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Callon Petroleum (NYSE:CPE)
Q4 2020 Earnings Call
Feb 25, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen, and welcome to the Callon Petroleum Company's fourth-quarter and full-year 2020 results and operating results conference call. [Operator instructions] And as a reminder, a replay of the webcast for the call will be archived on the company's website for approximately one year. 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, Kris. Good morning and thank you for taking the time to join our conference call today. With me this morning are Joe Gatto, president and chief executive officer; Dr. Jeff Balmer, chief operating officer; and Jim Ulm, our chief financial officer.

During our prepared remarks, we'll be referencing the earnings results presentation 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 Investors section of our website at www.callon.com for under the general presentation page. Before we begin, I'd like to remind everyone to review our cautionary statements, disclaimers and important disclosures included on Slide 2 and Slide 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 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 today, we will open the call for Q&A. And with that, I'd like to turn the call over to Joe Gatto.

Joe Gatto -- President and Chief Executive Officer

Thanks, Mark, and thanks everyone for joining us this morning. We're certainly glad to be back in the office this week following a very different situation just one week ago in the State of Texas. However, we clearly recognize the hardships that continue for so many even though temperatures have risen and basic services are mostly back online. We certainly look forward to brighter days ahead for all.

Over the last several days and months, our industry has once again been in the headlines and opinion polls for very good reasons. The evolution of the broader energy landscape will not be an easy path and certainly not moving in a straight line. We firmly believe that there is a substantial role for low-cost sustainable producers like Callon to play in underpinning the global economy and our way of life for years to come. Focusing on that future, our actions and decisions this past year have enabled us to deliver on our promises to investors, including meaningful free cash flow generation and improved financial strength.

As we further our life of field development model across our balanced portfolio in coming years, we project $500 million to $800 million of free cash flow generation through 2023 in a band of $50 to $60 per barrel, benchmark oil prices, adhering to reinvestment rates to 75% of discretionary cash flow and below. That cash flow will be directed to absolute debt reduction, keeping us squarely on the path to a leverage ratio goal below two and a half times by the end of next year. This operational financial outlook doesn't carry much weight unless it is complemented by our commitment to improve sustainability throughout our organization and day-to-day processes. Meaningful change in this area can't be accomplished merely through just redesigned protocols and initiatives.

It requires a change in mindset across the company, and our achievements in 2020 clearly demonstrate that our team has embraced that perspective. You can see on Slide 5 the performance for the fourth quarter, as well the full-year 2020 exceeded expectations in every category. At a high level, we generated approximately $125 million free cash flow over the last three quarters after pivoting our capital plan and portfolio allocation in March. Obviously, this free cash flow number captures several components of our business model, the most impactful of which were better-than-expected capital efficiency and cost synergies achieved this year as the organization did a remarkable job integrating in a far-from-normal environment.In sum, there's an impressive list of achievements on this page that came together to advance our debt reduction goals.

And over the second half of 2020, we are able to reduce our net debt by $350 million. 2020 was also a year we saw our overall ESG program and sustainability initiatives progress significantly. Our preliminary emissions figures and flare volumes were much improved. Spill volume saw a reduction of over 60% and our water recycling program continued to grow.

Safety has always been a core tenet of our business, and this past year marked a new record low for total recordable incidents for the second consecutive year. Importantly, this progress is complemented by a change on the governance front. We recently formalized a responsibility for ESG oversight within our committee structure, which will drive increased focus and accountability going forward. Since it doesn't always get as much attention as the improvements on our environmental scorecard, I wanted to highlight commander employees' engagement in support of those in need during this pandemic.

Outreach to first responders, support for our schools, and direct contributions to food banks were just a few of the ways people at Callon chose to make a difference. We will be publishing more detail on these and many other topics in our next SASB aligned sustainability report this summer. And we will also be providing an update in the coming weeks regarding changes to our compensation design, which will include enhanced linkages to ESG performance. Slide 7, provides a snapshot of our proved reserve base.

While the more than 30% reduction in benchmark oil prices certainly made an impact on our PB10 valuation, the fact that it only reduced total preserved gas volumes by approximately 5% pro forma for divestitures, speaks to the strong margins and quality of projects inherent our asset base. In terms of proved undeveloped reserves, we lowered the number of locations within our development window to align with our moderated development activity and projected reinvestment levels. Separately, certain undeveloped opportunities were removed as we continue with the application of more tailored spacing and stacking designs in select operating areas. In the right-hand chart, we have provided an alternative forward-looking view of our approved reserve value, utilizing the same reserve database and development assumptions with the only change coming in the way of pricing.

Utilizing flat benchmark pricing of $50 per barrel for WTI oil, 20 -- $2.75 per mmbtu for Henry Hub natural gas, and $22.50 per barrel for natural gas liquids. Our proved reserve value increased to just over $4.6 billion, almost doubling from year end SEC pricing and highlighting a significant foundation of proved reserve value and future cash flow generation potential. I'll also point out our PDP F&D cost of just over $10.50 per Boe that highlights our low-cost resource base and will be a key element on the next slide.After ending our first year -- full-year reporting cycle as a combined company, we have introduced additional details to provide investors insights into the building blocks of our balanced multi-basin model, which is outlined on Slide 8. On a total company basis, our cash margins, including corporate and interest expenses, is projected to be among the leaders in the industry at over $20 per Boe.

This is a great chart in that captures so many important elements of our business, including commodity mix, physical marketing strategy and risk management, operating cost control, and corporate expense management. When paired with a low-cost resource base, it allows us to reduce our reinvestment rates while sustaining reserves and production, our strong corporate cash margins will drive long-term free cash flows that are durable through periods of volatility. As I've discussed, our priority remained debt reduction, which will translate into the interest expense reduction. Once our leverage targets are met, we see the opportunity to redirect those interest expense savings to shareholders over time.

Before I leave this page, I'll point out a new element of our go-forward IRR materials and financial reporting. We provided an overview of production, realizations and operating costs for both the Permian and Eagle Ford areas. Overall, both operating areas provide support for resilient cash margins and significant flexibility for capital allocation decisions and diversification across physical pricing points and commodity mix. As a follow-on to our debt reduction priorities that I highlighted earlier, Slide 9 illustrates our path to attaining our goals on that front.

As a baseline, our $430 million operational capital budget for 2021 implies a 75% reinvestment rate based on $50 per barrel WTI. We are committed to no more than this level of activity. So the implied reinvestment rate will only move down with a higher oil price sample. Looking out to 2022 and 2023, our 2021 investing plan will provide us optionality for multiple paths depending on our outlook for commodity prices and capital costs after global supply and demand dynamics play out in 2021.

Overall, we envision reinvestment rates below 75% under these planning price scenarios that will generate cumulative free cash flow of $500 million to $800 million over the next three years and drive leverage potentially below two times by the end of 2023 just from organic free cash flow, excluding the impact of monetizations.While divestitures are not explicitly captured in these numbers, any transaction that we pursue must result in improvement to our credit metrics and overall leverage profile.We recognize the importance of aligning these key financial metrics with the strength of our operations and asset base, and are very encouraged by the magnitude and pace of improvements that we see in the coming quarter. At this point, I'll turn things over to Jeff to discuss operations.

Jeff Balmer -- Chief Operating Officer

Thanks. Thank you, Joe. Our team did an amazing job of handling a quick ramp down and then return to activity in 2020, all while driving down development in operating costs. We've put together a plan for 2021 that utilizes a more consistent approach to activities than what we find ourselves having to do during 2020.

We currently have three routes and two completion crews in the field to kick-start the year. We'll dial that back slightly toward the middle of the year, but the overall program should average roughly three rigs and one to two completion crews with balanced activity across each of the asset areas as depicted on the pie chart on the right. Altogether, we were targeting no more than $430 million in operational capital spending, and that's inclusive of seismic, leasing, various facility improvements, etc. This should result in somewhere around 60 drilled wells and 95 completed wells by year end.

We continue to migrate toward larger average project sizes, expecting an average of approximately five wells per project and just under 9,000 lateral feet per well. With this continuous level of efficient development, our project portfolio for 2021 has an average project IRR of over 45% and just $45 WTI oil. You may recall that we were originally targeting a slightly lower capital range but to support the future optionality, they took over in the previous line. We've elected to minimally bump up our spending this year.

Even with this slight change, we expect to generate meaningful free cash flow with a stronger production exit rate for 2021 than our prior forecast. And speaking of production, we're getting very close to having everything back online from the result of the storms and we expect to wrap up the remainder of returned to production work in the Delaware before the end of February. Our Eagle Ford is pretty much a 100% recovered and the Midland Basin production is right behind. As mentioned in our earnings press release, the impact was severe with nearly all of our production offline for a period of time.

During this weather event, our development activity was paused out of an abundance of caution. And while we probably lost a few days, our efficiency has been so prolific that I'm very comfortable that we'll pick those days back up without any issue. At this point, we don't see any lasting effects other than the production deferral and some minor spending for some facility repairs, which is still well within our LOE guidance. I'll leave it up to Jim did update everyone on 2021 full-year guidance later in the presentation.But before I move on to the next slide, I want to take a moment to recognize our entire field operations team.

The efforts, expertise, and attitudes of this team in the face of serious adversity, not just over the past two weeks with this extreme weather, but throughout a very tough 2020, is truly remarkable. Your work is acknowledged and appreciated, and we're all extremely proud of what you've performed. And I look forward to a front row seat and having us knock it out of the park again this year. On Slide 11, I've spent much of the last few quarters outlining various levers we pull on the field to help drive operating costs down and increase production uptime and reliability.

At the same time, we focused on reducing our environmental impact and improving as a steward of our natural resources. It should come as no surprise that improving our field operations has benefited our ESG initiatives while simultaneously lowering our lease operating expenses by about $30 million from both pro forma 2019 spending levels. Optimization of our chemicals, compression, gas lift, and water management programs are meaningful contributors to those savings this past year and will continue to be areas of focus in 2021. Some additional areas of concentration are the expansion of our Eagle Ford electrification efforts, increasing our produced water recycling and advancing efforts around tank vapor capture and those types of things.

One additional area I'd like to highlight is our pure leading ESP run times. So those are electric submersible pumps, which are down inside existing producing wells. That run time is now well over a year, which reduces work over frequency, and of course, overall costs. Moving to Slide 12.

While our operating cost improvements have been meaningful, our development cost savings have been extraordinary. Our Delaware costs are down more than $400 per lateral foot representing 35% reduction from 2019. Maybe more surprising has been our ability to cut our projected Midland basin development costs by almost half, despite having it be a more mature asset. We attribute much of this to continuing to acquire and analyze data and examine and refine our surface and subsurface assumptions and practices continuously.

The customized spacing programs, landing zone optimization, reduced water loadings and advanced completion design and changes to the flowback program all demonstrates the continued efforts to squeeze every last bit of economics out of our portfolio. These improvements along with faster cycle times are driving our field level of efficiency and lowering our overall economic breakevens. That's all for operations. So I'm going to turn things over to Jim.

Jim Ulm -- Chief Financial Officer

Thank you, Jeff. Starting to Slide 13, you can see that our 2021 oil production has been hedged primarily with NYMEX WTI collars, providing us with upside participation as prices have risen. In the second quarter of 2020, we had an RBL requirement to hedge a portion of our 2021 PDP production via fixed price swaps. We have been active in restructuring those positions to provide the best available cash flow protection.

And we moved out of numerous swaps executed during significantly lower commodity windows into more friendly collars as the year revolved. We are also more hedged in the first half of 2021 than in the back half of the year, allowing us to opportunistically top off positions as the curve continues to shift up to meet what appears to be an improving supply and demand equation. We've been very patient with entering positions for 2022, and have thus far been employing wide collars with a $45 floor and $60 ceiling with just over 3,700 barrels per day locked in at this time. We will continue to be patient and systematically employ protection for 2022 but will likely lean toward mechanisms that provide meaningful upside with firm downside protection.

While natural gas makes up a much smaller portion of our physical production and revenue base, we have floors stand at $2.60 per MMBtu for just over 60,000 MCF with upside of 285 per MMBtu on average. At the bottom right of the slide, we provided a sensitivity analysis of realized pricing, post the hedge impact of our current positions. You'll note our projected realizations climb meaningfully in the second half of 2021 coinciding with our ramp up in production. Turning to Slide 14, I will say that looking back into last year, I'm happy to say we've made significant progress in improving the amount of our RDL and total debt outstanding through our second lien offering exchanges, monetizations, and the continued focus on free cash flow generation.

In the chart on the left, you can see where we have significantly reduced the outstanding borrowings on our credit facility, alongside a net debt reduction of nearly $350 million since the end of the second quarter. We will continue to review all of the options for additional reductions in leverage, and we'll evaluate these opportunities as we manage our debt maturities.On Page 15, speaking of maturities, our earliest maturity is the 2023 senior notes. With the significant reduction in our credit facility borrowings, the improved opportunity for significant free cash flow generation over the coming next three years and what has been a resurgent high yield market, we see several avenues to continue improving our capital structure and financial flexibility. As Joe mentioned earlier, we are still looking at additional monetization opportunities this year to increase our debt reduction near term.

I'd like to point out that we have set a goal of having our net debt to EBITDA below two and a half times by the end of 2022. Slide 16 provides our update guidance for the full-year 2021. Some of this has already been covered by Joe and Jeff already, but I do want to point out some important points. Our annual production guidance is 90,000 to 92,000 Boe per day with an average approximate oil cut of 63%.

This is after accounting for the winter storm impact of roughly 2,000 Boe per day on an annualized basis. Based upon that impact, we currently expect the first quarter to average somewhere around 80,000 Boe per day with an oil cut likely closer to 62%. Given our meaningful improvement in lease operating costs, the midpoint of guidance sits at $200 million, which is below the bottom end of last year's guidance range. GP&T is slightly higher on an annual basis this year but this is the first time with a four-quarter impact reflecting our firm transportation capacity to the Gulf Coast.

We only began recognizing this as a meaningful line item in mid second quarter of 2020. We are budgeting for operational capital of up to $430 million. This is a 12% reduction for last year's spending levels and well below last year revised guidance. As outlined in the earnings release, we are currently running three rigs and two completion crews during the first quarter.

So we would expect first quarter capital to be a bit higher than a pro-rata 25% of the annual operational capital spend. With the ramp of completion activity expected through the second quarter, we would also expect it to follow suit and end up slightly higher than the first quarter. At this point, I'd like to turn the call back over to Joe.

Joe Gatto -- President and Chief Executive Officer

Thanks, Jim. The past year showed that our team is highly capable of managing through extraordinary circumstances and find creative and thoughtful ways to protect and enhance value for our shareholders. Investors have spoken, we have listened. Our goals are clear and achievable.

Our leadership and board are keenly focused on optimizing free cash flow generation, reducing our debt obligations, safely and efficiently maximizing the value of our assets, and achieving our sustainability goals. We will continue to improve the Callon value proposition and ways to create a durable, low cost business that can return capital shareholders once net debt is reduced to our target levels. With that, we'll to turn it over to Kris for -- open up for Q&A.

Questions & Answers:


Operator

Thank you very much, sir. [Operator instructions] Our first question is from Neal Dingmann of Truist. Please go ahead.

Neal Dingmann -- Truist Securities -- Analyst

Good morning. Joe, my first question is really just kind of completions, maybe broader about this. It's been interesting. Some of your peers, and Mark have talked about this, have seemed to have for whatever reason have gone to maybe what I'd call a tighter focus.

They've focused on fewer zones. They've focused on wider spacing. Maybe even in more sort of less broad areas, where you all have been able to sort of continue with this, what I'd call more diverse plan on all those facets. I mean, could you talk about -- will that continue to be the plan and are you able to do that just because you're continuing to see a strong enough returns when that's been the case?

Joe Gatto -- President and Chief Executive Officer

Hey, Neal. Yes, I think your last comment sums it up pretty well. I mean, there's a lot that goes into that. But as we've talked about, it's been very consistent in terms of our, what we call life of field development approach.

We have a substantial multi-zone resource space certainly in the Permian, employing a scale model, which was a big peice, obviously, the decrees of transaction to allow us to have the critical mass to co-develop the zones in the right way. Now that's not to say that we're chasing every zone that we see in the stack. I mean, we are making decisions for zones to help carry their weight. But given the strength of a multi-zone opportunity, we see that there's extreme value to capturing them and not letting them degrade over time and cherry pick what we have.

So this is all about sustainability over time and trying to get too focused on the near term. You're going to make decisions that will impact longer-term value.

Neal Dingmann -- Truist Securities -- Analyst

Got it. Got it. And then Joe, my second question, probably for you or Jim. That definitely it's not lost your -- what I'd call your sort of longer data plan that obviously has debt coming down nicely.

But you can't help but notice not only has the equity had been on a nice run the last few weeks, but obviously the creditors of bonds have as well. So I'm just wondering with that said, are there -- we've probably talked about this in the past, I don't know, because the credit has run like it has like the equity cost of capital now is cheaper, are there going to be potentially other opportunities sooner than that? Or is, look, or do you sort of stick with, look, our eye on the ball is still going to be on that longer-term plan and if something comes up, so be it? I'm just wondering how you all are kind of view in the near term versus longer-term plans.

Jim Ulm -- Chief Financial Officer

Hey, Neal. This is Jim. I'll kind of answer that briefly. And then if Joe has anything to complement it with.

We have said pretty continuously for the better part of a year, priority number one is absolute debt reduction but a refinancing or something along those lines of some of the near-term maturities would give us additional runway for free cash flow generation. I -- your point is well taken when the capital markets appear to be improving. We've tried to really look at what the best opportunity is at the time, and I think you'll see us continue to do that. But again, it's about absolute debt reduction.

It's about free cash flow and just continuing to evaluate opportunities as they come up. Joe, I don't know if there's --

Joe Gatto -- President and Chief Executive Officer

Yes. The plan we laid out with the free cash flow generation and complemented by, I think a reasonable monetization targets that we think can expand in this type of market and underpin it. Our options are only going to expand more if we continue to execute on that baseline, so we'll be opportunistic. And if there's things that make sense in the broader capital markets, we'll certainly be evaluating all of those that we do every day.

Neal Dingmann -- Truist Securities -- Analyst

So guys, does that mean with the refinance being you would consider to even buybacks in the open market, given, I guess what some of these bonds are still kind of sub 80? When you talk about refinancing, Jim, I guess that's what I'm wondering, is it how you think about is that refinance pretty broad as far as either traditional refi or going back into the open market?

Jim Ulm -- Chief Financial Officer

Yes, Neal, that's a good point. One of the things that you've seen is our bonds have traded up into the 70s and 80s. As I look forward into the year, I think one thing that that could make sense would be open market repurchase. But again, it -- that'll be on an opportunistic basis and we're going to focus on the free cash flow generation, the other initiatives that Joe mentioned, and it really just keep methodically moving forward and getting the debt down.

Neal Dingmann -- Truist Securities -- Analyst

Very good. Thank you all.

Joe Gatto -- President and Chief Executive Officer

Thanks, Neal.

Operator

Thank you. The next question is from Scott Hanold of RBC. Please go ahead.

Scott Hanold -- RBC Capital Markets -- Analyst

Yes, good morning. Just kind of curious on, that longer dated outlook through 2023 you all had. Obviously in the 2021 outlook, you do show a fairly balanced development plan. Can you give us some color and flavor like how that progress over those other couple of years? And also, look, maybe a little bit of color on where you see the IRRs of those opportunities because I think you had mentioned with their 45% IRR on the 2021 plan.

How does that look in mix in returns going forward.

Jeff Balmer -- Chief Operating Officer

Yes, the project portfolio is excellent. So we would anticipate, those types of project returns to be sustainable for many, many years. And Joe had mentioned, the idea behind the development program has been consistent for multiple years in the past and going forward where we evaluate the full stack. We have very well-developed proprietary set of data and algorithms that determine when we should -- make sure that we get it while we're out there one or two zones.

Maybe we can come back and give them at a later point in time but I would say that that our project portfolio is excellent and sustainable.

Scott Hanold -- RBC Capital Markets -- Analyst

OK. And the mix with the mix state fairly balanced?

Jeff Balmer -- Chief Operating Officer

Yes, and thank you for reminding me, yes. Obviously that there's more runway in the Delaware, which are fantastic returns, but we still have a fair amount of drilling to do out in the Eagle Ford and in the Midland basin. So for the – certainly for the next couple of years, you'll see the continued mix of assets.

Scott Hanold -- RBC Capital Markets -- Analyst

OK. Great. And then looking at those well costs, obviously you guys have really pushed the envelope on getting costs down on a dollar per foot basis and it seems like you're obviously lending some data to show that you think there's some sustainability. But again, maybe reflecting, obviously with the 2021 plan, firmly out there, but like as you look at '22, '23 again, can you sustain those costs that lower? Where would you see some pressures, if you were to see some?

Jeff Balmer -- Chief Operating Officer

Sure, and that's the fantastic question. From an inefficiency standpoint, we've made improvements every year, and so we would continue to project that we'll get better and better at what we do dropping down the overall costs and cycle times. From a contractual standpoint, our partnerships with our vendors, the reality of it is if we're in $60 or $65 oil or whatever the number is, we would all expect to see cost increases potentially but they would be more than offset by the improvements in free cash flow. I don't feel like we have a lot of exposure in 2021.

We've got a lot of good contractual systems put in place. And so, I mean, I think it would be a good problem to have if costs went up because we were making a lot more money on the revenue side.

Scott Hanold -- RBC Capital Markets -- Analyst

OK. I mean, I'm just kind of curious if you could give us some sensitivity around that. Like, what -- if we were to say, kind of a $60-ish kind of outlook, in those out years, where do you think the sensitivity is on some of those costs overall?

Jeff Balmer -- Chief Operating Officer

Yes, I'd be using a bit of a crystal ball in that forecast. Again, I think focusing on 2021, we're going to be well within a fair -- a couple of percent, maybe if we see some upper prices on the back half of the year. But I -- if you look back and you glue together what historic well costs have been based upon the contracts versus the efficiencies, I don't anticipate that we'll have a significant negative effect on the overall cost structure. And again, just reiterate from a profitability standpoint, we'll be even better in higher oil prices.

Scott Hanold -- RBC Capital Markets -- Analyst

Understood. Thanks.

Operator

Thank you. The next question is from Brian Downey of Citigroup. Please go ahead.

Brian Downey -- Citi -- Analyst

Good morning, and thanks for taking my questions. For Jim or Joe, as you think about the free cash flow and debt reduction targets you've laid out on Slide 9, are you approaching either the pace or strategy of hedging any differently entering this year? You -- Jim, I know you mentioned, you started on the 2022 hedging program, but the medium-term strategy change around hedging as you are thinking about this three-year goalpost?

Jim Ulm -- Chief Financial Officer

I would think, generally we've hedged during a calendar year, somewhere in the 60% to 65% range. I think that's probably a pretty good approximation. There may be moments where we opportunistically go higher than that but I think generally, that's right. I think as we look at '21 and '22 and '23, sequentially, the thought would be to use things that have price participation, as I said, but for downside, so that's potentially swaps, collars, or puts those types of things.

And then I think really, what's maybe different going forward in 2021, and 2022 is that we'll really be focused on kind of what that free cash flow breakeven price is and make sure that the weighted average floors that we have, are supportive of generating that free cash flow over the over the coming quarters.

Brian Downey -- Citi -- Analyst

And I guess is the time horizon over which you're extending those hedges, is that going to be pretty similar, or would you start going out any further than normal?

Jim Ulm -- Chief Financial Officer

I think we'll be looking very closely at 2021 for places to optimize, or maybe later in, in the second half. The hedges that we have in place right now are really first and second quarter of 2022, so we'll be methodical about it and kind of layer in as it makes sense. And again, part of that will be just driven off of what the curve does in 2022. We -- I think we'll end up 2022 in a similar absolute level and I think be watching that over the next couple of quarters.

Brian Downey -- Citi -- Analyst

Great. And then for my follow-up question, Jeff, you continue to make progress on the capital efficiency front for some of the other questions this morning. You talked about scale development program. I believe you mentioned the five well, average project size to this year.

I'm curious what else you are thinking about for the target for 2021. We've heard others in the industry talk about things like electric fracks and simul-fracks. I'm curious if your view of your current program and pad size is conducive to trying some of those techniques either this year or is that three-year planning period on both?

Jeff Balmer -- Chief Operating Officer

It is, as a matter of fact, we have converted over to using – we're bringing in and getting up and running more fuel completion crew, which we're really excited about. Based upon the recent weather, I think we're going to start with diesel for the first pad and just make sure everything work just fine. But when you go into dual-fuel for the entire year of 2021 on that record and then we'll also be testing electric practically with an independent set of wells and development program that we have here toward the end of Q1 or the beginning of Q2. And in addition, there's other projects that are under way that we've touched on a little bit like the continuous focus on electrification projects for the Eagle Ford and some other areas.

Callon has three substations that we own and operate that really help improve the reliability and drop down some of the emission systems. So yes, all that stuff is not only on the plate, but will be a big part of what we do in 2020.

Brian Downey -- Citi -- Analyst

Great. I appreciate the comments.

Operator

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

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Thanks, and good morning all.

Joe Gatto -- President and Chief Executive Officer

Good morning, Derrick.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Perhaps for Joe or Jim. Your reiterated guidance in the face of material weather impacts from Q1 would seemingly suggest a higher 2021 exit rate, as you noted in your prepared comments. Could you share with us the shape of your production trajectory and where you would expect to exit the year?

Joe Gatto -- President and Chief Executive Officer

Yes, Derrick. I mean coming off of the first quarter, obviously, a meaningful impact there. Coming into 2021 before the storm we were going to be -- the shape was a little bit lower in the first quarter before we started working through that duck inventory that had a substantial amount of completions in the first half -- I think around 55 or so. So, we have that increased trajectory going in the second and third quarter.

In terms of exit rate, we haven't put that out there yet. I think we're making sure we get past the storm and reconfigure things in the right way. But certainly, we're going to see a pretty hefty increase off of first quarter as the second and third quarter that will certainly impact on fourth quarter and give us some momentum into 2022.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Great. That's fair. And perhaps for my follow-up sticking with you, Joe, your team has really navigated this environment about as well as any. Regarding the additional asset monetizations of $125 million to $225 million that you referenced in your press release, could you speak to the nature of the asset included and the health of the A&D market for those assets?

Joe Gatto -- President and Chief Executive Officer

Yeah. Well, I'll certainly address your first comment, take that. Dana has done a remarkable job, so I appreciate you recognizing that and it's putting us in a position to take advantage of the opportunities sets in front of us. And we've been patient on the monetization front.

We were able to get some deals done last year, the right transaction for that type of a market. We had deffered a bit on your classic working interest transactions last year because we just didn't see the value proposition. We certainly the unseen path of getting transactions done that were been credit enhancing. So, as we talked about last year when we established our $300 million to $400 million target on the back of the Carrizo transaction, there was a broad pool of opportunities.

In other words, a lot of ways to be right. So, we still have that that broad pool, just a lot more of them are back on the table. So, we have a couple packages in the Delaware and the Eagle Ford that we've been looking at over time. Again, we didn't push it.

We've been patient and I think that patience will pay off here. We've maintained the dialogue and keep the momentum, so if windows open up, we'll be able to hit those markets pretty quickly. A lot of business, we've talked about over the last few quarters, certainly as an opportunity to monetize that asset and also potentially monetize some of the lay in capacity in that system. Again, being patient there has allowed us to put forth the plan we did today, right, to show potential bidders that we have a sustainable plan, we have the free cash flow that when you look at the asset base, you're not going to heavily risk it, because there's all this uncertainty.

We've shown the path for potential bidders at this point that you sign up for these types of water volumes and value them, we're going to deliver that and then some.So that continues to proceed. But in a volatile market, I mean, yes, it's been a lot better last month or so. We can't just follow-up with any one path. We got to keep a lot of doors open.

We'll continue to do that and hope to be updating everyone in the coming quarters on that front.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Very helpful. Great update. Thanks for your time.

Joe Gatto -- President and Chief Executive Officer

Thanks, Derrick.

Operator

Thank you. The next question is from Dun McIntosh of Johnson Rice.

Joe Gatto -- President and Chief Executive Officer

Hey, Dun. Dun, are you there?

Dun McIntosh -- Johnson Rice -- Analyst

Yes, sorry. I was on mute. Good morning. I appreciate all the color.

Just one quick one for me. If you could talk a little bit about how you thought about DUCs? Historically, a little bit of a bump on capex to exit the year was -- kind of where did you come into the year with DUCs? And what's an ideal level that you think about kind of keeping in the program over this kind of two- to three-year plan that you've laid out?

Jeff Balmer -- Chief Operating Officer

Yes, where we're sitting -- my apologies. I think there's a little feedback. When we came into 2021, we got to into the mid-60s give or take from the DUC count. We had been very rigorous in our assessment of capital spend within 2020 and so probably came into the year a little bit higher than would be normal.

We'll end the year 2021 with the current gameplay, roughly half of that going in into 2022. And that's a good spot to be for the -- where we sit relative to the capital program and having modestly consistent production where you don't see those significant peaks and valleys. So that's kind of where we sit.I guess the other items I mentioned is all dogs are, of course not created equal. So, where we came into 2021 would probably half of those were sitting in the Eagle Ford, which are very profitable, but smaller wells from a production standpoint, the mix right now going into 2022 would represent a higher percentage of wells being in the Permian Basin versus the Eagle Ford.

Dun McIntosh -- Johnson Rice -- Analyst

All right. Great. Thank you.

Joe Gatto -- President and Chief Executive Officer

Thanks, Dun.

Operator

Thank you very much. Ladies and gentlemen, you have no further questions in the queue. And this concludes our question-and-answer session. I would now like to turn the conference over back to Mr.

Joe Gatto for any closing remarks.

Joe Gatto -- President and Chief Executive Officer

Thanks, Kris. And thanks everyone for joining. I think we probably had some audio issues off and on, so you will certainly get that transcript out there. And please feel free to give us a call with any follow-up questions, but hopefully, that wasn't too bad.

Again, we look forward to talking to you all in May and with first quarter earnings and other updates. Thanks again.

Operator

[Operator signoff]

Duration: 44 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

Scott Hanold -- RBC Capital Markets -- Analyst

Brian Downey -- Citi -- Analyst

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Dun McIntosh -- Johnson Rice -- Analyst

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