Pioneer Natural Resources Co

LSE:0KIX

Earnings Call Transcript 2019-Q3

[Operator]

Welcome to Pioneer Natural Resources Third Quarter Conference Call. Joining us today will be Scott Sheffield, President and Chief Executive Officer; Rich Dealy, Executive Vice President and Chief Financial Officer; Joey Hall, Executive Vice President of Permian Operations; and Neal Shah, Vice President, Investor Relations.

Pioneer has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the Internet at www.pxd.com. Again, the Internet site to access the slides related to today's call is www.pxd.com. At the website, select Investors, then select Earnings & Webcasts. This call is being recorded. A replay of the call will be archived on the Internet site through December 2, 2019.

The company's comments today will include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospects of Pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Pioneer's news release, on Page 2 of the slide presentation and in Pioneer's public filings made with the Securities and Exchange Commission.

At this time for opening remarks, I would like to turn the call over to Pioneer's Vice President, Investor Relations, Neal Shah. Please go ahead, sir.

[Neal Shah, VP of IR]

Thank you, Anna. Good morning, everyone, and thank you for joining us. Let me briefly review the agenda for today's call. Scott will be up first. He will discuss our strong third quarter results driven by solid execution from the Pioneer team. After Scott concludes his remarks, Joey will review our strong horizontal well performance optimized for rate of return while delivering best-in-class oil production.

Rich will then update you on the benefits of our downstream planning for both oil and gas. Scott will then return to discuss Pioneer’s focus on sustainable practices and our commitment to social and governance issues. After that we will open up the call for your questions. Thank you. So with that, I'll turn it over to Scott.

[Scott Sheffield, President and CEO]

Thank you, Neal. Good morning. First of all, I want to thank all of our employees and our management team for really three great quarters and especially for achieving $250 million in free cash flow in the third quarter in just a short very, very short time frame. We’re reducing the top end of our full-year guidance again by additional $150 million, we're increasing our full-year production guidance by 3% at the midpoint, continued to see positive benefits for exporting of our crude oil, $46 million in the quarter, uplift a total for $279 million for the year.

Also, as you notice, we're starting to put in some ESG slides. And we are reducing of those 2016 to 2018 time period, we got a 38% reduction in our total greenhouse gas emissions intensity. We'll talk more about that later. Again focused on free cash flow yield and return on capital employed.

Going to Slide number 4, again, a very, very solid execution is driving our third quarter results. Again, production at the top end of the guidance also significantly improved capital efficiency coming through quarter by quarter by quarter.

Going to Slide number 5, again continue to improve capital efficiency. Again, we're the top end of the DC&F growing completion facilities ranked being reduced again by additional $150 million approximately 5%. We did achieve $100 million in facility savings already ahead of schedule. If you remember, it was a goal to achieve for the year 2020. We achieved it in a very, very short timeframe due to the focus of our production people.

Continued improvements in D&C efficiencies, as we're seeing again increasing the midpoint of production guidance by 3% on BOEs again, stronger BOE growth attributable to increased NGL yields from addition of two new gas plants we’re going up from about 135 barrels per million to about 155 barrels per million on those plants.

Going to Slide number 6, the 2019 outlook again lowering top end of guidance, DC&F to about $2.85 billion. Again, our D&C teams are continuing to execute every quarter at a very, very high level.

We're updating our 2019 average rig guidance to about 21. And that does include adding one rig that's already started in early November. Expecting to pop about 290 wells towards the upper end by original guidance up to 265 to 290.

Regarding our Midstream and DrillCo initiatives, there's really nothing new to report for the quarter. We're still in the process stage. We will update you once we have more information.

On Slide number 7, again the priorities are aligned with shareholders, continue to buy back stock in the quarter roughly about $200 million at an average price about $1.25. We bought back about 3% of their shares year-to-date, when you include the production growth of mid-teens, results in our annualized dividend results in about a 20% shareholder return, still tend to increase the dividend over time to be competitive with that of the S&P 500 yield.

Slide number 8, again, the competitive advantage of the Midland Basin over the Delaware basin. Again, I think the main change we made from the last quarter, we've had a lot of questions about how much federal acreage do you have in the Midland Basin and the answer is zero. So regardless of who gets elected, and this next election, Pioneer essentially has no risk. We have no infrastructure risk, as all of our lines will move from the Midland Basin to the Gulf Coast within Texas.

I won't go over the other comparisons because they've been repeated since last quarter. Slide number 9, again really no change. Again, we're focused on return on capital employed. Looks like it'll continue to move up for 2019 and over the next several years, we're still focused on mid-teen, moving it up to the mid-teens range and a $55 WTI environment.

Slide number 10. This is a new slide again showing percent of acreage developed is coming out of the Wells Fargo group with our peer group, and showing the acreage quality years of inventory breakeven price less than $50 WTI. You can see Pioneer is best to be far right and toward the bottom obviously.

In addition, we probably have probably some of the highest working interest and probably some of the lowest royalty burden obviously allows us to achieve much better economics on all of our drilling activity.

I'll now turn it over to Joey Hall to go over operations.

[Joey Hall, EVP of Permian Operations]

Thanks, Scott and good morning to everybody. I'll be taking over on Slide 11. Still seeing great results in the Wolfcamp D appraisal program. Our approach to delineation combined with our completion optimization is resulting at approximately 100% improvement in Wolfcamp D performance from the 12 wells drilled since 2017. As Scott mentioned earlier, we are adding a rig in November to set up for 2020 program and our operations team was able to fully accelerate the $100 million in annualized facility savings through value engineering and optimization.

Moving now to Slide 12, simply reiterating our approach to address market concerns regarding the negative consequences of tight spacing. Our large acreage position allows us to prioritize returns and we do not down space to artificially increase our inventory and risk negative parent-child impacts. Our development approach in conjunction with completion optimization has allowed our well productivity to improve year-over-year.

And now on Slide 13, starting on the left, once you normalize gross production for all peers on a two stream basis, Pioneer has the highest oil percentage. And then looking over on the right, we also have the best 12-month cumulative oil production. These two facts combined should lead to the best margins and the highest returns in the basin over time. I'd like to add my congratulations to our subsurface drilling completions and operations teams for an excellent quarter on all fronts. And I'll now turn it over to Rich.

[Rich Dealy, EVP and CFO]

Thanks, Joey and good morning. I'm going to start on Slide 14, where you can see the bar chart that shows that we are generating peer-leading EBITDA margins per BOE. And as you can imagine, that's the foundation for generating free cash flow and strong corporate returns and really is what allows us to be able to return capital to shareholders. The second thing that I think it highlights is the benefits of us moving our oil and gas out of the Permian Basin to higher priced markets. And that’s combined with our cost reduction efforts this year is really leading to great margins.

These will improve further relative to the peers. This does not reflect the benefits that we've seen from our G&A reduction efforts earlier this year that we're not fully realized until the third quarter. So when you combine higher margins with our strong balance sheet, it really provides significant financial flexibility as we move into 2020.

Turning to Slide 15, you can see at the upper left there, where our price realizations were $56 per barrel for the quarter. This is relative to Permian peers that would have realized $54 or so. So a $2 increase really was provided by our firm transportation to move our oil to the Gulf Coast where we realized $46 million of incremental cash flow for the quarter and $279 million year-to-date.

For the quarter, we did move about 205,000 barrels to the Gulf Coast about 75% of which was exported during the quarter that is increasing to 225,000 here in November and our volumes that will transfer to the Gulf Coast. If you look at the fourth quarter what's happened with narrowing differentials and shipping costs have been higher due to the tanker sanctions have a limited availability of ships, so we are forecasting a nominal to slightly positive cash flow impact in the fourth quarter.

And then the other thing I'd point out is that, similar to oil, we do move our gas out of the basin and with Gulf Coast Express coming on, we're moving about $300 million a day down to the Gulf Coast. So starting in the fourth quarter, we have about 60% of our gas will go to the Gulf Coast will be priced off Houston Ship Channel or NYMEX Indexes, and then about 40% will still move out to Arizona, California markets. They’re priced off of a SoCal Index. So very minimal Waha exposure moving forward.

And then lastly, just an update on our derivative positions. For the fourth quarter, we have added incremental barrels, so we're now at 110,000 barrels a day of oil, hedged at roughly $65 Brent and for 2020 we are 80,000 barrels at roughly $63 Brent with upside from there. So with that, I'm going to turn it back over to Scott.

[Scott Sheffield, President and CEO]

Thanks, Rich. We will now open it up for -- oh no, I forgot. We do have our ESG slide. Sorry, I got ahead of myself. On Slide number 16, I think the key points here is that the company is focused on all three of these measures and will continue to highlight all of these measures going forward, we have a great third year in a row, we just released our ESG report, but again focused on the environmental side.

Again, we've had 40% reduction in methane intensity and a 38% reduction in Greenhouse gas emissions intensity from 2016 to 2018. One of the key things that we do, we do not connect any new horizontal wells to production unless the gas line is already in place.

I think that's something that should be adopted by oil producers in the Permian Basin. Also, we're one of the few companies that our facilities 100% of our facilities are early monitored for Leak Detection and repair. We do it through aerial flying about 3,000 to 5,000 feet. We do it once a year. Very, very important practice to determine where your methane leaks and fix those leaks as soon as possible.

Again, on the social side, we have one Pioneer, we're focused on community, culture and talent development, continued focused on improving gender diversity, continued to move this up significantly in regard to percent of women inside the oil and gas industry, inside the management teams, the board level and all employees throughout the company.

And then on the governance over the last few years, we have set up some key committees both HS&E Committee, Oversight and have a very, very strong Corporate Governance Committee.

Going to Slide number 17 gives you a better breakdown on our Greenhouse gas intensity, and methane intensity in regard to our peers. Again, it’s peer-leading for 2018 data going forward already discussed the reasons why that we are taking, we are leading our peers in regard to some of our business practices out in the field.

Slide number 18 has been a very hot topic recently, over the last several months about how much flaring is going on in the Permian Basin. This data was taken by a company called Rystad out of Norway. It's already been published in the New York Times and also in several newspapers, but I think one of the best things to do everybody needs to focus on getting down to 2% or below 2% in regard to venting and flaring and we will take this off the industry.

You can see there is a lot of peers that are way above the average, everybody needs to have the same practice and focused for the same reasons that we had in regard to new wells coming on, they need to be connected to a gas line. And secondly, everybody needs to do some type of monitoring on the flaring side.

And finishing on Slide number 19. Again the company again just had three great quarters in a row and excited about going into 2020. It's all about execution, delivering free cash flow, and delivering higher return on capital employed numbers over the next several years. Again, thanks. I will now open it up for Q&A.

[Operator]

Thank you. [Operator Instructions] We will now take a question from Arun Jayaram with JPMorgan.

[Arun Jayaram, JPMorgan]

Yes, good morning, I was wondering if you could comment on what is driving the facility cost reduction efforts. I think you mentioned that through the redesign of your facilities, you're expecting CapEx to be $100 million less. So I guess my ultimate question would be how are you looking at facilities today with more of a focus on free cash flow generation, versus perhaps before when you had the million barrel target?

[Scott Sheffield, President and CEO]

Yes, Arun. It was simply and I think I've stated this publicly before is really since we have lowered our growth, the company growth rates from 20% to 25%, as they have shown the last two years to a mid-teens growth rate, it's not worth building for the next five years. So we're designing our facilities.

We're paying special attention to fill everyone that's not full. And secondly, we're making small changes in the design of the size of our facilities based on a mid-things row. So it was achieving that probably three to six months earlier, we were hoping to go into 2020. So we achieved about third quarter. So it's really achieving that three to six months earlier than I thought. So the team was focused, they did a great job. But those are the main two drivers.

[Arun Jayaram, JPMorgan]

Great. And my follow-up, Scott is I'm wondering if you could provide any commentary on your plans in 2020. We did note that you added a rig in November. I think there's two scenarios that you're looking at. One was either to add a couple, two, three rigs in late in 2019 to support 2020 growth, or maybe add a couple, two or three rigs later in 2020. I think the current consensus forecast is calling for about 13% oil growth at just under $3.4. billion in CapEx. So just wanted to get your thoughts on 2020 and where consensus sits today?

[Scott Sheffield, President and CEO]

Yes, thanks Arun. As we have stated publicly, we're going to be adding on roughly about two to three rigs per year over the next several years to achieve our mid-teens growth rate. When you look at about $140 million per rig, and the rigs we add and you back out of the fact that we've already achieved facilities, we’re going to have reduction in regard to both the water in the Midstream side from $300 million to a much lower number going into 2020.

That I think the street is fairly close to their numbers. We have we will be going to the board over the next, this November board meeting and then early in January and releasing in early February. But when you go through the math, it still implies a 2020 CapEx budget of roughly about $3.3 billion.

[Arun Jayaram, JPMorgan]

Thanks a lot, Scott.

[Operator]

We will now take a question from John Freeman with Raymond James.

[John Freeman, Raymond James]

Good morning, guys.

[Scott Sheffield, President and CEO]

Hi, John.

[John Freeman, Raymond James]

Just a follow-up on the prior question. So you had previously talked about kind of averaging 21

to 23 rigs even with the rig add in November, which I know was previously planned, you're now targeting 21 rigs. And I'm just curious if that's just all efficiency gains, or is it a timing issue where maybe some of the additional rigs you might have added for 2020 might not happen till early next year?

[Joey Hall, EVP of Permian Operations]

Hey, John, this is Joey. And you answer the question. All this is due to efficiency gains. Whenever you see a 30% improvement cycle times year-over-year, it doesn't take much to start winding down your rig count. So yes the reduction in rig numbers is purely due to efficiency gains.

[John Freeman, Raymond James]

Great. And then just my follow-up question, you've done a really good job kind of historically kind of opportunistically putting these hedges on kind of low to mid sort of 60s price for Brent. I'm just curious if just anything you're seeing on the macro side with the rig counts continuing to fall expectations for U.S. growth continuing to be sort of reduced. If that's sort of maybe changing the thinking of what levels you'd be willing to hedge that going forward?

[Scott Sheffield, President and CEO]

Yes, John. I think we still have to get through 2020 but I've been on public record talking about the Permian is going to slow down significantly over the next several years, I’ve lowered my targets and my annual targets, a lot of it has to do with free cash flow to start with the free cash flow model that public independents are adopting, the issues that private equity firms are going through in regards to consolidation reducing activity, the reduction of NGL prices significantly, we've deviated long-term from about 70% to 50% of WTI.

Now we're down to 30% of WTI especially for propane and butane, all that is left revenue, the strained balance sheets lot of the companies have, the parent-child relationships that companies are having, people drilling a lot of Tier 2 acreage. So I'm probably getting much more optimistic about 2021 to 2025 now in regard to oil price.

I don't think OPEC has to worry that much more about U.S. shale growth long-term. And all that is very beneficial. So we probably going to be more careful in the years 2021 to 2025 because there's not much coming on after the three big countries that are bringing on discoveries over the next 12 months Norway, Brazil and Guyana. Guyana will continue, obviously.

But I'm definitely becoming more optimistic that we're probably at the bottom end of the cycle regarding oil price. So we're still going to hedge in 2020 to protect what may happen with China trade agreement, and other things that may happen, but we will be more cautious as we go into the 2021 to 2025 time period.

[John Freeman, Raymond James]

Thanks, Scott. I appreciate it.

[Operator]

We’ll take our next question from Ryan Todd with Simmons Energy.

[Ryan Todd, Simmons Energy]

Thanks. Maybe a quick follow-up on the CapEx reductions. They were obviously quite impressive during the third quarter. We've seen big step downs over the course of this year from sand and pressure pumping shifts and then reduction and completion efficiencies and facility costs.

The big pieces behind you at this point do you see the potential for further gains going forward particularly on the completion efficiency side where it's been pretty impressive this year?

[Joey Hall, EVP of Permian Operations]

Yes, Ryan, we certainly had a tremendous year this year from a cycle time improvement and cost reduction perspective and I would temper expectations for 2020 because we did have some huge gains particularly related to the ProPetro transaction. And again, these efficiency gains we made in big steps this year primarily but just focus on lean manufacturing methodologies. And what I tell people all the time, one of the best things that ever happens to an operations team is slowing down and being able to catch your breath and reflect and get focused on performance.

And that's what transpired during this last slowdown. So we’re just able to focus on the basics and make big gains but going forward, your commentary is correct that I wouldn't expect to see huge leaps going forward but I wouldn't also suggest that we don't have room to improve.

[Ryan Todd, Simmons Energy]

Thanks. And you’re guiding to relatively flat oil production in the fourth quarter, can you provide any maybe any high level color on cadence or trajectory of activity and volumes over the next few quarters, or at least at a high level on 2020 whether we should see a relatively consistent growth or front or back-end loaded?

[Neal Shah, VP of IR]

Hey Ryan, it's Neal. If you look at the cadence of our rigs throughout the year, we started at 24, our rig count came down throughout the year down to 18. Right now we're sitting, we exited Q3 at 18, we added the additional rig at 19. But if you look at how those rigs dropped in terms of the POP cadence from a quarterly perspective, Q4 will reflect our lowest quarter from a perspective of POPs.

So that's kind of the main driver in terms of that oil production being relatively flat quarter-over-quarter. Now, as you look forward to 2020, we've yet to formalize the precise plans and the teams are still working for it. But I don't see any reason why you would see consistent growth quarter-over-quarter as we progress through 2020. But that's just really setting the framework. I think the team needs to work through their precise plans. And as you know, we'll announce that in February.

[Ryan Todd, Simmons Energy]

Great, thanks Neal.

[Operator]

We will now take our next question from Nitin Kumar with Wells Fargo.

[Nitin Kumar, Wells Fargo]

Good morning guys and thank you for taking my questions. Scott, if you could talk a little bit

about the M&A market. You know, you mentioned the DrillCo strategy. We just saw the Parsley Jagged Peak deal. You talked about guys running Tier 2 acreage, just kind of interested in how are you thinking about that?

[Scott Sheffield, President and CEO]

Yes, I think any type of transaction like Parsley did that consolidates acreage that is very contiguous improves the balance sheet, as accretive companies should do. There's probably not a lot of those still on record saying the majors are the most aggressive in regard to drilling activity. They will have to go up to decide whether or not to bulk up their inventory over the next two to three years and decide whether or not to acquire any independents. And so besides that, it just is not going to happen for a while, it may happen if we get into a better oil price market. So that's really about it.

[Nitin Kumar, Wells Fargo]

Got it. And then just going back to Slide 11 on the Wolfcamp D. Obviously gaining confidence in that zone, when should be expect it to move from appraisal into development mode?

[Joey Hall, EVP of Permian Operations]

Yes, that's one of the beauties to having such a large acreage position is that you can do this appraisal and sit back and watch results from these wells and make sure long-term that you fully understand the decline curves and also look, go back and look at your costs and see if you have the opportunity to reduce costs to make them even more economic and in the meantime, we can still go back to our traditional Wolfcamp A, Wolfcamp B, Lower Spraberry shale and continue to develop those until we fully understand the production from the Wolfcamp D.

So what I would suggest you would see next year from an activity perspective is probably pretty similar to what you saw this year. But if you look at the Jo Mill for example, I would say I went through a similar transition that we appraised it for a while. And then we started slowly adding more Jo Mill wells into the program this year up to 7%. But Wolfcamp D was a pretty small percentage of our program this year will probably be a little smaller percentage next year, but in the out years, you'll start to see it come in after we make sure we fully understand it, and we're able to continue to put that into our program.

[Nitin Kumar, Wells Fargo]

Great, thanks for answering my questions.

[Operator]

We will now take our next question from Jeanine Wai with Barclays.

[Jeanine Wai, Barclays]

Hi, good morning, everyone.

[Scott Sheffield, President and CEO]

Hi, good morning, Jeanine.

[Jeanine Wai, Barclays]

Good morning, following-up on Arun’s question on the rig adds. Can you walk through or talk about how you're balancing the 2019 CapEx budget with perhaps trying to mitigate any operational friction with having to add maybe more rigs faster in 2020 versus a more ratable cadence or is the right way to think about it really on efficiencies meaning that with the efficiency gains that you've been achieving the historical two to three rig adds really can be biased downwards. And so therefore, kind of concerns on operational friction might be overblown for 2020?

[Joey Hall, EVP of Permian Operations]

Yes, Jeanine, no, I wouldn't account that to anything related to operational friction. I would just say just like you saw the 2019 program play out. The numbers that we put out in the beginning of the year was fully what we anticipated the rig count would be but because of the efficiency gains we saw during the year we just frankly didn't need more rigs, you can even look at frac fleets, we dropped frac fleets sooner than we had expected. And whenever you look at 2020, now let's just changing the game and the amount of equipment you need to accomplish a certain amount of work just gets less and less as you continue to grow efficiencies.

So it's not related to any challenges or operational frictions, it's 100% due to the fact that we've just gotten better at drilling and better completing wells from a cycle time perspective.

[Neal Shah, VP of IR]

Jean, I'm going to piggyback on Joey's response. And if you look at where we started the year, right, we're 24 rigs with an average of 21 to 23 with POPs of 265 to 290. Right now we're sitting we're actually taking that average down to 21 rigs, but yet the POPs are going to the high-end of the range of 290. So if anything, the increased efficiencies by the great performance from the Pioneer teams has resulted, I'd say in less operational friction, which has manifested itself in our numbers and the CapEx as well as production.

[Jeanine Wai, Barclays]

Okay, great. That's very helpful. Thank you for taking my questions.

[Operator]

We’ll now take our next question from Charles Meade with Johnson Rice.

[Charles Meade, Johnson Rice]

Good morning Scott to you and your team there. I wanted to ask an update.

[Scott Sheffield, President and CEO]

Yes, thanks.

[Charles Meade, Johnson Rice]

Yes, thank you. I wanted to ask if you could maybe give us an update on how you're thinking about your buyback pace going forward, as I look at 2020, the big differences you guys have upped your dividend meaningfully. And depending what price deck you use that that could takes up a big chunk of the free cash flow you're generating. But on the other side, you have these assets. So can you talk a little bit about how those pieces go together and if there's any sequencing related to the pace of a buyback going forward?

[Scott Sheffield, President and CEO]

Yes, we're still, we still have a $2 billion buyback, we're still evaluating it and then regard to all the pieces as we deliver free cash flow, how much goes to the balance sheet. How much goes to dividend and how much goes to the buyback?

So we'll be discussing that in our upcoming board meetings over the next several weeks. And so at that point, we think it's all important. We don't have any specific to this point in time. So we'll get back with you as we develop our plans.

[Charles Meade, Johnson Rice]

Got it. Thank you. And then Scott, I want to go back to one of the -- or some of your comments in your prepared remarks. I think you've made your view on the venting and flaring and what should be the industry practice? You made that pretty clear. But I'm curious do you think are you sensing a change in what's kind of socially acceptable or acceptable for the industry as a whole? In other words, is industry coming towards you or do you think you're still kind of a Pioneer in that, no pun intended, in that regard.

[Scott Sheffield, President and CEO]

Yes, no that’s a good term of Pioneer. We always like to be a leader and so if I had a chance to speak in New Mexico at the First Methane Conference by the Governor Grisham out there recently spoken at Jason Bordoff’s Conference last March and April and made a statement. It's a big black eye for the Permian Basin. And so we don't want to become what's happened to the Bakken over the last five years.

And so we need to do something about it. So we're taking steps internally, to do something about it. And I want every other company in the Permian Basin do the same thing. So we're leading, and we just want the people to follow us and do this take the same steps. We also need more pipeline, met gas pipelines, that's an issue I haven't been able to solve and get them in faster.

We do have two more lines coming in early 2021 going from the Permian Basin to the Gulf Coast, but we definitely need more gas lines and people committing to those gas lines. People don't really have to make it legal commitment of MVCs like Pioneer, so I know being on one of the big midstream companies on the board that they will work out relationships and agreements in regard to where you don't have to commit volumes but they still can take your gas.

But we just need to figure out a way to shut it down and it didn't start until 2012 when Horizontal really took off, and we just need to take it off, need to take the black eye off, especially going into the next election.

[Charles Meade, Johnson Rice]

Scott, thanks for those comments.

[Operator]

We will now take our next question from Scott Hanold with RBC Capital Markets.

[Scott Hanold, RBC Capital Markets]

Yes, thanks. Hi, good morning. Could you all provide a little bit more color on the Wolfcamp D in terms of what you'd like to kind of continue to see from it to make it competitive or maybe some context on how it competes for capital in some of the other core areas?

[Joey Hall, EVP of Permian Operations]

Yes, Scott, going back to what I said earlier. It is a big part of our plan going forward. But I think everybody's aware because Wolfcamp D is deeper, it is more expensive and it is little bit more challenging.

Whenever we executed these last 12 wells, there were several objectives. One was to try our completion optimization, which you can see was successful, but also intermingled in there are some spacing tests, we've done four different spacing configurations in different areas.

So it just takes time for those things to be understood. And make sure that whenever we are ready to execute, we fully understand the impact of spacing completion, optimization, and again, like I said, the cost side, we were always looking at opportunities to get the cost down.

So in essence because we have the luxury of time because of a large footprint and an ability to go and do the things that we know the best, we will just continue to optimize the solution for these and make them more and more competitive. Having said that, the Wolfcamp D wells are very strong and competitive with the rest of our portfolio, but we just want to make them better by understanding their performance.

[Scott Hanold, RBC Capital Markets]

Okay, and on the potential for maybe some improve well cost reductions, really is that just inexperienced? Or there other things that you all are trying right now to aid in that?

[Joey Hall, EVP of Permian Operations]

Specifically in the Wolfcamp D?

[Scott Hanold, RBC Capital Markets]

Yes, I’m sorry, specifically with the Wolfcamp D.

[Joey Hall, EVP of Permian Operations]

Yes, I don't think it's any secret that whenever you're stimulating these deeper, higher pressured wells, it is more challenging. So, it does cost more, but we've seen every time that we've executed these wells that we've learned something and gotten better. But now you want to make sure that whatever adjustments you made doesn't impact performance. So those two things go hand in hand.

So we have gradually gotten better at execution, but now we just seem to understand performance and tie those two things together.

[Scott Hanold, RBC Capital Markets]

Okay, understand. Okay and then on your LOE cost, I mean power was an issue in several areas during the summer because of hot weather, what are some of the things that you’re all looking at to mitigate some of that? And how much are you impacted by that generally speaking?

[Rich Dealy, EVP and CFO]

Definitely, Scott it impacted us during the quarter just because of the summer heat in July, August, particularly were higher. So it affects us on both the gas processing side where it takes electricity and then the field level. So, we look at that from time to time, look to hedge it, but for the most part, it's seasonal, and so we're past that time period and would expect to see them refer back to more normal rates as we move through the rest of this year.

[Scott Hanold, RBC Capital Markets]

Okay, thank you.

[Operator]

We'll take our next question from Brian Singer with Goldman Sachs.

[Brian Singer, Goldman Sachs]

Thank you. Good morning, on Slides 12 and 13, you highlighted 180 and 365 day well performance and the improvement in rates over time. Well some of these slides are making a relative point versus peers? How do you see the absolute well productivity moving when you think about your 2020 program, and what is the scope and drivers of potential further improvement?

[Joey Hall, EVP of Permian Operations]

I think whenever you look at the -- those lines, you can obviously see that there's closure year-over-year. So I think it's obvious that we're reaching a point in time where the opportunity to improve well performance is not what it was compared to two or three years ago.

So there's definitely a convergence there. From the perspective of continuing to improve that, we are still tweaking completion designs and cluster spacing, doing more science in regards to understanding the opportunity to reduce costs because at the end of the day, we're generating economics, not just trying to produce oil.

So we want to make sure that all the decisions that we make from a completion perspective, have a return. So we're looking at it from that perspective, as well. But like I said, looking at those curves, I don't think anybody expects that we're going to continue to see that kind of improvement year-over-year. It'll eventually flatten out until new technology, EOR or some other opportunity presents itself, all of which are things that Pioneer is looking into.

[Brian Singer, Goldman Sachs]

And do you think that barring the technology, technological improvement that the 2020 and 2021 are up relative to 1980s, that flattening is happening now for the company?

[Joey Hall, EVP of Permian Operations]

Yes, I think you’d see a continuing pattern like you do that the lines are just going to converge and you'll see it flattening. I think you said it best.

[Brian Singer, Goldman Sachs]

Great, thanks and then my follow-up, you talked earlier about the share repurchase dividends and some decisions that still need to be made in terms of the magnitude of all of that going forward beyond what's already been authorized. But I wondered what your long-term leverage targets/acceptability acceptable level is because as was mentioned earlier, you'll have some moving pieces with asset sales. But ultimately, what do you think is the right sustainable leverage?

[Rich Dealy, EVP and CFO]

Yes, we still have the same leverage target at the company. Debt to cash flow of 0.75, Brian. So there's no change to that.

[Brian Singer, Goldman Sachs]

Is it fair to say then it if asset sales or operational free cash flow push you in a $55 world below that, that there would be willingness to return more cash to shareholders to get up to the 0.75?

[Rich Dealy, EVP and CFO]

Say your scenario again?

[Brian Singer, Goldman Sachs]

If we're in a $55 world i.e. or whatever you would regard as mid-cycle and you leverage either via asset sales or because of operational normal free cash flow is below 0.75, would there be willingness to continue or to add to the return of capital program to get it to 0.75?

[Rich Dealy, EVP and CFO]

Well, we're going to look at primarily toward, what is our free cash flow and our free cash flow and I'm debating, I'm still traveling around, we're going to go out and see all of our long shareholders again early next year. But we're trying to determine a long-term strategy of what's best between share buybacks in regard to in addition to increasing the dividend, whether or not to go to variable dividend and balance sheet.

And like I said, share buybacks and how to distribute. And so I did mention at Barclays that we have roughly approximately over the next several years about $5 billion. And so we're trying to come up with the ideal plan to disperse that in regard to all three of those. Obviously, with two-thirds of that going toward shareholder friendly measures such as buybacks and dividends. And it's all related to what the oil price deck is. So I can't give any specifics in that regard, but that's how we're thinking.

[Brian Singer, Goldman Sachs]

Great, thank you.

[Operator]

We’ll now move to David Deckelbaum with Cowen.

[David Deckelbaum, Cowen and Company]

Thanks for moving to me. Just a couple of questions, guys, thank you for the time. Curious, wanting to ask around your firm transportation agreements that you have in place, getting some of that brand pricing, you had a huge uplift this year, you all had early mover advantage locking up some of that capacity. Scott what's your outlook now on how you view brand versus TI and Midland pricing? And is that an asset or contract that you might look to swap out of and release some capacity, if that arbitrage is there to perhaps bring in some cash, if there's willing participants on the other side?

[Scott Sheffield, President and CEO]

Yes, I'm going to let Rich is by expert, he knows far more about it than I do. So I'm going to let him answer this question.

[Rich Dealy, EVP and CFO]

Yes, good question, I would say that long-term we see the benefits of moving the oil to the Gulf Coast and being higher price markets by being exported. So I don't see a scenario at this point where trading out of those contracts would be the right thing to do.

In fact, we continue to look at our long-term trajectory and we need incremental capacity out three or four years or so. So I think something we will continue to assess. And I think if you look at the forward-curve, it’s roughly $5 to $6 between Brent and WTI and Midland trades at a premium WTI today, because of the pipeline's trying to get filled up with volumes.

But long-term, I think it'll still be an advantage to have our oil on the Gulf Coast where we can sell it either into the refinery market, or export it worldwide where we've been demonstrating that we get a price uplift. So I think we're going to continue with that philosophy.

[David Deckelbaum, Cowen and Company]

Appreciate the color on that. And then just my last one is, I guess one of the larger future big ticket items in terms of cash proceeds in the door could be something around the water handling or water sourcing. You have with City of Midland coming online at the end of 2020. You said a decision would be made around the same time, I guess. What sort of factors are you weighing the most right now because there is going to be a very low cost source of water there. How are you thinking about whether that would fit in your portfolio or not?

[Joey Hall, EVP of Permian Operations]

Meaning the City of Midland project specifically?

[David Deckelbaum, Cowen and Company]

Yes.

[Joey Hall, EVP of Permian Operations]

Yes, certainly, the fact that we entered into it and because it is such a large contract in excess of 200,000 barrels of water coming on late next year, the early the next. That's obviously a significant part of our plans going forward. And it is a very low cost source of water.

Having said that we are looking at our water system holistically and looking at opportunities to make sure that we leverage that to the best of our abilities and more specifically in our focuses on reducing our well cost. I mean, the purpose of that water system is to ensure execution. But we want to make sure that it continues to deliver value in the City of Midland project is a big part of that.

[David Deckelbaum, Cowen and Company]

Thank you guys.

[Operator]

We will now take our last question from Michael Hall with Heikkinen Energy Advisors.

[Michael Hall, Heikkinen Energy Advisors]

Thanks, good morning. Just wanted to, I guess, follow back up on the kind of some of the commentary around 2020 in capital and rigs. I think in response to Arun, you have confirmed the Street capital number seemed reasonable but just curious on the volume side if 15% is more what we ought to be targeting or something just shy of that, given the current environment heading into 2020?

[Scott Sheffield, President and CEO]

Yes, it's too early right now to focus on that. But long-term, we're still in that mid-teens growth rate.

[Michael Hall, Heikkinen Energy Advisors]

Okay, fair enough. And guess the other question I had was just on the cash flow side of things, just trying to kind of square with our model anyways, the cash balance at the end of the quarter was lower, which seemed to be a function of the kind of the CapEx on the statement of cash flows or the abbreviated statement of cash flows, relative to the $665 million of reported capital.

Is there something going on in that that'll reverse next quarter or kind of, can you help bridge the gap between the $895 on the abbreviated statement of cash flow versus the $665?

[Rich Dealy, EVP and CFO]

Yes, Michael, it’s just timing. I mean, as you can imagine, as we were slowing down activity that Joey talked about during the year, those bills came in during the third quarter and we paid them. They were accrued at the end of the second quarter. So you can see our payables did drop.

So it's really just timing, there's nothing and then you would expect that given the activity level for the third quarter that would come down to match that in the fourth quarter, so I think it's really just there's nothing of consequences other than just timing.

[Michael Hall, Heikkinen Energy Advisors]

Okay. Make sense. Pretty good, thank you.

[Rich Dealy, EVP and CFO]

Thanks.

[Scott Sheffield, President and CEO]

Yes, go ahead.

[Operator]

Go ahead, Mr. Sheffield.

[Scott Sheffield, President and CEO]

Okay, sorry. Again, I want to thank everyone for participating in this quarter. Looking forward to seeing everybody next quarter. Talk to you later. Bye-bye.

[Operator]

And once again, that does conclude today’s conference. We thank you all for your participation. You may now disconnect.