Gulfport Energy Corp

NYSE:GPOR

Earnings Call Transcript 2019-Q4

[Operator]

Greetings and welcome to the Gulfport Energy Corp’s Fourth Quarter 2019 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] As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Jessica Antle. Thank you. You may begin.

[Jessica Antle, Director-Investor Relations]

Thank you and good morning. Welcome to Gulfport Energy Corporation’s fourth quarter and full year 2019 Earnings Conference Call. I am Jessica Antle, Director of Investor Relations.

Speakers on today’s call include David Wood, Chief Executive Officer and President; and Quentin Hicks, Executive Vice President and Chief Financial Officer. In addition, with me today for the question-and-answer portion of the call is Donnie Moore, Executive Vice President and Chief Operating Officer.

I would like to remind everybody, that during this conference call, the participants may make certain forward-looking statements relating to the company’s financial condition, results of operations, plans, objectives, future performance and business. We caution you that the actual results could differ materially from those that are included in these forward-looking statements due to a variety of factors.

Information concerning these factors can be found in the company’s filings with the SEC. In addition, we may make reference to non-GAAP measures. Reconciliations to the comparable GAAP measures will be posted on our website. An updated Gulfport presentation was posted yesterday evening to our website, in conjunction with the earnings announcement. Please review at your leisure.

At this time, I would like to turn the call over to David Wood, CEO of Gulfport Energy.

[David Wood, Chief Executive Officer and President]

Thank you, Jessica. Welcome everyone and thank you all for joining us this morning. For the full year 2019, Gulfport reported $118.6 million of adjusted net income and generated $814.4 million of adjusted EBITDA.

In addition, despite the difficult pricing environment, Gulfport’s operating cash flow before the changes in working capital and inclusive of capitalized expenses, totaled $640.3 million and we reported free cash flow of $37.8 million in 2019.

Overall, I am pleased with our full year financial results and operational performance. Net of the previously announced sale of certain non-operated interests in the Utica, capital expenditures incurred in 2019 totaled $574 million. This total is in line with our 2019 guidance of $565 million to $600 million and approximately 25% lower than full year 2018.

Total production was roughly flat in 2019 versus 2018, and in line with guidance and expectations. Our ability to generate cash flow in 2019, despite a declining price environment, was attributable to our strong natural gas hedge book, and the dedication and focus of our operations teams, who work to optimize efficiencies and improve our cost structure throughout the year.

To underscore this, during the fourth quarter of 2019, our per unit operating expense including LOE, production taxes and midstream gathering and processing expense totaled $0.77 per Mcfe, which was 13% below the levels we saw in the fourth quarter of 2018. We continue to focus on ways to improve our cost structure across the business, which Quentin will discuss further in his comments.

On the strategic front, we delivered on our goal to simplify the portfolio through 2019 and completed several non-core asset sales throughout the year in a difficult environment, which generated cash proceeds of over $95 million. We were also able to retire approximately $190 million of senior debt at a $50 million discount during 2019, which improved both our leverage and cash flow profile.

Year-to-date in 2020, we have repurchased an additional $10.2 million in principal amount of unsecured senior notes for $6.9 million in cash. As we continue to evaluate potential uses of cash, we will remain disciplined in our allocation of capital, balancing maintaining a strong liquidity position, and enhancing value.

Touching on reserves, Gulfport’s year end 2019 proved reserves totaled approximately 4.5 Tcfe and what comprised of 89% natural gas and 11% liquids.

Lastly, we made numerous structural and personnel changes to improve the organization during 2019. We assembled our talented new management team, which we believe will serve the organization well in the future. We added Patrick Craine as Executive Vice President and General Counsel, who brings extensive legal, governance and compliance expertise to the organization.

We recently also named a new head of our Human Resources Group, and brought in a new Chief Information Officer. Finally, on the finance and accounting side, we recently hired an extremely qualified Controller for our accounting group, and a new assistant controller. These are in addition to bring in Quentin on board in August as our new CFO.

These key additions have substantially improved our organizational structure, processes and capabilities. We are building a team orientated culture here at Gulfport, and which all are working to achieve our shared strategic and financial priorities, and where transparency active communication and accountability are all fostered.

In addition, our ongoing Board refreshment process continues, to ensure shareholders are represented by fresh diverse voices, with strong expertise and qualifications at the Board level. We recently announced Valerie Jochen and Al Bledsoe who have joined our Board, and believe both Valerie and Al bring strong skillsets, capabilities and experience to our Board.

Following these two appointments in the past two months, Gulfport’s Board is now comprised of eight Directors, seven of whom are independent and five of whom have joined the Board in the last three years.

As we recently disclosed, David Houston, our Chairman has decided not to seek reelection at our next annual meeting. Gulfport has benefited from his many years of distinguished leadership on Gulfport’s Board and our employees and Board thank him for the many contributions he has made to Gulfport over the years.

Gulfport recently published our inaugural Corporate Sustainability Report, which you can find on our website. The report highlights the success we had last year in improving our company, as we responsibly developed our assets and illustrates our commitment to the highest standards of health, safety and environmental stewardship.

The report also highlights our efforts to improve the communities in which we operate, through volunteering charitable giving and other initiatives. We also recently adopted formal Corporate Governance guidelines and a board diversity policy, underscoring our commitment to ensuring sound Corporate Governance policies. These can also be found on our website.

In summary, Gulfport did a good job of controlling what was within our control, and managing things out of our control in the best way possible. We executed on our operational plan within budget, and generated positive free cash flow, despite a sharply declining commodity environment. Our focus on capital discipline and cash flow generation carries into 2020, which is setting up to be a challenging year for the entire energy sector.

On the macro front, due to natural gas supply growth over the past several years and unseasonably warm winter, we entered 2020 with natural gas prices at the lowest level seen in 20 years. Having said this, we firmly believe that low gas prices cure low gas prices. Producers are faced with ever declining access to capital, shrinking borrowing basis, and a steady drumbeat from investors to generate cash flow.

These factors should lead to a decline in U.S. supply in 2020, and the strong U.S. economy and continued demand growth, give me belief that there will be bright days ahead for gas prices and gas weighted companies such as Gulfport. Because we believe in a much higher gas price in the future, we are aggressively cutting our activity levels in 2020 to preserve our high quality inventory for a better day.

Simply put, this level of pricing is not sustainable and producers are slowing down, which we believe will result in the price recovery. We want to be poised to drill our high quality inventory when this recovery takes place, rather than turning to sales high rate gas wells at low prices.

Gulfport’s 2020 operational plan and financial outlook prioritizes free cash flow generation, which ensures we maintain our strong liquidity position. Accordingly, we are managing activity to align total capital expenditures within cash flow at strip.

During 2020, we plan to invest approximately $300 million across our core assets, which is half of what we spent in 2019. We forecast minimal reliance on our revolver to fund our operations throughout the year, which again allows us to maintain a strong liquidity position, and underscores our focus on capital discipline.

Turning to our specific core areas in the Utica; our 2020 program will be centered around the dry gas window of the play. We entered 2020 with two rigs running, and currently have one rig drilling ahead today. We plan to continue with one-rig program throughout the third quarter of 2020.

In the SCOOP, our 2020 program is focused on the liquids rich wet gas area of the Woodford, where we continue to see strong efficiency gains. When normalized to a 7,500 foot lateral, our fourth quarter of 2019 average spud to rig release was 40.7 days, an improvement of 36% from the 2018 program average, and we are continuing that momentum going into 2020. During 2020, we plan to run 1.5 rigs on average for the year and currently have two rigs drilling in the play today.

In summary, our 2020 budget is highlighted by a significant reduction in capital and our commitment to exercise capital discipline, maintain strong liquidity, generate free cash flow and remain intensely focused on further cost reductions and efficiency gains in this challenging commodity environment.

With that, I will turn the call over to Quentin for his comments.

[Quentin Hicks]

Thank you, Dave, and good morning everyone. As announced in our earnings release for 2020, Gulfport’s Board of Directors has approved a capital budget of $285 million to $310 million, which as Dave mentioned, we forecast we’ll generate free cash flow at current strip prices.

The 2020 budget includes $265 million to $285 million of capital expenditures related to drilling and completion activities and approximately $20 million to $25 million of capital expenditures associated with leasehold activities.

At this level of capital spend, we forecast our 2020 full-year average daily production to be 1.1 billion cubic feet to 1.15 billion cubic feet equivalent per day. While CapEx is down 50% year-over-year, we expect only a high-teens decline rate in production, when compared to the prior year.

Looking to the first quarter, due to the low level of activity during the fourth quarter of 2019 and our previously announced asset sales, we currently expect our first quarter production to average roughly 1.1 billion cubic feet equivalent per day. With regard to realizations before the effect of hedges and including transportation costs, we expect our realized natural gas price to range from $0.70 to $0.80 per Mcfe below NYMEX prices in 2020.

We are forecasting a wider differential versus 2019, due to our decision to reduce activity, which results in periods when our production falls below our firm transportation commitments. We hope to improve these realizations through midstream optimization efforts that are not reflecting these opportunities in our guidance.

In addition, we expect to realize 30% to 35% of WTI for natural gas liquids and $4.50 to $5 discount to WTI for oil for the full year 2020, which is in line with our fourth quarter 2019 differentials following the sale of our Southern Louisiana assets.

Our realized prices continue to be supported by our strong hedge position, and we currently have over 50% of our expected 2020 natural gas production hedged at $2.86 per MMBTU. We estimate our 2020 hedge book is worth approximately $180 million at current strip, maintaining a strong strategic hedging program is an important element to supporting the long-term economic development of our assets, and we continue to look for ways to layer in additional hedges to support our realizations and cash flows.

In terms of cash expenses, we estimate LOE to be in the range of $0.14 to $0.16 per Mcfe in 2020, slightly lower than the full year 2019 levels. We expect production taxes to be in the range of $0.05 to $0.07 per Mcfe a modest decline versus 2019, due to the lower pricing environment. Midstream gathering and processing is currently forecasted to be in the range of $0.55 to $0.60 per Mcfe, which is roughly consistent with 2019 levels.

To provide further clarity into our cash cost structure, we have changed our methodology for G&A guidance going forward, and are providing guidance as total recurring G&A, including both cash and capitalized portions.

For the full year 2020, we are forecasting G&A to total $69 million to $4 million. As previously disclosed in an effort to better align our cost structure in December of 2019, we completed a workforce reduction representing approximately 13% of our total headcount.

As we continue through this year, we will look for ways to further optimize our cost structure, and reduce our total G&A burden in this challenging commodity price environment. We are turning over every stone trying to improve our cost structure.

Moving onto the balance sheet, I want to reiterate our commitment to generating cash flow, with the focus on not materially drawing our revolver and maintaining a strong liquidity position. We believe maintaining adequate liquidity is highly important for us during this downturn.

It provides optionality to do things such as pursuing accretive PDP weighted acquisitions at good value, or execute discounted bond repurchases, among other things. It also keeps the banks in our bank group in a relatively constructive place, at a secured lever stays low through 2020, which is important, as we are looking toward our spring redetermination in the extension of our revolver, which we will pursue later this year.

The downside to us aggressively slowing activity, is that our leverage metrics will tick up over time due to low gas prices and lower production. However, we believe that we can manage this dynamic within our bank group, especially if our thesis of better gas prices in late 2020 and 2021 develops. We will continue to stay in line with our bank group, as we believe actively managing these relationships and being transparent about our strategy and plans, results in a better outcome for all involved.

We firmly believe that drilling through the trough, depleting our quality inventory, and exhausting our liquidity to manage total leverage and/or maintain production is the wrong strategic and financial decision.

Liquidity is king in a downturn like this, and acting as a good steward of capital by exercising capital discipline during a downturn is always a better answer than drilling ahead and hoping for a recovery in prices.

Before turning it over to Dave, I want to address the material weakness and related third quarter restatement that was in our filings yesterday. During the year end accounting review conducted by our new management team, including myself and our new controller and his staff, we identified an error related to the transfer of unevaluated leasehold costs to the full cost pool amortization base.

As a result, certain leasehold costs were excluded from quarterly DD&A calculations and full cost ceiling tests in prior periods. This is a legacy issue, but one that needs to be addressed. Based on this evaluation, we concluded that the error resulted from a material weakness in our internal controls over financial reporting, and we properly developed the plan to remediate this deficiency, which is discussed further in our Form 10-K.

As a result, we restated our third quarter 2019 Form 10-Q. We did not restate any other prior periods, as the third quarter of 2019 was the only period where this error had a material impact. The error does not impact our proved reserves, liquidity, covenant compliance or other key metrics that drive consensus expectations, including adjusted EBITDA and cash flow from operations.

With that, I will turn the call back over to Dave for his closing remarks.

[David Wood, Chief Executive Officer and President]

Thank you, Quentin. From my perspective, I feel very good with the organizational changes we have made over the past several months, adding several highly qualified and talented individuals in key roles within the accounting department. And I’m confident that the new leadership will improve our internal controls, process and procedures going forward.

These improvements, coupled with the key additions to the senior leadership team mentioned earlier, will result in a more effective and efficient company going forward.

Our new teams are always looking at all options to create value and improve our company, and when combined with our high-quality assets, we are positioned to build long-term value. While the low natural gas prices we see today are certainly a headwind for us and our peers, we firmly believe there will be better prices in the future. Our 2020 outlook and financial plan to substantially reduce capital spend, save inventory and maintain liquidity, ensures Gulfport is well positioned to enjoy the benefits of a commodity rebound as it occurs.

Looking to 2021, based on the supply and demand dynamics in the current market and in the previous mentioned items, we have the view that gas prices will rebound to more rational levels, as we move into next year. Considering this, as we plan for 2021, we look to carry forward our commitment to continuing capital discipline, targeting cash flow generation, and not focusing on production levels, but rather building our capital plan toward positive cash flow.

This concludes our prepared remarks. Thank you again for joining us for our call today, and we look forward to answering your questions. Operator, please open up the phone lines for questions from the participants?

[Operator]

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Neal Dingmann of SunTrust. Please go ahead.

[Neal Dingmann, SunTrust]

Good morning, David and team. My first question is on capital allocation. Just looking, you generate some nice free cash flow in fourth quarter and I’m just wondering if you’re able to keep cutting spending, as you mentioned, and driving the free cash flow. My question is, how do you prioritize allocation, especially when you look – given where some of your bonds and things are trading at that nature? Thank you.

[David Wood, Chief Executive Officer and President]

Yes. Thanks, Neil. Good morning. Stating the obvious, this is a pretty tough market for most in the business. For small mid cap gas producers, I’d say it’s particularly tough. As Quentin said in his in his prepared remarks really, liquidity, balance sheet strength are key for us. We have – the way I look at it, all options on the table. We do have an approved bond repurchase program. We look at that and we’ll continue to look at that.

In terms of capital allocation within the business, we clearly want to spend within cash flow. We took the position this year as the shoulder of winter change from what we were expecting and this thing called coronavirus starting to impact the demand side. We took the view that we should have a budget that was a combination of our hedge book and the strip. We actually think that the second half of the year will be better than strip, for supply fundamentals. But we took the conservative view to live within cash flow, and so that’s kind of what we’ve done.

As you know, when we spoke prior times I really wanted to get a more ratable spend in our capital program through the year. Unfortunately, the way that the external factors have moved, we’ve kind of had to give away with that. And Donnie and his team will have most of the capital spend before the middle of the year, so that’s kind of where we are. I was hoping to be a little more ratable between the two basins. But again we’re responding to whether the market is, but simple answer, keep all options open, keep flexibility here, keep liquidity are kind of keys for us.

[Neal Dingmann, SunTrust]

Okay, great. And then just my second question just on the slowdown activity, could you just talk about any potential holding acreage or just talk about leasing, if you would? Thank you.

[David Wood, Chief Executive Officer and President]

Yes, so good question. Have good core positions in our two basins. There is a small amount of dollars in the budget to keep some key leases. As you know in this game, longer laterals is better in your core areas. So there are some leases that we have, that help promote that, and so there’s a little bit of capital in there. But other than that, there’s no real attention on that at all.

[Neal Dingmann, SunTrust]

Great, thanks so much.

[David Wood, Chief Executive Officer and President]

Thanks, Neal.

[Operator]

Thank you. Our next question is coming from Holly Stewart of Scotia Howard Weil. Please go ahead.

[Holly Stewart, Scotia Howard Weil]

Good morning, gentlemen and Jessica.

[David Wood, Chief Executive Officer and President]

Hey, Holly.

[Holly Stewart, Scotia Howard Weil]

Dave, any color you can provide on the future cost reduction opportunities? I know you mentioned it, both in the release and in your presentation that quotes vendors and service providers as well as midstream counterparties?

[David Wood, Chief Executive Officer and President]

Yes. So, Holly, I think certainly given the market that we’re in, cost cutting is really important and Quentin and his new team are very-very focused on that and I would say that there is opportunities here. I think there’s opportunities to deal with our midstream providers as well. So for us, it’s another scrub through everything. How much, when you’ve got low levels of activity is a little bit tough, but we’re looking at everything to cut costs out of our business.

[Holly Stewart, Scotia Howard Weil]

Okay, great. And then maybe Quentin, could you provide the well cost assumption numbers that are in the 2020 guidance, for both the SCOOP and the Utica?

[Quentin Hicks]

Yes. Actually I think Donnie is better suited to answer that.

[Donnie Moore]

Hey, Holly. Good morning, this is Donnie. What we’re looking at for Utica, we are targeting, for drilling and completion, only about 770 to 870 per lateral foot, that kind of compares to the best wells we did last year of about 850 in the Utica, D&C only. SCOOP, I think as Dave mentioned in his prepared remarks, continue to see those days come down around 40 days now. SCOOP, we’re targeting around 1,200 to 1,300 per lateral foot. So the teams are very focused on that. As Dave said, we’re going to be out of capital spend here pretty shortly, so there’s not a lot left in front of us. We’re really focused now on LOE and things like that to drive our costs down.

[Holly Stewart, Scotia Howard Weil]

And Donnie, what was the 2019 SCOOP?

[Donnie Moore]

2019 SCOOP was about 12 – the best well in the SCOOP was $1,250 I believe it was. And our range now that we’re targeting is about $1,200 to $1,300.

[Holly Stewart, Scotia Howard Weil]

Okay, great. And then just maybe one more if I could on – from a macro standpoint. I know you guys didn’t or had a very front-end loaded program in the Utica last year, and it sounds like there is some unplanned downtime on gathering system out there as of late. But can you just maybe talk about what you’re seeing in the basin? It seems like production is off really materially over the last few months in the Utica?

[David Wood, Chief Executive Officer and President]

Yes. So if we look on the macro gas supply, I think around November time, we’re starting to come down and we were actually feeling pretty good on the supply demand balance occurring, until we got into this unusually warm shoulder to the winter season, and then the added complications of coronavirus. So I think on the supply side, we’re feeling pretty good. We were hoping to bolster our hedge book, based on what we thought was going to happen at the back half of the winter.

What we’re seeing now with other operators, including us cutting capital, is we are seeing several of the key basins, Permian excepted, where the number of drilling rigs and the number of dollars being spent is pretty close to maintenance of the low maintenance. So I would expect the trend of declining supply to continue. And as you know, if you’ve now got a well drilled by June, it’s not going to contribute to production in the year, it takes about six months on average for everybody to do this.

So I could see a situation, where the second half of the year is going to see a supply continuing to fall, and we’re likely to see price improvement. So whilst our budget doesn’t reflect that improvement, we believe that we could exit the year $2.60 plus in terms of gas price and I think that sets up 2021 being a lot better. So the macro, even with this first half of the year being an issue, I think is better situated. So we just decided to take the conservative view in both our Utica and SCOOP programs, and as Quentin highlighted, just very much focused on keeping liquidity and flexibility. So that’s what we see is, and that’s how we look at it.

[Holly Stewart, Scotia Howard Weil]

Great. Appreciate the comments.

[David Wood, Chief Executive Officer and President]

Thank you, Holly.

[Operator]

Thank you. Our next question is coming from Jason Wangler of Imperial Capital. Please go ahead.

[Jason Wangler, Imperial Capital]

Hey, good morning. Wanted to ask, you mentioned obviously about the, your differentials and having some firm transport commitments that maybe you guys won’t meet. Could you maybe talk about kind of the level of that? And then I think it kind of rolled into maybe something you were talking about with the – maybe buying some PDP assets, how that might be able to kind of help you out with that situation this year and going forward?

[David Wood, Chief Executive Officer and President]

Yes. Most of the shortfall is really in the SCOOP this year, and it’s not a huge amount in the Utica in particular. And there is a few months this year where we fall slightly below, the FT commitment, and in the SCOOP there is – most of the year, we’re going to be well below it. On a dollar basis, our differentials, our firm transport costs in the SCOOP are cheaper, than they are in the Utica, which is a good thing when we’re falling short in the SCOOP.

Your point on our A&D is well taken. We have seen opportunities in the SCOOP in particular, the Mid-Con, where transactions have happened at very, very low valuations. Things that would be balance sheet accretive to us, where we can use our balance sheet to buy things that could be financed, primarily with the revolver, and improve our leverage profile and also allow us to meet our FT commitments a little better. So that is something we look at. We wouldn’t comment on anything specific, but obviously when there is a downturn like this, is when you can create value by moving on opportunities to buy things very cheaply.

So it is something we’re looking at, but we’re always focused on maintaining a strong balance sheet. So anything we would do in regards to M&A or A&D would also be making sure, that it doesn’t impair or make our balance sheet any worse than it currently is.

[Jason Wangler, Imperial Capital]

Okay, I appreciate that. And maybe still for you Quentin, I think David mentioned that you guys have a basket for the bond repurchases, is there a number that you have handy at that level of what you guys can purchase at this time, or does that move around or how does that work?

[Quentin Hicks]

It’s always a balance, right. I mean, as I mentioned in the prepared remarks, maintaining strong liquidity gives us optionality and flexibility going forward, and in a depressed environment like this, borrowing your revolver in a material fashion is just not a smart thing to be doing. So we’re fortunate that we’re not drawing hardly at all right now and we’re not expecting to be drawn much on a revolver through the year, and that was one of the primary reasons we set our budget so low, which gives us optionality to look at things like PDP, discounted acquisitions and/or bond repurchases at deep discounts.

So I wouldn’t comment on any number, but we will continue to evaluate that, just as David mentioned earlier, it is an opportunity for us. We would weigh that with other opportunities, and what it does to our liquidity situation.

[Jason Wangler, Imperial Capital]

I appreciate it. Thank you.

[Operator]

Thank you. Our next question is coming from Jane Trotsenko of Stifel. Please go ahead.

[Jane Trotsenko, Stifel]

Good morning all and thanks for taking my questions. The first one is on 2021 plus, just trying to understand, conceptually how we should think about, call it medium term production outlook. Is there a point like, where Gulfport would need to maintain and grow EBITDA to maintain leverage metrics, and how FT portfolio plays into this equation?

[David Wood, Chief Executive Officer and President]

Yes, Jane. I think 2021 looks a long way away, right now, I would say that. I think as I would reiterate our macro comments, I think supply continuing to drop. I think we’re going to get a good look at storage levels, likely at the end of the year around mid-year. I think if those are at a range where prices move, I think it will set up 2021 quite nicely. We have a belief that 2021 pricing will be better on average than what 2020 is, and so part of the influence in taking these steps in our budget and activity for this year is anticipation of that.

And so, if you can see a to $2.65, $2.75 kind of number for next year, then 2021 will look somewhat like our activity levels in 2019, and not look like our levels in 2020. So 2020 looks like it’s a bridge between what took place in 2019, and what we see is potentially going to happen in 2021.

If the other thing happens and gas prices are where they are now in 2021, I think there’s a whole bunch of fundamental issues that will be present, rather than supply demand fundamentals. And I think we have to evaluate that much closer to understanding what those were. So that’s the way I’d look at it.

[Jane Trotsenko, Stifel]

Okay, thank you so much. And then the second question is on the revolver and the upcoming redetermination season. What’s your current expectations for the revolver and redetermination season?

[Quentin Hicks]

Yes, we’ve been very active in our dialog with our lead banks in our revolver group, as we’ve gone through this budget review and kind of thought process. And it’s pretty clear to me as a gas weighted company that the price deck is – price decks are coming down significantly from where they were in the fall and there is going to be a lot more stress on a lot of companies, as it relates to borrowing bases in the spring redetermination, especially gas weighted companies.

Again, we are likely drawn. We – so if there is a reduction in our borrowing base or commitment level, it won’t be anything that has any kind of a material impact on our liquidity. It will impact it, I guess, but since we’re lightly drawn, it doesn’t have a – it doesn’t really hurt us as much as it would someone else who might be 50% or 60% or 70% drawn on the revolver.

So this is one of the key things that we’re focused on and why our budget is structured as it is. So we don’t need to rely on the revolver, because the banks are skittish right now, especially with gas-weighted and small cap names. And we want to make sure that we’re in a comfortable position as it relates to our borrowings under our revolver in this downturn.

[Jane Trotsenko, Stifel]

Got it. Thank you so much.

[David Wood, Chief Executive Officer and President]

Thank you, Jane.

[Operator]

Thank you. Our final question today is coming from Dun McIntosh of Johnson Rice. Please go ahead.

[Dun McIntosh, Johnson Rice]

Good morning, David. Maybe for you or Quentin. On Slide 4, you talk about how you expect to generate free cash, but have minimal reliance on the revolver for the 2020 activity. Just wondering if you could kind of help me understand that. When you are stating that minimal reliance, are you referring to kind of the $120 million that you already have drawn, or do you think you will have to draw a little bit at some point. Just trying to kind of figure these statements out?

[Quentin Hicks]

Yes, Dun. Our program as was mentioned earlier is very front-half loaded. So we will draw the revolver some through June timeframe, and in the second half of the year, we will pay it down and if our thesis of higher gas prices in the second half of the year sets up to be true, we’ll pay down more than what we’re currently projecting under strip. But under our strip scenario through the year, we’re roughly neutral to slightly positive cash flow. We won’t have any material drawn on the revolver by the end of the year. We’ll have about similar to what we had at the end of 2019. We’re projecting to have similar amounts drawn at the end of 2020, absent recovery in prices. If recovery in prices happens, it will be less drawn.

[Dun McIntosh, Johnson Rice]

Okay, thanks. That helps a lot. And then – most of my questions have been asked already. Thank you.

[Quentin Hicks]

Thanks, Dun. Appreciate it.

[Operator]

Thank you. At this time, I would like to turn the floor back over to Mr. Wood for closing comments.

[David Wood, Chief Executive Officer and President]

Operator, thank you. We appreciate everyone’s time today, and should you have any questions, please do not hesitate to reach out to our Investor Relations Group. This concludes our call. Thank you.

[Operator]

Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines or log off the webcast at this time, and have a wonderful day.