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Concho Resources Inc (NYSE:CXO)
Q2 2019 Earnings Call
Aug 1, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Concho Resources Inc. Second Quarter 2019 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to Megan Hays, Vice President of Investor Relations and Public Affairs. You may begin.

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

Thank you. Good morning, and welcome to Concho's Second Quarter 2019 Earnings Call. Our earnings release and corporate presentation are available on our website, and we plan to file our Form 10-Q today after market close. Participants on today's call will make forward-looking statements based on current expectations. They are subject to risks and uncertainties. Forward-looking statement and other disclaimers are provided in the earnings release and presentation. Our comments today may also reference non-GAAP financial metrics. You'll find the appropriate reconciliations in our earnings material. I'm joined today in Midland by Tim Leach, our Chairman and CEO, along with President, Jack Harper; Chief Operating Officer; Will Giraud, and members of the Concho's senior management team. Following our prepared remarks, we will host a question-and-answer session. Please limit yourself to one question and one follow-up.

With that, let me turn the call over to Tim.

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

Thanks, Megan, and good morning. Yesterday's results and updated 2019 outlook reflect our continued move to a lower capital budget than originally planned this year. And our desire to enter 2020 in the best position to deliver competitive production growth and increasing free cash flow. Production for the quarter averaged 329,000 BOEs per day, which exceeded the high-end of our guidance range. And oil volumes averaged 206,000 barrels per day. We delivered these volumes, while maintaining our discipline on operating costs. Controllable cash cost stay below $10 a barrel and we are working to drive this lower through field efficiencies, debt reduction and non-core asset sales. We are focused on actively managing our portfolio to bring value forward to shareholders and reinforce our flexibility in a lower price environment.

Last year, we completed the RSP acquisition enhancing free cash flow generation of our machine. And this year, we are looking to high-grade portfolio through trades and sales. Lower Permian natural gas and NGL prices weighed on our financial performance in the second quarter with realized prices down by more than 50% from last quarter. However, today, we anticipate modestly improving gas realizations for the remainder of this year. Operationally, the team is making the transition to full-field development across our assets. Our objective with project development is to maximize returns and recoveries. In that effort, we tested the limits on sand loading, lateral lengths, fluid volumes and now well density. We have a track record of innovation in the Permian. We've always favored the empirical data from drilling and testing. The resource took us a decade to build, and now we are trying to get the program up and optimized quickly for our next 2 or 3 decades of work.

We've used and we will continue to use the information we gather from these tests to make future programs better. I'm very proud of the job the team did executing on some of the most logistically sophisticated projects the company has undertaken. In the Delaware Basin, the 23-well Dominator project was designed to test logistical capabilities and well spacing that was approximately 50% tighter than our current resource assessment. While initial rates were solid, current performance data indicates that we developed the Upper Wolfcamp too densely. We are incorporating the data into our development model to adjust spacing on future projects, including those projects set to spud in the second half of '19. In the Midland Basin, we completed the Marion Benge project ahead of schedule. This project is our largest to date with 18, 2-mile wells targeting the Spraberry and Wolfcamp zones. Initial performance for the Marion Benge is strong. And the project highlights the benefits of a large contiguous acreage position with infrastructure that can drive efficiencies.

We transported the initial flow back water from this project to a recycling facility, where the water was treated and used to supply 100% of the water needs for operations at a 2-well location nearby. Turning to our capital program, we averaged 26 rigs in the second quarter, and capital totaled $785 million, which was down 15% compared to the first quarter. Year-to-date production volumes were ahead of schedule, and today, we are running 18 rigs, which is below our previous plan of 24. We've made the decision to adjust our drilling and completion scheduling in the second half of the year to slowdown and not chase incremental production at the expense of capital discipline. We are focused on 2 primary objectives, delivering our $2.8 billion to $3 billion plan in 2019 and positioning the company for a free cash flow inflection in 2020. For 2019, capital activity and volumes are all now front-end weighted, and we expect to exit the year with a larger than usual inventory of drilled but uncompleted wells.

This will provide strong momentum as we enter 2020. And importantly, our outlook for oil growth and free cash flow in 2020 gives us confidence in our ability to reduce debt and deliver increasing returns to shareholders. Our assets are in the best part of the Permian and support our commitment to delivering value to our shareholders now and in the future. That means prioritizing capital discipline, focusing investments to deliver the greatest return, finding ways to increase productivity and decrease cost, and maintaining financial strength and flexibility.

Thanks, and now I'll turn it back to the moderator and our team looks forward to taking your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from John Freeman with Raymond James. Your line is open.

John Freeman -- Raymond James -- Analyst

Good morning, guys.Thank you for taking my question. Given the scaled-back activity, we haven't got an update on sort of the initial 2-year plan looking out through 2020 that you all gave with the 4Q '18 release, and maybe just how we should be thinking about how this potentially impacts the 2020 initial plan that you all provided?

Jack Harper -- President and Chief Financial Officer

Sure, John. This is Jack. When we first described the cadence over the next 2 years, we described 2020 as production numbers that translated into double-digit production growth with oil production outpacing the overall growth, where we saw a free cash flow at $50 oil and where we saw free cash flow approaching $1 billion at $60 oil, and that's still what we see today under that same base budget scenario.

John Freeman -- Raymond James -- Analyst

And maybe when we -- the follow-up question, maybe when we look out to 2020 and we sort of think about what's some of the potential efficiency drivers would be versus '19? In addition to the fact that you will go to sort of wider spacing, maybe any color on, maybe sort of pad sizes potentially getting smaller, maybe in 2020 where cycle times get quicker as opposed to some of the larger pads like what we saw with the Dominator?

Jack Harper -- President and Chief Financial Officer

Yes, John. I think the average project size will remain about the same. We will enter the year with a higher than usual number of uncompleted wells, which I think will help bridge the gap on production and timing as we work our rig count back up modestly from where we look at ending at this year. So I think, having that uncompleted well inventory, as we enter the year, gives us more options.

John Freeman -- Raymond James -- Analyst

Okay. Thanks Jack.

Jack Harper -- President and Chief Financial Officer

You bet.

Operator

Thank you.And our next question comes from Derrick Whitfield with Stifel Financial. Please proceed.

Derrick Whitfield -- Stifel Financial -- Analyst

Good morning all.

Will Giraud -- Executive Vice President and Chief Operating Officer

Good morning.

Derrick Whitfield -- Stifel Financial -- Analyst

Perhaps for Tim or Will. As I recall, the Dominator tested 5 zones in total, with 3 on the eastern half and 5 on the western half. Is there a noticeable difference in the performance of the wells between the eastern and western half of the project?

Will Giraud -- Executive Vice President and Chief Operating Officer

Derrick, this as Will. We really have not seen much of a differentiation between the 2 sides of the project so far. But that's something we'll be watching as it continues to produce.

Derrick Whitfield -- Stifel Financial -- Analyst

And as my follow-up on page six of your PowerPoint, you noted that Concho tested the upper limits of well spacing during the second half of '18 and first half of '19. How many wells and projects probably pertain to that statement?

Will Giraud -- Executive Vice President and Chief Operating Officer

I don't know the number off top of my head. Typically, I would characterize '19 as the year that we were advancing our understanding of optimal lateral length, placement design and well spacing being one of the critical variables there. Typically, where we have done that, we have added, kind of, 1 more well into our project. Dominator is the most extreme example where we went 50% beyond, kind of, our traditional resource spacing. So I would say that in a number of the projects we have this year and including a couple more coming on in the back half of this year, you're going to see them developed at a modestly more dense than our resource spacing, but nothing anymore close to Dominator.

Derrick Whitfield -- Stifel Financial -- Analyst

Got it. That's very helpful. Thanks for your time.

Operator

Thank you. And our next question comes from Neal Dingmann with SunTrust. Please proceed.

Neal Dingmann -- SunTrust -- Analyst

Good morning all. Guys, Tim or Jack, it seems certainly that the brunt of the plan or primary plan is still about the capital discipline. And I'm just wondering with the lower activity, you maybe obviously not getting through and you certainly have the material inventory position. Could you talk about how you would view asset sales as far as further potential upstream sales or midstream sales? Just wondering anything if you comment on to the details on the size, timing and potential goals around that?

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

Yes, we talked in the past about kind of our leverage targets. And so the asset sales programs we are working on right now, which would include anything that we are not allocating capital to orders that non-core asset would support getting us to that leverage area quicker. And we are very focused on that. I mentioned, it is one of our top priorities. So we have a number of things out right now that are being tested and expect that to yield a good result for us.

Neal Dingmann -- SunTrust -- Analyst

Hope that. Okay, very good. And then just lastly, on the GOR, it seems like the percentage there is holding up pretty well. Could you just discuss as you, sort of, target different areas, I mean, your thoughts for the remainder of the year in the 2020, it is still good about roughly around that 63% holding?

Jack Harper -- President and Chief Financial Officer

Yes, Neal. This is Jack. I think it's important to remember in the first half of the year, our oil production is ahead of our expectation. So it's the gas production. And we won't overcome that percentage in the back half of the year because we are slowing down. As we look forward, moving back toward that mid-60s range, it's how we see things playing out over the next couple of years.

Neal Dingmann -- SunTrust -- Analyst

That's helpful, thanks guys.

Jack Harper -- President and Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from Paul Sankey with Mizuho. Please proceed.

Paul Sankey -- Mizuho -- Analyst

Hi, good morning guys. Tim, you mentioned the positive of free cash flow inflection next year. At the same time, we have seen this year some issues with some of the science project type stuff, and we are seeing what seems to be gas volumes relatively higher, NGL volumes relatively higher and there is some disappointment around overall volumes. Can you talk a bit about how this year flushes through allowing for the disposals as well? And what you think things will look like in terms of your level of capex and volume growth in 2020?

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

Yeah. Thanks, Paul. This year was a transition year for us and we entered the year harder on capital and also harder on production. And so when oil prices came down from where they were like last year, we reduced our capital budget and our capital budget range. We think it's very important to do what we said we are going to do and land the capital budget inside that range. And we are continuing to drive that number down. So -- and demonstrate our ability to show capital discipline and look within cash flow. So that's -- that is a driver for us for 2019. And we -- on almost every project we do, we have some level of experimentation, and so we have to fit that experimentation within the projects and the capital that we are deploying.

So -- and as we'll describe, '19 was heavily weighted toward density testing. And as we've described in the past, you can't test all the variables at one time. You can't test sand loading, completion design and density all at the same time and know what you got. So that's one of the answers. We feel very confident that landing '19 where we said we are going to land it and then set it up for the 2020 and beyond as the way we described it in the past as a more modest capital deployment on our properties, double-digit growth, and increasing amounts of free cash flow.

Paul Sankey -- Mizuho -- Analyst

Right. Is there a particular reason. I mean I know you have a capability to grow very fast, but you're talking about double-digit growth as a general aspiration. Could you reset things to be more at a low oil price reinvestment rate type approach, so that we could get more conviction that we are definitely going to have a really good inflation of free cash flow next year?

Jack Harper -- President and Chief Financial Officer

Sure. We have the flexibility to move the capital up and down pretty much at our discretion. I think if this relatively similar amount of capital year-over-year demonstrating double-digit growth outpaced by oil and yielding free cash flow at $50 seems like an appropriate level today, but next year will be like this year. There is a lot of variables in play. We'll have to see, when we get to the beginning of next year, what the landscape looks like.

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

I think our conviction of trying to budget around a $50 oil price and then a lower gas price. I think positioning ourselves in a conservative stance is going to pay dividends, and then pay dividends and capital return. And so I think our view of the future hasn't really changed.

Paul Sankey -- Mizuho -- Analyst

Great, thank you.

Operator

Thank you. And our next question comes from Brian Singer with Goldman Sachs. Please proceed.

Brian Singer -- Goldman Sachs -- Analyst

Thank you. Good morning.

Jack Harper -- President and Chief Financial Officer

Good morning.

Brian Singer -- Goldman Sachs -- Analyst

Starting on capex. Given that the $2.8 million to $3.0 million range is the same budget that you are forecasting with fourth quarter '18 results in February, can you talk to what you thought you would be able to do within that budget that you aren't now, i.e., where the degradation and capital efficiency may be occurring? Or should we expect your capital spending this year will be at the low end of that $2.8 billion to $3.0 billion range?

Jack Harper -- President and Chief Financial Officer

Yes, Brian. Again, I'd start with the production in the first half of the year has been ahead of our plan. In the back half of the year, it's going to be below our original plan, primarily due to putting less wells on production and to some effects of these spacing tests that Tim and Will have described. But more importantly than that is to preserve the balance sheet, keep our capital this year as close to our cash flow from operations as we can and set up for the inflection that we have described in 2020.

Brian Singer -- Goldman Sachs -- Analyst

I completely understand the reasons for the discipline. I think I would ask on the -- getting fewer wells online in the second half, and what it is specifically relative to the original plan that is changing the ability to get those wells on, i.e., same budget, fewer wells?

Jack Harper -- President and Chief Financial Officer

Well, as I described, there was a lot of noise in the beginning of the year with production and capital and non-op capital coming at ahead of our expectations, that coupled with a declining liquids and gas price market have us inclined to prepare back our capital to make sure we land well within that capital budget. We are not necessarily trying to hit the top end.

Brian Singer -- Goldman Sachs -- Analyst

Great, thanks. And then my follow-up is, do you expect -- with regards to the debt reduction goal over 2 years of $500 million to $750 million, do you expect that, that can be accomplished with double-digit growth next year and in the absence of further asset sales? Or do you think that the asset sales will be needed to hit that reduction plan from here?

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

We are kind of targeting debt reduction through asset sales and then the double-digit growth out of cash flow and reinvestment in our assets.

Brian Singer -- Goldman Sachs -- Analyst

Thank you.

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

Yes, thanks.

Operator

And our next question comes from Biju Perincheril with Susquehanna. Please proceed.

Biju Perincheril -- Susquehanna -- Analyst

Hi, good morning. Thanks for taking my question. Tim, you mentioned, you are adjusting spacing on the wells that you're spudding now based on the results from some of the recent pilots. So just wondering how should I think about spacing and productivity on the wells that your totaling between now and in the well -- when the wells that are spudding now comes online?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure, I mean, like I could mention 2019 was the year of testing a number of different things, one of the primary variables being well spacing. So there are still projects to come on in the back half of this year that have, as I stated, modestly down-spaced tests incorporated in them. I think going forward you'd expect us to revert back to that resource spacing, which I think you can generally characterize as across in a section. And then I also would expect us, as move forward into 2022, to also test what densities less than our -- that resource spacing looks like as well.

Biju Perincheril -- Susquehanna -- Analyst

Okay. That's helpful. And then a related question is, certainly appreciate -- can appreciate the necessity for projects such as Dominator to sort of compress your landing cycle time. So are there additional projects like those in other zones that we should expect sometime next year? Or are you -- did you have most of the data that you need at hand now?

Will Giraud -- Executive Vice President and Chief Operating Officer

I mean there is really nothing quite like that in the portfolio for '19 or beyond. As we've mentioned that was a test both of the intensity of activity with 7 rigs and then 5 frac crews operating some openings like a square mile, but then there was also testing of density that 150% of our resource that's greater than we've ever done. And so we've certainly learned some things about the impact of the inner well communication and spacing. We've -- I think and as we said from an operational standpoint, the team did a fantastic job executing the project with it all brought on safely as planned and ahead of schedule. But clearly, the -- it's entering the 30 and 60-day production rates were consistent with our other projects in that area, but the performance has declined and that's since it has been clear that it's just due time.

Biju Perincheril -- Susquehanna -- Analyst

That's great. And if I could ask one more follow-up on that is, other than productivity, you're also looking at sort of cycle time and cost savings, which you can get from the bigger projects. Can you talk about that aspect of the Dominator? And what does that mean for your capital efficiency going forward?

Will Giraud -- Executive Vice President and Chief Operating Officer

Yes, I mean, one thing that is consistent is our belief that large-scale project developments only have -- there are very clear benefits both in terms of the capital efficiency you get from concentrating that much activity at one spot at one time. And there is also benefits around resource recovery from developing all of that resource at the same time versus coming back a year or 2 later to do it in different chunk. So our conviction around that certainly is the same. I just think you'll see us revert closer to the resource spacing going forward.

Biju Perincheril -- Susquehanna -- Analyst

Great, thank you. That's very helpful.

Will Giraud -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

And our next question comes from Doug Leggate with Bank of America. Please proceed.

Doug Leggate -- Bank of America -- Analyst

Thanks. Good morning, everybody. Guys, I want to most likely just go back to the Dominator. I'm really -- it seems to me the market is conflating. What may have been an overly aggressive spacing tests, though at least the attempt to try and figure out the optimal density. But I guess, what I'm really trying to understand is, how does this -- when you talk about remediation, how does this change the go-forward development plan as you think about rightsizing large-scale developments? If I could just elaborate, what I'm really trying to get out is, you obviously committed a lot of capital here, which is kind of set the future for the second half of the year. So some of them are really what do you do, I guess, second half is now in place with that momentum. But does that need you to rethink that maybe the right-size of these large developments needs to be somewhat smaller? I'm just thinking philosophically how you're going develop the portfolio going forward?

Will Giraud -- Executive Vice President and Chief Operating Officer

Yes. So I mean, in terms of the project spacing, I don't know that it has taught us anything in terms of the optimal project size. The team has executed very well from a logistical standpoint getting that much work done on time, actually ahead of schedule. So I do think, as we talked about in previous calls, the optimal project size for us is probably in the 8 to 10 to 12 depending upon where you're in the Permian. But I'm not sure that Dominator gave us confidence that we can continue to push that up over time and find incremental efficiencies and how we do it.

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

But I would also say...

Doug Leggate -- Bank of America -- Analyst

Well, I guess... Yes, go ahead. Go ahead, I am sorry.

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

This is a Tim. The projects that we are looking at developing will continue to test densities and zones to continue to make our projects better. And I think you will see us, the projects -- not the project size will be smaller, but the densities will be smaller both vertically and horizontally. And we will be testing that against our -- the implications against our broader spacing assumptions. So I think, testing is something that we and the rest of the industry will continue to do to find buy zone, buy area, what the right answer is, and we have a very large inventory and the implications of developing that optimally both to recovery and rate of return is kind of what we are driving at. And 2019 was a very important year in gathering the kind of data that would design the programs of the future. But I think, the answer to your question is they will be less dense.

Doug Leggate -- Bank of America -- Analyst

Thanks, Tim. My follow-up is really just, hopefully relatively quick one regarding the medium turnout, like I mean your pivoted free cash flow that -- we have this kind of year-over-year data that this kind of cash flow volume is 0, 0. In another words, all these guys spending all their cash flow really don't know any equity volume at a high level. So I just want to underline, you guys are not backing away from that strategy. And if that is true then, can you give us some idea as to what you see as the right pace or balance for your portfolio between cash returns and the optimal growth, basically to be competitive with other industrial sectors?

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

Yes, I just say that as we stated last quarter, generating free cash flow in a $50 world is kind of the first marker and then if we find ourselves in the $60 world where we can generate close to $1 billion of free cash flow and that's next year, and then the outlined years to get better than that. And that's kind of what the plan is, that it starts with that marker of a lower commodity price environment still being able to generate free cash flow at lower commodity prices.

Operator

And our next question comes from Michael Hall with Heikkinen Energy. Please proceed.

Michael Hall -- Heikkinen Energy -- Analyst

Thanks, good morning. I'm just curious if you could talk a little bit about kind of how you balance the shifting of activity and slowing down pretty meaningfully in the back half with the potential efficiency degradations that come with that, so kind of the balance between sticking the budget versus impacting efficiencies? And how long until we might be in a place where the activity profile is in a kind of steady state type range where we won't see these swings up and down that seem probably or potentially relatively inefficient?

Jack Harper -- President and Chief Financial Officer

Sure, Michael. This is Jack. We lowered our capital budget to $50 and that's the way we are looking at it into the future. It had implications from bringing a budget in the $36 to $37 range down, certainly in the first year. But I think, importantly as we look at into the future and use that framework of, as Tim just mentioned, $50 oil yielding free cash flow and growing our production double digits, that's how we are getting to that point as fast as we can. And while we are building more uncompleted wells than normal into next year, we will be able to work through that more than likely in the first half of next year and get to a more steady state range from there. But by budgeting at that consistent commodity price, it should take out some of the noise that's been caused this year.

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

And with a less levered balance sheet.

Jack Harper -- President and Chief Financial Officer

That's correct.

Michael Hall -- Heikkinen Energy -- Analyst

Okay. And then if I could just, I guess, follow up a little bit on Brian Singer's question. How much exactly were -- has like outside activity exceeded expectations in the first half of '19 in terms of capital and volume?

Will Giraud -- Executive Vice President and Chief Operating Officer

It's certainly been a factor. We have been very successful with the wellbores sales program we talked about in the last conference, but the reality is activity levels in the Permian are very high and there is a series of these projects that are non-operated that we want to participate in ourselves because the returns are very compelling. And so it's a factor as we think about the full year '19 budget. It continues to be a pressure point.

Michael Hall -- Heikkinen Energy -- Analyst

Can you quantify, I guess, in terms of dollars, how much that's impacted things?

Will Giraud -- Executive Vice President and Chief Operating Officer

Probably -- it's probably in the $100 million plus above what we expected.

Operator

And our next question comes from Drew Venker with Morgan Stanley. Please proceed.

Drew Venker -- Morgan Stanley -- Analyst

Hi, everyone. I was hoping you can just give us an update on level of maintenance spend or maintenance activity for 2020 to hold exit -- to exit production flat in 2020?

Jack Harper -- President and Chief Financial Officer

Yes, Drew. Last quarter, we talked about a level of $1.5 billion to hold the production flat and that has not changed.

Drew Venker -- Morgan Stanley -- Analyst

Okay. And just a follow-up on your free cash flow comments, Jack. For 2020, have you assumed that NGL and gas prices rebound kind of to where they were last year, for 2020? Or what -- can you just talk about some assumptions behind that free cash flow number?

Jack Harper -- President and Chief Financial Officer

Yes, our current assumption is the future market, and so we haven't assumed anything better than that.

Operator

Thank you.And our next question comes from David Deckelbaum with Cowen. Please proceed.

David Deckelbaum -- Cowen -- Analyst

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

Jack Harper -- President and Chief Financial Officer

Good morning. Thanks. David.

David Deckelbaum -- Cowen -- Analyst

Just wanted to ask, I saw you had mentioned before that, that you all might consider some less dense development in 2020 relative, I guess, to the resource estimate. Are you at the point now where, I know that you've learned some things about process, but I guess, there's still -- is the MPV per section question still up for debate? And do you see like the most logical path here is kind of up spacing in order to enhance returns next year?

Jack Harper -- President and Chief Financial Officer

Well, we will continue to test on both sides of spacing, but clearly in the back half of this year, our bias is at the resource level or less than to continue testing in all the zones in both basins. So in general, I would say 2020 versus 2019 would have less densely spaced wells.

David Deckelbaum -- Cowen -- Analyst

All right. And then just check, if I might, as you talked about the broad parameters around the '20 plan, at what point now does that include rig additions? And if you contrast that to the 27 average that you guys have thought about previously, where does thinking kind of stand today as what you would need to maximize that free cash generation that you're looking for and still hit that double-digit growth?

Jack Harper -- President and Chief Financial Officer

Sure. The pace around this year will average somewhere in the below 25 rig range. That same range is what we expect to average today for next year, which implies a bit of an increase at the beginning of next year, but as I mentioned before, what this inventory of uncompleted wells that we entered the year with next year that allows us to bridge that gap as we -- in activity as we add those incremental rigs.

Operator

Thank you. And our next question comes from Scott Hanold with RBC Capital Markets. Please proceed.

Scott Hanold -- RBC Capital Market -- Analyst

Thanks, Not to belabor the point, but I'm going to go back to Brian's question on capex this year relative to activity levels and certainly OBO is a piece of it, but can you give us some context of some of these larger projects like Dominator and such, was there also some cost increases on those relative to your plan, I do understand they could be more efficient still, but relative to your plan that resulted in sort of the mismatch of where we are today versus your initial budget?

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

There's really not.

Scott Hanold -- RBC Capital Market -- Analyst

Okay. All right. And then you also talked about some uncompleted wells inventories heading into 2020, can you just give us the relative size of that versus what's, I don't know if the right word is normal levels? Or maybe where you were sitting as you entered 2019?

Jack Harper -- President and Chief Financial Officer

Sure. Overtime, we've described our level of ducts versus rig count in kind of that 1.5 to 2x range and that bounces around with these large scale projects, but on average that's have been where we have looked at the world. As we see it today, we will end the year at plus or minus 100 uncompleted wells, which is more in the 4 to 5x range of our rig count. So higher than normal, but again, I think, gives us flexibility as we enter 2020.

Scott Hanold -- RBC Capital Market -- Analyst

Understood, appreciate it. Thanks.

Jack Harper -- President and Chief Financial Officer

Thank you.

Operator

And our next question comes from Arun Jayaram with JPMorgan. Please proceed.

Arun Jayaram -- JPMorgan -- Analyst

Yeah, good morning, Jack, I was wondering if maybe you could clarify some of your commentary on 2020, thoughts on production and free cash flow that you made on the last call? If we put in your updated oil guide for '19, we get the volumes around 208 on the oil side. So -- and I believe your previous guidance called for a 23% kind of 2-year CAGR and oil. I think the straight number is around 250. So I was just wondering if you can maybe give us some thoughts on 2020? And how do you think the exit rate for the fourth quarter will play out on the oil side?

Jack Harper -- President and Chief Financial Officer

Yes, the gap this year, it does lead to lower back half oil production. But for the year, it's within 3% or 4% of the previous. I'm talking about 2019 right now. And having a modestly larger uncompleted well inventory, as we enter next year, helps us bridge that gap. And so, as I described then and I described now, we see 2020 as a year to grow our production in that double digits with oil outpacing the overall BOE growth and yielding the free cash flow at $50 and approaching those same kind of larger free cash numbers of $1 billion if oil is closer to $60.

Arun Jayaram -- JPMorgan -- Analyst

Okay. Does that put you lower in 2020 versus your previous expectations or at a similar place?

Jack Harper -- President and Chief Financial Officer

We haven't really changed our base plan. And so I expect our production in 2020 to look pretty similar as we have in previous points in time, but we are ways to finalizing the 2020 budget right now.

Arun Jayaram -- JPMorgan -- Analyst

Okay, fair enough. And just maybe a question for Will. You talked about some of the benefits of the larger projects, but it seems to have caused quite a bit more volatility in your results. I was wondering if you could talk a little bit about the cost benefit potential of moving to maybe some of the smaller package sizes that may give you a little bit more of a level-loaded program, which may provide more consistent growth versus more volatility, which you could argue maybe hurting your multiple?

Will Giraud -- Executive Vice President and Chief Operating Officer

There is no question that moving to these larger project development even on a company or size will cause what you call volatility, a nonlinear growth profile in the company. But if you think about the multiple decades of inventory we have, we are focused on the best most economic development of it over that long-term time period. And as I mentioned, we still believe that doing it this way is the way to recover the resource in a most capital efficient manner over the long-term versus just kind of cherry picking with some very small projects now that you are going to regret when you come back later in a year or 2.

Arun Jayaram -- JPMorgan -- Analyst

Okay, fair enough thanks.

Operator

Thank you. And our next question comes from Mike Kelly with Seaport Global. Please proceed.

Mike Kelly -- Seaport Global -- Analyst

Hey guys, good morning. Just hopping to bolt-on to the Brian Singer question as well. You guys entered the year forecasting 310 to 330 wells drilled to completed, and I think 330 to 350 pops. And I was hoping maybe you could refresh us on what that range for both those categories could look like now?

Jack Harper -- President and Chief Financial Officer

Yes. Sure, Mike. I think on both of those we are going to be at or below the low end of that range, the way we see it today.

Mike Kelly -- Seaport Global -- Analyst

Okay, fair enough, Thanks guys.

Operator

And our next question comes from Matt Portillo, Tudor, Pickering, Holt & Co. Please proceed.

Matt Portillo -- Tudor Pickering Holt & Company -- Analyst

Good morning guys.

Jack Harper -- President and Chief Financial Officer

Good morning.

Matt Portillo -- Tudor Pickering Holt & Company -- Analyst

Just a follow-up to that question, is there any incremental color you can provide on the 2020 pop guidance? You are clearly pulling quite a few wells out of 2019. You talked about going into 2020 with a larger duct count, but you're also coming in with probably a bit lower rig count than initially envisioned in the original guidance. So just trying to get a better sense of how we should think about your gross operated completion count heading into next year? And then back to one of the previous questions, as we think about the 2020 oil growth expectations, should we be basing that off of the revised 2019 numbers, so looking out into 2020, kind of growing that double-digit growth rate off of the lower 2019 oil guidance?

Jack Harper -- President and Chief Financial Officer

Yes, I think entering the year with more uncompleted wells will give us flexibility on how we stage those in. And whether it's front-end loaded or evenly distributed, but when you look at the 2 years next to each other, it's -- the capital will be relatively similar and the wells put on production will depend a bit, but probably similar this year.

Matt Portillo -- Tudor Pickering Holt & Company -- Analyst

Just to clarify that the new well count is the 300-or-so wells, we should think about that as a similar well count for next year? Or basically you're going to catch up on the wells that you push from this year into 2020?

Jack Harper -- President and Chief Financial Officer

Yes, I think it should look relatively similar to this year when it does settle and the cadence may be different next year, but it should be relatively similar to '19.

Matt Portillo -- Tudor Pickering Holt & Company -- Analyst

Okay, thank you.

Operator

Thank you. And our next question comes from Richard Tullis with Capital One Securities. Please proceed.

Richard Tullis -- Capital One Securities -- Analyst

Hi thanks,Good morning .Tim and Jack, if you are taking a step back at a high level, what has changed in your view of, whether it's cost of well productivity and commodity since late April when production guides were actually raised at that point?

Jack Harper -- President and Chief Financial Officer

Well, our focus is heightened on landing our budget within our cash flow. The gas and liquids market has deteriorated; therefore, so has our cash flow modestly. And so our bias to touching the top end of our budget range or going above is nonexistent. And so we prioritize capital discipline for this year to set up the company in the best position to head into 2020 and do the things we have described.

Richard Tullis -- Capital One Securities -- Analyst

Okay. And for the follow-up, what were the main drivers of the impairment at the north wells -- New Mexico Shelf assets?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. This is Will. The shelf has been flagged on the watch list for impairment. I think, the last 2 quarters in the queue due to sensitivity to pricing and also the inability to book undeveloped reserves there, because we don't plan to allocate any capital there in the next 5 years.

Richard Tullis -- Capital One Securities -- Analyst

Okay thank you, appreciate it.

Operator

Thank you. And our next question comes from Gail Nicholson with Stephens. Please proceed.

Gail Nicholson -- Stephens -- Analyst

Good morning. A very different question. Cap expenses excluding GP&T below $10, with the strategic debut with Solaris that was announced last night, can you talk about the potential impact on LOE going forward with increased water cycling usage? And then thoughts on any potential infrastructure -- water infrastructure capex savings, I mean, in the future as well?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. Just addressing your first question specifically on kind of overall cost structure, we don't expect there to be any significant change up or down in the near term from that Solaris deal. But just kind of more broadly on the Solaris transaction, I mean, it's something which look very similar to how we start our previous deals and the crude gathering space with ACC and Oryx. We have got a very strong long-term commercial contract that underlies the deal to handle our produced water in Eddy County. Also similar to those crude deals, we are partnering with a very sophisticated operating team that has a dominant regional footprint.

And for all that, we get the benefits of really high-level service handling all of our produced water volumes. They also bring with them the needed infrastructure to allow large-scale water recycling like in reference which I think will be a driver of savings in the future. And then, we'll have a 20% equity investment that gives our shareholders exposure to a growing competitive business and of we'll see the table in terms of how it goes from here.

Gail Nicholson -- Stephens -- Analyst

Great, thank you.

Operator

Thank you. And our next question comes from Jeffrey Campbell with Tuohy Brothers. Please proceed.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Good morning. I just wanted to ask one question because I have been listening to a lot of discussion around Dominator and spacing, and so forth. I just want to ask you is it fair to say that while Dominator did not add as much inventory as you might have hoped, your corporate inventory assumptions are based on far more conservative spacing and remain unaffected?

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

That's correct. All 3 of us said that's correct at the same time.

Operator

And our next question comes from Leo Mariani with KeyBanc. Please proceed.

Leo Mariani -- KeyBanc -- Analyst

Hey, guys, I was hoping to touch on the asset sales. You surely mentioned that a number of things are in queue. Just wanted to get a relative sense of magnitude, are we talking $100-or-so million of asset sales or kind of more like upwards of $1 billion? Is there any just kind of high-level numbers you can throw out just to give us a sense of how impactful this could be?

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

Let me take that one. I want to just say that it's a combination of properties and also system like this Solaris deal that generates cash, but it's on the upper end of what you described.

Leo Mariani -- KeyBanc -- Analyst

Okay. That's helpful. And I guess, just with respect to obviously some of the issues you had here on Dominator. I think you guys have said that. There may be some lingering effects into the second half and maybe a couple other pads that also tested spacing that was too dense. I just wanted to get your kind of high-level thought, I mean, do you think that by saying in the fourth quarter you guys are no longer bringing on pads that are likely to show some underperformance, just want to get a sense of when some of the deleterious impacts are kind of removed from the numbers here?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. I mean the cycle times on these projects, you plan them in years, but you really implement them in a couple of quarters, and so the ability to dramatically change our '19 plan is pretty limited at this point. Although, I do think by the fourth quarter, you'll start to see adjustment to that capital plan.

Leo Mariani -- KeyBanc -- Analyst

So just to be clear, so would you basically anticipate that the impact of some of the pads that were spaced too tight will sort of be gone by the end of the year and allow you to see pads that are tied in next year that are just spaced correctly? Just trying to get a sense of when we start to see maybe a little better kind of run rate production performance?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. I'd say that -- yes, I think, it's the short answer to your question.

Leo Mariani -- KeyBanc -- Analyst

Okay, thank you.

Will Giraud -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

And our next question comes from Nitin Kumar with Wells Fargo. Please proceed.

Nitin Kumar -- Wells Fargo -- Analyst

Hey, good morning. Thank you for taking my question. I have a very quick one here. In April, you still expected 2019 oil production to grow faster than your coal production rate. As you're talking about that updated guidance that's more. What has changed? And what's your confidence level that in 2020 oil will still grow faster than the total production?

Jack Harper -- President and Chief Financial Officer

Yes, the main thing that changed in '19 is less wells being put on production in the back half of the year. Does that get that percentage back up? Next year with the well mix and the cadence of the completions that we are confident that we will reverse that, and you will see that oil percentage picking back up.

Nitin Kumar -- Wells Fargo -- Analyst

Great, thank you.

Jack Harper -- President and Chief Financial Officer

Thank you.

Operator

And our next question comes from Charles Meade with Johnson Rice. Please proceed.

Charles Meade -- Johnson Rice -- Analyst

Good morning, One question for me on the Dominator pad. Doing some rough math, it looks to me -- the Dominator pad with respect to the shift lower in oil for the back half of the year, it looks to me like maybe about half of that shift lowering the oil is you can attribute to the Dominator pad, but I'm curious is that the right ballpark? And what's it look like from your end?

Jack Harper -- President and Chief Financial Officer

It's certainly a factor, and I think that factor with putting less wells on, really the primary driver to that back half oil production.

Charles Meade -- Johnson Rice -- Analyst

Okay. Thank you, Jack. And then I think, Arun touched on this point earlier, but I wonder if I can just revisit it. Looking at your annual guide now for oil growth, what are the -- it leads a pretty wide window for what 4Q could be. So I wondered if you can talk about what are the events and decisions that would line up on your end that would lead you to the high end of that range? And what are the events and decisions that would lead you more toward the low end of the range?

Jack Harper -- President and Chief Financial Officer

You are talking about within '19 and just the fourth quarter specifically?

Charles Meade -- Johnson Rice -- Analyst

Exactly. What would have to have in the back end of the year if we kind of pick -- take your guidance for 3Q and then annual guide leads a pretty wide range for 4Q might. What's the pay attention to you there?

Jack Harper -- President and Chief Financial Officer

Sure, it's timing and it's well performance. And as Will just mentioned, you will see some of the benefits of projects spaced less densely than the Dominator coming through toward the middle end of the fourth quarter and heading into the first quarter. So those are going to be the primary drivers.

Charles Meade -- Johnson Rice -- Analyst

Got it. Thank you.

Operator

Thank you. And this concludes our Q&A session for today. I'd like to turn the call back over to Tim Leach for closing remarks.

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

Thank you for dialing in. And I look forward to talking to you next quarter. Thanks.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

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

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

Jack Harper -- President and Chief Financial Officer

Will Giraud -- Executive Vice President and Chief Operating Officer

John Freeman -- Raymond James -- Analyst

Derrick Whitfield -- Stifel Financial -- Analyst

Neal Dingmann -- SunTrust -- Analyst

Paul Sankey -- Mizuho -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

Biju Perincheril -- Susquehanna -- Analyst

Doug Leggate -- Bank of America -- Analyst

Michael Hall -- Heikkinen Energy -- Analyst

Drew Venker -- Morgan Stanley -- Analyst

David Deckelbaum -- Cowen -- Analyst

Scott Hanold -- RBC Capital Market -- Analyst

Arun Jayaram -- JPMorgan -- Analyst

Mike Kelly -- Seaport Global -- Analyst

Matt Portillo -- Tudor Pickering Holt & Company -- Analyst

Richard Tullis -- Capital One Securities -- Analyst

Gail Nicholson -- Stephens -- Analyst

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Leo Mariani -- KeyBanc -- Analyst

Nitin Kumar -- Wells Fargo -- Analyst

Charles Meade -- Johnson Rice -- Analyst

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