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Continental Resources Inc (NYSE:CLR)
Q3 2020 Earnings Call
Nov 6, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Continental Resources, Inc. Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference call over to Rory Sabino, Vice President of Investor Relations. Please go ahead.

Rory Sabino -- Vice President, Investor Relations

Good morning, everyone, and thank you for joining us today. Welcome to today's earnings call. We'll start today's call with remarks from Harold Hamm, Executive Chairman; Bill Berry, Chief Executive Officer; and Jack Stark, President and Chief Operating Officer. John Hart, Chief Financial Officer and other members of management will be available during Q&A. Today's call will contain forward-looking statements that address projections, assumptions and guidance. Actual results may differ materially from those contained in forward-looking statements. Please refer to the company's SEC filings for additional information concerning these statements and risks. In addition, Continental does not undertake any obligation to update forward-looking statements made on this call. Finally, on the call, we'll refer to certain non-GAAP financial measures. For a reconciliation of these measures to generally accepted accounting principles, please refer to the updated investor presentation that's been posted on the company's website at www.clr.com.

With that, I will turn the call over to Mr. Hamm. Harold?

Harold G. Hamm -- Executive Chairman

Yes. Thank you, Rory, and good morning, everyone. Under investment in the oil and gas industry has created a huge opportunity for today's investors. Crude oil and natural gas inventories have been and continue to be drawn down worldwide, yet remain higher-than-normal levels at this time. Industry consolidation within our sector will continue to drive capital discipline has additional supplies are not needed at this time. I believe the winners in our sector will produce low-cost operations and the most capital-efficient barrels to deliver significant and consistent free cash flow. We deliver on both of those, and that is why when you invest in commodities, Continental Resources should be your #1 choice. We are undervalued, and I believe we have the best value in our sector. We have industry-leading capital efficiency and lowest comp leadership among our peers. Our technological and operational expertise continues to drive these efficiencies. We have a large production base from our high-quality assets with dominant position in both the Bakken and Oklahoma. Our assets, the Fortive commodity optionality and gives us the capability of pivoting quickly and nimbly has demonstrated this quarter to take advantage of higher natural gas prices. And Jack and others will talk about that. We continue -- we proactively manage our business with a long-term view on generating shareholder value regardless of the price environment.

This will be the fifth consecutive year of positive free cash flow for our company. We have unmatched shareholder alignment. We are always delivering innovative entrepreneurship across all of our teams and all of our operations. We are responsibly fueling a better world through ESG's stewardship and our company's record best safety experience. We have a seasoned leadership team. Our sustainable free cash flow provides a direct path to further debt reduction and return of capital to shareholders. Despite recent volatility from demand concerns attributable to COVID, we remain optimistic in our ability to produce considerable, sustainable shareholder value well into the future. I also wanted to provide an update regarding American Gulf Coast Select. The AGS task force continues to make great progress on technical recommendations and best practices around standardizing a new U.S. Gulf Coast financial and fiscal market for crude oil. In the third quarter, we saw an important announcement from Magellan Midstream Partners, which allows for crude oil from third-party pipelines to access Magellan East Houston Terminal, a line for additional access to Gulf Coast refineries and international waterborne markets. This is a natural evolution for the Houston crude oil market, providing a transparency, reliability and liquidity required to be competitive in global oil markets, and there's more to come. Finally, I wanted to provide my thoughts on the current state of the election. The election process is not final, and we like you are waiting to see the results when all legal votes are counted. Energy jobs at Energy became the center of this election and motivated many voters in these swing states. I believe that had the Democrats position to eliminate oil and gas, they call fracking, have they been known at the commencement of early voting, the outcome would have swung further President Trump. I run it clear with Joe Biden who helped craft the card Administration's energy plan and a Fuel Use Act of 1977, which you also voted for.

If you'll remember, the Fuel Use Act mandated 100% coal usage for electricity generation. Even as the EIS predicted disastrous environmental damage and a prohibited use of clean burning natural gas at the same time, and some of you remember perhaps the asset range that was caused. The reality is natural gas usage has dramatically improved as U.S. CO2 levels over the last three decades have declined to the point where we achieved the 2030 Paris of core targets a decade early in 2020. Many energy supporting candidates did well in this selection, and we will have several champions back in the Senate and the house. Congressional district five in Oklahoma City was a prime example of energy voting and the importance of energy to local economies. I believe President Trump's support of Energy jobs and his focus on economic prosperity bolstered his orders. Americans care about the economy and the economic growth that will be powered by American Energy. No matter the final outcome, Continental is well positioned to be a leader in powering our nation's recovery. While we wait to see the final results of the Presidential Election, the Cenit will more than likely remain in the hands Republican leadership and the House Republican representation will be strengthened. This should serve as a backstop brand legislation that would be harmful for U.S. oil and gas producers.

I will now turn the call over to Bill Berry.

William B. Berry -- Chief Executive Officer

Thank you, Harold, and good morning, everyone. As I shared with you in my prepared remarks, I wanted to preface by saying by highlighting five main takeaways. We're seeing the best year ever for our HSC and ESG performance. We had a very strong third quarter, delivering $258 million of free cash flow. We are highly focused on free cash flow, debt reduction and continued shareholder capital returns. Currently, debt reduction is our first priority. We continue to maintain our low-cost leadership position, and our assets provide commodity optionality to position ourselves to benefit from relative movements in strip prices between oil and gas. So let me discuss these in a little more detail. Continental Resources is on track to deliver outstanding HSC and ESG performance in 2020. We're on pace to deliver our best year on safety performance ever in spite of significant industry and pandemic disruptions. This is attributable to the continued and exceptional efforts of our teams. Can't thank them enough for all their work and their outstanding performance in these areas. Our gas capture has continued to be a focused effort for us and currently is in excess of 99%, which is peer leading. We're on track to deliver our fifth consecutive year of positive free cash flow, a leadership position versus our peers. Our culture is defined by our low-cost operations. And in the third quarter, as you can see on slide four, we again delivered low-cost industry leadership. Our LOE per BOE was $3.19 for the quarter, below our annual guidance, even as we were producing for part of the quarter at curtailed rates.

This reflects the efficient nature of our assets and operations. Our cash G&A per BOE was also below annual initial guidance at $1.04. Based on these excellent results, we are lowering the upper range of guidance for LOE and cash G&A for the year to $3.50 to $3.75 and $1.10 to $1.30, respectively. We delivered lower capital expenditures in the third quarter versus the second quarter. As noted on slide six, third quarter capex was in line with our internal estimates, and we are well positioned to deliver full year annual capex trending at about $1.2 billion guidance level. We restored all previously deferred oil production that was curtailed during the second quarter. Our team did an exceptional job turning all wells back online. Our 57% oil cut in the third quarter is above the guidance we provided to you last quarter, suggesting it would be closer to 56%, reflecting the return of our oil wells. Third quarter oil and total production figures both see the consensus estimates. We're on track to deliver our full year 2020 production guidance of 155,000 to 165,000 barrels of oil per day and 800 million to 820 million cubic feet per day. We have also updated and tightened our December exit rate production to between 315,000 and 325,000 BOE per day. This sets us up nicely for improvements in both production and free cash flow in the second half of 2020, underscoring the strength of our assets and operations. For 2021, we're projecting a 65% to 75% of cash flows from operations reinvestment rate. Our sustainable shareholder value return continues with our ability to maximize free cash flow to pay down debt. This will be driven by capital efficiency, capital discipline, low-cost leadership and the commodity optionality afforded to us by our oil and gas assets. Based on this, we wanted to share with you some projections on free cash flow, capex and debt targets, which you'll find on slide seven.

We know you may have questions regarding the specific inputs of 2021, including rig counts, well counts, etc, as we are still in the process of finalizing our operational detail, we will provide that level of information and more at the usual time early next year. As part of this, we are projecting $1.2 billion to $1.3 billion in capex in 2021. We're projecting a low single-digit production growth forecast year-over-year for 2021 with a cash flow breakeven of $32 WTI. We've talked about moderating growth for the past couple of years, and we have consistently stated it is imprudent to overproduce into an oversupplied market. And this is even more important today. The cornerstone of our 2021 plan is maximizing free cash flow to pay down debt. This has been a consistent message for us for several years, and we have -- as we have been free cash flow positive since 2016. We expect to deliver significant organic free cash flow and are projecting approximately $400 million at $40 WTI and $650 million at $45 WTI, with free cash flow yield ranging from 8% to 14%. We believe this will be top-tier performance in the industry. Our main priority in 2021 will be debt pay down, we believe we will be reaching $5 billion or below of total debt by year-end 2021. This would equate to approximately 2 times total debt-to-EBITDA at $45 oil. While our near-term goal is focused on approaching $4 billion or below by year-end 2022 or 2023, depending on commodity prices, we are ultimately projecting total debt of $2 billion to $3 billion. We believe this is to be part of a strong program of capital returns to shareholders.

I will remind investors that while our dividend has been suspended but not terminated, both our shareholders and our Board are very important of bringing the dividend back at the appropriate time after our debt is reduced. We also wanted to highlight that our assets provide optionality to capitalize on increasing gas prices in 2021. And we already have this benefit. We have a deep, rich set of both oil and gas inventory across the Bakken and Oklahoma that allows us to be nimble and responsive to changes in commodity price fundamentals. Not only can we shift capital between the Bakken and Oklahoma, but within Oklahoma, we can ship between oil or gassier projects. This provides an inherent advantage to Continental, and we are already capturing this with hedges on the strengthened gas curve next year. We expect to capitalize on increasing gas prices in 2021, while deferring some of our strong oil projects for higher price opportunities until the back half of 2021. As shown on slide 11, we saw this optionality in May and shifted our Oklahoma drilling rigs to gas. We currently have 202 million cubic feet per day hedged in 2021 with 2/3 representing collars with a weighted average floor of about $2.67 and a weighted average ceiling price of $3.44. Our Oklahoma gas wells can deliver over 50% rate of return at $3 Henry Hub, thanks to our low-cost operations. We also have direct access to multiple premium markets from these Oklahoma assets. We have the inventory, teams and the capabilities without transport bottlenecks to easily pursue either commodity as price fundamentals warrant. Finally, I did want to highlight the latest update regarding a potential accelerator for debt pay down, which is a partial monetization of our water infrastructure assets. With strategic water infrastructure cost in Bakken and Oklahoma, we believe our unique water opportunity is a differentiator. We have executed a nonbinding term sheet with 6th Street, a $47 billion global investment firm with a lot of experience in energy and infrastructure partnerships, on this opportunity for a significant noncontrolling interest in our water infrastructure assets. Proceeds of this pending transaction will be earmarked for accelerated debt reduction. We are currently working with 6th Street regarding definitive documents and are targeting consummation of the transaction later this year or early 2021.

This debt reduction accelerator will be in addition to the organic debt reduction schedule I outlined earlier in my comments. And is not reflected in any of our slides. We have an extremely talented and dedicated team at Continental, and they are absolutely confident in our ability to maximize cash flow, deliver low-cost operations and generate sustainable shareholder value. Our teams will continue operating from the position of strength, and we commend their ingenuity, discipline and expertise. The cornerstone of our 2021 plan is maximizing free cash flow, driven by capital discipline, a peer-leading cost profile and commodity optionality afforded by our assets. The output of this program is impressive and is underscored by strong free cash flow generation.

I'd now like to turn the call over to Jack.

Jack H. Stark -- President and Chief Operating Officer

Thanks, Bill, and good morning, everyone. I want to start out by thanking our employees for their hard work and dedication that has established Continental as a low-cost leader among our oil-weighted peers. Innovations from our employees continue to be implemented every day to lower costs and increase capital efficiencies across all aspects of our business while keeping safety job one. As Bill said, all wells are back on production. This includes 21 SCOOP and 42 Bakken wells that were turned to production during the third quarter. These third quarter wells are producing in line with expectations, and I'll point out that 77% of the production from the new wells in SCOOP was oil. We have completed 52 wells in Oklahoma this year through the third quarter, primarily targeting the oil and condensate windows at SCOOP. Approximately 90% of these wells are Woodford producers in SpringBoard I as we move from the Springer to the Woodford reservoir in Phase two of our road development. All totaled, we have completed 78 Woodford producers and SpringBoard I. And as the chart on slide nine illustrates the average Woodford well performance is tracking right on top of the type curve we published one year ago. This highlights how well our teams know their assets in Oklahoma and reinforces the fact that we deliver what we say.

The second chart on slide nine shows that we are seeing improved performance on a unit basis compared to legacy units due to continued improvements in completion design. Combined with the 24% decrease in completed well costs achieved over the last two years, capital efficiencies from our Oklahoma operations have never been better. Currently, SpringBoard I is approximately 50% developed. We recently closed a very strategic acquisition in SCOOP that added approximately 19,500 net acres and up to 185 high-quality wells to our inventory that are oil-weighted and have demonstrated returns of 35% to 50% at current strip prices. This is a great example of the strategic bolt-on acquisitions we target in our core operating areas. Most of these properties are located in the SpringBoard III area, where we are targeting multilayered reservoirs, including the Woodford, Sycamore and Springer reservoirs that are all proven. Continental currently controls approximately 33,000 net acres in SpringBoard III, covering an area approximately 76 square miles in size, and approximately 80% of of the acreage as HBP. We estimate that up to 260 operated wells could be drilled in the Sycamore and Woodford reservoirs alone at an average working interest of 70%. Production in this area is oil weighted, and the performance of the wells competes head-to-head with our SpringBoard I and II areas. For perspective, the charts on slide 10 shows the impressive performance we've seen from four recently completed Woodford and Sycamore delineation wells in our SpringBoard III and IV areas. These charts include two Woodford and two Sycamore producers and 60% to 70% of the production is oil. Names and locations have been withheld for competitive reasons, which you can see, these are outstanding producers. Current EURs for these wells range from about 1.5 million to 2.5 million BOE per well. As we've seen in SpringBoard I, our capital efficiencies will benefit greatly from the economy of scale as we develop these projects.

A strength for our growing Oklahoma assets is that they provide great optionality to both oil and gas. As shown on slide 11, approximately 70% of our rigs were focused on oil-weighted assets in 2019. In the second quarter of 2020, we strategically shifted our rigs to more gas weighted assets in anticipation of the run-up in natural gas prices as supply is predictably waned. Gas prices have almost doubled since making that decision. And over the last few weeks, we have turned 20 new wells to production that combined are producing approximately 175 million cubic feet of gas per day and 10,700 barrels of oil per day on flowback. These rates are still climbing, and we expect rates in excess of 250 million cubic feet of gas per day as the wells continue to clean up. These prolific gas-producing wells are benefiting from today's strong gas prices and are expected to deliver 50% rates of return at $3 gas. Given the current market dynamics, we anticipate natural gas prices will continue to strengthen in 2021 and '22, and we plan to keep our Oklahoma rigs focused on gas weighted wells for the near future. Operationally, slide eight shows that efficiencies have driven our completed well costs in the Bakken and Oklahoma down 14%, 24%, respectively, since 2018. The majority of the cost savings have occurred this year and 70% to 80% of these cost reductions are structural in nature. Big news for the quarter is that our Bakken drilling costs were up below $2 million for the first time. This is 20% below our average cost in 2019 and is driven by the structural changes in techniques and design that shaped another 3.4 days off of our drill times. Today, our routine spread to TD is 11 days, and we believe we're on track to achieve a $6.9 million total completed well cost in the near future. This is an all-in cost, including coal facilities and artificial lift. In Oklahoma, we are targeting similar results with an all-in well cost of $8.9 million.

Looking ahead, we plan to continue drilling with two rigs in the Bakken and three rigs in Oklahoma through year-end. Bakken completions will resume with one Stem crew in late member and two additional crews by early December. Companywide, we expect up to 46 gross operated wells will be turn to production by year-end, all of which have been stimulated and are being prepared to flow. At year-end, we expect to have approximately 140 DUCs and 145 wells in progress. With that, we are ready to begin the Q&A section of our call, and I will turn the call back over to the operator.

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from Doug Leggate of Bank of America.

John Abbott -- Bank of America -- Analyst

This is John Abbott on for Doug Leggate. Our first question is on the corporate breakeven. And if we went back to your commentary during the second quarter, you seem the cash flow breakeven was in the upper 30s to low 40s. But if when we look at your slide number seven, where you suggest that you can generate $200 million of free cash flow of $35 million. It seems that your breakeven has fallen, let's say, maybe to $32 million. Could you explain sort of the change during -- between the second quarter and the third quarter? And is the lower sustainable breakeven sustainable on a multiyear basis?

William B. Berry -- Chief Executive Officer

Mean the breakeven is a factor of the capital you choose to invest, we have a very low maintenance cost relative to peers. We have exceptionally well-performing assets. We're benefiting from higher gas prices as well on that portion of the stream, so we are. So as we look to '21, we'll come out with formal guidance on that in February. We've given you some indicators now. Yes, we do see the breakeven at roughly $32 next year. I don't think that's too dissimilar from where we were before. We were indicating kind of in the mid-30s, but it depends on the capital program at any given time and where you're putting those assets and the productivity. Additionally, as you've seen, we've had substantial improvement in well cost, and we're projecting, obviously, to continue seeing more, as Jack alluded to earlier. So I think we're extremely well positioned, not only for next year but for the balance of this year. We've got a proven track history. $258 million of free cash flow in the third quarter is just an appetizer.

John Abbott -- Bank of America -- Analyst

And then for our follow-up question, recognizing that you may be limited in what you can say given that you just entered a nonbinding agreement. Do you still believe in the $1 billion value for -- over $1 billion value for the water business? And if you were to sell a portion of that, how much might you sell? And how do you -- how should we think about the impact to maybe OpEx or to your well costs from a partial sale?

William B. Berry -- Chief Executive Officer

Yes. We're not -- for obvious reasons, we're not able to get into the specificity of the agreement right now. We're in the process of definitive documentation. And so that will be rolling out toward the end of the year or first of next year. What I can say is that when you looked at the valuations in the past, those valuations that we had described, were predicated on $55 mid-cycle oil prices and associated drilling programs. So obviously, that's been attenuated somewhat. Anticipation is that they'll grow back at that point in time -- at some point in time, we'll be actually back at that kind of mid-cycle pricing and mid-cycle drilling activity. So -- but right now, we're not able to share with you any of the details of the contract for obvious reasons.

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

On the operating cost impact that you asked about, we've talked about that in previous quarters. So two points on that: You won't notice. It's within our guidance ranges. And the second part of that is it means it's very low. It's low single-digit pennies per BOE. So it's not a dramatic impact. The proceeds, you'll notice because they're going to go directly to debt, and that's going to be a significant and extremely beneficial impact.

Operator

The next question comes from Derrick Whitfield of Stifel.

Derrick Whitfield -- Stifel -- Analyst

Well, probably starting with just kind of the strategy pivot or slight strategy pivot into gas. Cash flow optimization is certainly a great business if you can hedge it as you are. The biggest concern I've heard from investors is that oil could materially decline in your 2021 outlook. As I read and listen to your comments, it certainly projects a more balanced tone with the continued activity in the Bakken and a potential return to oil-weighted activity in Oklahoma in the second half. That to us implies a modestly -- flat-to-modestly down oil profile. Is that a fair read?

William B. Berry -- Chief Executive Officer

Yes. We're really not giving oil or gas-specific guidance at this point in time. For the main reason is that, as you described, the gas the fundamentals are a lot stronger. So all the fundamentals are not what we think they will. Ultimately, we've had a significant oil inventory that we we'll bring back home when the fundamentals start strengthening. And so if that strengthening happens in the beginning of the year, we'll shift to oil. If it starts happening later in the year, we'll begin. The gas is still strong. We shift to gas. And so the focus you're seeing there is really cash flow focused. And I think you can see that described by what Jack was highlighting. We're bringing on equivalent of about over 30,000 BOEs of gas. We intentionally did that by moving rigs from oil to gas. So we could have kept drilling oil, but from a cash flow optimization, from a capital efficiency that makes no sense to do that. And so what you'll see, that optionality is what we're talking about is really, really important to this company and the differentiation of this company because with that optionality, we can go drill gas wells or we can drill oil wells, depending on what the strip is showing us. And using a hedge to be able to make sure we're assured of getting those prices.

Derrick Whitfield -- Stifel -- Analyst

Great. And as my follow-up, I wanted to focus on basis fundamentals for Oklahoma. In addition to a strengthening Henry Hub price, is it also reasonable to expect tighter dips in light of recent pipeline additions and the declining associated gas profile?

William B. Berry -- Chief Executive Officer

Yes. I think -- of course, you saw the netback prices improving from Q2 to Q3 from $0.12 to $0.98, and that was as an expectation, we'll continue to see that type of strengthening. Erin Chang, who is Vice President of our marketing and might have comment also on the dips in particular.

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Yes. Derrick, I think for the reasons that you mentioned, we would expect stronger differentials as we continue throughout the end of this year and into next as production in Oklahoma continues to decline. We're probably 80% to 85% statewide off of the peak in 2019. And we were a benefactor of the new pipeline coming in service earlier this year as well. So that continued lengthen capacity relative to supply is going to continue to remain structural for differentials.

Operator

The next question comes from Brad Heffern of RBC Capital Markets.

Brad Heffern -- RBC Capital Markets -- Analyst

Just as another follow-on question on the water business. Obviously, I don't want to pin you down on it too much. But can you verify that the sort of debt targets and walk that you give on slide seven do not include the potential water sale?

William B. Berry -- Chief Executive Officer

Yes. Thanks for bringing that up, Brad. And I'll put it in the script, but I also wanted to -- I appreciate you asking the question because I do want to highlight that, that none of those slides, none of those projections of debt have included any of the contribution of Waterco assets being focused on reducing the debt level. We will, as I stated, we've earmarked those for reducing the debt. What you're seeing in that schedule that we've highlighted where we're going down to $4 billion of total debt and then going below that, it's all from our organic activities. None of that is from any type of dependency on the Waterco. And this will be an accelerator. So the proceeds we received from WaterCo will reduce that even further at a more rapid pace than weather on those slides.

Brad Heffern -- RBC Capital Markets -- Analyst

Okay. And then on the Bakken, it's been a little bit more than a year since you guys gave those very wide step out results. I was wondering if you could just give an update on whether you pursue more step out since then? And maybe just broader commentary on how you see the core inventory in the Bakken shaking out at this point?

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Yes. You bet. We are and have completed some wells that are step-outs further to the south, following up to our previous successes. And so we'll have some of those results to talk about here in the fourth quarter.

Harold G. Hamm -- Executive Chairman

[Indecipherable] It's safe to say, though, that basically, what we initially saw or step-outs has basically proven out across volume.

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Yes. That's a good point, Harold. We are -- I guess the main point of your question here is, are we still pleased with the results we're seeing as these step outs? And yes, we definitely are. And we see that as just continuing to be a growing part of our portfolio.

Operator

The next question comes from Neal Dingmann of Truist Securities.

Nate Sanson -- Truist Securities -- Analyst

This is Nate Sanson on for Neil. So my first question is with regards to your latest SCOOP acquisition. So it looks like the acquisition might be quite far south in the place. I'm wondering if you could just discuss your thoughts on that part of the SCOOP versus more central or northern areas of the place.

William B. Berry -- Chief Executive Officer

Well, yes, it's -- you're correct in the sense, it's a little bit further south. But what you're seeing down in this area is we're seeing more, I guess, I would say, more oil-weighted -- oil-weighted performance from the wells down in this area. I think those two or four wells that we showed you there are a great example of the type of performance we're seeing. And as you get down south, we're seeing that we have multiple reservoirs plus multiple zones within those reservoirs that we are targeting. In the Sycamore, we have a couple of targets in there that we have. And also in the Woodford, it gets -- we also see the Woodford thickening in this area and have two targets in there. So we do have multiple reservoirs with multiple targets within them. And of course, we also see the Springer being a component in this area as well. So it is an oil-rich, very I guess, I'd say it's an area that we're pleased with, and we're going to continue to build our position there.

Nate Sanson -- Truist Securities -- Analyst

Great. That's super helpful. And for the follow-up. I'm just hoping you completed your thoughts on the latest Dakota access development. So it seems like there was some incrementally negative press surrounding the oral retook place in the DC Corp. or appeals earlier this week. So I'm just wondering if your thoughts around the eventual outcome of that have changed at all?

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Unfortunately, I think you broke up just a little bit. Would you mind repeating it, Nate?

Nate Sanson -- Truist Securities -- Analyst

Yes, no problem. No problem. So I was just wondering if you could provide your additional thoughts on the latest Dakota access developments. It seems like there was negative press that came out surrounding the world arguments on the DC court of appeals early this week. So just wondering if your thoughts have changed at all on that?

William B. Berry -- Chief Executive Officer

Yes. On I think, hopefully, you would have seen a transfer's comments yesterday. And they came out feeling very strong that the legal case is still appropriate. They've got a strong case. And our position is a real will prevail and that they do not expect that DAPL will be shut down.

Operator

The next question comes from Arun Jayaram of JPMorgan.

Arun Jayaram -- JPMorgan -- Analyst

I was wondering if you could shed a bit more light on what looks to be a pretty dynamic capital allocation program as we think about next year. And I know it's early, you haven't given us your official guide. I'm just trying to think about as we look to model next year, how -- today, you're thinking about kind of capital allocation between the North and the south. And where the -- where some of the capital that you're using on some of the gas opportunities, where is that being allocated from?

William B. Berry -- Chief Executive Officer

So if you look at the capital program we've got going on right now, it's -- we've got three rigs in the south and two in the north. And so there's a possibility we may continue with that. That's about the same rig pace we'll be utilizing in 2021. Again, we may move some things around, depending on what the commodity prices are doing. But we've been real pleased with our movement in May. And then as you -- everyone will call, I'm sure the gas prices were in the $1.60 range or so at that point in time. And then we ended up moving a lot of rigs into the gas area to start accessing the -- what we thought was going to be a stronger fundamentals on gas that's proven out. Offtake for gas, as Aron Jane mentioned earlier in Oklahoma is real strong, we've got flexibility and access to good markets. So I know that's not a lot of specificity with what you're really wanting to understand as far as modeling, whether we're going to be drilling in the north or the south. But you could almost, in your models, look at what your perspective is for the stronger commodity price. And that's where we're going to be drilling.

Arun Jayaram -- JPMorgan -- Analyst

Got it. Got it. And maybe one for John Hart. We understand that you are negotiating here and maybe not wanting to provide too many details with 6th Street here. But what are some of the broader objectives, clearly, debt reduction is something that you're thinking about. What are some of the pushes and pulls as we think about you getting to the finish line and agreement there?

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Well, it is a situation where we can't disclose any more than we have. We'll -- we did give some indications of timing on that. So we're looking to the future of having something in the not-too-distant future to announce on that more. I think there are a lot of factors. These are assets that are critical to our ongoing operations and growth within the basins we're at. There are assets that we can grow substantially in the value of that. And so they are very important assets. Partnering with someone in financial capacity. Those proceeds will be earmarked toward the immediate near-term debt reduction and acceleration of that as compared to what we've got modeled in the strip, but we need to get across that finish line first. Once we achieve that, we'll come out with more information for you at that time.

William B. Berry -- Chief Executive Officer

So Arun, we intentionally put all the slides together that showed the cash flow show debt reduction without taking any credit for any type of WaterCo transaction because, as you know, on any of these things, there's always possibility going to work out, and we want to make sure that there's path to the debt targets that we have in front of us. And that's why those slides are the important one. And as John just mentioned, this will be an acceleration. I'll just move it more money into that and bring those debt targets ahead on our schedule.

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Our cash flow generation and our debt reduction without doing anything on WaterCo are extremely impressive numbers. This is the fifth consecutive year that we've generated free cash flow. We've given you indications of about 2021. Obviously, the cash flow yield on that is dramatic at the top end of peer group. I mean, it competes across industries. And with -- in being able to do something with WaterCo only accelerates and amplifies that. So we're very well positioned. Again, $258 million of free cash flow in the midst of the ongoing pandemic here in the third quarter. I think that's very impressive. A lot of companies have hopes and aspirations. We have reality, low-cost and strong generation capacity with a deep inventory.

Arun Jayaram -- JPMorgan -- Analyst

And that next year free cash flow guide is at $400 million at $40 million, is that right?

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Yes. We gave you some ranges on that, $400 million at $40 million, $650 million at $45 million, $200 million at $35 million, a breakeven of $32 million. We also did something we haven't done before. And we gave you a reinvestment range of 65% to 75%. So I think we've given you a lot of variables there. What we hope you glean from it is just what our capacity is and our ability. Our job is to generate regardless of commodity price. And we've got a proven history of being able to do that.

Rory Sabino -- Vice President, Investor Relations

You can see some of the details and these figures that John provided on slide seven of the deck as well.

Arun Jayaram -- JPMorgan -- Analyst

[Indecipherable]

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Slide seven certainly want to focus on Slide 4, comparing to a broader group. slide five, the capital efficiency and cost leadership relative and then slide seven, there's a lot in there to get your hands around. And it's all third-party data that's very high. It's very strong.

Operator

The next question comes from Brian Singer of Goldman Sachs.

Brian Singer -- Goldman Sachs -- Analyst

I wanted to ask on the production trajectory because there's, I think, a lot of moving pieces that you've kind of talked to in your press release. It seems like there's a big step-up coming here in the fourth quarter with the strong volumes that you're highlighting on the natural gas side in Oklahoma. And then you also talk about mid-single digit -- low to -- low side low single-digit production growth on a year-on-year average basis in 2021. That would appear to imply a declining trajectory on a BOE a day basis over the course of next year. But I wondered if you could just kind of comment on how you see that production trajectory for both oil and natural gas sequentially over the next few quarters?

William B. Berry -- Chief Executive Officer

We'll come out with a lot more on '21 in February. We did give you indications that we're projecting low single-digit growth next year-over-year, exit to exit, we'll come out with that in February. I'm not particularly worried about a decline or anything of that nature or significant one is I think you said. You do see variability between quarter-to-quarter, just depending on the timing of when different projects are coming on. And obviously, we focus on very sizable projects of scale, and you can bring on a lot of volume in any given period of time. So there's normal fluctuation in there. I think we feel good about '21, particularly the cash flow generation and the depth and quality of inventory that underlies that in an oil, gas and condensate nature to where we can optimize cash flows depending on whatever the particular market is. So I think we're set up well for '21.

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Yes. The other point on the -- the $250 million that Jack talked about that we're bringing on. We're ramping into that. So it's not an instant pan is $250 million to go into your calculus there.

Brian Singer -- Goldman Sachs -- Analyst

Great. And then my follow-up is on the inventory -- on the inventory side. Can you just talk about developments in the Bakken in particular since that sometimes is not necessarily as talked about that in terms of enhancing inventory, either within the core or pushing out beyond the core of the core?

William B. Berry -- Chief Executive Officer

Yes. Thanks, Brian. As we talked about before, we do have some tests going on that are basically confirmation is outside -- down south and the extension areas. And we are pleased with the initial results we're seeing there. But from an inventory standpoint, maybe we just step back and take a look at it. Just if you look at our inventory as a company and it's capable of growing our production at a 5% to 6% combined annual growth rate for the next 10 years. And the inventory that we've got scheduled to achieve this growth over the first five years, represents about 1/3 of our inventory corporately and delivers a 30% to 50% rate of return at $40 and $50 WTI, respectively. So in oil cut over these five years right now, it seems like you could say the average around 55%. So -- and this is something, I think, really should be pointed out is that this is a well-defined inventory, with proven reservoirs with demonstrated well density, and it's not assumed. There's -- this is our assets. We know our assets well, as you saw from -- just say, the results in our SpringBoard I area. I mean, a year ago, we predicted and anticipated the performance of the Woodford wells, and you could see how there's great follow through there. So point there is that we really understand our assets, and we're not estimating that we have x density or x number of reservoirs that will produce, we know these reservoirs. And that is really key and probably a differentiator in a lot of ways of our inventory from others in the fact that it is very well known. And that's why our performance year-over-year and quarter-over-quarter from our assets, is very, very repeatable, so -- and predictable in our production performance guidance in also and obviously, in our cash flow. So anyways, I just think that, that maybe gives you a better, broader perspective of our inventory.

And in Oklahoma, I have to say, we added on this nice bolt-on acquisition. We told -- we've always said in the -- in times like these, we find that this is an opportune time for us to grow, and we'd like to do it through bolt-ons. And obviously, we've done that here this quarter. We also added some smaller bolt-on earlier this year in -- over and above this acquisition we mentioned here of 19,500. We've actually -- in Oklahoma put almost that much more acreage, basically double that, adding -- by adding almost another 20,000 acres in Oklahoma this year, doing it really pretty much under the radar, but getting it in core areas of our operations. And so I really think that this is just know that we're continuing to build our inventory in our core areas, and we see that as just the opportunities that are always show themselves in times like these. So we're really pleased with where our inventory is and where it's going. And -- so I'll leave it at that. Thanks.

Operator

The next question comes from Joseph McKay of Wells Fargo.

Joseph McKay -- Wells Fargo -- Analyst

This is Joe on for Nitin. I know we got some thoughts around the election in the opening remarks, but could you just give a little more detail around how you're thinking about the outlook for the regulatory environment moving forward, given what we know right now?

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Yes. That's the way that NIM sometime occupy during the last administration Obama's metricon, we suffered death by 1,000 cuts. We were able to survive it fight them off with the legislation and hold them off the best we can. And thank goodness, it looks like we're going to control the Senate. Add to the house representation. So that's the game we'd be playing again to hold them at Bay. So we'll have a work cut out if it goes on way. And but we're used to plan that game and that it'll be up to us again to do that again. The good thing about is, like I talked about earlier, I think everybody, very strong support turned out because of the fact that the Democrats want to end oil and gas. Nobody want to do that if I realizes this is very, very important. Continental is lucky. We have very low federal exposure, less than 7% or something close to that. And so we're not going to be fighting the game, not a problem like other people might be. But anyway, that, that's where. So good question. Thank you.

Joseph McKay -- Wells Fargo -- Analyst

Got it. And then you guys -- you mentioned the more constructive outlook for the natural gas market. Can you just provide some quick thoughts around how you see NGL -- yes, NGLs?

William B. Berry -- Chief Executive Officer

Is the question was how do we see NGLs, was that the question?

Joseph McKay -- Wells Fargo -- Analyst

Yes.

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Yes. This is Aaron Chang. I think similar to the crude oil appreciation that we've seen from the second quarter, we've seen that same appreciation in our NGL pricing and realizations as we move into the third quarter, and we'd expect it to continue to increase. Through the end of the year and into 2021.

Harold G. Hamm -- Executive Chairman

We're about 1/3 NGLs with our gas brand in Oklahoma, is that correct? It's --

William B. Berry -- Chief Executive Officer

Our acreage position in Oklahoma is about 1/3 condensate, 1/3 dry gas. And 1/3 to a full year. That condensate is a very rich condensate. So the NGL uplift on that can be very significant to our cash flows. And obviously, the returns and etc. So we got a very valuable inventory position, and we've got a lot of good commodity optionalities we talked about on the call.

Operator

The next question comes from Jeanine Wai of Barclays.

Jeanine Wai -- Barclays -- Analyst

This is Jeanine Wai. So my question is really just on slide 10, and we saw the disclosure on SpringBoard III and SpringBoard IV. And we are wondering maybe if you could talk a little more broadly about any quality differences between SpringBoard I and then the subsequent SpringBoards. In terms of oil cut and consistency, it looks like the well results that you provided on slide 10 are very oily, but we know that it's just a limited subset.

William B. Berry -- Chief Executive Officer

Right. Well, I think what you can see there is the type curve we've got on slide 10 comes directly from SpringBoard I. And you can see these wells are performing right in line, actually, of outperforming that curve and so as far as any differences and contrast between the 2? I mean, we're actually seeing this area right now. And these are delineation wells, that type -- the dash line there, the 1.5, that's a unit curve. So you'd expect these wells maybe to produce a bit more, but these are really outperforming that unit type curve by a significant margin. So we're very pleased with the results, and I think it has to do with reservoir quality in this area. And so -- but all of these areas are just, I mean, a very good performing areas. We have no concerns at all. And in fact, we're very pleased with this and pleased that combined. We've managed to put together about 40,000 additional acres in these areas pretty much under the radar during the last year.

Operator

You next question comes from Noel Parks of Coker & Palmer.

Noel Parks -- Coker & Palmer -- Analyst

I was interested in hearing a little bit more about the bolt-on acquisition you did in the SCOOP in Springer. And just curious about the acreage that you bought, how long have the prior owner been in the play? And I was just curious whether they have been actively drilling or had sort of -- or had sort of neglected the acreage? And I'm also wondering if -- since you said it's right in proximity to stuff you already hold. I was wondering if this was acreage that was on your radar screen way back when you were sort of building the initial SCOOP position back in, I guess, we're talking 2012 time frame. So is real familiar acreage to you, in other words?

Harold G. Hamm -- Executive Chairman

Well, I'll speak to that. No, this is a player that's been in the industry for a good one, and we've dealt with them extensively over time. And so they weren't new to play. And so anyway, we've had a good relationship with them.

Noel Parks -- Coker & Palmer -- Analyst

And so it is -- have they been actively working it? Or had they had capital constraints and so forth?

Harold G. Hamm -- Executive Chairman

No, they're an active player.

Noel Parks -- Coker & Palmer -- Analyst

Oh, they are -- actually, we're still an active player. And I guess I'm curious then, what the process of getting the valuation was like, whether it was one of the easier things to deal with upfront? Or did it take you a while to sort of hit the bid-ask on the limit price?

Harold G. Hamm -- Executive Chairman

This one by we've dealt with a long time, and so normal process.

Noel Parks -- Coker & Palmer -- Analyst

Okay. I guess just what I'm trying to get at a little bit is, we've all been talking about the obvious case for consolidation for so long. So -- and maybe you can just talk more generally about what you're seeing in the SCOOP. I'm just trying to get at sort of why now? And do you think seeing this deal might make a few other people think a little more seriously about selling?

William B. Berry -- Chief Executive Officer

We've been active in the area for a while. So this is a combination of acreage from a player plus other players, as Jack was highlighting. So it's not just one event that we've been picking up acreage in this area. It's something that's been going on ever since we got into the SCOOP. So it really gets down to understanding your geology and understanding the geography and then making sure you're in the right spot and sometimes different people have different prospects. And so this is something that we've been pursuing for quite some time, is continuing to increase our ownership in the area that we know is geologically good. And so it's not something that just happened over the last month since all the merger activity --

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

Yes. I agree, Bill. I mean this is just standard operating procedure for us. If we went back in time, you'd find that we do this each year. And these are just continued bolt-ons and strategic moves that we make just to continue to bolster our position in core areas that we like and have good geologic reasons and performance reasons why we did.

William B. Berry -- Chief Executive Officer

Yes. I'm going to build on Jack Just because you made a really good point. This is something that we do. It's a strength of the company. We built this company on organic development. So that's who we are. We have real good capabilities in that space. And so we're always looking with our GSIs team where we should be going next, whether it's proximal to what we have or maybe out in the different areas. So that organic growth is just part of who we are, part of our DNA.

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

And it takes minimal integration to make it happen.

William B. Berry -- Chief Executive Officer

Right. It details right into our existing operations, day 1.

Operator

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

Rory Sabino -- Vice President, Investor Relations

Thank you, again, for everyone joining us today. Please reach out to the IR team with any additional questions. I would like to turn the call over to Mr. Hamm for some closing remarks.

Harold G. Hamm -- Executive Chairman

Yes. Thanks, Rory. My heart had is off to Bill and his team for the great execution and recurring 95%, 97% of our workforce to the workstation beginning in early May and aligned them to perform at this very highest level, taking advantage of existing opportunities during this awful worldwide pandemic. Thanks to all of Continental's great workforce. I know that many of you sacrifice for lot. Have a good day and this end of our third quarter call.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Rory Sabino -- Vice President, Investor Relations

Harold G. Hamm -- Executive Chairman

William B. Berry -- Chief Executive Officer

Jack H. Stark -- President and Chief Operating Officer

John D. Hart -- Sr. Vice President, Chief Financial Office and Treasurer

John Abbott -- Bank of America -- Analyst

Derrick Whitfield -- Stifel -- Analyst

Brad Heffern -- RBC Capital Markets -- Analyst

Nate Sanson -- Truist Securities -- Analyst

Arun Jayaram -- JPMorgan -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

Joseph McKay -- Wells Fargo -- Analyst

Jeanine Wai -- Barclays -- Analyst

Noel Parks -- Coker & Palmer -- Analyst

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