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Concho Resources Inc  (NYSE:CXO)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 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 Fourth Quarter 2018 Concho Resources 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 is being recorded.

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

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

Great. Thank you, Daniel. Good morning, and welcome to Concho's fourth quarter 2018 earnings call. Our earnings release and corporate presentation are available on our website and we plan to file our Annual Report on Form 10-K today after market close. Participants on today's call will make forward-looking statements based on current expectations. They are subject to risks and uncertainties. Forward-looking statements and other disclaimers are provided in the earnings release and presentation. Our comments today may also reference non-GAAP measures. You will find the appropriate reconciliations in our earnings materials.

I'm joined today in Midland by Tim Leach, our Chairman and CEO; along with President, Jack Harper; Executive Vice President and Chief Operating Officer, Will Giraud; and members of the Concho's Senior Management Team.

During today's call, we will discuss fourth quarter and full-year 2018 -- operational and financial results, and we'll update you on our 2019 outlook. Following our prepared remarks, we will host a question-and-answer session, please limit yourself to one question and one follow-up.

Now, let me turn the call over to Tim.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Thanks, Megan. Good morning. This was a transformational year for Concho. We started the year communicating the importance of our strategy, execution strength and capital discipline. During 2018, we delivered on each of these and achieved strong results, while running one of the largest development programs in the Permian.

Our biggest milestone in '18 was the acquisition of RSP. Based on our track record in the Permian, RSP checked all the boxes. The transaction enhanced our long-term strategy and the scale of our growth platform. As we fold this premium inventory into our development machine, we're extremely pleased with the assets and the team that joined us. The portfolio that we've created is a competitive advantage and we're focused on high-grading it and blocking up acreage for drilling long laterals and project development. To that end in 2018, we executed 15 asset trades, covering 60,000 net acres in aggregate. We also sold non-core assets for proceeds of about $360 million and received $160 million distribution from our investment in the Oryx regional gathering system.

Through portfolio high-grading development and delineation during 2018, we've increased our horizontal resource to 12 billion barrels of oil equivalent, roughly two-thirds of this resource is considered premium and achieves a rate of return greater than 35% at $60 oil. The average rate of return of this premium resource is 68% and we have 40 years of runway at our current pace.

Our capital program in '19 is directed to these locations. We also delivered solid operational performance. We increased production 36% year-over-year driven by a 41% increase in oil volume. Our teams are leading the transition to large scale manufacturing style development and well performance for the projects completed in 2018 is strong. Free cash flow has been a practice, not a concept and we again executed a disciplined program that highlighted the quality of our assets.

We invested a total of $2.5 billion in our drilling and completion program and generated around $2.6 billion of cash flow, marking the third consecutive year for cash flow to exceed our capital investments excluding acquisitions. And our track record for free cash flow and outlook for the business enables us to initiate a dividend this quarter. We ended the year with investment grade credit ratings from the three top rating agencies and a strong balance sheet. We're working to deliver a value proposition in our industry that competes for capital across the broader market and in 2018 we made significant progress in achieving this goal.

While supportive market conditions and higher oil prices are welcome, our returns-focused game plan means we find opportunity especially in times of volatility. There's been a lot of conversation about service cost, historically if the slowdown materializes, there's typically a three or four month delay before activity levels and service costs respond to market realities. We expect this to be the case in 2019.

Against this backdrop, we are continuing to focus on free cash flow growth and maintaining balance sheet strength. Because of this, we're calibrating the 2019 program around lower commodity prices and even at lower prices, the efficiency of our machine and the compelling benefits of the RSP transaction are apparent. We talked last quarter about the evolution of the E&P business model. Our model will build excess cash flow and maximize returns on and of capital. At a time of broad industry change, our strategy combined with the best team, assets and balance sheet, we'll deliver in a way and in a time frame, very few in our industry can.

We have carefully and thoughtfully pursued our plan, developing a platform more capable and better positioned than at any other time in our history. And the 2019 sets up an incredible trajectory for our Company, one that reinforces the investment case for Concho.

With that, I'll turn it over to Jack.

Jack Harper -- President

Thank you, Tim. Our performance enacted (ph) in 2018 contributed to one of the most strategically important years in our history. We invested in high value growth projects, controlled cash costs, executed a disciplined capital program and strengthened our portfolio. In short, it was another year of good offense and delivering on what we say we're going to do. I'll start with a recap of fourth quarter and full year 2018 results, before reviewing our updated outlook for 2019.

Fourth quarter production averaged 307,000 Boes per day in line with our guidance range. Oil volumes averaged 199,000 barrels per day and now make up 65% of production volumes compared to 62% during the fourth quarter last year. Controllable cash costs look good, though we continue to focus on improvement. Adjusted earnings per share was $0.94 and adjusted EBITDAX totaled $751 million, a 46% increase as compared to the fourth quarter of '17.

For 2018, production volumes were 263,000 Boes per day. This includes a partial year contribution from RSP, which we acquired in mid-July. Controllable cash cost per unit improved, down 4% compared to 2017. Full-year adjusted earnings per share was $4.60 and adjusted EBITDAX totaled $2.8 billion. As Tim mentioned, we invested $2.5 billion in our capital program, while generating $2.6 billion in operating cash flow and received proceeds of approximately $520 million from divestitures and our strategic investment in Oryx.

Our disciplined capital program and prudent portfolio management continued to be used to strengthen the balance sheet. Long-term debt ended the year at $4.2 billion and our annualized leverage ratio stood at 1.4 times. Clearly the backdrop for oil prices was different last quarter. Companies were poised to increased activity and inflation wins were not in our favor. The steep drop in crude prices at the end of the year illustrate how fast this business can change. A strong financial position has a core value and a competitive advantage, and our balance sheet and cash flows are well protected. Based on our guidance range approximately 70% of our oil is hedged, and roughly 60% is covered with basis swaps.

Operationally, things are proceeding as planned. During the fourth quarter, we ran 34 rigs, one of the largest programs in the basin. We continue to advance our style of returns-centric development, which focuses on large scale and multi-well projects across our asset base. Our project results continue to demonstrate the prudence of this approach which mitigates parent-child impacts, drives operational efficiencies and maximizes the long-term value of our investments.

As the competition to supply the most efficient barrel intensifies technology is increasingly important. Our move to manufacturing style development combined with the teams use of technology is accelerating innovation, improving productivity and optimizing program economics. In 2018, more capital was directed to large scale projects than ever before and our well performance on an absolute and lateral adjusted basis increased 21% to an average peak 30 day rate of more than 1,400 Boe per day.

While the average lateral length was relatively consistent year-over-year. In addition to creating value through how we build develop and operate our assets, we're also looking to capture the most value with how we market the oil and gas, we produce. Since the beginning of 2019, the Midland-Cushing discount has narrowed significantly as Plains' Sunrise system ramps up and anticipated line conversions come to fruition. The scenario around takeaway capacity and regional pricing has played out largely as we expected and communicated.

I'm glad we were patient and didn't sacrifice long-term value for short-term transportation arrangements. We're not aware of a single Permian barrel that didn't clear the middle market. Importantly, we are now in a strong position to begin diversifying our pricing and market exposure and we're making progress on this strategy. During the first quarter of '19, we entered into a firm sales agreement with a third party purchaser that will provide an integrated transportation and marketing solution, including ample dock capacity. This agreement ramps to 50,000 barrels of oil per day from Plains' Cactus II pipeline comes online. The barrels sold under this arrangement will receive waterborne pricing.

The energy sector safety can (inaudible) the headwinds including big swings in oil prices and investor frustration. With this backdrop, we're redoubling our focus on cost control, capital discipline and growing free cash flow and returns. While others in the sector are talking about a new strategy, our actions and track record uniquely position us to deliver differentiated performance. Our updated 2019 capital program is based on our view that volatility will continue to challenge the sector. The program includes a capital spend of $2.8 billion to $3 billion, which represents a 17% reduction compared with our previous guidance.

This level of capital supports volumes with less investment and sets up a strong and sustainable free cash flow growth trajectory. With an oil production growth rate of 15% in the fourth quarter of ' 19 versus the fourth quarter of ' 18. We continue to highlight the 2019 exit rate, because 4Q '18 includes a full quarter of RSP activity. Looking ahead to 2020, our base plan calls for a similar investment level as '19 resulting in substantial free cash flow growth. We will respond to the price environment guided by the capital allocation framework laid out last quarter.

This framework places an increased emphasis on returns of capital when we have excess free cash and still gives us the flexibility to opportunistically deploy additional capital. Our focus will remain on growing free cash flow over the long term, more so than in any individual quarter. We started the year with 34 rigs and 10 completion crews, which is our peak level for the year.

As a result, we expect the 1Q capital of $825 million to $875 million which will moderate as we move through the balance of '19. Production for the quarter is expected to be in the range of 300,000 Boe to 306,000 Boe per day, which reflects the timing of our move to more projects style development across the asset base and the ramp of wells placed on production in the second and third quarters. We have the team and assets to deliver differentiated value. Our scale advantage, execution strength and strong financial position allow us to deliver one of the most competitive barrels in the world.

We'll now open up the call to your questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Arun Jayaram with J.P. Morgan. Your line is now open.

Arun Jayaram -- J.P. Morgan -- Analyst

Good morning, Tim and Jack. First question, pretty sizable change in the 2019-2020 guide versus what you articulated last quarter. You've mentioned volatility, but I was wondering if you could maybe give us some thoughts on how your thinking has evolved since that time in terms of the guide and what do you see as the benefits of the new operating plan, which does seem to indicate more capital efficiency versus your old plan?

Tim Leach -- Chairman of the Board and Chief Executive Officer

Yeah, Arun, I guess, when we put this plan together, the thinking is really very similar to what we were thinking in November, is that we were trying to be conservative and generate free cash flow. And so with oil prices declining in the fourth quarter, we thought we are being conservative back in November with how we were deploying capital at that time. This reduction just is that a pace that will give us additional free cash flow, also gives us substantial growth of production. So, I think it will allow us to demonstrate that we can generate growing amounts of free cash flow and grow the Company.

Arun Jayaram -- J.P. Morgan -- Analyst

Fair enough, and Tim just a follow-up on the free cash flow characteristics of the new plan. Any way you could give us a sense of your thoughts on --call it between $50 to $60 per barrel number in '19 and '20, what the free cash flow would look like? And your thoughts on prioritizing that free cash flow in terms of cash return, the balance sheet or reinvesting in your portfolio.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Yeah. I'm going to give you directionally how I think about it. And then, I'm going to let Jack kind of clean up the mess and give you more specifics, I think. But I think between $50 and $60 there is a big change in the amount of free cash flow that we can generate. But I think as you look into the future, that range of pricing is very good for us, and I think that we can demonstrate that we can grow the Company at acceptable growth rates and start to generate a free cash yield that competes -- kind of across all industries and that's really what I'm focused on doing is growing our free cash flow yield to a level that generalist investors can get excited about.

Jack Harper -- President

Yeah. And Arun, just to add a little color to that. I think this level -- this capital level reflects a pace and an amount that allows us to cover our dividend and our capital budget in the low 50s this year, but we see an inflection point on free cash flow next year at an even lower price than that. And when you think about a price like $60, that amount of free cash approaches $1 billion in 2020. And in terms of (multiple speakers) go ahead, I'm sorry.

Arun Jayaram -- J.P. Morgan -- Analyst

Those (ph) $1 billion in 2020?

Jack Harper -- President

That's correct. And I also wanted to make sure we talked about -- you asked about priorities. Most certainly balance sheet strength is a huge priority for us. We have a strong balance sheet, but I think we believe that can be stronger and like to see it gravitate more toward the lower end of the range we've stated of 1 to 1.5 times. So making sure we achieve that and then having the optionality for additional returns to shareholders or to run our business, depending on the set of circumstances that are at that moment in time.

Arun Jayaram -- J.P. Morgan -- Analyst

Great. Thanks a lot.

Operator

Thank you. And our next question comes from Brian Singer with Goldman Sachs. Your line is now open.

Brian Singer -- Goldman Sachs -- Analyst

Thank you. Good morning.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Good morning.

Brian Singer -- Goldman Sachs -- Analyst

Following up on, a little bit on the free cash flow point, you had talked about having a big free cash flow number potentially, if oil prices stay strong in 2020, but I wonder if you could talk a little bit about M&A. You mentioned earlier and you highlighted in your slide presentation, you have 40 years of premium inventory. It seems like a lot of premium inventory. Can you talk to the interest or disinterest in further consolidation on a net basis and whether that is the potential use of free cash flow or whether the free cash flow would be more thought of for debt pay down and return and return to shareholders, as you mentioned?

Tim Leach -- Chairman of the Board and Chief Executive Officer

Well, this is Tim. I think that consolidation and leadership in the Permian Basin is something that will always be a player in. And I mentioned how many trades we've done to try to continue to block up our assets. So continuing to high grade this portfolio of assets, I think you're going to see the entire industry working on that, and we want to be at the forefront of that. The free cash flow that we generate from our business though doesn't need to go into consolidation. The free cash flow was kind of what runs our business, runs our capital program and provides cash flow to shareholders. So, I wouldn't -- I think about those two things separately.

Brian Singer -- Goldman Sachs -- Analyst

Great, thanks. And then my follow up is with regards to oil mix, oil production as a percent of the total. Your guidance would appear to imply as an increase in oil as a percent of the total both in 2019 and 2020 versus recent quarters. Can you just talk to the dynamic and drivers of this, and whether on the natural gas side, you see any constraints, i.e. flaring or reinjection that are being assumed or expected?

Jack Harper -- President

Brian, this is Jack. The increase in oil percentage, which is accurate is a reflection of capital mix in the projects that we have planned for in the budget which do have an increasingly oily mix. And it's the timing and the cadence of bringing on those projects. As to the gas constraints, we do not anticipate any meaningful constraints in our business. The increase in oil is really more driven by capital allocation.

Brian Singer -- Goldman Sachs -- Analyst

Great. Thank you.

Operator

Thank you. And our next question comes from Phillip Jungwirth with BMO. Your line is now open.

Phillip Jungwirth -- BMO Capital Markets -- Analyst

Thanks. Good morning. Based on the 2019-2020 guidance or outlook, it's currently laid out. How would you say, you're tracking versus the original $2 billion RSP synergies and which synergy areas would you say you're outperforming, either, the development efficiencies, asset optimization, shared infrastructure or corporate level savings?

Tim Leach -- Chairman of the Board and Chief Executive Officer

As I've said before, I think the synergy part of what we've achieved in terms of interest cost savings and G&A reduction, those things are done. The real value creation opportunity on the RSP assets was manufacturing style development, which now 70% of the development going on in '19 on the RSP assets are long laterals and manufacturing style. So that is a value creation on the RSP assets and we'll continue on now as we develop those over many years. So I'm very pleased with the value that I think is being created out of RSP.

Phillip Jungwirth -- BMO Capital Markets -- Analyst

Great. And then on the upcoming dominator development of 23 wells there, how are you looking to measure success of the project in terms of operational efficiencies, leveraging facilities, productivity per well and then how would you expect to communicate results from this project?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. Phillip, it's Will. Yeah. We're obviously bringing that project on right now. I think that's something we will be speaking to in more detail next quarter, but I would say, we would measure it, then we would measure any other drilling project in terms of the returns we received versus the investment and also that's a bit of a unique project just given it's size, and as we've said before, we're trying to see how far we can push the efficiencies as you make these projects larger and larger and also there's elements of spacing, testing and other things going on with that project. So, there's a lot in there, but I'm not sure there's anything unique about it versus any of the other big projects we're doing.

Phillip Jungwirth -- BMO Capital Markets -- Analyst

Great. Thanks.

Operator

And our next question comes from Neal Dingmann with SunTrust. Your line is now open.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Good morning, guys. First question, just on your sort of '19 and '20 plan, it looks like you talk about -- Jack and very nice capital cut for '19 as you and Tim just pointed out, but then it looks like what I think, if I'm reading that right year-over-year CapEx for '19 into 2020 assume is relatively flat. Does that mean latter part of '19 or sometime in '20 you would pick some rigs up, I'm just trying to sort of balance those to the years?

Jack Harper -- President

Yeah. We average, for this year, 27 rigs, and to get there we obviously are declining over the year, but it's a similar level of rigs next year in that plan, so yes, I would anticipate a bit of a ramp sometime during 2020, but not much.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Okay. And then lastly just look into slide 11 where you saw some of your key projects, looks like you continue to be pretty diversified as far as kind of about 78 wells in that Delaware Basin with this key projects and about 67 Midland, is that cadence wise? And I guess you still feel equally as good about the two areas as judged by kind of the diversified plan.

Jack Harper -- President

Absolutely. We like the diversity of the Delaware and Midland Basin. When you look at our capital allocation, this year, it's about a 60-40 mix, with the 60 going to the Delaware.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Very good. Thank you.

Operator

Thank you. And our next question comes from Leo Mariani with KeyBanc. Your line is now open.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Hey, guys, I was hoping you could expand a little bit on that, the 2019 activity in CapEx plan, just kind of looking at the full year guidance, obviously you've got first quarter projection -- I'm sorry, first quarter CapEx certainly is kind of above the full-year run rate. Can you give us a little bit color around how you guys kind of plan to reduced activity, if it's kind of -- or rig sort of roll off as we work our way into the second quarter -- is first quarter you're -- kind of your high CapEx quarter for the year, well, can you kind of tell us about the activity in spending pace throughout '19?

Will Giraud -- Executive Vice President and Chief Operating Officer

Yeah, definitely. Leo, there is a really helpful slide back on the very last slide in our deck around the guidance where we actually show you the 2019 rig cadence. And so we are averaging 32 rigs in the first quarter, going to 26 in the second and then back half of the year averaging 24. So there is definitely a front-end loaded aspect as we come off the high of 35 rigs, we ended the year with.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Okay. That's helpful for sure. And I guess just in terms of asset sales, which you guys obviously focused on a little bit in selling off some of the non-core pieces in 2018, what can you kind of tell us about the plans for 2019? You guys going to kind of continue to prune and should we expect decent proceeds and asset sales here in '19.

Will Giraud -- Executive Vice President and Chief Operating Officer

You know, that's a little hard to predict, we will definitely be very active on the portfolio management side, as Tim mentioned, we're most focused on the trades that's kind of the preferred use of our non-core acreage as -- to using this currency and a trade, but you saw us peel off a non-core asset package or two in 2018, and that's certainly something we look at for 2019.

When you look at the map, the goal is to end up with very large blocks of acreage in the best parts of the Permian. And so, when you look at our map, the Northern Delaware kind of jumps off the page at you as an area that we still have a relatively scattered position. We'd like it, but it's certainly a focal point for trades and an opportunity for non-core asset sales.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

All right. Thank you.

Operator

Thank you. And our next question comes from Bob Brackett with Bernstein Research. Your line is now open.

Bob Brackett -- Bernstein Research -- Analyst

I got a question about some of the development efficiencies. I saw that big jump in lateral length from 8,000 to 9,700, you're able to achieve that in with a mix of Delaware and Midland acreage?

Will Giraud -- Executive Vice President and Chief Operating Officer

That's right. That really goes back to that conversation around the trades and swaps, that's been the big enabler for pushing lateral links, especially in the Delaware Basin.

Bob Brackett -- Bernstein Research -- Analyst

And then expanding on that, can you talk about the fine tuning of completions. You dropped stage count last year, but improved the wells. Can you talk about where stage count goes in '19? And also maybe sand per foot, if there's any relevant change there.

Will Giraud -- Executive Vice President and Chief Operating Officer

Certainly, I think we should. If you look at the program year-to-year one evolution as you noticed was stage spacing, but then also the intensity of the completions has backed off a bit. We continue to work on evolving completion strategy for all the different zones and also kind of applications of -- it's not just the pounds per foot. There's a lot around lateral targeting and other aspects of the completion. So, I would expect to continue to see that change over the future. But I think that's a driver and increase well performance over time as well.

Bob Brackett -- Bernstein Research -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Drew Venker with Morgan Stanley. Your line is now open.

Drew Venker -- Morgan Stanley -- Analyst

Good morning, everyone. As I wanted to follow up on the last question on well performance improvements. Can you speak to how much you think the well performance improvements have come from optimizing spacing and well design aside from, and things targeting of the reservoir as opposed to just completion design modifications.

Will Giraud -- Executive Vice President and Chief Operating Officer

That's a little hard to describe in a brief way, but certainly, I think what we're pleased by is that as we've moved into this large-scale project development, we're seeing the results we expect and it's enabling us to some pretty interesting things from testing and continuing to understand the best way to do it.

Drew Venker -- Morgan Stanley -- Analyst

Understood. Maybe, if you all could give a little bit more color on how you think spending maybe would flex in the higher price environments like $60 or $70 price environment that would be helpful I guess for -- both for '19 and '20.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Yeah, I would say that we run a flexible business, but I really think that higher oil prices would just generate bigger cash yields for us, free cash flow. So, and I think that's how we can differentiate ourselves, so, we can show growth and really strong free cash flow.

Drew Venker -- Morgan Stanley -- Analyst

Thanks, Tim.

Operator

Thank you. And our next question comes from Michael Hall with Heikkinen Energy. Your line is now open.

Michael Hall -- Heikkinen Energy -- Analyst

Thanks. Good morning. I appreciate the time. I guess, I wanted to just kind of come back to the evolution of your thinking on the -- as you thought the E&P business model. I'm just kind of curious and kind of what -- what would you say, your guiding principles behind the line in the evolution of this E&P business model. It's kind of taken the other side on some level? Concho has got probably one of the deepest inventories in the business, low cost structure, differentials are narrowing, costs are falling cyclically. So, one could ask why flow now or not kind of push through. I'm just curious to what extent that was discussed or debated and kind of what are the guiding principles behind, I guess, why in this evolution.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Well, I mean we've been talking for some quarters now about a compelling business model for our industry. And the one thing to remember about Concho is that, while I think we're one of the leaders in the shale revolution, we are -- this Company was only started 12 years ago. And so, as I talk to shareholders that were investors on the IPO of this Company, they have vested -- our shareholders have stayed with us through the discovery of the biggest oilfield in the world.

They've stayed with this while we were delineating it and trying to figure out how to best drill it. And now it's kind of time for a payday. And so when you think about what is the payday look like for those long-term investors, I think it's a model that competes with any other kind of industrial model in the world where you can grow and generate enough free cash flow to redistribute to shareholders that, it's a new kind of oil and gas model.

Michael Hall -- Heikkinen Energy -- Analyst

Okay. That's helpful. I appreciate the color. And I guess kind of segues into my next question, which was the payday, I guess the dividend, how are you guys thinking about target yields on that, if you have one, and what sort of time frame should we think about for the pace of growing the dividend.

Tim Leach -- Chairman of the Board and Chief Executive Officer

I mean, this quarter, we just initiated our first dividend ever. So, it's kind of early again. But I would say that I think what we're thinking about more is being able to demonstrate increasing cash yields and then talk about, after your balance sheet is right where you want it, in what form is the best way to get capital back to shareholders.

Michael Hall -- Heikkinen Energy -- Analyst

Okay. Appreciate the color. Thanks very much.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Bob Morris with Citi. Your line is now open.

Robert Morris -- Citigroup -- Analyst

Thank you, and good morning, gentlemen. Tim, you mentioned earlier that when there is a slowdown there is typically a three or four month lag on seeing oilfield service cost inflation, deflation. But at this point, we're a little bit into that, with the slowdown by year and a lot of your peers in the Permian Basin, what are you expecting or seeing today as far as oilfield service cost deflation on the year?

Tim Leach -- Chairman of the Board and Chief Executive Officer

Well, let me say in general that if everybody was within their cash flow, we don't need 500 rigs running in the Permian Basin. So we are thinking that the back half of the year, up to be less expensive than it is today, but if you want to talk about how --

Jack Harper -- President

I would just add to that, that we have -- our plan is based on cost as we see them today. And so to the extent they do come down, that would be incrementally beneficial.

Robert Morris -- Citigroup -- Analyst

Okay. And then, Tim, just curious with the slowdown in activity now, how does this impact the economics on the price you paid for RSP? Or is the bulk of the slowdown really on the legacy Concho assets or how do you think about that with regard to RSP?

Tim Leach -- Chairman of the Board and Chief Executive Officer

We've combined this -- we've successfully put two businesses together. RSP was a thriving business that was generating its own cash flow, if you look at how the capital is being distributed in '19, there's just about as much capital going back to the RSP assets, as they've represented in the whole combination. So, I think about it as taking two businesses and combined into one better business, but so, the capital efficiency is gained from the way that we are drilling the RSP assets.

Robert Morris -- Citigroup -- Analyst

Okay. Thank you.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Yeah, thanks.

Operator

Thank you. And our next question comes from Paul Sankey with Mizuho. Your line is now open.

Paul Sankey -- Mizuho Securities -- Analyst

Hi, guys. Appreciate your comments about, doing what shareholders want, things have changed, obviously in the time that you've been in IPOs and then run the Company. Are you now really going to more cash? I guess the point is you going to more cash return oriented strategy? And the big idea, I think two or three years ago, maybe longer was that, you would sell the Company. Is the idea now to run it hard for cash return? Thanks.

Tim Leach -- Chairman of the Board and Chief Executive Officer

That wasn't my big idea, Paul, I don't know it may have be your big idea. I just...

Paul Sankey -- Mizuho Securities -- Analyst

I thought you told me that.

Tim Leach -- Chairman of the Board and Chief Executive Officer

No, you were talking to the other Tim, I think. But my big idea is to create a business model that has never existed before. One that attracts capital across all industries because of the growth and capital return to share -- to create something that's really compelling for investors. Then that's what gets our blood pumping is to see if we can through the right set of assets and capital allocation, bring something that's a compelling investment.

Paul Sankey -- Mizuho Securities -- Analyst

And so the idea is rapid cash return growth I guess right now or I mean, do you have such a big growth opportunity in volume terms.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Yeah, well -- I mean, I still think we're growing pretty substantially even in and in reduced capital scenario.

Paul Sankey -- Mizuho Securities -- Analyst

Yeah. Okay.

Tim Leach -- Chairman of the Board and Chief Executive Officer

From a pretty big base, I would say, too.

Paul Sankey -- Mizuho Securities -- Analyst

Two (ph). Yeah. Well, that's kind of the idea, because I guess you're getting too big to sell yourselves. Right. So...

Tim Leach -- Chairman of the Board and Chief Executive Officer

I don't know, yeah, that can happen. Go onto the next topic.

Paul Sankey -- Mizuho Securities -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Jeffrey Campbell with Tuohy Brothers. Your line is now open.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Good morning. Earlier in the call, you said 2020 outlook is using lower than 2019's low 50's benchmark. What are the variables to elevate the year-over-year free cash in 2020 bearing in mind a flattish year-over-year spend and a lower commodity assumption.

Jack Harper -- President

Yeah. Just to clarify, what we said earlier is that our 2019 dividend and capital program can be funded in the low 50s, and that as we look into 2020 at a lower price like $50, we can cover all of those things and have additional cash flow. And if we see a price somewhere at the level of the strip is currently or even approaching $60, we see free cash approaching $1 billion.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Okay. And then I guess what I'm asking is, what is it about 2020, if it's going to make that performance even if the commodity assumptions lower? Is it just this continued push toward bigger and bigger projects and longer laterals? So, just what are some of the variables are?

Tim Leach -- Chairman of the Board and Chief Executive Officer

Sure. I mean the -- our focus will be on the most efficient deployment of our capital under any circumstance and that is further highlighted, the lower the commodity prices, and I think it's actually an opportunity for us to differentiate ourselves. But you're right, it's making our investment better through large project development, lateral placement within the zones, well spacing, all of the small malls that can now be turned to increase efficiency.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Okay. Thank you. That was helpful. And I was also just wondering, just from looking at the math of what you've been doing recently, I was just wondering, how is your Reeves County acreage competing for capital with the New Mexico, Delaware Basin and the core Midland Basin acreage and I was wondering if any of the large scale projects that you've detailed on slide 11 are located in the Reeves area.

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. This is Will. There are large scale projects in the Reeves area. I mean if you look on slide 9, I think they do a good job of showing where all of our wells are located. I think you can see. And that's just the fourth quarter, but you can see a pretty broad dispersion of development across all of our assets now, and if you looked at it on annual basis, I think you would see it across almost the entire portfolio.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Okay. So none of the projects that were named on slide 11 are in Reeves, but Reeves is bringing in some projects.

Will Giraud -- Executive Vice President and Chief Operating Officer

Yeah. I think the Jack project is in Reeves. And then, there's one other significant project, and there's also -- Tempest well, it is.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Okay. Okay, great. Thanks for that.

Operator

Thank you. And our next question comes from Ryan Todd with Simmons Energy. Your line is now open.

Ryan Todd -- Simmons Energy -- Analyst

Okay, thanks. Maybe just a question on the large scale projects, you've seen strong results to date on the various projects that you develop. Can you provide any additional color on takeaways that you are seeing from these projects, whether regarding proper development of multiple horizons, efficiency gains, potential impact to parent-child dynamics and well productivity, things like this.

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. I mean, while it's still early, it's been a slow evolution for us into these larger and larger project sizes. I would just say, we're obviously very pleased with what we're seeing, but we're expecting to see, I think we're also double down on the necessity of doing it this way. And that this is the better way to do it and -- I'm modestly optimistic that over measured in periods of years, we will continue to find more efficiencies out of doing it that way. In addition to just the base reasons to it around mitigating parent-child impacts and things like that.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Yeah. I would also add that when you look at the Permian Basin map having big blocky acreage. Once again, it becomes apparent to us, that's the way you can mitigate parent-child relationship and also frac hits from neighbours and things like that. So we're very pleased with the way our acreage is configured and the trades and the way we've continued to block up big chunky blocks of -- the best parts of the Permian.

Ryan Todd -- Simmons Energy -- Analyst

Thanks. And are you -- I mean are you trending toward a time where you increasingly develop four sections in terms of all the developable horizons at the same time? Or do you think that you focus one or two, or two or three of the primary target horizons first and then go back at a later time and do secondary horizons?

Will Giraud -- Executive Vice President and Chief Operating Officer

We think it's a three dimensional problem, so you need to do all horizons simultaneously. And so one of the big questions and you can kind of see it if you look at our list of projects on slide 11. One of the big questions is what the optimal project size and the answer is a little bit different depending upon where you are in the Permian and your lateral length. But we think it's important to do, we're typically doing half mile fairways. It's kind of a way we think about it is, developing the entire all of the horizontal targets in a 0.5 mile fairway up on time.

Ryan Todd -- Simmons Energy -- Analyst

Thanks. That's helpful. Maybe just a quick one on the fourth quarter. 4Q CapEx was probably a little bit higher than expectations, was that just tightness toward the end of the quarter, was there any particular driver of that?

Will Giraud -- Executive Vice President and Chief Operating Officer

I mean, we were clearly ramping activity into an anticipated activity level in '19. So there's a little bit of that, there's a whole bunch of those things, but I'll just point you to the fact that 2018 capital came at the high end of our guidance range. I don't think it was really outside of our expectation.

Ryan Todd -- Simmons Energy -- Analyst

Great. Thanks. I appreciate the help.

Operator

Thank you. And our next question comes from John Freeman with Raymond James. Your line is now open.

John Freeman -- Raymond James -- Analyst

Good morning.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Hey, John.

John Freeman -- Raymond James -- Analyst

Hi. The slide 11, which shows the breakdown of activity this year is really helpful. Would it be possible to get the 1Q wells that are anticipated to pop in 1Q. I'm just trying to see what the percentage of those kind of really large pads in the Delaware that come on at the very end of 1Q is sort of the total in 1Q.

Will Giraud -- Executive Vice President and Chief Operating Officer

Yeah. I mean, we're guiding you pretty clearly there on the far right side of the page, there's a lot of wells coming off of the back half of the first, probably in the neighborhood of 70 (ph) in 1Q.

John Freeman -- Raymond James -- Analyst

Perfect. And then when I look at, you've got the rig cadence as it goes through '19 in 4Q, you had the 34 rigs and the seven frac crews. Does that sort of ratio of rigs, the frac crews, does that sort of hold through the year or just maybe how we should think about that?

Will Giraud -- Executive Vice President and Chief Operating Officer

Yeah. It's probably in the range of seven completion crews throughout the year in '19. And it will bounce around a little bit as we, one of the big things we've been working with on these projects is trying to compress the time from spud to first sales on the project and the way we do that, we will hit it with multiple rigs at the same time and also multiple completion crews. So, the completion number may bounce around from month to month, but I think the average is in that seven to eight number.

John Freeman -- Raymond James -- Analyst

Great. I appreciate it. Thanks a lot.

Operator

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

Charles Meade -- Johnson Rice -- Analyst

Good morning. Chairman Jack and to the rest of your team there. I want to go back to...

Jack Harper -- President

Good morning.

Charles Meade -- Johnson Rice -- Analyst

Thank you. I wanted to go back to the -- some of the earlier questions around the 2019 and the 2020 guide, it looks like you guys are pointing to pretty steady quarter-over-quarter growth, through '19 and on into '20. But if you just looked at the, if you just looked at the rig count going from 34 down to 24 in capital spending trending down to the back half of the year, that wouldn't -- that wouldn't, you wouldn't guess that there'd be steady growth. So, what are some of the other -- what's missing from that picture that helps you guys continue that steady growth, just despite the reduced spending in rig rates.

Jack Harper -- President

Sure. I think it's a -- it's good look at the bottom left of slide 11 and while the drilling and completions match up for the year, we do have more wells being placed on production during the year. And it's the cadence of those wells being put on production and being able to start completing all of the large projects that we invested in last year and we're not producing last year.

Charles Meade -- Johnson Rice -- Analyst

So it's just -- it's just going to be the delay, through the completions and the size of pads to bring on those wells to production.

Jack Harper -- President

That's correct.

Charles Meade -- Johnson Rice -- Analyst

Okay. Thank you, Jack. And then, then well -- perhaps this is a question for you or kind of, talking about assets, different way, early, but you mentioned about those, the way you're developing different, different zones across the pad. And I wondered if you could talk a little bit about those, the two -- to the pads that you guys talked about, the Gettysburg pad and the Square Bill pad, both kind of in the same, neck of the woods there and Southeast New Mexico. But I was noticing that one of them was just 3rd Bone Springs and the other one was 3rd Bone Springs and Wolfcamp A. And I wonder if you could talk about, if -- what's the reason, that you targeted just one zone in one and two on the other, and what's more indicative of the way you guys are going to operate going forward.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Yeah. I mean, I said the -- I should have probably clarified, so the ideal is to be doing half -- 0.5 mile fairways we're attacking of them, you think back to when these projects were started. This is on that evolutionary continuum. And so as we've been doing, we've been testing both horizontal spacing within an individual zone which that Gettysburg, as an example of that. And we've also been testing the interaction between different landings which the Square Bill is an example of that. So it's just part of that evolution to this large scale model, where you're truly developing all the zones simultaneously.

Charles Meade -- Johnson Rice -- Analyst

Thank you for that.

Operator

Thank you. And our next question comes from Jeanine Wai with Barclays. Your line is now open.

Jeanine Wai -- Barclays -- Analyst

Hi, good morning everyone.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Good morning.

Jack Harper -- President

Hi.

Jeanine Wai -- Barclays -- Analyst

I just wanted to follow up on some of the prior free cash flow questions. The release indicates that moderating activity really enhances Concho's free cash flow,outlook and capital efficiency and I think you mentioned earlier on the call that the updated outlook generates $1 billion of free cash flow in 2020 at $60 WTI. So I'm just wondering how much higher, is that number versus the prior outlook at the same oil price?

Jack Harper -- President

You know that's -- it's hard to compare with the different capital spend levels. But I think relative to where we are today, really I think the most important focus is kind of lowering the bar in terms of the base level of commodity to set the capital budget. And the efficiency gains, we are able to see by high grading the budget. And so I just focused more on where we are today and I think it's -- in terms of dollars invested and yield gain, it's, at least as good if not better than before.

Jeanine Wai -- Barclays -- Analyst

Okay, great. And then I guess my second question is just a more general one. You mentioned building a Company that hasn't existed before. Can you discuss how you benchmark yourself versus peers in both the near term and the medium term, and I know you mentioned a bunch of things on the call already. But any specific numbers that you can provide on the metrics would be great. Thank you.

Jack Harper -- President

Sure. We tracked certain metrics that we think correlate the most closely with share price appreciation. But ultimately our share price itself is the report card that is most important.

Jeanine Wai -- Barclays -- Analyst

Okay, great. Thank you for taking my questions.

Operator

Thank you. And our next question comes from David Deckelbaum with Cowen. Your line is now open.

David Deckelbaum -- Cowen -- Analyst

Good morning, Tim and Jack and everyone. Thanks for taking my questions.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Sure, David. Good morning.

David Deckelbaum -- Cowen -- Analyst

You know you talked a lot about the focus on free cash. I'm curious as you, as you look at your program at 19 and 20 and perhaps beyond. You also alluded to Jack and his team working a lot of things to cut costs. When you look at the large projects, how do you balance the desire to create sort of an annual free cash yield versus sort of the cash recycle periods associated with a large pads. And I guess if you thought about where you are in optimizing that process? Do you still feel like it's early innings and that there is -- that there is a lot of efficiency gains to be had in '20 and '21?

Jack Harper -- President

Well, I'll start with the efficiency gains. And yes, I do think they are -- there to be had there. As we mentioned before, they're not going to be as obvious as they have been up to now which is lateral lengths stage spacing and sand loading. Spacing within the zone -- the spacing. I'm sorry placement within the zone and spacing of wells in the large projects. And so I think there are incremental gains to be had. Speaking of the large project development though in the first part of your question, as we've ramped up last year was the biggest ramp and we're going further in terms of percentage of capital spent on those kind of projects now. And so now we're starting to get into a mode where we will roughly equal out the number of wells that come in and go out and completed. And so that I think you able to see that efficiency of that type of development, starting this year and enhancing next year.

David Deckelbaum -- Cowen -- Analyst

Okay. So that kind of smooths out that cadence than over in the next couple of years.

Jack Harper -- President

Yeah, I think the fourth quarter to first quarter should be the shallowest or flatest production cadence this year and I wouldn't say that, that will never happen again in the future because it very well may. But as we look out over the next year, it should -- the trajectory should be up.

Tim Leach -- Chairman of the Board and Chief Executive Officer

I would add also that one of the things about continuing our business in this way and at the pace that we're doing it -- it flattens that PDP decline curve. And the flattening of the PDP decline curve really helps us run our business and generate more free cash flow.

David Deckelbaum -- Cowen -- Analyst

That makes sense. So, I suppose, even as you get to 2021, if there is a need to add rigs or like Jack was talking about, at the end of '20 based on whatever your targets are, you're still low with your PDP decline to a point where you're still lowering that free cash breakeven over time.

Tim Leach -- Chairman of the Board and Chief Executive Officer

That's right.

David Deckelbaum -- Cowen -- Analyst

Okay. If I could just ask one quick follow, you talked about the firm sales agreements getting down to the Gulf. As you've waited, you alluded to earlier, appreciate that you didn't act to rationally before. As you've waited for the market to clear a bit, did you see sort of a natural opportunity to be able to mark more of your barrels to brands with favorable terms. And is there sort of a philosophical balance or mix that you'd like to have exposed to Brent versus Midland.

Jack Harper -- President

Sure, David. We like the idea and have described the desire to have a mix of pricing between Midland and some Gulf and beyond related price. However, we like Midland as a place to price barrels, and so I think, even though we'll build out this diversity, Midland will more than likely always make up the majority of where our barrels are priced.

David Deckelbaum -- Cowen -- Analyst

Thank you, guys.

Operator

Thank you. And our next question comes from Nitin Kumar with Wells Fargo. Your line is now open.

Nitin Kumar -- Wells Fargo -- Analyst

Hey, good morning, guys. Thanks for taking my question. Just maybe referring back to something you said at the beginning of the call, you've got activity here by 17% within the quarter. You mentioned, it takes about three or four months to get that -- you also talked about prioritizing some of your extra free cash flow to growth, what are your markers over the next two years to additional activity? I know you just got activity, but I'm just kind of curious, what are your markers to adding activity at this point?

Jack Harper -- President

Sure. We value a -- running a steady shift as we've described in the past. And so I think that's what you see as talking about, when we lay out '19 and our base plan for '20. And so as our cash flow grows and the production base grows, you should expect to see our activity levels grow as well. And it will be, we'll have to see what the circumstances look like at that point in time, but I think you should expect a -- the same things. It should be growth balanced with increasing cash yield.

Nitin Kumar -- Wells Fargo -- Analyst

Got you.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Also say, the second half of this year and into next year, if we see lower service cost, we can get more done with the same dollar, so that might lead to more activity and more efficiency, lower service cost.

Nitin Kumar -- Wells Fargo -- Analyst

Great. Thank you for that. And the other one is just your gas and NGL pricing, for that year you've modeled a 10% discount versus Henry Hub, traditionally, it's been around 15% to 20% premium. When do you expect that to come back to kind of more normalized level or is that the go forward normal for the basin?

Jack Harper -- President

Well, it will be highly driven by the NGL pricing. And so when we see ethane and propane recover to higher levels like we saw in the third quarter that would be the main driver of that gas realization for us.

Nitin Kumar -- Wells Fargo -- Analyst

Okay. Thank you, Jack.

Jack Harper -- President

Thank you.

Operator

Thank you. And our next question comes from Richard Tullis with Capital One Securities. Your line is now open.

Richard Tullis -- Capital One Securities -- Analyst

Thanks. Good morning. So, Tim, Concho has a fairly long history drilling the North West Shelf, how does that area compare on returns today given the generally lower well cost. And I guess, we've been seeing some solid well results from industry drilling in Abo and Yeso recently. So how are you looking at that area these days.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Sure. I mean, we still like the North West Shelf, the returns as you referenced are still very attractive. The challenge has always been for us as we've gotten bigger, it's just -- it doesn't drive the growth of the Company. And so, it has become a smaller and smaller piece of our capital budget. Over time, not because we disfavored, it's been a great flywheel asset over the years and really funded the growth of the Delaware Basin for a long time.

Richard Tullis -- Capital One Securities -- Analyst

Okay. And then just lastly, I guess more of a macro question for Tim or anyone on the team. What is the next leg in the Permian consolidation process? And does the consolidation slow at least from an M&A viewpoint with oil say at $55, $60 oil.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Well oil volatility has always been the enemy of consolidation, it seems like. And everybody has been saying for several years that consolidation is going to start next quarter and it never has. So I mean, yes, last year was a pretty active year though in, deals in the Permian. So I think you're going to see a steady stream of the map resolving itself to who the final players are going to be that can really execute with the scale and I also mentioned blocky assets are very critical. So, I think it will take years of work. I think for -- the picture to resolve itself.

Richard Tullis -- Capital One Securities -- Analyst

All right. Well, that's all from me. Thank you.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Thank you.

Jack Harper -- President

Thank you.

Operator

Thank you. And our last question comes from Derrick Whitfield with Stifel. Your line is now open.

Derrick Whitfield -- Stifel -- Analyst

Thanks. Good morning, all. And certainly I want to applaud you guys on your capital discipline outlook. Perhaps for...

Tim Leach -- Chairman of the Board and Chief Executive Officer

Let someone (ph) start.

Derrick Whitfield -- Stifel -- Analyst

Perhaps for Tim or Jack, the capital efficiency implied in your 2019 and 2020 outlook is relative to consensus is quite impressive. Building on an earlier question, in your earlier PDP decline comment, Tim as you slow growth, to what degree does your base decline decrease at year-end '19 and year-end 2020?

Tim Leach -- Chairman of the Board and Chief Executive Officer

It's such a big base right now. It only moves a couple of points in the near term, but a couple of points is a big number of barrels. So, but over the long term. That's an important factor to keep an eye on.

Derrick Whitfield -- Stifel -- Analyst

Completely agree. And then referencing page 8 of the powerpoint, you guys posted a material growth in your premium resource category, are there specific areas or intervals that accounted for that significant amount of growth?

Jack Harper -- President

Hey, Derrick. It was -- it's really representative of the areas that you've seen us focusing on it. And talking about over the last 12 to 18 months. So it's driven by Northern Midland Basin, Delaware Basin. And so it really is representative of the portfolio and we'll continue to high grade that and attempt to move more resource into that category.

Derrick Whitfield -- Stifel -- Analyst

Great. And thanks for the update and taking my questions.

Tim Leach -- Chairman of the Board and Chief Executive Officer

All right. Thank you.

Jack Harper -- President

Thank you.

Operator

Thank you. And that concludes our question-and-answer session for today's call. I would now like to turn the call back over to Tim Leach for any further remarks.

Tim Leach -- Chairman of the Board and Chief Executive Officer

Thank you for your attention. I know there's a lot of earnings coming in today and the lots of calls, but I appreciate your interest in Concho and look forward to talking to you in the next quarter. Thank you very much.

Operator

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

Duration: 61 minutes

Call participants:

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

Tim Leach -- Chairman of the Board and Chief Executive Officer

Jack Harper -- President

Arun Jayaram -- J.P. Morgan -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

Phillip Jungwirth -- BMO Capital Markets -- Analyst

Will Giraud -- Executive Vice President and Chief Operating Officer

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Bob Brackett -- Bernstein Research -- Analyst

Drew Venker -- Morgan Stanley -- Analyst

Michael Hall -- Heikkinen Energy -- Analyst

Robert Morris -- Citigroup -- Analyst

Paul Sankey -- Mizuho Securities -- Analyst

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Ryan Todd -- Simmons Energy -- Analyst

John Freeman -- Raymond James -- Analyst

Charles Meade -- Johnson Rice -- Analyst

Jeanine Wai -- Barclays -- Analyst

David Deckelbaum -- Cowen -- Analyst

Nitin Kumar -- Wells Fargo -- Analyst

Richard Tullis -- Capital One Securities -- Analyst

Derrick Whitfield -- Stifel -- Analyst

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