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Concho Resources Inc (NYSE:CXO)
Q2 2020 Earnings Call
Jul 30, 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 Second Quarter 2020 Concho Resources, Inc. Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to Ms. Megan Hays, Vice President of Investor Relations and Public Affairs. Ma'am, you may begin.

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

Thank you and good morning everyone and welcome to our second quarter conference call. As a reminder, during today's conference call, we will provide forward-looking statements based on current expectations. I'll call your attention to the forward-looking statements and other disclaimers that are provided in the earnings release and presentation.

Our comments today may also reference non-GAAP financial metrics and reconciliations for those metrics can be found in our earnings release. You can find the earnings release and presentation on the Investor Relations page of the Concho website. Joining me on the call today are Tim Leach, Concho, Chairman and CEO; along with President, Jack Harper; Chief Operating Officer, Will Giraud. Tim is going to begin followed by Jack would will give you a review of our financial results and outlook. Following their prepared remarks, we'll be happy to take your questions. [Operator Instructions]

With that, I'll turn the call over to Tim.

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

Thanks, Megan. Good morning. The second quarter tested the strength of the industry and I'm confident we're even stronger company after the recent challenges. Not many companies are going to come out of this stronger, but I believe that we're one of them. As I think about the first half of this year, we've made real progress on several priorities that will position us for the future, maximizing our cash flow by adjusting our spend rate production and cost structure. Increasing the strength of our balance sheet, continuing to return capital to shareholders through our dividend and managing the oil price volatility with capital discipline, while also preserving our operational capacity.

The last several months have been more volatile than anything we've ever seen. Oil ended the quarter, up 92%, the largest move in a quarter in 30 years, but what a ride oil prices dropped to negative $38 then rebounded to positive $40 as the U.S. and OPEC Plus cut production. Against a volatile backdrop and historically weak price realizations, Concho delivered strong operational and financial performance in the second quarter. Our results reflect the strength of our portfolio and our team, we delivered strong cash flows and lower cost, while we cut our activity.

Moving forward, we are maintaining the same level of focus that helped us navigate the first half of the year. In short, we will continue to remain flexible, as we look past 2020 we will be patient for sustained higher prices, before increasing spending. Today there are 125 rigs running in the Permian, a year ago they were 440 and frac spreads have declined even more dramatically. This reduction in activity is starting to show up as declining Permian production. In addition, field declines are setting in, capital continues to be scarce and we're seeing the effects of a shrinking industry.

We believe the future of our industry requires better capitalized companies, more capital discipline, less leverage and being more aware of market signals for growth. Before the pandemic, we outlined a clear vision for the evolution of our business. Delivering both sustainable cash flow growth, production growth and increasing returns to shareholders. While there is more uncertainty than usual around the macroeconomic environment, this plan remains unchanged. And the principles that form our strategy people, assets, returns and financial strength will guide us along the way.

Operating responsibly is key to the evolution of the business model as well. We believe that operating responsibly and delivering good financial performance are not mutually exclusive. Our flaring performance in 2020 is trending toward 1% of gross operated gas volumes as compared to 1.8% in 2019. In August, we will publish our first sustainability report, we look forward to engaging with you on these important topics. We continue to work through the pandemic and the impact that its having on our communities and workforce. I want to acknowledge the hard work of our employees, they continue to perform well in a tough environment. This was a great quarter and I'm proud of our performance.

Before I turn the call over to Jack, I want to summarize a few things that I hope you will come away with. First, we're successfully managing the cycle without losing focus on the long-term value and operational capacity of the company. Also we're improving our operational performance, which is lowering our cost structure. Next, we're continuing to reduce our net debt. And finally, we will be patient on the recovery, prioritizing free cash flow and reinforcing our machine.

With that, let me turn it over to Jack.

Jack Harper -- President

Thank you, Tim. Our results for the second quarter, not only continue our trend of solid financial and operating performance, they also demonstrate that we are controlling what we can. And by doing so, we are well positioned to become a more profitable company. Last quarter, we outlined the steps that we're taking to align our business with the current environment. Those steps include reducing our capital program, improving our cost structure and reinforcing our balance sheet.

Regarding our capital program, capex in the second quarter totaled $312 million, 44% lower than the first quarter of this year. The step down in the quarter reflects less overall activity as well as continued improvement of well costs. For the second time this year, we are reducing our well cost guidance due to better operational efficiencies and a lower surface -- service cost environment. We expect the cost to drill, complete and equip a well to average less than $800 per foot or more than 30% lower than the cost to do that work last year.

With respect to our cost structure, controllable costs which includes lease operating, cash G&A and interest expense totaled $7.49 per unit, down 20% from 2019. We are managing all aspects of our cost structure. Examples include the logical items like well maintenance, workovers, water handling and optimizing artificial lift. We also made the difficult decision to implement voluntary separation program. These combined efforts are expected to result in more than $135 million in reduced operating and G&A costs, up from our prior target of $100 million. Quickly adjusting our capital program and managing our costs lower combined with our hedge position drove strong cash flow generation. Operating cash flow before working capital was $550 million, which resulted in $238 million of free cash flow, which brings me to reinforcing our balance sheet. Our cash position nearly doubled to $320 million and at the end of the second quarter, our net debt was $3.6 billion, down from $4.3 billion a year ago despite commodity price volatility. And although, we have one of the better balance sheets in the industry. We plan to direct the $375 million to $450 million of free cash flow anticipated in the back half of the year to our balance sheet, making quick progress toward our goal to reduce net debt by another $600 million.

Oil volumes for the second quarter averaged 200,000 barrels per day and we remain on track with our full year guide of approximately 197,000 barrels per day and $1.6 billion in capital spending. We've built the leading position in one of the best resource basins in the world. Our portfolio quality, depth and durability are nearly unmatched. Importantly, we have a good mix of investment opportunities across federal, state and private lands. This mix allows us to redirect capital without degrading the returns or the capital efficiency of our drilling program. And as Tim discussed, we are working to minimize our emissions as well.

I'm confident in our operating principles and performance regardless of the environment we're in. Without question, this has been a challenging year thus far, testing every company. To meet the challenge, we're maintaining our approach to capital discipline and prioritizing free cash flow. I believe that our second quarter results show that the steps we are taking are enabling us to build a better company, driven by more efficient capital investment and cost control.

With that, let me turn the call over to the operator for Q&A.

Questions and Answers:

Operator

[Operator Instruction] Your first question comes from the line of John Freeman with Raymond James.

John Freeman -- Raymond James

Good morning, guys.

Jack Harper -- President

Good morning, John.

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

Good morning.

John Freeman -- Raymond James

So obviously offset the capital efficiencies you've realized so far and directed that to drilling and completing the 20 additional wells, which obviously sets you all up with a lot more momentum into 2021. And I'm just hoping you all could maybe kind of elaborate on kind of how you all went through sort of the thought process on the trade-off of whether you drill and complete the 20 additional wells or you just reduced the full-year capex budget?

Jack Harper -- President

Sure, John. It's Jack. As we described last quarter, we're trying to have that balance between prudently investing our capital and maintaining our production base as we end of the year. And we feel like this strikes that balance of maintaining a stable production base, but also building a little bit of momentum as we start the budget season for '21.

John Freeman -- Raymond James

And then when we look at the continued progress you've made on reducing well costs now the less than $800 a foot versus the $850, can you elaborate a little bit more on sort of just ballpark of that drop how much is just due to efficiency gains versus service pricing? And then sort of what areas of any, if you think there's still room to kind of drive those efficiencies more?

Will Giraud -- Executive Vice President and Chief Operating Officer

John, it's Will. Yeah, I think if you just kind of looked at the improvement, roughly half of it is related to efficiency gains and another half is kind of more just service cost pricing coming down. And I think there is probably still some work to be done on both of those. So I think the team has done a really good job continuing to improve cycle times. I think there is more to do there as well. On the service cost side, it will depend on what activity levels look like here in the Permian in the back half of the year.

John Freeman -- Raymond James

Great. I appreciate it, guys. Nice quarter.

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

Thank you.

Jack Harper -- President

Thanks, John.

Operator

Your next question comes from the line of Brian Singer with Goldman Sachs.

Brian Singer -- Goldman Sachs

Thank you. Good morning.

Will Giraud -- Executive Vice President and Chief Operating Officer

Good morning.

Brian Singer -- Goldman Sachs

Wanted to follow up on your debt reduction objective to get debt down to $3.0 billion, a $600 million reduction. What are your thoughts and how it philosophically would achieving that goal then impact subsequent actions. When you get to $3 billion, then what happens next? Is that where you would more quickly increase returns to shareholders, which you just continue to have an even lower debt reduction goal, would there be capital to allocate to production growth, which you said earlier was an -- a longer-term objective. Can you talk a little bit more about that?

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

Yeah. We've talked about that in the past too that that we felt like a stronger balance sheet in this kind of environment was kind of a top priority. So I think getting to that goal quickly enables you to then look at all the other options on how to return capital to shareholders. So I think that is the logical next step.

Brian Singer -- Goldman Sachs

Great. And is there any frameworks that you're considering either in terms of more of a variable dividend versus share repurchase and then percent of capital allocated to grow the projects versus dividend to shareholders?

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

No, I mean, we've talked about all those, the variable dividends getting a lot of traction right now. But I would tell you, I'm just -- main message from this quarter is I'm so happy that we have a viable strong business at this new pricing level. That's the main message and that we can very quickly get by producing more free cash flow and running our business, we can get this thing balance sheet position where we think it's appropriate for any scenario in the future and that gives us all kinds of optionality. Especially, we have returned to pricing like we've had in the past.

Brian Singer -- Goldman Sachs

Great. Thanks. And then my last one is on well performance and really a little bit of a two partner. The first is, can you just talk a little bit about what you're seeing from the well performance to-date, particularly as it relates to the spacing and how some of those wells are performing maybe not necessarily in their first 30 or 60 or 90 days, but thereafter? And then also, can you talk about the base decline rate. And if there is anything beyond -- if there's anything you're doing to manage -- to best manage that?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. Hi, Brian, it's Will. On the performance side, I mean, the quarterly production was right kind of in line with what we expected. The well performance, I would characterize the same, if you're asking about kind of in the latest batch of projects that are at a spacing density less than some of the test, we did in 2019 those -- it's worth noting they're still relatively early in their life, but they look in line with what we would expect. So that all feels pretty good.

As it relates to the base decline, it's still -- I think we would still talk about that low 40s for this first year decline, but finding a way to continue to moderate that, I do think that as we go at a slower pace, you will see that moderating maybe a little faster than we were expecting in previous conversations. But that's probably to come later.

Brian Singer -- Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Derrick Whitfield with Stifel.

Derrick Whitfield -- Stifel Nicolaus

Thanks. Good morning to all.

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

Hey, Derrick.

Jack Harper -- President

Good morning.

Derrick Whitfield -- Stifel Nicolaus

Perhaps for you, Jack. With regard to your 2020 outlook, I certainly appreciate the challenges of providing quarterly guidance in the current environment. With the activity you've outlined, would it be safe to assume you could exit the year about where you are right now? And the reason I ask is, I seem to recall in your Q1 commentary flattish profile for the balance of the year. That was your comments back then.

Jack Harper -- President

Thanks, Derrick. Yeah. If anything, since our last call, in our last conversation my confidence has increased in our business. And as for the second half oil production, I do still expect for it to stabilize in that 190 to 200 day range. But we left our annual guidance unchanged for a couple of reasons. First off, mid-90s on oil in the back half of the year, only positively impacts that annual number by about 1%. And additionally, exit rate basis, we see our production holding up well, and better than most.

And secondly, we described in the last quarter, our focus on free cash flow generation. And our improved cost structure along with a stable production base have us ahead of plan in that regard. And then lastly, I guess, I'd to say, the style and cadence of our program in the back half of the year will allow us to enter next year with maximum flexibility, stable production base and a strong financial position. I think many of our peers will struggle to achieve that.

Derrick Whitfield -- Stifel Nicolaus

Great, thanks for the detail and then perhaps for you, Will, on the follow-up question. And I would like to really circle back to a topic that I raised last quarter and frame it slightly differently that is, what a lower for longer price environment where the investor ask is flattish growth and return of capital, would that environment change your view on optimal spacing? And I acknowledge in asking this question that your spacing is conservative relative to industry based on the operational adjustments you made in the second half of last year, but is there an opportunity to get greater returns with wider spacing?

Will Giraud -- Executive Vice President and Chief Operating Officer

Yeah, I mean, we've definitely moved to a wider spacing here in 2020. I don't necessarily think that you'd see us adjust to something wider than that. If that's kind of what you're asking, if I'm understanding the question, right. I do think given the volatility we see in the commodity and a whole host of other factors, including when to run a relatively steady program. I think, we're very comfortable with the cadence of our business right now and also the spacing patterns and targets we're going after.

Derrick Whitfield -- Stifel Nicolaus

Thanks all. Well done, guys.

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

Thank you.

Jack Harper -- President

Thanks.

Operator

Your next question comes from the line of Arun Jayaram with JP Morgan Chase.

Arun Jayaram -- JP Morgan Chase & Co -- Analyst

Good morning. I guess, the story of the quarter was clearly the free cash flow and the lower capex, I was wondering if you could help us think about maybe the second half trajectory of capex and perhaps some of the drivers of the lower capex in 2Q?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. Hey, Arun, It's Will. Yeah, the drivers on the capex improvement so far as Jack mentioned was a couple of things, it was activity obviously slowing down over the course of the year, but then also pretty impressive improvement in just our cost structure on the drill, complete and equip side. As it relates to the back half of the year, there's a couple of things happening there. First, our activity in the second half, as a little bit more activity on higher working interest properties including five rigs that are currently on the Mabee Ranch where we've got 100% working interest.

Second, we saw a very low amount of non-operated capital in 2Q. And so, I think our expectation is, we'll still see that non-op activity come to see us in the back half of the year. And so that was kind of another toggle on the capital.

Arun Jayaram -- JP Morgan Chase & Co -- Analyst

Great. And, Will, how does this influence your views kind of sustaining capex on a go-forward basis? I mean, I think you guys have publicly talked about something now called in the $1.4 billion range. Please stop me if I'm incorrect with that view. And just thoughts on how that could translate in terms of 2021 sustaining capex?

Will Giraud -- Executive Vice President and Chief Operating Officer

Yeah. We've talked a lot about kind of the run rate we're going to be at here in the back half of the year that the $350 million a quarter being a good proxy for maintenance capital. I think this quarter shows that really -- what we're focused on right now is controlling the things we can control and grinding on costs, whether they are capital costs or lease expense costs or G&A costs. And so we're going to keep working on that number, but for now, I think that's a good number to have.

Arun Jayaram -- JP Morgan Chase & Co -- Analyst

Okay. I just wanted to clarify, Jack, your commentary on second half oil, if we look at the current Street median numbers for oil on Bloomberg they're 105 for 3Q, 191 for 4Q, which would average just under 199. Can you just clarify your thoughts on the second half oil numbers at that $1.6 billion of capex?

Jack Harper -- President

Yeah, I think those numbers you just reference from consensus seem reasonable to me. And so I think that ties with what I said earlier.

Arun Jayaram -- JP Morgan Chase & Co -- Analyst

Great, thanks a lot, Jack.

Jack Harper -- President

Well, sure.

Operator

Your next question comes from the line of Scott Hanold with RBC Capital Markets.

Scott Hanold -- RBC Capital Markets -- Analyst

Yeah, thanks. Great quarter, guys. Maybe another slight follow-up on that maintenance capital question. The eight rigs and two frac crews, you all are running in the second half of the year. Is that generally a good level to think about that's maintenance capex or to be at your maintenance production levels would you need to add a little bit more on the rig or frac crew side.

Jack Harper -- President

Sure. Hi, Scott, it's Will. I think it's eight and four right now, Eight rigs, four completion crews and that's probably a good number. We tried to talk more in terms of capital than activity just because, as I mentioned, there can be a little bit of noise as we bounce around between different working interests in different projects. But that is a good just kind of stronger end for activity.

Scott Hanold -- RBC Capital Markets -- Analyst

Got it. Appreciate that. And then, Tim, you had mentioned that obviously companies that are better capitalized, earned a better position, especially in this volatile oil market that we're in. Can you guys give us your 10,000 foot view on M&A going forward here, considering what's occurred and how does Concho play into that?

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

Well, we're really focused on running our business efficiently. And I do think, I mean, we've seen consolidations happen in our industry. I think individual deals are just that they're individual deals, if they're all different. So I don't think you can characterize consolidation by any one deal or perhaps the last deal that just happened. But I do think the industry, in general, is going to have to get more efficient. And to get more efficient these companies and the industry is going to have to be better capitalized and be able to run at lower cost and with less debt.

And so, I think, we'll see that happen. I'm not sure how that affects Concho. Concho is really well-positioned with the property base we have and where we're located. I think we can continue to do what we do for a very long time. So we've -- I think our number one mission right now is just to continue to create a more efficient company with what we've got.

Scott Hanold -- RBC Capital Markets -- Analyst

Okay. Appreciate that. But just out of curiosity, are -- I'm assuming you guys look at the market constantly, you -- have you seen anything change in that market over the last several months?

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

Well, I mean, the second quarter was maybe the worst quarter we've ever had as an industry as far as the oil price movement. And just -- so, yeah, I think that everybody was looking at their business plan and there were very few business plans that were viable in our industry. So, I think, that forces the industry to reevaluate itself.

Scott Hanold -- RBC Capital Markets -- Analyst

Appreciate it. Thank you.

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

Thank you.

Operator

Your next question comes from the line of Neal Dingmann with SunTrust.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Morning all. First, I guess, my two questions just were based on Tim what you and Will had said earlier. First, Will, had mentioned, talked about maintenance capital in the earlier question and Tim not a surprise, you talked about returning -- just talked about shareholder returns. So both of my question on this, I'm just wondering on the, I think it's $350 million to $375 million per quarter maintenance capital, my first question is that, do you anticipate that continuing to come down even a bit more? It just seems like you guys are doing incredible job with efficiencies.

And then my second part today would be, if that does come down or I guess let's say the inverse of that, prices go up sounds like, Tim, would you just keep that the same and not grow production anymore, and just take that capital and give it back to shareholders? Or I'm just wondering again basically around this maintenance capital can it get any better and what would you do with the excess?

Will Giraud -- Executive Vice President and Chief Operating Officer

I'll take the first part of that and then let Tim or Jack take the second. I mean, as it relates to what we've been able to do so far this year, I can't say enough positive things about our drilling and completion teams and what they have done to take advantage of not only the lower service cost environment we're in and to have the flexible program and able to take advantage of that. But also the efficiency gains, the cycle times, footage per day improvement, etc. It's been really impressive and I am optimistic that given more time the machine will continue to grind out gains and over some measure of time, we will continue to get them lower.

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

Yeah, Neal, I think the answer to the other question is, as I mentioned at the very opening that we're going to be very cautious on increasing any kind of activity and require a much stronger and longer price signals from the market before we do so.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

So Tim, let me ask one of the last thing, if I could. So does that mean you would consider even though it is potentially would be called a variable dividend, is that something you would look at, and something you'd consider from time-to-time throughout the year, when you consider shareholder return options?

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

Yeah, I'm not really ready to talk about the mechanic of it, but that the concept of a variable dividends being talked about throughout our industry, and I think we'd be well positioned to do something like that.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Very good. Thanks, guys.

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

Thanks.

Operator

Your next question comes from the line of Leo Mariani with KeyBanc.

Leo Mariani -- KeyBanc Capital Markets

Hey guys, just wanted to follow up a little bit on free cash flow, it certainly seems like your message was pretty clear in terms of what you've be doing in the second half of the year with, I guess, building cash to reduce net debt. But, I guess, maybe just kind of going forward into next year, wanted to get a sense of how share buybacks might play into the equation here, wasn't a word that I heard you guys, I guess mention of late?

Jack Harper -- President

Yeah. Leo, this is Jack. Yeah, as Tim alluded to earlier, I think, we can get substantially there on our debt reduction by the end of this year with perhaps a little bit of work to do next year. But beyond that what we've described in the past and on this call is a range of opportunities between increasing dividends, share buyback or further cash build. And I think we really have to see what the circumstances look like at that point in time to determine which one is the most effective.

Leo Mariani -- KeyBanc Capital Markets

Okay. And I guess just -- I know it's kind of tough to say how things play out obviously on the oil price side as we get into next year, but we kind of stabilized here in roughly $40 and it sounds like the situation you guys are describing is that you can kind of start to stabilize your oil volumes into year-end. I mean, don't want to put words in your mouth, but it would be reasonable to assume that if we continue to muddle along at $40 next year, we should think of Concho volumes is fairly flat and activity fairly flat and you guys talk about needing a much higher oil price to potentially grow again. Would that be closer to $45 just trying to get some book ends as to how this can play out?

Jack Harper -- President

Sure. When we came into this year, we described our business plan in the $50 environment, and the things we could do and as prices have bounced around and cost have changed, clearly what could be done at $50 can now be done at a lower price. And when we look out at the strip currently and what we think our business can do, it's a viable business that can achieve a lot of the same objectives we came into the year talking about.

Leo Mariani -- KeyBanc Capital Markets

Okay. And maybe just lastly on the shut-ins. Are all those back online at this point? And if not, can you quantify what still offline?

Will Giraud -- Executive Vice President and Chief Operating Officer

It's all generally on.

Leo Mariani -- KeyBanc Capital Markets

Okay. Thanks, guys.

Operator

Your next question comes from the line of Matt Portillo with TPH.

Matthew Portillo -- Tudor Pickering Holt

Good morning all.

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

Good morning.

Jack Harper -- President

Hi, Matt.

Matthew Portillo -- Tudor Pickering Holt

Can you just briefly discuss, I guess, your thoughts around permitting on federal acreage. How much running room you have at the moment? And then as you mentioned in the prepared remarks just the quality of the reservoir on federal acreage relative to non-federal acreage in New Mexico and kind of how we should think about your inventory profile potentially allowing you to avoid drilling federal lands if there is a slowdown on permitting other issues?

Will Giraud -- Executive Vice President and Chief Operating Officer

Hi, Matt, it's Will. This obviously is very topical right now. I think one of the challenges is it's hard to know exactly what and how a administration might do to limit onshore development. From a federal permitting front, we believe we have enough permits in hand or in process for probably one to two years worth of drilling on our federal acreage. I think probably more importantly though, we've run a number of scenarios in the event we're unable to develop our federal acreage in New Mexico over the next five years and we feel confident we can quickly shift our capital to other acreage in our portfolio, without any significant impact to our capital efficiency over that period.

Matthew Portillo -- Tudor Pickering Holt

Great. And then a follow-up question for Tim. Just philosophically longer term, I was curious how you're thinking about capital allocation to the drill bit relative to cash flow? And specifically, if there is kind of a longer term plan around reinvestment of that capital allocation potentially below your cash flow profile as we continue to drive free cash flow generation through the cycles.

Will Giraud -- Executive Vice President and Chief Operating Officer

Well, I think, as I mentioned, I'm just happy to get through the second quarter in such good shape. As far as looking out long-term, we just see being able to deliver more free cash flow with a lower reinvestment rate back into the business over a longer period of time. So, I don't think we're prepared to talk about percentages or anything like that right now, but it just -- it looks good over a long period of time that how much free cash flow we can generate as a business.

Matthew Portillo -- Tudor Pickering Holt

Thank you.

Operator

Your next question comes from the line of Paul Cheng with Scotiabank.

Paul Y. Cheng -- Scotiabank

Alright. Good morning. Thank you. Tim, you said that the business need to change to be more discipline and also that generating better free cash flow and better return. We totally agree. And from that standpoint, do you have a target that you can share for Concho? What's the longer-term average cycle for a return on capital employed? And and also that you will be targeting that you think will need to be in order to attract investors complete this to general market? And also that, when I think that some of other companies that your peer, that will be targeting say a overall investment maybe 70% of the total free -- total cash flow on a full out-cycle. Is that approach you believe is reasonable for the industry and for yourself and if not, why not?

Jack Harper -- President

Hey, Paul, it's Jack. Let me piece that out a little bit. I think on the first part of the question, our business needs to generate returns and we need to generate returns that exceed our cost of capital and we think we have a business that can do that. So that's point number one. And I guess the second part of your question had to do with cash flow at percentages of reinvestment. And again going back to some things that we've said on this call, we think we're positioning our business to allow for that type of flexibility to invest more efficiently and increase our free cash flow. So by definition, that would mean a lower percentage of our cash flow over time, would be necessary to maintain or grow production.

Paul Y. Cheng -- Scotiabank

Jack, thank you for that. And in terms of the return on capital employed, obviously with that you have one that you [Phonetic] still can do better than your cost of capital, but to compete with the market how much better do you think you need to be in order to be competitive? I'm just trying to see that, what is the expectation from the company. What will you be targeting?

Jack Harper -- President

Well, I'm very competitive. So the more the better and I hope that you're seeing evidence of that in our -- in the actions we're taking in our cost structure, our realizations for our oil and the efficiency on the drilling and completion side. So my expectation is that we're going to maintain the intensity on all of those things.

Paul Y. Cheng -- Scotiabank

A final question from me, very quick one, for the federal land you're looking at loss from a total land position, but from a inventory backlog standpoint, what is the federal land inventory as a percentage to your total inventory?

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure, Paul. It's about -- the federal acreage is about 20% of our total net acreage. And so from an inventory standpoint, it's higher than that. I mean, the federal acreage is generally good acreage especially in Lea County. So it's something between probably 25% and 30% of our total inventory.

Paul Y. Cheng -- Scotiabank

Thank you, Will.

Will Giraud -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Your next your next question comes from the line of Doug Leggate with Bank of America.

Doug Leggate -- Bank of America Merrill Lynch

Good morning, guys. While all the DCF related questions have been asked, I appreciate you getting all. Let me try a couple, maybe just ask slightly differently on the sustaining capital. Ex-hedging where would you say your oil breakeven as at this point. On the $350 million per quarter?

Jack Harper -- President

Doug, it's Jack. Let me take a shot at that. I think that our breakeven to cover our program and our dividend is somewhere in the mid-to-high 30s range on oil.

Doug Leggate -- Bank of America Merrill Lynch

Okay, that's good. Thank you. Now I've obviously got to take a shot at the whole comments around the business model, because I think finally the market might be waking up to the high value is established in these business in your business in particular in terms of this kind of free cash flow. So all your comments then have been pressing and great to hear you reiterate a lot this morning. My question is this, if and when oil prices do recover, how do you think about the planning process going forward? I mean, obviously some level of growth versus the broader market is probably desirable just not 20%, 25%, 30% where the industry was. So how do you think about our reinvestment rate? Is there a cut on your spending, Is there a cut on your growth rate? I know you're not there yet, because you've survived the second quarter -- more than survive the second quarter, but just philosophically, when you think about the long-term, what are the parameters are feeding into your thought process about what you want to offer to market?

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

Alright. For most of my career, we would reinvest all our cash flow and then show our success by how much we can grow our production. That's how this industry worked for a long time. Well, that's not how it's going to work in the future. And so, I think, philosophically staying focused on the efficiency of the business, driving down cost, what does it cost to add a barrel of production, what are your returns, those types of things. I think it's probably going to be measured in percentages of your total cash flow that are reinvested into the business and reducing those percentages over time to be able to show continued growth.

I also mentioned that I thought our industry as a whole needed to be more aware of price signals and what was going on in the market. So as we entered this cycle, no one really thought the U.S. shales could grow as much as it did, as much production and that threw everything out of balance at a really bad time. And so, I think, as consolidation takes place and the major producers get their shops in order, I think everybody is going to be more aware of supply and demand fundamentals in the world. And yes, I think what you're talking about is lower growth required bigger cash flow distributions. Less percentage of your total cash flow reinvested into the business more efficient machines.

Doug Leggate -- Bank of America Merrill Lynch

Well, Tim, you've led the market early 20 years ago when we started talking about the [Technical Issues] business model. So it's great to hear and again, congrats on sticking with it through this tough time.

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

Thank you.

Operator

Your next question comes from the line of Jeffrey Campbell with Tuohy Brothers.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Good morning. Tim, we've had a lot of talk about consolidation and rationalization and so forth. And it seems obviously that one of the reasons for the industry's capital inefficiency is because creditors continue to restructure losing businesses instead of just selling assets. I'm just wondering what your sense was if any there, some of the folks behind the scenes providing this capital to the industrial losing patience with the effort.

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

Yeah, well I just -- yeah, I commented that there wasn't any capital available to our industry private equity seems to be closed, public equities closed, the debt markets are tougher. So I think that is a key signal. And I think there will not be as much sloppiness in the future as there has been in the past.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Thank you. An for my follow-up, if you can comment, should a administration be unconstructive on the federal leases where conscious capital allocation between the Midland and the Delaware remain roughly similar to the present or might change on that basis.

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

I don't have this. I'd probably take it that Will, but we have a big position in New Mexico and state land and private and also a big position in the Delaware and Texas. So we think we can keep our balance between those two basins.

Will Giraud -- Executive Vice President and Chief Operating Officer

I think that's probably a good approximation. Like I mentioned in my comments, I mean, I think one of the challenges in talking about it, you don't exactly know what a new administration might do. And so you'd have to kind of take the fact that they come to you.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

No, I think that's fair. Thanks for the answer. Appreciate it.

Will Giraud -- Executive Vice President and Chief Operating Officer

Thank you.

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

Thank you.

Operator

Your next question comes from the line of David Heikkinen with Heikkinen Energy.

David Heikkinen -- Heikkinen Energy -- Analyst

Good morning everybody and thanks for taking my question. One question, as you think about the expansion of the Solaris Water joint venture, can you talk about your capital commitment and then the overall impacts on conscious financials as that flows forward?

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

Sure. Hey, Heik. Yeah, I mean, a lot of the commentary we gave around the transaction we did with them in Eddy County a couple of quarters ago would apply to this conversation around what we've done now with them expanding into Lea County. The benefits to us are on both the capital side and that this entity will be spending capital dollars to build out water infrastructure as opposed to our sales. It will also help on the lease operating expense side and help us continue to drive down to the extent we're trucking any water. This will get -- should get all of our water on to pipe over time.

And then one of the kind of longer term, but it's still very important goals is to increase our percentage of recycled water use and our opinion is that you're going to need to have big third-party infrastructure to handle big volumes of water and move it around the basin where it's needed as opposed to the older model where individual companies kind of build it themselves and utilize it at pretty low rates. And so those are kind of drivers for it. I think an important also piece of it is the existing equity owners agreed to increase their capital commitment to the entities. So I think it sits in a very good position and helps to take the burden off of us from a capital standpoint.

David Heikkinen -- Heikkinen Energy -- Analyst

Yeah, the share of the burden. Okay, thanks guys.

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

Thanks.

Operator

Your next question comes from the line of David Deckelbaum with Cowen.

David Deckelbaum -- Cowen -- Analyst

Morning, guys. Thanks for the time. If I could ask, I guess just following up on David's question, Lea County has been one of your more active areas, how quickly should we see this impact to well cost and LOE? And then my follow-up to that would just be I think you commented, obviously, that you're below your target for footage costs this year leading edge. Could you give us some parameters around where you're at? So, I guess, if we had annualize that it sounds like you'd be down similarly in that sort of mid-single-digits going into next year.

Will Giraud -- Executive Vice President and Chief Operating Officer

Sure. On the water question, I mean, I think it's noteworthy that a big portion of the improvement on both the capital and LOE sides have been some of the things we're doing around water, both from a sourcing and disposal standpoint. So a fair amount of that was already banked into getting to where we are today. We do expect to see incremental benefit, but it will probably modest from where we are with that transaction.

As to your kind of broader question on drill, complete and equip costs and where they go in the future, the number we're talking about is a annual programwide number it's not aspirational, it's kind of the whole program, short laterals, long laterals etc. And so I do think we'll continue to trend that down over the course of the year and into next year, but time will tell in terms of where that go. And I think it will also be driven by what's happening from an activity level in the Permian in the back half of this year.

David Heikkinen -- Heikkinen Energy -- Analyst

Do you suspect that there are going to be some inflationary pressures on the service cost side. I mean, if everyone's more or less holding maintenance mode similar to you all, do you think that there are still pockets where you're going to see some pricing pressure?

Will Giraud -- Executive Vice President and Chief Operating Officer

Yeah, I mean, to a point Jack made earlier our capital strategy has been to try to slow down and level out over the course of this year our production base. It seems like some of our peers, a bit more of a dramatic deep V where they've cut activity. And so it seems like some of them this earning season will be pretty helpful in terms of getting some insight into how they're thinking about it. But I do think we will see some modest level of activity from peers come back in the back half of this year and then try and kind of level out maybe a deeper V of production decrease.

David Deckelbaum -- Cowen -- Analyst

Appreciate it, guys.

Operator

Your next question comes from the line of Charles Meade with Johnson Rice.

Charles Meade -- Johnson RIce -- Analyst

Good morning, Ken, Jack and Will and your whole crew there. You guys have gone through a whole lot of -- covered a lot of ground here, but I just wanted to ask one other question kind of along the same lines, but from a different angle. If you guys six months from now were able to swap another big chunk of your production in the high 40s WTI kind of along the lines of those swaps you already have in place. Would that be sufficient for you guys to want to add to that 8 rig and 4 rigs or four completion crew pace?

Jack Harper -- President

Thanks, Charles. This is Jack. Just on the hedging piece. First off, we're pretty mechanical about the way we go about that. And so we won't be waiting for any particular price to add hedges. We will continue quarterly to look at that and kind of plan around what the future looks like. But I think as Tim and really all of us have alluded to here on the reinvestment is we need to be more mindful of all the things going on in the world and the signals that we're getting, and right now adding a lot of production and activity doesn't seem to be the signal.

Charles Meade -- Johnson RIce -- Analyst

That's helpful. Jack, I appreciate comments there and that's it for me.

Jack Harper -- President

Thank you.

Operator

Your next question comes from the line of Gail Nicholson with Stephens.

Gail Nicholson -- Stephens Inc.

Good morning. When you guys look at your current cycle time improvements that you achieved over the last 12 months, what do you think is the most impressive achievement?

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

Well, there's a lot of them and really I think you have to say that getting to where we are today is the aggregation of a lot of small gains as opposed to any one individual piece. So I'm a little challenged to pick one, other than just to say I think the teams are focused on the right things and are having good success at it.

Gail Nicholson -- Stephens Inc.

When you look at the potential incremental cycle time improvement, do you think that there is one area that there's more improvement that could be achieved?

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

No. I think probably one of the big challenges or focuses will be if activity in the basin does increase holding the game, holding the quality crews and rigs that we've got. And so that probably a big point of focus if you see some increased activity in the back half of the year.

Gail Nicholson -- Stephens Inc.

Okay, guys. Thank you.

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

Thank you.

Jack Harper -- President

Thanks.

Operator

Your next question comes from the line of Nitin Kumar with Wells Fargo.

Nitin Kumar -- Wells Fargo Securities

Good morning and thank you for taking my question. A lot of my questions have been asked already, but one topic that I guess hasn't been addressed is the cost, the LOE this quarter was quite low sequentially, I think you've deferred some workovers and maintenance activity. How should we think about LOE? I think your guidance for the rest of the year bakes that in, but how should we think about it in long-term, is the $4.50 or so number for LOE an achievable target in 2021 or should we stick with somewhere between $5 to $5.50?

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

Sure. Nitin, it will. We were at kind of $5.50 in the first quarter and rounded to $4.50 in the second quarter. And if you try to look and see what drove that pretty dramatic improvement. It's a combination of things including just kind of process improvement, some of these things we're doing around water, around power generation and getting off of generators and EFPs and other things we're doing on artificial lift. So those gains should be sustainable, and that's probably about half of the improvement. The other half as you referenced kind of came from an unnatural, basically stopping our workover program in conjunction with trying to manage through the curtailment period there in the second quarter. And so that's -- that piece is not sustainable. So, I think kind of half of that gain is and half is not if that helps you dial it in.

Nitin Kumar -- Wells Fargo Securities

That's very helpful. That's really it that I have. Thanks, guys.

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

Thank you.

Jack Harper -- President

Thank you.

Operator

Your next question comes from the line of Nicholas Pope with Seaport Global.

Nicholas Pope -- Seaport Global Securities LLC

Hey, guys. Can you hear me?

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

We can. Hey, Nick.

Jack Harper -- President

How are you doing?

Nicholas Pope -- Seaport Global Securities LLC

I had a question on the emissions and ESG slide that you provided, I'm just curious you kind of highlighted that brought flaring down to 1% on the year, and I'm -- I hope you could talk just real quick about kind of how you're -- how you've been achieving that reduction. I just wanted to know how much is based on kind of lower activity versus kind of capturing and processing the gas reinjecting the gas, where is the gas going? And I guess was being flared and how sustainable do you all think that 1% kind of number is and kind of pushing that lower because it's great, I mean, it's a great trend that you guys have been on with that emission side of things.

Will Giraud -- Executive Vice President and Chief Operating Officer

Nick, it's Will. I'm going to take a shot at that. That has been a major focal point in our company here for a couple of years and it really -- you got to give the operational team and especially the guys in the field a lot of credit for doing that. A big key is not having any flaring around new well hook ups. And so there has been great coordination with our midstream partners, making sure that we have the gas pipe there when you're ready to go on a production side.

And also frankly and getting down to the numbers, where in being unwilling to produce your oil unless you have that gas hook up. And so that has barrel impacts from a production standpoint, we as an organization have decided that's worth it to achieve the goals around flaring. The rest of it, what's left is really around the typical plant upsets and things that happen in the field on a daily basis. And you definitely had a more benign operating environment here in the second quarter. Just as activity was coming off generally.

Nicholas Pope -- Seaport Global Securities LLC

Got it. And do you think that's sustainable as activity in the basin. And is your own activity ramps back up do you think the numbers where you're at right now aren't sustainable longer term on that?

Will Giraud -- Executive Vice President and Chief Operating Officer

Our goal is to keep grinding it lower.

Nicholas Pope -- Seaport Global Securities LLC

Got it. OK, that's all I had. Thanks, guys. Thanks.

Operator

At this time, I would like to turn the call back over to management.

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

Okay, thank you for being interested in our company dialing in. I know this is the beginning of a busy earnings season. Once again, I'm very proud of the performance of the company in the second quarter and look forward to talking to you in the next quarter. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

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

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

Jack Harper -- President

Will Giraud -- Executive Vice President and Chief Operating Officer

John Freeman -- Raymond James

Brian Singer -- Goldman Sachs

Derrick Whitfield -- Stifel Nicolaus

Arun Jayaram -- JP Morgan Chase & Co -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Leo Mariani -- KeyBanc Capital Markets

Matthew Portillo -- Tudor Pickering Holt

Paul Y. Cheng -- Scotiabank

Doug Leggate -- Bank of America Merrill Lynch

Jeffrey Campbell -- Tuohy Brothers -- Analyst

David Heikkinen -- Heikkinen Energy -- Analyst

David Deckelbaum -- Cowen -- Analyst

Charles Meade -- Johnson RIce -- Analyst

Gail Nicholson -- Stephens Inc.

Nitin Kumar -- Wells Fargo Securities

Nicholas Pope -- Seaport Global Securities LLC

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