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Concho Resources Inc  (NYSE:CXO)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2018 Concho Resources Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Ms. Megan Hays. Ma'am you may begin.

Megan Hays -- Vice President of Investor Relations and Public Affairs

Thank you. Good morning and welcome to Concho's third quarter 2018 earnings call. Our earnings release and corporate presentation are available on our website and we plan to file our quarterly report on Form 10-Q today after market close.

Participants on today's call will make forward-looking statements based on current expectations this morning. Also some of our comments may reference non-GAAP financial measures. Forward-looking statement and other disclaimers as well as reconciliations to the nearest corresponding GAAP metrics are in our earnings release and corporate presentation.

I'm joined this morning in Midland by Tim Leach, Chairman and CEO; Jack Harper, President and CFO; Will Giraud, Executive Vice President and Members of the Concho Senior Management Team. Following their prepared remarks, we will take your questions.

Now let me turn the call over to Tim.

Tim Leach -- Chairman and Chief Executive Officer

Thanks, Megan. Good morning. Well the Permian continues to be as busy as ever. November oil production is forecasted to be 3.5 million barrels a day, up 26% year-over-year and accounting for 60% of the total US production growth this year.

Cost have started to stabilize as the industry awaits new long-haul pipe capacity before increasing activity. The basin continues to have the largest US rig count at 490 rigs, but rig additions have slowed. At the same time the drilled uncompleted backlog has reached new highs and will likely be a catalyst for activity once the new pipeline projects are completed.

The Midland discount to Cushing's WTI has narrowed, its capacity may come online sooner than previously expected. The futures curve indicates that Midland barrels will be priced at a premium WTI in 2020 and beyond. The dynamic backdrop reinforces the advantage of scale running a big stable program and being headquartered in the middle of the action.

Third quarter was another strong quarter for Concho. Results include partial quarter contribution from the RSP acquisition as a result we won't go through the normal comparisons against prior periods as they won't be especially meaningful.

This was a busy quarter. We made investments of approximately $760 million in our high return inventory and once again fully funded our drilling program within cash flow. Production for the quarter was 287,000 BOEs per day, exceeding the high end of our guidance range.

Additionally, the RSP transaction was completed in July and the teams are now fully integrated. We started transitioning the development of these assets to large scale manufacturing mode in line with the rest of our portfolio. We've previously discussed the significant advantages created by the efficiencies and growth we can achieve through these large-scale projects.

Jack will provide more color on this shortly, but the shift in our capital program for next year demonstrates our focus on bringing more large-scale development across our portfolio, including the RSP acreage. Over the past several years, we've effectively managed our business to best position Concho for future cycles, fuel long-term growth and consistently expand returns to shareholders.

This focus is included growing oil production within cash flow, optimizing the development of our resource, reducing our cost structure, and strengthening our asset base with acquisitions, divestitures and trades. All of this has led to a compelling outlook for free cash flow generation and strong oil growth.

There is growth for the sake of growth and then there is value driven growth. We believe we've delivered value driven growth over the past decade. Over that period our business model was to estimate our cash flow and determine our investment level with production growth as an output. In recent quarters, we've guided you to the evolution of this model.

We said that the new model was on the horizon for Concho and our industry. RSP accelerates it. We're well positioned to deliver on a model that provides competitive oil growth, a dividend to our shareholders and free cash flow, and with the free cash flow we'll have the flexibility to make additional returns to shareholders, reinforce our balance sheet and play offense.

Consistent with this framework, we plan to proceed with disciplined growth of our capital program, easing into larger programs to optimize the reinvestment rate on our assets and maximize corporate returns, all while generating significant free cash flow.

For 2019, the capital outlook is a range of $3.4 billion to $3.6 billion. We used $55 to $60 oil as a starting point to plan activity based on our view that we expect more volatility, not less in oil prices. We think it's better for our people, our partners on the service side, and the efficiency of our program to be a steady ship. Planning in this range allows us to prudently step up our capital spend, deliver efficient oil growth, provide shareholders a return of capital and have free cash flow upside.

As part of this plan we'll make significant progress in moving RSP's assets to large-scale development because this is the most efficient way to deploy capital and that creates the greatest value for our shareholders. And I believe the plan positions the company to deliver significant oil growth in '19 while setting up an even stronger 2020 for Concho. Further, our financial strength and outlook for free cash flow drives our plans to initiate a regular quarterly dividend beginning in the first quarter of 2019.

The indicated annual rate is $0.50 per share and it signals our confidence in the outlook of our business and the strength of our machine today and confidence in our outlook for us to return additional free cash flow to shareholders as an increasingly meaningful part of our overall investment thesis over the long-term.

Now I'll turn the call over to Jack to discuss the quarter in more detail.

Jack Harper -- President and Chief Financial Officer

Thank you, Tim. Third quarter results highlight our ability to deliver profitable growth, while not only integrating the largest acquisition in our history, but also navigating regional headwinds like the Midland-Cushing differential.

Operationally, we are extremely pleased with the execution and efficiency we delivered in the quarter. Production totaled 287,000 BOEs per day and oil production averaged 185,000 barrels per day. Controllable cash cost also look good, and we continue to demonstrate the momentum of our business with solid earnings and cash flow generation.

In the third quarter adjusted net income per share was $1.42 and EBITDAX was $829 million. As Tim highlighted our capital spending excluding acquisitions was fully funded by our cash flow. This is the 12th quarter out of the past 13 quarters where our cash flow exceeded our drilling and completion capital, generating approximately $630 million in free cash flow over this period. Most of that free cash flow was used to reduce debt and as a result our balance sheet and leverage ratio are strong following the RSP acquisition. We discussed the liability management actions we took regarding RSP's debt last quarter, which reduced annual interest expense by $15 million.

At the end of the quarter our annualized leverage ratio was 1.2 times. It wasn't too long ago that we described an inflection point in our business as we leaned into resource optimization. At that time, the emerging trend was multi-well pad projects and we predicted that a time would come when we would spend most of our capital budget on projects.

On slide nine, we illustrate the three key levers for 2019 development program. First, approximately 80% of capital will be allocated to large-scale projects, up from two-thirds of our capital in 2018. And we're quickly advancing RSP's assets to manufacturing mode, 70% of the activity on RSP acreage will be projects up from 25% in 2018.

Second, we continue to capture efficiencies through longer laterals. Last year, our program averaged 8,000 feet, but our portfolio of high grading efforts and asset swaps are enabling us to push beyond that especially New Mexico. Our average lateral length for the entire program will increase 20% next year to 9700 feet.

And third, we plan to run approximately 34 rigs and expect to drill more than 400 wells over the course of the year with the activity roughly even between the first and second half of '19. We currently forecast that more wells will be put on production in the second half of '19. And as a result, we expect strong 2019 exit rate with fourth quarter 2019 oil production expected to be 25% higher than the fourth quarter of 2018. This is significant as the fourth quarter of '18 will include a full quarter of RSP activity.

To summarize, in 2019 we plan to allocate more capital to large-scale, long lateral development than ever before. And the results in our production cash flow and corporate returns is significant. And the key measure for gauging our success will be free cash flow, return on capital employed, and production growth per debt adjusted share. These metrics better define how we're thinking about the next stage of our business. Disciplined high margin oil growth and capital returns to shareholders.

I'm proud of our performance and the team behind the results. In addition to closing and integrating RSP, the team has delivered some of the best performance in the company's history. They are the reason Concho continues to drive growth and value for our shareholders and they're all focused on continuing our momentum.

With that we'll open it up to your questions.

Questions and Answers:

Operator

Thank you. (Operator Instruction). And our first question comes from John Freeman from Raymond James. Your line is open.

John Freeman -- Raymond James -- Analyst

Good morning, guys.

Tim Leach -- Chairman and Chief Executive Officer

Good morning, John.

John Freeman -- Raymond James -- Analyst

First question I've got kind of follow-up on Jack said especially on the lateral lengths big step up of 20% increase in the average lateral in '19 versus '18 and obviously your '19 CapEx budget would include that incremental costs. But in terms of the production guidance for '19 should we assume that it's still based on kind of what the wells are doing on the '18 program or is it including some uplift from the longer laterals?

Jack Harper -- President and Chief Financial Officer

Sure. We'll set in another way, I think, you're asking , does it embed some greater efficiencies then we're seeing in '18 and the answer is no. The efficiency is in the more large projects in more longer lateral development, which in and of itself is a more efficient way to go about our business. So, in that respect, yes.

John Freeman -- Raymond James -- Analyst

Okay. And then just the follow-up I've got on the, looking at this kind of the evolution of the model in this -- the 2019-2020 outlook, impressive growth in ROCE, very impressive out in 2020. And I guess I'm just thinking about when you all think about the free cash flow. However, you all want to characterize it, in terms of, on an absolute basis or like a free cash flow yield. How we should sort of think about the balance of that free cash flow in terms of dividend growth versus as you all kind of phrase it on slide seven portfolio enhancement because obviously the balance sheets already in good shape. Just sort of how you all are thinking about that?

Tim Leach -- Chairman and Chief Executive Officer

John, I think, that as we think about the company going out into the future being able to grow our oil production, deliver capital returns to shareholders and do all that efficiently. I mean that's the new business model. So the -- how do you, what do you do with the additional free cash flow that comes in. We kind of outlined the options that will be in front of the company in terms of returning more cash to shareholders and different forms whether it's a special dividends or stock buybacks or increasing the existing dividend you have all those options in front of you, but also strengthening your balance sheet, and continuing to play offense on the buying, selling and trading in and around our big core blocks of assets, all those things are in front of us, and I think you'll see us do a little bit of all that.

John Freeman -- Raymond James -- Analyst

Sounds good. Thanks, Tim. Good job, guys.

Tim Leach -- Chairman and Chief Executive Officer

All right. Thank you.

Operator

Thank you. Our next question comes from Scott Hanold from RBC Capital. Your line is open.

Scott Hanold -- RBC Capital -- Analyst

Thanks. Good morning.

Tim Leach -- Chairman and Chief Executive Officer

Good morning.

Jack Harper -- President and Chief Financial Officer

Good morning.

Scott Hanold -- RBC Capital -- Analyst

Just to follow up a little bit on that last question. When you look at the dividend, can you talk about like your thoughts and the strategy and more specifically obviously being -- one thing not in your control is commodity prices. So, is there a point where you mentioned special dividends, but is -- are you always going to be careful not to put it too much of a high recurring dividend in place just because of that volatility aspect?

Tim Leach -- Chairman and Chief Executive Officer

Yeah, I think, that as we've discussed in the past, we're in a business not only have we just discovered one of the largest reserves of oil in the world and that we are working on optimizing how to develop that, that's kind of job number one, but then describing to our shareholders, how they're going to profit from all this is really a big part of our business. So, we still have all the things we talked about in the past. We have a volatile commodities to deal with. We have the run-off rate of our PDP and all that to manage, but the outlook is so positive that we thought now that sending the signal that we see growing free cash flow over time, this was the best time to initiate that and, yeah, we have always valued flexibility, and not locking this into anything that damages the company over the long-term. We think what we're doing now is very sustainable and well within the bounds of what we see going on into the future.

Scott Hanold -- RBC Capital -- Analyst

Okay, thanks for that. And as a follow-up question, in your outlook for 2019 to 2020, the thing that stood out to me was that, how the oil cuts increase over time and it appears to be, and correct me if I'm wrong, but it goes up into the upper 60% range. And could you talk about what really is your causes that transition, is it more focused on some of the RSP assets would typically are much -- or is there some gas flaring there that impacts as well?

Will Giraud -- Executive Vice President

Hey, Scott, it's Will. It's really more of the former, it's a result of the allocation of capital to our assets, allocation to things that have higher oil cuts and then also allocation to more of the RSP assets, which typically have a higher oil cut as well.

Scott Hanold -- RBC Capital -- Analyst

Okay. That's what I thought. Appreciate it. Thanks.

Tim Leach -- Chairman and Chief Executive Officer

Thanks, Scott.

Operator

Thank you. Our next question comes from Bob Morris from Citi. Your line is open. Please check your line is not on mute. And we'll take our next question from Leo Mariani from National Alliance Securities. Your line is open.

Leo Mariani -- National Alliance Securities -- Analyst

Hey, guys. Just wanted to follow-up a little bit on the comments around the CapEx budget. You guys talked about sort of a conservative price deck of 55 to 60 for 2019 I'm assuming that's WTI Cushing price then you obviously have the range of $3.4 billion to $3.6 billion. Just wanted to get a sense of how you guys might proceed, if we did see further upside in the oil price where maybe we averaged something closer to the mid-60's to '70s would you guys potentially elect to ratchet it up that budget and obviously you've got the dividend now and you talked about buybacks. Just wanted to get a sense of how you would sort of manage that?

Tim Leach -- Chairman and Chief Executive Officer

Yeah, I've used a few key metaphors in my prepared remarks and a steady ship is one of them and as we plan these larger programs, been a steady shift is what helps you create the highest efficiency. So, I think, that if we see a higher oil price, which quite frankly we are kind of planning for that, that was the cash flow upside that we see in '19. So, I guess, the answer is no. We wouldn't plan on changing our capital program based on near-term fluctuations in oil price.

Leo Mariani -- National Alliance Securities -- Analyst

Okay. So then I guess uses of incremental cash flow, if those were to come to like here in '19, is that more for some of the things you mentioned such as special dividend and buyback, is that more where that would be directed?

Tim Leach -- Chairman and Chief Executive Officer

Exactly.

Leo Mariani -- National Alliance Securities -- Analyst

Okay, that's helpful. And I guess just wanted to get a better sense of how the RSP acquisition is going on the integration side. I'm sure there's going to be further synergies and benefits that over time. Can you maybe just kind of talk about how that process is going kind of where you're at in the process is still sort of early days? Do you expect to see more cost kind of knocked out as it work our way into next year. What can you tell us about that?

Will Giraud -- Executive Vice President

Sure. Leo, it's Will again, I think, the RSP integration is going great. The team has done a really good job. I think the results you see for the company this quarter reflect that, that we integrated the biggest asset and group of people we ever have kind of kept on chugging, and so everyone has done a great job. I think that the strength of this '19 and '20 capital programs we put out reflect the integration of those assets and the strength of the combination.

Leo Mariani -- National Alliance Securities -- Analyst

All right. Thanks very much.

Tim Leach -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Drew Venker from Morgan Stanley. Your line is open.

Drew Venker -- Morgan Stanley -- Analyst

Good morning, everyone. Thank you for all the color. I think it's a useful positioning of a new strategy. I'm thinking now partly about consolidation because the depressed valuation across Wall Street, but also think you are in a stronger position now from a cash flow standpoint and you guys have highlighted portfolio enhancement is one of the prongs for uses of free cash flow. So, can you just talk about how you might approach those for financing, if you have any appetite for even bolt-ons? But I guess also if bigger acquisitions or do you have any interest given the right circumstances, how that might be funded?

Tim Leach -- Chairman and Chief Executive Officer

I think the most important points on that question are to emphasize we got the acquisition, we were looking for in the RSP transaction. So, we got a very large swath of very blocky acreage all in the right spots. So, that really accomplished a lot of goals as far as asset enhancement and then but we talk about a lot of blocking up buying selling and trading and you can see the result of that in these longer laterals that we've been able to announce this year. Our asset base is more in line with this more efficient development. That's really, really important. And so going forward activity that you'll see from us will continue to be the blocking up. But that's typically kind of a you sell some assets, you buy some assets, and you trade some assets, it's not really a huge call on capital. And so I think that's the way to think about it going forward.

Drew Venker -- Morgan Stanley -- Analyst

That's all from me. Thanks, Tim.

Tim Leach -- Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from Doug Leggate from Bank of America Merrill Lynch. Your line is open.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Thanks. Good morning, everybody. Tim, I hate to hark on the cash flow and CapEx question, but I just wonder if I could touch on a slightly different way. Obviously, when you think about inflation and operational capability and maintaining efficiency with the rig additions that you've laid out for the next year or two. Is there a kind of upside limit that you see to where you would want to spend within as it relates to the oil price to avoid unintended consequences on efficiencies or costs or something like that?

Tim Leach -- Chairman and Chief Executive Officer

Okay. I think that's a really important question. I'm glad you asked that and I think what you're asking about is how do you find the most efficient capital reinvestment rate on these assets. And clearly the more work we do on that, there is a way to develop these things that optimizes returns that optimizes recoveries and minimizes the effects of wells on the edge or parent child relationship was there is a way to do that correctly. And I think we've made great strides in the '19 capital programs, '18 capital program and the way we've configured our assets. So, I mentioned in my comments that we were kind of easing toward that optimal, trying to find that optimal rate of reinvesting capital in this set of assets, and I think there is a range. It may not be associated with our operational capabilities of how much capital can you go. How many wells can you frac? How many wells can you drill? I think it's more driven by the kind of assets we have and that's really a key driver in capital allocation as well.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

I know it's not an easy question to answer. So, appreciate you, let me have another go at it. My follow-up is hopefully a quick one is kind of related, I guess, and this wraps together the post few months of having RSP under your belt now. I'm just wondering how you're feeling about the synergy targets that you laid out. And if I can layer into that. Is there -- when you talk about potentially using cash for bolt-ons to enhance your portfolio is there another side to that as well, which is maybe letting some of the non-core acreage go, but just wondering if you could give a general roundup on this too?

Tim Leach -- Chairman and Chief Executive Officer

I think we're ahead of schedule. The whole value creation proposition on RSP was converting these assets to the kind of operational development that we do it well as a company, and we're ahead of schedule on that. And so we're feeling very confident and very pleased with the pace of the RSP integration into our system. So, the value creation that we estimated when we acquired RSP, I think, is ahead of our expectations, and so we feel very good about that. We've already demonstrated that we will sell assets that aren't strategic to this program going forward. We've sold several groups of outlier assets in our portfolio. Anything this kind of sitting out by itself, if it can't be traded or if it can be blocked up with something else is a candidate for rationalization.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Appreciate the answers, Tim. Thank you.

Tim Leach -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Neal Dingmann from SunTrust. Your line is open.

Neal Dingmann -- SunTrust -- Analyst

Good morning, Tim and Jack. Well, Tim, I really like that slide you have in 12 where you really now just sort of throw out there, and I saw the large-scale projects now in progress, but ahead. Guess my question on that is, when I look at some of these future ones, let's just use the Taylor one that you have on there, particularly, in the Del. Could you talk a bit about, are you going to go after, would you try to do a little more some of the deeper basins that you haven't explored quite as much? Just trying to get a sense on, I guess, kind of what you inject or saying about the efficiencies you're seeing on these large projects. But I'm just trying to figure out, does that include a little bit of delineation around in these projects as well as kind of go after some additional zones.

Will Giraud -- Executive Vice President

Sure. Neal, it's Will. This slide back here is really meant to continue the conversation we introduced last quarter about how we're doing these large-scale projects kind of all over the asset base and give you -- get as a sense of timing. So, this, I think, it's just a update of those projects we announced last quarter. Speaking specifically to the Taylor or maybe more broadly to all of these, we are definitely continuing to test additional zones, continuing to test spacing the Taylor is really designed to test different benches of the wolfcamp specifically. But there is still a fair amount of delineation and even discovery work to be done on our assets in the Permian. So, it's interesting we've talked about moving to large-scale transition, but we will take typically sneak an extra well or so into those projects, if we can to test a new concept.

Neal Dingmann -- SunTrust -- Analyst

It makes lot of sense. And then lastly, Tim, on your prepared remarks and certainly in some of your comments earlier doesn't sound like you're too concerned about upcoming service cost kind of sounds like maybe perhaps still stay in line. I know I've asked you about this in the past, would you think about, I know, I've talked to some others that are locking in some rigs on a bit longer-term contracts, people seem to be little more concerned maybe on rig inflation and they are on fracs here in the, let's call, for 2019. Could you all maybe just address the drilling or completion side. Any concerns you might have there?

Tim Leach -- Chairman and Chief Executive Officer

No, I think, the drilling side of our business is one of the best parts of our business, and I think the way we have approached that in the past will continue. I mean you can see that it doesn't require that much of a growth in rigs to accomplish all the future not just for '19 and '20, but beyond. So, by drilling longer laterals and spacing, we're using the efficiency and all that you can get a whole lot more done and we do have rigs that now we are on six-month contracts or one-year contracts, but we do have kind of a portfolio approach on that, but I don't think you should expect us to any change in strategy based on what we're seeing today. Yes, we have any kind of estimates of future cost increases or anything like that are all baked into our plan and we feel very comfortable with it.

Neal Dingmann -- SunTrust -- Analyst

Great details. Thanks, guys.

Tim Leach -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Derrick Whitfield from Stifel. Your line is open.

Derrick Whitfield -- Stifel -- Analyst

Thanks. Good morning all.

Jack Harper -- President and Chief Financial Officer

Good morning.

Derrick Whitfield -- Stifel -- Analyst

Tim or Jack regarding your 2019 and 2020 outlook. Are there any outsized infrastructure investments in 2019 or 2020 that would invalidate the crude mass of assuming approximately $100 million for operating rig line in 2020?

Jack Harper -- President and Chief Financial Officer

No, the infrastructure part of our budget is going to be in the same percentage range that it has always been somewhere in that 6% to 10% of the capital typically. And so, no, it shouldn't impact the way we've allocated in the past.

Derrick Whitfield -- Stifel -- Analyst

Got it. And perhaps for Will with the understanding that you guys are still in the relatively early stages of large-scale development. Are there any generalization you can make regarding efficiencies gain or challenges experience. I know that you guys recently talked about sequencing and timing in your Barclays presentation?

Will Giraud -- Executive Vice President

Sure, I mean, we continue to experiment with different completion designs, timing, spacing, there's still a lot of learning to be done there. But, I mean, early benefits, I think, you see it in '19 and '20 program and you see it in the confidence of making these average project size is bigger over time. We like what we're seeing, we like the benefits we get of efficiency with our vendors of concentrating the much activity in one spot and we like the results we're getting at them. So, more to come.

Derrick Whitfield -- Stifel -- Analyst

Great. Thanks for taking my questions.

Will Giraud -- Executive Vice President

Thank you.

Tim Leach -- Chairman and Chief Executive Officer

Thanks, Derrick.

Operator

Thank you. And our next question comes from Charles Meade from Johnson Rice. Your line is open.

Charles Meade -- Johnson Rice -- Analyst

Good morning, Tim, to you and your team there. I want to kind of take another run at that theme that Derrick had on his last question. So as you guys are transitioning to these larger-scale pads. Are there -- the efficiencies, I think, you guys have done a good job of explaining and I think the markets on top of that, but are there any challenges that are emerging either the ones that you anticipated or the ones that you didn't anticipate that could lead to some non-obvious outcomes either in your CapEx profile quarter-over-quarter or your production ramp?

Jack Harper -- President and Chief Financial Officer

Sure. These large-scale projects, they really emphasize planning, and planning ahead and our team has done a good job of that. I think we are out in front out here in the industry on this. So, yes, there are midstream considerations, there's water delivery, there's water disposal, there's a lot of considerations, but which typically can require up to a year of planning and again our team has done a great job in managing that. And so while there are challenges, we're up to it, and that is why we're increasing the percentage of capital toward these kind of projects.

Tim Leach -- Chairman and Chief Executive Officer

I do think I would add to that, that one of the results of this style of development is, you can't really take a 12-month time slice and compare capital invested and results of that capital without looking at longer periods of time, and that's one of the reasons, I think, we just kind of introduced now talking about two years and a lot of the results from our '19 capital investment you're going to see in '20 and beyond. And so, I think, that's going to be a trend that you see going forward is just bigger time slices on these bigger projects.

Charles Meade -- Johnson Rice -- Analyst

That makes sense, Tim. I appreciate that. And then again going looking at that the 2020 CapEx piece and again Derrick asked this one way, I'll try to ask it another. If we just you gave a rig, average rig, running rigs in '19 and '20. If we just said, if we just took that ratio and applied it to your '19 capital budget what will we be missing, if we, if you just use that simple math?

Jack Harper -- President and Chief Financial Officer

That's a good starting point. A lot of things will happen between now and next year this time when we roll out of capital budget. So, really the main items would just be the state of the industry and the state of activity out here. But, as a basis, that's a good starting point.

Charles Meade -- Johnson Rice -- Analyst

I appreciate the color. Thank you.

Jack Harper -- President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Jeanine Wai from Barclays. Your line is open.

Jeanine Wai -- Barclays -- Analyst

Hi, good morning, everyone.

Tim Leach -- Chairman and Chief Executive Officer

Good morning.

Jack Harper -- President and Chief Financial Officer

Good morning.

Jeanine Wai -- Barclays -- Analyst

In terms of the forward plan and just following up on some of your comments and some of the prior questions. You're forecasting free cash flow in 2019 and 2020 and you mentioned a few times Concho being more of a steady ship and not changing activity in terms of relation to oil prices, and that makes sense on the upside, but can we just discuss a little bit about the downside. So, for example, if oil prices or service costs or whatever else move against you. You're prioritizing preserving whatever amount of free cash flow you've committed to, at that $55 to $60 WTI level or do you instead maintain activity and then let kind of the free cash flow float and the floor is just really staying within cash flow including the dividend.

Jack Harper -- President and Chief Financial Officer

Well, I think, just going back over the last 10 or 11 years as a public company, you've seen the way we behave. We've been through a lot of ups and downs with commodity price and capital cost. And so, I think, you would see us behave in a similar kind of disciplined and prudent way. Clearly, our dividend is the priority. And so if the consequence of lower price is lower production growth over a year or two, that's fine.

Jeanine Wai -- Barclays -- Analyst

Okay. And are you able to ballpark how much free cash flow you're forecasting in '19 and '20 at your price deck?

Jack Harper -- President and Chief Financial Officer

Yes, we can.

Jeanine Wai -- Barclays -- Analyst

Okay, great. Keep us guessing. Thanks very much.

Operator

Thank you. Our next question comes from Michael Hall from Heikkinen Energy. Your line is open.

Michael Hall -- Heikkinen Energy -- Analyst

Thanks. I appreciate the time. Yeah, there continues to be a lot of discussion about impacts the bounded, the first unbounded well productivity on these pads in the Permian. What are you guys seeing on that front? And how are you contemplating that parent child relationships in the plan you've laid out and what -- how might that evolve as you think about moving more and more to these larger scale projects?

Jack Harper -- President and Chief Financial Officer

Sure. Big driver on go into these large scale projects are when we think maximizing the resource by minimizing the impact of the parent child effect and then also getting the benefits on the capital side from efficiency. So, those are kind of the two big drivers behind going to project development. As it relates to kind of what we're seeing compared to what we're expecting, we have built our type curves and our internal modeling based upon the results we've seen here. So, I think, everything we've seen has been consistent with what we were expecting, and baked into that outlook that's we've talked about for '19 and '20.

Michael Hall -- Heikkinen Energy -- Analyst

Okay. And do you have a kind of estimate of kind of how you think about or how you did -- how you are programming in the relationship between single-well pad development versus multi-well pad development that parent child relationship?

Jack Harper -- President and Chief Financial Officer

Yes, we definitely baked that into all of our players that are forecasted.

Michael Hall -- Heikkinen Energy -- Analyst

And is there something that you would be willing to share?

Tim Leach -- Chairman and Chief Executive Officer

It's different by zone and different by area and it's extremely complicated and we're developing a program to minimize it. I'm not sure that any company and any location can completely eliminate that because you always have edges of your leases and things like that, but I think with our asset base in the big blocky nature of our assets and the way we're prosecuting our development program, we are in the best position to kind of minimize that effect and we think we have it estimated very well.

Michael Hall -- Heikkinen Energy -- Analyst

Okay, that's helpful. It makes sense. And then I guess it's kind of been hitting on some level, but just want to kind of revisit the just in terms of the planning process and as you thought about the 2019, 2020 program. How did you approach optimizing growth relative to the free cash flow and kind of what are the key metrics and arriving at that optimization for the current plan?

Tim Leach -- Chairman and Chief Executive Officer

Well, I mean, I think it was a combination of several things. We talked about early on with our shareholders about being careful about planning, so that our plan included this continued optimization of our assets, but also targeting free cash flow and that's what gave rise to starting with the $55 to $60 range for our planning, and then also besides looking out just a year or two looking at further than that and seeing what the future likely looks like and which is very encouraging and talking about how do we optimize a business model that gives our shareholders the greatest advantage. So I still think we have all the options in front of us on how to allocate capital in the future, but we clearly have two very important priorities, and one is to demonstrate that we can grow our oil production and deliver free cash flow and deliver a return of capital to our shareholders and do all that in a very efficient way as we kind of mechanically mind that this asset that we have.

Michael Hall -- Heikkinen Energy -- Analyst

Okay. And just to be clear on that slide seven, the free cash flow opportunities in orange there. Are those prioritized in that order left to right or is that just kind of everything that's on the table?

Jack Harper -- President and Chief Financial Officer

Everything is on the tablet, it really depends on the landscape at the time, as we mentioned in the prepared remarks, we've worked on the balance sheet in the most recent past, but all options are there, and it would just really depend on the point in time.

Michael Hall -- Heikkinen Energy -- Analyst

Okay, great. That make sense. Thanks very much.

Tim Leach -- Chairman and Chief Executive Officer

All right. Thank you.

Jack Harper -- President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Monroe Helm from Barrow Hanley. Your line is open.

Monroe Helm -- Barrow Hanley -- Analyst

First of all congratulations on progressing the asset base unto the point where you've got free cash flow that you can share with the shareholders. I think they'll probably open up another sort of investors through that be interested in the stock, so congratulations on that. My question has to do with the outlook for your takeaway capacity in 2019, obviously, there are some parts of the market that don't have access to Gulf Coast of having pretty, realizing pretty high differentials. Can you kind of talk about where you said as we look into 2019 and 2020 as far as oil takeaway capacity on your system?

Tim Leach -- Chairman and Chief Executive Officer

Sure. We've talked a fair amount about oil takeaway here over the last quarter or two, but just to back up and talk a little bit about our strategy, we have partnered historically with the largest players on that side. And done deals with them that where they typically gather our barrels and put it on their pipe and take it out of the Permian. We do historically price our barrels in the middle market and we've used financial hedging as a way to insulate ourselves from periodic upsets in the Midland-Cushing differential. But as the actual flow assurance we have contracts that give us strong assurance that our barrels will move. We have been able to move our barrels through this type. We feel very confident about the barrels kind of until you get into the back half of '19, but all of a sudden a bunch of these new pipeline projects come on. So, I'm saying, if anything we continue to feel better and better on that issue.

Monroe Helm -- Barrow Hanley -- Analyst

Great, thank you.

Tim Leach -- Chairman and Chief Executive Officer

Thank you.

Jack Harper -- President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Bob Brackett from Bernstein Research. Your line is open.

Bob Brackett -- Bernstein Research -- Analyst

By the way of talking about parent child relationships, I'm looking at page five, where you talked about that Windham B large scale projects. You've got four zones you're targeting there, if I assume 660-foot spacing, there could be eight wells per zone, so call it 32 targets, and it looks like you hit 10 of them. What was the thinking in that, do you go back later and drill child wells or do you cream the 10 best targets. Just any follow on how you develop?

Will Giraud -- Executive Vice President

Sure. It goes back to the question one of the gentlemen asked earlier about how are we doing on continuing to test additional zones and eliminate other zones. And so that's just a measure of continued to go back and hit the targets that we like the best and test a few additional other concepts. So, for example, in that pad we had one Wolfcamp C in there testing that, that's kind of an emerging zone. The others in the Permian have been talking about we have not talked a whole lot about it.

Bob Brackett -- Bernstein Research -- Analyst

So then that's four or five wells in the other two targets and is that the ideal spacing or do those get downs based?

Will Giraud -- Executive Vice President

It's typically as we -- one of the big things we're learning is what's the optimal projects and so at the point in time when we're drilling things like the Windham you're seeing us typically target a half-mile section at a time at that implied eight across or 660 spacing. And so to the extent you're testing additional zone, you can get some odd numbers but, yes, you're right and I think that was Tim's point that you're not eliminating the parent child issue, you are going to have to come in and offset these pads in time, and so I think that Windham just reflects kind of how we think about the world.

Bob Brackett -- Bernstein Research -- Analyst

But if you're doing the half-mile you're eliminating some of the infill issues you might still have some edge issues, but that's a better world.

Will Giraud -- Executive Vice President

Yes, right.

Tim Leach -- Chairman and Chief Executive Officer

Right.

Bob Brackett -- Bernstein Research -- Analyst

Okay, thank you.

Tim Leach -- Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from Brian Singer from Goldman Sachs. Your line is open.

Brian Singer -- Goldman Sachs -- Analyst

Thank you. Good morning. Wanted to follow-up on couple of the earlier questions. First, as it relates to the 2019 and '20 CapEx budgets or 2019 CapEx plans, specifically. How did you take inflation and labor availability into account. What have you baked in, particularly, on how you see lateral adjusted well cost evolving and what do you see at the upside or downside risks?

Jack Harper -- President and Chief Financial Officer

Sure. Brian, this is Jack, as Tim mentioned, we used 55 to 60 to lay out this budget. We have embedded some inflation in some of our assumptions in some of our cases. I think the important point is we built a budget around 55 to 60, so in '19 we see some modest free cash, but more importantly we see that inflection point in 2020 to more free cash.

Brian Singer -- Goldman Sachs -- Analyst

So, I guess, do you assume then that well cost will rise with the inflation assumption or less so because the price points that you're assuming actually are a little bit below where we are today.

Jack Harper -- President and Chief Financial Officer

No, the higher the price point, the higher our assumption is for increased activity and inflation. So, really the way to think about it as the commodity price moves up, so does our assumption there.

Brian Singer -- Goldman Sachs -- Analyst

Okay. And then --

Jack Harper -- President and Chief Financial Officer

But again it's all dependent on activity.

Brian Singer -- Goldman Sachs -- Analyst

Great. And then on well productivity when you take into account your plans parent child mitigation efforts, technology innovation. Do you see your lateral adjusted oil rates in the Delaware Basin rising falling or holding flat in 2019 kind of where are we in the maturation or lack of it just from a well productivity EUR perspective.

Jack Harper -- President and Chief Financial Officer

Yeah, we see flat or assumed the same types of efficiencies, I think, the more important way we're looking at is with more large project long lateral development, it's overall over a much longer period of time, a more efficient way to deploy large chunks of capital.

Tim Leach -- Chairman and Chief Executive Officer

Yeah, Brian, I think we've said before that we're -- the team is really good at finding additional efficiencies. We're not necessarily the best of forecasting them.

Brian Singer -- Goldman Sachs -- Analyst

Great, thank you.

Tim Leach -- Chairman and Chief Executive Officer

Thanks.

Jack Harper -- President and Chief Financial Officer

Thanks.

Operator

Thank you. Our next question comes from Arun Jayaram from JPMorgan. Your line is open. Please check that your line is on unmute.

Arun Jayaram -- JPMorgan -- Analyst

Yeah, good morning. On slide nine, you highlight the planned production starts and you do indicate that you have a more second half weighted production profile. Just wondering if you could give us a sense of first half of '19 versus second half. How many pipes you expect to have just roughly in the first half versus second half?

Jack Harper -- President and Chief Financial Officer

Sure. When you look at the page nine over on the right side, when I look at that put on production bar, it looks like about a 40-60 mix to me.

Arun Jayaram -- JPMorgan -- Analyst

Okay, great. So, a little bit more in the second half. And my follow-up question, Tim, the Wall Street Journal has reported that one of the large privates in the Permian Basin maybe putting itself up for sale. I was just wondering broadly, if you could comment on the portfolio post RSP and also on the disposition side, you guys have been speculated to maybe shopping your Big Chief assets and some of the Half East assets. Just wonder broadly, if you could discuss the portfolio?

Tim Leach -- Chairman and Chief Executive Officer

Yes, sure, and I'm going to focus on the broadly part of your question. And, I would say, and I've already said once in this call, how happy I am that we bought RSP that those assets and the fit with our existing portfolio really create a lot of powerful economies and you can see that in our early implementation of the strategy that we've been talking about for a while. So, I really think we have a great set of assets. We will be buying, selling and trading outlier properties in and out of our portfolio as a -- just a normal part of our business. And, I mean, we've got a very large inventory and we will constantly be trying to high grade that. We also are a Permian Basin focused company that -- so I think when you asked about what's going on in the Permian. We ought to be the experts on what's going on in the Permian. So, as properties are bought and sold or wells are drilled. We are familiar with all that and it's part of our business because that's our focus. And I would just kind of end your -- the very broad question you asked by saying, we've never bought anything out of the newspaper. And so, it's the way we do our business. As you've seen over the years is very focused and I think you ought to expect that from us in the future.

Arun Jayaram -- JPMorgan -- Analyst

That's helpful. If I can sneak in one final question, just broadly maybe for you, Jack, is on a combination with RSP, what type of PDP declines you see on a one-year basis that's kind of embedded in your 2019 guide?

Jack Harper -- President and Chief Financial Officer

It's low to mid '30s. It's where it's been prior.

Arun Jayaram -- JPMorgan -- Analyst

Great. Thanks a lot.

Operator

Thank you. And that does conclude our question-and-answer session for today's conference. I'd now like to turn the call back over to Tim Leach for any closing remarks.

Tim Leach -- Chairman and Chief Executive Officer

Great, thanks. Thank you for all the great questions and thanks for your interest in Concho. I hope you picked up on this quarter and in previous quarters how excited we are about the prospects for our business, not only in the next year or two, but for the long-term. So, thank you for your interest, looking forward to talking to you again.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.

Duration: 52 minutes

Call participants:

Megan Hays -- Vice President of Investor Relations and Public Affairs

Tim Leach -- Chairman and Chief Executive Officer

Jack Harper -- President and Chief Financial Officer

John Freeman -- Raymond James -- Analyst

Scott Hanold -- RBC Capital -- Analyst

Will Giraud -- Executive Vice President

Leo Mariani -- National Alliance Securities -- Analyst

Drew Venker -- Morgan Stanley -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Neal Dingmann -- SunTrust -- Analyst

Derrick Whitfield -- Stifel -- Analyst

Charles Meade -- Johnson Rice -- Analyst

Jeanine Wai -- Barclays -- Analyst

Michael Hall -- Heikkinen Energy -- Analyst

Monroe Helm -- Barrow Hanley -- Analyst

Bob Brackett -- Bernstein Research -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

Arun Jayaram -- JPMorgan -- Analyst

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