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PDC Energy Inc  (NASDAQ:PDCE)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the PDC Energy Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, instructions will follow at that time.(Operator Instructions)As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mike Edwards, Senior Director of Investor Relation, you may begin, sir.

Mike Edwards -- Senior Director Investor Relations

Thank you. Good morning, everyone and welcome. On the call today we have Bart Brookman, President and CEO; Lance Lauck, Executive Vice President; Scott Reasoner, Chief Operating Officer; and Scott Meyers, Chief Financial Officer. Yesterday afternoon, we issued our press release and posted the slide presentation that accompanies our remarks today. We also filed our 10-K. The press release and presentation are available on the Investor Relations page of our website, which is www.pdce.com.

I'd like to call your attention to our forward-looking statements on Slide 2 of that presentation. We will present some non-US GAAP financial numbers today. So I'd also like to call your attention to the appendix slides of that presentation, where you'll find the reconciliation of those non-US GAAP financial measures. With that, we can get started, and I'll turn the call over to Bart Brookman, our CEO.

Barton R. Brookman -- President and Chief Executive Officer

Thank you, Mike, and hello, everyone. This morning, I'm going to let Scott and Scott, cover the report of what I think is a terrific fourth quarter. The resilient 2019 plan, we rolled out a couple of weeks ago, they will also give an early look at what is an exciting 2020 outlook. First, I think it's important to refresh everyone's memory on PDC's corporate strategy for long-term value creation, our strategic priorities and the confidence we have to execute our business plan. This first slide, let me briefly summarize the six components of our strategy.

First, employee safety and protecting the environment. Second, to deliver top tier financial metrics. Third, maintain competitive value add drilling inventory. Fourth, deliver sustainable peer competitive operating results. Next, drive technical innovation throughout PDC and six and last, build a best-in-class organization.

These six long-standing priorities provide the foundation for PDC's decisions and strategy and will remain our focus as an organization going forward. However, recognizing the recent shifts in the market climate, let me discuss how two of these objectives are evolving in a changing landscape, in our strategic planning process. Those two being providing top tier financial metrics and delivering sustainable peer competitive operating results. Should note both are highlighted on the strategy slide.

This next slide highlights our ability to adapt around the two priorities I noted, particularly in a $50 oil, $3 gas world. Remember, we have a successful track record executing on our strategy over the last several years and this has positioned us to remain focused on returns and pursue free cash flow.

Let me walk through some of the changes, we are making. While we continue to understand the importance of NAV and balance sheet strength. Our long-term business plan will be executed with the following new set of financial and operational components. First, sustainable free cash flow. We have line of sight year-over-year growth and free cash flow exceeding $50 million of growth per year.

Next, with consistent repeatable free cash flow or a significant asset monetization event, we will consider returning capital to our shareholders. Second, financial and operational discipline. Line of sight, both G&A and LOE for the Company, each to be under $3 per Boe. And very important, we believe we can achieve our cash flow neutrality goal, even at $45 oil.

Third, return on capital. In a moment, I'll discuss our focus on cash flow margin, while we pursue portfolio level, rate of return threshold over 50% throughout our drilling inventory. Fourth, growth. Debt adjusted cash flow per share growth, over 10% and production per share growth, over 10%. As we will show you later in the presentation, these strategic priorities are achievable for many years to come and provide catalyst needed for adding value to our shareholders.

This next slide, addresses changes to the corporate metrics for PDC which tie to compensation. We believe these proposed new metrics will further align management's compensation with the Company's commitment to capital efficiency in generating sustainable returns for investors. Five metrics, two important changes. Let me we quickly cover these.

First, free cash flow margin has been added while leverage ratio has been removed. This is calculated as free cash flow divided by the capital investment of the Company. Second, cash flow per share has been modified to debt adjusted cash flow per share. Third, our total combined LOE and G&A per barrel as a cost structure measurement tied to profitability and productivity for the Company.

Fourth, production, always a measurement of operational success but expect more moderate growth going forward. And last, our fifth, corporate metric capital efficiency, a one-year measurement of our drilling F&D for the annualized drilling programs. What is most exciting for the Company, we have the assets, the drilling inventory and the organization to deliver on all the strategic objectives, I've outlined.

Last, before turning the call over to Scott, I would like to address the recent filing by Kimmeridge Energy Management. As we stated in the press release issued last week, we are open to the opinions of all shareholders and take constructive suggestion seriously.

We've had numerous discussions with Kimmeridge, just as we engage with other shareholders to better understand their views. Our Board and management team routinely review our portfolio. Our strategy and the structure of the Company with the goal of driving shareholder value. We will continue to consider the suggestions and perspectives in the 13D filing, consistent with our commitment to advancing the best interest of the Company and all our shareholders.

I would like to remind everyone, the purpose of today's call is to discuss our financial results for the fourth quarter year-end and our outlook. We ask you please keep your questions focused on our business plan. Thank you in advance for your cooperation. I will now turn the call over to our COO, Scott Reasoner for an operational update.

Scott J. Reasoner -- Chief Operating Officer

Thanks, Bart, and good morning. Before getting into the numbers, I want to take a minute and thank our employees for the tremendous work they do each and every day. There were many challenges in 2018 that were both in and out of our control and by constantly focusing on safety and attention to detail, we are extremely proud to be in the position we're in today and it's because of your efforts.

Now on Slide 8, you can see our production for the fourth quarter averaged 128,000 barrels of oil equivalent per day, which is a very impressive 17% growth over the third quarter. Capital for the quarter came in at approximately $210 million with about a 60-40 split between Wattenberg and Delaware. I want to point to our Delaware Basin acreage count is now approximately 42,000 net acres. Our year-end acreage count was approximately 51,000 acres, however, we had approximately 9,500 net acres expire in the first quarter and anticipate nearly 8,500 net acres to either expire or be monetized the remainder of this year.

These acres are primarily in Culberson County and have a pretty immaterial impact to our two focus areas of Block 4 and North Central. On Slide 9, you can see the strong growth in production in the fourth quarter and the positive impact LOE which is down to just over $3 per Boe. On the production side of things, the Wattenberg saw very effective midstream run times, including DCP's new Plant 10, that push line pressure lower and our volumes, higher. Both of these trends have continued so far in 2019.

In the Delaware, we saw strong growth in the quarter to approximately 31,000 barrels of oil equivalent per day. As a reminder, we released the Delaware completion crew in early October. So our turn in-lines were weighted to the first half of the quarter. This downtime toward the end of 2018 plays into our 2019 guidance expectation of a slight decline in production in the first quarter. Completion activity has resumed with the first couple of 2019 wells turned in-line, a few weeks ago.

In terms of LOE, Wattenberg came in at $2.71 per Boe in the quarter and under $3 per Boe for the full year. While Delaware is approximately $4.15 per Boe for both time periods. This is strongly tied to the uplift in volumes seen in both basins and we expect this trend to continue as we move through 2019.

On Slide 10, we detail our capital plans for 2019, which include capital investment excluding corporate capital of $810 million to $870 million. At the midpoint, this represents a reduction of approximately $150 million compared to 2018 capital. I'll note, this also includes $40 million of Delaware midstream investment. We believe, we are on track to execute the divestment of these assets in the first half of this year and that a portion of the 2019 investment will either be recouped or not spent. As you can see on the bar chart, we anticipate generating adjusted cash flow from operations of $840 million to $890 million assuming $50 WTI and $3 gas. At the midpoint, this plan generates approximately $25 million of free cash flow. With pricing where it is today, our free cash flow quickly climbs north of $50 million before making any adjustment to the midstream capital outlay.

Finally, we anticipate this plan to generate production growth of approximately 20% year-over-year. In the Wattenberg, we're clearly in development mode with 2019 being all about efficiencies. We expect to invest approximately $500 million in 2019 to turn in-line between 110 and 125 wells. The pie charts on the top right of the Slide 11 show the breakdown by lateral length of our turn in-lines this year compared to 2018.

As you can see, MRL and XRLs account for approximately 80% of 2019 turn in-lines compared to less than 50% in 2018. In fact, we plan to turn in-line approximately 20 fewer net wells in 2019 but reach a greater amount of lateral feet due to these efficiencies and our increased working interest. This is most evident when looking at our remaining inventory. Excluding DUCs, our year-end 2000 inventory was approximately 1,500 compared to approximately 920 at the end of 2018. However, the average lateral length has increased by 30% to over 8,200 feet while the average working interest has also increased. These efficiency gains are largely possible due to the tremendous work our land team has done in blocking up our leasehold for the last few years.

Shifting over to the Delaware. We anticipate investing approximately 40% of our total capital or $350 million in our 2019 plan. In 2019 we have modified our completion design to reflect increased stage spacing and slightly less proppant per foot. We believe these tweaks which will help save more than $1 million per well will not impact the productivity of our wells thus improving economics.

We also believe there is room to improve these costs as we continue to test more local sand and improve our drill times which have been averaging less than 30 days of late. As we mentioned in our release, our plan assumes dropping the rig count from 3 to 2 around mid-year and turning in-line 20 to 25 wells compared to the 26 wells in 2018.

Similar to Wattenberg, our mix of turn in-lines is weighted toward longer laterals, which in this instance completely eliminates SRLs from the 2019 plan. Look for us to try and continue this trend. Moving forward as the economic benefit of long laterals is more evident in the Delaware compared to the Wattenberg.

I'd like to close by going into more details surrounding our Block 4 acreage in our upcoming plans for the area. As you can see, we're showing a bit more detail in terms of our expected GOR than on previous calls by defining Block 4 into three sub areas. As you're all aware, our Grizzly Pad which tested 12 wells per section in the Wolfcamp A was turned in-line late last year in Area 3 as shown on the map. As we indicated on our last call, the productivity of this pad was below our expectations due to localized rock quality and fluid properties, knock down spacing. These wells have since been placed on artificial lift and we've seen their production stabilize and they're providing valuable data in terms of productivity differences between the upper Wolfcamp A and lower Wolfcamp A.

I mentioned all this because in 2019, we plan to continue testing various spacing assumptions and landing zones in an effort to find the right balance between rate of return and net present value.One of the first test is our 7 well Tinman pad that is planned in Area 3. Our guidance assumes similar results to the Grizzly Pad. It is designed to test a variety of spacing assumptions between the Wolfcamp A and B zones. Overall, we are excited about our plan in the Delaware this year and look forward to continuing climbing the learning curve. With that, I'll turn the call over to Scott Meyers for a financial review.

R. Scott Meyers -- Chief Financial Officer

Thanks, Scott. I plan to give a couple of key highlights for both the fourth quarter and the full year 2018, before giving detailed financial guidance for 2019 and an updated look at our 2020 outlook. As a reminder, I plan to cover both non-US GAAP and forward-looking statements and want to point out our disclosures and reconciliations of these metrics can be found in our slide deck.

Net cash from operating activities for the quarter was more than $300 million representing a year-over-year growth of 76% compared to the fourth quarter of 2017. This was largely driven by an increase in total sales between periods of nearly 40% as well as positive changes to working capital compared to prior year.

In terms of G&A, we saw 40% increase in both terms of full year and fourth quarter numbers. We touched on this in the third quarter, but it's worth mentioning again G&A in 2018 include $16.5 million in legal related costs and approximately $13 million for a government relations department. Additionally, we made a strategic decision to upgrade our systems and processes at PDC during 2018 and 2019. We are currently in process of replacing our ERP system and streamlining our processes so we are more scalable and efficient in 2020 and beyond. G&A is obviously something that comes under a lot of scrutiny both at PDC and across the industry, and I want to stress that we are extremely focused on driving these costs down, while also positioning ourselves well for the future.

As I'll show you in a few minutes, we project our 2019 G&A per Boe to decrease nearly 25% to just over $3 per Boe and target below $3 per Boe in 2020. Quickly touching on non-US GAAP metrics, the bar graph show pretty steady growth in both adjusted EBITDAX and adjusted cash flows. These increases are largely production-driven and as you'll see in a few slides, we expect continued annual growth in both of these numbers despite the expected reduction in per Boe sales price.

Moving to Slide 17, we give a detailed breakout of our production cost. Scott has already touched on LOE, but it's worth highlighting again that we've been able to deliver, reduced cost on a Boe basis for three consecutive quarters. We are very pleased with Wattenberg, LOE ending the year under $3 per Boe, especially given the third-party midstream challenges we faced and the impact it had on both in terms of higher costs and lower volumes.

In the Delaware, we are similarly happy with the LOE in the $4 per Boe area. We think there are some efficiencies to gain here but at the end of the day, we think an all in corporate wide LOE per Boe of $3 is extremely competitive industrywide. We look to target a corporate wide LOE per Boe below $3 in 2020.

Quickly highlighting our financial position, you can see on Slide 18 that we're able to generate roughly $25 million of free cash flow in the fourth quarter. Due to this we exited 2018 relatively undrawn with our revolver with a total liquidity position of $1.3 billion with no near-term debt maturities. Our leverage ratio improved to 1.4 times compared to 1.9 times at the end of 2017. In terms of hedges, you can see that we have approximately 50% of our 2019 oil volumes hedged at approximately $55 per barrel.

I think, it's important to note that the majority of our Delaware barrels receive -- Brent (ph) base pricing meaning that this percentage is actually much higher in terms of our WTI exposed barrels. We also have a great start on our 2020 program with 8.6 million barrels hedged at nearly $60 a barrel.

Shifting gears to 2019, we show our anticipated cost structure and commodity mix. As you can see, we expect our commodity mix and price realizations to be relatively unchanged from last year. In terms of cost, we expect our TG&P to be relatively in line year-over-year. Our LOE and G&A per Boe are both expected to decrease year-over-year. As I previously mentioned, G&A per Boe is expected to decrease 25%. While our LOE per BOE is expected to decrease 5% to 10%.

We are very pleased with both of these trends and plan to remained focused on moving forward -- moving this forward as can be seen by the inclusion in our compensation metrics. Finally, moving to Slide 20, we give our first look at our updated 2020 outlook at a constant $50 oil and $3 gas price deck. Providing these multi-year outlooks is something we take great pride in at PDC, as we believe it differentiates ourselves compared to many of our peers. We believe this outlook does a great job of showing that we did not sacrifice our 2020 outlook for our 2019 plan.But actually improved year-over-year in many metrics.

Looking at the table, you see we highlight not only our projected free cash flow, but also our free cash flow margin, which we define as our annual free cash flow divided by annual capital investments. Both of these metrics, screen competitively in '19 and strong in 2020 as we project to generate $175 million in free cash flow between the two years at a $50 oil price. Additionally, we show our production growth per debt adjusted share and an effort to emphasize our shifting strategic priorities. These calculations assume our average 2018 share price of over $51 per share and would further improve if we reran it at the 2019 year-to-date price.

The last thing, I'll add is our 2020 capital plan is currently projected to modestly increase compared to 2019, as our range includes the possibility of additional completions in each, the Wattenberg and the Delaware. These completions would likely be done if driven through efficiency gains and or improvement to our 2021 outlook. And our ability to meet our strategic priorities that Bart already outlined on Slide 5.

In closing, I want to stress that we intend to remain extremely disciplined with a long-term focus on delivering value to our shareholders.

With that, I'll turn the call back over to the operator for Q&A.

Questions and Answers:

Operator

(Operator Instructions)

And our first question comes from Mike Kelly from Seaport Global. Your line is now open.

Mike Kelly -- Seaport Global -- Analyst

Hey guys, good morning.

Barton R. Brookman -- President and Chief Executive Officer

hi Mike.

Mike Kelly -- Seaport Global -- Analyst

Hi, congrats on the fabulous updates thus far in 2019. And I wanted to kind of jump into that -- the money Lance Lauck slide on Page 20. And really ask you, if you look at this great trajectory 2020 over 2019, and I just wanted to get a sense even maybe beyond this. Is there anything Bart, that would really hold you back from being able to replicate this sort of results beyond 2020 and curious if there is -- if you see there's potential upside to that free cash flow margin number and free cash flow number aggregate as you go further while maybe keeping that ability to keep growth on a debt-adjusted per share basis at that 10% or greater level? Thanks.

Barton R. Brookman -- President and Chief Executive Officer

Yes, and Mike, it's a great question. We -- we're really encouraged by our longer-term outlook, we actually have a five year outlook we run, which obviously we haven't shared with the market, but the quality of our Wattenberg and Delaware assets, the frontline returns coupled with some of the new tactical financial and operational things, I talked about, and Scott talked about, really give us line of sight as we go to 2021 and '22, to continue advancing all of these metrics.

So obviously, I think the thing you can expect is more moderate growth, this free cash flow, I think we have opportunity to continue build on it. And the capital spend is something obviously we have optionality based on what Scott Meyers talked about -- about adding some additional frac crews, making sure we're not building too many DUCs. We have optionality, at some point in time of adding rig but right now, we've got this on a fairly flat rig outlook.

So yes, we've got a good strong five year outlook and then we have good optionality among the two basins as we continue digging (ph) -- as Scott Reasoner said, we're in full development mode in Wattenberg and Delaware right now, is obviously still emerging. We're learning a lot, but we are extremely pleased with the results we're getting right now. Lance, jump in here, and if you have anything to add on this.

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

No, I think that -- that's a good projection and outlook. There is lot of optionality in our portfolio for the continued debt adjusted cash flow per share growth, as well as continuing to improve the metrics that Bart has shared on. So I think we're in a very, very good position.

Mike Kelly -- Seaport Global -- Analyst

Great. Appreciate that. And switching gears to the midstream front, you kind of teased us a little bit on this potential sale you expect first half of this year. And I guess kind of a two part question there, one, just trying to get my arms around how we should think about the potential? The potential for this asset, I don't know if you want to lay it out in terms of what you spent the day or EBITDA that you've generated, but just trying to frame valuation there to some degree that you feel comfortable giving us?

And then the second part is just thoughts on use of proceeds from that sale. Thanks guys.

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

Yes, Mike. Thanks. Good question. As far as how we have spoken about our Delaware Basin, midstream assets, what we've outlined to the market is that we've invested approximately $150 million through year-end 2018. We spoke a few minutes ago about the budget of around $40 million for 2019, a portion of that which we believe will get returned as part of this monetization.

We've not gone into EBITDA metrics or numbers or multiples there, Mike. But, we've really just spoken about the invested capital to date. I think one of the things that we think about as part of this process, we've gotten some questions around just some of the timing that we're looking in the first half transaction now. And just -- just to share additional insight to that. We spend a lot of time with the finalists on the other side of this just walking through our plans for growth for the future, understanding how our assets get integrated into their assets as well.

And then, talking to all the operational conditions, because this is a -- this is a long-term relationship that we are going to be putting in place here. And so we spend that quality time making sure we understand those key components of where and how the terms are going to work going forward. So we're -- the teams done a really good job on that. And then finally just to kind of close it out as far as the use of proceeds, look, we're going to consider a variety of options including the consideration to return capital to shareholders, as Bart outlined earlier in the presentation, today.

So hopefully, that answers your questions there, Mike, on that.

Mike Kelly -- Seaport Global -- Analyst

Yes, Thanks Lance. Congrats again, guys.

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

Thanks Mike.

Operator

Thank you. And our next question comes from Welles Fitzpatrick from SunTrust. Your line is now open.

Welles Fitzpatrick -- SunTrust -- Analyst

Hey, good morning.

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

Hey Welles.

Welles Fitzpatrick -- SunTrust -- Analyst

On the kind of -- I don't want to call it guidance, so let's say the theoretical 2020 plan, obviously you are focused a little bit more on the Wattenberg than the Delaware. Is that -- would you describe that as a function of the Delaware still emerging as you said in the prepared remarks, or -- are you really trying to get to as much of are you trying to plough through as much of the Wattenberg now before any potential rule change. Because I know the omnibus bill doesn't sound like it's all that bad?

And lastly, is it contingent on Big Horn FID?

Scott J. Reasoner -- Chief Operating Officer

This is Scott, Welles and I -- I will start out with the -- the way we've approached looking at our capital there and we -- we're really excited about where our Wattenberg is. Obviously it continues to do what we expect it to do pretty much every day and that gives us a really good feeling and we are moving the Delaware in that direction. The maturity differences are really great in terms of the way we can balance those two. And I think that's what we've been focused on is making sure we're doing all we can to generate a really positive rate of return, at the same time still developing our Delaware and we are learning a heck of a lot as we are moving along there, the downspacing efforts, the different benches, our ability to continue to test the additional zones that we haven't relied on for the overall look at the Delaware well count that type of thing is really still something that, we're focused on.

And, so we're really trying to balance all of those, all of those factors, including the -- including the idea that we love -- keep our motion and movement forward in the Wattenberg, because of the current state of the regulatory world. So I think we're in a good spot with where we are.

Barton R. Brookman -- President and Chief Executive Officer

Yeah what -- just one add, Welles and then I'll put this over to Lance on the takeaway. I think Scott and the operating teams have done a really phenomenal job of pursuing optimum capital efficiency in both basins with a balance between the rig base and the frac crews and in Wattenberg, in particular, it's probably a signature that is maybe leading in the country as far as our efficiency and our drill times, followed by the efficiency in our fracs and pounds of sand per day that we're completing. And that all lines up to some of the most efficient operations we clearly in the Wattenberg.

So in Delaware, as Scott said we're making great strides overall in our drilling and completion. So we kind of start with making sure we're not disrupting that machine in both basins and then we build it up to a total capital allocation. Lance, you want to jump on the takeaway?

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

So Welles, from Wattenberg as we look at the gas processing there with DCP, as you know first of all Plant 11 is scheduled in June of 2019 to begin operations and it's a projection that we have that's a ramp in volumes that go through that plant. So it's a few months before you get up to the full 200 million cubic feet per day and that's how we've modeled in our guidance, and that's just their start-up procedure that they conduct.

Additionally, there's a 100 million a day bypass that's in August of this year that will bring additional capacity to their system. So they are in a good spot, they are on track with this and so we're very pleased with the work that DCP is doing on Plant 11. And then as you spoke of Big Horn Plant 12, DCP is targeting a second quarter 2020 start-up for that plant. And so we look forward to that plant coming online as well and adding additional capacity to their total super system (ph)

Welles Fitzpatrick -- SunTrust -- Analyst

Okay. No, that makes total sense. And then just one last one, last quarter I think is a little bit too early to get an update on maybe production in EURs on those -- the change methodology in the Wattenberg where you're putting in extra stage at the toe and the heel. Can you talk to that at all? Are you seeing about that 10% uplift that you might expect?

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

Welles, I guess at this point, it's still too early tell. The line pressures have come down somewhat, but we still don't have a long enough run to really understand that. We do continue to do it because we have faith based on our history of extending our lateral lengths. So a lot of factors that go into that where our teams have a lot of faith that we're getting that but we still aren't able to measure it.

Welles Fitzpatrick -- SunTrust -- Analyst

Okay. No, totally understood. Congrats. Good quarter and breakout.

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

Thank you.

Operator

Thank you and our next question comes from Paul Grigel from Macquarie. Your line is now open.

Paul Grigel -- Macquarie Capital Inc. -- Analyst

Hi, good morning. Could you touch on where your current corporate decline rate is, and if there is any sizable difference between the Delaware and the Wattenberg?

R. Scott Meyers -- Chief Financial Officer

This is Scott. And I'll give a little run at this and maybe Lance can bring clarity, if I don't cover the whole thing. We -- our corporate decline rate changes so much depending on the particular circumstances that we're in and every time we turn a pad on, it's a different decline rate because they are so significant contributors to the overall productivity. But and it's hard to give a current decline rate. It changes. Like I said as we bring a pad on or don't have one come on for a while. So we've struggled to really get that, our reservoir team would say, do you want this today, or do you want it tomorrow, becasue oftentimes how we look at that, how they would answer us.

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

Yeah and I -- Paul I can tell you that Delaware is probably steeper than the Wattenberg. Obviously we have a lot of legacy production. We also have a higher line pressures right now that are, as pressures come down, we're able to unbundle quite a bit of our legacy production. So that's probably over time going to be flattening the decline and then the Delaware obviously were a few years into the development of those field, so most of the wells are new and at the very front end of their curve.How that all looks, when you roll it up again, I think that's not a number we've put out in the market.

Paul Grigel -- Macquarie Capital Inc. -- Analyst

Okay. And I appreciate it's challenging and varies on year-over-year versus ex-Texan (ph) and timing of pads, is there an underlying assumption within the current plan on what the PDP decline rate was for replacement maybe on a '19 over '18 basis?

Barton R. Brookman -- President and Chief Executive Officer

I think there is an assumption. I -- we would have to go -- cut that apart and look at our model, but it's not something we reveal to the market.

Paul Grigel -- Macquarie Capital Inc. -- Analyst

Okay. And then I guess maybe focusing out on 2020 still pretty robust growth and certainly a robust free cash flow margin as well. Could you maybe provide some color on how you arrived at this particular outcome as being the one as opposed to maybe higher growth or maybe one with lower growth and more free cash flow? Just kind of how you arrived at that the plan you did versus the other considerations?

R. Scott Meyers -- Chief Financial Officer

All right this is Scott Meyers. I will head the first crack and I think throw it back to Lance or Bart for some more color. But if you look at what Bart outlined in the beginning of the presentation about $50 million of free cash flow being able to grow the Company in the 10% rates. What we're looking to do is be able to do this for multiyear approach. So you can see our numbers here, especially on the free cash flow are probably a little bit higher than that, but to go much significantly higher than that puts more of a strain on be able to do this in 2021 and 2022 and beyond.

So what we're really trying to do is have steady consistent growth year-over-year, improving our free cash flow, our free cash flow yield and still growing the Company and what we think is competitive rates and driving down those G&A and LOE cost on a Boe basis at the same time. So that's kind of what we do when we mix everything together for what we are planning on doing in the next few years. Anything else sir?

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

Yeah. Paul and I think -- I think back to some of the earlier comments, we really -- we start also, when we look out and really working with the operating teams and finding that operational balance that is driving turn in-line schedules not over-building DUCs, frac crew efficiency behind the drilling rigs, midstream takeaway DC capacities, oil takeaway, we also consider netbacks basis differentials, the capability of our operating teams and we've put that all in a bucket and say, what's best as we're trying to achieve the strategic priorities that I outlined.

So there is probably 20 different levers we're pulling at any given point in time. It's always a challenge. The good news is the assets are quality, and the teams are doing a phenomenal job. So, we're extremely pleased with the outlook. But I think it's important we also have the ability to pull a lever here there and move these metrics a little bit, but I think what we're trying to provide is the quality of the assets and our ability and the sustainability of this outlook.

Paul Grigel -- Macquarie Capital Inc. -- Analyst

Okay. And yeah, make sense. I guess one clarifying question just there maybe for Scott Meyers. Is that part of the reason that DUC count increases in '19 is a little bit lower CapEx and free cash flow but also set up for 2020 kind of balancing those items. Is that been interpreted correctly?

R. Scott Meyers -- Chief Financial Officer

Yeah, I think that's fair and also as we start going into our Wattenberg Field and our three different areas of development, it's naturally going to lead to a little bit higher DUC count from an operational standpoint for our teams, for our safety, of our employees too, but yes that absolutely comes into play making sure that we're balancing our CapEx and our growth this year. And again, as Scott has pointed out, we are really operationally efficient with the three rigs running in one full time frac crew and so we feel very comfortable that leads to the best overall economics for the individual development of those wells.

Paul Grigel -- Macquarie Capital Inc. -- Analyst

Understood. Thank you very much.

Operator

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

Leo Mariani -- Keybanc -- Analyst

Hey guys, I was hoping you could give a little bit more color around kind of use of free cash flow, you guys certainly talked about returning capital to shareholders as a consideration. Just trying to get a sense of what other considerations are, let's just say, prices do better this year, you guys sell the midstream properties, could you potentially recycle some of that proceeds into maybe adding some additional acreage? Just want to get a sense of how you're thinking about balancing potential new acreage purchases with returning capital to shareholders.

Scott J. Reasoner -- Chief Operating Officer

Yeah Leo, let me jump on this and Lance can add to this. And I think everybody is fully aware we're always in the deal market. We're always out looking at inventory adds. I would say right now, our mode is we're a notch notch, maybe a big notch more finicky. Right now, we're slowing down. Our drilling pace that stretches out your inventory, gives us a little more line of sight of a longer runway on that and we've been -- we've been in detailed discussions as a management team and moved the Board around use of proceeds. We haven't finalized everything, I think everybody on the call understands what that means and what our options are. And I think when you ask the question, you said, what's the balance? And I think that's probably the right word, right now. We're giving consideration, all of them.

We've got to continue to watch the market and I think the key in this is what I opened with and what -- what Scott reinforced. We want to be in a mode of generating free cash flow quarter-after-quarter and have confidence in that, really understand where the markets are, understand our hedge book and have total confidence in this outlook, which we do. But we like to be in the middle of it, versus it being an outlook and we're just emerging into that zone. So more to come on it, OK.

So we are giving consideration all of the above.

Leo Mariani -- Keybanc -- Analyst

Okay, that's helpful. And I guess when you guys talk about returning on capital to shareholders. I guess, are you guys more focused on buybacks versus a potential dividend this time?

Scott J. Reasoner -- Chief Operating Officer

I think we're giving consideration to both and again I would go back to your question on balance where, I think we're having balanced, robust discussions around both of those. And it's very interesting to hear the market's opinion on A versus B.

Leo Mariani -- Keybanc -- Analyst

Okay. And I guess can you guys maybe just also comment on how you see the current kind of Colorado regulatory development sort of going these days. I mean, obviously you've got a bunch of new folks in the legislature, just wanted to get a sense of what those discussions are and continue to hear more about local control out there in the press and just wanted to get a sense of what you guys think that could mean for PDC going forward?

Barton R. Brookman -- President and Chief Executive Officer

Yes. And there's probably not a lot to update from what we've communicated in the past. Obviously, the new administration. We're incredibly engaged. We have not seen an energy bill, we have full knowledge that there is an energy bill being drafted. We anticipate the next month, we are going to see something and what that looks like, we don't know. What we do know and what we've heard is local control is one of the primary themes within the bill and I would just encourage everybody to really step back and look at PDC's acreage position in Weld County, which is very pro-oil and gas.

We've operated there for over 20 years, we have a phenomenal reputation. We have intense efforts to be engaged with the communities and be involved with the communities and almost all of our acreage is not overlapped with the annexed areas of the community. So we feel like we've tactically got a very, very strong position in Weld County and have line of sight of development of our acreage. So more to come on this. It's a changing environment and I know over the state right now with the new Governor and new legislative group, they've got multiple different platforms that they're working on.

So it's probably been slower than we anticipated but we do think, we'll hear some over the next month.

Leo Mariani -- Keybanc -- Analyst

Okay, thanks a lot.

Operator

Thank you. And your next question comes from Brian Downey from Citi. Your line is now open.

Brian Downey -- Citi -- Analyst

Thanks for taking the questions. We appreciate the solid outlook and clarity on the plan to 2020. Can you discuss what the cost inflation assumptions are baked into those numbers? It sounds like Wattenberg well cost range is flattish this year with some changes in lateral length and Delaware costs are falling due to a completion design, but wasn't sure if there are any nuances embedded in the assumptions there?

Barton R. Brookman -- President and Chief Executive Officer

At this point, we have not built any changes to that. The three, four, five for Wattenberg is what we're holding with and we are at about 11.5%, 13% and we do have some double excels in our plans. So, 2.5 mile laterals but we are looking at about $15 million on. So those are the numbers at this point.

Brian Downey -- Citi -- Analyst

Okay and can you talk a little bit more about the Block 4 Area 3, development at Delaware, it sounds like you'll have some learnings from the Grizzly Pad and with the plan in '19, optimized development completion before really attacking Area 2, is that the right way of thinking about it for 2020?

Barton R. Brookman -- President and Chief Executive Officer

Yes, we actually have a combination, we're speaking to Area 3 mostly because that's the near-term work that we're doing. But as we go through the later part of this year, we're drilling in the -- in that Area 2 over to the west in that -- I am sorry, over to the East. As we go through that we are -- we are absolutely downspacing understanding the and still debating exactly how to lay those wells out in terms of the spacing but really getting to the Area 2 is our next step. And I think when we look at that, we have two fairly large pads.

We're just -- we're just not quite ready to say exactly what we're going to do there yet. And maybe I know the -- even this morning, the team was meeting on exactly how do we lay these wells out and in what zones we're considering the Wolfcamp C in this discussion, as well as an additional Bone Spring well in it too, so all of that you have to cut them but all of that, it will be in Area 2 on the map there.

Brian Downey -- Citi -- Analyst

Great. Appreciate it. Thanks.

Operator

Thank you. And our next question comes from Elai Cantor (ph) from IFS Security. Your line is now open.

Elai Cantor -- IFS Security -- Analyst

Hey, good morning, guys. I've got a follow-up on the A&D discussion. Can you talk a little bit more about how you're thinking about replacing what looks like one of the highest quality inventories across the onshore US landscape, and specifically, how your preference to bolt on a DJ compares to adding something at Delaware whether or not you look outside of those two areas and how the bid-ask spread today compares to where it was in third quarter of last year when oil prices were higher?

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

Elai, this is Lance. As we look across sort of both our basins, the DJ and Delaware. I mean, we're clearly in the deal flow as far as searching those best opportunities to bring bolt-ons to the company, to grow the inventory. I think one of the key things that we want to continue to stress is that we have a very high threshold for new acquisitions and we want to make sure, what we would be acquiring -- would be acquiring at the right place, the right price with the great rock quality that we have with our current inventory.

I might also point out that organically, we'll continue to try to find ways to increase our inventory organically. For example, we've got some Wolfcamp C tests then in the Delaware, as well as Bone Spring tests in the Delaware. So as things like that test in the new intervals that we think would be helpful for growing out that inventory also. As you look at which basin, the DJ versus Delaware, we're basically looking at both basins and it gets down to recognizing that scale is important because with the scale, it enables us to be more capital efficient and enable us to improve margins, given the increased economies of scale that you would have in opportunities like that, so we continue to stay in the deal flow.

We've looked a lot opportunities last year, we didn't acquire anything last year because we didn't see the opportunities that best fit at least where we are pursuing it, what we are focused on. So hopefully, Elai, that gives you kind of the -- a high-level look at how we think about the bolt-ons as far as adding inventory going forward.

Elai Cantor -- IFS Security -- Analyst

It does. Thanks for the color, Lance. Just in terms of the bid-ask spread, what are you -- what are you seeing on that front, and is looking outside of the DJ and Delaware out of the question at this point or is it something that you're entertaining?

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

It's hard to project sort of the bid-ask spread. I mean, right now, I mean, clearly with the volatile oil prices that's gone from what was it the 70s October last year down to I think as low as 45.50 (ph). That really puts everybody on edge as far as saying, do I want to transact, do I not want to transact. So that in and of itself tends to push somewhat of a pause button on pursuing opportunities like that, so that's something I always keep in mind as we go forward.

And then as far as other basins. We continue to look very hard at our two existing basins, of course, but then if there was another basin that we at least start to look at some, we have looked at some things in the Midland Basin, but that was -- it was just very preliminary and not something that we saw the size and scale that we wanted to move forward with. But what we're looking for is just to have the big, thick reservoirs that's got the high oil content and a lot of opportunity for inventory in the future. But, look at us -- is focused on the Delaware and the DJ.

Elai Cantor -- IFS Security -- Analyst

Okay, thanks for that Lance. As for my follow-up, can you give us more detail on what spacing assumptions you're using in the Delaware Basin to get to the 365 remaining locations, are there any differences that you're using in the East versus the Central and what exactly you are planning to test with the Tinman?

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

Yeah, well I'll walk through the first part of that and then turn over to Scott, maybe he will talk a little more about the Tinman specifically there. The spacing assumptions that we use to derive the 365 locations, they vary across our acreage position East versus the North Central, which are our core areas and a solid good quality rock. We really like these areas and we have a range, if you look at everything out there between 14 and 20 wells per section in these oilier areas and that's kind of the range. And the locations themselves are predominantly the Wolfcamp A, Wolfcamp B. We have a -- we've actually put a few select wells in there for the Wolfcamp C in the Bone Spring, some of what we are testing here this year.

Sort of the lower side of the spacings if you will is more the North Central area because it is a little higher GOR. And then the sort of the higher ends of that might be a little bit closer to the Eastern side, which got a higher oil mix there. So that's sort of how we look at it. We're still testing and looking at different opportunities there for these spacings, but we feel comfortable with where we are at today and keep in mind, the actual ultimate spaces is going to depend on the geology, reservoir thickness, fluid regime, parent well, child wells all those types of things as it works out.

Scott J. Reasoner -- Chief Operating Officer

And when you look at the Tinman itself, we're really looking at the interaction between the A, combined Upper and Lower A and the B and it really is a fairly complex look at it, a variety of different things we're testing there and something that we're really be -- will really be excited because when you integrate that B with it, obviously you have to worry about what does that do to the Lower B, or the Lower A, that type of thing and placing those wells properly as part of what we're trying to get to.

So about a whole series of different tests we're looking at, when we look at that Tinman.

Elai Cantor -- IFS Security -- Analyst

Scott, from a horizontal perspective, what spacing are you guys going to be testing in A and then the B and the Tinman?

Scott J. Reasoner -- Chief Operating Officer

I don't know if I have those specifics with me unfortunately.

Elai Cantor -- IFS Security -- Analyst

Okay, thanks for the color guys.

Operator

Thank you. And our next question comes from John Nelson from Goldman Sachs. Your line is now open.

John Nelson -- Goldman Sachs -- Analyst

Good morning.

Barton R. Brookman -- President and Chief Executive Officer

Hi John.

Scott J. Reasoner -- Chief Operating Officer

Hello John.

John Nelson -- Goldman Sachs -- Analyst

Congrats on the leaderships to strengthen the alignment of management incentives with shareholder desires and the very, very thoughtful multi-year plan.

Scott J. Reasoner -- Chief Operating Officer

Thank you.

Barton R. Brookman -- President and Chief Executive Officer

Thanks for that John.

John Nelson -- Goldman Sachs -- Analyst

If I can pick up on the former point, the free cash flow margin metric was a new one for me. Could you just speak to how the Board views the merits of this metric?

R. Scott Meyers -- Chief Financial Officer

Well there is lots of ways we've been trying to look at different metrics to try to get a return-based approach to our numbers, and we're really looking at what can we really control and what can we really drive, and when you really look on cash on cash returns, we really think it's the best way to major companies. So we can continue to grow the cash that's coming out of PDC. In other words, our free cash -- our cash flow is growing and we can control our capital investment. We really think that shows strength in numbers. We like this free cash flow margin, and the ability to grow that at what we're projecting basically 15% in 2020 compared to our capital. We just think that helps differentiates ourselves to the peers and something that's easily comparable between companies because you don't want to worry about historical cost basis impairments and lot of other things you have to do with some of the other metrics.

John Nelson -- Goldman Sachs -- Analyst

That's interesting. For my second question, I think, a new Director of the COGCC was appointed last month, I was hoping, you can comment, if you've noticed any change in the rate of permit issuance since the leadership transition. And if you have any engagement with the regulator and are expecting any other potential changes down the line?

Scott J. Reasoner -- Chief Operating Officer

This is Scott. And we're obviously engaged, very interested in that exact -- in that exact discussion. There is more scrutiny being given to permits that are in and around normal as it's defined. I believe it's normally occupied buildings that type of thing, and I believe they're looking at something around 1,500 feet. The precise way they approach that I am not completely schooled up on yet, and I don't know that anybody is in the industry yet, but what they're doing is giving it more scrutiny.

With that, we're in a tremendous position because we've got permits that take us out into 2020 and so this, what I think is a little bit of a learning process between the industry and the new regulators is something that we can manage very effectively. We are -- even within the permits that we have submitted. We have a very short list that are given additional scrutiny.

So again, this is going to be a learning process. The thing I will say is, it's something that we feel like, according to what our -- at least according to what our land team seized so far. But as they are approaching this, it's something that we can manage it. It really is a -- is just a little bit more work on the front end of a permit to get some additional approvals from some of the offset landowners.

John Nelson -- Goldman Sachs -- Analyst

That's really helpful color. And just to I guess follow-up on that as we all kind of sit and wait to see what local control means, that comment that you have permits through or is it into 2020 or how many months, I guess what I -- is maybe the way to say it of permit cover do you have to the extent that there is --

Scott J. Reasoner -- Chief Operating Officer

It puts us into 2020. I can't speak to how far with the three rigs it really, I would just say the best -- best thing I would say is, it puts us into 2020 before we need the permits and we have submitted today even approved. And so we've got a good long runway before it becomes an issue for us.

John Nelson -- Goldman Sachs -- Analyst

Okay. Congrats again on the update. I will let somebody else hop on.

Barton R. Brookman -- President and Chief Executive Officer

Thank you, John.

Scott J. Reasoner -- Chief Operating Officer

Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from Ray Deacon (ph) from Petroletics (ph). Your line is now open.

Ray Deacon -- Petroletics -- Analyst

Yeah. Hey, good morning. Far sight (ph), I was wondering if you could give a little more detail on Slide 11. It looks like the lateral lengths went up about 30%, but the location count went down about 40%, does that reflects, I guess one year's drilling and I was just wondering if maybe you would fine-tune the location count for maybe a lower oil price or something or?

Scott J. Reasoner -- Chief Operating Officer

No, this is Scott. It really is a function of taking the locations we had. We -- obviously reduce those by the wells that we've drilled and turned in-line and then -- and then adjusting them for the lateral length, but also the additional working interest. So as we've traded, we've increased the working interest in the average well that we have, all of that a function of these consolidation efforts that we and the rest of the industry have done to really bring efficiency to all of us is something that really the math is around the longer laterals and the additional working interest and again that group of wells that's been turned in-line this year.

Barton R. Brookman -- President and Chief Executive Officer

Scott, please clarify for Ray, our total lateral feet for '18 versus '19 in Wattenberg.

Scott J. Reasoner -- Chief Operating Officer

Has got, yeah. I mean, we are doing fewer wells, but our lateral length is more than offsetting the reduced number of wells, so that is guidance -- the typical math, you're going to see going forward and it really is a more efficient -- more of we control our own destiny. We're not dependent on other operators. Typically, as you can see the working interest, we just keep going up, that just reduces. What that does is it reduces the non-op portion that we would add in someone else's wells.

Ray Deacon -- Petroletics -- Analyst

Got it, got it. And you -- I was looking at some data since the summer and it looked to me like you're drilling kind of 20% better wells per foot than the number two guy in the basin and kind of almost double the average of the basin. I don't know if my numbers jive with yours, but I -- or -- what -- how much you give the proppant per foot in the stage spacing in the Delaware, but where are you in the DJ currently?And have you been doing anything different?

Scott J. Reasoner -- Chief Operating Officer

I don't know -- we're getting to the point where we pretty well settled in and a part of it is where we are located. Obviously, we're in great rock and that's an advantage over some of our peers. But it's also hopefully part of it's because of the excellent work that our team is doing. It's really hard to gauge unless do direct offset just exactly what brings that but right now, we're at -- right at 1,100 pounds per foot still in terms of sand. Mostly 24 Northern, there are times when we have to shift off of that, if there's a bit of a shortage, but it doesn't seem to overly impact or thus we can drill -- impact the wells at all. And we're really looking at 170 feet between stages with about -- with some tests being considered at about 240 feet, again the process we have these tests in mind for quite some time, but because of line pressure, we really haven't been able to deal with that or didn't feel like it was appropriate to deal with it. We really said, let's hold until we can actually measure it testing that. And with that obviously, the 243 comes additional management of the cluster of prefs, it's not just adding stage length, it's managing the prefs clusters, as well.

Ray Deacon -- Petroletics -- Analyst

Got it, got it. Great. Yes. And just one last one, the -- the comment about the bypass in August of next year in the DJ. Is that just a -- gives you more options and smoother outlets, pure gas, is that the -- is that what it means?

Scott J. Reasoner -- Chief Operating Officer

Actually, the bypass is this year in August -- August of '19?

Ray Deacon -- Petroletics -- Analyst

Okay, '19.

Scott J. Reasoner -- Chief Operating Officer

Yes, so what it does is, it just gives the producers more opportunity to produce greater volume because of the bypass and basically what happens there is the raw gas comes to the plant, but it gets compressed and sent around the plant, and mixes at the tailgate of the plant to meet -- still need spec on the other side of it. So what it does is -- it's not processed volumes but it's volumes that are sold there on a raw Btu basis. But what it does is enables the flow of all the volumes of the producers in the field to increase. So it's more of a temporary solution, longer-term, obviously it works then moving toward, you can pass the construction to where that turns into processing capacity.

Ray Deacon -- Petroletics -- Analyst

Okay, got it. Thanks very much.

Operator

Thank you. And our next question comes from Tim Rezvan from Oppenheimer. Your line is now open.

Tim Rezvan -- Oppenheimer -- Analyst

Hi, thank you folks for taking my call. I appreciate the strong update and the efficient outlook you gave through 2020. But, I think any of us analysts would notice PDCE remains one of the cheapest E&Ps on traditional valuation metrics. So I guess for Bart, do you think this is more because of the Colorado overhang or because of inventory concerns and I guess in the absence of clarity on either of those items, do you think this issue can be addressed?

Barton R. Brookman -- President and Chief Executive Officer

The answer is yes. I think if we continue to focus on the quality of our assets and the strategy we laid out, we can make strides in that. I think there's no question, when you look at multiple, if you want to call it multiples depending on which multiple tied back to your evaluation that the Colorado operators right now are depressed.

I think it doesn't take a smart person to recognize we have a very challenging regulatory environment and we've been -- we've been fighting that for several years. So appreciate Ray's comments earlier about the quality of our rock. We still believe, we have some of the best assets in the country, some of the most capital-efficient projects. So our goal is to constantly be looking at ways to change our business plan. It's why we've tweaked some of our operational and financial strategies that we outlined and we're hopeful that those will fuel ongoing shareholder value. So it's a very fair question and obviously, you look back at the multiples even a few years ago, it was quite a spread between Colorado and some of our peers who weren't in Colorado and we've had a compression. The whole sector has come down, so the absolute multiple compression -- the band between the Colorado operators and some of our other peer -- peers is more narrow today.

But at the same time, it doesn't take away from our push to try to drive that up. So again, fair question.

Tim Rezvan -- Oppenheimer -- Analyst

Okay. I appreciate your answers. Thank you.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Bart Brookman for any further remarks.

Barton R. Brookman -- President and Chief Executive Officer

Yes. Thank you, Nicole. And thank you everyone for your ongoing support and taking the time to get an update of around our strategy and what we think is a terrific outlook. So with that, we'll look forward to seeing everybody on the road here in the future. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

Duration: 65 minutes

Call participants:

Mike Edwards -- Senior Director Investor Relations

Barton R. Brookman -- President and Chief Executive Officer

Scott J. Reasoner -- Chief Operating Officer

R. Scott Meyers -- Chief Financial Officer

Mike Kelly -- Seaport Global -- Analyst

Lance A. Lauck -- Executive Vice President Corporate Development and Strategy

Welles Fitzpatrick -- SunTrust -- Analyst

Paul Grigel -- Macquarie Capital Inc. -- Analyst

Leo Mariani -- Keybanc -- Analyst

Brian Downey -- Citi -- Analyst

Elai Cantor -- IFS Security -- Analyst

John Nelson -- Goldman Sachs -- Analyst

Ray Deacon -- Petroletics -- Analyst

Tim Rezvan -- Oppenheimer -- Analyst

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