Continental Resources, Inc.
Q4 2019 Earnings Call Transcript

Published: 27 Feb 2020

[Operator:]

Good morning. Welcome to Fourth Quarter 2019 Continental Resources 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. Please note this event is being recorded.I would now like to turn the conference over to Rory Sabino, Vice President of Investor Relations. Go ahead.

[Rory Sabino:]

Other members of our management will be 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.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 in the company's website 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 our fourth quarter earnings call. Operationally, 2019 was an exceptional year for Continental. Let me give you some of the highlights. We met or exceeded all of our guidance. Oil production grew 18% year-over-year. We generated excess cash flow of approximately $600 million. We returned $190 million in stock buybacks. We reduced net debt by approximately $200 million. We initiated our quarterly dividends.We consummated strategic trades, bolt-on acquisitions and leasing in Continental-dominated core areas for approximately $165 million. This added up to 370 additional gross operated location to our extensive oil-rich inventory. All this was achieved, while maintaining capital spend expectations.In 2020, we plan to take the stewardship of our shareholders' assets to the next level through continued capital discipline and operational excellence. In this current price environment, we are moderating our near-term growth and keeping capital spend flat year-over-year.We see the oil and gas market as fundamentally oversupplied, with demand even further impacted by the coronavirus. By preserving our high-quality asset for a more structurally sound market; we are further enhancing future value for shareholders.I want to highlight Continental's continued commitment to ESG. As one of the leaders of the horizontal American energy renaissance and a major contributor to U.S. energy independence we are proud to be a part of the approximately 15% rollback in CO2 emissions that has occurred since 2006, thanks to the affordability and availability of clean burning natural gas and light sweet crude oil produced as a result of horizontal drilling.We have always been strong stewards of the environment. Our resource and the communities in which we operate benefit from it. We're one of the best in the industry when it comes to gas capture, with a 98% overall gas capture and sales rate. Our ongoing objective is to have best-in-class ESG. You can find our ESG philosophy posted on our website, www.clr.com and our 2019 Sustainability Report will be available in the second quarter of 2020.Organizationally, Continental took a major step in its long-term succession plan with the appointment and flawless execution of Bill Berry as Chief Executive Officer, as I stepped up to the Executive Chairman position. I'm excited to introduce Bill on his first earnings call with the company.Bill has done a tremendous job in his role here as CEO. He is already driving operational excellence and strategic direction. Bill and I, as well as the other members of our executive team, look forward to another year of strong execution in 2020.With that, I'd like to turn the call over to Mr. Bill Berry.

[Bill Berry:]

Thank you, Harold, and good morning, everyone. As Harold mentioned, 2019 was an exceptional operating year for Continental, with our teams providing consistent and repeatable results across all our assets. This performance is in line with Continental's track record of delivering shareholder value in a sustainable cash flow-positive and returns-focused manner.Over the past three years, Continental has generated approximately $1.4 billion of cumulative free cash flow of which nearly 90% was returned to shareholders in the form of $1 billion in debt reduction over $200 million in share repurchases to date and the initiations of the company's quarterly dividend.Looking to 2020, we expect this track record to continue. Our 2020 program is expected to generate free cash flow of $350 million to $400 million at $55 WTI. We will prioritize maximizing shareholder value, capital return in the form of share repurchases, debt reduction and dividend. As long as our equity is significantly undervalued, we will prioritize share repurchases over debt reduction and dividend.We would expect to return to shareholders 100% of cash flow in excess of the $350 million to $400 million range. So, even in the event of commodity price improvement, we will continue to prioritize shareholder returns. As part of our strategy, we are committed to capital discipline. We're targeting flat capital spend, combined with 4% to 6% production growth year-over-year. We believe this reduction and our projected growth rate is appropriate given current market conditions, and last year's outperformance.Production for 2019 and 2020 will still deliver a combined two-year CAGR of approximately 10% at the midpoint of our 2020 guidance. Combined, cumulative volumes are expected to be on track with our original five-year vision estimate for 2019 and 2020.Before I turn the call over to Jack for more details around our 2020 operational outlook, I also want to highlight the innovative ability of our teams to enhance the value of our assets beyond the drill bit. Our expanding mineral position concentrated on our top-tier acreage position in Oklahoma continues to grow.In 2019, over 75% of Continental's operated wells in Oklahoma pit are minerals and 90% of our minerals acreage is under Continental-operated units.As we have highlighted in the past, Continental will earn 50% of revenue for 20% of the costs in 2020, further accelerating shareholder return. 2019 was a strong year for our minerals entity and we continue to see a multibillion-dollar IPO potential in the future.In addition to the minerals, we are maximizing value by pursuing strategic opportunities for our water infrastructure asset. Last year we divested a water gathering recycling system in Oklahoma for $85 million. We estimate the value of our remaining water infrastructure assets across the Bakken and Oklahoma to be in excess of $1.5 billion. We are currently evaluating the monetization of a portion of these assets.Like our strategy with minerals, we are capitalizing on the unique nature of our water sourcing gathering, disposal and recycling assets, which have been built ahead of the drill bit. This alignment with Continental development plans across our basin leading operations provides line of sight for future shareholder value.Continental is positioned for success in the evolving U.S. energy business with grassroots exploration combined with low-cost operations at the heart of our DNA. We are the lowest-cost operator amongst our oil-related peers, thanks to the quality of our assets, our operations and our people.We have a well-established track record of exploration success, reserve growth and continuous improvement in capital efficiency. As we look out into 2020 and beyond, Continental will continue to deliver this performance in the most efficient and profitable manner with our teams delivering the right rock, the right density, at the right cost. With our strong portfolio and disciplined approach to value creation, we will continue to deliver strong capital and corporate returns for our shareholders.With that I'll turn the call over to Jack.

[Jack Stark:]

Thank you, Bill and good morning, everyone. Appreciate you joining our call. Let me provide a few more details around our 2020 capital budget. Our total CapEx is flat year-over-year at $2.65 billion. Our drilling and completion CapEx is also flat year-over-year at approximately $2.2 billion.Approximately 60% of the drilling and completion CapEx is going to the Bakken and 40% is going to Oklahoma. Our average rig count for the year will be down 15% from 2019 with approximately nine rigs allocated to the Bakken and 10.5 rigs allocated to Oklahoma. Production is expected to grow 4% to 6% year-over-year, while our net completed well count for the year will be down 5% with approximately 245 net wells completed by year-end.Approximately 242 wells will be in progress at year-end, up 12% year-over-year or over-year in 2019. Approximately $700 million of our 2020 capital spend is associated with these wells that will have first production in 2021. These 2021 wells are part of longer-term projects that are projected to drive sequential production growth in 2021 and increase fourth quarter 2021 production by low double-digits over our full year 2020 average production rate.Our inventory remains robust, as we indicated from our growing Ryder Scott evaluated reserves. Over the last four years, our crude reserves have grown 32%, while production increased 57%. This equates to a reserve replacement ratio of 198% and highlights how our underlying organic growth continues to build inventory.Over the past year, our step-out drilling program expanded the economic footprint of the Bakken to the Southern and Western extents of our acreage. We also added 18,000 net acres to our Bakken position during the year. And in Oklahoma, we added to our proven oil-rich SCOOP inventory.Combined, we added up to 370 gross operated locations to our inventory as Harold pointed out. At year-end 2019, our reserves were up 6% year-over-year, in spite of an approximate $10 drop in oil price. Our reserves to production ratio was 13 years, which is one of the highest among our peers. Clearly our inventory quality, efficiencies, technology and organic growth have all contributed to our growing reserves.To emphasize the quality of our assets, let me provide a few operational highlights from 2019. Our Bakken oil production grew an impressive 14% year-over-year and continued to deliver exceptionally consistent results as shown on Slide 11.On this slide you can see that the average well performance for 2019 tracks right on top of the wells completed in 2017 and 2018. This includes 465 gross operated wells located throughout our acreage position that were completed over the three-year period. The 2017 and 2018 programs have already paid out and the 2019 program is currently about 75% paid out.We expect our 2020 Bakken program will perform similar to these previous three years. Such outstanding repeatable results, explain why we consider the Bakken to be the best oil reservoir in the country. Our Oklahoma assets were responsible for 43% of the company's 2019 oil growth.Project SpringBoard and SCOOP played a key role, as its production grew to an average of 25000 net barrels of oil per day in the fourth quarter. This exceeded the initial guidance we gave for SpringBoard back in third quarter of 2018 by 50%.The outperformance was driven by shorter cycle times, improved well designs, growing infrastructure and reservoir performance. Our oil differentials in SpringBoard were also the best in the company running below $2 per barrel. During the year drilling cycle times were reduced 25% and completed well costs were reduced by 10%. And nearly 100% of our oil, gas and water volumes at SpringBoard are on pipe.SpringBoard was approximately 35% completed at year-end 2019 with around 60% of the Springer units and 20% of the Woodford units developed. SpringBoard is an outstanding project and a great example of the quality and value we create from our Oklahoma assets in our own backyard.Outside of SpringBoard, we completed 34 wells from our proven Woodford Springer and Sycamore reservoirs in SCOOP. Many of these wells were located in SpringBoard 2 where early development is underway. SpringBoard 2 covers approximately 62 contiguous square miles, in which Continental owns 64% average working interest and approximately 14% of the minerals underlying Continental's leasehold position.I want to thank our teams for their continued commitment to excellence and their exceptional performance in 2019. Now I'll turn the call over to John.

[John Hart:]

Thank you, Jack. Hello, everyone. I would like to begin with an overview of our 2019 financial performance. Continental generated $775 million of net income and free cash flow came in right above the upper end of our guidance at $608 million. CapEx was in line with our expectations at $2.6 billion. Return on capital employed was strong and on target at 11% for the year.Continental continues to be the lowest-cost operator amongst our oil-weighted peers with an average LOE per BOE of $3.58 for 2019. We also generated a peer-leading $1.57 G&A per BOE and saw our DD&A per BOE continue to decline, reflecting strong capital efficiency.2020 is projected to generate approximately $350 million to $400 million in free cash flow at $55 per barrel WTI and $2.50 per Mcf Henry Hub based on production growth of 4% to 6%. A $5 change per barrel WTI is estimated to impact annual cash flow by approximately $300 million.Our drilling and completion maintenance CapEx to hold production flat is estimated to be below $2 billion, reflecting the quality of our assets and continuing capital efficiency. For 2020, we have guided our oil differentials to a range of $4.50 to $5.50. Since year-end 2019, we have seen a significant expansion of Bakken pipeline as well as continued infrastructure directed towards coastal markets, which will benefit our differential. We have guided our gas differentials to a range of $0.50 – negative $0.50 to negative $1.Our guidance ranges are consistent with 2019. Of the total 2020 budget, the company is allocating approximately $125 million to our previously announced minerals agreement with Franco-Nevada for mineral royalty acquisitions. With a carry structure in place $100 million of the $125 million capital cost will be reimbursed by Franco-Nevada to Continental.Continental will earn 50% of total revenue in 2020 based on already achieving certain predetermined production targets. Continental will include the $125 million in our consolidated CapEx, but will be reimbursed monthly by Franco for their $100 million share. Capital discipline is a central tenet in our capital program for 2020 and beyond. We maintain a strong degree of flexibility going forward thanks to our strong performance. As today's macro environment has inserted a higher level of price volatility into current markets, we believe a prudent and responsible response is to moderate our five-year vision to a growth CAGR of 8% to 10% versus a range of 12% before. This encompasses 2019 and 2020 actual and targeted growth respectively.In moderating our growth, we have reduced our five-year estimated CapEx for 2019 to 2023 by approximately $1.5 billion roughly half of which is from 2020. In a $55 and $60 environment with $2.50 gas our 5-year vision is estimated to generate approximately $3.5 billion to $4 billion of free cash flow over the five years.Return on capital employed in 2020 is expected to be strong as well at approximately 8% at $55 and 10% to 11% at $60. At $60, we see low to mid-teen returns on capital employed from 2021 to 2023.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 begin the question-and-answer session. [Operator Instructions] Our first question is from Doug Leggate from Bank of America. Go ahead.

[John Abbott:]

Good morning. This is John Abbott on for Doug. He's actually on a plane right now. He should be listening to the webcast. And we just had a few questions here. Bill how would you define CLR's investment case now? The market clearly has no appetite for growth. And as a deliberately unhedged E&P the embedded volatility versus peers looks increasingly difficult to defend.

[Bill Berry:]

Yeah. If you look at where we are right now with the capital investment, we started to track last year when organizational capacity-wise we had the ability to keep on drilling some wells spend some more money and we deliberately chose to lay down some rigs put the capital discipline in that we talked about in order to make sure we delivered free cash flow level that we wanted to. And that's a little bit of what you're seeing continue on into 2020. It's a very deliberate effort taking into considerations the market, the return that we wanted to deliver to the shareholders, transcribing into a capital program that then generates the production growth that we're looking at.

[John Abbott:]

Okay. And then for our follow-up question, we just saw the – we just talked about the updated CAGR. I think sustaining CapEx this year is about $1.8 billion. How does that sustaining CapEx just evolve over time over a five-year period?

[John Hart:]

Our maintenance capital stayed pretty consistent over the last few years in that $1.5 billion to $2 billion range. It's obviously beneath that as you indicated there. That's a reflection of a couple of things

[Bill Berry:]

Yeah. One thing – this is Bill. One thing you can look to is the DD&A and we're continuing to see a continued improvement in DD&A every year and that's a reflection of the capital efficiency.

[John Hart:]

Yeah. I remember a few – but if you go back to 2016 for instance, we were above $20. We're low $16 on a DD&A rate today so that's a good add-on Bill.

[John Abbott:]

Thank you for taking our question. Appreciate it.

[Bill Berry:]

John, thank you.

[Operator:]

Our next question is from Arun Jayaram from JPMorgan. Go ahead.

[Bill Berry:]

Hey, Arun.

[Arun Jayaram:]

Yeah. Good morning. Arun Jayaram, JPMorgan. A couple of questions thinking about 2020 perhaps for John Hart. John in the guidance, if we take the upper end of the guidance range it implies around 3,000 barrels a little bit more than 3000 barrels of oil growth. In the slide you indicated that you expect the Springer to grow by 6,800 barrels a day. And so just wondering if you could help us understand what's going on with the Bakken the STACK and you do have some other assets but just trying to understand the pieces which kind of get us to that 3,000 barrels a day of growth in 2020.

[John Hart:]

You've got a number of variables when you're looking at overall production. One is inside operated and outside operated are part of it also. Inside operated, we're showing our production growing across the company. The outside operated some of the timing of their projects is a little longer-dated on a couple of our key non-op partners so their production is for 2020 is off 1% or 2% and then rising nicely as they go into 2021. But for the year just based on their timing it comes off a little bit. Organically, within Continental, we're showing relatively flat production in some of our basins. And then as you referenced on – I think in Springer you were referencing it's up a little bit.

[Arun Jayaram:]

Fair enough. And just my follow-up as you mentioned on the water side that you believe that you have call it $1.5 billion of call it asset value on the water side and perhaps would look to maybe monetize some water investments, can you give us some sense on timing? And what would be a potential use of proceeds if you did sell incremental water assets?

[Bill Berry:]

Yes, this is Bill. And yes probably referring back to my opening comments, we have a process that's underway on it so it's probably inappropriate for us to further comment on it. But looking to any cash flow that we're seeing coming in beyond that $350 million to $400 million range that's one of the things you're going to see us piling 100% back to the shareholders.

[Arun Jayaram:]

Great. Thanks a lot.

[Operator:]

Our next question is from Brad Heffern from RBC. Go ahead.

[Brad Heffern:]

Hey, good morning, everyone. I guess on the maintenance capital, historically you've talked about $1.5 billion to $2 billion. I guess on this call you said just under $2 billion. With oil really not growing very much, it looks almost like a maintenance capital type of program this year. And so is it really just sort of the nonproductive capital that you've called out that reconciles the difference between the higher budget this year and the maintenance number that you're giving? Or any other color you can give there?

[John Hart:]

I wouldn't call this year maintenance capital because of the $700 million that we've got going into our D&C. It's just the timing of that. Long Creek in the Bakken, as an example of that big long-term massive project. You'll see production coming on in 2021. Frankly I think we're comfortable with the timing of that just based on where the current commodity markets are.We see better value bringing that production on next year and we look forward to a strong 2021. So 2020 is not what I would call a maintenance. It's just the timing and the nature of the projects and when that production is delivered.

[Brad Heffern:]

Okay got it. And then on the minerals side you guys have talked about since inception the Franco-Nevada JV being an IPO candidate at some point. What's the time line on that? And are we getting close to the end of you sort of leasing up all the minerals that you're looking to achieve?

[Bill Berry:]

That's still an active program, so it's not anything that we're ready to telegraph as to the timing on it but we're still actively increasing the leasehold that we have in that space.

[John Hart:]

Production on it's growing nicely as well so it's something we're very excited about.

[Brad Heffern:]

Okay. Thank you.

[John Hart:]

Thank you.

[Operator:]

Our next question is from Jeanine Wai from Barclays. Go ahead.

[Jeanine Wai:]

Hi, good morning, afternoon, everyone.

[John Hart:]

Hello.

[Jeanine Wai:]

Hi. My first question is following up on some of the growth questions. Last year you grew oil by a really healthy clip. 2020 guidance less – guidance calls for less than 1% growth but 5% total production growth. So if we just kind of roll forward to the five-year plan I think the math implies about a 9% year-over-year total production growth on average through 2021 to 2023. So can you comment on what the oil trajectory looks like in 2021 and 2023? And do you anticipate that oil growth will kind of get back to outpacing total production growth after this year?

[John Hart:]

Absolutely. If you look to our five-year vision or listen to us I guess because – since you don't have the numbers. But we've indicated a target of 8% to 10% for a five-year horizon. That's a BOE percentage. The old percentage is higher than the BOE percentage. So we're growing oil faster than absolute volumes during that five year. We see the oil to gas ratio for Continental improving by several percentage points relative to 2020 versus 2023 and 2022 and 2021.So we see good growth throughout it. A lot of that growth in oil starts in 2021 with the timing of those projects and then continues into those outer years as well. So we are very focused on oil. We see that as the predominant value driver going forward. It's just the timing of when the projects are delivered.And it's coming off a much higher base in 2020 than where we originally guided to. We exceeded those expectations. So the percentage growth this year is not as much but the absolute production volumes are right on line with where we expected. We just delivered some of it earlier. And you'll continue to see oil growth outpacing BOE as we go forward.

[Jeanine Wai:]

Okay, great. That's really helpful commentary. My second question is on just cash flow sensitivity and activity plans. So if we do that back-of-the-envelope math on your cash flow sensitivity for the $5 move in oil to get from the $55 planning that price down to $50 and then if we take another haircut for natural gas trading below $2 right now this implies that Continental is outspending at strip pricing, which we all know moves around. But when do you actually start reevaluating the 2020 plan activity?

[John Hart:]

I think we do that continually. We do that now, we do that immediately. So we always do that. We don't mark-to-market on a daily basis. We take a view towards market. But listen we have been cash flow positive in significant numbers as Bill indicated earlier since 2016 and we'll make further adjustments if we need to.Our breakeven today is below $50 million to $300 million. It's a rounded number. And as Bill spoke with water assets and others, we have the capability to generate significant cash flow from other assets as well. So we're on track so far.In 2020, we reduced our debt by $50 million in January and we've been buying shares year-to-date as well. So we've reduced debt while buying shares and we'll adjust this going forward. Regardless of where the price is, we intend to be cash flow positive. It's only been a few years since we had a breakeven plan in the mid-30s. So we're on top on it. We'll stay there.

[Jeanine Wai:]

Very helpful. Thank you for all the detail.

[John Hart:]

Thank you.

[Operator:]

Our next question is from Josh Silverstein from Wolfe Research. Go ahead.

[Josh Silverstein:]

Thanks. Good morning, guys. Just sticking with some of the strategic moves. Why wouldn't you guys do all of the water business sale right now as opposed to just a chunk of it? The public float is obviously around the $1.5 billion if not a little bit less today. What's the holdup in wanting to do that?

[Bill Berry:]

There's really no holdup. We're looking at the assets we have and packaging it in the approach that's most advantageous to us and most marketable to the group that's out there. But you'll see that later on in the year as we go through the process that we'll be able to tell you a little bit more details on this. But as I said, it's a process underway on it and then it's really premature to go into a description of how much of it we're doing at this point in time.

[John Hart:]

It's also an asset that's going to grow significantly over the next few years. So if we hold a portion of it it's got a lot greater value in the future.

[Bill Berry:]

Just to build on that we have seen pretty strong demand for these resources in our discussions. And so they're – we think that we have a pretty good path certainly on this.

[Josh Silverstein:]

Got it, okay. And I guess just along the same lines I mean this question was asked I think a few conference calls ago. But what's the reason for staying public these days? I mean is it just to have a float to potentially do some sort of transaction? Or if you guys still have this bullish view of $55 and then $60 oil coming back, why not just accelerate the process of being able to capture most of that value and doing it in-house?

[Harold Hamm:]

We've always operated for the best interest of shareholders, and we'll keep all that in mind as we go forward. But we do have a view of stronger prices in the future as you mentioned there. And so in a way, we all know and can see the problems with public market today and it's challenged, but we'll watch it closely as we go forward.

[Josh Silverstein:]

All right. Thanks guys.

[Harold Hamm:]

Thank you.

[John Hart:]

Thanks, Josh.

[Operator:]

Our next question is from Brian Singer from Goldman Sachs. Go head.

[Brian Singer:]

Thank you. Good morning.

[Harold Hamm:]

Hey, Brian, good morning.

[Brian Singer:]

Wanted to ask a little bit on Oklahoma. So, if you look overall the producing reserves had a little bit of a gassier mix in terms of what was booked relative to the past couple of years. The cost to add those reserves looked a little bit higher. And maybe essentially that's because of the Oklahoma impact. And I wondered if you could talk to how you see the underlying capital cost structure in Oklahoma and the competitiveness in the portfolio. And to what degree are increases in activity there needed to hit the five-year plan or if need be and the macro environment warranted sticking with the five-year plan driven by the Bakken?

[Jack Stark:]

Yeah, Brian. This is Jack. In 2019, we actually did focus a bit more dollars in Oklahoma than we had previously. We're usually a little -- had about 40% going to Oklahoma, 60% to the Bakken. But last year we had about a 50-50 mix. And this year you'll see us rotating to the Bakken more heavily as you do see in our budget and we've got about 60% of our capital going to Bakken and 40% to Oklahoma.So the gassier mix you see that you're pointing out there is really just we had a little bit more Oklahoma in our mix. But our Oklahoma assets, I mean, think about the oil production growth that we've seen in SpringBoard last year. I mean, Oklahoma represented almost 50% of our production growth -- oil production growth in the company and we are continuing that program on this year.So we -- our oil assets in Oklahoma are very strong. And we're going to -- this year, we've got I'd say 75% of our total capital is actually going to be in SpringBoard I and portions of SpringBoard II. So we're going to continue to see that oil growth in Oklahoma. And it's growing very nicely.If you look on the slide, I think we've got it in there in Slide 12, you can see that our oil production in Oklahoma is going to be going up about 35% even 40% this year. So -- and as far as its contributions long-term, it is an integral part of our program our five-year vision and beyond. And it is -- and I'd say probably, I'm going to say that the mix is probably in that 60-40 range looking at it just kind of across the board in that five-year plan. So it's a very important part of our program and we're very pleased with the outcomes we're getting.

[Brian Singer:]

Great. And my follow-up goes to the earlier discussions and your comments with regards to some of the potential divestitures IPOs whether it be the minerals business water business, et cetera. If -- at today's stock price market environment, how would you think about the capital allocation? How much do you think of proceeds or what percentages very broadly would you think of towards debt pay-down or reserving for debt pay-down versus deploying to share repurchase? And where if at all would -- keeping capital for potential inorganic opportunities that come available where would that lie?

[Bill Berry:]

Yeah, I think, this is Bill. You probably heard in my earlier comments that we at today's stock price have a strong preference toward repurchasing shares. And so I think you'll see that driven in large part by the share price.

[Brian Singer:]

Great. Thank you.

[Bill Berry:]

You bet.

[Operator:]

Our next question is from Neal Dingmann from SunTrust. Go ahead.

[Neal Dingmann:]

Good morning, Harold and team. My first question is just on kind of around what you've been talking about on activity and capital discipline. And really what I'm focused on here is while I definitely see the need and you also continue to talk about spending around free cash flow, I'm curious how you think about balancing this sort of near term and the potential especially in the release when you talk about the outperformance specifically in the SCOOP and the one-year or less payback in the Bakken. So given how good those returns are I'm just wondering how you sort of decide to think about activity.

[Jack Stark:]

Well, as I mentioned Neal, we have rotated back more heavily from a capital investment standpoint into the Bakken this year. The infrastructure in the basin has grown over the last year growing natural gas takeaway and processing. And so we've rotated back in to where we -- continue to grow and maintain our basically industry-leading gas capture up there.Right now, we're capturing probably 94%, 95% of the gas in the basin right now are in our -- from our activity up there. So, I mean, I think that pretty well states what we're doing is that we have looked at the opportunities here and we're kind of back to our prior I'd say cadence or pace, which is 60% Bakken, 40% Oklahoma.

[Harold Hamm:]

Yeah. And I think as far as activity our view is that we should not be overly supplying a market that is oversupplied right now. So that's part of the reason that we feel comfortable with the level of activity overall.

[Neal Dingmann:]

That was my follow-up Harold. Just overall could you talk just a little on macro your thoughts for remainder of the year. If -- I'm just kind of curious if you think that we're going to be -- continue to oversupply. And obviously, prices are going to impact like they are because of that. Do you see any reason to build DUCs or do anything like as such that you all have in the past?

[Harold Hamm:]

No, we don't see any reason to build DUCs. We can answer that quickly. Let's back up just a little bit. Before this coronavirus came about we saw the market correcting very, very quickly as far as balance of supply and demand. Obviously, if this is going to take something away from demand, we'll have to see how broad that is given a few weeks here.But it just means cut back a little bit and wait and see how that plays out. Hopefully, it won't get any worse than anybody expects, but who knows at this point? So overall, we see the market strengthening. Certainly, this is a reaction to what we're seeing around the world right now.

[Neal Dingmann:]

Very good. Thanks Harold. Thanks, Jack.

[Harold Hamm:]

Thank you.

[Operator:]

Our next question is from Derrick Whitfield from Stifel. Go ahead.

[Bill Berry:]

Hello?

[Derrick Whitfield:]

Good morning, all. Good afternoon. Sorry about the…

[Bill Berry:]

No worries.

[Derrick Whitfield:]

With my first question I'd like to touch on your five-year vision. We continue to be amazed by the degree, at which the sector and your stock has derated despite the strength of your financials as shown on page 4 and 5 of your presentation. For the five-year vision, is there a valuation scenario where management will consider doing ex-growth beyond 2020 and plowing the free cash flow into elevated share buybacks and debt reduction?

[John Hart:]

We've certainly talked about we're going to prioritize share buybacks in this environment. I think if you look back over 2019 and into the first part of this year, we've done a good job of balancing debt repayment or share buybacks. But when we're looking at the price that we're looking at now, which we do not believe is indicative of a company that made $800 million of net income and that will continue to make significant net income in 2020, we're going to put more emphasis and priority towards those share buybacks.

[Bill Berry:]

As you know we have an authorized program for $1 billion. We spent about $200 million of that, so there's still $800 million of -- out there for additional share repurchase.

[Derrick Whitfield:]

Great. And then as my follow-up, regarding your minerals position, could you broadly speak to the size of your net royalty acre position today and the amount of net production that's being produced?

[Steven Owen:]

In the past, we've never disclosed the total net mineral acres that we've acquired to date. It's an ongoing process and we're very active, we're very successful and it's going to continue. It's all opportunity-based and it really helps that we have all the title and know where our group is going to go and we're continuing to purchase and be successful.

[John Hart:]

Yes. Steve's politely saying, it's a competitive situation and we're working to grow that now. I'll give you one indicator of the production on it's north of 3,500 a day and we've been pleased with what we're seeing today.

[Derrick Whitfield:]

That’s great. Thanks for the detail.

[John Hart:]

Thank you

[Bill Berry:]

Thank you.

[Operator:]

Our next question is from Paul Cheng from Scotiabank. Go ahead.

[Paul Cheng:]

Hi, good morning guys. The first one is for John. John, in 2018-2019 what's the average CapEx that is related to the production not being on stream in the same year?

[John Hart:]

It was lower by several hundred million compared to 2020. So we were $500 million or below.

[Paul Cheng:]

$500 million or below, okay. And Jack maybe this is for you. For SpringBoard 2, I think in SpringBoard 1, you guys had provided some indication that what is the size of the resource, the number of inventory and all that, whole nine yard. Is there a number that you -- a set of numbers that you can provide for SpringBoard 2 in terms of your recoverable resource estimate and the number of prospect inventory that you have in mind? And also that -- what is the type curve? Is it very similar to what we've seen in the SpringBoard 1?

[Jack Stark:]

Yeah, Paul this is Jack. And SpringBoard 2 is -- as I said it was about 62 square miles of size. Our average working there is about 64% and there ultimately will be about 235 wells drilled in there and that's just an approximate number there. But we're targeting the exact same proven reservoir that we know in SCOOP very, very well and that is the Woodford, Sycamore and Springer.And as far as performance is concerned, the performance we've already seen from wells that have been drilled is very much in line with what we're seeing in SpringBoard 1. And so we're very pleased with the outcomes that we're seeing. And it's in the queue and part of our vision for further development. And we'll mention that there -- we have other areas where we also have dominant positions like this SpringBoard 3, 4 and 5 and they're of comparable to slightly smaller size.And we will -- right now we're drilling and testing some wells in those areas looking at some interesting opportunities there as well that could add even toward the inventory we have today. And so we haven't been very transparent, I guess I would say with the asset because when we came out with SpringBoard 1 and we're very specific about it, we found we brought a lot of competition especially from a minerals side. And so I could -- we have the details. This is inventory that's on the shelf. And over time results will come out. But what we're seeing here is, we have a very competitive situation still in here. And so just know that we're very pleased with the results and the direction we see the whole play going.

[Paul Cheng:]

Maybe Jack let me ask in another way. I think in SpringBoard 1 you started in mid-2018. And I think by the end of this year that you pretty much will be done or maturity of the well being through. And in SpringBoard 2, what's the pace of that development? That -- should we assume that sometime by 2022 you will be largely done?

[Jack Stark:]

No. I mean SpringBoard 1 is about 35% complete at this time. I'd say about 60% of the Springer wells in the project have been drilled, but only in the range of I think 20%, 25% of the Woodford. And we also -- and so -- and as far as -- if you look down at SpringBoard 2, I'd say we're probably also in a very similar range. Maybe it's about 30% developed down there. And so there's a lot of running room in here.And so these are projects that are going to be multiple years go well beyond 2022. And as you can see on the plot, I think we have in -- I mean on page 12 you can see SpringBoard 2 already starting to bring on but you can just see how it's moving as far as new production growth that we're adding there.And as far as overall on the five-year plan, our inventory that we're using to essentially provide that's -- included in that five-year plan really is 30% or less of our inventory right now company-wide. So it gives you perspective on just how much room…

[Paul Cheng:]

Okay. Thank you. And if I can just make one request. I think in the middle of the earnings season in the press release, if you can also include the actual oil and gas production by basin for Bakken, SCOOP and STACK. That will help a lot of people. Thank you.

[Jack Stark:]

All right. Thank you.

[John Hart:]

Paul, I think if you look in the 10-Q there are some breakouts in there that would be helpful to you also -- or 10-K pardon me, I forgot what quarter we're in right now.

[Operator:]

Our next question is from Matt Portillo from TPH. Go ahead.

[Matt Portillo:]

Good morning all.

[John Hart:]

Hey, Matt.

[Matt Portillo:]

The first question relates to capital allocation, which you guys have touched on a bit. If strip holds around $46 or $47 a barrel, it looks like the current capital program is slightly free cash flow negative or effectively neutral. If that's directionally correct, should we expect the commensurate CapEx cut over the coming quarters to potentially mirror something more analogous to the maintenance program you talked about? And just one point of clarification on the $2 billion maintenance number, does that include facilities and other cost associated with development?

[John Hart:]

All right. So the $2 billion is -- I think what somebody indicated earlier it's below $2 billion. But it's -- it does include some production facilities. It doesn't include everything. But the non -- beyond that it's not a big number for those other items to deliver that production. So, I think we're good in that range.On 2020, remember there's $700 million that doesn't deliver production this year delivers it in the future. So, the pace of that if we wanted to adjust that there's also several hundred million dollars that is outside of D&C and our budget for this year and we can adjust there as well. So, there are levers that we can pull to continue adjusting our 2020 capital spend that do not impact the 2020 production is the key message I'm delivering there.

[Bill Berry:]

Yes, Matt to your point, yes, we are focused on delivering free cash flow.

[John Hart:]

Yes, we will be cash flow positive regardless. That's our target.

[Matt Portillo:]

And then just a second question. You've laid out a couple of different scenarios for your five-year view at a $55 and a $60 case in the past. I was curious if you could give us a little bit of context or flavor around how that budget might look in a $50 case which is fairly close to where strip is today and how we should think about free cash flow and ROCE and growth in that scenario?

[John Hart:]

Well, our budget is -- we're still cash flow positive at $50 slightly. It's not a lot but the breakeven is below $50. So, we've got flexibility there. I don't -- we'll adjust as we go forward on what are the levers and stuff we pull. Our maintenance capital, for instance, that's designed to keep us flat for multiple years into the future.If we wanted to do one year, it would be even lower than what we've indicated. And our 2020 budget that we've got like, I said earlier, there's a lot of other levers that we can pull that do not impact the production. Am I missing part of your question there or--?

[Matt Portillo:]

No, I think that's helpful. Just trying to understand if we were at $50 given that you're prioritizing free cash flow, you'd like to really return capital to shareholders, buying stock, et cetera. Should we expect a $50 case to look more analogous over the five-year plan to kind of the maintenance capital program?

[John Hart:]

For the -- are you talking about the full five years or are you just talking about 2020?

[Matt Portillo:]

Correct, the full five years. So, just taking a kind of five-year view at a $50 case and prioritizing free cash flow and shareholder returns.

[John Hart:]

I'd want to look at -- I would say it would be below $50. At $50 for five years, we can still deliver growth. Obviously, cost and efficiencies would change and a number of other things would change, but we haven't run it just at $50 with all of those scenarios. We've factored in a lot. So, I think you'd still be showing growth.Probably -- we probably wouldn't target as high as what we're targeting now, but we expect the markets to improve. There's a lot of noise right now. There's a lot of volatility. But as Harold spoke of earlier, once -- getting the coronavirus behind us and getting a number of other things we were seeing the markets continuing to improve and tightness in the physical market. So, we'll judge that as we move forward.

[Matt Portillo:]

Thank you. That's helpful.

[Operator:]

Our next question is from Gail Nicholson from Stephens. Go ahead.

[Gail Nicholson:]

Good afternoon. I think the market assumes that the Woodford is not as good of a zone in SpringBoard as the Springer. And I was just curious how are the current Woodford wells in SpringBoard I holding up? And then with the very nice growth that you're having in 2020 versus 2019 in the SpringBoard what percentage of activity is allocated to the Woodford?

[Jack Stark:]

Okay. As far as -- the first part of your question what was that?

[John Hart:]

Woodford versus Springer quality.

[Jack Stark:]

As far as the quality of the performance, I mean we've said the Woodford is about 70% oil versus the Springer. And it's the biggest contrast, but they are really excellent performers. And what you'll typically see is the Springers have a higher IP initially than the Woodfords, but the Woodfords ultimately catch-up and actually have a lower decline rate.And so the Woodfords and the Springer actually make a really nice mix because you have a little bit lower decline rate on the Woodfords relative to the Springer but the Springers themselves are really from a performance standpoint EUR standpoint very much in line with Springer just a little bit lower on gas -- or on oil.

[Harold Hamm:]

And I think we're -- when it comes to the overall mix, the Woodford versus Springer, I'll take a long guess at it, but I think we're about 60% Woodford and 40% Springer.

[Jack Stark:]

Yes. It may be -- this year, we've moved into the Springer. We've actually started -- we took care of about 60% of the units there. And so we're 20% of the Woodford. So, the Woodford will be a more dominant piece this year. And so Woodford I'm going to say is maybe in the range of maybe about 80% of our activity there this year. And so -- but -- and so really what we'll be doing is we'll be adding a higher percentage of Woodford this year for sure.

[Gail Nicholson:]

Great. I really appreciate that clarity because I think that really shows the strength of that zone with the growth that you guys are forecasting on a year-over-year basis.

[Jack Stark:]

You bet.

[Harold Hamm:]

Yes.

[Operator:]

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

[Rory Sabino:]

Great. Thank you very much for joining us today on today's earnings call. 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.