Continental Resources, Inc.
Q2 2019 Earnings Call Transcript

Published: 6 Aug 2019

[Operator:]

Good afternoon, and welcome to the Second Quarter 2019 Continental Resources, Inc. Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.I would now like to turn the conference over to Rory Sabino, Vice President of Investor Relations. Please go ahead.

[Rory Sabino:]

Good morning. Thank you for joining us. I would like to welcome you to today's earnings call. We'll start today's call with remarks from Harold Hamm, Chairman and Chief Executive Officer; Jack Stark, President; and John Hart, Chief Financial Officer. We will have other members of management available for Q&A as needed.Today's call will contain forward-looking statements that address projections, assumptions, and guidance. Actual results may differ materially from those contained in forward-looking statements. Please refer to the company's SEC filings for additional information concerning these statements and risks. In addition, Continental does not undertake any obligation to update forward-looking statements made on this call. Also this morning, we will refer to initial production levels for new wells, which unless otherwise stated are maximum 24-hour initial test rates. We will also reference rates of return, which unless otherwise stated are based on $60 per barrel WTI and $3 per Mcf natural gas.Finally, on the call, we will refer to certain non-GAAP financial measures. For a reconciliation of these measures to Generally Accepted Accounting Principles, please refer to the updated investor presentation that has been posted on the company's Web site at www.clr.com.With that, I will turn the call over to Mr. Hamm. Harold?

[Harold Hamm:]

Good morning, and thank you for joining us for our second quarter earnings call. The company has completed a very solid quarter that's placed us firmly on track to execute our 2019 plan to further enhance shareholder value. Our share buyback and stock dividend plan, announced June 3rd, has been a strong validation of our continued focus on enhancing shareholder value. Share repurchases from our free cash flow has amounted to $92 million so far or approximately 10% of our initial target. We do not think our current share price is a fair indicator of the value of our company, and we are determined to capture value for our shareholders. As a reminder, our first dividend payment is scheduled for November. Our multiyear free cash flow projection will leave room to include this dividend in the future.Our crude oil production growth is running ahead of schedule and we expect average production for the year to be in the upper-half of our original guidance. We have also achieved the efficiencies throughout the first-half of 2019 that will allow the reduction of drilling rigs from 19 rigs in SCOOP STACK to 12 rigs on early fourth quarter of 2019. This 37% reduction in our southern rig fleet was made possible by the step change in performance from our Springer and Woodford rig fleets in Project SpringBoard. I am proud that our teams can exceed production estimates with lower rig activity, that is operating and capital efficiency at its best. Jack will elaborate more on the mechanics of these efficiencies and timing of the rig reductions.We're very committed to meeting our CapEx and other corporate guidance for the year, and have the flexibility to do so as we're demonstrating. This includes a free cash flow that is expected to come in at the high end of our $500 million to $600 million range for 2019. We also continue to add value for shareholders through strategic initiatives such as those we announced last week. This includes a recent bolt-on acquisition in SCOOP and other strategic acreage trades in our core operating areas. While these initiatives require modest associated spend, they provided added inventory and increased working interest in our core assets for 2020 and beyond. Likewise, the success we are having with our mineral acquisitions is building significant future value for shareholders.Our mineral acquisitions program is progressing so well, as noticed in last week's release, that a majority of our annual spend estimate has been transacted in the first-half of the year capturing significant future value for the shareholders. For example, we own approximately 19% of the mineral royalties underlining Continental's lease hold positions in SpringBoard. And as we announced last week, from another embedded asset, our teams have monetized a portion of our water recycling and gathering infrastructure in STACK. This sale represents less than 10% of our broader water infrastructure portfolio, and was executed for $85 million. We estimate that our remaining water assets are valued at approximately $1 billion, and generate an EBITDAX of approximately $100 million annually. Our water infrastructure assets represent more shareholder value that is not currently being recognized by the market.Now, for future operational color I'll turn the call over to Jack Stark.

[Jack Stark:]

Thank you, Harold, and good morning everyone. We appreciate you joining us on our call. Once again, we have some great operational highlights to share that all center around the simple message of growing shareholder value. In the Bakken, second quarter production was up 23% year-over-year. During the quarter, we completed another 35 wells that flowed at an average initial rate of 2,300 BOE per day. One of the wells at Carson Peak 835-H in Dunn County, flowed at an impressive initial rate of 4,870 BOE per day. The three strategic step-outs we announced last quarter continue to meet expectations as they are outperforming legacy offset wells by 75% to 145% at 120 days, and delivering returns of up to 85%.A highlight for the Bakken this quarter is that we received regulatory approval to begin development of our 10-square-mile Long Creek Bakken unit in Williams County, North Dakota. This is another high impact oil project, much like our SpringBoard project, that is expected to add up to 20,000 net barrels of oil per day. Continental plans to drill up to 56 additional wells in the unit with an average working interest of 87%. Production is projected to begin in the third quarter of 2020, and should reach peak production in the second-half of 2021. The unit was formed to capitalize on our dominant ownership position and maximize the value of these assets. All products will be gathered and distributed on pipe through centralized facilities. This is another significant catalyst for growing shareholder value.In Oklahoma, the big news for the quarter is that oil production is up 35% year-over-year averaging 36,300 barrels of oil per day. This reflects the impact of Project SpringBoard and our overall shift to a more oil focused drilling program in both SCOOP and STACK since mid 2018. Oil growth in Project SpringBoard is on track, and we fully expect to meet or exceed our updated target of 18,000 barrels of oil per day in the third quarter. For the fourth quarter, we are targeting 22,000 barrels of oil per day and are well on the way to achieving this July production average approximately 19,000 barrels of oil per day. To date, we have brought on 60 wells in SpringBoard, of which, 46 are Springer and 14 are Woodford.We expect to bring on approximately 30 additional SpringBoard wells later by the end of the year, 23 of the 46 Springer producers came on recently. These are located in rows 2 and 3. Really performance from these wells looks strong with oil production turning above the 1.3 million BOE type curve we introduced earlier this year. Over half of these wells have been producing for just two weeks but are already hitting the high range of expectations. For example, The Nancy J two and three wells are both flowing approximately 1400 barrels of oil and 2.8 million cubic feet of gas per day with impressing flowing, impressive full and casing pressures of approximately 2800 PSI. This is right in line with expectations given the increased reservoir thickness in rows 2 and 3. We'll provide more detailed updates once we get the remaining wells in rows 2 and 3 on and allow them to line out.I also want to point out that the Woodford and SpringBoard is beginning to make its presence known as we get more wells on line. We are very pleased with the early performances of the Woodford wells as these unit wells are outperforming our legacy type curve from parent well new oil window as shown on slide 13.The key takeaway here is that SpringBoard is significantly outperforming our production targets announced almost a year-ago of 16,500 barrels of oil per day for the third quarter 2019. As a result of both reduced cycle times and solid well performance as Harold noted, we also own approximately 19% of the royalties under SpringBoard as a result of our strategic acquisition of mineral, this is another great example of how we leverage our knowledge and expertise to maximize returns for shareholders.In STACK, we have completion work underway on two units in the oil window called the Reeba [ph] Joe and Shelter Units, both units contain seven Meramec wells with four targeting the upper Meramec and three targeting the lower Meramec. First production is expected in late third quarter. Looking back, we continue to be very pleased with the performance of the units we have developed over the last 10 months in both oil and condensate windows of STACK. The wells in these units continue to outperform our type curves as shown on Slide 15. In fact the Simba units are projected to pay out in less than one year. Key point here is that our teams have a good handle on well density and the results are repeatable. Operationally, our teams continue to deliver capital efficiencies to their ingenuity and technology. In SpringBoard, our drilling cycle times are now routinely averaging 32 days down 30% from the initiation of the project.In STACK, we have drilled our second sling hole design well confirming that saving up to $500,000 per well is achievable. Year-to-date our completion teams in Oklahoma have completed 22% more lateral feet than budgeted and they have done so at 17% lower cost per lateral foot. And in the Bakken moving to 45 stage completions using engineered perforations is saving up to $500,000 per well while delivering the same results as our previous 60 stage completions. These savings come from a wide variety of items but they all translate again to significant value for shareholders. These efficiencies will enable us to achieve our 2019 objectives in Oklahoma with fewer rigs than budgeted, so over the next couple of months we'll be releasing seven of the 19 rigs we had drilling at the end of the second quarter in Oklahoma. In the Bakken, we'll continue drilling ahead with six rigs.With that, I'll turn it over to John.

[John Hart:]

Thank you, Jack. Good morning, everyone. Let me start with a snapshot of our performance. We are performing at a high level with significant net income driven by solid corporate returns and production. We also continue to realize strong free cash flow and accordingly we have commenced our share repurchase program and implemented a dividend to be paid in the fourth quarter to further enhance shareholder value.I wanted to highlight our share repurchases for the quarter. As Harold mentioned, we have executed $92 million in share repurchases as of August 2. This equates to 2.4 million shares. Continental is focused on shareholder value with our only prior equity offerings being our IPO in 2007 and one follow-on offering in 2011, we did not dilute shareholders over the last few years as many did as we weren't financially strong. So our buyback program is a buyback in the truest sense. Further Further buybacks are ongoing and we will update you quarterly on our progress. We expect our initial buyback program to last through 2020.Switching to our mineral royalty activity, our pace of 2019 mineral acquisitions has been heavily weighted to the first-half of the year. We are pleased with our team's execution as our opportunistic ability to acquire minerals ahead of the drill schedule was translate to strong future returns our minerals relationship is unique because of a known drill plan as shown on Slide 8 of our investor deck, 90% of our minerals are under Continental operated units. In the first-half of 2019, over 75% of continental wells spud in the sale and underlying mineral ownership. We believe this entity will become a strong IPO candidate as a scale increases over the next few years.Let's take a moment to provide an update on our 2019 guidance and the strategic initiatives announced in last week's release. As Harold previously noted and as we disclosed last week, we divested of a small portion of our water handling assets for 85 million, while acquiring strategic oil weighted inventory in SCOOP for $79.5 million, this actors acquisition along with acreage trades, where we added to our existing assets and oil weighted areas have added in the front -- an estimated $55 million to our 2019 CapEx, which was previously unbudgeted.Additionally, in conjunction with Franco-Nevada, we plan to spend 25 million gross dollars above budget on mineral acquisitions this year. Net to Continental this only represents 5% of $5 million of cash expenditures. Remember while total spend this call consolidated within our financial statements 80% will be reimbursed by Franco-Nevada on a monthly basis. Essentially, we will fund 20% of the cost for 50% of the revenue based upon achieving performance targets.So if the previously mentioned items and inclusive of the change, we have made in rig and completion crew activity we are tracking toward our 2.6 billion budget and accordingly are leaving it unchanged. 2019 CapEx has been weighted to the first-half of the year. Looking forward to the back half of 2019, CapEx is expected to be lower than year-to-date.As discussed in prior periods, third quarter will be higher than the fourth quarter due to project timing. After inclusion of the unbudgeted CapEx associated with the recent acquisitions and our mineral royalty yet acquisitions we expect the third quarter to be generally in line with the first quarter. While the fourth quarter is expected to be significantly lower bringing annual numbers in line with what I previously discussed. This includes unbudgeted items from our previous release our operational expertise and well productivity are also rendering strong production growth for the year. Accordingly, we are now expecting full-year oil production to be higher than prior guidance annual production is now expected to grow 16% to 19% versus 2018. We are also expecting full-year gas production guidance to grow 5% to 8% versus 2018. Across our broader goods, we are realizing improving results in our LOE and G&A cost metrics.For cash G&A, we revised lower guidance lower to $15 to $35 per BOE, versus our prior range of $25 to $45. Equity compensation also improved to $0.40 to $0.50 versus a prior range of $0.45 to $0.55. Production expense improved with the current guidance at $3.50 to $4 per BOE, versus our prior range of $3.75 to $4.25. Finally, capital efficiency is driving strong results in our DD&A rate, which we expect to come in around the midpoint of our current guidance of $15 to $17.Oil differentials are in line with our expectations for the year, while gas differentials have been impacted by weakened NGL pricing as such we are revising our gas differential to negative 50 to negative dollar. We are also revising our production tax guidance to approximately 8.5% reflecting more production from North Dakota. We expect to generate strong free cash flow for the remainder of 2019 as debt levels are reasonable we will likely apply more cash to share buybacks in the near-term and balance debt reduction in higher commodity prices.If you turn to slide five, you can see we expected to deliver a cumulative $5 billion in free cash flow over the next five years with $60 WTI. The company's five-year vision is predicated on our desire to return capital to shareholders through buybacks, dividends, and continued debt reduction. Combined with the unique ownership profile of our company, we believe that no other EMP is more aligned with shareholders in its ability to deliver returns and value.With that, we're ready to begin the Q&A section of our call. And we'll turn the call back over to the operator. Thank you.

[Operator:]

We will now being the question-and-answer session. [Operator Instructions] The first question comes from Doug Leggate with Bank of America. Please go ahead.

[Doug Leggate:]

Thanks. Good morning, everybody. Guys, I guess, John, maybe I could kickoff with a kind of double-edged question. The CapEx guide for the year hasn't changed, so just wondered if you could give us some comfort on the trajectory in the second-half of the year, because that's obviously pretty key to underpinning the whole free cash flow pivot. And my kind of related question, if I may, is -- and I don't meant to sound petulant in any way, but what is the value of Continental being a public company?

[Harold Hamm:]

Okay, I'll take that, Doug. First of all, on CapEx, we've -- by releasing seven rigs we certainly expect that CapEx in second-half of the year is normally much slower. And John went through the quarter-by-quarter rundown. So will we be spot on with the 2.6? I think we're going to be really close, and we certainly have capability here to adjust on the fly as we go forward. But talk about the value of being public, in today's market we don't see a lot of value in it, just to tell you like we see it here today, but we can't control the market. We can control what we're dealing with here on a daily basis. And that's what we're doing. We didn't start a buyback program to go public or private. We think as long as value is not reflected in the stock we got to be buying it back, and that's what we're doing. And that's what we'll continue to do.

[Doug Leggate:]

Well, Harold, we concur that the free cash flow outlook versus what the market is paying for you there's clearly something broken there. So I guess if I could risk just a couple of quick follow-ups. Is there a limit to where you see a practical free float? And then my last kind of part of this question, I guess, is how do you think about prioritizing given what your share price is? Because we have a valuation in this $60 level rant [ph], so we're clearly there with you, but how do you think about buying back your shares as an investment relative to drilling wells or reducing debt? So what's the limit of your free float, and then buybacks versus debt and growth?

[John Hart:]

I think of the free float, Doug, the key comment is that valuation is more important than float. If you go back to 2007 when we went public we only had 15% in the float we traded perfectly fine. You looked at the volume and amounts that we trade on, on a daily basis, we're training perfectly fine. Ultimately investors care about that, but more than that they care about the valuations and companies receiving appropriate valuation for their assets. So we believe the buyback coupled with dividends and capital discipline, which we've exhibited for a long time, will ultimately return the value to where it should be fairly traded.

[Doug Leggate:]

Okay, I know it's a tough one to answer, John. My last question, real quick hopefully. Jack, going from 19 to 12 rigs in the Springer area, can you just talk about the completed well count that supports the same, the unchanged growth trajectory? And I'll leave it there. Thanks.

[Jack Stark:]

Yes, that's a good question, Doug. And really, we're not changing the well count; it's just the rig count. And the key thing there is it just really emphasizes the efficiency gains that we've received from our rigs. So I mean that's the simple answer. And it's a real tribute to our teams for the efficiency gains that they've really brought to the table through our operations.

[Doug Leggate:]

Understood. Thanks guys. I really appreciate the aggressive approach to this broken market. Thanks.

[Harold Hamm:]

Yes, thank you, Doug.

[Operator:]

The next question comes from Drew Venker with Morgan Stanley. Please go ahead.

[Drew Venker:]

Hi, everyone.

[Harold Hamm:]

Morning.

[Drew Venker:]

It's a very thorough operational update. If we could just start on you guys dropping rigs in Oklahoma, is that a function of just really efficiencies and you're still going to get just as much done in the balance of this year? And then any thoughts you have on next year in terms of trajectory as we head into 2020 for activity in Oklahoma?

[Jack Stark:]

Yes, as I mentioned to Doug there on his question, just really along the same lines, it's really we're dropping rigs because efficiencies, but the well count, it doesn't change. So, we're actually getting more done obviously with fewer rigs. And as far as trajectory is concerned, say for SpringBoard in particular since these rigs are being put down in Oklahoma, we see SpringBoard production obviously growing through the fourth quarter, where you see us up at 22,000 barrels a day is what our target is. And we see that production continue to decline moving on into 2020.

[Drew Venker:]

Makes sense, Jack.

[Operator:]

The next question comes from Arun Jayaram with JP Morgan. Please go ahead.

[Arun Jayaram:]

Yes, I wanted to ask about you guys are pulling back in the South just given the efficiency gains that you're seeing. I wondered if we could read into any thoughts on future capital allocation between the Bakken and the South, and could we read into that decision as highlighting maybe a little bit more capital allocation to the Bakken as we think about 2020, and on a go-forward basis?

[Harold Hamm:]

I think our capital allocation as we have it laid down there, I believe, on page four, is going to stay about the same next year versus this year. We're drilling those wells awfully quick up there. And so, such a rig can do what a dozen rig can do down here. So our teams up there got it down to a very fine art, and so we see that capital allocation staying about the same.

[Arun Jayaram:]

Great. And just a follow-up, you guys highlighted another -- a larger road development opportunity at Long Creek. Could you talk about, this would be the one, call it, following SpringBoard. What you like about these larger projects, and could we see more of this in terms of mix towards these larger project over time?

[Tony Barrett:]

Hi, Arun. This is Tony Barrett. And obviously what we've demonstrated over the last year in SpringBoard with the reduction in cycle times and increased efficiencies certainly translates here to the Bakken as well. What we like about these projects, this one in particular, is contiguous 10 square miles of leasehold, high average working interest, integrated infrastructure. As we've said, all of our product here will be on pipe. And it's basically every time we do one of these projects we learn more and we save more. So this particular project, again we said the peak on this was 20,000 net BO per day, so it's another large scale development project that we have teed up in the north. And it's really just -- the point here is that SpringBoard was not a one-time thing. We have opportunity to do this in multiple basins.

[Arun Jayaram:]

Great, thanks a lot.

[Harold Hamm:]

Arun, I got to add just a little something there -- little more color is just that this is a reflection of us being into these plays early and getting a dominant position. We often talk about being an exploration company, and grassroots, and getting in there at lost as an early entrant. And the reason we're able to put these units together with these high working interests. I mean, if you look at SpringBoard we're looking at 75% average working interest. Here you to 87% average working interest. That doesn't happen that often, you know. And these are big projects. And it's really, as I said, just the result of being out early, having the vision, and pulling the acreage and position together.

[Arun Jayaram:]

Great. Thanks a lot, Jack.

[Operator:]

The next question comes from Brian Singer with Goldman Sachs. Please go ahead.

[Brian Singer:]

Thank you. Good morning.

[Harold Hamm:]

Good morning.

[John Hart:]

Good morning.

[Brian Singer:]

Harold, you talked early on about the minerals interest at SpringBoard and your continued acquisition there. And you've got a slide thinking about some of the longer-term potential goals, but I wanted to just see if you could add a bit more color on the medium-term objectives in both additional acquisitions that you see, and then how you see the value to continental would use accreting, would that be from continuing to highlight on calls like these, would that a spin-off IPO et cetera?

[Harold Hamm:]

I think you hit the nail on the head there. Certainly, these IPOs are, let's say, created a lot of value. So that's ahead of us. Our teams have been very successful, and acquiring this mental interest early on ahead of the bit. And being able to project what we're going to be within the next few years just creates a whole lot of value. So that's exactly where we're headed, Brian.

[Brian Singer:]

Great, thank you. And then to follow-up a bit more on the cadence of activity, looking at the Anadarko basin down to 12 rigs by the end of the year. What would that get you from wells drilled and completed perspective? And then what level of activity would you expect to bring back or to return to in 2020, if there is any increase?

[Harold Hamm:]

I'll just say that really, when you look at the efficiencies, again we're actually able to stay on track with what we put out there as our five-year vision. And with the even with a reduced rig count as we're talking about, because of the efficiency gains, we've experienced. And so, we started out in SpringBoard with a high number of rigs out there, just think it was around 14 I believe it was Pat. And keep in mind, we did that because we had to get out in front of the road development, you have to get the road drilled before you start completing it. And so, that was a key driver in getting as many rigs focused in SpringBoard as we did have initially. So again, welcome to the same in just where it will do with less.

[Brian Singer:]

I guess just a follow-up on that is fourth quarter CapEx a good run rate that you would be expecting on an ongoing basis for 2020?

[Harold Hamm:]

Fourth quarter is significantly lower. I mean, you can do the math with the incremental items that were run budget and everything else excluding those are dead on track for the 2.6. I would look more at the annual than I would look at the core. The fourth quarter is typically lower, I mean, by just the timing of projects, but also, weather it concerns and other we tend to avoid, you know, those periods a little more that we might for the summer month, for instance, tend to be heavier levels of activity for us. That's fairly normal for us. But fourth quarter is not around reflection of next year. Sorry.

[John Hart:]

Brian, I might add that, we've picked up backwards here that's going to have some work on and our teams are busy right now. Look at what's going to take the so far drilling made there. So we may very well pick up on those rigs, we could be more aggressive. But we'll stay within our CapEx.

[Brian Singer:]

Great. Thank you so much.

[Operator:]

The next question comes from Paul Grigel with Macquarie. Please go ahead.

[Paul Grigel:]

Hi, good morning. I'm basing at Long Creek, could do touch on, is that similar to other projects within, that same area within the Bakken, is it tighter? And how should we be thinking about multiple benches of either the three forks or wine rack to try that out a little bit more?

[Tony Barrett:]

Sure. So, Paul, this is Tony again. This particular area is interesting because up into this point, it's been fairly underdeveloped with just parent wells. Within the sections, our plan is calls for 56 wells to be drilled across in addition to the five existing wells in the unit. About half of those will be middle Bakken and half of those will be [indiscernible]. So the spacing is consistent with what we've done in the area in the past and seeing great success. And we expect the same here.

[Paul Grigel:]

Okay, no, that's helpful. And then maybe on well cost and balancing CapEx with CapEx being a little bit more front half loaded. I think like the completion count maybe trending down a little bit. Is that just a simple timing factor a little bit when wells come on throughout the year? And how should we be thinking about leading edge while cost and efficiencies both in the South and up in the Bakken?

[Pat Bent:]

Yes, this is Pat Bent. And I would think about it in terms of the efficiencies you have seen in the drilling rates as well. So our completion crews have exhibited similar efficiency gains from a stage per day perspective. And so, as you look in the Bakken as well as in Oklahoma, you see anywhere from 20% to 30% even 40% increases in stage per day count. So that helps our cost as well. So, that continues to drive our cost down. And so, you are going to see a commensurate reduction in our completed well cost as you go throughout the year.

[Paul Grigel:]

Okay, thank you.

[Harold Hamm:]

Thank you.

[Operator:]

The next question comes from Derrick Whitfield with Stifel. Please go ahead.

[Derrick Whitfield:]

Hi, good morning all and congrats on a strong operational update.

[Harold Hamm:]

Thank you.

[John Hart:]

Thank you.

[Derrick Whitfield:]

Perhaps beginning with Bakken, several of your industry peers have noted gas processing constraints in the current quarter and throughout the balance of the year. Are you guys experiencing any growth impediment in the basin?

[Harold Hamm:]

We have a very large footprint though that allows us to work within certain areas over things within certain areas due to these constraints. So we are able to work around them. And we have led the industry up there with gas capture we still do. And so, we have been working ahead of that, but we hearing the second-half of the year that a lot of new facilities coming on, gas plants and pipeline that [indiscernible] system. So, our production up there is ahead of schedule. And we are doing very well for what we have, but, footprint allows us to work around these constraints pretty well.

[Derrick Whitfield:]

Great. And as my follow-up, regarding your water assets, could you comment on what led you to your decision to monetize the STACK assets sold? And further, how motivated are you based on your current valuation to monetize additional asset?

[Harold Hamm:]

Yes. This was a pretty simple situation. We were kind of winding up toward what we had to do. At least we still have few projects there within this area. But other people had lot of developmental work yet to do. And so, it just made sense that our team would commercialize this area and offer for sale. So that's what we did. And it is well received that end market and it brought a decent price. And so, serving a general public is going to be hell lot of day than just the Continental.

[Derrick Whitfield:]

Thanks for your time and comments.

[Harold Hamm:]

You bet, thank you.

[Operator:]

The next question comes from Jeanine Wai with Barclays. Please go ahead.

[Jeanine Wai:]

Hi, good afternoon everyone.

[Harold Hamm:]

Hello.

[Jeanine Wai:]

Hi. Let's see, I guess my first question is circling back to Doug's question as it relates to the up to billion dollar buyback program by the end of '20 and the debt reduction target, how do you manage the free cash flow allocation between the two of these if next year, for example, commodity prices are lower than expected and you have maybe just like $500 million of free cash flow? I know you mentioned in your comments that valuation is more important than flow, but the debt reduction target is also I think a pretty important group initiative.

[John Hart:]

Right. Right now our debt to EBITDA is about 1.5 times. So, that's pretty solid -- solid investment grade rating with strong outlook. And that if you look beyond just that metric to other debt metric that are actively followed debt per flowing barrel for instance, well, that's continuing to decline even if keep a flattish type debt. We want to balance both of them. If you are in a $60 environment you are balancing both of them. If you are in a $50 environment, you clearly have less cash flow. That's just the math. In that scenario, I would suspect we would probably -- where we are at today, we would lean more towards the share buyback and keeping the debt constant with the strong metrics that we've got and frankly the improving volumetric metrics. So we'll balance both of them in commodity price obviously is a variable in that and it's, it moves around constantly. So we very actively manage those over the full 5-year horizon. We've got a lot of cash flow coming in. So I think we can achieve a number of goals in a number of different scenarios.

[Jeanine Wai:]

Okay, great. And then my follow-up question is on the medium-term plan. I believe the 5-year plan call for CapEx somewhere in the low 3 billion in 2020 and 2021 and kind of just putting everything together, given the improvement you're seeing and efficiencies in the South perhaps over time moving the larger project sizes in the Bakken that might also drive additional efficiencies and just overall better than expected well performance. Do you anticipate that this low threes level is still the right ballpark over the next couple of years.

[Harold Hamm:]

Yes, that you gave a lot of variables there. Those are all reasonable things that were reflect above will be coming out with our 2020 guidance early next year kind of consistent with our normal timeframe all of those variables plus others are things that will go into that. The key is that we feel strong about our five-year plan and where we're at on that. We'll will judge where the markets are, we will judge him all of those variables that you made and we'll make adjustments is appropriate and we'll update you not only in the context of 2020, but at the 5-year projection.

[Jeanine Wai:]

Okay, great, thank you for taking my questions.

[Harold Hamm:]

Certainly.

[Operator:]

The next question comes from Mike Kelly with Seaport Global. Please go ahead.

[Mike Kelly:]

Hi guys, good morning. I wanted to circle back to Derrick's question on the of the water infrastructure. And I do want to get your thoughts on the potential to monetize additional assets here in the near term. And it was curious, if really a primary motivation here could be to sell assets at a relatively fair value and recycle the proceeds into an accelerated share repurchase, which is an asset you clearly think is mispriced. Thanks.

[Harold Hamm:]

Yes, certainly, that could be a driver. I think it all has to do with timing of our development. These are very valuable to us during the development stage, but as we wind up our development. And you know to serve the general public around us. It may very well be more value valuable to other operators out there. So we will look at each one of them, as it comes up that there is a lot of value within the facilities that we have.

[Mike Kelly:]

Okay. And if I am looking at the long Creek development, I'm just curious here, what you think is a reasonable expectation? What you could do to well cost. Under this 56 well development there average well cost there versus kind of your base case Bakken development has been. Thank you.

[Pat Bent:]

This is Pat Bent again and that's a great question. Obviously we've seen that over the Continental's lifecycle. As we get on these larger pads and are able to have redundant activities that were able to lower our costs, anywhere from 10% to 15%. The Bakken is a great example of that, if you go back a few years looked at our well cost of our cycle time, much higher than they are today. So we still see that 10% to 15% opportunity out there in front of us.

[Mike Kelly:]

Appreciate it. Thank you.

[Operator:]

The next question comes from David Deckelbaum with Cowen. Please go ahead.

[David Deckelbaum:]

Good afternoon, guys. Thanks for the time.

[Harold Hamm:]

You're welcome.

[David Deckelbaum:]

Just curious on implied in the guidance. There was a higher royalty or production tax is that more exemplary of the fact that is Bakken outperforming relative to the original plan that you had there? And I guess what does it imply for sort of the rest of the asset base, as you think about your production guidance for the year?

[Harold Hamm:]

I think all of the assets are performing well. We are obviously ahead of projections we raised the guidance accordingly with that. The Bakken has been part of it the way, the North Dakota has a higher all severance tax and then they have a fixed tax for gas there. So the rate ends up being higher, when you mix that and it's given us a little bit higher rate. The key is that would also -- it's also got very strong margins, so it's all part of the balance and more than offset with the G&A and LOE and other cost reductions we've had.

[David Deckelbaum:]

Appreciate that. I guess this is moving to the south as we think about the next several what is SpringBoard to fall into the program and how soon do you think you'll learn about that?

[Harold Hamm:]

Well, as we've said before, we've kind of I guess we've been quiet about exactly where and when we might be moving there mainly for strategic reasons. When we came out with SpringBoard number one there was a lot of competition in there that we didn't necessarily need and so. But it is obviously it's in SCOOP and it's in an area that that we feel very strongly about. And so we'd love to put on a map and show exactly where we're headed ultimately but it's not really the right strategic thing to do for us.

[John Hart:]

I think maybe the timing, I think you asked know when perhaps we could do that and so answering that, I would expect it's going to be first quarter of 2020.

[Harold Hamm:]

Yes from a timing standpoint?

[John Hart:]

Yes.

[Harold Hamm:]

I'm sorry I missed that part of it. Yes. That seems like reasonable time sometime first maybe first-half 2020.

[David Deckelbaum:]

Thanks. Thanks guys.

[Operator:]

The next question comes from Betty Jing with Credit Suisse. Please go ahead.

[Betty Jing:]

Good morning. I have a question on 2020 just higher levels speaking with the oil price volatility, is the Governor on the program to generate a meaningful level of free cash flow for buyback and debt reduction or would you like to keep some level of a double-digit production growth and then flat free cash flow EBITDA outcome?

[Harold Hamm:]

Obviously commodity prices impact cash flow. We're committed to as free cash flow regardless of what the price environment is in your lower price environment, we would moderate the level of activity and we would back off the level of growth but we will be generating free cash flow in a variety of scenarios. When you get up into that $55 to $60 range, we can do all of the things above that we mentioned. But if you're thinking of a lower price environment, we would moderate our level of activity to reflect that.

[Betty Jing:]

Got it. And then a follow-up on the Long Creek project, would it be incremental to a baseline a six rig program in the Bakken. Just trying to understand the implications of these larger projects both in the SCOOP and Bakken like would that lead to just lumpier production growth or corporate production growth?

[Harold Hamm:]

No it's not. Actually this that's normal program up there and so it is a good project that I don't believe will have a lot of lumpiness and production and we're going to have two rigs on it and as production comes on, it will go to market.

[Betty Jing:]

Got it, thanks.

[Harold Hamm:]

Thank you.

[Operator:]

The next question comes from Neal Dingmann with SunTrust. Please go ahead.

[Neal Dingmann:]

Hi guys, thanks for taking the question. Harold, in the past you've altered completion activity if you viewed weak sort of gas or oil prices to be temporary weak. My question is if you could comment today about how you view sort of the current oil and gas market given the fundamentals and if this is impacting any of your near-term activity decisions?

[Harold Hamm:]

It's not, we're not drilling wells or we're not completing. We're not going to do that, we're certainly watching price and very cognizant of what's going on with price. We're practicing capital discipline in every regard and we thank all operators should be doing that and that's our driver going forward.So I think we're going to price the cycle here that with precision rigs go down in the U.S. four, five a week where the level is that we need to be at, if anybody gas that and I'm think we're probably 100 rigs more U.S. and is needed today.

[Neal Dingmann:]

Very good. And then one just follow-up, you all have had only notable success in number of your Bakken step out, that's the Baird Federal and others. I'm just trying to get a sense when I look at either latter part of this year or maybe even in 2020. How much of these will continue -- will contribute to the overall incremental Bakken activity versus what I consider your sort of older core areas?

[Harold Hamm:]

Yes, Neal. Yes, we'll continue to do some step out, the teams are already talking about looking at doing some unit developments out in these areas. We don't have any specific timelines there yet, but they clearly have these areas on the table.

[Neal Dingmann:]

Very good. Thank you.

[Operator:]

Thank you. The next question comes from Brad Heffron with RBC Capital. Please go ahead.

[Brad Heffron:]

Hey, good morning everyone. A question on the minerals, so you've called out that 19% number of the minerals that you own under the SpringBoard project, I just want to make sure, I was interpreting that correctly. Does that mean that, if you had an 80% NRI, before it's now 84% or any more color you could give around sort of what's been accomplished with the minerals JV?

[Steve Owen:]

You bet, this Steve Owen, just to put in perspective, 19% net mineral acres under our total lease hold position out there would give us an average of 2% increase in net revenue. So your 80% would actually give us more like an 82% to 82.5% in net revenue.

[Brad Heffron:]

Okay, got it. Thanks for that. And then just thinking - sorry thinking about the minerals longer term it seems like you guys have had maybe more success than you would have expected and it's been going faster So I'm wondering if that's pulling forward future - future mineral spend from later on in the JV timeline or if it's increasing the overall amount of spending.

[Steve Owen:]

The 25 million that we talked about that was unbudgeted that's pulling from the last year in the program. So that's a good question, yes that is pulling that board from later in the program. Ultimately, we along with our Franco-Nevada will look at the total size and scale and if the continuing activity beyond that when you know that's something we can certainly talk about expanding that at some point in the future if that's necessary, but for now we're pulling forward from the latter year tranches to now.

[Brad Heffron:]

Okay, thank you.

[Operator:]

The next question comes from Leo Mariani with KeyBanc. Please go ahead.

[Leo Mariani:]

Hey, guys. I know that's it too specifically highlight some numbers around the water infrastructure with $100 million of EBITDA on the remaining assets here clearly you're monetized a piece of it. Recently, certainly seems to imply. I think there is a significant hidden value there. Can we expect to see other water deals there by the end of this year or were these deals kind of really pick up and in 2020. How do you see kind of the remaining water infrastructure assets been monetize over time.

[Harold Hamm:]

Yes. We don't have it have any near-term deals plan for that. No, not a big clear, the 100 millions, what's left -- did not include what we sold that was separate and distinct from that, so our remaining assets have about a little over 100 million now the EBITDA, we see that growing with our development in our activity going forward. So, it's a very valuable asset if we ever did anything in near-term, it would probably be a small stake, but there is nothing there is nothing grooming or contemplated right now.

[Leo Mariani:]

Okay. All right, that's helpful for sure. And I guess if you guys could just talk about your oil cut kind of been sitting around 58% or so in the first-half of 2019. How should we expect the oil cut to kind of move as we get later into 2019 into early next year.

[Harold Hamm:]

We look forward again we see all growing a little bit in the third quarter gas, probably a little off a little bit overall BOE more flattish with the second quarter, -- fourth quarter because of that capital spend in the third quarter. We have a significant uptick in production, a lot of that is oil-weighted. I don't have -- the percentages -- we don't look so much as a percentage as we do the absolute volumes. I'd say it's probably somewhere flattish in that range. The key is the absolute volumes are growing significantly and we're focusing on the oil side.

[Leo Mariani:]

Okay, thanks.

[Operator:]

The next question comes from John Freeman with Raymond James. Please go ahead.

[John Freeman:]

Good afternoon, guys.

[Harold Hamm:]

Hi, John.

[John Freeman:]

On the minerals business now that it's been about a year since you formed that and obviously it's been very successful, just any updated thoughts or plans to expand that to the Bakken and is there anything that we're not thinking about in terms of it would make it -- any disadvantages or anything that Bakken prevented from happening up there?

[Harold Hamm:]

That's always been a possibility, the Bakken has and our team certainly is approaching a lot of different areas with open eyes and if opportunity would present itself. You know, we certainly be looking at it.

[John Freeman:]

Okay. And then just my follow-up on some of the questions that Neal asked on the step out wells, which obviously have performed great, after the 120 days, I believe in the past, you've talked about potentially looking to push a little further north of where the McClintock is or maybe some additional step out testing is just any updated thoughts on that?

[Harold Hamm:]

Oh, sure. Yes, it's in the works. And as we said, we're just going to continue to you know, step out and apply this -- our latest stimulation technology in these older areas. And, basically, as we've seen, we've typically seen as a very, very significant uplift in performance, as you'd expect. And so, it just takes time to get it done, but we're just in the queue.

[John Hart:]

And I just might add that we do lock the rock to the north there too.

[Harold Hamm:]

Sure.

[John Freeman:]

Thanks, guys. I appreciate it.

[Harold Hamm:]

Thank you, John.

[Operator:]

The next question comes from Marshall Carver with Heikkinen Energy Advisors. Please go ahead.

[Marshall Carver:]

Yes, thank you. The the 12 rigs in the southern region in 4Q, what would the split be between the SCOOPING the STACK?

[Harold Hamm:]

Of those 12, two in the STACK, 10 in the SCOOP, this is Pat.

[Marshall Carver:]

Okay. Thank you. And a follow-up, you talked about leading the industry in terms of guests capture in the Bakken, what was your gas capture rate in 2Q and how would you see that trending?

[Harold Hamm:]

For the year, I think our gas capture is in it right about 88%, 89% range. So we're fully in compliance with what the NDIC is basically mandated that they want up there and that's exclusive that any kind of incentives that they're willing to put in place that happened in place as well. So we are definitely a leader in gas over the Bakken.

[Marshall Carver:]

All right, thank you.

[Harold Hamm:]

Thanks, Marshall.

[Marshall Carver:]

Yes.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Rory Sabino for any closing remarks. Please go ahead.

[Rory Sabino:]

Great. Thank you very much for joining us today. Please address any further questions to the IR team. Have a great day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.