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Callon Petroleum (NYSE:CPE)
Q3 2020 Earnings Call
Nov 03, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to Callon Petroleum Company's third-quarter 2020 financial and operating results conference call. [Operator instructions] As a reminder, this call is being webcast and a replay of the call will be archived on the company's website for approximately one year. Please note, this event is being recorded. I would now like to turn the call over to Mark Brewer, director of investor relations for opening remarks.

Please go ahead, sir.

Mark Brewer -- Director of Investor Relations

Thank you, Gary. Good morning, everyone, and thank you for taking the time to join our conference call. With me this morning are Joe Gatto, president and chief executive officer; Jeff Balmer, our chief operating officer; and Jim Ulm, our chief financial officer. During our prepared remarks, we'll be referencing the earnings results presentation that we posted yesterday afternoon to our website, so I encourage everyone to download the presentation if you haven't already.

You can find the slides on our events and presentations page located within the investor relations section of our website at www.callon.com. Before we begin, I'd like to remind everyone to review our cautionary statements, disclaimers, and important disclosures included on Slide 2 and 3 of today's presentation. We will make some forward-looking statements during today's call that refer to estimates and plans. Actual results could differ materially due to the factors noted on these slides and in our periodic SEC filings.

We'll also refer to some non-GAAP financial measures today, which we believe help to facilitate comparisons across periods and with our peers. For any non-GAAP measures we reference, we provide a reconciliation to the nearest corresponding GAAP measure. You may find these reconciliations in the appendix to the presentation slides and in our earnings press release, both of which are available on the website. Following our prepared remarks, we will be opening the call for Q&A.

With that, I'd like to turn the call over to Joe Gatto.

Joe Gatto -- President and Chief Executive Officer

Thank you, Mark, and thanks, everyone, for taking time out today on this important Election Day. I'll start with Page 4 in the deck for those of you following along. We've put another strong quarter in the books and continue to deliver on our stated goals and plans that were developed in the midst of a changing landscape with outcomes exceeding expectations. Despite persistent challenges facing the industry, our team has persevered and set the bar higher with improvements across the board.

Development and operating costs continue to reap the benefit of our scaled development model, focused on larger projects. G&A remains at the front of the pack among our peer group and we continue to build free cash flow with approximately $100 million generated over the past two quarters, well ahead of expectations. Our recent monetizations and financing efforts have increased liquidity substantially and we remain focused on absolute debt reduction and efficient execution of our moderated capital development program as we enter 2021. We posted strong numbers across the board yesterday, exceeding street estimates in nearly every key category.

Production came in at 102,000 BOE per day, 63% oil, and drove quarterly EBITDA to approximately $171 million. Strong operational efficiency resulted in operational capital of just $38.4 million and lease operating expense of $45.9 million. Our adjusted cash G&A was $0.87 per BOE, with full cash G&A, which includes the cash portion of our capitalized G&A at just $1.59 per BOE. The result of this strong performance was $80 million of free cash flow for the quarter.

On the back of a consistent development philosophy, sustained well performance. Callon is poised to hit the upper half of our previous full-year production guidance, even after the impact of the non-operated asset sale and overriding [Inaudible] interest transaction. Equally as important, we have also lowered the upper end of our full-year 2020 capital guidance by $15 million, the second such reduction this year since announcing our adjusted capital program in May. Although 2020 has been quite different than what most of us expected at the outset, it has not deterred our team from achieving numerous milestones that are detailed on Page 5.

We've managed to integrate two organizations while implementing a large-scale development program across all three of our asset areas and also exceeding our synergy targets for capital costs and G&A well ahead of schedule. In addition, we have delivered improvements in our field operating cost structure as a result of the combined knowledge base from our two organizations in the applications of best practices from each. At the center of many of these accomplishments, our IT organization has facilitated the level of coordination required to execute at a high level over the last six months and supported the first completely remote accounting system conversion our vendors have ever completed. On the financial front, our recent asset monetizations and second lien note issuance significantly improved our liquidity and broadened the avenues to additional debt reduction.

To that end, we announced a private debt exchange transaction this morning that builds upon our momentum for absolute debt reduction and increases optionality for the future. Looking into 2021, a moderated development program characterized by lower reinvestment rates and repeatable, diversified activity across the portfolio provides the necessary foundation for achieving our financial goals. Lower decline rates, coupled with our life of field development philosophy, will enhance our ability to generate free cash flow while preserving our high-quality inventory. At the core of our business, we will continue to advance our broader emissions reduction initiatives, support our employees and our communities and further align ourselves with the needs of our shareholders.

In terms of our vision for a sustainable oil and gas company, I want to highlight some of the achievements featured in our inaugural sustainability report that greatly enhance transparency for our investors and other stakeholders. We've included a small sample of these achievements on Page 6. Many of these accomplishments have not only resulted in improved environmental emissions, but are also driving bottom-line results. Our focus on minimizing flaring which is down 30%, reduces our carbon footprint and increases revenues through additional hydrocarbon capture.

In addition, our well-established recycling program has resulted in lower capital costs for our Delaware development program and substantially reduced our water disposal volumes and associated costs. We are an employer of choice in the industry and our stringent safety standards have led to our best safety year on record with a total recordable incident rate well ahead of the industry benchmark. Our governance practices and the board diversity have continued to evolve and our board members set a strong example earlier this year by electing to reduce their own compensation alongside management as part of our cost reduction efforts. I encourage you to download a copy of our report to gain a better understanding of our achievements and evolving goals to ensure the sustainability of the Callon organization.

Moving to Page 7. Our operations organization has been quick to implement best practices, incorporate subsurface learnings, and drive efficiencies in our capital program. The summation of these efforts has been a significant uplift in our capital efficiency with rapid deployment of our model across all of our operating areas. Specifically, well costs are down anywhere from 14% to nearly 40%, and our most recent wells continue to show improvement in leading-edge costs.

Across the industry, we are witnessing a wave of consolidation with many pointing to lower G&A costs as a clear benefit. This category was just one of the primary synergies we highlighted for the market last year as part of our consolidation efforts, and I'm proud to say that we have significantly exceeded our target. As you can see on Page 8, we are on track to reduce our total cash G&A expense, which includes both our capitalized cash G&A and cash G&A expense to roughly $60 million from over $135 million. Our current cash G&A expense puts us among the lowest across a broad group of peers of various sizes and has been a significant contributing factor to free cash flow generation in this volatile environment.

At this point, I'm going to turn the call over to Jeff to discuss operations.

Jeff Balmer -- Chief Operating Officer

Great. Thank you very much, Joe. Let's move over to Slide 9, which has the field optimization, improving LOE as the title. The team has continued to execute on our field optimization efforts and the hard work that was under way in the second quarter really showed up with our third-quarter numbers.

Despite having higher workover activity during this period, we were able to bring total lease operating costs down to just $45.9 million. And while our VP of operations, Jamin McNeil, will tell you that there are 100 different levers to pull to create that type of outcome, the most prominent efforts and here, I'll describe them by asset, have been items like the electrification and sand management efforts in the Eagle Ford, ESP, which are electric submersible pumps, and beam pump management programs in Midland, and improved water management, gas treatment optimization, and compressor program efforts in the Delaware Basin. And then across the board, our continued efforts to manage our chemical treatment programs in-house has led to a much improved cost structure in all three assets. We've also begun to look at alternatives for backup options to reduce flaring and capture additional gas and NGL volumes in areas that have seen third-party disruptions in the past.

All of these efforts have the dual effect of lowering costs and capturing additional revenue, and in nearly every case, enhancing our sustainability efforts. Here on Slide 10, we've updated the performance for our nine-well Dunkin/Horton/Wright project. So this is in the Midland Basin, of course. The relative performance of these Wolfcamp A wells and our stellar Wolfcamp B, compared to the offsetting Wright pad from 2019, highlights how important the application of learnings has been to creating repeatable development results that maintain strong economics in this current price environment.

So for comparison, every one of the Wolfcamp A wells and the Wolfcamp B well in this new project exceeded 120,000 cumulative barrels of oil. So this is not BOE, it's barrels of oil in the first 120 days and the offset pad nearly twice as long to reach that same level of productivity. And I want to stress, this is not about poaching the best locations and just trying to put up big initial production figures like in IP24, which is just a 24-hour IP or an IP30, a 30-day IP, these are 120-day production graphs. Our team has worked very hard to ensure that through proper spacing and stacking, improved frack geometry, and significant subsurface analysis we're making better wells right next to all the previous projects that did not benefit so much from our improved technical capabilities.

More importantly, we're effectively recovering the resource in place by focusing on zones that require co-development and reducing the potential for overcapitalization of an area that results from cherry picking locations. So again, think about $4 million, $4.5 million for 1,000 barrels a day well, four months into its life. Moving to Slide 11. In the Delaware, our most recent project, the six-well Amphitheater development is off to a great start.

Again, this project has benefited from our site-specific spacing and stacking program. Early time production has been very strong, matching our two best developments, the RAG run and Wally World heads while still employing our managed pressure flowback technique. What I personally find the most impressive is the level of efficiency we achieved in drilling and completing these wells. At nearly 9,500 lateral feet on average, we completed roughly 1,800 feet per day after having our completion provider on the sidelines for three months.

The estimated average well cost was just $825 per lateral foot, a significant savings, compared to these two offset projects that are seen on the chart on Page 11. Notably, we achieved our highest level of recycled water usage to date with more than 95% of the water used or 2.5 million barrels for fracture stimulation coming from our own recycling program. That's all for operations this quarter. So I'm going to turn the conversation over to Jim.

Jim Ulm -- Chief Financial Officer

Thank you, Jeff. As Joe mentioned earlier, our recent financing and monetization activity coupled with yesterday's private exchange offer has provided a strong uplift to our planned financial initiatives. Slide 12 gives a brief overview of the important elements of those transactions. First, the non-operated asset sale closed yesterday and provided roughly $30 million in proceeds.

Associated production for September was roughly 1,700 BOE per day, with just under half of that amount coming from oil. Our overriding royalty interest transaction raised $140 million in gross proceeds. Recent production there was approximately 1,800 BOE per day and that was about 63% oil. Remind you that the burden of all post-production costs remain with the purchaser, our average net revenue interest across the portfolio after the transaction is still a robust 74%.

Finally, our secured second lien notes raised gross proceeds of $300 million, which has helped meaningfully reduce the balance on our revolver. We have already begun tapping into the remainder of that available basket with yesterday's exchange, where we entered into an agreement with certain holders to exchange $286 million of principal for senior notes at a weighted average exchange ratio of $555 per $1,000 of principal value. This results in a reduction of $128 million in net debt and also lowers our cash interest by $5 million annually. If fully executed up to $390 million, this could increase up to $175 million of debt reduction and $7 million of cash interest expense reduction.

This would still leave second lien capacity available for additional opportunistic exchanges, inclusive of the $100 million option granted to Kimmeridge. It is a meaningful step toward addressing our debt reduction efforts. Altogether, this series of transactions has boosted liquidity to over $615 million, but equally important, we've advanced our deleveraging initiatives by reducing our net debt outstanding by approximately $400 million and we have the ability to improve that significantly. Looking at Slide 13, we have provided an expanded version of our normal capitalization table to better illustrate the various positive impacts of these financing initiatives.

On October 1st, we announced the affirmed credit facility and the subsequent reduction as a result of our overriding royalty interest and non-operated asset sales along with the second lien notes, capacity, and issuance. With yesterday's exchange announcement and the closing of the non-operated asset sale, our credit facility balance has dropped below $1 billion, our senior notes outstanding can be reduced by over $550 million, and our liquidity and debt metrics both improved. Equally as important, our net debt and cash interest are lower and our 2023 and 2024 nearest maturity balances are seeing material reductions. We will continue to look at various opportunities to manage our maturities while still reducing our total debt position.

On Slide 14, we have continued to manage our hedge positions actively and were able to monetize some of our positions during the quarter, helping to offset minimal losses. At the same time, we have been adding incremental price protection for 2021, utilizing collars to protect against downside risk, while leaving plenty of opportunity to reap the benefit of improved commodity prices. We now have roughly 60% of our estimated 2021 oil volumes hedged. We were able to move some more of our positions into collars that provide roughly the same NYMEX WTI downside protection, but incremental upside in a rising commodity environment.

On the natural gas side of our hedge book, we've got a fairly even balance of collars and swaps covering roughly 60,000 MMBTU per day during 2021, with downside protection at around $2.60 in MMBTU and upside protection with our collar -- potential with our collars. We will continue to watch the market closely and be systematic about managing our positions and protecting our cash flow. On Slide 15, we have updated our full-year guidance to account for the various benefits of our improved operational efficiency and cost-cutting efforts that Joe and Jeff described earlier. We are raising the lower end of our annual production guidance range, despite the impact of our override and non-operated asset sales, which had a combined recent production rate of 3,500 BOE per day.

Additionally, we are lowering our range of operational capital by $15 million at the top end, which follows our significant reduction last period when we lowered the top end of the range by $75 million. Our full-year guidance range for LOE has improved by roughly $10 million with the range now set at $200 million to $215 million. Our GP&T guidance has increased as a result of our election to convert our previously temporary firm transportation agreement in the Eagle Ford to a longer-term arrangement. We also converted one of our term sale agreements from a wellhead sale to a pipeline point of delivery arrangement.

In both instances, we are seeing an uplift in pricing as previous deducts for transportation have been limited since we are now bearing the cost of transportation. As such, the accounting standards require us to disclose the previous deducts from revenue as transportation-related costs. That the net effect on EBITDA and cash flow is expected to be negligible. Finally, I want to point out that our 2021 operational capital expectations have been ranged at $375 million to $400 million, reflecting our growing confidence in achieving even greater levels of savings and efficiency.

Our final slide on 16 provides an independent assessment of free cash flow yields according to sell-side consensus estimates. In a sector where there seems to be a growing desire to create meaningful free cash flow yield, Callon sits at the front of the pack. We are well aware that some of our larger peers are planning to return cash to shareholders. But as we have repeatedly stated, our plan is to apply our free cash flow, alongside our monetization proceeds toward meaningful debt reduction until we have significantly lowered our total debt balance.

We have provided clear evidence that we are not only capable of generating free cash flow, but that we are actively pursuing all rational avenues to advance those deleveraging goals. At this point, I would like to turn the call back over to Joe.

Joe Gatto -- President and Chief Executive Officer

Thank you, Jim. Let me finish up by saying I'm extremely proud of our entire team and thank them for remaining focused and enduring an extended period away from our normal working environment. Many of us, and I'm sure many of you, our research analysts, investors, and partners have dealt with an extremely tough personal and work situation since March. There's just a few more months left in 2020 and I think we're all going to happily close the door on this year.

But I hope everyone is able to reflect on the positives that came out of our perseverance and put us in a position to draw upon that base of strength as Callon and an industry heading into 2021. With that, I'm going to turn it back to the operator.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Neal Dingmann with Truist. Please go ahead.

Neal Dingmann -- Truist Securities -- Analyst

Good morning. Hi, guys. Could you guys just talk about maybe your -- Joe, really for you or Jeff, just talk about cadence, specifically, the focus going forward. Will that continue to be diversified with the three plays? It seems like a number of your peers are targeting almost just primarily Midland basin these days.

I'm just wondering how you all -- you know you definitely have a nice success in Delaware as well. So I'm just wondering how you all look at it.

Joe Gatto -- President and Chief Executive Officer

Yeah. No, we -- the capital allocation that we've employed in 2020, you know, we'll see that roll forward in '21. We were fortunate to have three very strong areas that have touched on our return profiles, but importantly, have different cash conversion cycles and capital intensities to help us with our free cash flow goals. So you'll see a similar type of allocation across the areas going forward.

We still have to pin that down for '21 and going into '22, but you'll certainly see that.

Neal Dingmann -- Truist Securities -- Analyst

OK. And then just a follow-up. Just on the financial plans. You know, when you and Jim look at sort of where you're at now after doing the royalty and the other transaction.

I mean, are you -- think you're fine now for a while? Or are you always looking at sort of other deals like that as you finish the year and go into next year?

Joe Gatto -- President and Chief Executive Officer

Yeah. No, we've put some initiatives in place and I think in a lot of ways, Neal, pushing over that first domino and I think the -- have expanded our optionality. So we've made some good progress and we're going to continue to push ahead and deliver on our financial goals and put us in the right position for the long-term.

Neal Dingmann -- Truist Securities -- Analyst

Very good. Thanks, Joe.

Joe Gatto -- President and Chief Executive Officer

Yeah.

Operator

The next question is from Brad Heffern with RBC Capital Markets. Please go ahead.

Brad Heffern -- RBC Capital Markets -- Analyst

Hey, good morning, everyone. I appreciate the additional disclosure on '21. I'm curious with the WTI strip below $40. Is there a situation you can envision in which you would potentially let production decline rather than a maintenance program? Or I guess, put another way, if a maintenance program doesn't generate free cash flow, do you choose to maintain the production base? Or do you choose to modify it to generate free cash flow?

Joe Gatto -- President and Chief Executive Officer

Brad, I think the quick answer without getting into a lot of the details is, we've put a firm stake in the ground in terms of generating free cash flow generation. We did that in 2020, obviously, and pivoted in an environment that showed some weaker pricing. At the end of the day, I think 2020 is going to shake out to be $38, $39 on average for the year. So we've shown -- even in that environment, we've generated substantial free cash flow over the last two quarters now that did come with production below, where we obviously, set out the year and some production declines.

So again, we have to stay focused on our goals of free cash flow generation and not just focus on headline production.

Brad Heffern -- RBC Capital Markets -- Analyst

OK. Thanks a lot. And then, I guess on the asset sale front, obviously, you've gotten a lot over the finish line. The one thing that stands out is, not being done yet in the water sale.

So can you give an update on that process? And maybe if there's anything else that you want to call out on asset sales? Thanks.

Joe Gatto -- President and Chief Executive Officer

Yes, the water business has certainly been one that we've been working on for some time. Volatile environments make asset sales challenging at times and we don't want to force anything into the market. I'd say with the water business, we've said this before, after putting in some of these initiatives over the last few months and solidifying our financial position, that only helps us in terms of our discussions with potential partners around that business. As you know, we've been looking at more joint venture type projects.

So they have more clarity in terms of seeing our liquidity and financial position being approved that those water volumes are going to show up. So these latest initiatives only help the dialogue there and we hope to continue to push that and other initiatives that we've talked about forward. But I think the bottom line is with every passing day and our optionality just increases, especially getting some more of these other pieces to fall into place over the last month.

Brad Heffern -- RBC Capital Markets -- Analyst

OK. Appreciate the color. Thanks.

Operator

The next question is from Brian Downey with Citigroup. Please go ahead.

Brian Downey -- Citi -- Analyst

Good morning. Thanks for taking the questions. Jeff, clearly, great strides on the LOE front as you showed on Slide 9. If my math is correct, your full-year cost guidance range implies a slight sequential uptick in absolute LOE for the fourth quarter, closer to where you were in the first half.

But I'm curious how you see the potential go-forward LOE costs versus at $46 million absolute level in 3Q? Is that quarterly run rate something sustainable into 2021?

Jeff Balmer -- Chief Operating Officer

Yes. Overall, it looks pretty good. The season of 2020 was a little bit -- I wouldn't say a roller coaster, but certainly sinusoidal to some extent, and that we had chopped back some of the spend in the second quarter, got things up and running again in the third quarter and some items like that. But the overall -- on kind of a per BOE lifting cost for the year, that is always going to be our focus area and our challenge is that that bar will continue to come down.

So from a sustainability standpoint, yes, I do believe that that we've got our cost structure and efforts in place, both from a decreasing the costs and optimizing production.

Brian Downey -- Citi -- Analyst

Great. Appreciate it. And then Jim or Joe, our non-GAAP free cash flow was approximately $80 million in the quarter, but the cash capex did come above your accrued capex figure for 3Q. How do you anticipate is that something that may reverse in 4Q? Or how should we think about any material working capital changes on, either the investing or operating cash flow side for the fourth quarter?

Jim Ulm -- Chief Financial Officer

Yeah. This is Jim. I will tell you, just as we head into 4Q, we are continuing to experience kind of the normalization of working capital. We saw pretty significant pivot late second quarter, third quarter, and I would expect that to normalize through year-end '20 into 2021.

Brian Downey -- Citi -- Analyst

Thanks. I appreciate the color.

Operator

[Operator instructions] The next question is from Derrick Whitfield with Stifel. Please go ahead.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Hi, thanks and good morning, all.

Joe Gatto -- President and Chief Executive Officer

Hey, Derrick.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Perhaps for you, Joe, to start. Your team has navigated the environment about, as well as, any -- as you think about the current macro environment, is there an absolute net debt level or ratio that you're targeting? And what are your greatest non-price levers to achieve it?

Joe Gatto -- President and Chief Executive Officer

Sure. You know, Derrick, if you could turn back the page and think about where we were and what we've talked about post Carrizo transaction not too long ago. It hasn't even been a year since we closed the transaction, so we made a lot of progress. We talked about getting our leverage down in that 2 times range in the near-term, that is still very much our goal, which, you know, depending on what price assumptions you're using, will translate into a level of absolute debt reduction to go ahead with that or start to go along with that, so those are both very much on the table and pushing toward.

We have an extraordinary amount of leverage to oil prices as we've talked about, to move into '21. Jim talked about us opening up a little bit more upside optionality to take advantage of that and we'll continue to do that, but that's a significant lever. On the non-price side, you know, again, our thought has always been, let's have a lot of ways to be right in an uncertain environment, so we talked about the water business has been one of the primary ones to look at. We do have a couple of non-core properties in both the Delaware and Eagle Ford that we're pursuing, a more classic working interest type of sales that get a little bit challenged in a market like this.

But we've been patient in the past and waiting through this and just staying in touch with the key buyers out there. And when the time comes around transactions that not only bring in proceeds, but are going to deleverage our credit metrics. You know, we have a pretty good stable of those opportunities out there as well.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

And as my follow-up, if we were to think out to 2022, would Page 15 effectively be the playbook for 2022 as well? And would your maintenance capital largely be the same as 2021?

Joe Gatto -- President and Chief Executive Officer

You know, I think directionally, Derrick, that's a pretty good assumption in terms of how we're modeling out. You know, we're in the midst of looking at 2022 and balancing our objectives around free cash flow with staying true to our philosophy around developing the resource base in the right way, from a life of field standpoint and making sure we're not making near-term drilling decisions by high grading or compromising the resource for the long-term. But largely, given the strength of what we're seeing around this life of field development and our cost -- overall cost structure, I think, directionally, that's a pretty good estimate.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

And Joe, just one more, if I could, just to make sure I'm clear on the oil cut guidance for 2021. With the activity cadence for 4Q and as you're projecting out the 2021, you are expecting a 63% oil cut for 2021?

Joe Gatto -- President and Chief Executive Officer

That's right. Yeah.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Perfect. Thanks. That's very helpful, guys. Thanks -- thanks for your time.

Joe Gatto -- President and Chief Executive Officer

Thanks, Derrick.

Jeff Balmer -- Chief Operating Officer

Thanks, Derrick.

Operator

The next question is from Noel Parks with Coker & Palmer. Please go ahead.

Noel Parks -- Coker & Palmer Inc. -- Analyst

Good morning.

Joe Gatto -- President and Chief Executive Officer

Good morning.

Jeff Balmer -- Chief Operating Officer

Good morning.

Noel Parks -- Coker & Palmer Inc. -- Analyst

I had a couple of questions about the list of improvements that Jeff sort of ran down by area and I also heard that you did have higher workover activity this quarter. So I was curious if that was related to any of the initiatives in particular? And also, just a sense of it's a long list of changes you've made, just a sense of which -- could you give me a sense of which components still have the most runway for further cost and efficiency improvements, whether it's water infrastructure or the field items like compression? And versus which are -- have probably improved about as much as we're going to see at this point. I was interested that you talked about the chemical management program going in-house is something I haven't really heard much about before.

Jeff Balmer -- Chief Operating Officer

Sure. And I'll give you my best answer, then let me know if there are some other components that you'd like me to expand on. It's really a combination of a lot of small items and then also some more prominent ones. The ones that I mentioned, things like sand management, so we're using some different completion techniques.

We're lowering our water usage and still getting extremely good production. We're using slightly different sand mixtures. And so when we pull those wells back, the likelihood of having to go back into that same well and do a costly workover because of, either sand that lays down in the lateral or getting it out on surface, and destroying portions of the surface equipment, all that stuff gets decreased pretty substantially. When we look at items, like the submersible pumps that are downhole primarily in the Midland Basin and we're expanding that into the Delaware.

If you can continue to have terrific run times, which is just a matter of -- you put the pump in the hole and then it goes and happily runs without having you go in and pull it and change that out. We have submersible pumps now. Our standard is over an entire year before we have to go and do a change out. So those are all again improvements that we've made that are going to continue.

We still see some continued improvements across the board. That chemical program that you mentioned is really a wonderful derivative of the combination of the two groups, both the legacy Carrizo and Callon. And that by having an in-house chemist, we're able to leverage that expertise in a large different number of assets instead of just in the historic ones. And so what you're looking at, trying to look at reducing the amount of scale that happens in wells or the surface equipment or the generation of hydrogen sulfide or anything like that, we've seen millions of dollars of reduction that we have seen some and will see in the future with that continued chemical management program.

And so that we're about, I'd say, halfway through, three quarters of the way through of sharing best practices with lifting mechanisms, how we do drill-outs, the people development. So while we've managed to perform extremely well, in my opinion, there is still some runway. Some of it's a little aspirational in that -- we're still moving people around and leveraging their expertise in different areas. But also a portion of it is really just a commitment to continue to get better all the time.

And I'm not sure if that answered in enough specificity to your question, but I'll turn it back to see if there's anything else that you'd like to double check on.

Noel Parks -- Coker & Palmer Inc. -- Analyst

No, that was great, especially when you say that you're only at this point, only about halfway through showing your best practices at year end that's really encouraging. And, um, I guess the other thing -- just wondering on the financial side, just your thoughts about hedging from here on. You do have good solid production into next year and just wondering if you were thinking more about going further out the curve. You know, we are in a very mild contango for oil or if you we're thinking about still more downside protection into 2021? And also, if I could tack on, I'm wondering if you had any thoughts about the NGL market right now, especially, you know, where we are seasonally.

Jim Ulm -- Chief Financial Officer

Yeah. I guess, directionally, we talked today that -- that we're a little bit more than 60% on oil and roughly 60% on nat gas for 2021. We're trying to come up with a strong balance in the program between two-way collars and swaps, but really kind of give us greater price upside. The goal in the hedging clearly for '21 is to support the free cash flow generation that Joe talked about.

So we're on track with where we thought we were going to be in '21. We're starting to extend and look for opportunities that make sense into the first half of '22. And again, the goal there is to really make sure that we can support and have the free cash flow that we can use to pay down the RBL and other deleveraging initiatives. We're roughly a third of our NGLs hedged as well.

There's a pretty liquid market for ethane in 2021, so we are hedged there. That's another area we're really going to look at. And I think just in general, the last thing I would say, Noel, is we've diversified our pricing points. So we're looking very carefully at each one of those pricing points, looking for the right price and structure to just maximize cash flow.

So that's kind of as I look at it and think about it, our latest thinking heading into '21 and '22.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Joe Gatto for any closing remarks.

Joe Gatto -- President and Chief Executive Officer

Thanks, Gary. Just to wrap up. I want to thank everyone for joining us today. It's been a turbulent year, but I think we're really proud in terms of results we continue to put up, and hopefully, everyone sees that.

I guess we're going into a holiday season. So I wish everyone a safe and happy season going into year end. And the extent we don't talk to you, we'll look forward to updating early next year. Thanks, again.

Operator

[Operator signoff]

Duration: 41 minutes

Call participants:

Mark Brewer -- Director of Investor Relations

Joe Gatto -- President and Chief Executive Officer

Jeff Balmer -- Chief Operating Officer

Jim Ulm -- Chief Financial Officer

Neal Dingmann -- Truist Securities -- Analyst

Brad Heffern -- RBC Capital Markets -- Analyst

Brian Downey -- Citi -- Analyst

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Noel Parks -- Coker & Palmer Inc. -- Analyst

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