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Concho Resources Inc (NYSE:CXO)
Q4 2019 Earnings Call
Feb 19, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2019 Concho Resources Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker, Ms. Megan Hays, Vice President of Investor Relations. Please go ahead.

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

Thank you. Good morning, and welcome to Concho's fourth quarter 2019 earnings call. Our earnings release and corporate presentation are available on our website and we plan to file our Annual Report on Form 10-K today after the 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 statements and other disclaimers are provided in the earnings release and presentation. Our comments today may also reference non-GAAP financial measures. You'll find the appropriate reconciliations in our earnings materials.

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.

Now let me turn the call over to Tim.

Tim Leach -- Chairman and Chief Executive Officer

Thanks, Megan. Good morning. I'm very pleased with the fourth quarter and the reasons to be a Concho shareholder continue to be compelling. We're growing margins, growing free cash flow, growing distributions to shareholders and doing this while advancing sustainability. We've assembled a top-tier Permian asset base in our own backyard with multiple decades of project inventory that strengthens our ability to generate free cash flow, increase returns to shareholders. In this dynamic environment, we'll continue to focus on disciplined reinvestment, controlling cost and maintaining a strong financial position.

Since our third quarter of '19 earnings call, we've seen oil prices roller coaster between $50 and $60, and we've been both places twice. Despite the commodity price volatility and many uncertainties, our business model is designed to deliver free cash flow across a wide range of commodity prices. Last year, we identified six key areas for improvement, which included reducing well cost. Our well costs continue to move in the right direction as a result of safely drilling and completing wells faster. We're also transitioning to next-generation frac equipment that is more efficient and provides cost savings and emission reductions.

Second, lowering our cost structure. For the fourth quarter of '19, controllable costs were 17% lower year-over-year, and we're well below our target of $9 per Boe. Third, selling non-core assets. We closed in New Mexico Shelf Asset Sale on November 1st, bringing full-year 2019 sales proceeds to $1.3 billion.

Fourth, delivering profitable growth. Fourth quarter oil volumes increased 4% quarter-over-quarter in spite of the production impact resulting from the New Mexico Shelf Asset Sale. Fifth, reducing debt. With the proceeds from the shelf sale, we ended the year with no bank debt and $70 million of cash on the balance sheet.

And finally, increasing returns to shareholders. In 2019, we paid $100 million of dividends and repurchased $250 million of stock. Going forward, we recognize that both asset quality in execution are necessary to the success of our business. We made real progress toward our goals in the second half of the year. And I'm proud of our employees for their performance. Their efforts are directly benefiting our bottom line and driving the inflection in free cash flow that we delivered in the fourth quarter.

Now turning to 2020. Jack will speak with -- to the specific numbers, but I want to summarize our high level strategy for the year. We're focused on four things: first, growing margins. We have several ways within our control to grow margins, including cost reductions and a better capital program. We also stand to benefit from better oil price realizations as Permian barrels are now pricing at a premium.

Second, growing free cash flow. We expect lower well cost and our focus on smaller projects and wider spacing will result in better well productivity, which supports growing free cash flow. And we have the inventory and operational capability to support our commitment to free cash flow over the long-term.

Third, growing distributions. Yesterday, we announced a 60% increase to our dividend. The dividend raise demonstrates our confidence in the cash flow potential of our business. Also in the fourth quarter of '19, we initiated a $1.5 billion share repurchase program. We were active in the fourth quarter and bought back 3.3 million shares at an average price of $76 per share.

Fourth, advancing sustainability. Our stakeholders are seeking greater transparency regarding sustainability, and we take this seriously. Our flared volumes averaged 1.6% of gross in '19, compared to 2.7% in '18. We've published a two-degree scenario report and we're working on a sustainability report to detail our progress. This set of priorities and the results of our drilling in '19 guided our capital allocation and development strategy for 2020 and beyond. We're developing the assets with wider spacing and have multiple decades of inventory.

Additionally, we're looking to optimize our acreage position through trades with adjacent operators. Our portfolio management efforts in 2019 increase the average lateral length of our inventory by 7% and our working interest by 2%. Our inventory is a key advantage that enables us to deliver attractive long-term returns.

We talked about the evolution of the E&P business model from pure growth to restrain growth, greater free cash flow and higher returns. We've built momentum over the last two quarters, delivering on strategic focus that we laid out last year and providing a plan for 2020 that we believe makes a compelling investment case for the future.

With that, I'll turn it over to Jack.

Jack Harper -- President

Thanks, Tim, and good morning. I am proud of the results of an increase in cash flow the team delivered in the fourth quarter. We continue to prioritize financial discipline and cost management, and our performance over the past two quarters enhances our competitiveness, improves our platform for continued growth and strengthens the investment case for Concho. Reviewing the fourth quarter, specifically, oil volumes totaled 215,000 barrels per day, which exceeded the high end of our guidance range. It also represented an 8% increase from the same period last year.

On the cost side, we made significant progress as well. Controllable costs which includes lease operating, cash G&A and interest expense totaled $8.43 per unit achieving our $9 target ahead of schedule. Also, during the final quarter of the year, we reinforced our investment grade balance sheet by eliminating our revolver balance.

Now to the key metric, free cash flow. We generated $187 million in free cash flow for the quarter, which reflects the difference between operating cash flow before changes in working capital of $801 million and exploration and development costs incurred of $614 million. There are two important drivers for the cash flow growth. Our high cash margin production and improving efficiencies across our drilling and completion operations. For 2019, average drilling, completion and equipment cost per foot were just below $1,000, which reflects an 18% decrease, compared to 2018.

Despite all the movement during 2019, we stayed within our guided capital budget and grew oil production 25% year-over-year. We also moved to a steadier drilling program in the second half of 2019, which carries into 2020 and will lead to a more efficient capital program. For 2020, we are planning a $2.6 billion to $2.8 billion capital budget, with our activity equally split between the Delaware and Midland Basins. We expect this level of investment will result in drilling, completing and turning online approximately 300 wells during the year. The average project size will be six wells, and our average well spacing will be 700 feet to 800 feet, as compared to approximately 550 feet last year.

Rolling our cost improvements in faster cycle times together, we expect to spend approximately 10% less year-over-year, while completing about 10% more lateral feet. Our activity is expected to generate 10% to 12% oil production growth, which represents 217,000 to 221,000 barrels of oil per day, compared to pro forma 2019 volumes of 197,000 barrels per day.

Gas and NGL prices have fallen since our third quarter '19 call, but our hedge book has us in a position to deliver on the priorities and targets that we've previously discussed. We expect to fund the capital program and generate $350 million of free cash flow at $50 oil and current prices for gas and NGLs, due to lower well cost, a lower cost structure and beneficial hedges that provide stability in a volatile market.

After our third quarter call, we layered on hedges at $57 WTI. So while they limit our upside and a $60 scenario, they are substantially above market in today's $50 environment. Our forecast for $650 million of free cash flow at $60 oil, includes the new hedges as well as current NGL prices. We see the potential to deliver $750 million in free cash flow with strong execution and an NGL environment consistent with $60 crude.

So again, 2020 is off to a great start, and we will continue to focus on growing margins, growing free cash flow, growing distribution and advancing sustainability. These priorities will support our performance. We also have a very strong commitment to capital discipline, because we believe it's key to maintaining a strong balance sheet and growing long-term value through the cycles.

We'll now turn the call back over to the moderator for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Arun Jayaram with JP Morgan.

Arun Jayaram -- JP Morgan -- Analyst

Yes, good morning. My first question is related to the improvement in cash margins that we saw in 4Q. In 4Q, your controllable cash costs, LOE, G&A and interests were $8.43 per Boe, and that did include some of the impact from your higher cost New Mexico Shelf assets. The 2020 guide either using the midpoints, looks like it's a $9.17 per barrel. If you use a low-end of that guidance range, it's around $9. So I was wondering if you could help us reconcile the 4Q run rate in the cost structure versus the 2020 guide?

Jack Harper -- President

Yes. Arun, this is Jack. The fourth quarter had a couple of things in there. First off, strong production. We also had a couple of one-time items that will not be recurring. But as we look forward to 2020, our midpoint of our guide as you say, is just above $9. I hope with strong performance and execution throughout the year, we can make our way toward that moment.

Arun Jayaram -- JP Morgan -- Analyst

Great. And just on the oil differentials were also tighter than your guidance, which obviously drove the cash margin uptick in the fourth quarter, what's your thoughts on this into '20?

Jack Harper -- President

Yes, going back a little bit in time we're glad that we were patient. The thing that Midland pricing was coming to us and that has happened. And so that has been very beneficial to price of barrel in Midland and we see it like that out for the next couple of years.

Arun Jayaram -- JP Morgan -- Analyst

Great and just my follow up Jack. What stood out to us is the fact that you're completing 20 more wells than you're placing under production this year. What is driving that delta and could this have some positive implications for '21 as well?

Jack Harper -- President

Sure. The way I'd really characterize the entire 2020 program is steady. We're going to run about the same number of rigs and completion crews throughout the year. So it really should be roughly equal during the year, wells drilled and put on.

Arun Jayaram -- JP Morgan -- Analyst

Okay, fair enough. Thanks a lot.

Operator

Thank you. Our next question will come from Brian Singer with Goldman Sachs.

Brian Singer -- Goldman Sachs -- Analyst

Thank you. Good morning.

Tim Leach -- Chairman and Chief Executive Officer

Good morning.

Brian Singer -- Goldman Sachs -- Analyst

Good morning. Given some of the movement in terms of how the reserves that have been added in the cost of reserves and the F&D cost to add reserves with a better program focused on wider spacing in 2020. What would be your expectations for what the 2020 capital program would deliver from a reserve replacement perspective based on kind of what your expectations are for F&D costs on the wider space program?

Jack Harper -- President

Good morning Brian. It's Jack. I would expect that the go forward 2020 and beyond F&D and reserve replacement to look a lot more like the past. We had some well documented issues in 2019 with some spacing tests, but going forward with the space program and the efficiency, we're seeing in our drilling program, I feel that we will look more like the past.

Brian Singer -- Goldman Sachs -- Analyst

Great, thanks. And then on Slide 8, you talk about your expectations for lateral length moving up to about 10,000 feet in 2020 versus 9,000 feet. Can you add a bit more color on how you see the Midland Basin varying from the Delaware Basin? And then can you also talk to where you see if at all any maximum or lateral lengths or at least any limitations on lateral length from a technology perspective or just a risking perspective?

Will Giraud -- Executive Vice President and Chief Operating Officer

Brian, it's Will. Yes, pushing that average lateral lengths up to 10,000 feet is really a result of the team's doing a good job trading around and locking up our acreage position. So I think that's a positive driver into 2020. As to between the different basins, the way you get to that 10,000 on average is a blend of a little bit higher than that on the Midland Basin, then a little bit less than that on the Delaware Basin. But broadly in both places, we are getting the two miles as our base lateral length in the Midland Basin. We pushed to two and a half and even some examples recently three, but from a acreage position two miles is really a good number to use.

Brian Singer -- Goldman Sachs -- Analyst

And do you think that there is, or do you see an opportunity to add more acreage for the purposes of increasing the lateral length beyond the two miles or is that something that will be part of how you would think about use of capital to further improve efficiencies?

Will Giraud -- Executive Vice President and Chief Operating Officer

I think, there's opportunity to do that. When you ask about use of capital, I think the best way to do that is with non-core assets is currency in these trade. So that's really what we're using to lengthen laterals and kind of continue to block up our position.

Brian Singer -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Derrick Whitfield with Stifel.

Derrick Whitfield -- Stifel -- Analyst

Good morning all. Congrats on a strong year-end update.

Tim Leach -- Chairman and Chief Executive Officer

Thank you.

Jack Harper -- President

Thanks.

Derrick Whitfield -- Stifel -- Analyst

Beginning with your capital efficiency chart on Page 8, the year-over-year sequential improvement is quite impressive. Could you comment on what degree of improved well productivity year-over-year is implied in your forecast?

Jack Harper -- President

Hey, Derek, it's Jack. Good morning. Yes, with the up space program in our -- the well costs coming down, 2020 does imply a more efficient program. No doubt. But it's driven both by the cost and the expected performance.

Derrick Whitfield -- Stifel -- Analyst

Okay. Thanks and as my follow-up, I'd like to focus on sustainability and would certainly want to commend you and your team on the sustainability initiatives and your positive recognition in yesterday's Texas Railroad Commission flaring study. Perhaps for Tim or Will or Jack, could you guys elaborate on your efforts to expand water recycling firm wide as you referenced in Page 12 of the deck?

Will Giraud -- Executive Vice President and Chief Operating Officer

Hey, Derek. It's Will. Yes, water recycling is a big push right now. And for our sales and for industry to get to higher and higher percentage of water recycling, it's going to require big trunkline, shared third-party infrastructure. So that's been one of the drivers behind some of these transactions you've seen us do on the water side. So that we can source more recycled water and also recycle an increasing percentage of our own.

Derrick Whitfield -- Stifel -- Analyst

It's very helpful, guys. Thanks for your time.

Tim Leach -- Chairman and Chief Executive Officer

All right. Thank you.

Will Giraud -- Executive Vice President and Chief Operating Officer

Thank you, Derrick.

Operator

Thank you. Our next question comes from Paul Cheng with Scotiabank. Paul your line is open. Please go ahead. Okay, we'll take our next question from Doug Leggate with Bank of America.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Yes. Thank you. Good morning, everybody. Guys, I wonder if I could just hit one housekeeping question and one detailed question on inventory. My housekeeping question is the GP&T guidance is obviously up a little bit. My guess is that's related to Gulf Coast sales. Can you just walk us through how you expect that to trend? What your current Gulf Coast exposure looks like and whether you would consider changing the absolute volumes committed at the course at some point?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. Hi, Doug. This is Will. Yes, the driver there, we've talked about that waterborne pricing deal we did on about 50,000 barrels of oil gross a day and so that's what's pushing GP&T up. There is also an offsetting increase in the price we realized for that. And as Jack mentioned earlier, just in terms of thinking about how that may change over time. We did that transaction to get access to waterborne pricing to kind of build that portfolio of pricing points. But as we sit here today, we like the blend. We have kind of Midland based pricing for a majority of it and some exposure to waterborne pricing for the rest.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

So the 50 is a good number going forward, for what duration Will?

Will Giraud -- Executive Vice President and Chief Operating Officer

It's going to be 5 or so year deal.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Okay. Like I said, this is really more about the realization that goes on the other side of that I was trying to get to. So thank you for that. My follow-up is really is this -- defined in your deck as you've done many, many times that you've got decades of inventory. I think, you guys have done a pretty good job as you've probably seen in our work at least of emphasizing free cash flow, which we think is about the only reasonable way to value any E&P nowadays. The other side of that, however, is what the sustaining capital is that goes along with those free cash flow and inventory numbers. So I'm wondering if you can walk us through where that stands today, your maintenance capital, if you like, and how you think it evolves. So as your portfolio -- let's assume this 10% plus growth rate is the new normal, how does that touch sustaining capital involved and leave it there. Thanks.

Will Giraud -- Executive Vice President and Chief Operating Officer

Yes, Doug. The way we see it today our sustaining capital is about $2 billion. That over a longer period of time, we think the base decline rate will moderate somewhat. So my expectation is that number would -- could improve over time and yield more more free cash flow.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Okay. I guess if I may just offer an observation. I think in order to compare any E&P with the broader market some visibility on those numbers is what we would hope would be more consistent this quarter. So if you guys could give us some thought it would be much appreciated.

Will Giraud -- Executive Vice President and Chief Operating Officer

Okay. One other thing I would add is just the focus in 2020 and in a $50 environment is more tilted toward rate of return as we've spoken about. You asked about our inventory and so, that does have implications on the inventory. But the good news is, I think we see strong opportunities for as far out as we can see that will allow for the way I described our capital in the future.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

I appreciate the answer guys. Thanks again.

Operator

Thank you. Our next question comes from Neal Dingmann with SunTrust.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Good morning, guys. My first question is on growth and yield. So I'm just wondering, you definitely now have a very compelling oil growth, free cash flow yield and dividend yield. I'm just wondering how would you think about Tim prioritizing these if you had to going forward.

Tim Leach -- Chairman and Chief Executive Officer

Yes. We spend a lot of time talking about that, we've talked about that on this call, from the past that we want the dividend to be a meaningful part of the investment consideration. We took a big step in this quarter to get there, and that's our first priority and call on cash flow. And so as I think about returning capital to shareholders, I think a growing a dividend is the highest priority way. But we've also demonstrated that at different pricing levels will generate different amounts of free cash flow that will be available to also return to shareholders, and that way we would do primarily through share repurchases at the right time.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

No, that certainly makes sense. I like the combination. And then my second question is on the flexibility for 2020 program. I'm just wondering how actively will you move around those 18 or so rigs that you have throughout your northern, southern Midland and Delaware positions this year or is it kind of set where they might operate?

Tim Leach -- Chairman and Chief Executive Officer

Neal, it will...

Will Giraud -- Executive Vice President and Chief Operating Officer

I think the way Jack characterizes the program, steady is a good way to think about the activity level. Those rigs as they move around the different parts of the basin.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

And will that include -- if I could just one follow-up. Does that include, you certainly seem to have one of the more stable or steadier programs I think almost the same rigs since late August. Now is that, even in this environment, you're pretty comfortable with running around that same type of program throughout this year.

Jack Harper -- President

For sure. I mean I think that was a big part of our 2020 budget was to budget around a conservative oil price and plan to run that activity not foolishly, if we see something dramatically lower, but one of the big lessons from last year is the benefits of running a steady consistent program.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Now very noticeable. Thanks guys.

Jack Harper -- President

Thank you.

Will Giraud -- Executive Vice President and Chief Operating Officer

Thanks.

Operator

Thank you. Our next question will come from John Freeman with Raymond James.

John Freeman -- Raymond James -- Analyst

Good morning, guys.

Jack Harper -- President

Good morning, John.

John Freeman -- Raymond James -- Analyst

Just looking again at the really big improvement on the cycle times, especially from 3Q '19 to 4Q '19 with another 10% improvement. Is there any way to drill down a little bit more into that just in terms of what drove that big of an increase? I mean any few things that you could point to?

Jack Harper -- President

Sure, John. It's steadiness. It's staying in the same areas and really focusing on doing the same well-types so over and over again. We also did I think improve our overall well design over the course of the back half of '19. And then just we've had really good run times and overall efficiencies with our different partners.

John Freeman -- Raymond James -- Analyst

And then, last quarter you broke out the sort of what was driving some of the savings in the Northern Delaware and it pointed out that water was about 30% of the savings in the Delaware, what's sort of the -- but just a big high level ballpark sort of estimates on the Midland side in terms of, if you're breaking out similar to how you did the Northern Delaware last quarter.

Jack Harper -- President

Yes, it probably doesn't look that different. Like we talked about earlier, increasing the amount of recycled water we use, there is a savings element in that clearly to the extent sand costs have improved that applies to both sides of the basin. And then Midland is probably where we've been able to continue to push lateral links passed that two mile piece, which helps you meaningfully on a dollar per foot basis.

John Freeman -- Raymond James -- Analyst

Great, thanks guys. I appreciate it.

Jack Harper -- President

Thanks, John.

Operator

Thank you. Our next question will come from Scott Hanold with RBC Capital Markets.

Scott Hanold -- RBC Capital Markets -- Analyst

Thanks, good morning. If I would -- could drive into the resources that you all have. I mean, in past you guys have talked about your resource base a little bit. I think the prior one last year was 26,000 location at about $12 billion BOE. When you look at your new spacing configuration and how you view as premium inventory. I know you talked about having plenty of length in that, but do you have some numbers, you can help kind of quantify for us with that?

Jack Harper -- President

Yes, Scott. The way I would characterize that is just to say that we have prioritized rate of return in the back half of '19 and going forward in 2020 and we have as many years of that as we can see looking forward in a very similar disbursement of rates of return in our assets. So while it's still measured in decades if rate of return remains the focus in this commodity price, it will not be as many as the highest it once was. But it will be measured in decades.

Tim Leach -- Chairman and Chief Executive Officer

I think it's good to remind you that in previous conversations we talked about the balance of rate of return and recoveries and that as Jack said that in this environment, 2020 where we've got a spacing program just focused rate of return and we have ample inventory around that spacing design. But it's flexible, and those two things are related to the resource base and and the economics based on the spacing design.

Scott Hanold -- RBC Capital Markets -- Analyst

So, when you step back and look at it, I mean, and you talked about decades of inventory, and certainly I think you've got that good visibility with your footprint on a map, but do you sense that the inventory is adequate or do you think it's maybe a little bit too much or where you you'd still look at some select larger monetizations stuff you may not get to for a while or is it just more blocking and tackling today?

Jack Harper -- President

Yes, Scott. We certainly have -- we're happy with the amount of inventory we have, if you look at what we've done over the last two or three years in terms of monetizing assets, both midstream an upstream. I hope that's an indication of our willingness to sell things that are at the back end of our priority. From a capital allocation standpoint, we will continue looking at our portfolio through that same lens.

Scott Hanold -- RBC Capital Markets -- Analyst

Understood, thanks.

Operator

Thank you. Our next question will come from Leo Mariani with KeyBanc.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Hey guys, just a question here around oil cut. If I'm looking at this right, in terms of your 2020 guidance. I'm seeing about a 66% oil cut this year. It looked like to be about 64% in Q4 and again about 64% in the first quarter, so just wanted to get a sense of how that sort of evolves throughout the year and what's kind of driving that improvement?

Jack Harper -- President

Yes. The mid '60s plus or minus is due to our capital allocation across the basin is what we see and it should be pretty steady at that level.

Tim Leach -- Chairman and Chief Executive Officer

Selling the shelf was a -- the shelf was a gassy asset.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Okay, thanks. And I guess just from the perspective. Looking at your 2020 production guidance and comparing that with kind of where you guys were in the fourth quarter, if I kind of back out the shelf sale in the fourth quarter of '19. I mean it looks like 2020 is kind of expected to be sort of flattish with fourth quarter, but I guess down a little bit in the first quarter of '20, just kind of wanted to get a little color on that. And I guess you guys just see production starting to pick up in terms of the growth coming in, in the second quarter and I guess just overall. I mean, looking at that kind of level there, do you like maybe there was a little conservatism in those numbers.

Tim Leach -- Chairman and Chief Executive Officer

Sure. Leo. Yes, just to kind of recap. I mean, if you take the shelf out of the year for 2019, we're projecting to grow our oil rates in 2020 a little more than 10%. And so that -- I think your question really is about the cadence of that growth, because you point correctly to that fourth quarter number we reported 215. If you take the shelf out, then it's about 210. And our first quarter guide at the high end is essentially flat with that number. So I wouldn't read too much into that. There's a little bit just inter-quarter noise around the first quarter there's probably more completion or more wells put on production in the back half of the quarter than the front, but as Jack has mentioned the theme of steady should be the way you think about 2020s growth.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Okay, that's helpful color. And I guess just on your dividend versus buyback, you guys had pretty significant buyback tech activity in the fourth quarter. I know part of that was driven by the shelf sale you've obviously boosted the dividend aggressively here in 2020, which is great to see you should have quite a bit of other free cash flow. Are you guys going to still stay aggressive on the buyback here in 2020? Or do you guys kind of view that high fourth quarter buyback is a little bit more one-time in nature?

Jack Harper -- President

Well, we talked about using the proceeds from the sale of the shelf to fund buybacks and we did that. And I would say that we also talked about the various levels of free cash flow that are possible between $50 and $60 oil. And one of the greatest uses of that amount of free cash flow will be opportunistic stock buybacks. So...

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Okay, thanks guys.

Jack Harper -- President

Thanks.

Operator

Thank you. Our next question will come from Bob Brackett with Bernstein Research.

Bob Brackett -- Bernstein Research -- Analyst

Hey, good morning. I'm intrigued by Slide 15 in the deck where you talk about your horizontal wells drilled by zone and formation. And there's a bit of two questions here: one, is there's a mix shift between say your pre-2018 program and the current program, for example in the Delaware from the second Bone Spring into the Wolfcamp A. And for the Midland from the Wolfcamp A into the lower Sprayberry. Question is what drives that shift assuming that you're trying to maximize the IRR of every well you drill?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure, Bob. I mean, there's a variety of things driving that. In the Delaware, one of them is just trying to target the oiliest zones with the backdrop we have in terms of natural gas pricing and NGL pricing. So there's some aspect of that, but also it's just a -- in the Midland Basin as you talk about the different Spraberry intervals, the rates of return there have been superior for us than many of the Wolfcamp zones in the Midland Basins, so capital has moved that way as well.

Bob Brackett -- Bernstein Research -- Analyst

And how do I think about prospectivity, should I use sort of the level of activity in the last couple of years as a measure of how good the zones are? Or is that too simplistic?

Jack Harper -- President

I think that's probably too simplistic, I mean, part of this is -- as Tim has talked about before, over the last couple of years, there's always been an element of exploration in our program where we've tried to continue testing other zones with the knowledge that if you don't go get them now, you may not be able to get them in the same way later. And so we continue to kind of trying to figure out the exact right answer on that. I think one lesson from '19 is especially in a $50-oil environment, we're going to have less risk tolerance in terms of doing that here in 2020, but it's still an important question to answer for the long-term.

Bob Brackett -- Bernstein Research -- Analyst

Okay, thank you.

Operator

Thank you. Our next question will come from Jeffrey Campbell with Tuohy Brothers.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Good morning, and congratulations on the quarter and the year. I noticed with interest in capex is now split 50-50 between the Delaware Basin and Midland Basin as opposed to 60-40 in 2019. I just wondered what was driving the increased capital allocation to the Midland Basin?

Tim Leach -- Chairman and Chief Executive Officer

Yes. Hey, Jeffrey. I wouldn't read too much into that. I mean, our capital allocation process, definitely it looks a lot like what we have done in previous years, which is that the teams compete with each other for capital, based on a rate of return basis and also kind of long-term ROI. And so 60-40 and 50-50 are generally similar numbers to me.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Okay, thank you. I appreciate that. And on Slide 12, going back to the flaring. Obviously, a lot of improvement there. I just wondered, is there a physical constraint to further reducing the flaring? And if so, how is that going to be resolved?

Tim Leach -- Chairman and Chief Executive Officer

That's the result of a very intentional effort on our part. There's a lot of push, obviously, on the industry and from within the industry to continue to move that number down. So that's a big focal point here.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Well, I guess what I was asking, do we need any further pipeline development to reduce the flaring. I mean, is there some specific physical constraint or physical catalyst that's going to help push that down any further?

Jack Harper -- President

Yes. We are -- to answer your one question, yes, there does need to be additional pipeline development and there are fortunately, a couple in the queue. As for now, we are happy with our providers and our agreements and we are moving all of our gas and we don't anticipate any change to our program in 2020 based on constraints.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Okay, great. Thank you. I appreciate it.

Operator

Thank you. Our next question will come from David Deckelbaum with Cowen.

David Deckelbaum -- Cowen -- Analyst

Good morning, guys. Thanks for taking my questions. I wanted to just go -- thank you. Just wanted to go back real quickly to the conversation on the split or allocation between Midland and Delaware. Did that capital allocation process change in '20 versus what it was in '19 being that sort of team-driven model? And I guess as we think beyond '20, I know you said you don't see a big difference between 60-40 and 50-50. Does that change precipitously over time as we get into '21 and beyond?

Tim Leach -- Chairman and Chief Executive Officer

I don't think so. This is Tim. I mean, we're constantly learning new things about the program and our assets through the science that we're doing and that informs and drives how we build future programs. And we've had great success on the Midland Basin side in certain zones that make those zones more competitive for capital. So -- but I like having a balance between the two areas. And the ability to move capital back and forth. Our New Mexico area still has some of the best rock in the entire world. And we'll continue to get a large amount of capital allocated to it.

David Deckelbaum -- Cowen -- Analyst

I appreciate that. Are there specific areas that you drilled in '19 that you are shifting capital away from in '20 in the Delaware?

Jack Harper -- President

Not really. The only thing that's shifting is the style of development in the spacing of the wells, but other than that, no.

David Deckelbaum -- Cowen -- Analyst

Okay, and then just a last one I had is -- I know you guys have increased your -- the number of locations, the lateral lengths on average by 7% this year. You're drilling a program in '20 with averages of 10,000 feet. What does -- how long does that, sort of, 10,000 foot average lateral lengths program extends for?

Will Giraud -- Executive Vice President and Chief Operating Officer

Well, it's dynamic. As we sit here today, you've got a lot of it still to do, but I think one of the challenges to our team is to continue to do the work on the asset side with acreage swaps, and otherwise, to extend that runway out as far as we can see.

David Deckelbaum -- Cowen -- Analyst

Got it. But as we stand today, if we were to allocate like a '21 program, it would be somewhat similar, I guess?

Will Giraud -- Executive Vice President and Chief Operating Officer

Yes, I mean, I don't want to get into modeling it, but we should be able to do 10,000 foor laterals for a long-term.

David Deckelbaum -- Cowen -- Analyst

Thank you, guys.

Will Giraud -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Thank you. Our next question will come from Matt Portillo with TPH.

Matthew Portillo -- Tudor Pickering Holt -- Analyst

Good morning all.

Tim Leach -- Chairman and Chief Executive Officer

Good morning.

Matthew Portillo -- Tudor Pickering Holt -- Analyst

Tim, just a follow-up question on the dividend policy going forward. Assuming crude generally holds around $50 to $60 WTI. Is there a framework with which investors should be thinking about the dividend as it relates to progression in growth?

Tim Leach -- Chairman and Chief Executive Officer

Well, yes, I would say that the difference between $50 and $60 and free cash flow is large. But as I've stated, we view our -- the dividend is the first call on our cash flow and capital. And we want to grow that dividend in a compelling and competitive way. So as the company is able to grow, I think that dividend, you got to expect it to grow over time as well.

Matthew Portillo -- Tudor Pickering Holt -- Analyst

Perfect. And then a follow-up question as it relates to the shift in the business model that you mentioned over the last few years, targeting in more of a moderated growth program with growing free cash flow over time. Could you potentially talk about any directional color on how capex might progress over the next few years, if crude is to stay at or above $50 a barrel?

Jack Harper -- President

Yes, I think that one of the important things and we've said it several times on this call is that steady means efficiency. And so the growth of the capital spend, I think will be very restrained. And in fact, this year's capital spend is less than last year's, and we're getting more from that capital that we're spending more lateral feet. It's tremendous driver in efficiency and our margins and things like that. So I think that and expect that the capital program going forward will -- the growth of that will be very muted, and but the results you see from it ought to grow.

Matthew Portillo -- Tudor Pickering Holt -- Analyst

Thank you.

Jack Harper -- President

Yes.

Operator

Thank you. Our next question will come from Paul Cheng with Scotiabank.

Paul Cheng -- Scotiabank -- Analyst

Thank you. Can you hear me?

Tim Leach -- Chairman and Chief Executive Officer

We hear you.

Jack Harper -- President

Yes.

Paul Cheng -- Scotiabank -- Analyst

Okay, thank you. Sorry, that I think last time I have some problem with the phone. I have to apologize first because I missed the first six or seven minutes of the call. So if my question has already been addressed, please let me know. If I look at longer term, I think a lot of the investor, especially in the value side, they would like to have a more clear road map in terms of how the future cash flow is being used. So wondering that as the company shifts more toward into the free cash flow and the return model. Do you have a target, how much is the percent or the ratio of your cash flow you're going to reinvest in the business? And how much do you expect that to return to the shareholder?

Jack Harper -- President

Sure. We've laid out our framework in a slide pretty well here that we expect it $50 of oil plus or minus to be able to grow our business and generate increasing amounts of free cash flow. But the points in the cycle, when the price goes above that, not chasing that price and letting all the free cash come back to see the shareholders either in the form of a dividend or a buyback. And so that's the underlying framework that I think you should expect. And as Tim just mentioned that can improve with better efficiencies and getting more for less.

Paul Cheng -- Scotiabank -- Analyst

At $50 do you have a, say, target? How much is the free cash that you want to generate over time as a percentage?

Tim Leach -- Chairman and Chief Executive Officer

Well, you can see what we're doing in 2020 at $50. And my expectation is that we should be able to improve from that level going forward.

Paul Cheng -- Scotiabank -- Analyst

Okay, so $350 is the baseline that we should use and assume that you're going to do better in the future and then that bank lenient to what is the capex that you may use?

Tim Leach -- Chairman and Chief Executive Officer

Okay.

Paul Cheng -- Scotiabank -- Analyst

Long-term, do you have a target production growth now. I think at one point in the future -- in the past that you're talking about 15% and for this year, that, say 10% to 12% oil growth, 6% to 8% on the total volume growth. Is that a reasonable target growth rate in the future on the longer term?

Jack Harper -- President

Yes. As we've described, many times, but we're searching for that optimal mix of growth in free cash flow, you can see what the output of that is in 2020. And beyond that we will see what the circumstances hold.

Paul Cheng -- Scotiabank -- Analyst

Yes. Thank you. I would just make one comment then, I think for the investors, they would want to see a higher free cash flow than a higher growth rate, given the growth, the investor are no longer here. I don't think that the market will want any company going, say call it beyond 10% at all. Thank you.

Operator

And our next question will come from Gail Nicholson with Stephens.

Gail Nicholson -- Stephens -- Analyst

Good morning. Just a standpoint of the hedge book, you guys have a very healthy hedge book this year. With the continued volatility that we have experienced in the commodity. Has your hedging strategy changed at all, in the standpoint of what you feel is needed from a hedge protection on a go-forward basis?

Jack Harper -- President

Our strategy really hasn't changed. I mean, the basis of this strategy is hedging the PDP volumes out for a couple of cycles, for 12 to 24 months, that's the basis. But the tactics have changed, you know, where we've got the waterborne volumes that you hedge that a little bit differently. We've talked about-in the past, we didn't hedge gas and NGLs so much, we've -- you've seen us be more active with that thankfully. And so, but the basic strategy is still the same and it's not to assume that we know which direction commodity prices are going, is just to take some of the risk and volatility of our cash flow in the short-term.

Gail Nicholson -- Stephens -- Analyst

Great, thank you. And then in regards to LOE, when we look at potential future improvements. Is that more water cost savings driven, is there incremental savings from electricity that's being put in, a switch from EPS to gas lift? Or just can you talk about just kind of some of the projects that are being implemented in 2020 to further improve the LOE cost?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. I mean, the water piece is probably a net neutral to the extent we're doing those transactions, it's at a market rate. And so, it shouldn't have much of an impact either way on LOE. As it relates just broader improvement in LOE, I would say that it's going to come through the aggregation of a whole lot of small effort as opposed to any one big gain. I mean, as time passes and electrical infrastructure is built out, you need less generators as time passes and technology helps you improve things on the productivity side with automation and otherwise. There is definitely long-term opportunity there, but it's going to be a grind.

Gail Nicholson -- Stephens -- Analyst

Okay, great. Thank you.

Operator

Thank you. Our next question will come from Josh Silverstein with Wolfe Research.

Josh Silverstein -- Wolfe Research -- Analyst

Thanks, good morning guys. Just on the capital budget for this year. Maybe just a clarification there. Is the $2.6 billion to $2.8 billion all in, I'm asking because you guys have historically put some capital into midstream projects have added some or spend some dollars on an acreage additions? So just wanted to see if we should be thinking about any additional capital beyond that level?

Jack Harper -- President

Yes, the -- any additional capital beyond that should be pretty minimal. So I think that's the way you should look at it. In terms of the specific items, you've mentioned the same percentages hold that we've talked about in the past for infrastructure in non-exploration and development capital.

Josh Silverstein -- Wolfe Research -- Analyst

Got it.

Jack Harper -- President

They are included in that number, the $2.6 billion to $2.8.

Josh Silverstein -- Wolfe Research -- Analyst

Got it. So like, they're roughly 150-ish or so that you spent over the last couple of years, that's in that number for this year now?

Will Giraud -- Executive Vice President and Chief Operating Officer

Yes, it's kind of that 7% to 10% of the total.

Josh Silverstein -- Wolfe Research -- Analyst

Got it. Okay, thanks for that. And then just on the cost structure, but between the two basins, obviously there's a big decline expected in the Delaware this year. Just curious with the leading edges right now and is there any reason to think why the Delaware couldn't get below the Midland entering 2021?

Will Giraud -- Executive Vice President and Chief Operating Officer

Well, I do think the forward guidance we're giving there on the DC&E per foot reflects kind of the environment as we see it in 4Q and projects it is being steady across 2020. I think, if you looked at the breakout between that number -- the Delaware Basin is probably $100 a foot higher on average and the Midland Basin is about $100 a foot lower on average, and while they have had similar drivers in terms of causing that number to come down over time and there has been dramatic improvement of the Delaware especially around some of our things we're doing on the drill side. I do expect the Delaware number just structurally to stay higher, because of the depths and pressures.

Josh Silverstein -- Wolfe Research -- Analyst

Got it. Thanks guys.

Will Giraud -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Thank you. Our next question comes from Noel Parks with Coker & Palmer.

Noel Parks -- Coker & Palmer -- Analyst

Good morning. Can you hear me?

Tim Leach -- Chairman and Chief Executive Officer

Yes, good morning.

Noel Parks -- Coker & Palmer -- Analyst

Great, thanks. In the -- in your comments earlier today you were talking about next-gen frac equipment. And I was curious, do you view the sort of next stage of efficiency more being on the equipment side as opposed to the frac recipe side going forward?

Jack Harper -- President

I'll let Will jump in on this in detail, but I would say efficiencies come in small bites everywhere. And that's been the case for a long time. So I would expect everything to get more efficient over time.

Will Giraud -- Executive Vice President and Chief Operating Officer

Yes. No, that's -- I agree. And what we're really trying to highlight there is just the move to this dual fuel, including One Tier for a fleet. We think that's another opportunity to keep driving cost down to the extent you're burning compressed natural gas or even field gas in your fleet instead. So we're pushing on that side pretty hard.

Noel Parks -- Coker & Palmer -- Analyst

Great, and you've done a lot as far as lateral length as you described. But I'm wondering for those remaining areas where you -- your leases leave you having to do short laterals? How much of a compromise in returns or efficiency? Do you have at this point with shorter lateral?

Will Giraud -- Executive Vice President and Chief Operating Officer

Well, I mean we're trying pretty hard to not drill one mile laterals, but I mean the uptick from going to one mile to two is very significant. I mean, it on order of magnitude it can double the rate of return.

Noel Parks -- Coker & Palmer -- Analyst

Okay. And are there any differences. And I guess the stimulation effect in this or anything? I'm thinking about with the longer laterals, of course, you have a sort of more complex completion. You have the issues that somethings happen at the two, the well compared to on a shorter lateral. Are those factor at all?

Will Giraud -- Executive Vice President and Chief Operating Officer

I mean, I wouldn't say just flat no, but technology is fixed, most of the big problems using dissolvable plugs, to the extent you're going beyond two miles for the tow and some of those types of things. But broadly, the answer is no. The effect of this is the same.

Noel Parks -- Coker & Palmer -- Analyst

Thanks.

Operator

Thank you. Our next question comes from Richard Tullis with Capital One Securities.

Richard Tullis -- Capital One Securities -- Analyst

Thanks, good morning. Most of my questions have been asked. But just one last one for Tim or Jack, it's been, I guess, a little more than a year since the RSP acquisition closed. Any one or two items stand out at this point that may have surprise to the upside or maybe even cause some disappointment, compared to the initial thoughts at the time of the acquisition?

Tim Leach -- Chairman and Chief Executive Officer

No, it's a great combination of like assets. I still think size, scale and blockiness of our acreage position is very important and you can see that through the efficiency numbers that we're continuing to gain also allowed us the sale of the shelf and continued to high-grade our properties makes us a better company.

Richard Tullis -- Capital One Securities -- Analyst

Thank you. That's helpful. And lastly, just thanks for the detail and the presentation on the different cost components. I think that's helpful. That's all from me.

Jack Harper -- President

You bet. Thank you.

Tim Leach -- Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. And our final question will come from Jeanine Wai with Barclays.

Jeanine Wai -- Barclays -- Analyst

Hi, good morning everyone.

Tim Leach -- Chairman and Chief Executive Officer

Good morning.

Jeanine Wai -- Barclays -- Analyst

I wanted to follow up. Good morning. I wanted to follow-up on some of the dividend questions you announced that nice dividend increase. And in terms of just understanding it a little better for the dividend coverage, but oil price are you comfortable with, you've got a really strong hedge book program this year that puts a lot of protection on the downside. It also makes a breakeven pretty low at far below $50 WTI. But what about unhedged and maybe as a follow-up to that going forward. Since the strip is pretty flat at 51% for hedging purposes. Where do you feel comfortable for '21 and '22 coverage?

Jack Harper -- President

Yes. And starting in 2020, we feel comfortable that sub-$45 oil, we can cover our capital plan and that dividend. So that gives us comfort this year to weather anything that may come. And if oil looks like it's going to be lower for longer below that price. We will modify our capital plan. Going forward, I think just philosophically, the way to think about the dividend, is that it should represent an increasing percentage of our cash flow, and it should most likely outpace our growth in production.

Jeanine Wai -- Barclays -- Analyst

Okay, great, thank you for taking my question.

Operator

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Tim Leach for any further remarks.

Tim Leach -- Chairman and Chief Executive Officer

All right, thank you. I know that this was a busy morning, there's lots of companies reporting this morning. I appreciate all the good questions and interest in our company. We look forward to talking to you next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

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

Tim Leach -- Chairman and Chief Executive Officer

Jack Harper -- President

Will Giraud -- Executive Vice President and Chief Operating Officer

Arun Jayaram -- JP Morgan -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

Derrick Whitfield -- Stifel -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

John Freeman -- Raymond James -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Bob Brackett -- Bernstein Research -- Analyst

Jeffrey Campbell -- Tuohy Brothers -- Analyst

David Deckelbaum -- Cowen -- Analyst

Matthew Portillo -- Tudor Pickering Holt -- Analyst

Paul Cheng -- Scotiabank -- Analyst

Gail Nicholson -- Stephens -- Analyst

Josh Silverstein -- Wolfe Research -- Analyst

Noel Parks -- Coker & Palmer -- Analyst

Richard Tullis -- Capital One Securities -- Analyst

Jeanine Wai -- Barclays -- Analyst

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