Extraction Oil & Gas Inc (XOG) Q2 2019 Earnings Call Transcript

XOG earnings call for the period ending June 30, 2019.

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Extraction Oil & Gas Inc (NASDAQ:XOG)
Q2 2019 Earnings Call
Aug 01, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon. I am Amanda, and I will be your conference facilitator today. I would like to welcome, everyone, to the Extraction Oil & Gas second-quarter 2019 financial and operating results conference call. [Operator instructions] Please be advised that the remarks today, including your answers to your questions, include statements that the company believes to be forward-looking statements within the meanings of the Private Securities Litigation Reform Act.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated. These risks include, among others, matters that the company described in its financial and operating results news release issued this afternoon and in its filings with the Securities and Exchange Commission. Extraction disclaims any obligation to update these forward-looking statements. While the company believes these forward-looking statements are reasonable, they are subject to factors such as commodity prices, general economic conditions, competition, technology and environmental and regulatory compliance, the company's drilling schedules, capital plans and other factors that may cause its results to differ materially.

I would now like the call over to Louis Baltimore, Extraction's director of investor relations.

Louis Baltimore -- Director of Investor Relations

Thank you, and good afternoon to everyone. We're glad you could join us today for our second-quarter earnings call. With us today on the call, we have Matt Owens, our president and acting CEO; Rusty Kelley, CFO; Tom Brock, our chief accounting officer; and Eric Jacobsen, our SVP of operations. I'd like to remind you that today's call, in addition to the aforementioned forward-looking statements, also includes the discussion of certain non-GAAP financial measures.

Please be sure to read our full disclosure on forward-looking statements and GAAP reconciliations in our earnings release and in our filing on Form 10-Q, which we provided earlier today after the close of trading. I'll now turnover the call to Matt Owens, our president and acting CEO, to go through some of the highlights for this quarter, along with an update on Mark's health.

Matt Owens -- President and Acting Chief Executive Officer

Thanks, Louis. Good afternoon, everyone. Welcome to our second-quarter earnings call. I would like to start off by thanking all of our investors and partners for your continued support for Mark during this time.

His treatments are progressing along, and he remains in good spirits. We appreciate him being in your thoughts and are looking forward to him returning to the team once he makes his full recovery. Turning to our second-quarter results. Our upstream operations were executed as planned, and the DJ Basin midstream buildout continues as scheduled.

As of today, DCP's Plant 11 is processing gas and Rimrock's plant is expected to come online in mid-August. We also expect Rocky Mountain Midstream's next plant to start up near the end of the third quarter. Our total equivalent volumes were largely flat the first quarter as we expected and previously communicated. We turned to sales 36 Gross, 32 net wells during the quarter with roughly 2/3 of these wells beginning production during the first half of May and the remaining during the second half of June.

In terms of midstream optionality, the projects associated with the agreements we entered into over the last 12 to 18 months are finally nearing completion. Starting this quarter, Extraction will have the ability to sell gas to four different processors in the Wattenberg Field, which should provide for increased production efficiency by minimizing downtime associated with plant maintenance and elevated line pressures. Focusing on operations. 12 of the wells brought online during the quarter were in our North Hawkeye Area, bringing our total number of wells in this area to 19 this year.

The remainder of the wells turned to production during the quarter were in our Windsor area. From a gas-processing standpoint, the Hawkeye wells are flowing to Rocky Mountain Midstream. The Windsor wells are flowing to DCP and eventually Rimrock, which is why we targeted for these wells to begin production at the end of the quarter, coinciding with the plant commissionings. We continue to be encouraged with the well results in North Hawkeye.

If we turn to Page 18 in our investor presentation, you can see the 19 wells turned to production this year are tracking near our 1 million BOE type curve, confirming the same outperformance we saw from the original six wells completed in this area last year. This area is strategically important to us for two main reasons. First is its rolled landscape out around the Denver Airport. Second, it provides large, repeatable drilling inventory that will compete for drilling capital with our other core areas, as demonstrated by the performance of our 25 wells producing to date.

In Broomfield, we are already completing our first batch of wells on the Interchange Pad, which includes extractions first three-mile laterals, and drilling is moving forward on the Livingston Pad. As per midstream, the buildout of elevations gathering system and facilities also continue on schedule. We expect the elevation system to be ready to move first production from our Broomfield wells near the end of the third quarter. On the regulatory front, we successfully entered into a comprehensive operator agreement with the city of Aurora in our Hawkeye area.

This agreement solidifies Extraction's ability to develop over 65 initial long lateral locations and creates a pathway to develop our remaining acreage in the area. This further demonstrates our company's ability to effectively collaborate with local governments under the new law, and we expect to execute additional local agreements in the near-term. Like our agreement in Broomfield, this new agreement with Aurora will last for over five years. This extended term allows the company tremendous flexibility with respect to development timing and provides the visibility necessary for elevation to undertake its infrastructure buildout in these areas.

It's the combination of our strong stakeholder relations and operational excellence that I believe really sets Extraction apart. These tw core competencies enable us to develop top-tier areas with minimal vertical penetrations, where we can continue to produce many of the best wells in the DJ Basin. Before I turn it over to Rusty to go through some financial highlights and capital allocation decisions, I'd like to close with the three key elements that make up the Extraction story. First, we targeted the acreage in the core of the DJ Basin that has minimal vertical penetrations.

It's this virgin rock that enables us to drill and complete more productive and more economic wells. The presence of a thick and productive Codell across the vast majority our acreage enhances our returns and location counts. Second, we expect our diverse portfolio of gas-processing options will provide us with unparalleled redundancy and flow assurance in the near future, while our ownership of Elevation Midstream provides an additional source of potential value. Third, we have repeatedly demonstrated our ability to work successfully at the local level to obtain large-scale operator agreements, ensuring our ability to develop this world-class resource.

As we stand today, is the elements I just outlined for you that give me so much optimism about our company's future. I'll now turn it over to Rusty Kelley, our CFO, to review our financial results for the quarter.

Rusty Kelley -- Chief Financial Officer

Thanks, Matt. I'd like to quickly touch on some financial highlights. Our liquidity and balance sheet remains strong. We exited the second quarter with a $1.1 billion borrowing base, with $480 million drawn.

During the second quarter, we executed repurchases of over 25 million shares of our common stock for $100 million, which is an average price of $3.97 per share. In total, we've repurchased over 38 million shares for $163 million. This represents a 22% reduction in our shares outstanding since we started the share buyback program in November of last year. We've also been active in the market repurchasing our senior notes.

During the second quarter, we repurchased 14 million of face value senior notes for $10.9 million. Since beginning the debt repurchase program, we've retired approximately 50 million of senior notes for $39 million, resenting a 21% discount face value. On the asset sales front, we do not have anything more to announce yet, but we are actively negotiating multiple divestitures we believe will be executed over the coming months. Both financially and operationally, Extraction continues to execute on its 2019 plans and remains well-positioned for the future.

With that, I'd like to open it up for Q&A.


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Questions & Answers:


Operator

[Operator instructions] Our first question comes of the line of Paul Grigel of Macquarie.

Paul Grigel -- Macquarie Research -- Analyst

Best of luck definitely to Mark as well. I guess first, may be starting off with capex and Cadence. Turn-in-lines into your end if the plants come on, how should we be thinking about that from the completion at either Broomfield or just kind of overall, in the turn-in-lines over third quarter and fourth quarter and the focus on maintaining the capex budget?

Matt Owens -- President and Acting Chief Executive Officer

Yes. Paul, capex is on schedule for what we have planned for the year. We always thought, we'd be slightly ahead in the first half for what we end up spending the second half with the majority of our turn-in-lines coming online in the second half of the year, mostly toward the end of third quarter, trying to coincide with the two midstream projects that we have working. So one would be the elevation system building the Badger facility, and that is what we will need online to slow our wells in Broomfield.

And then the Rocky Mountain Midstream East Greeley lateral is the other big project that we have coming on at the end of the third quarter. So we will have a bunch of wells that are probably turning online in the third quarter. But they probably won't be up to full production until near the end of the third quarter or beginning of fourth quarter.

Paul Grigel -- Macquarie Research -- Analyst

OK. That's very helpful. I guess may be turning to the divestitures comment. How do you think about Flat River midstream within elevation, and then may be more holistically, where does elevation fit within the strategic outlook, maybe longer term realizing there's still a lot of building going on?

Matt Owens -- President and Acting Chief Executive Officer

Yes. So for Flat River, we look at that kind of the same way that we've been looking at elevation. And in terms of divestiture, the plan is at someday to realize gains off of those investments that we have made. But Flat River is a similar situation to Extraction, where a lot of the volumes ramp and that system will be coming at the end of this year and through next year.

So just like with elevation, we think once the volumes are flowing through those systems, they will make them more valuable, and we should hopefully, be able to get better realizations off of those monetizations.

Paul Grigel -- Macquarie Research -- Analyst

And then maybe how elevation fits in longer-term as well?

Matt Owens -- President and Acting Chief Executive Officer

Yes. So same with elevation. Elevation will be ramping up in its volumes once it turns its first system on at the end of this year. We'll have more and more wells in Broomfield coming online throughout all of next year, and we'll continue to see a ramp there.

But once we get a few quarters under our belt of some solid revenue and cash flows coming in at that -- at the elevation level, that's when we'll probably look at potentially doing something with it.

Operator

And our next question comes from the line of Welles Fitzpatrick of SunTrust.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

With -- you guys were obviously pretty active on the share repurchases. Do you guys expect that to be reup out of the board? Or have you been focusing a little bit more on the 50 million, I think you have left on the debt authorization since midyear.

Rusty Kelley -- Chief Financial Officer

Welles, this is Rusty. We have, as you've seen, exhausted the authorization and we -- while we still have some amount on the bonds that gives us some opportunistic ability, I think what you're seeing from us is going to be a continued focus, especially, with the volatility in the market on liquidity and just balance sheet strength. I think it's going to be our focus going forward.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

OK. Perfect. And then on the Aurora OA. How many acres does that cover? And can you hit a significant portion of unincorporated Adams from those pads?

Matt Owens -- President and Acting Chief Executive Officer

Yes. We can hit unincorporated Adams from pretty much all of them. There's five pads that we have approved now in the Aurora area that are mostly part of this agreement and a lot of those are larger pads. They are capable of drilling both directions, but we will have the ability to add more pads to this agreement as time goes on, and we identify more pads, which are going to be brought to the council's attention and then permitted underneath the rules that we agreed to in this agreement.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

OK. And then just one last one if I could sneak it in. It seems like Badger is really key to getting these OAs, especially, the tankless capabilities that all these municipalities seem to want. How many opportunities has that presented to you in so much of the vast majority of other folks don't have a Badger facility? Are people coming to you with those types of opportunities?

Matt Owens -- President and Acting Chief Executive Officer

Yes. I would say that it's helped us in several situations so far in blocking up our acreage in these areas, where we can -- we have a little bit more leverage on swaps with other operators, and we're able to consolidate our acreage in the one spot, which makes all the midstream facilities more attractive to us because it's less spend and more volumes coming into the -- coming into what we're already building.

Operator

Our next question comes from the line of Brad Heffern of RBC.

Brad Heffern -- RBC Capital Markets -- Analyst

I guess recognizing that you guys don't do quarterly guidance, there is a big ramp for the second half of the year that's implied in the annual guide. So I was wondering if you could give any broad strokes around how you expect that to play out. It sounds like there is some flush production coming out of the second quarter, but then -- and then there will be a low and the flush production in the fourth quarter as well. But any thoughts around that?

Matt Owens -- President and Acting Chief Executive Officer

Yes. Like I mentioned earlier, the two big projects that coincide with our ramp on the midstream side are the Badger facilities and then the East Greeley lateral that Rocky Mountain Midstream is building. And both those are slated for coming online right around the end of the third quarter. So some wells might be able to start coming online slightly before that, so you might have them start coming online and cleaning up.

But the big ramp in production will be in the fourth quarter versus the third. So we would expect both quarters to be up over what second quarter was, but the largest growth will come in the third quarter as -- I mean, I'm sorry, the fourth quarter as the wells will all be online for the majority of that quarter.

Brad Heffern -- RBC Capital Markets -- Analyst

OK, got it. And then in the past you guys have given a number that's sort of behind pipe production that's constrained. Do you have any sort of number like that right now? And then by the end of the year, would you expect that number to be close to 0 because of all this capacity coming on?

Matt Owens -- President and Acting Chief Executive Officer

Yes. We do have a number in mind. It obviously -- we hit right what we wanted to on our production for this quarter. After the learnings from last year, we've been a lot more conservative in our assumptions on run time for the midstream companies out here, and I think that has played out well for our production guidance so far this year, at least.

So we do probably have, let's say, in the neighborhood of 10,000 BOE a day. Currently constrained, but that's something that we have been planning for and that's something that we would expect to come back online as DCP's plant ramps up. As you heard earlier today, they're commissioning that right now. And it's going to start moving volumes hopefully in the next month and ramp up toward that full capacity.

Operator

And our next question comes from the line of Brian Downey of Citigroup.

Brian Downey -- Citi -- Analyst

May be a quick one on crude differentials. I know, we talked about it last quarter, but if you have any updated thoughts on the second half of the year, if any of the larger projects coming online that you talked about, change any of Extraction's oil gravity or if that's just broader market dynamics that you mentioned in the release there?

Matt Owens -- President and Acting Chief Executive Officer

There will be a large change in Extraction's overall oil gravity, but as far as a differentials go, it's kind of the same story that we told last quarter. We saw the quality differentials started to run up in the first quarter, and peak in the second quarter as more and more of that lower gravity crude from the Permian was slowing up toward Cushing and getting that better price. But we still see on the forward month strips for the quality differential in Cushing starting to fall back down dramatically at some time in the third quarter -- second half of the third quarter when those Cactus and EPIC pipelines in the Permian are slated to turn on and divert that crude from the Permian over toward the coast.

Brian Downey -- Citi -- Analyst

Got it. So you'd expect something in line with what you were realizing, I'll call it, back half of last year as a reasonable run rate as you approach the end of this year?

Matt Owens -- President and Acting Chief Executive Officer

Yes. I would think so. It's probably not going to fall right all the way back down there in one quarter, but we would expect it to fall back down into something with a seven-handle and then hopefully, eventually over a quarter or two get back down to maybe the mid-7s.

Operator

Our next question from the line of Jeffrey Campbell of Tuohy Brothers.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

I was wondering, do you anticipate any recovery and the DJ nat gas and NGL prices as these midstream projects come online? And if so, over what time period?

Matt Owens -- President and Acting Chief Executive Officer

I think we do expect there to be some sort of relief once you get White Cliffs conversion running and the fracs expansion that will open up the capacity that the basin has to get to Belvieu right now. So I think with those lines being full or the space being full going to Belvieu, some people have had more of their NGLs diverted to Conway, which is -- I think have been one of the main reasons all of us have suffered on the NGL side. Price realizations anyways. But those projects are under way right now.

They'll be coming on in the next quarter or two, and I think that will have the differentials that we all see across the basin in terms of NGLs.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

OK. And regarding the Aurora permitting, does that have to go the state level now for some kind of approval? Or is the local agreement sufficient to begin operations?

Matt Owens -- President and Acting Chief Executive Officer

So the way that it works with the Senate Bill 181 is, the goal is to have operators get these sort of local agreements in place first and before submitting their permits to the state, just to try to get the state out of being the mediator in between the two parties. And so now that we've got this agreement done, we'll just go about the normal state permitting process and submit our permits to the state, just the normal way that we had in the past, and since we already have the local approvals, they should flow through the state at a reasonable pace.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Right. And just a follow-up on that last part, I was just wondering, my understanding is there's still some kind of ongoing rule making going on at the state level, but whatever that is, you don't anticipate that, that's going to create any real headwinds to getting this done since you have the local thing in place?

Matt Owens -- President and Acting Chief Executive Officer

We don't think that will happen because the -- like the governor has said in the past, if municipalities wanted to enter into operator agreements before waiting for the rule making, then the administration's going to take that as them seeing they're fine with the rules that they were able to get or negotiate with the operator in that certain agreement.

Operator

And our next question come from the line of Betty Jiang of Credit Suisse.

Betty Jiang -- Credit Suisse -- Analyst

As we get closer to the mission de-bottleneck, can you talk about your confidence level in the timing of the really critical midstream expansion in late 3Q? Like what are key milestones that we should be watching? Any risk of slippage there?

Matt Owens -- President and Acting Chief Executive Officer

We've been very active with Rocky Mountain Midstream. We meet with them very regularly to make sure that the timing of the pipeline for East Greeley is on track with what we've assumed in our budget. So far we're comfortable with where they're at. We're also comfortable with where Elevation Midstream is at in terms of its Badger facility.

But we're not there yet. It's still -- there's still another couple of months before those are supposed to be online, and we'll continue watching them very, very closely. But we do have some contingency plans on how to reduce some capital spend at the end of the year if something like that needs to happen. But right now we're confident with where the timing looks for both of those systems.

Betty Jiang -- Credit Suisse -- Analyst

Great. And then can you talk about how much production benefit do you see from the DCP Plant 11 ramp in the third quarter? Any estimate on the volume behind pipe and will you be at -- like, how many new production we could expect be tying into that plan?

Matt Owens -- President and Acting Chief Executive Officer

So we didn't have a lot of wells or we don't have many wells left to drill that go into the DCP system. We did have some that we turned online at the end of the second quarter, trying to coincide with -- when we thought the O'Connor 2 plant was initially going to start up. So since that is running behind by a couple of months right now,, that's the production I was mentioning earlier that seems to be constrained right now, so that would be somewhere around that 10,000 BOE a day number of brand-new wells. So just remember that, that we wouldn't be a 10,000 barrel-a-day flat number, that will turn on and that it doesn't decline.

But once the plant does come on and gear -- ramps up to full capacity, I should say, we should be able to open up pretty much all of the constraint production we have from those new wells that we turned on.

Betty Jiang -- Credit Suisse -- Analyst

Sorry. Just a clarification, the 10,000 barrel-per-day of constrained volumes, is that baked into the production guidance? Or is that new to us?

Matt Owens -- President and Acting Chief Executive Officer

Yes. Because it would have -- we had it baked in our second quarter, and we actually modeled this slightly slower start-up than what was initially thought for that plant. So right now we're still comfortable with where we sit in terms of our production on DCP.

Operator

And our next question comes from the line of Marshall Carver of Heikkinen Energy Advisors.

Marshall Carver -- Heikkinen Energy Advisors -- Analyst

So the commentary on focusing on building liquidity, does that basically mean you're going to be using any sort of free cash flow to then your credit line that will be the primary usage, any additional cash the next few quarters?

Rusty Kelley -- Chief Financial Officer

Yes, this is Russ here. Again, that's going to be focus, I don't want to give a complete playbook that will be dependent on commodity prices, revolver capacity, etc., but that is certainly making sure that we preserve our liquidity and is definitely and our balance sheet strength is a definite focus of the company right now.

Marshall Carver -- Heikkinen Energy Advisors -- Analyst

OK. And a follow-up. Regarding the commentary around potential asset sales, is that acreage to pay for your land budget or would that be some actual producing assets with some -- that could be used to pay down debt or something like that?

Matt Owens -- President and Acting Chief Executive Officer

It's been a combination of what we've looked at and what we've executed in the past. For instance, the divestiture that we did in the first quarter or had close in the first quarter this year, that was a combination of some acreage and some production. So it's not as easy nowadays to sell it just nonproducing acreage, but we do have some packages that we're marking right now, that includes just acreage and then we have some other ones that do include a little bit of production and those are the ones we are pursuing at this time.

Operator

And our next question comes from the line of Leo Mariani of KeyBanc.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Just hoping maybe you could give a little bit color around potential other new operating agreements that maybe you guys are hot and heavy on from a negotiating perspective and maybe you're thinking kind of come here in the near term?

Matt Owens -- President and Acting Chief Executive Officer

We are working on other operator agreements. Currently, we have been working on them for a while. It's not something that we really want to point out exactly who it is at this time, but as you can probably guess, they're down in the southern Hawkeye portion of our acreage. And we feel fairly confident that we'll have at least another one of those executed, hopefully, in the next quarter or so.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

OK. And I guess have you guys seen anything thus far now that some of the new local regulations have been implemented in terms of any type of cost increases in any of the counties or municipalities that you do business in?

Matt Owens -- President and Acting Chief Executive Officer

Nothing that I can see or that I can point to, that's of any significance. Our midstream facilities that we've been building or that we will building down in these areas seem to have covered most of what would've been an incremental costs, had the midstream facility not been built to the spec that we're planning to build it.

Operator

And our next question comes from the line of Irene Haas of Imperial Capital.

Irene Haas -- Imperial Capital -- Analyst

Yes, so I mean, you guys have spent a lot of time really trying to build out alternative ways of gas processing, so now you have options. And if everything kind of come in on time, say, fourth quarter of '19, what's the implications for 2020? Would you be able to pretty much produce unimpeded? And we're probably looking at pretty high double-digit ramp for fourth quarter, is there something that we should assume for first quarter of 2020?

Matt Owens -- President and Acting Chief Executive Officer

The production that is coming on in fourth quarter will be a pretty significant ramp that will carry into the first quarter, kind of like, you saw, probably this year we had some decent sized pads that we turned online at the very end of last year that had most of their flush this year. But for 2019, that's really happening kind of at the end of the third quarter is when really we're going to start turning those new pads on. But then their first full quarter of production will be there in the fourth quarter. And yes, if everything is online and -- or once it all gets online, the midstream facilities, we should be able to flow for the most part unconstrained besides the normal downtime assumptions that -- and maintenance assumptions that we just use in our model and budgeting.

Irene Haas -- Imperial Capital -- Analyst

And for 2020, are you looking at a free-cash-flow type situation? And also, could we have a little update on the midstream spending for '19 and '20? Because you've -- kind of move things around, there's a lot going on. So just a little more clarity as to how much you might end up spending in 2020? Because it will be little lighter than we might have expected?

Matt Owens -- President and Acting Chief Executive Officer

I wouldn't expect 2020 midstream spend to be as great as 2019 is. 2019 is really a year where all -- a lot of or pretty much all of the cost associated with building that whole Badger facility hit pretty much in this year. That's why our number has been that up to $250 million. The rest of the midstream facility build will come for the Hawkeye acreage, and we're still debating internally when exactly that is going to start because that obviously will have to do with the pace of development that we choose moving forward.

So we don't have an exact time of when that capital will start flowing, but I can assure you, it won't be as much next year as it -- what it was this year in terms of midstream spend.

Irene Haas -- Imperial Capital -- Analyst

And free cash flow 2020?

Matt Owens -- President and Acting Chief Executive Officer

Yes. That is -- our target is to be free-cash-flow positive in 2020.

Operator

And at this time I'm showing no further questions. I'd like to turn the conference back over to Matt Owens for any closing remarks.

Matt Owens -- President and Acting Chief Executive Officer

I'd like to thank everybody for joining us on our second-quarter earnings call today. We look forward to updating you at the end of next quarter as these midstream projects begin to turn online. Have a good afternoon. Thank you.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Louis Baltimore -- Director of Investor Relations

Matt Owens -- President and Acting Chief Executive Officer

Rusty Kelley -- Chief Financial Officer

Paul Grigel -- Macquarie Research -- Analyst

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

Brad Heffern -- RBC Capital Markets -- Analyst

Brian Downey -- Citi -- Analyst

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Betty Jiang -- Credit Suisse -- Analyst

Marshall Carver -- Heikkinen Energy Advisors -- Analyst

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Irene Haas -- Imperial Capital -- Analyst

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