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Pioneer Natural Resources (NYSE:PXD)
Q1 2019 Earnings Call
May. 07, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to Pioneer Natural Resources first-quarter conference call. Joining us today will be Scott Sheffield, president and chief executive officer; Rich Dealy, executive vice president and chief financial officer; Joey Hall, executive vice president at Permian operations; and Neal Shah, vice president, investor relations. Pioneer has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the Internet at www.pxd.com.

Again, the Internet site to access the slides related to today's call is www.pxd.com. At the website, select Investors, then select Earnings and Webcasts. This call is being recorded. A replay of the call will be archived on the Internet site through June 1, 2019. The company's comments today will include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospects of Pioneer are subject to a number of risks and uncertainties that may cause actual results and future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Pioneer's news release on Page 2 of the slide presentation and in Pioneer's public filings made with Securities and Exchange Commission. At this time, for opening remarks, I would like to turn the call over to Pioneer's vice president, investor relations, Neal Shah.

Please go ahead, sir.

Neal Shah -- Vice President of Investor Relations

Thank you, Anna. Good morning, everyone, and thank you for joining us. Let me briefly review the agenda for today's call. Scott will begin by discussing our strong first-quarter results and our solid execution including our positive outlook for the remainder of the year.

Scott will then comment on the many initiatives in progress to enhance shareholder value. Further, Scott will review our strong performance in the Permian Basin, specifically our best-in-class oil production and the benefits of our low-cost basis acreage. After Scott concludes his remarks, Joey will update you on our strong horizontal Permian well performance and Rich will then review the benefits of our firm transportation commitments to Gulf Coast. Scott will then return with a brief recap and commentary. After that, we'll open up the call for your questions.

Thank you. So with that, I'll turn it over to Scott.

Scott Sheffield -- President and Chief Executive Officer

Good morning. Thank you, Neal. It will probably take me a couple of quarters to get back in practice, but I think I have to allow you this already, but I have spent the first 100 days interviewing and listening to over 150 employees and investors. I did have -- on the investor tour, we did a listening tour.

I did have Ken Thompson, our non-executive chairman, and several outside directors, and Ken served all the meetings. And it's a practice. We're going to continue to do an annual meeting like that where I invite the non-executive chairman and some of our outside directors to listen to what investors are thinking and what they are saying. There's something that definitely has not changed since the two and a half years since I've been gone, and that's the company has great people and great assets. This slide I've been impressed with when Neal came out with it last quarter. It's updated, but you can spend the entire presentation really on this first slide, the importance of it.

I think several of the key points here is that the company is achieving free cash flow now as we speak over $100 million estimated for '19 based on the strip prices.  In addition -- and that is a primary focus of the company over the next several years. Also the company has moved toward -- we've increased our dividend. It will be officially approved in August, record date to be late September.

We are semiannually, but the Board has improved the intent to move to a 1% yield, so about a 260% increase. Long-term goal is to move toward the midpoint of our peers in regard to that dividend. Also key drivers improving capital efficiency. The company has already achieved over $300 million from '18 and '19. We're focused now on achieving another $400 million of capital reductions including G&A, which breakdown about $150 million midstream, up to $100 million in facilities, a full year of sand, if you remember we're not achieving all the sand and gel savings for 2019.

But that's another $75 million and then we're targeting up to $100 million of G&A savings. So that's how we get to the other $400 million. So when you look at a total of about $700 million, that's over -- it's about $2.5 million per well when you look at assuming that we POP 300 wells per year. It's a little bit less this year, but going forward, will be about 300 going forward.

And so it's about $2.5 million per well savings. In regard to ROCE, it's a main focus of the company. The company, over a year ago, put it in regard to one of the key focuses for the management team here and the company going forward. We are peer leading based on the results in 2018. We're targeting to hit 15% within the next five years at $60 Brent flat.

If you look at strip pricing, we're targeting on getting up 20% and over, over the next five years. In regard to buying back shares. The company had already started a practice of buying back shares on average price to $136 per share, but I wish I could have bought some when -- after I returned. It was restricted by the company for two reasons: one, Eagle Ford negotiations were in full steam negotiations and then the G&A restructuring, which I started fairly quickly.

So we were able not to buy shares after I returned. We will continue to seriously look at it, especially when we get to those type prices in buying back future shares. Going to the next page on the solid execution. I think the main point in this slide is the fact that we've had a 6% increase from fourth quarter and the fact we are the top 10 on both oil and BOEs from the Permian. We did have a great uplift, which Rich will talk more about on a project we started probably about six, seven years ago to be able to export crude from the Gulf Coast. Permian horizontal LOE still one of the lowest in the industry, below $3, and we still are left with probably the best balance sheet among all the public independents in the U.S. Going to the next slide, '19 outlook.

I think the most important thing here is that the capital is on track. This is the first time in over two years the company under-spent capital for the first quarter for the first time in over a two-year time period. We're 100% committed to spend within budget between the $2.8 billion and the $3.1 billion and the capital obviously will trend down the rest of the year before we go into 2020. On the $3.75 billion estimated cash flow, Rich will talk more a little more about it. But we did put on some more hedges since I returned.

The three-way -- we call them three-way callers, $55 by $65 by $80 Brent. So we're up to 80 -- I mean 20% hedge for 2019. Next slide, on improving capital efficiency. Probably one of the more important slides.

Again, I've summarized it on the first slide, but we've already achieved a little over $300 million in savings going from '18 to '19 primarily on the completion side. We're looking to achieving other $400 million in savings going in from '19 to 2020 and, again, I've summarized it already, but it's made up between a full year of sand and gel savings up to $100 million a year in facilities, $150 million a year in midstream facilities and $100 million -- up to $100 million in G&A savings. Going into Slide 7. The reorganization after listening to a lot of the employees and getting with the management team, the first thing we did, we asked 30% of the officers to retire. We promoted six persons to the management committee in their early 40s, so bringing up younger talent into the management committee and now we're over 35% female on the management committee, which is something I'm proud of.

 We basically had an organization that is dealing with our assets all over the world and all over the U.S. That was the structure that we've had over the last several years. And simply, we're going to a very simple structure, flattening the organization, less managers, more functional going back to a functional organization and simply, the main focus is adding capital. The company had weekly reports on production.

One of the things I found out, but they were not focused over the last two years on the capital side of the business. And so now we're focusing at something that we have started and the company is already doing a great job as shown in the first quarter in regard to focusing on capital. So capital, focusing on that, is just as important as delivering on the production side of the business. Going to strategic direction slide. These are the four critical things.

It's about execution. Execution, essentially, we had to add capital to that. You have to be able to execute both on production and capital. Obviously, focusing on free cash flow going forward with a competitive dividend and opportunistic share repurchases.

Again, we had the best balance sheet in business and we'll continue to build on that as we deliver free cash flow '19, '20, '21. We'll just continue to build up the balance sheet and then as we see downturns like we've had over the last several years, we will use that as an opportunity. These are drilled through the cycle or buy shares cheap during those time frames. If you notice we have removed the 1.10 million, but one thing, just to let you know that I strongly believe our rock will deliver over 1 million BOEs over the next several years.

It's just no longer a focus, especially with the commitment to 1 million or the time frame. Going to next Slide 9, strengthening our value proposition. This is just a table of contents. I'll be a little bit more specific about G&A expense, optimizing our cash flow through monetization of midstream, assessing field facilities and water infrastructure and talk about accelerating value on our long-dated inventory. Obviously, the focus is return on capital. Next slide on improving cost structure, G&A per BOE.

You can see we move from a little bit above the middle of the peers to the top quartile. The -- so up to $100 million probably takes about $1 per BOE off of our G&A per BOE. The long-term goal over the next two to three years is get below $2. An interesting report I looked at yesterday, if you remember, Jim Parkman, who was -- partners with Tom Petrie, he had put out an interesting report yesterday.

He took the 76 public companies and basically put out a report showing the cash G&A and the cash interest. But I know that we have the best balance sheet among all those 76 companies. We did not have the best G&A. Now we're a peer-leading G&A.

When you put both items together, we're probably peer-leading No. 1 or No. 2. What's interesting that 76 companies, he mentioned that over a half will either merge or go bankrupt over the next several years.

And that's the two drivers. They're too high on their cash G&A and their cash interest. In regard to the monetizing the assets, we will be opening up a data room shortly for our 27% interest in the target-operated Midland gas processing infrastructure. You can see the current throughput is about 1.8 Bcf a day; capital budget, we're spending about $150 million a year and we have been with our share of building two new plants and you can see the EBITDA and you can just take that to make your own estimates on what our proceeds will be. In regard to the field facilities, as I've mentioned already, we're targeting, going into 2020, up to about $100 million a year savings there.

In regard to water infrastructure, we are evaluating what's available out there. We're not 100% sure. We are going to divest the water infrastructure. We're just evaluating the opportunities.

There has been some interesting deals that are being done out there. We are going to be reducing that capital significantly, that $150 million a year drops down below $100 million next year and gets down to $50 million. So at the end of the day, the $300 million that we've been spending on water and infrastructure will essentially be disappearing over the next two to three years, probably over the next two years. And so that's something that a lot of our peers did not have to spend on.

So in regard to the Eagle Ford. We've mentioned we closed the sale of Eagle Ford yesterday. But I've read a lot of the analysts' reports and I'm surprised about the comments coming from Eagle Ford. We look at it as a great opportunity divest of an asset that really did not achieve the returns that we saw.

It's taken us a while, but we're receiving up to the -- potentially up to $475 million in proceeds contingent on future commodity prices. I sort of look like this is a rounding error, I'm famous for using the rounding error syndrome inside Pioneer over the last several years. A simple way to look at this is that at current commodity prices of WTI between $60 and $65, we will receive somewhere between $275 million to $475 million. You need to deduct somewhere between $200 million and $250 million for MVCs and that's all dependent upon the drilling activity, the company we sold to will be starting up drilling activity fairly soon and they'll be accelerating that.

And so it's a net positive for the company. We're removing a very low margin property. When you look at back of the tables, it's about a $12 margin per BOE and a very high operating cost of about $14. So we look at it as a very big plus to move this asset out of Pioneer. Accelerating value of long-dated inventory.

As most of you all know we probably have a substantial amount of locations and very -- throughout the entire play in the Midland Basin. Since 1/1/18, the cash market has been very weak. We're starting to see a comeback some. In addition, we're looking at acreage that will probably we won't get to between that 10- and 15-year range.

We feel like it through a drillco structure. We'll be able to monetize it at somewhere between $25,000 and $30,000 per acre and we expect to have something in place by the end of 2019. I didn't mention onto midstream asset sale, we do expect that to close by the end of also 2019. Slide #13, enhancing shareholder value. Again I won't go over detail, but this is our -- obviously we're focused on returns.

We're focused on capital discipline, focused on capital and production. Return on capital, obviously seeing a significant improvement, still have a great balance sheet. It'll probably get better with time, especially as we deliver free cash flow. And again, we have the inventory of low-risked, high-return wells to support our organic growth. I've got two or three more slides before I turn it over to Joey, but these are some slides we used on our investor tour over the last few weeks.

This first slide just emphasizes the fact that we have the lowest cost acreage among all the players in the Permian Basin due to the fact that we acquired most of this acreage back in the '80sand '90s. And average cost is about $500 per acre. We averaged the last three years of recent Permian transactions. They averaged about $38,000 per acre.

And I've already seen some -- what's interesting I've already seen some analysts' reports that are backing out what Chevron and Oxy are looking at from the Delaware Basin standpoint and looks like that they are paying somewhere between $50,000 and $60,000 per acre depending on the premiums that they're offering at Anadarko for something in the Delaware. Next slide. We obviously are asked this a lot about a parent-child relationship. We had down-spaced early on back in 2014 since we drilled the first wells in the main play of the Midland Basin and Martin and Midland and Upton counties that we did go down to about 600 feet or less down in the northern part of Upton County and realized we did have interference starting in '15, but we went to 850 feet. We've been there since then and you can see the performance of our wells.

So essentially, with our number of locations we have in our footprint, we're not forced like a lot of our peers to down-space because they're running out of inventory. It'll be a long time before Pioneer runs out of inventory. Next Slide 16, delivering best-in-class oil production. You can see this is using drilling information on the oil mix. It's a key slide that we have the best oil mix of any one of the peers in the Permian Basin on a two-stream basis.

All of our peers are listed below. And when you look at just oil production itself that we are the leading company among all those companies. What's it -- this is just an interesting factoid, but all three of the companies -- what's interesting if you look at paying $50,000 to $60,000 per acre for something in the Delaware, all three of the companies involved in the recent announcement with Anadarko, including Anadarko, are in the middle of that pack. So just an interesting factoid. I'm going to -- now I'm going to turn it over to Joey Hall, to give you an operations update.

Joey Hall -- Executive Vice President at Permian Operations

All right, thanks, Scott. Good morning, everybody. I'm going to be starting off on Slide 17. So last quarter, we updated you on the strong well results from our second Stackberry test in Midland County and now we've had very similar and encouraging results from our third Stackberry test in Central Martin County.

Here we had five wells drilled and completed as one project. The wells on this pad are currently outperforming previously drilled wells in the same area by about 24%. So we've obviously advanced our completion strategies, but the most important thing here is that we continue to deliver strong well performance in full development mode. And of course, this demonstrates our ability to implement more large-scale projects going forward as we will.

We've also continued our success in the Wolfcamp D appraisal process. We POP'd another Wolfcamp D2 well pad in western Glasscock County that's had great results and we'll also continue our Wolfcamp D appraisal process in 2019 and beyond. So in total, we brought on 71 wells in Q1. Going into Q2, it is worth noting we will continue to bring on more larger pads and so all in all, for the Permian team, another solid quarter of execution.

And now I'm going to turn it over to Rich. 

Rich Dealy -- Executive Vice President and Chief Financial Officer

Thanks, Joey, and good morning. I'm going to cover Slide 18 where you can see that we had a significant uplift this quarter from firm transportation to move our oil to the Gulf Coast once again and where we're going to get Brent-related pricing. This did increase our oil price margin by over $8 per barrel during the quarter or added $150 million of incremental cash flow for the quarter. During the first quarter, we moved about 90% of our oil or roughly 200,000 barrels per day to the Gulf Coast, of which we exported 75% of that with roughly 60% going to Asia and 40% to Europe. Our firm transportation volume do increase in the second quarter, in May, to 205,000 barrels per day and based on our forecast, the differential is between Midland and Brent pricing.

We are forecasting a second-quarter uplift from firm transportation of $50 million to $110 million. Longer term, our firm transportation increased just over 250,000 barrels by the end of 2020, which is consistent with our forecasted production growth. As a reminder, we try to move our other products to higher-priced markets as well and today we moved about 60% of our gas out West to price it off at SoCal index and once Gulf Coast express comes on in the fourth quarter, we'll move about 300 million cubic feet a day of gas to the Gulf Coast where it will be priced on a Ship Channel Price index. And with that, we'll have basically zero volumes in Waha priced off a Waha index. As Scott mentioned, we have added to our derivative position for 2019 and 2020 for oil.

We now have 20% of our 2019 production and 5% of our 2020 production covered with three ways. Those provided basically a floor Brent price of about $65 or higher and longer term we just continue to target to be more toward a 50% hedge position depending on commodity prices. So with that, I'll turn it back to Scott for a few closing comments.

Scott Sheffield -- President and Chief Executive Officer

Thank you, Rich. Again, the last slides, one we've already got thorough, but you see the company has gone through just a key focus really on the cost side of the business. I think most people know that we have probably the best assets. We have had the best balance sheet.

Now we just need to achieve one of the best cost to be No. 1  in regard to drilling completion facilities and G&A cost. And that's where the key focus has been since I've returned. So I'm going to stop there, and we'll open it up for questions.

Questions & Answers:


Operator

[Operator instructions] We'll now take a question from Arun Jayaram with JP Morgan. 

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

Good morning. Scott, I wanted to get your perspective on Shale M&A. When you took the reins back -- as CEO back in February, the press release clearly stated your commitment to the real long term suggesting there is no M&A angle to your return. In light of the situation with Oxy, Chevron and Anadarko, just wondering to see if you give us your thoughts on how the Board thinks about M&A?

Scott Sheffield -- President and Chief Executive Officer

Yes. Thanks, Arun. Obviously, I've told investors on my tour that I didn't come back to sell the company. The stock was cheap.

It's moved up obviously through a lot of our restructuring. I think obviously the industry has lost a lot. All the energy stocks went up when the Anadarko announcement. The -- my perception is I was surprised that Anadarko was the first company to be taken out.

When you look at all the reports, they were probably cheap. They were trading at a very low EBITDA and Chevron was able to go in and make a deal quickly. Now Oxy is paying up for it, obviously. I personally don't think that there's going to be a lot of M&A over the next one to two years, now over the next five years I think the majors will definitely start running out of inventory.

Things may happen, but I don't think there'll be a wave of consolidation. As I've mentioned earlier, I think a lot of companies, smaller companies, in the Permian are going to have to consolidate and focus on the G&A and the interest. They got to get better balance sheets. They have to get a better cost structure and that's what's going to be working and what's focused on.

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

Great. And my follow-up, I did have a housekeeping question, Rich, perhaps, for you. It's just how the accounting will go for the retained MVCs through the Eagle Ford transaction. We did note that you did lower your other expense guidance, but just trying to understand how the MVCs will flow through the income statement and cash flow statement.

Rich Dealy -- Executive Vice President and Chief Financial Officer

Sure, Arun. So yes, we are -- in the second quarter, we'll have one month of Eagle Ford deficiency fees that are included in the guidance of the $25 million to $35 million. But starting once we close the transaction in May, we will bring our estimate of those featured MVCs that we're going to share with the buyer on our balance sheet. And so it's somewhat of an estimate because we don't know how much they're going to drill and the more they drill, the lower those featured MVCs will be to us, but we'll make an estimate and bring that on our balance sheet and then think of it like debt.

So we'll make those payments on an annual basis for our share of those and those we paid typically in the first quarter of each subsequent year after we know the exact volumes that were delivered. So that's how it will run through the income statement. There will be one more quarter of one month and then after that, it will just be a balance sheet impact and working capital changes.

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

Will that flow through the interest expense line item if it's going to show like debt or...

Rich Dealy -- Executive Vice President and Chief Financial Officer

No. It will flow through our -- well, the charge that we take initially will go through a gain loss and then after that it will just be a reduction of a liability on the balance sheet. So it won't go through the P&L.

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

OK. Thanks a lot.

Rich Dealy -- Executive Vice President and Chief Financial Officer

Sure.

Operator

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

Brian Singer -- Goldman Sachs -- Analyst

Thank you. Good morning. Scott, you mentioned at the town halls that you're doing with all your employees and as well some of the managerial changes that you've made. Can you talk about what you're emphasizing in these meetings and to the management committee that wasn't being emphasized previously? And how are you building the incentive structure to deliver the results near term such as the 2019 capital budget that implies step downs as the year progresses and also longer term the goals that you've put in your slide deck here?

Scott Sheffield -- President and Chief Executive Officer

Yes. I think the big change -- there was really nothing wrong with the 1.10 million when Tim came out with it. In fact, you remember I've mentioned the 1 million barrels in my last quarter call in '16. So Tim came out in early '17.

And the focus obviously inside the company over the last two years through all the interviews was achieving that 1.10 million barrels. And the focus was probably 90% more on the production side and less on the capital side. And so the big change is to treat capital just as important as production. And so each person that's drilling will be held -- the drilling person over drilling will be held accountable.

The person over completions will be held accountable for his capital. The person over facilities will be held accountable for theirs. And so we're moving the accountability to each individual and up to the executive over those people. So that's probably the key driver in regard to the focus in regard to accountability.

And it will be tied all the way into the compensation side also on the compensation of each of those individuals. So that's probably the key driver and what comes out of that, of course, is driving the company down to be peer leading on drilling completion facilities and G&A will allow -- when you take $700 million, as I've mentioned, out of the capital side and on the G&A side, it drives -- what happens is that it drives up significantly free cash flow, which drives return on capital employed, which allows us to increase dividends and continue to increase dividends and give back capital to the shareholders. I hope that helps, Brian.

Brian Singer -- Goldman Sachs -- Analyst

Yes, it does. Thank you. And then my follow-up is over the years or even over the decades, Pioneer's participated in a number of different capital structures regarding monetization of production or reserves. Can you talk to why you see the -- what you see as the advantage of the series of drillcos? And then how do you think your long resource life impacts the attractiveness of Pioneer to larger companies as you consider the level and the structure of some of the divestitures in the Permian that you're talking about? And I recognize the response you made on M&A in the last question, but I was just kind of wondering longer term.

Scott Sheffield -- President and Chief Executive Officer

Yes, the -- first of all the cash market. I mean we're probably just as open to do a cash market versus drillcos. The cash market has been dead since 1/1/18. It's starting to come back a little bit.

That's a combination of companies are probably still levered, they can't go to equity markets like they used to and the private equity companies are being consolidated. Capital is being reduced there. And so there is no exit mechanism now for private equity companies. And so you've had a total change.

We were hoping that the Denver transaction will be your first cash transaction. I don't know the status of it. It's acreage closed by Pioneer's. But it's been going on for about six months now and nothing has happened in that regard.

So there's not really a cash market up until -- I have seen some of the reports you all have put out, people are putting somewhere between $50,000, $60,000, $70,000 per acre when you back out the African assets of Anadarko that both Chevron and Oxy are paying for. So that's probably the closest thing that I've seen. So the drillco structure is probably the only potential structure today that can pay us the appropriate value of those assets. I mean -- so the goal is probably start with one, make sure it doesn't affect us executing.

We would probably start with two rigs at the end of this year going into 2020, very, very little capital increase, 0% to maybe 10% of a typical well, we would get carried, it would -- the well would pay out in roughly a three- to four-year time frame. And then it would add production growth after that payout at certain returns. And so it's just another way to raise capital and not lose acreage. Our acreage that has the -- so the value that acreage to date that I was referring to was probably worth about $35,000 per acre if we drill it today.

But we are drilling more -- a better quality-type assets, up in Martin/Midland County and northern Upton County. And so it's the best way to monetize the value through a drillco structure. If somebody would pay us close to that in a cash, we would definitely go the cash route. So that's the only reason we're focused on the drillco structures.

Your last question, Brian, what did you want...

Brian Singer -- Goldman Sachs -- Analyst

Yes. It was whether monetizing some of those longer-dated reserves would impact the longer-term attractiveness to Pioneer, a larger company. Is that -- do you see the long reserve life as a strength?

Scott Sheffield -- President and Chief Executive Officer

You know, I see it as a strength. I don't see us doing some drillcos here and there on some acreage that we won't get to for 10 to 15 years. I don't think it will affect what any potential acquirer has on Pioneer. I mean -- because they would be picking up the -- if they give us the right price that the Board thought it was better to -- for shareholders to accept, I don't think a drillco structure will -- the company that buys it will -- essentially will get that upside.

So as I've said, they'll get the upside anyway after payout after three or four years, they get to hold that asset for another 30, 40 years.

Brian Singer -- Goldman Sachs -- Analyst

Greta. Thank you.

Operator

We'll now take our next question from John Freeman with Raymond James.

John Freeman -- Raymond James -- Analyst

Good morning, guys. On the G&A front, obviously, you've already made a lot of progress with the -- on the G&A front with pretty high percentage of your officers that were asked to retire, the junior promotions, etc. And I've realized it will take several quarters before we probably see it in the numbers just a way that severance payments, etc., work. I'm just curious of the $100 million sort of target, how much of that do you feel like you've already achieved? Like it may not show up yet just because of the way the severance works, but how much of the $100 million target has already been achieved?

Scott Sheffield -- President and Chief Executive Officer

Yes, John. It's a good question. In fact, I forgot to mention the timing on the G&A when I went through it. All those savings will go into effect by June 1.

So the organization has already been chosen, the managers have been chosen already. So the new management team is in place throughout the organization and we had a voluntary separation program, it was the first thing we did. That's already in place. And then we're going through the involuntary.

So I can't give you any specific numbers in regard to people at this point in time, but everything will be completed by June 1. And so you'll see the savings for the third quarter. So you're only going to see one month of savings for the second quarter. But you'll see the actual run rate going into the third quarter when we give out guidance.

John Freeman -- Raymond James -- Analyst

Great. And then just my follow-up question. I just want to make sure that I heard you correctly, Scott, on the Eagle Ford deal. So on the future potential contingency payments, you said the top end of the range of the $475 million was based on $65 oil roughly and then did you say the bottom end of the range was $275 at $60?

Scott Sheffield -- President and Chief Executive Officer

It's not -- the bottom end is $55, it'll be less -- and I did not give the estimated proceeds from $55, but I was using current WTI pricing between $60 and $65 to give you a $275 million to $475 million range.

John Freeman -- Raymond James -- Analyst

Perfect. Thanks, Scott. Appreciate it.

Operator

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

Jeanine Wai -- Barclays -- Analyst

Hi. Good morning, everyone.

Scott Sheffield -- President and Chief Executive Officer

Jeanine, how are you doing?

Jeanine Wai -- Barclays -- Analyst

I'm good. Thank you. So the release indicates that you're accelerating free cash flow generation by adjusting to a mid-teens longer-term growth profile versus previously, you're at that 20% CAGR. And I was just wondering, can you give us a sense of the magnitude of that acceleration by gearing down? For example, are there any other operational efficiencies associated with adjusting the mid-teens besides the $100 million of field facilities savings that you mentioned in your prepared remarks? Or maybe a hard question to answer, but how much did you compress the timeline to achieving your competitive dividend? And was that something that factored into your new rate?

Scott Sheffield -- President and Chief Executive Officer

Yes. The company had already come out with a 12% to 17% production growth. And so they had already started moving down toward that. So just long term, we're changing the 20% growth rate to the mid-teens production growth rate.

And so, as you know, some years we may have 12% to 13%, some years, we may have 17% to 18%. So we can't just hit 15% every year based on adding rigs, adding fleets, taking rigs off and taking fleets off. And so the $400 million of additional savings is what we are focused on now. So we've achieved the $300 million in savings from -- mostly from the completion side and steps we took last year with ProPetro, combining our assets with them and then the next $400 million is what we're focused on now that I've already gone over.

Jeanine Wai -- Barclays -- Analyst

OK. Great. Thank you.

Operator

We'll now take our next question from Doug Leggate with Bank of America.

John Abbott -- Bank of America Merrill Lynch -- Analyst

Good morning. This is John Abbott on for Doug Leggate. Our first question is regarding the water business. If you did -- you already gave us an idea of how your CapEx plans are going to change over the next several years.

But if you did pursue the path of divesting the business, well, how do we think about the potential impact to both production and well costs?

Scott Sheffield -- President and Chief Executive Officer

Yes. My first point, John, was the water capital is coming down significantly. We'll be completing the Midland water plant here early '21, so 2020 will be the last year, but it's coming down substantially from this year. So No.

1. So it's not going to be a capital issue on water going forward. You'll probably see the line item disappear and just go into DC&F over the next couple of years. No.

2, there's been some deals out there that have been done primarily on saltwater disposal wells. Pioneer has been out here for a long period of time. We put it over $1 billion into water infrastructure. We probably have close to $1 billion into saltwater disposal and gathering lines.

And so one of the things that I've talked to investors about on my tour was one thing we don't want to do is straight dollars. We don't want to divest of this water infrastructure, lose control and also -- and our operating expense goes up significantly. So we got to be careful on what we do. Do we monetize or not? But one thing we are doing, we are -- in regard to the new organization, and we are focused on adding third-party revenues since we have probably the largest water infrastructure system, probably one of the largest water recycling system, the largest disposal system, is to turn it into a third-party business and start bringing in third-party revenue from other operators, since we pretty much dominate the Midland Basin.

So we're looking at that as a new strategy. And so the focus is understanding if people are going to start paying 18 to 20 -- I have heard of some deals being paid 18 to 20 times cash flow. That's a different story. But we're not just going to trade dollars and increase operating expense. So...

John Abbott -- Bank of America Merrill Lynch -- Analyst

Appreciate the color there. And then the second question, in your opening remarks you said if we got back to the levels we saw earlier in the year, you would look back at buying back shares, which raised the question about what do you do with incremental cash flow above your base plan and also with potential proceeds from divestitures? I mean do you keep that on the balance sheet? Do you look at buybacks on an opportunistic basis? Do you -- are you open to special dividends? How do you think about that?

Scott Sheffield -- President and Chief Executive Officer

Yes. That was a good point. That was discussed on my listening tour with the long-term investors. And I think, first of all, we're going to build the balance sheet and -- with free cash flow.

Obviously, we got ProPetro shares, we got the Targa system and we got free cash flow that's building up on our balance sheet. As I said, downturns, I've been through seven downturns in my career. There's going to be some others over the next 10, 15 years and you need to save capital for those downturns because that's the best time to be buying the stock. And secondly, in history, it's shown that during the downturns, it's the best time to be drilling wells.

And so it gives us an opportunity. We're running 25 rigs during the downturn, but we were up before it, but it gives us an option instead of shutting 10, 15 rigs down, like most independents would have to do, we can keep running 25 rigs. We can cut five rigs. And so that's where -- and then if the share price dips low like it historically has, it's an opportunity to buy back shares at that point in time.

Too many of our peer group are buying back shares at too high a price, in my opinion. That's one thing Pioneer will not do.

John Abbott -- Bank of America Merrill Lynch -- Analyst

Thank you, Scott, for taking our questions.

Operator

We'll now take our next question from Paul Sankey with Mizuho.

Paul Sankey -- Mizuho Securities -- Analyst

Good morning all. Scott, can you talk a little bit more about the acreage that you're planning to sell? How much are you talking about? And what kind of proceeds do you think you can get?

Scott Sheffield -- President and Chief Executive Officer

Yes, we talked about the math on the proceeds, Paul. It's acreage that if we drill today, it's worth $35,000 an acre to us. By going through a drillco-type structure, it's worth somewhere between $25,000 and $30,000 per acre. A lot of it's going to be in our joint venture area with Santa came down in the southern portion.

So we'll have to get their approval in that regard. And so I don't think that the cash market is there, as I've mentioned already. We will start off with about two rigs on the drillco-type structure. We're talking to a lot of private equity already.

And we hope to put it in place by the end of the year. But it's generally acreage that we would drill, get to in that 10- to 15-year time frame.

Paul Sankey -- Mizuho Securities -- Analyst

Yes. Understood. And could you continue then to talk a little bit about the balance that you see between growth and buying back stock? You've addressed this obviously as you've been talking. But again, would we expect you to be taking more buyback in the -- as the route forward to get the value of the stock up and further to that.

Could you talk about where you think the inherent value of the stock is? I mean, you've talked about waiting for it to get cheap. But could you talk about some ranges of where you think you're undervalued versus, for example, what price you might sell the company for? Thank you.

Scott Sheffield -- President and Chief Executive Officer

One thing I can probably -- we don't give out our NAV, our values, but I can -- in just point, you know the amount of acreage we have, you know that both Chevron and Oxy are paying somewhere between $50,000 and $60,000 per acre, so most of you all can do the math on what our acreage is worth based on that price deck. And so the focus during the downturns, again, as I mentioned, is continue to build up our cash position. So we can live for the downturns, so the downturns that we can, as I said, drill to the cycle and buy back shares cheap. I think at $135, the stock is cheap.

Paul Sankey -- Mizuho Securities -- Analyst

Got it. And then finally, there's been some concern about your gas cuts. Can you just talk about whether there's anything to worry about? Thanks.

Scott Sheffield -- President and Chief Executive Officer

No. I think based on -- I was heavily involved in the analysis, being an ex-Reservoir Engineer, on what happened, I've came back and looked at a lot of the data. But you can see with our slide that we're the leading oil company on cut in regard to the entire Permian Basin, that's both Midland and Delaware. And so there were essentially no issues.

Over time, the gas ratio is going to increase. It will continue and it's a plus. So it has not affected the oil cut at all.

Paul Sankey -- Mizuho Securities -- Analyst

Thanks a lot, Scott. Thanks.

Operator

We'll now take our next question from David Deckelbaum with Cowen.

David Deckelbaum -- Cowen and Company -- Analyst

Good morning, Scott, and welcome back to your first call, back as CEO.

Scott Sheffield -- President and Chief Executive Officer

Thanks, David.

David Deckelbaum -- Cowen and Company -- Analyst

I just wanted to follow up on some of the comments earlier, just -- so I understand. You kind of like hedged yourself on evaluating the water business. Is it your belief at this time that it's just not -- the timing is not appropriate just given the ongoing build-out for the Midland plant that goes online in '21? Or that you believe that market, perhaps, is not being amenable to selling right now?

Scott Sheffield -- President and Chief Executive Officer

No. It's neither. Since -- over the last couple of years, I've seen two or three companies do saltwater disposal deals. I have seen water infrastructure funds being created.

So my goal is to, myself and the management team, to understand what's out there if we do decide to monetize, inform our Board and let them know and we all make a decision. But at the same time, my goal is to increase third-party revenues into our system. And also we don't really have to do anything because our capital is going down. I wanted to focus on the $300 million of capital in both midstream and water.

It's too big a number, our peers don't have it and so a lot of the -- of our shareholders were taking the $300 million per year and divided it by the number of wells we were drilling and they are adding $1 million to $1.5 million per well versus our peers and you can't see it through the efficiencies. It's going to take a long time to see it through the efficiency gains and also through our processing plant arrangement. And so it's best just to go hit and evaluate moving the midstream outlook as I said by the end of the year and the water is going to come down. And so if someone is willing to come along and pay 20 times some type of cash flow, that's a different story.

But we're not just going to trade dollars and increase operating expense. So it's all about learning.

David Deckelbaum -- Cowen and Company -- Analyst

Yes. Got it. Thanks, guys. And just to -- had you articulated before the size of the opportunity for long-dated inventory that you would be willing to put into drillcos?

Scott Sheffield -- President and Chief Executive Officer

Yes. The opportunity is probably in the 30,000-acre range to start off with. But as I said, I do not want to take any risk in regard to executing on the main program. And so that's why we're looking at sensibly doing a two-rig deal.

And a typical rig expense is somewhere between $100 million and $130 million per rig per year, so you're looking at $200 million to $250 million type deal with private equity to get it started. And then if it's successful, then we could add to it over time.

David Deckelbaum -- Cowen and Company -- Analyst

Thanks for the answers, guys.

Operator

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

Charles Meade -- Johnson Rice -- Analyst

Good morning, Scott, to you and your whole team there. You guys made, really, a rapid series of moves to simplify your structure, I mean the Eagle Ford asset sale that you're talking about, the midstream asset sale and I think that's why everyone is so focused on this water -- what happens with the water business. But are there any other pieces that you see or opportunities you see to further simplify or streamline your business? Or do you feel like you're pretty close to the finish line there?

Scott Sheffield -- President and Chief Executive Officer

No. I think by the end of the year, focusing on facilities and focusing on the midstream sale are really the last two items. And I think water, the goal is turn it into a profit center and making sure that if we keep it long term that we can convince everybody that it's worth keeping and it does lower our operating expense as compared to our peer group. So that's the focus.

It's really not anything else that we have. So...

Charles Meade -- Johnson Rice -- Analyst

Got it. Got it. Thanks for that. And then, Scott, this -- going back to a couple of time, I think, twice, you've mentioned in the context of your strong balance sheet being able to drill through the cycle if we do get another downturn, and I want to explore a little bit just what that means.

Does that mean that at some point if oil prices went back down, you guys would go back into an outspend mode? Or is there some other way we should interpret that, the ability or intention to drill through the cycle?

Scott Sheffield -- President and Chief Executive Officer

No. The goal is to focus on -- you can take the 15% growth and see where our production grows over the next several years. But we know there's going to be one down or two in there. We had one already in late '14, we had one, small one, in the late last year and so I think the entire -- I'm hopeful in regard to the changed mindset and the investor attitude with this free cash flow, more capital back, it's actually helping OPEC.

It's a big plus. We need to bring U.S. shale growth down. And so we don't see the company -- I was told by several investors, just getting input on this tour, that if we added any rigs at all this year, they would sell the stocks.

So I'd like to see that capital discipline by the investors too. So it's helping with the world supply demand situation.

Charles Meade -- Johnson Rice -- Analyst

Good point. Thank you, Scott.

Operator

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

Ryan Todd -- Simmons Energy -- Analyst

Thanks. Maybe one follow-up first on the water business. You mentioned a focus on adding third-party revenue in the water business. Once the Midland plant is up and running in 2021, how much excess capacity would you potentially have? Or would introducing third-party volumes require additional capital investment?

Scott Sheffield -- President and Chief Executive Officer

Yes. Right now the, I think we'll be moving about 400,000 barrels of water per day. And so we're going to be using all that ourselves. And so we would have to actually increase throughput to be able to offload water.

So Joey or Rich, do you have any comments?

Joey Hall -- Executive Vice President at Permian Operations

The only thing I would say in that 400,000 barrels per day, it ebbs and flows and so we'll be creative in how we formulated our contract so that we could take advantage of downtimes and not affect our operations. So and it's also points of opportunity in different areas where maybe we're not as active in drilling and we've built out infrastructure. We'll have the opportunity to deliver in those areas. So I think it's a business model we haven't quite worked through the details of, but there's certainly opportunity.

Rich Dealy -- Executive Vice President and Chief Financial Officer

And clearly, it'll be for areas that's adjacent to our existing acreage, so minimal capital to basically -- them connected to all the adjacent.

Ryan Todd -- Simmons Energy -- Analyst

Yes, thanks. That's helpful. And then maybe a follow-up on the dividend. On the move to a 1% yield, is that -- should we expect that later this year? And then I think you mentioned in your comments, you talked about having a dividend yield at the midpoint of your peers, longer term.

Should we think about that as your peer group is large-cap E&Ps of the broader market and what do you think the right -- as you talk would investors, what do you think the right comp is in terms of positioning yourselves versus the E&Ps of the broader market?

Scott Sheffield -- President and Chief Executive Officer

The first question, I think I already stated that in August, the Board will approve the dividend increase and be a record date late September. So I've already answered that first question. Long term, the midpoint of the peers also happens to be the same percent as the midpoint of the S&P 500. So that's a long-term goal.

So if we can get to the midpoint of the peers and the midpoint of the S&P 500, combined with growing mid-teens that it will be a stock that everybody has to own.

Ryan Todd -- Simmons Energy -- Analyst

OK. Thanks, Scott.

Operator

We'll now take our next question from Bob Brackett with Bernstein Research.

Bob Brackett -- Bernstein Research -- Analyst

Good morning. If private equity can't exit and if cash markets are dried up and if Pioneer has the best G&A and interest expense and the technology and free cash flow, would you consider consolidating the Midland?

Scott Sheffield -- President and Chief Executive Officer

No. There's really no opportunities that would allow us to optimize our portfolio, and so the answer is no.

Bob Brackett -- Bernstein Research -- Analyst

Great. Follow-up would be this year -- well, 2018's return on capital employed was 9%. Where do you think that is a year from now? And where do you think it ends up long term?

Scott Sheffield -- President and Chief Executive Officer

Yes. I thought -- Bob, I thought I already answered that, but I said at a flat $60 Brent price, it will be up to mid-teens, 15% within five years, and at strip price, it will be up above 20%.

Bob Brackett -- Bernstein Research -- Analyst

OK. Appreciate it.

Operator

That concludes today's question-and-answer session. Mr. Sheffield, I would like to turn the conference back over to you for any additional or closing remarks.

Scott Sheffield -- President and Chief Executive Officer

Again, thanks. We look forward to the next quarter and we'll be out on the road over the next several weeks talking to more of the sales side and buy side. So again, we appreciate all your comments. Thank you.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Neal Shah -- Vice President of Investor Relations

Scott Sheffield -- President and Chief Executive Officer

Joey Hall -- Executive Vice President at Permian Operations

Rich Dealy -- Executive Vice President and Chief Financial Officer

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

Brian Singer -- Goldman Sachs -- Analyst

John Freeman -- Raymond James -- Analyst

Jeanine Wai -- Barclays -- Analyst

John Abbott -- Bank of America Merrill Lynch -- Analyst

Paul Sankey -- Mizuho Securities -- Analyst

David Deckelbaum -- Cowen and Company -- Analyst

Charles Meade -- Johnson Rice -- Analyst

Ryan Todd -- Simmons Energy -- Analyst

Bob Brackett -- Bernstein Research -- Analyst

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