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Cimarex Energy Co (NYSE:XEC)
Q1 2021 Earnings Call
May 6, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Cimarex First Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Megan Hays, Vice President of Investor Relations. Please go ahead.

Megan Hays -- Vice President of Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss Cimarex's results for the First Quarter of 2021. Participants on today's call may discuss non-GAAP financial measures. You will find the most directly comparable GAAP financial measures and appropriate reconciliations to those GAAP metrics in our press release, which is available on our website. Also, as a reminder, during today's conference call, we will provide forward-looking statements based on current expectations. I also call your attention to the forward-looking statements, cautionary statements and other disclaimers that are provided in the earnings release and presentation.

Joining us on today's call will be Cimarex President and CEO, Tom Jorden; our Chief Financial Officer, Mark Burford; and our Vice President of Operations, Blake Sirgo. Following their prepared remarks, we will take your questions. [Operator Instructions] With that, I'll turn the call over to Tom.

Thomas E. Jorden -- President and Chief Executive Officer

Thank you, Megan, and thank you to all of you who have joined us this morning. As you see from our release, Cimarex had a solid first quarter, and we're on track to meet our full year targets. We generated GAAP net income of $128.1 million or $1.25 per share. Adjusting for $99.4 million in noncash mark-to-market hedge losses, our adjusted net income was $203.7 million or $1.98 per share. Adjusted cash flow for the quarter came in at $395 million, which significantly exceeded capital expenditures and allowed us to generate $208 million in free cash flow after payment of our dividend. We ended the quarter with over $500 million cash on hand and net debt of $1.5 billion. Our oil volumes averaged 68,600 barrels per day during the first quarter. We expect to see significant momentum in our oil production through the latter half of the year as we bring on a number of development projects.

We are seeing strong results thus far from our relaxed spacing which will enhance our capital efficiency going forward. As previously guided, we expect our 2021 exit rate for oil production to be 30% above our 2020 exit rate. The 2020 exit rate was significantly impacted by reduced activity in 2020. Our full year capital guidance is unchanged at $650 million to $750 million. Our Permian total cost per foot for our development programs is tracking nicely within our guidance range of $800 to $850 per foot. We operate within a wide geographic range in the Delaware Basin, and this can impose variability in our project costs. These differences include depth, pressure, water cut, lateral length and production facility costs.

Although we quote program average costs, the individual projects within this average vary between $725 per foot and $1,000 per foot. And as always, when we quote development costs, we include all costs, drilling, completion, facility, well connect and flowback. Blake will provide more detail on this. Our lease operating and transportation costs came in high for the quarter, mostly as a consequence of winter storm Uri, which led to increases in fuel charges, electricity and labor.

Importantly, we expect lease operating and transportation costs to normalize in the second quarter, and importantly, our annual guide for lease operating remains unchanged, while our transportation guide is slightly higher to account for the transitory events in Q1. Mark will dive into this in more detail. I'd like to comment on winter storm Uri and the impacts on Cimarex. We have all heard or read many stories of the impact of Uri, both on the oilfield directly and on regional electricity generation and delivery.

The best word I can think of that describes the response of our field personnel is valiant. We saw it coming and mobilized additional field equipment in order to be ready. In spite of our best efforts in preparation, our operations were impacted by the storm and freezing temperatures. In the midst of these challenges, our field staff worked relentlessly to keep our production online. Our field staff kept an unwavering focus on safety and never gave up. As a result, the production impact on Cimarex from winter storm Uri was severe but very short lived. Kudos to our entire organization for the drive and dedication they demonstrated. It is humbling to be part of such an outstanding operational team.

As we throttle into 2021, our focus on environmental excellence is accelerating through detailed and innovative engineering, comprehensive data analytics to dissect our emissions footprint and strong engagement with our field employees. I'm particularly excited about our enhanced facility designs, which do not have tanks at any point in the production stream from wellhead to sales, thus eliminating some of the most vexing and chronic emission offenders. Our first project utilizing this facility design is our Burgoo King project in Culberson County. This design reflects the latest in an evolution of design improvements in order to reduce emissions, and we expect to leverage this approach across all of our new facilities in 2021.

We are also embarking on a multiyear electrification project, which will include the transition to grid powered electric fracking and compression. Together, these initiatives will significantly reduce our emissions footprint and allow us to deliver our products safely and cleanly. I would also like to provide an update on our thinking on our long-term financial plans. As we've previously discussed, our goal is to have cash on hand in order to retire our $750 million in senior notes that are callable in 2024. With our improved asset performance and the recent recovery in commodity pricing, we expect to achieve that goal in 2021.

Then what? As we have discussed in prior calls, the concept of a variable dividend is very interesting to us. We're watching our competitors carefully and are debating the various models that have been advanced. Fundamental to our capital return strategy is: one, predictability; and two, sustainability. This is difficult in a cyclic commodity environment. We are pleased to have a good mix of high-quality assets with exposure to oil, gas and natural gas liquids. We believe this is a core competitive advantage that dampens the impact of price swings of any single commodity. Our experience has taught us that diversity pays in the long run, and this view will color our thinking on any variable dividend approach.

We will and are modeling permutations and the price swings of oil, gas and natural gas liquids, and we will adopt a strategy that accounts for dynamic commodity prices while protecting our base business and balance sheet. This is the ultimate challenge of Shale 3.0. You, our owners, want predictability. Finally, allow me to comment on the regulatory and macro environments. At the state level, we are glad to see permitting resume in New Mexico. At the federal level, much has changed since our last call. We read the policy proposals from Washington and find some things that are constructive and quite frankly, some things that concern us.

Directly and through our national trade associations, we are engaging in dialogue that we hope will drive workable and sound public policy. As an industry, we need to raise the bar. We need to reduce our environmental footprint and earn credibility through transparent reporting. This is an effort we believe is worth engaging in. Global demand for our products will persist for many decades to come. We are proud of our industry and proud of the many men and women who provide abundant, affordable domestic energy that powers our economy. With that, I will turn the call over to Mark.

Mark Burford -- Senior Vice President and Chief Financial Officer

Thank you, Tom. Good morning, everyone. I'll address the key items in our first quarter 2021 financial results and give some color on our outlook. Our results this quarter benefited from strong price realizations in all commodities, especially gas price realizations, which were higher as a result of the February severe winter storm. Our unit costs are also elevated in the quarter due to the impact from the winter storm, which drove up fuel costs and electricity rates in addition to lower production volumes relative to the remainder of the year.

As our cadence wells coming online picks up, we expect our per unit cost to normalize and therefore, our full year 2021 cash guidance remains unchanged, except for incorporating Q1 winter weather impact for our full year 2021 transportation cost. Total capital investment for the quarter was $165 million, including $131 million of drilling and completion capital. Adjusted cash flow from operations in the first quarter totaled $395 million, generating $231 million of free cash flow or $208 million of free cash flow after the dividend.

As a result of the strong free cash flow in the quarter, we exited the quarter with net debt of $1.5 billion, a decrease of $251 million from year-end 2020. From a capital allocation perspective, our priority continues to be increasing our cash on hand in order to repay the 2024, $750 million notes, as Tom described. We're executing a disciplined capital program, which means we're not increasing our capital spending this year in a higher price environment, which translate directly into incremental free cash flow.

Also, as we've done through our history, we are pruning noncore assets from our property base, which in the second quarter, we expect to close sales for proceeds of approximately $115 million. We remain focused on maintaining, improving our financial position, generating free cash flow and providing cash returns to our shareholders. We are on a solid path this year to meet our debt objectives and surveying work toward instituting an incremental capital return strategy that we believe will maximize value for our shareholders. With that, I'll turn the call over to Blake

Blake A. Sirgo -- Vice President-Operations

Thanks, Mark. We had a strong start to 2021 with five rigs and two frac crews running in the Permian and one rig running in the Anadarko. Our operations were quickly challenged early in the quarter with winter storm Uri impacting our operations in the Permian and Anadarko. Despite multiple days of below freezing temperatures and rolling power outages, our operations teams did what they always do and rose to the challenge. We were able to keep a significant portion of our production online while mitigating impacts to our drilling and frac operations. Because of these efforts, we are able to quickly regain our operational cadence and delivered strong volumes in the first quarter.

We're focused on both sides of the capital efficiency equation, productivity and costs. Tom spoke earlier about some of the strong results we are seeing in productivity with our recent Big Sky and Dixie land development. We are also seeing strong performance on the cost side of the equation. Our drilling and completion costs for the first quarter of 2021 tracked just below the low end of our guidance. With higher activity levels across the Permian, horsepower, labor, steel and fuel costs are on the rise. However, our teams are working hard to offset inflation with continued efficiency gains.

For example, during the quarter, on average, we drilled 1,400 feet per day, which represents a 26% increase achieved over the past four quarters. Our leading-edge performance includes the spectacular bid 2H in Culberson County, which reached total depth in 9.1 days for a 2-mile lateral, translating to more than 2,000 feet per day. Our operations teams continue to make strides in performance, which is keeping cost inflation in check. As such, we are reaffirming our full year cost guidance of $800 to $850 per foot.

As Tom mentioned, we continue to research and leverage new technology to reduce our emissions footprint. Taking emissions reduction seriously means we have to look at how we power our operations from drilling to completions and lifting. We believe building and expanding our power grids is the future of the oilfield, and we are first movers to electrify our operating areas. We are currently running two drilling rigs powered directly from our grids.

These rigs have seen a 50% drop in associated emissions as well as the 23% drop in fuel cost to power each rig. As we move more of our operations to electricity, we believe there are high-return opportunities to expand our power grid. These opportunities will translate to lower emissions, better run times, greater efficiencies and lower costs. And with that, we are now happy to take any questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question will come from Arun Jayaram of JPMorgan. Please go ahead.

Arun Jayaram -- JPMorgan -- Analyst

Good morning.

Thomas E. Jorden -- President and Chief Executive Officer

Hi, Arun.

Arun Jayaram -- JPMorgan -- Analyst

Hey Tom, I wanted to see if you could maybe expand on some of your thoughts, the Board's thoughts on variable dividends. We've seen two approaches out there from some of your peers, Devon and Pioneer, who have kind of a formulaic type of approach. You talked about Cimarex's kind of balanced leverage to the three commodities. So I was just wondering if you could talk about some of the pros and cons that you and the Board see with the variable dividend approach? And if you did migrate to such approach, how do you see this playing out relative to what Devon and Pioneer have thus far communicated?

Thomas E. Jorden -- President and Chief Executive Officer

Well, thank you for that question, Arun. I'll tee it up and then let Mark go into detail. Our commitment to dividend is evidenced by the fact that we've paid a dividend since 2006. And our Board is very much celebrates the act of returning cash to our owners. I will say that yes, I don't want to comment on any specifics of what our competitors have done. But I will say that as we look at it, we will model what our cash flow looks like as swings in commodity pricing.

We'll model high, medium, low on both oil and gas, come up with an estimate of what we think our sustainable cash flow is and then decide what percent of that sustainable cash flow we think will be returned to our owners. We probably have a bias at current on a quarterly distribution model rather than an annual model. We just like the way that looks and feels to us. And then we will probably discuss this with our Board.

We have an ongoing discussion with our Board. But as we said in our opening remarks, our first priority is calling those notes, but we're going to -- we think, blow through that goal here by the end of the year. So I think, certainly, by the second half of the year, you're going to see us provide clarity on a specific approach. But with that, Mark, why don't you fill in the gaps?

Mark Burford -- Senior Vice President and Chief Financial Officer

Sure, Tom. Yes. The only thing I could probably add, Arun, is that certainly, this year, exiting the first quarter, $524 million in cash, and we also discussed the fact that we could have a small property sale $115 million, see add that plus what we expect for free cash flow for the balance of the year. We're going to be in a very good position by the end of the year to meet our objective to have sufficient cash for those 2024 notes and have some cash in excess of that for liquidity purposes that we want to have continuing cash on our balance sheet.

When you look at the process of which Tom described, we will be very diligent in how we look at our regular dividend. We'll stress test our scenarios. And as we've done, like we're increasing our regular dividend in the first quarter this year, we will also continue to monitor that and have an emphasis on monitoring increasing that regular dividend. Then further on the variable dividend, which Tom described, we would also expect that we will have a good chance to be instituting that.

We'll get more mechanics out to the latter half of this year. And 2022 looks like a year, we would be in a position to start having met our debt objectives to start working on a variable dividend. And where our preference is probably to look at it on a more regular cadence on a quarterly cadence is one element that you're probably biased toward but we will be able to communicate maybe more granularly in the second half of this year on some of the mechanics we're anticipating how to calculate that.

Arun Jayaram -- JPMorgan -- Analyst

Great. That sounds very intriguing. And my follow-up is, I was wondering if you could give us a little bit more detail on some of the initial performance at the Big Sky project, which did feature some of your relax spacing as we also give us some thoughts on -- I know the market has been looking for count fleet, which I believe is coming near term. So maybe just give us some thoughts on this migration to these wider spacing patterns, and maybe some thoughts on what this could mean in terms of productivity gains?

Thomas E. Jorden -- President and Chief Executive Officer

Yes. Arun, John Lambuth is in the room, and I'm going to let him answer the question. I'll just tell you upfront that we are really, really encouraged by what we're seeing and feel greatly confident that our prior discussions of increased capital efficiency are going to be underpinned by solid results. But John?

John Lambuth -- Executive Vice President of Exploration

Yes, Arun, we actually have three developments, upsized developments now on production. We have between three to five months of production on those. One of them is in Lea County, the other two are in Reeves County. In fact, the one we have the most production on is in Reeves County. Both of those in Reeves were at about eight wells per section. And as we forecast them right now, as Tom said, we are very, very pleased with the performance we've seen so far.

And as we project out, ultimate recoverable for those wells. We believe that those eight wells are going to achieve about the same 1,280 acre oil EUR is what we are achieving, say, two or even over the last year, which is 12 wells per section. So in essence, by drilling with four less wells, we're going to get the same oil EUR recovery, which, of course, then leads to phenomenal project returns and efficiency. So as Tom said, we're very pleased with what we see. I must say it is still early, but we are at five months on one of them and gaining much more confidence on how those wells are performing and looking forward to more of them coming on.

Arun Jayaram -- JPMorgan -- Analyst

John, what are the names of those three projects? And that's all I have. I just want to get some more details on this.

John Lambuth -- Executive Vice President of Exploration

Yes. The projects are Dixieland and Big Sky, and then the one in Lea County is Red Hills.

Arun Jayaram -- JPMorgan -- Analyst

Great. Thanks a lot, 'gents.

Thomas E. Jorden -- President and Chief Executive Officer

Just before we go on, this really ties into our variable dividend discussion. Because when we look at where we have this business, we feel really solid about our capital efficiency, our ability to maintain or slightly grow our production with a reduced portion of our cash flow and our free cash flow is really sustainable.

It's not only about the quality of our assets, but the work that we've done and that John is talking about on capital efficiency, really allows us to underpin any free cash flow with a highly efficient capital program. And we've probably never felt better about our business than we do now.

Operator

The next question comes from Jeanine Wai of Barclays. Please go ahead.

Jeanine Wai -- Barclays -- Analyst

Hi. Good morning, everyone. Thanks for taking our questions.

Thomas E. Jorden -- President and Chief Executive Officer

Hi, Jeanine.

Jeanine Wai -- Barclays -- Analyst

Good morning. Our first question maybe for Tom or for Mark. You've accelerated the timing of achieving your goal of banking the cash for the 2024 for the recent divestiture. Looks like you're on track to us to have $1 billion of cash at the end of the year. And it appears to be a seller's market right now on AMD, which is nice. And are there any other assets that could be earmarked for sale this year? And is there any update on what your minimum cash balance is given, I think, Tom, that you mentioned that you definitely want to ensure predictability and sustainability and return of capital?

Mark Burford -- Senior Vice President and Chief Financial Officer

Sure, Jeanine. As first part of your question on other asset -- potential asset sales. Right now, we don't have anything on the drawing board for additional asset sales cycle beside what we discussed in the $150 million range that we have signed PSAs for expect to close in the second quarter.

As far as the cash position, you're right, $1 billion is very reasonable with additional cash proceeds from the sales and the free cash flow outlook for balance of the year. And a minimum cash balance that we would think of would be probably in the $250 million to $350 million, which we contemplate as kind of the working capital swings we could anticipate and some -- cover some portion of our capital program for some period of time. Those kind of factors would be entering into our mind on what we would think a minimum cash position should be.

Jeanine Wai -- Barclays -- Analyst

Great. We can dial that in. Thank you. So our second question, maybe just on operations 2022. So it looks like the exit rate commentary of 30% up 4Q to 4Q still stands, which is great, sets up for nice operational momentum next year. And I just wanted to revisit how you're thinking about capital efficiency in 2022?

Is the goal to hold that exit rate flat for efficiencies because you've got operations going well, you have really high-return assets. That would put you a double-digit growth year-over-year or is the preference to pull back to a lower steady state and maybe stay within a similar or lower capex range to 2021?

Thomas E. Jorden -- President and Chief Executive Officer

Well, Jeanine, I'll let Mark go into detail, but 2022 is a long way away. We really are very pleased that we think we're set up to enter 2022 with tremendous flexibility and options. But as we've said in past calls, any capital allocation, either on an absolute level or relative level for 2022, we're going to want to make that decision once we see what the increased demand looks like, what the supply picture looks like for a macro. And as we've said in the past, we're highly unwilling to just chase the strip and have our capital be a function of the strip which has been a mirage, quite frankly, over the last few years. So Mark, what the upside?

Mark Burford -- Senior Vice President and Chief Financial Officer

Yes, Jeanine, I think what we're really focused on, as Tom has discussed, is the capital efficiency is the key to how we're thinking about any period, including 2022 and further the macro backdrop of the commodity price is always an element. But as we look at the capital efficiency, there's a couple of elements of that. Obviously, be it drilling and completion capital and the cadence of how would we operate that.

There's an element there to being efficient with the resources we have with drilling crews, drilling rigs and frac crews that we wanted to have a good cadence, good consistent cadence that allows us to maximize the efficiency of those programs and maximize return and capital efficiency on those programs. As Tom said, we have a lot of time between now and '22 to really dial that in. But those will be our focus points, Jeanine, on how we think about proceeding into '22.

Jeanine Wai -- Barclays -- Analyst

Great. Thank you for the time.

Operator

Next question comes from Michael Scialla of Stifel. Please go ahead.

Jarrod Cole Giroue -- Stifel -- Analyst

Hey. Good morning, guys. This is Jarrod for Mike.

Thomas E. Jorden -- President and Chief Executive Officer

Hi, Jarrod.

Jarrod Cole Giroue -- Stifel -- Analyst

Hey. So looking at price realizations for the quarter, you guys were really strong on NGLs and gas. And we were just wondering if you have an outlook for the rest of the year? Obviously, gas was high with the winter storm, but I'm just curious how you see NGL pricing for the rest of the year?

Mark Burford -- Senior Vice President and Chief Financial Officer

Hi, Jarrod. the NGL prices was very nice, strong and gas prices during the first quarter. And we see going to the balance of the year, probably in that $0.40 to $0.50 deduct from NYMEX for natural gas prices when you bake in the four curves for the Permian and the Waha passive Permian differentials and Mid-Continent differentials. And then as far as the NGL realization, we're still going -- we're 39% realization of WTI in the first quarter. We see that probably easing back into the low 30s for the balance of the year.

Jarrod Cole Giroue -- Stifel -- Analyst

Okay. Perfect. Thanks. That helps. And then a quick follow-up. Are you guys seeing any signs of inflation anywhere in services? And do you see any opportunities to improve efficiencies? Thanks.

Blake A. Sirgo -- Vice President-Operations

Yes. This is Blake. We have seen some mild inflation in Q1, really just with the pickup in activity across the Permian, which we expected to see. It wasn't a surprise. Really what we focus on is working with our service partners to maximize efficiency and reduce downtime. Those lead to ultimately lower cost per foot, which is what we're after. And so we're going to keep driving that as hard as we can and currently believe that will offset any inflation we might see.

Jarrod Cole Giroue -- Stifel -- Analyst

Got it. Perfect. That's all for me. Thank you.

Thomas E. Jorden -- President and Chief Executive Officer

Thanks.

Operator

The next question comes from Doug Leggate of Bank of America. Please go ahead.

John Abbott -- Bank of America -- Analyst

Good morning. This is John Abbott on for Doug Leggate.

Thomas E. Jorden -- President and Chief Executive Officer

Hi, John.

John Abbott -- Bank of America -- Analyst

Quick -- this is another question, sort of looking at 2022. I recognize that it's still early, long along the way. But you mentioned that you were looking at the regulations for federal lands. When you think about it, any more thoughts about potentially -- depending on what you're seeing, you allocate more activity toward New Mexico? Just sort of how you're thinking about that at this point in time, just what you're seeing? And does it make sense to potentially step up activity?

Thomas E. Jorden -- President and Chief Executive Officer

Well, New Mexico is a great asset of ours. We've talked in the past that we did have a plan on the shelf for accelerating in New Mexico. And we still do have that, and that certainly would be an option for us. We are seeing a loosening of the permitting. We're getting new permits. We're getting right of ways. We're getting sundries. We also scan competitor activity. And we know our peers are likewise seeing permits. So we're feeling pretty comfortable, confident, perhaps is a better word.

That New Mexico, we can just act prudently and not have to take any extraordinary action around a threat of permit restrictions. But that doesn't answer your question. Some of our best returns are in New Mexico. It's a very target-rich environment. And as we look at 2022, I don't think you should be surprised if we have a greater proportion of activity in New Mexico than we do now. But again, that's not a reaction to a permit issue that's just a program configuration. But we haven't made those decisions for 2022, and it will be driven by best returns on capital. It will be driven on midstream. I mean, a lot of factors drive that. But New Mexico is tremendous part of our portfolio, and we're delighted to have it.

John Abbott -- Bank of America -- Analyst

Thank you. And then our follow-up question is just what are your latest thoughts on long-term sustaining capital and -- over a multiyear basis and your potential oil breakeven?

Mark Burford -- Senior Vice President and Chief Financial Officer

Yes, John, the -- thinking in terms of near term, say, as we reestablish our oil base this year with the resumption of our activities, say, the oil range of mid-80s type oil type forecast, sustaining capital around that level. We would estimate to be somewhere in the $600 million to $650 million range of capital to sustain that kind of 84,000 or mid-80s, excuse me, barrels per day. And with the sustaining capital on an equivalent basis a little more vary, but we think in terms of oil volume kind of sustainability?

John Abbott -- Bank of America -- Analyst

Thank you very much for taking our questions.

Mark Burford -- Senior Vice President and Chief Financial Officer

Sure, John.

Operator

The next question comes from Caroline Shavel of Goldman Sachs. Please go ahead.

Caroline Shavel -- Goldman Sachs -- Analyst

Hi. Good morning, this is Caroline on for Neil Mehta. Thank you for taking our questions. I wanted to start with your 2Q production guide. It was a little light relative to, I think, where expectations were coming in. But as you mentioned in the prepared remarks, you still feel confident that you're on track for the 30% oil growth year-over-year for the fourth quarter.

Can you just walk us through, maybe its timing of wells coming online or other factors that might just get people more comfortable with the ramp and the fact that you're going to be able to execute on that fourth quarter exit rate?

Mark Burford -- Senior Vice President and Chief Financial Officer

Yes, sure. So the second quarter guide is impacted by the cadence of wells within the quarter being more quarter end weighted. So that's having some bearing on our second quarter forecast. And then for the full year, you will see that we have a strong cadence again in the -- as the third quarter, which will be really contributing to that fourth quarter exit rate that we've described. So the cadence of our activities. We feel very confident in and that we'll hit that cadence activity and achieve that year-end production forecast that we've established.

Caroline Shavel -- Goldman Sachs -- Analyst

Thank you and then my next question is, I mean, the Permian is obviously the key area of focus for Cimarex and you'll be at 0 rigs in the Mid-Con by the end of the month. Understanding that you've already sold some noncore pieces of that asset this quarter. But I just wanted to get your thoughts more broadly on the strategic fit for the Mid-Con moving forward?

I know you don't necessarily have -- you haven't mentioned you didn't have any further sales planned this year, but what do you need to see in the Mid-Con to be able to attract capital to it? And then given what you saw recently in the market with these sales, what are the considerations there in terms of potential for further AMD?

Thomas E. Jorden -- President and Chief Executive Officer

Well, I'll finish with the conclusion and then back it up and fill in the reasoning. We really see the Mid-Continent as a sustaining ongoing part of our portfolio. We like the geographic diversity. We like the commodity diversity. We like the market diversity. We've never chosen to be a one basin, one commodity company. And particularly with the demands on Shale 3.0 that I talked about in my introductory remarks, we see the diversity of our portfolio as a key element of our sustainability of returning cash to our owners.

But the reason that we're going to 0 rigs in Mid-Continent is we've got a project that we're finishing up that is really a seminal test of some new ideas, some new completions that we are wholly excited about, and we'd like to watch the flowback before we decide what next. We have a strong portfolio of opportunities in the Mid-Continent that compete heads up on a return basis with the Delaware Basin. So don't misinterpret rig count for enthusiasm. John, you want to say anything about that?

John Lambuth -- Executive Vice President of Exploration

The only follow-up I would give is that we have been diligently working to consolidate our position to really what we consider the core of -- in Anadarko in terms of best returns. One of those is Lone Rock, which we're currently drilling on. And where we have a number of areas like that where we've been enhancing our working interest. And quite frankly, looking forward to deploying more capital there. But Tom is absolutely right, we do want to see this initial development come on monitors flowback and then make the argument for more capital going in that direction.

Caroline Shavel -- Goldman Sachs -- Analyst

Sure. Thank you.

Operator

The next question comes from Jordan Levy of Truist. Please go ahead.

Jordan Levy -- Truist -- Analyst

[Indecipherable] This is Jordan Levy on for Neal Dingmann. My first question is just looking at Slide five in your presentation. It looks like 2Q, the -- a lot of the projects coming online will be weighted toward Culberson based on kind of the current allocation you all have laid out. Just wondering if we should think about activity trending back toward Reaves later in the year barring nothing gets moved around in kind of the Permian asset allocation framework?

Mark Burford -- Senior Vice President and Chief Financial Officer

Yes, Jordan, that's -- yes, there's a little waiting toward -- the way our frac crews are running currently that is a little weighted toward the Permian and the overall mix in the second quarter, but it will be balanced back out. We do expect to have a balanced program between Reeves and Culberson for the full year, a little more even tilted toward Reeves when you get to the end of the day with our total well counts. So it's just anomalous that -- where the counts are coming in for that second quarter.

Jordan Levy -- Truist -- Analyst

Perfect. And just a quick second question. I'm just curious, there's been a lot of discussion on both sides of the conversation on going to kind the laterals in the 12,000 to 15,000 foot range. And if I remember correctly, you all have done some testing of that sort in the past. I'm just curious how you're thinking about whether you see the benefits of continuing to increase that average lateral length? Or you think you reach a point of diminishing returns?

John Lambuth -- Executive Vice President of Exploration

Well, this is John, and I know Blake will add to this. We're very confident in our -- first off, in our two mile, 10,000-foot performance in our expectation. But that said, we have great excitement for even going longer, where the land allows us to do that. And in fact, there are parts in Reeves, which we call river tracks where we actually do go longer than two miles that the land affords us to accomplish that.

I am aware in Culberson, we're intending to go on a 3-mile development here soon. And likewise, even in Anadarko, we're looking at several areas where we want to go three miles. And we do believe that the incremental uplift we would receive from doing that is much more beneficial than the costs associated with it. But I'll let Blake add to that.

Blake A. Sirgo -- Vice President-Operations

Sure. Yes. We've drilled as much as 2.5 miles, and we do have some 3-mile wells on the schedule for later this year. We see a lot of value in the 3-mile units, of course, from a cost per foot standpoint, they look fantastic. We're blessed with really big acreage positions, and our land team is hard at work, trying to see how many 3-mile units we can put together. So look forward to adding more of those into the portfolio.

Jordan Levy -- Truist -- Analyst

That's great color. Thanks so much guys.

Operator

The next question comes from David Heikkinen of Heikkinen Energy Advisors. Please go ahead.

David Heikkinen -- Heikkinen Energy Advisors -- Analyst

Dave Heikkinen will be pronounceable but thanks for taking my question. As you talked about the moves in Washington, D.C., can you just refresh us on your thinking about cash taxes? And then really, thinking about D.C. moves, and how that would fit in or factor into your long-term return of cash to shareholders thinking because it seems like a variable that we're going to have to address?

Mark Burford -- Senior Vice President and Chief Financial Officer

Yes, David, yes, certainly, there's a lot of different items could be changing the tax landscape. Certainly, an effective tax rate, corporate rate going from 21% for post 28%. We'll have a bearing on our cash taxes. Right now, the way the current tax situation, we do see our NOLs, which are approximately $2 billion, preventing us from having current tax -- cash taxes until the latter part of '23 and into '24. If there's increased tax rate, that will certainly be 28% versus 21% versus -- when we do become current tax payable, it doesn't necessarily -- it doesn't accelerate that timing of it.

The other elements that they're being discussed is, obviously, has been a lot of years of intangible drilling cost deductions being items that could be eliminated for the industry. That would cause us to accelerate that timing of our NOL utilization faster by year or 2. And then it depends on the rules that they put around the capitalization and deduction of those IDCs and how much bearing it has on the companies in that industry.

But over time, they'll start to balance out as you get year's of deductions from those prior years being capitalized, and they'll start to neutralize in each other. So certainly, there's a lot of reasons to expect that the Washington putting more of a tax burden on all the industry and specifically oil and gas, but it all has to be factored into what we are available for return to shareholders.

David Heikkinen -- Heikkinen Energy Advisors -- Analyst

Alright. Thanks.

Operator

The next question comes from Steven Dechert of KeyBanc. Please go ahead.

Steven Dechert -- KeyBanc -- Analyst

Hey, guys. Just want to see if we could get some color on the quarterly capex cadence for '21? Thanks.

Mark Burford -- Senior Vice President and Chief Financial Officer

Yes. Sure. So as we've described in the previous calls that our capital cadence to kind of somewhat mirrors our welcome well online cadence, and it's a bit weighted toward the second and third quarters. And so we would expect a little bit more capital in the second and third quarters and a little bit of a tailing off into the fourth quarter. But again, it mirrors fairly closely our wells online cadence as well.

Steven Dechert -- KeyBanc -- Analyst

Okay. Great. That's it for me.

Operator

The next question comes from Nitin Kumar of Wells Fargo. Please go ahead.

Nitin Kumar -- Wells Fargo -- Analyst

Hi. Good morning and thanks for taking my questions. Tom, I want to start on a bit of a philosophical one. This year, I think just a little bit under 50% of your oil production is hedged. Next year it starts dropping off a little bit. Historically, you've participated in the hedge market. But I'm curious, with the balance sheet approaching less than 1 times leverage, meeting that the goal of paying off the debt. What's the role of hedging for Cimarex in Shale 3.0?

Thomas E. Jorden -- President and Chief Executive Officer

Well, Nitin, that's a great question. And that's one that we need to debate at the Board level. A number of years ago, we instituted our hedge policy. As you know, we layer in every quarter, we layer in about 10% of our anticipated future production every quarter with the goal that we would feather them in, not be subjected to any single bet on commodity pricing but also not have long-term hedges.

We typically don't go out more than five or six quarters with the goal of having roughly 50% of our production hedged. We've never viewed it as an attempt to outguess the market. We've never viewed it as anything other than a shock absorber on our cash flow, such that if we had sudden swings in commodity pricing, we'd be able to execute on our capital plans without inordinate interruption. Having a lower debt structure certainly does invite rethought of that. I think that we would probably still have some degree of hedging, but we might back off that 50%. But I'll let Mark comment on that.

Mark Burford -- Senior Vice President and Chief Financial Officer

Yes. I would just echo what Tom was saying there, Nitin, is that, yes, we have had a practice of getting to nearly 50% hedge for 12 months forward. And that kind of reflects what we're looking at what we have hedged through 2022. It's just starting to reach out into that time period. But it's absolutely right, Tom.

It's absolutely right in the fact that we have that practice of maintaining those hedge positions for shock absorber on our capital. But if we have pay off the 2024 notes, we maintain the liquidity of $250 million to $350 million cash in our balance sheet. This would have to be also a factor we take into account when we look at our risk tolerance and our mark-to-market on the commodity exposure. So it's something we'll have to continue to discuss. And as we get further down and we're getting our balance sheet down to what we think is a very conservative levels of leverage.

Thomas E. Jorden -- President and Chief Executive Officer

Nitin, I really appreciate the philosophical question. But I will just share with you, we are long term players, and we've been through a number of these cycles in our career. And when I think about the question, if April of 2020 guy has heard me answer that question in May of 2021, where we say, great, no problem now. We can lower our guard on hedges. April of 2020, Tom, would be hitting me over the head with the rubber mallet.

So we do like to have a long-term view and not get intoxicated by short-term joy, even though it's really hard for us to have discipline. We are going to be disciplined in how we think about this.

Nitin Kumar -- Wells Fargo -- Analyst

And that's exactly what I was hoping to hear, Tom, because Shale 3.0 is not just for a quarter or two, it's something that you're doing as a long-term steward of capital. The -- my follow-up question, which I know it's a bit of a tough one. We've talked about federal acreage and taxes on this call, but there are other regulations coming out of Washington right now, you've alluded to a few that made sense and some perhaps not as much.

Beyond the industry dialogue, what are you doing? What is the business doing to -- if you can walk us through a few things that are there operationally, to make sure that you're ahead of the curve and not following regulatory rule making?

Thomas E. Jorden -- President and Chief Executive Officer

Well, we're certainly engaged in a number of initiatives across our platform. We've already spoken at length about emissions, and that's a huge focus of ours operationally, engineering and from a corporate strategy standpoint. We're looking at wastewater handling. We do a tremendous amount of recycling. We're very proud of that and probably should be talking about it more than we do.

We've got some really innovative engineering in our assets where we redirect, produced water on the fly, and there's times when we're recycling tremendous amounts of water. We're also looking at alternatives to disposal of water. There is some technology we're exploring that is evaporative technology, there's some rather innovative technologies out there. Across our -- we have a huge focus on spills, we're certainly focused heavily in our environmental footprint. Blake, do you want to comment on any initiatives I left out?

Blake A. Sirgo -- Vice President-Operations

No. I've emailed, obviously, the emissions ones are -- what we're working on is way above and beyond what any rigs is. We're trying to limit every possible emission we can throughout our whole value chain. And that's something our operations team shares a core metric. We design and fight for it just like we do for productivity and cost. And we like being on the leading edge of that, and we're going to keep pushing it.

Nitin Kumar -- Wells Fargo -- Analyst

Thank you so much for the answers, guys.

Operator

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

Thomas E. Jorden -- President and Chief Executive Officer

Well, I want to thank everybody for joining us this morning. We are on track to deliver the year we've promised. We feel very confident and look forward to updating you on our progress as the year goes on. So thank you.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Megan Hays -- Vice President of Investor Relations

Thomas E. Jorden -- President and Chief Executive Officer

Mark Burford -- Senior Vice President and Chief Financial Officer

Blake A. Sirgo -- Vice President-Operations

John Lambuth -- Executive Vice President of Exploration

Arun Jayaram -- JPMorgan -- Analyst

Jeanine Wai -- Barclays -- Analyst

Jarrod Cole Giroue -- Stifel -- Analyst

John Abbott -- Bank of America -- Analyst

Caroline Shavel -- Goldman Sachs -- Analyst

Jordan Levy -- Truist -- Analyst

David Heikkinen -- Heikkinen Energy Advisors -- Analyst

Steven Dechert -- KeyBanc -- Analyst

Nitin Kumar -- Wells Fargo -- Analyst

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