Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Parsley Energy Inc (NYSE:PE)
Q3 2019 Earnings Call
Nov 6, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to Parsley Energy's Third Quarter 2019 Earnings Call. My name is Rob and I will be your operator today. [Operator Instructions] A question-and-answer session will follow the formal presentation. And now I'm pleased to turn the call over to Kyle Rhodes, Parsley Energy's Vice President of Investor Relations. Thank you, you may begin.

Kyle Rhodes -- Vice President, Investor Relations

Thank you, operator and good morning everyone. With me on the call this morning are President and CEO, Matt Gallagher; Chief Operating Officer, David Dell'Osso; Chief Financial Officer, Ryan Dalton; and Senior Vice President of Land and Marketing, Stephanie Reed. Our remarks today may contain forward-looking statements, so please see our earnings release for a discussion of these statements and associated risks, including the fact that actual results may differ materially from our expectations. We also make reference to non-GAAP measures, so, please see the reconciliations in the earnings release.

During this call, we'll refer to an investor presentation that can be found on our website and our prepared remarks, we'll begin with reference to Slide 4 of that presentation. After our prepared remarks, we'll be happy to take your questions. And with that, I'll turn the call over to Matt.

Matt Gallagher -- President and Chief Executive Officer

Thanks, Kyle. Parsley has executed with a sense of urgency throughout 2019 and the third quarter was no different. We turned the corner to sustainable free cash flow sooner than we had initially expected and started a return on capital program to shareholders with the initiation of our regular quarterly dividend program. Our capital efficiency continues to [Indecipherable] once again eclipsing our prior target. And finally, we announced an accretive Delaware Basin transaction with our acquisition of Jagged Peak Energy. As you can see on the map this was a natural fit with our legacy Delaware position Let's move on to Slide 5. Before we look ahead, we have to focus on home base first and that is what we have done with our 2019 action plan. Delivering on these targets is important to us personally. Accountability is critical to us corporately. This is another quarter of positive progress reports. A lot of good news here down the right-hand side of the page. But a couple of items in particular I wanted to highlight. First, one of the Parsley's key goals this year was accelerating our timeline to sustainable free cash flow. Thanks to the high level of execution delivered across our organization, we generated $21 million of positive free cash flow this quarter, and initiated a regular dividend program. The Jagged Peak transaction enhances this free cash flow profile in 2020 and beyond. Another key objective for us this year was to deliver improved capital efficiency. I am excited to report that strong cost controls, coupled with our returns focused development approach have indeed generated a step change in capital efficiency and we are again boosting our target. We now expect 14% to 16% plus year-over-year improvement.

Again the Jagged Peak transaction helps preserve and build upon these capital efficiency gains in 2020 and beyond. Finally, I wanted to touch base briefly on the strategic review for our water assets. To start, we have had a lot of interest across the board and our team has evaluated an array of options. At this juncture, we believe monetizing in minority stake to our financial partner seems to be the best path for Parsley. We are currently in exclusive discussions and consistent with our prior timeline, expect to provide a more fulsome update in the next month to two. I will also note the Jagged Peak has built out a complementary water infrastructure which could provide additional optionality in the future.

I'm proud that our team has delivered across the board on our 2019 action plan. However, we recognize that in this market environment, a company is only as good as it's last quarter. Thus we must finish strong and maintain the sense of urgency in 2020. Turning to Slide 6, I want to reiterate the Jagged Peak transaction is about more than color on a map. Critically it enhances Parsley's competitive advantage in some key value drivers. We've shown this relative ranking graphic in the past and here we presented on a pro forma basis. We have often talked about the importance of strong operating margins in supporting a sustainable free cash flow profile. Jagged's oily, low cost assets are margin enhancing. We view capital efficiency as another key value driver. A top tier recycle ratio signals that when you put in an incremental dollar in the ground, you are getting well more than that dollar back. Jagged's assets reinforce our top-tier recycle ratio.

Touching on scale from it, this transaction makes us a better company, not simply a bigger company. We have long said that efficient capital allocation within the Permian requires sufficient scale. We worked hard to achieve that operational scale during 2017 and 2018, and now we can apply our scale advantages to Jagged Peak's assets. And with 15 rigs running in 2020, we will remain in the shale scales sweet spot and we will retain our corporate agility.

I think where added scale structurally will help Parsley is on our cost of capital with our path to investment grade credit profile now likely accelerated. Finally, with one of the highest insider ownership positions in the E&P space, we have a highly visible alignment of interest with shareholders.

Upon closing. I look forward to welcoming Jagged Peak representatives with a significant equity ownership to our Board which only strengthens this long-standing alignment with our shareholders. Simply put, we are convinced that this transaction makes us more capital efficient and ultimately a more attractive company that can create incremental value for all shareholders.

Now on to Slide 7. Accountability will remain front and center, and execution will remain paramount for Parsley in 2020. We unveiled the synergy scorecard when we announced the Jagged Peak transaction and I believe it is important to highlight that achieving integration success will be built into go forward incentive plans for all Parsley employees. Furthermore, I want to reiterate that the purchase price paid for Jagged Peak was a close to add the market deal, meaning these tangible synergies will become true value enhancers that accrue to all shareholders. That said, it is clear, again in this market that the burden of proof and a transaction is assumed to be waiting until proven otherwise. Internally, this is a motivator, and our team is excited to track our progress on value creation in 2020 and beyond.

Ultimately, we remain committed that Parsley will be a more capital-efficient company with more free cash flow as a result of this deal. We have made major strides this year solidifying operational excellence. I'll now turn to David to highlight how we see this magnifying on a larger and complementary asset base.

David Dell'Osso -- Chief Operating Officer

Thanks Matt. A natural question on the Jagged Peak transaction might be, why now and why these assets? Matt has already step through a host of the answers here, but I want to address that questions, specifically through capital efficiency lens. the cost side or productivity side of that equation. Let's turn to Slide 8 and start with the cost side. I think the graph on the bottom left of the page provides some useful context to start with. About this time last year, as we are bundling of our 2019 capital budget, you can see where our Delaware cost were. As you know rate of return is due to our capital allocation mix. As we finalized the 2019 budget a higher Delaware cost structure resulted in a smaller capital allocation during 2019. The costs are not frozen in time. Our team is constantly working on grinding cost lower through wide raising efforts, shortening cycle times, optimizing well designs, leveraging scale benefits and improving supply chain management, just to name a few. And as you can see, we achieved the material improvement in our Delaware cost structure with well cost down more than 20% over the past year. These significant cost savings boosted the returns profile of our legacy Delaware Basin assets. So as we started to sketch out the 2020 budget on a stand-alone basis, the Delaware was poised to garner increased capital allocations and returns focused development plan. In the graph at the bottom center of the page, you can see the Jagged Peak's Delaware cost structure has also been in a nice downward trajectory albeit with the 2Q19 well cost, it is still 10%-15% above Parsley's six-month rolling average. Importantly, the well cost difference is not consumables driven as you will note that Parsley's base design profit loadings are higher and typically consist of more Northern White Sand. Rather, this is where scale helps and we believe applying Parsley scale advantage will help drive well cost lower on Jagged Peak's asset base. On a combined basis, we expect to register all-in drill complete and equip costs in the low of 1,100 per foot in 2020 providing a nice capital efficiency tailwind.

Turning to Slide 9, let's now touch on the productivity side of the capital efficiency equation. As shown in the graph on the left, the well productivity of Jagged Peak's core assets have been consistently better than our comparable Delaware Basin assets. Simply put, the rock underlying Jagged Peak's assets is familiar to us. The Wolfcamp and 3rd Bone targets thicker as you move north west from our Trees Ranch area, making for more productive wells. So again tieing it back to the original question, why now and why these assets? Simply put, adding better wells at our existing cost structure makes us a more capital-efficient company moving forward.

Let's move to Slide 10 and tie this back to accountability. When we unveiled our returns focused 2019 action plan in February. one of our key objectives were according measurable year-over-year capital efficiency gains. We originally targeted 8% to 10% plus improvement. Throughout 2019, we have continued to squeeze out more organic oil production for less capital. And for the second quarter in a row, we are raising our 2019 capital efficiency target. As shown in the graph on the left, we now expect to deliver 14% to 16% plus year-over-year improvement. I am proud of the measurable strives our team has made on this key objective in 2019 but our work is far from done. Looking ahead, we think the Jagged Peak transaction will preserve and sustain this new normal of capital efficiency in 2020 and beyond. Finally, I think it's important to highlight that this go-forward capital efficiency always does not rely on future service cost deflation. With that in mind, let's turn to Slide 11.

Things have gone well this year, which made back the question, does this deal now increase our operational risk going forward. It's a fair question. It would not be intellectually honest for me to say the integration risk is zero. But we believe that risk needs to be weighed relative to the reward. That is already here on the rewards side of this transaction.

Here we reiterate what this half of value creation looks like. On the other side, we believe execution risk is sufficiently low. We have a high degree of confidence and managing it. Our confidence stems from two primary forces, familiarity and activity pace. On the former, there is a deep institutional knowledge based on the Jagged Peak assets residing at Parsley. The geology is familiar. In some areas there's a natural extension from our legacy Trees Ranch asset, and our teams are well versed with this particular asset.

On the second point, we're referring to both the activity pace of Parsley and the broader industry. On one hand, Parsley has done this before as we ran 16 rigs throughout [Indecipherable] 2018. Furthermore, it is always easier to slowdown model and speed one up. We're not ramping activity on these newly acquired assets.

Instead, we are slightly moderating activity to prioritize free cash flow that has a knock-on effect of reducing our operational risk profile. Finally, as shown on the right axis of the right graph, we are in a deflationary service environment. We should result in optimal service quality for operators of scale like Parsley. So to conclude by circling back to answer the original question, we're excited that this transaction offers a favorable asymmetric risk reward outcome for our shareholders and look forward to making meaningful strides on the straightforward path to value creation. And now, I'll pass it over to Ryan to discuss Parsley's strong financial position and walk through our improved 2019 outlook.

Ryan Dalton -- Executive Vice President, Chief Financial Officer

Thanks, David. Turning to Slide 12, David's last comments were focused on operational risk, but I'm more focused on the financial risk. A strong balance sheet is a paramount importance to us, and we feel like the Jagged Peak transaction only reinforces that corporate strength for Parsley. Not only do the assets fit hand in glove, the Jagged Peaks conservative balance sheet management complements our legacy strategy.

As we noted at announcement, our leverage profile holds steady after this all-stock transaction on a path to further deleveraging. In the recent weeks, Parsley has received an upgrade and improved outlook from the credit rating agencies, and ultimately we believe this transaction accelerates our path toward an investment grade profile. Finally, I will note that both Parsley's and Jagged Peak have taken a proactive approach to mitigating oil price risk, with the majority of forecast to 2020 oil production now hedged. You can view our pro forma hedge position in the supplementary slide.

Turning to Slide 13, I am excited to walk through another positive guidance update where the numbers really speak for themselves. We turned the corner to positive free cash flow. Net footage is once again up, and capital budget range is once again tightened lower. Oil production up and unit operating costs down. All of this add to continued improvement in capital efficiency.

Next, I wanted to provide a little more detail on our activity plan into year-end. During the third quarter, Parsley utilized three-to-four frac spread we proactively managed its completion schedule. We intend to continue this practice through the end of 2019. We believe this that capital investment pace will help avoid operational friction costs associated with budget exhaustion and will facilitate strong organic oil production growth in early 2020.

In the fourth quarter, we are guiding to oil production at 88,500 to 92,000 barrels per day. We expect to turn 32 gross horizontal wells to production, slightly weighted toward the back half of the quarter. The working interest on our 4Q19 well is expected to average roughly 85%.

Before I wrap up, I want to point out that the guidance on this slide speaks to Parsley on a stand-alone basis for 2019, as the Jagged Peak transaction is not expected to close until the first quarter of 2020. We provided a preliminary pro forma 2020 outlook when we announced the transaction in mid-October and are reaffirming that high level outlook today. You can find incremental detail in our supplementary slides. And now, we'll be happy to take your questions.

Operator

At this time, we'll be conducting a question-and-answer session. [Operator Instructions]. So that we may address questions from as many participants as possible, we ask that you limit yourself to one question and one follow-up. [Operator Instructions].

Our first question comes from John Freeman with Raymond James. Please proceed with your question.

John Freeman -- Analyst

Good morning, guys.

Matt Gallagher -- President and Chief Executive Officer

Hey John.

John Freeman -- Analyst

The first, my questions. I want to focus on Slide 8 and you've articulated how you're going to drive the Jag legacy costs down about 100 per foot sort of embedded in the 2020 guide. But when I think about kind of the Parsley legacy wells and we think about the drivers that there would have been to drive the cost lower there. One of them that it doesn't look like it's specially being embedded in the guidance was sort of a switch or increased use of local sand and I know last quarter you had only done a couple of tests, it was pretty early. You probably need more tests, but I guess since Jag is 100% local sand, do you feel like given the dataset you're inheriting that accelerates your ability to move over to the local sand?

David Dell'Osso -- Chief Operating Officer

Hey, John, it's David. We certainly do expect to increase our original sand usage and that's part of why you see the bottom end of that range of 1075 as an example. There is potential to save more than what we've seen in our recent 2Q and 3Q results. Those results did have some regional usage but it was a minority fraction. So you're absolutely right. It is an opportunity going forward, and we're going to have to see we've got a RQ going for stimulation which includes sand as well and so we're going to get a little bit more data on that pretty soon.

John Freeman -- Analyst

Great. And then my follow-up question. In the 2020 guidance outlook that you've given, do you assume that the lateral length to Jag is sort of [Indecipherable] or do you factor in that, obviously with the land synergies you're picking up in the deal that the lateral length for Jag probably moves closer to what you all have been at closer to 10,000 ft?

David Dell'Osso -- Chief Operating Officer

For 2020 in the near term, don't expect it to change much that we did highlight those land synergies, which will create benefits over the long term and the very near term though it's based on a pretty comparable lateral length that we show on the Slide 8.

Operator

Our next question comes from Charles Meade with Johnson Rice. Please proceed with your question.

Charles Meade -- Analyst

Yes, good morning, Matt, to you and your whole team there. Matt, I wonder if we could go back to your prepared comments you talked about the water infrastructure and that you guys have I believe what I heard you say that you've settled on structure and you're working with a part of your couple of preferred parties. Can you elaborate a little bit on what led you to I guess pick this structure, I believe, which you said is a minority, having a minority investor in the project and what timeline we should be thinking about?

Matt Gallagher -- President and Chief Executive Officer

Sure, Charles. Anytime we go into an analysis of one of our assets we cast a wide net of possibilities and we funnel down based on what fits our needs the best, and we really believe you can look at our lease operating expenses that we are a leader in operations of these assets. So this structure allows us to continue those operations across the basin and bring in a partner, financial partner essentially. I'll take it over to Dalton for more of the timeframe on that.

Ryan Dalton -- Executive Vice President, Chief Financial Officer

Yeah, I mean what became apparent to us as we look there all these different options [Indecipherable] method was operational control is very important to us. That's an alarm, gets up at night. We know that is being addressed by Parsley employees, but again timeframe as Matt mentioned hopefully within the next month or two, we'll be able to go into more details. But even though we're saying we're just monetizing a portion of the water assets, we wouldn't be doing so if it weren't creating clear value for our shareholders.

Charles Meade -- Analyst

Thanks for that added color. And then the next question is perhaps for David and I appreciate you guys have a lot of -- 10 slides with lot of information you put together on this capital efficiency theme, and it makes sense to me the way David, you're talking about this productivity side and a cost side. But does It also make sense to perhaps think about it as a -- as a what assets you have and how you prosecute those assets and if separated that way and how, of course those effects on both the cost and the productivity side, how much of this, of this uplift you've seen on Jag or pro forma Parsley? How much of that is just kind of better Jag rocks to work with and how much of that is how you're going to be doing it differently?

David Dell'Osso -- Chief Operating Officer

Yeah, Charles I think going forward. The, there is a slide a little bit later on we talking about widening fairways. We kind of get a refresh on our inventory. So I think the Jag assets, it allows us to sort of increase our capital allocation to the Delaware, but within the Midland, we're going to see it pretty similar 2020 pro forma look to what you saw in 2019.

We will have some continued trends there. So yeah, there -- I take your point, there are going to be differences between certain areas in a higher allocation of the Delaware as part of it, but as we talked about more value per dollar invested with these new assets should help on the Delaware side.

The lower cost structure allowed us to normalize it more with what we've seen in the Midland this year.

Operator

Our next question comes from Neal Dingmann with SunTrust. Please proceed with your question. Neal.

Neal Dingmann -- Analyst

Morning all. Thanks for the color so far. Could you all walk through I'm looking at specific that Slide 16 where you basically detailed that the proposed spend about 35% of Delaware allocation next year post Jag. I'm just wondering again how fluid is that in sort of the thought process behind the 35% spend there and the 65% in the Midland Basin.

Matt Gallagher -- President and Chief Executive Officer

Sure, hi Neal. We got a -- when you combine the two companies together, that's where the rig map is essentially seen essentially no changes in the Midland Basin and in a moderation of activity in the Delaware, just to flip to free cash flow as we've done corporately in 2019, hitting on in this quarter. So then as we've been within a horseshoe a percentages that is essentially what we foresee even throughout the budgeting process in a wide range of commodity prices.

So I don't see that changing much. We're coming down the homestretch of penciling in the the final details on the schedule and on the physical rig move. So I think what you see is essentially what you get there in 2020, and then there is no reason to think that wouldn't be an approximate for a longer-term capital allocation as well.

Neal Dingmann -- Analyst

No, great, great details. Thanks, Matt. And then just secondly, Matt I know you've talked about productivity sort of assumptions in the past. I'm just wondering, could you comment how you all sort of view and look at sort of productivity changes maybe as you begin 2020 and how you sort of bake that into your 2020 guidance.

I know you guys tend to be a little conservative, which I'd like to see. I'm just wondering anything you could talk about sort of these productivity assumptions not only as you start the year but through that whole 2020 guide.

Matt Gallagher -- President and Chief Executive Officer

One thing we do and that may be different just across the industry is as you, as you look out over a longer term, and this whole basin is developed, we put what we call a 3% aging factor essentially on our long range planning in our modeling. So that's -- you're always fighting against that on the productivity front, and I think that's fair when you look at the reservoir system based on all of our analysis to start off with some sort of -- some sort of degradation.

Obviously, we're going to be attempting to offset that year-in and year-out with technology and approach, people, processes and technology. And we think we have a nice head start on a lot of those items, and then you can see on process this year, the rate of change that we saw in the Delaware just from budget cycle last October into a six-month period following that, it was a material rate of change, and that really kicked off the analysis is going into this Jagged acquisition.

So you're going to have positive surprises along the way. But we think it's important to fundamentally put an aging factor on productivity over the long term.

Operator

Our next question comes from Asit Sen with Bank of America Merrill Lynch. Please proceed with your question.

Asit Sen

Thanks, good morning. On slide 20, I'm sorry 16. I appreciate all the color on 2020 outlook details, but just wondering Matt if you could broadly speak to say number of completions relative to 140 in 2019 and working interest, how that changes relative to 93%, 94% in 2019.

Matt Gallagher -- President and Chief Executive Officer

The 140 is going to be on Parsley stand-alone and that should be about the same ratable assumption in this. We're pretty excited about this preliminary 2020 outlook when you think as the combined company, we can reduce capex 15% and generate 10% year-over-year oil production growth. But maybe Kyle you may have some additional details on completion timing and the assumptions.

Kyle Rhodes -- Vice President, Investor Relations

Yeah, Asit, I would just use kind of a similar 10,000 foot lateral as your base assumption there and we'll have more details, a higher resolution on the 2020 outlook with the working interest, but I think 90% percent is probably a good place holder until hearing otherwise .

Asit Sen

And Matt, you're pretty clear in budgeting at $50 oil, but just wondering how your strategy would change if oil prices were to hold at $60 a barrel. And conversely, if you had to cut back where would you rig allocation likely change based on what you know so far?

Matt Gallagher -- President and Chief Executive Officer

I think lot of the same as we promised going into 2019 that is oil prices rebound that would accrue to our balance sheet positively and cash on the balance sheet or likely pay down of debt. And then, so we don't see reramp in activity. We think this model is insufficiently competitive, not only in the industry landscape, but across multiple industries.

So we think we would enjoy the benefits of the additional run-up in revenues. If oil prices recovered on the downside, we also think that we have some of the lowest break-evens in the industry. And so we think we're more resilient to the downside add on top of that, well over $1.2 billion of unhedged cash flow on a stand-alone basis going into 2020.

So there is some resiliency there. You don't make capital allocation based off our hedges, but it does give some information. So I don't see a good hedge to be very low '40s or below before we aren't meeting our free cash flow objectives. So I think we, that's, it would be in that ballpark before you saw activity reduction.

So I think we'd be one of the last to reduce. We're committed to the dividend and committed to growing the dividend over time. So those are going to be the priority on the downside.

Operator

Our next question comes from Leo Mariani with KeyBanc. Please proceed with your question.

Leo Mariani -- Analyst

Yeah. Hey, guys. I think you've obviously kind of outlined the fact that you expect your Delaware cost to be lower in 2020. Just want to get a sense on the budget for next year. Are you assuming lower Midland costs as well or are you just kind of using sort of today's costs for 2020?

David Dell'Osso -- Chief Operating Officer

Yeah, Leo. Going forward in the Midland, I would say we are using today's costs which are lower than they were when we budgeted 2019. So we're not assuming further significant inflation in the Midland, but we do expect our Midland costs to be lower, probably thinking, say 925-ish for DC&E for the Midland Basin. And that's -- I want to mention that includes facilities and pullback. In the past we've often referenced our cost as a D&C. So I'm talking all in 925 per foot for the Midland.

Leo Mariani -- Analyst

Okay, that's helpful. And I guess just with respect to rounding out 2019, should we still expect fourth quarter of '19 kind of be the low point for capex for this year?

David Dell'Osso -- Chief Operating Officer

Well, we have -- we've had between 3 and 4 frac spreads running throughout the year. That more spread is essentially a flat spread. It allows us to manage our capital pace and our small duck bank. And so I would say I wouldn't necessarily characterize 4Q as definitely a low point because part of that half of third quarter we had flexed to 3.5 for 3rd quarter 3 frac spreads, half 4 will be at a higher proportion of 4 throughout the 4th throughout the 4th quarter of 2019. So that will reflect a little bit in the capex as part of our, what we baked into our guidance.

Operator

Our next question comes from Jeff Grampp with Northland Capital Markets. Please proceed with your question.

Jeff Grampp -- Analyst

Good morning guys. To the water transaction, I'm curious how you guys are kind of evaluating, bring in cash in the door today versus maybe a capital carry on any future build outs. Can you just talk about how you guys kind of evaluating those trade-offs and what use of proceeds might be for any cash proceeds upfront?

Matt Gallagher -- President and Chief Executive Officer

Sure. Yeah, you have to look at it holistically. That's exactly right. And has to be a beneficial trade-off for shareholders over a long-term. You've got discount rate assumptions, and there are going to be additional cost versus keeping it 100% in-house. So it has to be made up for in space and the valuation then you have to take that capital and you have to -- you have to deploy it to a shareholder-friendly and valuation creation model. So it's not without analysis. That's why it has been taking a long time and it's not without the mechanical trade-offs, but that should all be corrected for in the valuation.

Ryan Dalton -- Executive Vice President, Chief Financial Officer

And then Jeff, you asked about use of proceeds. We will pick up a little bit of revolver debt with the Jagged Peak transaction. So I would expect the first use of proceeds would be -- would be debt pay down. Any proceeds beyond that really isn't earmarked at this time, other than optionality. You know it's never really bad thing to have a bit of cash on the balance sheet.

Jeff Grampp -- Analyst

Understood, appreciate those details. And for my follow up referencing Slide 10, here you guys referenced kind of go into optimal project by 6 to 8 wells. I think that's maybe a bit higher for memory serves than what you guys have maybe done in recent past. So I was just wondering how fast can you guys transition to that? Is that something that maybe wait until merger closing and you do that from day one or do you kind of walk that up to that level over time?

Just kind of want to know how you guys are maybe thinking about that.

Ryan Dalton -- Executive Vice President, Chief Financial Officer

Yeah, Jeff, I'll remind we've actually executed projects at this scale before, and we'll have a few of them even here in the back half of 2019 to further in. I think really going from average of about three per pad to the six per project in 2020. That's a shift up. Certainly, it allows us to achieve better surface level cost efficiencies.

But it doesn't get into that mega project scope where you have significantly larger and more complex facility feel which handle massive in some cases surges in production upon initiating flow back. So we don't see this as a major step change. We've done before. We have confidence we will be able to do it effectively throughout 2019, and it allows us to save some costs, but I think very much in a fair way of what we've done before.

Operator

Next question comes from Mike Scialla with Stifel. Please proceed with your question.

Mike Scialla -- Analyst

Yeah, hi good morning everybody. It seems like Jagged Peak had come to the conclusion. They needed to co-develop all the zones from the 3rd Bone Spring down to the Wolfcamp B on their properties. I want to get your thoughts on that and how you might develop those assets any differently than what they were doing with some of the new projects that they were working on.

Matt Gallagher -- President and Chief Executive Officer

I think when we look at our projects, we have development slots that we've been doing since 2016 really and we've been in two-to-three well and two-to-three bench slots has been doing co-development.

So that is the path. When we talked about these six and eight well pads, we envision co-development of multiple slots and you just keep -- you just keep growing that over time. They do act as a system and you want to -- you want to draw it down in units and essentially. So there might be some differences on the downstairs -- we call it downstairs spacing. You can -- you can pull out a single well or single slot here there we do per project reviews based on our-- our seismic and our interpretation of frac baffling and the geoscience associated with each project and there may be a slight difference in interpretation on a one-to-two well basis here and there, but I don't see anything dramatically different.

Mike Scialla -- Analyst

Okay. And I know it's early days in the transaction, but I'm sure you've been following their projects. Just want to see, I think they had some data on their Coriander project. Anything you can say as to how that has looked in terms of -- have you seen or anything else in terms of well performance there?

Matt Gallagher -- President and Chief Executive Officer

No, broadly, thethere is still several company and that be reporting subsequent to us. So nothing--nothing to comment really on their operations.

Brian Singer

Our next question comes from Brian Singer with Goldman Sachs. Please proceed with your question. Thank you. Good morning. Good morning.

Matt Gallagher -- President and Chief Executive Officer

Good morning.

Brian Singer

Couple of follow-ups on some of the earlier questions. On the cost side slide in the productivity Slide 8 and 9, beyond the local sand savings that you addressed earlier, what opportunities and impacts are there for you as a result of the acquisition or otherwise to further reduce your legacy well cost per foot? And then on the productivity front on Slide 9. What is the scope for opportunities if any to improve productivity on Parsley legacy acreage versus just blending in the higher productivity coming from -- coming from Jag?

David Dell'Osso -- Chief Operating Officer

I think on the cost side Brian, we commission the frac RFQs that will include more than just saying we're going to have to see that part of the market has been soft, but it's increasingly soft. This time it has gone through the end of 2019. So we're going to get some information on that. As the the basin slows down broadly, we continue to see some rig attrition in the Permian. Unemployment remains low. We're going to keep watching that. At some point other ancillary services could potentially see some additional softness, and we'll be mindful of that. We structurally RFQ several services and goods kind of throughout time.

So there could be broader possibilities there and we're obviously always pursuing cycle time improvements and other things that can drive down the variable cost associated with our development.

As far as the productivity side, we're going to go into this in a collaborative manner and we mentioned the improvement of rock quality particularly to the northwest there, but we're absolutely open-minded about learning ways to potentially take some of what has been done, is applicable and applying it to our legacy assets.

So I think it's too early to forecast or estimate what if any in productivity improvements could be -- could be taken. But we'll certainly be seeking those where possible.

Brian Singer

Great, thanks. And then my follow up is with regards to Slide 13. You make the point that you're facilitating steady organic growth into the first quarter of '20, and I think you mentioned earlier that you have a modest inventory of DUCs or something that seem relatively small.

Can you just talk about what you're doing on that front, are they late in the quarter type completions that will help first quarter growth and how you see that evolving within your capex budget?

David Dell'Osso -- Chief Operating Officer

Yeah, Brian, you kind of hit on a record at the end. The fourth quarter, the POPs that we have are more backward, they're more toward the back half of the quarter. So you're going to see that in the first quarter of 2020. As we've been at the fourth quarter frac cadence that will continue.

So you're going to see some of that manifest. That's why we expect to see that tick up in 1Q after a more flattish 3Q, 4Q. The magnitude of that is, as we mentioned earlier, we're still working through budgeting and finalizing all of that. So there'll be more information on the magnitude later. But you'll see it tick up mostly for the reasons that you stated.

Operator

Our next question comes from Michael Hall with Heikkinen Energy Advisors. Please proceed with your question.

Michael Hall -- Analyst

Thanks, good morning guys. I just kind of wanted to follow up I guess some of your opening comments, Matt around execution. You know with the consolidation, we have seen in the last couple of years, certainly across the industry consolidation hasn't gone without any challenges. I was hoping you could maybe just describe in a little more details on those specific things that you've learned from your past consolidation efforts that will help derisk the execution of bringing Jag into the fold in 2020.

Matt Gallagher -- President and Chief Executive Officer

I think that is a great question and I think hitting on, obviously one of our larger integration in the past transaction Double Eagle that we did not achieve our stated forecast in the prior 12 months or in the subsequent 12 months. When we look back at that, we are entering into eight new counties in the leasehold position without in situ operations from that operator.

We added a 188 people in the 12 months following the operation essentially building a company from scratch. So there was -- and we are doing in an inflationary environment, 2017 and 2018 extreme rig ramps in the basin. That's why we thought it was important to show the reduction in activity, the fact that we have been in this activity level in situ to the company this time last year and then also, we're in a deflationary environment. So those are nice tailwinds, but it doesn't take the honest way from elevating our game on the, on the integration process, which we are in full swing on right now, when I look at our teams. When I look at the type of caliber of processes we have in place, analytics, visualization of the business. We are light-years ahead of what we were at that time. One case in point, we've gone live with what we call our integrated operations center. We happen to start that up in the Delaware in 2019 [Indecipherable] that we'll be able to apply the oversight and insight the Jagged Peak operations in fairly short order. So that's a 24x7, 365 monitoring operation utilizing control systems, automated control systems and visualization.

So we have some tools at our disposal that we've been working on post that Double Eagle transaction. It's a scar that has healed but we look at it and we remember it. And as I mentioned, we just really view this as a bolt-on assets. We work these assets, evaluated them essentially since we evaluated the Trees position in 2012. So we have been intimate with it and it is right along, right next door to us. So things are -- in a comparable fashion, things are stacked in our favor. Now we have to go out and deliver on the execution.

Michael Hall -- Analyst

Appreciate that color and openness in discussing Double Eagle. Thanks guys. I'll leave with that. Appreciate it.

Operator

Our next question comes from Biju Perincheril with Susquehanna. Please proceed with your question.

Biju Perincheril -- Analyst

Hi, good morning. Thanks for taking my question. So going back to the question on well cost in the Delaware Basin, looking at Slide 8.

I think you guys started out on proppant loading, started lower and moved higher, and I think Jag has gone in the opposite direction. So now when you look at the two sets of data, do you see an opportunity to pull back on your proppant loading and save some well cost outlay?

Ryan Dalton -- Executive Vice President, Chief Financial Officer

We're open minded and we recognized the delta between the design that we've pumped on average and what Jagged Peak has pumped on average and recognizing the well performance they've seen we've got expanded data sets now that 2019 has progressed. So that is absolutely a variable. When we talked about in that slide collaborative approach to best practice, we are constantly seeking to to where to turn those dials, not only in terms of the profit quality were tight, but also on the proppant loading. I don't think it's -- I think it's a little early to bull's eye exactly where that lands. But that is a variable we're looking at.

Biju Perincheril -- Analyst

Got it. And my follow-up was on a, in the past, you talked about compressed stage completions and I think you had a few of them come online during the quarter. So first, any early read into the performance of those? And second, I've seen in the past if I remember in one of your hesitation was sort of a higher risk profile and what is -- is that still a valid concern given sort of the state of the service sector and availability of the high-quality providers?

Ryan Dalton -- Executive Vice President, Chief Financial Officer

In terms of compressed stages specifically if you referring to the risk profile of that, I think the fact that we've been able to execute a number of those this year, our sense of what the risk profile is has diminished due to the performance that we've been able to accomplish. As far as isolating, there's numerous variables at play in well performance and one of the, one of the things that happens when you you ship your capital allocation mix a bit, you develop multiple horizons, you change completion designs deliberately, all those are aimed at improvements in capital efficiency, which we've seen broadly, kind of deep involving that data and isolating exactly what the compressed stage itself has contributed.

I think we still are going to need a little bit more data to get quantitative on that. But we are seeing the upgrade. So in terms of compressed stages, upsize, stimulations, landing zones, spacing, all those things we're studying with our internal analytics group. But in the meantime, we're pleased to have successfully execute these and it seems broad improvements in capital efficiency will continue to refine those designs and decisions going forward.

Operator

Our next question comes from Kashy Harrison with Simmons Energy. Please proceed with your question.

Kashy Harrison -- Analyst

Good morning everyone and thank you for taking my questions.

Matt Gallagher -- President and Chief Executive Officer

Hey Kashy.

Kashy Harrison -- Analyst

So I was wondering if you could, if you could refresh us on where oil base declines might be headed in 2020 pro forma for Jagged Peak and then how you think about maintenance, do you see any spend for the combined entity?

Matt Gallagher -- President and Chief Executive Officer

Yeah, we're going to be about 1% higher integrated than we were on a stand-alone basis on a -- with Jagged Peak integrated on a, on a decline profile. So -- but even after that, we will be a lower on an annual decline than we were exiting 2018. So we kind of went in and repeated the playbook from 2019. We went from -- corporately, we went from call it 16 rigs down to 12 and we had a slower decline down and induced free cash flow and worked on efficiencies throughout the year. I see much the same happening in 2020 and beyond.

Kashy Harrison -- Analyst

Make sense. And then...

Matt Gallagher -- President and Chief Executive Officer

So we have about 40% pro forma is what we're looking at.

Kashy Harrison -- Analyst

Thank you. That's helpful. And I think earlier, Matt, you were talking about your intention to grow the dividend. I was wondering if you could just dive into perhaps a bit more detail specifically are you trying to get to a market, competitive yield. Do you have any thoughts on variable dividends, just the bigger dividend strategy would be helpful? Thank you.

Matt Gallagher -- President and Chief Executive Officer

Sure. Good question. I think that is still in a very robust and live discussion among the Board and will be coming into a nice framework within that. In these early days, we do see obviously the rate of change in the free cash flow generation is high and favorable, and we need to keep up on the dividend in the early times so 2020 increases, but over time it needs to be consistent and aligned to the strategy approximating some portion of your free cash as part of your capital allocation. So I think early on, it may be -- it may be disproportionate. But over time, it gets into a more linear and graduated increase.

Operator

Our next question comes from Atiraj Kumar with Wells Fargo. Please proceed with your question.

Atiraj Kumar -- Analyst

Good morning, guys and thank you for taking my questions. Just wanted to touch base on in 2019 if I remember correctly, one of the things you changed about your development schedule was moving to slightly wider spacing and focusing on those capital efficiency. Your costs have come down significantly that time and part of the rate of return equation is the costs. So I'm just want to understand is there a drive or maybe a need to maybe revisit some of those tighter spacings or are we looking at these wider spacings for now, as you look at your reinventory?

Matt Gallagher -- President and Chief Executive Officer

No, I think I think more of a good thing is a good thing. Higher rate of returns have a, have a nice compounding effect on the company model. So I think we like where the spacing is at. You bring up a great point that there is room to down space and still more than sufficiently covered cost of capital. But again, it goes back to the original analysis when we build out a long-term model against the runway in the compounding effects of high rates of return on capital allocation. It just more than offsets the benefit of trying to extend the runway at the tail end of a decade or so on your inventory link. So as it sits right now, we feel we like the spacing assumptions that we're at, don't see any additional downspacing even though there's probably a little bit of room in the rate of return profile.

Atiraj Kumar -- Analyst

Great. And then as you were -- just in terms of activity in the base [Indecipherable] you're managing your frac schedule, some guys are taking holidays. We care about the kind of a macro impact of the fourth quarter. As the basin continues to get developed, how much impact are you having from offset shut-ins or offset activity? Just trying to understand the basin level dynamics right now from the operations.

Ryan Dalton -- Executive Vice President, Chief Financial Officer

We have -- we've certainly seen it from in terms of frac interference, we've seen it from our own operations. We have good communication with offset operators and generally model and foresee those things and build them into our plan, mechanically. I think one thing that is going to be a positive about moving toward the bigger project development is more geographic concentration. So you're -- things like frac heads are going to be more kind of centralized in areas. So six well project may not create anymore frac downtime than a two or three well projects.

So you have fewer larger projects. So I see that as going forward broadly. The more the basin with that direction, that's probably a good thing but at the end of the day when you take those things into account in our model and we have communications with offset operators and make sure from a safety standpoint execution standpoint that those impacts are taken into account.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 52 minutes

Call participants:

Kyle Rhodes -- Vice President, Investor Relations

Matt Gallagher -- President and Chief Executive Officer

David Dell'Osso -- Chief Operating Officer

Ryan Dalton -- Executive Vice President, Chief Financial Officer

John Freeman -- Raymond James -- Analyst

Charles Meade -- Johnson Rice -- Analyst

Neal Dingmann -- SunTrust -- Analyst

Asit Sen -- Bank of America Merrill Lynch

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Jeff Grampp -- Northland Capital Markets -- Analyst

Mike Scialla -- Stifel -- Analyst

Brian Singer -- Goldman Sachs

Michael Hall -- Heikkinen Energy Advisors -- Analyst

Biju Perincheril -- Susquehanna -- Analyst

Kashy Harrison -- Simmons Energy -- Analyst

Atiraj Kumar -- Wells Fargo -- Analyst

More PE analysis

All earnings call transcripts

AlphaStreet Logo