandPacquisitionactivity.Givenalltheliquiditycomingintoyourbalancesheet,wouldyouguyslookatusingthedrypowdertopotentiallytakeadvantageoftherecentdeclineinassetvalues?
Scot t Shef f ield(Chairman,CEO):
No.Wehave--theacreagevaluesarestillhigh.Wehaveover20,000locations.We'veonly--wepurchasedverylittlein2014,onlyplaceswherewecanbuyacreageinthe2,000to3,000,4000-peracrerangetoallowustodrill10,000-footlaterals.Sothat'stheonlyareathatwemaysee,andsoverylittlecapitaldoingthat,allgoingintoprimarilyinfrastructureanddrillingonthereturnside.
TimDove (President,COO):
Yeah,theonlythingIwouldaddtothat,Eli,is,weareveryactiveinacreageswaps.Sosituationswherewecanmakesurethatbyvirtueofswappingacreagewithotherindustryparticipants,tobeabletoincreaseourlaterallengthsoutto,say,10,000feetversus5,000feet,we'reswappingacreageinalotofscenarios.
EliKantor(Analyst-CanaccordGenuity):
Thanks,guys.Nicequarter.
Operator:
AndwemovenexttoGilYangwithDiscern.
TimDove (President,COO):
Gil,areyouthere?
Operator:
Gil,pleasecheckyourmutefunction.
Hearingnoresponse,we'llmovetoournextquestionfrom(inaudible)withIHS.
Unident if iedPart icipant :
Hey,goodmorning.IwouldliketoknowaboutBradyBrowncrushstrengthversuswhitesandandifthere's
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anymisconceptionoutthereabouthowresistantitistocrushing.
TimDove (President,COO):
Yes.AndifyoulookatallthedifferentaspectsofsandintermsofwhatmakesitAPIqualitysand,it'sthingslikecrushfactorandsphericityandroundness,andsoon.IfyoutakealookatBradyroundonthecrushfactorascomparedtowhitesands,justslightlylesswhenitcomestothecrushfactor.Butnonetheless,APIstandard.
Thatsaid,we'vebeenusingBradyBrownsandinthesedeeperzonesintheWolfcampforyearsandhaveneverhadanyissuepertainingtoanycrushfactors.Andusuallythedatawouldsayit'sgoodupto,andprobablyslightlyexceeding,11,000feetTBD.
Unident if iedPart icipant :
DoyouresincoatanyofthatBradyBrownsandthatyou'vegot?Andhowmuchmightthatcost?
TimDove (President,COO):
We'renotresincoatingit.Othersare.Youhavetogetwiththemastowhatthecostofitis.
Unident if iedPart icipant :
Okay.Okay,andthenjustastothewaterthat'sbeingsourced--theeffluentwaterthat'sbeingsourced,whatwouldtheyhavedonewiththatwater,hadtheynotsoldittoyou?Andhowcleanisitwhenyouguysgetit,orwhat--doyouhavetoprocessitfurtherinordertoutilizeit?
TimDove (President,COO):
Yeah.Myunderstandingisalotofthiswaterisjust--effluentwatertodayisjustputonthegroundbythemunicipality,soit'sotherwisebeingwasted.Wewillbeworkingwiththemunicipalitiestodosomewatercleanupsoit'sreadyforouruse.Butinprinciple,that'salreadybuiltintotheeconomicsoftheprojects.
Unident if iedPart icipant :
Okay,andisthereawaytohaveageneralideaofhowmuch,howmuchit'scostingyou?Imean,sincetheywerejustgoingtodisposeofitanyway,itwouldhaverepresentedacosttothem.So,Imean,thisseemslikeawinforthemunicipality,aswellasforyouguys.Isthereanycostsyoucanhelpustounderstandhowmuchit'scostingyoutobuythatwater?
TimDove (President,COO):
Well,now,thepricingtermsofourcontractsareconfidential,asyoumightguess.Butsufficeittosay,itisagreatwin-winforthemunicipalitiesandforusandfortheindustrythatwecanotherwisetakewaterthatisunusableandconvertingittoausethatmakessensefortheentireindustry.Andso--andthemunicipalitiesarethebeneficiaryfromarevenuestandpoint.SoIthinkit'salong-termwin-win,butIcan'tgiveyouthedetails,ofcourse.
Unident if iedPart icipant :
Okay.Thanks,Tim.Okay,bye-bye.
Operator:
AndwewilltakeaquestionfromGilYangwithDiscern.
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GilYang(Analyst-Discern):
Hi.Let'sseeifIcangetthisrelayedthistime.Canyouhearme?
TimDove (President,COO):
Yes.Yourphoneisnowworking.
GilYang(Analyst-Discern):
Allright.Sorryaboutthat.
Iwaswonderingifyouaregoingtoincreasetheefforttorenegotiateleasessoyoucandrillmorehorizontalwellsandreducetheverticalwellsdrillingobligationandwhetherornotthelowerpriceparametershelpthoseconversations.
TimDove (President,COO):
Yeah,Gil,actually,thatwasthesubjectofoneoftheslidesthatIhadinmyslidepack.Ididn'treallymentionit.Butwearenowmovingdownfromwherewewere,about11rigsverticallydowntoaboutsixhere.Veryshortlywe'llbeatsixrigsrunningvertically,ofwhichoneofthemisdrillingwaterwellsforus.AsImentioned,we'redrillingSantaRosanon-potablewaterwellsforpartofourwatersupply.
So,Ithinktheansweriswhatwe'reusingis,we'reusingcashbasically--andrelativelylimitedamountofcashtoworkwiththelandowners,thelease--actually,themineralownersinthiscase,tonegotiatewaystoavoidthiscontinuousdrillingobligationsituationasopposedtohavingtodrillverticalwellstodoit.Andwe'vebeenverysuccessfulinthatregard.Ithinksosuccessful,we'llprobablybereducingthatverticalrigcountfurtheraswegetintothenextyear.Probablywe'llhaveessentiallyzeroverticalrigsrunninginacoupleofyears.
GilYang(Analyst-Discern):
Canyougivesomeideaabouthowthatwillchangeyourcapitalefficiencyintermsofproductionperdollarsspent?Willthatbeanoticeableimprovementoristhatmoreinthenoise?
TimDove (President,COO):
Well,Imean,we'rejustgoingtobeavoidingdrillingverticalwells,ifthat'swhereyou'regoingwiththat.Andthatmeanswe'lldrillthatmanymorehorizontalwells,whichwethinkaremoreefficientfromacapitalstandpointandfromaneconomicstandpoint.
GilYang(Analyst-Discern):
Right,right.Iwastryingtogetanideaifthat--ifyouseeanoticeablechangetogrowthorisitmoreaminorblip.
TimDove (President,COO):
Well,Ithinkit'ssignificantinthesensethatthehorizontalwellsmakesuchlargervolumes.Theissueisgoingtobewecandrillandproduceverticalwellsalotfaster,andso,becauseyougetthepaddrillingeffectonthehorizontalcampaign.Soitisatrade-offhere.Inthelong-term,youwouldmuchratherbedrillinghorizontalwells.
GilYang(Analyst-Discern):
Okay.Right.Okay.Andthesecondquestion,forScott,isintermsofthemarketsharebattlewithSaudi
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Arabia,isthisjusta--isthisastreetfight,oristhisanoutrightmarketshareissue?Orarethereotherthingsgoingon,hiddenagendasthatyoucanmaybespeaktointermsofmaybedrivingdownpricesintheUSsothattheycanpurchaseUSassets,orjustgettingtheotherOPECguysinlinesotheyallcooperateintermsofcontrollingthemarketbetter?What'stherealagendahere?
Scot t Shef f ield(Chairman,CEO):
Youknow,Ithinkthat'stherealagenda.There'sbeenarticleswrittenaboutwhetherornottheyaretryingtohurttheRussiansortheIranians.ButyouhavetorealizeOPECisdowntojustSaudiArabia,maybeKuwait,maybeUAE.Butwhenyou'retryingtonegotiatewiththebankruptVenezuelansortryingtonegotiatewiththeShiiteinIraqandIran,it'sgoingtobealottougherforOPECtocometoanagreementtocutproduction.
SotheUSisstillgrowingoveramillionbarrelsaday.Mostpeoplehavetheworldgrowingonly600,000barrelsadaythisyear,becauseofEuropeeconomy,whatChinaisdoing.Andsothestimulus,Ithink,willhelplong-term,atrilliondollarstimulus.Andsopricesshouldrecoverwithinthenexttwoyears.Butit'sgoingtobereallyhardforOPEC,Ithink,tocometosometypeofanagreementjustbecauseofthestatusofthesevariousOPECcountries.
Ididn'taddLibya,butwhodoyounegotiatewithinLibyatocutproduction?Yougotthreefactions.OneofthemisAl-Qaeda-related,sowhodoyounegotiatetheretocutproduction?So,it'salottougherthanithasbeeninthepast,soit'sdowntoSauditocutproduction.Theyjustdon'twanttodoit,soit'sputtingpressureontheUSshaleoilrevolution.
GilYang(Analyst-Discern):
Allright,thanks.
Operator:
Andtherearenofurtherquestionsinthequeue.Atthistime,I' llturnthecallbacktothespeakersforanyadditionalorclosingremarks.
FrankHopkins (SVP-IR):
Again,thankyouforlisteningtoourgreatquarter.Wegotagreatstory,agreatassetoverthenexttwoyears.So,lookforwardtoseeingeverybodyoutontheroad.
Thankyou.
Operator:
Thatdoesconcludetoday'sconference.Thankyouforyourparticipation.
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