Greetings and welcome to the Ring Energy, Inc. 2019 Fourth Quarter and 12-Month Financial and Operating Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Tim Rochford, Chairman of the Board of Directors of Ring Energy. Please go ahead, sir.

Thank you, operator. And we’d like to welcome all the listeners to the 2019 fourth quarter and 12-month financial and operations conference call. Again, my name is Tim Rochford, Chairman of the Board. Joining me on the call this morning is our CEO, Kelly Hoffman; David Fowler, our President; Randy Broaddrick, our Chief Financial Officer; Danny Wilson, Executive VP of Operations; and Hollie Lamb; Vice President of Engineering as well as Bill Parsons, Investor Relations. Today, we'll cover the financials and operations for the fourth quarter and 12 months ended December 31, 2019. But because of the special circumstances and the recent events that we're experiencing right now, all of us, we feel it's necessary and it's of utmost importance to identify, discuss and summarize factors that both directly and indirectly affect the ongoing operations of the Company. So, we plan to do that in a broad sense. And at the conclusion of the fourth quarter and 12-month review, we'll turn it back over the operator and we can open it up then for any questions you may have. For now, I'm going to ask Randy Broaddrick, our Chief Financial Officer to just give us a brief overview. Thank you, Randy.

Thank you, Tim. Before we begin, I would like to make reference that any forward-looking statements, which may be made during this call or within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For a complete explanation, I would refer you to our release issued Wednesday -- sorry, Monday, March 16, 2020. If you do not have a copy of the release, one will be posted on the website -- the Company website at www.ringenergy.com. Revenues for the 3 and 12 months ended December 31, 2019 were $52.2 million and $195.7 million. Net income for the 3 months ended was $5 million or $0.07 per share, and for the 12 months was $29.5 million or $0.44 per share. For the three-month period, net income includes a pre-tax loss on derivatives of $6.1 million. For the 12-month period, net income includes a $3 million pre-tax loss on derivatives, a $3.8 million additional tax expense and acquisition-related costs of approximately $4.2 million. Net cash flow from operations was $30.1 million for the three-month period and $107.5 for the 12-month period. This equates to $0.44 per share for the three months and $1.61 for the 12 months. Our oil sales volume for the three months ended December 31, 2019 was 923,384 barrels as compared to 906,874 barrels for the three months ended September 30, 2019. Gas sales volume was 779,099 MCF, as compared to 731,627 MCF for the three months ended September 30, 2019. On a BOE basis, our sales volume for the three months ended December 31, 2019 was 1,053,233 as compared to 1,028,812 for the three months ended September 30, 2019. For the 12-month period 2019 oil volume was 3,536,126 and our gas volume was 2,476,472 MCF. On a BOE basis that is…

All right, Randy. Thank you for that. I appreciate it. I'm going to ask Kelly Hoffman, our CEO, to review our 3-month and our full 12-month operations for 2019. Kelly?

Thank you, Tim. And I want to thank everyone for joining us on our call today. We drilled 4 new one-mile horizontal San Andres wells on our Northwest Shelf asset in the first quarter. We completed, tested and filed IPs on 8 wells in the fourth quarter of 2019. And the average IP rate for all of those 8 wells was 504 BOE per day. And that equates to 104 BOE per 1,000 lateral foot on an average of about 4,990 feet per well. We also participated in three non-operated horizontal wells in the Northwest Shelf in the fourth quarter. At the end of the fourth quarter 2019, we had four additional wells in various stages of testing. And we performed 20 conversions from ESP to rod pumps in the fourth quarter of 2019. And all drilling activities, work over projects were all completed on time, and then were all within our proposed budget. For the 12 months ending December 31, 2019, we drilled a total of 30 new wells and 13 of which were located in CBP, 16 of those wells were the Northwest Shelf, and one of the wells was in a Delaware project that we have. For the same period, we completed, tested and filed the IPs on 39 horizontal wells, and the average IP of those wells was about 472 BOE per day, and that equates to about 105 BOE per 1,000 foot lateral. As it relates to the Northwest Shelf, since acquiring the Northwest Shelf in April, we drilled a total of 16 wells, completed, tested and filed IPs on 14 of those wells, of which the IP rights were 555 BOE per day, or 114 BOE per 1,000 foot. As you can see, the average IP rate for the Northwest Shelf is noticeably higher…

Kelly, I appreciate that and appreciate everybody being on the call today. I'm going to spend part of my time today addressing some concerns that have come up regarding some recent articles that have been written about Ring Energy by persons with unknown motivations and that contain a series of half truths and some flat out misinformation. Without giving these articles too much credence, I'll address some of the more blaring issues that came out of those, because I know a lot of you have questions about those. And I know also that we have a lot of new -- obviously with the turnover in the market, we have a lot of new investors, who may be hearing some of this information for the first time. So, I'm going to go into a little bit more detail than I usually would. One of the criticisms that we've seen in some of these articles was the purchase of our Wishbone asset. And I'll address that a little bit later. We've also seen people downplaying the quality of our IPs, because they're not as good as the shale players. What they're failing to talk about and that is they're failing to mention the drill cost is associated with those. And then also, we've had -- there was a question regarding our drilling economics, why if they are so good, we’re not ramping up our program, and I'll address all of these. Let me start out by saying, the comparison between us and the unconventional players is a little bit unfair. And I'll give you reasons why -- there are several difference between conventional and unconventional reservoirs. The primary zone of interest for Ring Energy has been from the day we began business has been the San Andres formation, particularly on the Northwest…

Thanks, Danny. We have now had that Northwest Shelf asset approximately a year, and we’ve continued to discover and refine this exceptional asset. We have continued to such update our economics. When we initially rolled out the Northwest Shelf curve, we had an understanding of the production profile at the time. We have since refined the frac, reduced the drilling and completion costs, while at the same time decreasing the LOE with smart equipment deployment. Our production has exceeded our initial expectations. But until we have more data, the production curves will remain a conservative estimate of what we think the Northwest Shelf can do. I'm briefly going to review the changes on the type curves. These slides and the corporate presentation will be updated by close of business tomorrow, so that you can review your numbers at your leisure. Due to diligent efforts in our drilling and completion departments, we have been able to reduce our during completion costs. And as recently as today, vendors have continued to reduce our costs. We had an initial $2.4 million drilling complete cost for a 1-mile lateral on the Northwest Shelf. Thus far, we've been able to reduce that to a $2.1 million investment. These savings are on both sides of the equation, drilling and completion. It also includes a larger fact than the previous operator employs the purchase of the ESP pump, which creates long-term savings. This long-term savings translates into a reduction in our LOE model. When combined with the robust well performance, both impacts create stellar returns at current commodity prices. We have modeled a net realized BOE price of $35, $40 and $45. These models have an internal rate of return that ranges from 71% at 35% to as high as 129 at $45. Our anticipated price will be positively affected by the hedges that both Kelly and Randy mentioned. For example, we have 5,500 barrels of crude hedged at $50. Combining those hedges with an open market price of $29 or $28, we would have an effective oil price above $40. This hedged effective crude price with the low cost of drilling and completion and our continued ratcheting down of our LOE means we can create value even in a depressed market. We additionally updated the CBP curves with regards to LOE and drill cost and completion costs. We have seen savings in that area as well. It demonstrates that the continued development on our legacy CBP assets are accretive as well. We've ratcheted down our drilling complete costs from 1.9 to 1.8 and have a slight reduction in LOE. We have modeled the same net $35, $40 and $45 realize price for BOE. And these models have internal rates of return from 46% at $35 to as high as 89% at $45. At this point, I'd like to hand it back over to Danny to discuss what we've done in 2020.

Thank you, Hollie. And before I get to that, I have a few other things I want to visit about. Kelly and Hollie both mentioned, I want to remind everybody, we took over the Northwest Shelf properties from Wishbone in April of 2019 when the acquisition closed. In 2018, Wishbone had a 2-rig drilling program running early in the year. And that was in an effort to drive up the production prior to the sale, something we would all do. As the property went on the marketing in Q3 of 2018, they shut down all the drilling, and drilling wasn't resumed again until we were -- until we took over operations in April. This obviously caused a spike in their production in late 2018, early 2019, and then the production began falling off due to the lack of drilling. And once we were able to get back on there and get a hold of the property and started drilling in April, we were immediately able to rest the decline and a few months later, we actually had the trajectory moving back in a positive direction. And I bring this up, because another article that was put out there was just completely false on the production that they've reported or tried to report to everybody and make our acquisition look like it was a failure. So, I want to address that right now. That article came out and said that in January of 2019, the average production for oil on the Wishbone properties was 6,603 barrels per day, and that by November of 2019, it had fallen all the way to 4,205 barrels a day, which is a 35% decline, even though as they pointed out, we have started drilling again in April. This person was obviously very misinformed or was…

Thanks, Danny. As we mentioned, we had completed our year-end reserved. We acquired Wishbone assets in April. And since that time, we have grown our total proven reserves by about 10% with respect to oil, despite an SEC oil modeled price reduction of about $10 or 16%. This could only be achieved by a strong PDP base that is accentuated with our rod conversions and reductions in LOE, and layering on strategic drilling. In 2019, income year-end proved reserves consisted of 71.4 million barrels of crude, which is approximately 88% black oil as a company percentage, and 58.3 BCF of natural gas. Of the 81.1 million barrels of BOE in total proven reserves, 58% of these are proved developed. Overall, we have added puds as well, our proven undeveloped locations. On our CBP asset, we have 40 identified proven vertical drilling locations, 29 proven horizontal locations and over 667 potential horizontal locations. In our Delaware, we have 43 proven vertical locations, 4 proven horizontal locations, and 154 potential horizontal drilling locations. On our Northwest Shelf asset, which we've referred to as the Wishbone asset, we have 57 proven horizontal locations, and 13 proven non-operated horizontal locations plus 231 potential horizontal locations. And all of this adds up to many years of drilling. At this point, I'm going to hand it back over to Danny to wrap up.

Hollie, I appreciate it. I'm going to give you a little more color on the information that Kelly gave you regarding our activity in the first quarter. To-date, we have drilled and completed 4 additional wells on the Northwest Shelf. All the wells are on test and performing well. The first wells were put on production in mid-February, which is a little later than we would have liked that did -- reduced activity, drilling only 4 wells in the quarter. We are actually now having to share frac crews. With other operators, we kind of had to get in line whereas opposed to couple years ago or even last year, when we had two rigs running, we were dictating the pace of completion. Now, it's more of a shared activity with some of the other operators. So, because of this delay, we are seeing a little bit of a reduction this quarter from last quarter, we expect to see about a 5% to 7% drop in production from Q4. That doesn't reflect on the quality of the wells we're drilling, only in the timing of the drilling. The program -- if we had moved forward with the drilling program we proposed early in the year with our higher CapEx budget, we had modeled out that we would have seen some modest growth here. However, with the suspension of the program, in the event that we do not drill any more wells, we're expecting to see an overall decline in our production from December of 2018 -- excuse me, December of 2019 of about 15% to 20%. As Kelly mentioned earlier, in the event our economic position begins to improve, whether it's through better oil prices or reduced drilling costs, we can easily get back to drilling in a matter of days. In fact, we have a drilling rig sitting on one of the locations just waiting to rig up. So, in the event things change, we can move quickly on that. And while we realized this by suspending the drilling program, we're sacrificing some growth. Our focus continues to remain on free cash flow and the strengthening of our balance sheet. But again, in the event that circumstances changes, we can immediately get back to work and we can turn that around very quickly. And with that, I'm going to turn it over to our President, David Fowler.

Danny, thank you very much. Many of us were speculating 2020 would see a robust M&A market, but due to last week's precipitous drop in oil prices and what we saw yesterday, most all M&A talks have what I would say gone into a holding pattern as everyone looks to navigate their way forward in these unpredictable times. Despite the drop in the commodity prices, make no mistake, we remain market-aware for potential ideas that we call value-add opportunities that we're going to be able to pursue without further leveraging our balance sheet. 2019, as you've heard, discussed this morning, was one of our best growth years in recent times. And as Randy mentioned earlier, we achieved our year-end objective of becoming cash flow positive, as we did so with a cash surplus of over $4 million. Again, I would like to remind everyone that our production averaged about 11,000 net barrels of oil equivalent per day. Now, to achieve a free cash flow positive position with what many people would consider a low daily volume is an exceptional feat when you take into consideration many of our peers who produce over 10 times our daily volume or about 100,000 BOE per day, have only recently achieved free cash flow themselves. The exceptional well economics from both the CBP and the Northwest Shelf, again this is what Danny and Hollie just detailed, is the cornerstone or foundation of our success and has proven our high stated IRRs are true, and is the primary reason we achieved this free cash flow milestone. Let me remind everyone, it's only been three years since we drilled our first pilot horizontal San Andres wells at the end of 2016. Our CBP assets along with the addition of the Yoakum County assets or the Wishbone…

All right, David. Thank you. And thank you, everybody. The entire team did a great job of illustrating and discussing the key points. Before I turn it back to the operator, and I know we're all anxious to get to that queue, so that we can start with the Q&A. But again, reviewing the team, we applaud, because execution, we did exactly what we said we’d do. We actually not only reached cash flow neutrality, we surpassed it in the fourth quarter with a surplus of cash. And by the way, we did it with production growth consistently through the year. So, with that that really concludes our presentation. We're going to turn it back to the operator, and we're going to open up for questions that the listeners may have, operator.

Thank you. [Operator Instructions] Our first question comes from the line of Neal Dingmann of SunTrust.

Good morning, Tim and team. Guys, my first question, just dive right into, it is more -- I mean, obviously with the stocks trading around the liquidity and CapEx, could you just -- Danny, you guys and Randy, and everybody sort of alluded to this, but could you maybe, Kelly all of you, give a little more color as far as when you look at with the redetermination coming with obviously not drilling any well, just how you look at sort of liquidity and maintenance CapEx kind of if I could intertwine those all together for the remainder of the year to have the confidence of continued free cash flow?

Yes. Well, Neal, let me just start off. This is Tim. Let me start off by saying, as we were hopefully clear in our release -- our release from a week ago, yesterday, I believe it was, we have ceased drilling for now. That's not to say that drilling couldn't come back into play. It will -- we measured a lot, of course, by the deck itself, the pricing. But we know, we're confident right now that in that $30 environment that we can service the debt, we can take care of the somewhat modest CapEx that we have somewhat budgeted out with infrastructure and the conversions that Danny and Hollie mentioned earlier. We know that I think everybody knows on this call that we continue with our efforts to monetize and look to sell that Delaware asset. And I can tell you, as I think Kelly mentioned earlier, surprisingly, even with today's environment, with the last couple of weeks, we still have some very serious interested parties and that they hopefully, as we do see a vision that goes beyond just this current pricing environment. So, we're hopeful that we can continue to pursue that. And then, along with the maintenance and the ongoing CapEx with reference to the conversions of the sub pump into the rod pumps, some workovers, et cetera. And at that $30 environment, keeping in mind that $30 environment gives us a yield much higher than that with that hedge component of $50. So, we're hoping Neal that the added value from October 1st, when we were last assigned or assessed value for the redetermination last fall, from that point until now that there's been a number of added value as it relates to the basket of wells that have been drilled and completed. I don't know that's enough to keep up with the differential and the pricing of then versus now. I think our price deck then was at $49, and maybe a little change. So, we'll have to wait and see what that's going to look like in May. But, we're having great communication with the banking group. We're trying to stay out in front of this. And we think we're going to do a pretty good job of keeping it, maintaining it going forward.

And does that include -- you mentioned it, I know, you guys said it several items on not having to drill anything, necessarily else. What about just if Danny could just comment on the need and how much you could pull back just on the rods and some of the other infrastructure costs that you’ve had?

Sure. Danny?

Yes. No, Neal. And that's a good question. We know everybody wants to know that. Look, we've taken a look at our budget. Obviously, we came out with the earlier one in the mid-$80 million range. The new budget’s probably and we haven't finalized anything yet. But, I think right now we're looking at spend of about $40 million to $45 million, something in that range with about half of that already being spent in Q1. The deal with the rod conversions and ESP changes really had nothing to do with the drilling program. Those are the work we're doing on the existing wells. But, I think you can see -- I mean, we're seeing a dramatic drop in our costs on pulling these wills as we've been very aggressive, especially last year on getting a lot of these things properly sized and converting to the rod. Are some -- just for an example on this CBP during the first quarter, about half of the jobs that we've done now have been rod jobs as opposed -- and what I mean is working on wells that we converted last year to rods, about half of them are now that rather than just pulling ESPs. So, if you look at the difference in that at $200,000 a well versus 20 to $40,000 well, it's money well spent. We're going to continue forward with that program. We are pulling it back a little bit. We are not as aggressively looking at that. But, we're still going to be fairly aggressive. But again, out of a $40 million to $45 million potential budget moving forward, half of it already been spent in Q1, you kind of see what the rest of the year is going to look like.

Great details there. And one last one if I could. Just, David for you or Kelly, any of you guys want to take it just. Could you just talk about the decline? I know you mentioned, I think year-end to year-end. But again, I'm not looking for just that. Again, could you talk about sort of how you all see sort of -- I guess, sort of two parts, but all dealing with the same question about the decline. Maybe how you will see it this year, I mean more than just quarter just year-end to year-end, but maybe your assets, and how should we be thinking you know, in a plan where you potentially are going to drill more wells. How should we potentially think about the decline?

That's a really great question. Danny had mentioned -- this is Hollie. Sorry. In case you didn’t know, I'm the girl. So, Danny had mentioned year-over-year decline. We're anticipating in that 17% to 20% range. If we halt drilling now and don't pick up the drillbit this year, we're going to see further decline in next year, but it's into that flattening phase, because we don't have new wells on that high steep decline. They've already kind of hit their B factor and have had a lesser decline. So, I would anticipate somewhere in the neighborhood of 10 to 12, the following year if we didn't pick up a drillbit this year.

Our next question is coming from the line of Noel Parks of Coker & Palmer.

I was just wondering, when you were talking about the big improvement you had in production from the new frac design, and you said you don't necessarily assume that every well will be that high going forward. I was wondering what would be the source of variability in production of future wells. Will it just be geology or just different performance, like you successfully brought production forward with the new frac design, but arrive at essentially the same EUR? So, what would that variability be going forward?

I'll answer part of that. And then I'll let Hollie address the EUR part of that. No, so far, we have a sample size of now eight wells that we've used to the new frac on. Now, we also have -- we developed this frac job in relation with several other operators in the area, particularly the Steward. And they are having tremendous success. The variability, yes, will come through the geology. Not every area is equal, we do have. And we have different landing zones, depending on the area. In some areas, we have multiple landing zones. So, that'll be it -- which to answer your question is geology. But, we are seeing that the wells that we’re using the new frac job on are superior, so far. The results are very superior to the wells that we've done in the past. When we look at the difference between 555 BOE a day and 648, that’s a pretty dramatic increase for -- and really the prices didn't change that much on the -- as far as the completion goes. So, do I think -- I think we'll start seeing -- I think we'll see continued success with that. Hollie also mentioned earlier that and I'll reiterate for everybody, our type curve is based on 400 BOE per day. So, you can see, they're far exceeding that. However, we're not ready yet because of the small sample size to change the type curve. But I’ll let Hollie address the EUR question.

So, as Danny alluded, the geology plays a big factor in how we land these wells. The San Andres and the Northwest Shelf is about 400 feet thick. We've identified basically five potential horizontal benches, depending on where you are in the structure. They're not omnipresent. You don't have five in every well, or five in every section. And so, there is some variability in EURs based on landing zones and completions. The best thing for us to do is take a conservative approach. And as we build more data that can be verified, then we'll look at changing the type curve. The EURs overall are statistical play. We are seeing pretty consistent clustering. But, we're looking at exploring all the benches and maximizing that asset.

Yes. And Noel, I think, just to add to that a little bit. The bigger frac job was more sand and the higher injection rates. I think we're opening more zones. Again, we've only had these wells on since mid part of Q4, we really can't tell, what the EUR is going to be. But, I would expect that they are going to increase just because I feel like we're draining a larger part of the reservoir with each well.

Great, thanks. And just for some perspective, across the industry, do you have an idea of roughly how many rigs are running right now on the Northwest Shelf in the platform at the moment?

That's a good question. I think, in our particular play -- now, that’s all I can really speak about, I don't know of any of the offset operators who are drilling on the Northwest Shelf, or do you, Hollie? Our field guys haven’t reported anybody drilling there?

We are always in constant contact with a lot of the operators out there. We have non-op interest in their wells. They have non-op interest in our wells. And talking to Steward and Riley, I don't believe any of them are drilling on the Northwest Shelf, particularly in the San Andres right now. I am trying to look up on Baker rig count, and that's a good source of rig count availability. And they have been listed by operator. I'm just not quick enough.

Yes. And on the CBP, Noel, I'm not aware of anybody. I mean, we’ve really been the only company drilling horizontally for quite a while on the CBP.

Our next question is coming from the line of Dun McIntosh with Johnson Rice.

Most of my question have been asked. I think you all did a great job of kind of walking through everything on the call. But, just for a point of clarity, you talked about earlier in the call, I think bringing in the event the prices do come back. And when you do get out in the field, bringing -- having a rig and spud to TIO in kind of 30 days. And then later in the call, you mentioned 90 days. Just kind of any color on there about how quick you could get operations back up and running in the event of a price recovery in the next 12…

Yes. No. I mean somebody said 90 days. That was incorrect. The only thing I mentioned there, and typically our cycle time is about 30 to 35 days, somewhere in that range. We were a little longer this time. And as I mentioned, it was because -- when we had 2 rigs running, we controlled the frac crew, we controlled everything in the field. And we occasionally would let the frac crew go and work for somebody else. But now, obviously, with the reduced activity, there's a little more sharing. I mean, we're in communication -- we share frac crew with Steward and Riley, and a few other small operators in the in the area. And it's just kind of a coordination thing. But, I can tell you, nobody else uses the drilling rigs that we use. We use a rig that's too big for a vertical well. It's too small for the shale wells. We use a company called Robinson out of Big Spring. They have 2 or 3 of these rigs that they've modified just for the Central Basin platform in the Northwest Shelf, San Andres drills. Those rigs, literally have one sitting on the next location. So, I mean, it's just a matter rigging it up. Our drilling superintendent or manager and our completion guys have been on the phone constantly. As you can tell, we're using the lower drill cost now in our economics. I think, there's going to reach a point where, just like it did in 2014, we're going to figure out a way to work at $30, $35 a barrel. We did it before, we'll do it again. But those costs are going to have to come down a little bit farther. So, can we get it turned around very fast? Yes, absolutely. These vendors are sitting on our doorstep. They are waiting to go back to work. So, we can get it up and running very quickly.

Next question is coming from the line of John White of ROTH Capital. John White of Roth Capital.

Congratulations on the quarter and congratulations on your execution. Very nice. I liked seeing you stop drilling and stop your CapEx devoted to drilling. And as much as you're continuing your infrastructure spend on rods and pump and the change out, would you -- it might be helpful, would you consider putting out a CapEx budget for the rest of the year that just addresses those items, and as you noted -- I mean, I understand your -- from an operation standpoint you can get back to drilling much quicker than the shale operators but for having a more precise number on infrastructure spending in a press release might be helpful for people?

You bet, John. That's a good -- that's a great point, actually. And that's something that we are working on and we plan on doing that. Just give us a little more time so that when we put that out, we'll be pretty certain where we're standing.

Okay, I just wanted to suggest that. And yes, I know the Robinson Drilling guys, Luke Crownover. That's a good group.

Yes. We're very pleased with their equipment. By the way, just to clarify, obviously, Steward is listening in and they texted us. They have a rig running, so.

There you go now. There is a rod rig running.

Our next question comes from the line of Andrew Bond of Alliance Global Partners.

I'm calling in for Bhakti. Thanks for taking our questions. If you're able to share how many of your collar contracts have you exercised so far this year?

Sorry. I want to understand when you say exercised, and what we have is costless collars with a floor and ceiling. So, they’re -- with the price declining, they come into play, we haven't -- it's based on the average price. So, most likely for March we'll end up receiving a payment. We did not receive or pay anything for January or February as the price was between the collars. Does that -- I'm not sure what you meant by exercise.

Yes. I guess that's helpful. Maybe then, just as a follow-up, to get a little more detail. Would then those contracts -- maybe you can help like kind of the exercise, not exercise. Just kind of the process, while spot prices are below your -- below the floor prices, would then the lowest call prices be paid out first or do -- is there a decision process there or is it kind of just whatever rolls off?

So all of our collars for 2020 are the same with the $50 floor. And so, on a monthly basis, the average price is compared to that $50 floor. And we receive that amount times the 5,500 BOE a day that we have hedged. So, there's no exercise. And it's essentially a kind of an automated process. Once the price for a month is finalized, it’s compared to those floors and then multiplied by the volumes that we have hedged.

Yes. That makes sense. That’s helpful. I guess, I'm just trying to figure out kind of these different kind of levels of puts and calls, kind of trying to figure out which ones will, for lack of a better word, disappear first?

None of them really disappear I guess the thing. I guess, they come off a month at a time. But, we have the 5,500. If you're talking about the ceiling, those will all stay the same for the year. We have that amount. So, as far as the floor, the $50 is the same for all of them. And so, say the price ends up being $30 for March, we will then receive $20 times the 5,500 BOE a day. I'm not sure how else...

Right. No, no. That makes perfect sense. I’m more so trying to figure out -- I guess, I understand the gain their below the 50, but maybe I'm missing something here on the call price. Just trying to figure out how those will change -- those volumes will change as you're getting the gains for -- as prices are below the foot price?

The ceiling won't change. The average price is going to stay the same for the entire year.

Our next question is coming from the line of Logan Moncrief with Thomist Capital.

Focusing on the spring redetermination, using the reserve report that was published in the K, I guess, I'm kind of calculating back of the envelope PDP value at strip at around $400 million. The question is, I mean, just kind of the way that banks are kind of gearing up, I guess, you'd assume that there'd be some sort of haircut to that. So, I guess, the question is kind of mechanically kind of how does that work? If they come in with the borrowing base that’s lower than what's drawn on the line right now, how much time do you have to cure that and kind of what options do you have to cure any deficiency there?

Certainly. That's a good question, Logan. So, let's try to address as best we can. So, looking back at the value that was given the last determination, I think we mentioned earlier in the call that was based on a $49 debt. Obviously, that number is going to change. And the result of that is going to so put the pressure on, as you're suggesting, which you're correct, rather than expect a full $425 million base, what would the adjustment look like? So, one thing that we have to consider is -- in our favor is that since that last determination that last evaluation, whether you make up the difference between October 1st and year-end, which is a catch up on the third-party reserves, you're making reference to, there's also the activity that’s flowed over, both on the completion side, as well as the drilling and completion side for the new wells. So, that will add to the basket value. And whether or not that's enough to make up remains to be seen. I doubt that it will be as we're seeing the strip today. I can tell you that we've run some preliminary numbers as recent as of late last week, and we feel that across the board that we are going to probably still be closer to maybe 500 million. Of course that depends on where that deck is going to be when they run it. But strip last week, and Hollie help me if you can here. I know that we were working on that Wednesday or Thursday, I think we were somewhere like 500 million number?

Yes. I ran it with a strip last week and then adjusted for the hedges. And that put us in the PDP number of around 540 million. And so, as Tim has mentioned, In May, jus are boring but, we were near that in our fall redetermination.

So, is it safe to assume that if they use something that resembles strip here that your borrowing base would go up, would increase?

No, I don't -- I am not expecting that at all. I think, what we're suggesting is that if they -- if we stay on the same similar parameters as before or as past years, and with the adjustment from -- and I'll share with you that back at October 1st, our PV10, or actually it was PV9 on PDP was right in the round numbers of 675 million, for example. Our PV10 at year end, or at that time was, I should say, at October 1st was about 650. But PV9 was right at that 675. So, with adjustments, keep in mind that they were $49. So, with those adjustments now, we would anticipate that that base could in fact, or realistically could come down. I guess that the other part of your question is, to try to respond to that is, okay, well, what can we do about that? What are our options? Well, we do have free cash flow taking place as we speak. So, we feel we're in a position where we can whittle away at that principle right now, not significantly, but to some degree. So, I think it's going to go a long ways to be able to show the banking group that we've demonstrated we can do that. Aside from that, you know that we've been marketing for some time the Delaware asset. And even though you would sit in an environment today and say, who the heck is going to write a check? Well, they’re -- believe it or not, as Kelly mentioned, they’re those that maybe not banging the door down, but they're at the front door, very serious parties that we're still talking to at numbers that are reasonable for us to consider. So, that's an option. And of course, if the bank comes back and says well, look, your new base has been adjusted to $375 million and you've borrowed $366 million, that gives a very, very little liquidity, but we don't plan, Logan, we don't have a plan to outspend. So, hope is one thing, that's not a strategy. The strategy is, we're going to stay within -- we're going to stay within the boundaries of our cash flow, and adjust that and manage that the best we can.

Okay, perfect. And I appreciate you taking my questions. And just one more on Q4 production, kind of this scenario where oil stays in this $29, $30 range and you just significantly cut your activity and just let some cash flow -- a little bit of cash flow be generated from the assets. This kind of gets to what Hollie was talking about in terms of declines. But, what does Q4 production look like under that scenario, that draconian scenario?

Are you talking about Q4 or Q1?

Q4 of '20 -- Q4 of '20 kind of an exit rate production.

Yes. Hollie, I think you’re best to probably address that.

I -- me and Danny are both looking at each other and neither one of us have that on our cheat sheets that we have in front of us. So unfortunately, as Danny mentioned, it was going to be in that 15% to 20% reduction from where we currently are and so -- year-over-year. So, we can do the back of the napkin calculations, but we don't have that number.

Yes. I think you could just kind of shoot for somewhere. If you look at our Q4 number, from this year, just kind of shoot for about 15% to 20% less than that. And it should be -- you should be in the ballpark.

Final question is coming from the line of Richard Tullis of Capital One Securities.

Just a quick one for me. I guess, probably best for Danny or Hollie. Talk a little bit about higher oil price or lower well cost to get back to drilling. Can you kind of frame up for us really what you're looking for that combo of higher oil price or maybe even more importantly, lower well cost to resume drilling in Northwest Shelf?

Sure. No. And that's a great question. Richard, we went through this -- like I mentioned before, we went through this in 2014. And what we saw was that the prices on commodity -- not the commodities but on pipe, on drilling, on everything lower down to a point -- I mean, these guys, these vendors don't want to go out of business. So, they're going to lower their costs down, whether it's through cuts to their payroll, just whatever it is. They're going to do everything they can to get these prices down to the point where we can go back to work. And I think, it might take a little bit of time for everybody get to that point, depending on if we see any -- obviously any rebound in the pricing. We would have to sit down and run our models and see at what point can we service our debt, pay down -- maintain free cash flow and then also have some excess cash to go back to drilling? I think, that these points will be clarified probably in the next 30 to 60 days. I think, we'll have a better feel, because what I've mentioned to Kelly and Tim, and the rest is, I've been surprised at how quickly the vendors have responded. Typically, in the past and all the other downturns we've been through since I've been in the business, but it typically takes about six months for the vendors to come to their senses and realize that they're going to go out of business if they don't lower the prices. We were getting calls on - after the Russia announced they weren't going to get in line with OPEC. We had calls the next day from vendors already slashing. We've had -- we've seen reductions already anywhere from 15% to 20%. I expect those to get a little deeper as we continue forward. I would be surprised if we don't reach a point where these costs are going to get down to a point we can go back to work, at least on a limited basis.

We have reached the end of the question-and-answer session. I will now turn the call back over to management for any closing remarks.

Thank you, operator. Well, listen, we know that it's a busy time. And there's a lot of distractions out there. So, once again, thank you for giving us your time and listening in this morning. Everybody, stay well. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.