Ovintiv Inc. (OVV) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Encana Corporation’s Third Quarter 2019 Results Conference Call. As a reminder, today’s call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] For members of the media attending in a listen-only mode today, you may quote statements made by any of the Encana representatives. However, members of the media, who wish to quote others who are speaking on this call today, we advise you to contact those individuals directly to obtain their consent. Please be advised that this conference call may not be recorded or rebroadcast without the expressed consent of Encana Corporation. I would now like to turn the conference call over to Steve Campbell, Senior Vice President of Investor Relations. Please go ahead, Mr. Campbell.

Thank you, operator, and welcome, everyone, to our third quarter 2019 conference call. Let me remind you that this call is being webcast and the slides are available on our website at encana.com. Before we get started today, please take note of the advisory regarding forward-looking statements in the news release and at the end of our webcast slides. Further advisory information is contained in our Annual Report and other disclosure documents filed on SEDAR and EDGAR. I also wish to highlight that we prepare our financial statements in accordance with U.S. GAAP and report our financial results in U.S. dollars. So references today to dollars mean U.S. dollars and the reserves, resources and our production information are after royalties, unless we state otherwise. Following our prepared remarks today, we will all be available to take your specific questions. Please limit your time to one question and one follow-up. This simply allows us to get to more of your questions. I’ll now turn the call over to our CEO, Doug Suttles.

Thanks, Steve. Good morning, and thanks for joining us today. Recently, I read a sell-side note that was titled “Likely a Boring Quarter for Encana”. Well, from today’s news, you can see it was anything, but boring. We generated a $1.25 billion of free cash flow, executed exceptionally well across the company, and announced a strategic move to establish corporate domicile in the United States that we believe will create long-term value, as it ultimately better positions our company. Our recent actions are proof positive that we are committed to unlocking the significant value we see in our equity. We will leave no stone unturned to capture this value for the benefit of our shareholders. We have a lot to cover today in today’s call, so we will organize it around these key topics. First, we’ll cover our third quarter financial and operating performance, as well as year-to-date highlights. We are increasing the midpoint of our full-year production guidance on the back of continued strong performance from the Anadarko and the integration of Newfield has gone exceptionally well. In addition to our brief remarks today, there is supplemental information and our corporate presentation located on our website. Next, we’ll discuss our recent and significant actions to increase shareholder value. We intend to establish a U.S. domiciled company that will expose us to significantly larger and growing pools of investment. By looking at peer data, this will expose our company to almost three times the amount of index participation we see today as a Canadian company. It is very important to note that, we do not anticipate any material costs to the company in executing this move. In recognition of the significant transformation, we have made – we have made to our company. We have also decided to change the name to Ovintiv. On more of an administrative note, we will also be consolidating our share count in a 1-for-5 exchange to enhance peer comparability and decreased volatility. Third, we will close today’s call with some high-level thoughts on our outlook and how we are planning to approach 2020. As always, we’ll take your questions after our prepared remarks. So let’s get started. We continue to deliver outstanding financial results, reflecting the quality of our asset portfolio and our constant drive to innovate and find new efficiencies in our cost structure. In the third quarter, we posted net earnings of $149 million, or $0.11 per share and generated more than $250 million of free cash flow. When combining the last two quarters, we have now generated $378 million of free cash flow. We generated free cash in 2018 and 2019, and we intend to do this again in 2020. As we’ve said before, many in our industry are trying to navigate to where we are today. As our business matures and we transition to a more industrial business model, we’re delivering against broad – we’re delivering against broader market competitive metrics, such as earnings per share, cash flow per share and free cash yield. We have a growing list of highlights for 2019. Perhaps the most important of these is the successful integration of Newfield. Tomorrow will mark the one-year anniversary of the Newfield acquisition announcement. Since that time, we’ve exceeded the identified synergies and they’re showing up in our bottom line results. Our people across the company are working as one team and delivering exceptional results. For the third time this year, we today raised our projection for annualized G&A synergies from this transaction, now set at $200 million. This compares to our original target of $125 million. More telling is the fact that we have now eliminated nearly 90% of Newfield’s G&A. Our rapid reduction in STACK well cost from a legacy $7.9 million to an average of $6.5 million have moved returns higher and made this play very competitive within our portfolio and the industry. Today, we present longer data production data from all of our wells showing consistent performance from the play. We have continued our track record of returning cash to shareholders. In fact, we are at the top of the list of E&P companies for total cash returned and we fulfilled our buyback plan in a timely fashion. We repurchased $1.25 billion of our stock and what we believe to be a very compelling valuation. In addition, we raised our dividend 25% this year. As our company in cash flow grows, we expect the dividend to grow as well. We see this as a sustainable practice and the requirement for our healthy investor-focused E&P companies on the road ahead. Setting aside the first quarter, which was noisy due to the timing of the Newfield closing, we’ve generated $378 million of free cash flow at current commodity prices, and we estimate additional free cash in the fourth quarter. As we have said before, the first part of call for our free cash flow is the balance sheet and the reduction of short-term debt. Consistent with prior practice, we continue to refine and high grade our asset portfolio. In earlier this year, we exited from China and sold a non-strategic dry gas asset in the Arkoma, the proceeds went to the balance sheet. In addition, we recently made a few key succession moves with four internal promotions and other moves below them to build tomorrow’s leaders and ensure continued execution at all levels in the organization. And today, the announcement of our intent to establish a corporate domicile in the United States and our new brand are added to the list and reflect a significant transformation of our company. We’re excited about our future and our ability to compete and win in both the E&P space and the broader market. Now, I’d like to turn the call over to our President, Mike McAllister, for a brief operations update.

Thanks, Doug, and good morning, everyone. As you can see, we posted another quarter of strong execution. Our approach to reservoir development, combined with solid operational and commercial execution, is what enables us to deliver quarter-after-quarter. We have a quality multi-basin portfolio. Our people have a proven ability to adapt, managing risks and continually shifting resources to generate desired corporate-level outcomes. Our three liquids-rich core growth assets continue to perform very well against our production and cost targets. Our capital efficiency metrics continue to improve through meaningful reductions in cycle times across all core assets. Our total production from the core growth assets averaged nearly 480,000 BOE per day, up about 10,000 BOE per day from the previous quarter. Our core assets remain on track to deliver 15% year-over-year liquids production growth. You will notice today that we raised our expectations for full-year production, primarily related to continued outperformance from the Anadarko Basin. In the Permian, our third quarter volumes were up 13% over last year’s third quarter. Although most of our activity has been focused in Midland, Martin and Upton counties, we have been really encouraged by strong recent results in Howard County. In the Anadarko, we see strong year-over-year growth in oil and liquids up 16% when compared to the same period in 2018. The story here is really pretty simple. Production results are consistent and the team continues to find operational efficiencies to reduce costs and cycle times. More on this in just a minute. The Montney averaged 54,000 barrels per day of liquids during the third quarter, in line with expectations. This represents a 22% increase year-over-year. Most impressively, our cycle times in the Montney have improved to the point, where we are delivering our stated objectives with just three rigs instead of the four rigs as we had planned. It’s always worth reminding folks that with $4 million well cost, sub 80-day cycle times, single-digit royalty rates, and a realized condensate prices at 90% of WTI, our investments here compete with anything in our portfolio. Our base assets are delivering significant free cash flow today and play a critical role in our corporate-level performance. Collectively, our base assets produced just over 100,000 BOE per day in the third quarter, up nearly 8,500 BOE per day over the second quarter, with a gross driven by oil and condensate. Our Williston infill program is giving us confidence in a much larger inventory account than we originally estimated. In the Eagle Ford, consistent well performance and solid execution are continuing to produce free cash flow. In the Duvernay, strong well performance from our recent pad led to a 40% quarter-over-quarter growth. Let’s move on with a little more detail on our strong STACK performance to date. Our development in the STACK Merrimack is focused on the black oil window in the heart of our – excuse me, our contiguous acreage position. This is a dominant acreage position that is early in its ultimate development. Our strong well performance in the area and focus on base production delivered 162,000 BOE per day through October. In addition to our consistent well results, the team continues to find operational efficiencies, deploying our cube development model, resulting in rapidly reduced well costs, cycle times and improved returns. STACK well performance continues to be consistent. The plots on this slide focus on a subset of wells in the black oil region. To date – today, we have pumped 40 high-intensity cube-style completions. And as you can see, oil production is outpacing our expected oil type curve at 180 days from initial production. Please mark your calendars for a STACK Day Event in late January. Since we acquired this asset, we continued to be encouraged by a significant value we’re seeing and the competitive returns the play is generating today. By late January, we will have nearly a year of new data from the Anadarko and we look forward to sharing a great story with you. I will now turn the call over to Corey.

Thanks, and good morning, everyone. Let’s discuss the list of wise regarding our decision to establish a corporate domicile in the United States. Let me say upfront, this move does not represent a shift in strategy. It is simply about gaining access to deeper pools of investment capital. We believe the opportunity to enhance long-term value for shareholders will be greater as a U.S. domiciled company, despite significantly and strategically repositioning our multi-basin portfolio in North America’s top basins, while constantly innovating to improve our returns and corporate financial performance. We believe our valuation continues to be disconnected from our U.S. peers. This is due in part to the inability to access certain pools of capital in the United States that are limited investing in securities of foreign companies. As a U.S. company, we may be able to attract deeper and growing pools of passive investment in capital in the United States, particularly if our shares are included in U.S. indices and other investment vehicles that only includes securities of U.S. domiciled companies. We believe this change will level the playing field with our principal competitors, most of which are U.S.-based companies. There will be a great deal of more information in our preliminary proxy statement, which will be filed with regulators next week. Please take time to read this document to more fully understand our rationale and the mechanics behind this plan move. We estimate that we can make this domicile change without material cost of the company, allowing access to the larger pools of investment in the U.S. capital markets. To remain accessible to both our U.S. and Canadian shareholders, we plan to remain dual listed on the New York Stock Exchange and the TSX Exchanges. There’s no doubt that passively managed money and the importance of index funds and ETFs is on the rise. Using public data, we estimate that today under 10% of our ownership is comprised of passive accounts, far less than the 30% average for our U.S. peers. This is not a trend that is likely to reverse and we want to expose our equity to new and rapidly growing pools of money in the U.S. We know that you might have some more specific questions as a shareholder regarding the change. So we have included a frequently asked questions page on our website for you to reference now. Our preliminary proxy statement will be filed next week with more details. I’ll now turn the call back to Doug.

Excuse me. Thanks, Corey. We are also using this opportunity to rebrand to better reflect who we are today and further breakdown perceptions that we believe are dilutive to our valuation. This move represents the significant and transformational changes we have delivered. We are an entirely different company today and we are positioned to lead on the road ahead. We are one of the largest independent producers, with approximately a 1.25 million barrels per day of oil and condensate production. We are often reminded that some folks still perceive us as a natural gas company. We are proud of our company’s history, but we have meaningfully transformed our business and created a company that is built for today’s environment. It is important that our transformation is recognized in our valuation. Make no mistake, we have a long and proud history in Canada, and our assets here are world-class. And as Mike described, with our cost and productivity, our returns in Canada continue to be every bit as strong as the rest of our portfolio. We will continue to make profitable investments in the Montney and the Duvernay and manage these assets out of our Calgary office. We do not expect any impact on our Canadian workforce, either in the office or the field. We define the new E&P. We have a sustainable business model delivering today what many others are aspiring to do in the coming months and years ahead. This business model is generating leading results in our sector and can be head-to-head for capital and investments in the broader market. We are leading the way in an industry at the cusp of transformation. We have successfully positioned our company to achieve differentiated performance in this market. We are balancing industry competitive liquids growth, disciplined capital allocation to generate free cash flow and a consistent return of cash to shareholders. These are the key ingredients that should lead to long-term shareholder value. Our strategy is to produce strong and sustainable corporate financial performance. Since 2013, we have taken great strides to reshape the company and deliver corporate – the corporate metrics you can see today. We have greatly increased our multi-basin scale, focusing on high value oil and condensate production. Our proved reserves are now 2 billion barrels equivalent, but more important, they have moved from 15% liquids to 55% of liquids. Our oil and condensate production has expanded sevenfold over this time period. We have significant scale with almost a 1.25 million barrels of oil and condensate production that sold this quarter for an average of 95% of NYMEX WTI pricing. When analyzing the second and third quarters, we generated $3.4 billion in cash flow. For an illustrative reference, we compare our 2013 results adjusted for the current oil and gas prices and you can see how dramatically our business has improved. Finally, we continue to focus on our strong balance sheet. We had our investment-grade rating, about $3.4 billion of liquidity and a clear path to further deleveraging. We know that the market is growing increasingly more concerned with leverage and testing downside scenarios for lower prices. As we execute our forward plan, we see our balance sheet continuing to delever. It is this transformational execution that underpins the next chapter in our company’s [not life.] [ph] I’ll now turn the call over to Brendan.

Thanks, Doug. The framework for our 2020 outlook is highlighted on this slide. Our number one priority will be the generation of free cash flow, delivering modest liquids growth at mid-cycle prices. We will do this by allocating capital to the high-return liquids opportunities that we have in our portfolio. In a lower price environment, we have tremendous flexibility with no long-term rig contracts or HBP requirements. We would adjust our capital accordingly and prioritize free cash flow over production growth. If prices strengthen, this will lead to a higher free cash flow generation. In this scenario, free cash will go to the balance sheet. Thanks for your time today. We’re now happy to take your questions. Operator?

[Operator Instructions] We will now begin the question-and-answer session and go to the first caller. Your first question comes from the line of Greg Pardy of RBC Capital Markets. Please go ahead. Your line is open.

Yes, thanks. Good morning. Really just two questions, I guess. One is from everything you’re saying around the change and where the company has domiciled, effectively, there’s really no movement of people, the name changes, but that’s about it. So it’s pretty much business as usual. Is that fair, Doug?

Yes, Greg, you’ve got that exactly right. I mean, this move is the intent and purpose and what’s driving this is quite simply accessing the capital market and the passive flows that are in it today. But how we operate the business and run the business will not change. There’ll be no movement of roles or responsibilities, no reduction in staff and actually no change to how we’re allocating capital.

Okay. You also mentioned just on the sheer consolidation that the 5-to-1 and you mentioned volatility. But is there broader thinking around that?

Well, Greg, it’s really around peer comparability. We actually produce one of the largest annual cash flows in the sector. But with our current share count on a per share basis, it looks considerably lower than peers. So we think this just makes sense to do this. At the same time, as we do the domicile and name change, it feels like, for comparability and ease of understanding, we think it’s a simplification move.

Okay, great. And then the second one is really just operation around the Montney. But can you just kind of lay it what the growth trajectory is coming, just a fair bit of growth as we got coming in 2021, I believe?

Yes. Greg, as you know, we’ve been working with care [ph] to build the gas plant in PRA that’s going very well. That should start up in early 2021. As we’re finalizing details and budgets for 2020, the real question is how we ramp into that new facility? And obviously, we want to maximize capital productivity, so not spend capital too far in advance. I would say, though, that one operational detail here, which is advantageous to it is that, we have the ability to route existing production to that plant as well, which means as the timing gets closer and it comes on, we don’t have to actually drill wells to start the plan up. We could actually route existing production and then build production into the startup once it’s current.

Got it. Thanks very much.

Thanks, Greg.

Our next question comes from the line of Brian Singer of Goldman Sachs. Please go ahead. Your line is open.

Thank you. Good morning.

Good morning, Brian.

Wanted to see if you could discuss the oil production trajectory in the Anadarko Basin and oil specifically versus liquids broadly? The well performance that you consistently reported and put in your slides is very strong. It doesn’t necessarily always maybe translate into what we see for total basin quarter-to-quarter oil. And I wanted to see if you could talk a little bit more about those moving pieces the bass declines, the timing of completions and then ultimately, what that trajectory looks like over the coming quarters?

Yes, Brian, I think the two factors I’d highlight, and to be honest, some of the – restaurant of that we may just need to follow-up with you afterwards. But the two things I’d highlight, as you can see in the results Mike talk to, the wells are performing quite well, in fact, with our new high-intensity completions. BOEs are on track with a type curve, but oil is above type curve. And, of course, that’s the product that matters most there. But the second effect, so well performance is strong. But the second effect is, obviously, you’re entering the year at the time the transaction closed. I believe it was what, Mike, 13 rigs active?

Yes, that’s right.

And, of course, we’ve ramped that down to more sustainable level. But you can see, we actually basically had flat production from 2Q to 3Q, despite the drop in activity. But other than that, to be honest, I will probably just need to follow-up with you offline on the rest of the questions.

Great, thanks. And then the follow-up is a little bit more on the 2020 outlook. How you’re thinking about more broadly achieving your free cash flow objectives and the sequential production trajectory that, that would entail?

Yes. Brian, I think that – by the way, for all of us in the E&P sector and people like yourself who follow it, I think, obviously, the Gods like to mess with us at the end of the year by creating maximum volatility in the commodity price, while we try to do planning. But one of the things we’re very clear on is that, we’re prioritizing free cash flow first as we look to the business in 2020 under today’s conditions, so at prices similar to what we see right now. We would anticipate modest liquids growth with free cash generation. But we’re refining that model as we go into the year. And then, of course, if the world worsened from where it is today, we would continue to prioritize free cash, so would pull back on capital. And if it turns out stronger, the additional cash flow will go to the balance sheet.

Great. Thank you.

Our next question comes from the line of Gabe Daoud of Cowen. Please go ahead. Your line is open.

Great, thanks. Good morning, everyone. Maybe just sticking with 2020 again. So modest single-digit liquids growth, plus free cash flow on a mid-cycle price. So I guess, Doug, is that mid-cycle price kind of what we’re seeing on the screen today? And then would Plan B essentially represent a kind of a maintenance-level program that hold volumes flat year-over-year?

Yes. Gabe, I would say that what we’re really indicating in prices like today, because I would say, if you think about the three pieces oil, gas and NGLs, oil is probably around where we think mid-cycle is. Gas is obviously weak and NGLs are weak. But we still believe that even in that environment, we would actually have liquids growth and free cash generation. Now if, for instance, if we can further, what we’re indicating is, we would pull back capital and pull back some of the growth to make sure we still generated free cash flow. I think, we’ve talked before that the business we built in – even into the $40 WTI range, we can hold production flat and be free cash flow neutral, which just shows the efficiency of the business.

Understood. Thanks for that. And just, I guess, Doug, as a follow-up, sticking or going back to the STACK, this year, I think on average, the rig program was about six to seven. But then obviously, you blew down a number of Newfield docs, which led to on-streams being significantly higher. So I guess, just trying to think about capital efficiency out of the STACK for next year, do you have to add a lot of activity to achieve your goals there next year? And just given the some of the well cost savings you guys have obviously seen, just trying to figure out how that could potentially move all those moving pieces? How that could move – how that can move the budget in the STACK next year relative to the number this year, which I think was [8.25 to 8.75?] [ph]

Yes. It’s – Gabe, I don’t want to go too far here, because we haven’t finalized plans for the year there yet on – for 2020 and how we’re going to allocate capital across the portfolio. But what we’ve been trying to do is level load the program like we’ve done in the Permian and you’ve seen the efficiency benefits that’s delivered. Obviously, we’re not going back to 13 rigs, but we’re probably in and around where we are today, or maybe just slightly higher, we’ll see as we do the budget. But we don’t intend to go back to 13 rigs, which is where it started the year.

Okay, understood. Thanks a lot, Doug.

Thanks, Gabe.

Our next question comes from the line of Asit Sen of Bank of America Merrill Lynch. Please go ahead. Your line is open.

Thanks. Good morning. I have one for Mike and one for Corey, if I may. Mike, on the Permian, you talked about strong Howard County results. I think you mentioned 28 gross wells online. Any more color as to what you’re thinking? And when you’re thinking broadly Permian and you’re thinking about 120 well till this year. Are we thinking about, again, very early next year and allocation towards Howard County?

Hi, Asit. Yes, Howard County represent about 25% of our program this year. We would expect that not to change as we go into next year. But again, as Doug mentioned, we haven’t finalized the budget yet for 2020. The the real surprise and real – really the encouraging results we’re seeing is coming out of the Wolfcamp Bay in Howard and it’s basically well above our type curve expectations. So we’re really feeling pretty, pretty good about those results.

Okay, great. And then Corey on cash margin for BOE for the quarter was, I think, $14.67. Just wondering if – in the current environment, you could rank the four different assets, Permian, Anadarko, Montney and the base assets on unit cash margins. And any drivers outside of pricing that could differentially effect margin outlook, again, big picture over the next 12 to 18 months?

Yes. Hey, Sen – Asit – sorry, the – if you look across all four of them, they all get to a very similar margin albeit, but slightly different product mix and well cost. So they all compete really well in our portfolio and we tend to allocate capital to them on that basis.

Okay. Thank you.

Our next question comes from the line of Jeanine Wai of Barclays Capital. Please go ahead. Your line is open.

Hi, good morning, everyone.

Good morning.

Hi. On the STACK, that’s my first question. On the well cost, you cited the same 1.4 million savings as last quarter. Although the pacesetter wells are under 6 million, which is great. It seems like things are continuing to progress well on the cost side in your last update. So are there any completion design changes in the STACK that you’ve been testing that potentially are offsetting some of these continued cost reductions?

Yes. This Doug, I’ll make a couple of comments and see if Mike wants to add. And it’s a great question, because we have put up more intense completions in the ground or high-intensity completions we’ve done elsewhere in the company with really strong success. And we do think that’s one of the things leading to the strong old production performance there. And they do add – on a like-for-like basis, they do add costs compared to that 7.9 number. So what we’re doing is, before we put up another new number out there, is looking at this balance of where we’re going with the completion versus the cost savings. But as Mike indicated, we’ve had wells under $6 million now, and this is one of the areas you should expect us to talk a lot more about it at the STACK Day at the end of January. Mike, anything to add?

Yes. No, not a lot here, Doug, other than. We’re working on additional opportunities to reduce costs. That will help us continue to drive down to $6 million and below. But offsetting that is we’re testing higher-intensity completions up to 3,000 pounds per foot and looking at those results. So it’s a bit of a balance of a more intense completions, but coming in with different ideas – number of ideas that we’re chasing to drive our costs down for well.

And could any of these changes potentially bias you towards the lower-end of your six to eight wells per section cube configuration, that would enhance returns. And or just trying to think about any incremental capital efficiency in tailwinds that there might be next year that the market is under appreciating?

Yes. I think, on the spacing and stacking, this is sort of density question. I think, of course, that always moves around on where you’re at in the play and how thick the sections are and do you have the Osage [indiscernible] all sorts of things. The interaction between the completion design and the spacing, I’m not sure it’s going to have a huge influence at this point. I think what it is – what we’re looking to see though, is if we spend a bit more money on the completion, does it make a better well and therefore, generate better returns, which will improve capital efficiency at the same time. And as Mike mentioned, actually, right across the business, actually, we just took our Board on Monday of this week out to the Anadarko, and they got to firsthand see what we’ve been doing. And our teams just continue to innovate all across the business and come up with new ways to execute, which improve efficiency. You’ve probably seen our focus on cycle times. And one of the reasons we do that is a lot of the cost in this industry are paid for on a day basis. So if you can actually do things more efficiently and quicker, it’s less expensive. The other thing we get out of that is, of course, we get information back sooner. So therefore, we can weave that information into our thinking. But I don’t necessarily see the spacing and stacking being driven dramatically. off these completion designs is just can we make better wells, get better recovery for the capital we’re investing.

Okay, great. Thank you for taking my question.

Our next question comes from the line of Jeffrey Campbell of Tuohy Brothers. Please go ahead. Your line is open.

Good morning, and congratulations for the quarter and the excitement that sell-side didn’t see coming. I want to ask you about the Anadarko decline rate. I was just wondering, is this just represent better than expected well performance? Are you doing something proactive to influence the base?

Yes, Jeff. Good question. I – one of the things that team does, and if you think about a company of our size, we produce about 600,000 BOEs a day, about a 1 million barrels a day of crude and condensate. And with a large base, you can imagine, if you can optimize that base even a 1% move is a big number. And in the Anadarko, specifically, the team has been doing a very good job of optimizing the base, including things like artificial lift and managing line pressure in a number of things, which are having an impact. And, of course, the other piece about that is, these are usually at little to no cost. So the economic value is very strong, but we have had some very good results on the base here recently with optimization.

Thanks for that color. And my other question was, with regard to the Williston infill well outperformance that you cited, I’m just wondering could you discuss maybe what the prior spacing assumptions were and what it might look like going forward based on these results?

Hi, Jeffrey, it’s Mike here. Yes. We’re – prior – yes I mean, we had 1,320-foot interwell spacing and we’re finally putting a well in between, so going down to 660-foot and actually even testing tighter than that. We’re seeing – and also you need to understand we’re going with larger completions going up to 700 pounds per foot. And what we’re seeing is significant improvement over the parent well performance. And, in fact, we’re also seeing enhancements in the offset parent wells, basically improving production after their frack hit by the child well. So things are really encouraging in the Williston basin, and we’re pretty excited about some of the well results we’re seeing.

Okay, great. Thanks for the color. I appreciate it.

Our next question comes from the line of Neal Dingmann of SunTrust. Please go ahead. Your line is open.

Good morning, Doug, and great color this morning. Doug, my question is, what’s your – for – I guess, as you go into 2020 and maybe even 2021 kind of a general leverage target? And then how do you balance this with any potential additional share buybacks?

Yes. Neal, it’s a good question there. The – what we said pretty consistently at mid-cycle pricing, that would like to be 1.5 times or less. As I mentioned, I think earlier on a previous question, we’re probably a bit under mid-cycle pricing today, which would mean that the leverage looks a little higher. But, of course, the other things you have to consider in this is liquidity. And you also have to consider when our debt is due, and we don’t – our next debt is not due till 2021 – end of 2021. So we look at that. What it means is, we’re comfortable where it’s at. Obviously, the business is generating free cash flow at the moment. So we see it naturally delevering through time, and we’re very comfortable with that. So we don’t think we have to do anything dramatic to get to that sooner. So we want to get to that 1-for-5 or under in the business we’ll do that naturally. And when we combine that with the liquidity in the desk schedule, it feels very, very doable to us.

Okay. And then one follow-up. You’ve all certainly seen some nice improvements with your cube development in the Anadarko. I’m just wondering, do you have an idea of what the ultimate spacing will be in key areas of this play, as this becomes more mature?

Yes. I think if you had a typical, it’s probably the six to eight we’re doing today. It will vary a little bit based on the local geology and the thickness and other things. That’s true in every play. That’s why, we always be a bit cautious about putting a single number out there. But the development pattern in spacing, the stacking and spacing piece that we’re using today, feels about right and it may move a little bit. But this feels like the base case. And, of course, this is something on our STACK Day at the end of January. We’ll talk a lot more about. But what we’re seeing is very consistent results using that spacing and then used some performance improvement, which we actually believe is tied to the completion design we’re using.

Very good. Thanks for the time.

Our next question comes from the line of Marshall Carver of Heikkinen Energy Advisors. Please go ahead. Your line is open.

Yes, good morning. I saw that the costs were coming down and the guidance a little bit of a downtick on cost per BOE. Which costs are you seeing improvements on? Just want to get some color on whether that’s LOE, [P&G, G&A] [ph] or what?

Yes. Marshall, it’s actually in essentially every bucket. We’ve had great progress here. Obviously, the G&A has come down significantly, whereas we’ve raised this energy target from the original $125 million per year to now $200 million per year. You’re seeing that flow through. One of the things that may be overlooked in places is just how efficient this organization is. I mean, we produce 600,000 BOEs a day with 2,500 people. And by the way, we essentially operate everything we do, which means that, that we’re – we don’t get to that headcount to letting other people run the activities. We do that ourselves. The constant focus on efficiency improvements and innovation, it’s actually had a direct impact on our LOE across the business. In our TMP team, we’re always trying to optimize the value of the product receipt that we receive and where we sell it with the cost to get it to those markets. So there’s a bit of give and taken there. Because in the end of the day in that bucket, what we’re really trying to do is the maximum realized price after cost in, but we are seeing it right across the Board and every bucket.

Okay. Thank you. And when you’re thinking about modest liquids growth, do you want to give any extra color on what you think of modest? Is that high single-digit, low single-digit, or any extra color there?

Yes. It, of course, the trick here is not to guide before we guide. But we’re – this will be kind of mid single digits is sort of the range exactly what that number is. It’s little too early to tell as we optimize. And we also need to see over the next couple of months how the commodities shake out as well. And, of course, we’ve updated our – the status of our hedge program as well, which has some impact. And so I don’t want to give you a precise number, because I need to actually have some sense of where pricing costs are. And then we’re very clear we’re going to generate free cash in 2020 and how we toggle growth against the commodity price to make sure we get there as what we’re finalizing on now.

All right. Thank you very much.

At this time, we have completed the question-and-answer session. And we’ll turn the call back over to Mr. Campbell.

Thank you, operator, and thank you, everyone, for joining us this morning. We’re clearly excited about today’s results and look forward to seeing you on the road ahead. Thank you.