Feb 28, 2019
Operator
Good day, ladies and gentlemen, and welcome to the PDC Energy Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host, Mike Edwards, Senior Director of Investor Relations. You may begin, sir.
Michael Edwards
Thank you. Good morning, everyone, and welcome.
On the call today, we have Bart Brookman, President and CEO; Lance Lauck, Executive Vice President; Scott Reasoner, Chief Operating Officer; and Scott Meyers, Chief Financial Officer. Yesterday afternoon, we issued our press release and posted a slide presentation that accompanies our remarks today.
We also filed our 10-K. The press release and presentation are available on the Investor Relations page of our website which is pdce.com.
I'd like to call your attention to our forward-looking statements on Slide 2 of that presentation. We will present some non-U.S.
GAAP financial numbers today, so I'd also like to call your attention to the appendix slides of that presentation where you'll find a reconciliation of those non-U.S. GAAP financial measures.
With that, we can get started and I'll turn the call over to Bart Brookman, our CEO.
Barton Brookman
Thank you, Mike, and hello, everyone. This morning I'm going to let Scott and Scott cover the report of what I think is a terrific fourth quarter.
The resilient 2019 plan we rolled out a couple of weeks ago, they were also give an early look at what is an exciting 2020 look. First, I think it's important to refresh everyone's memory on PDCs corporate strategy for long-term value creation, our strategic priorities, and the confidence we have to execute our business plan.
This first slide, let me briefly summarize the six components of our strategy. First, employ safety and protecting the environment; second, to deliver top tier financial metrics; third, maintain competitive value add drilling inventory; fourth, deliver sustainable peer competitive operating results; next, drive technical innovation throughout PDC; and sixth and last, build a best-in-class organization.
These six long-standing priorities provide the foundation for PDCs decisions and strategy, and will remain our focus as an organization going forward. However, recognizing the recent shift in the market climate let me discuss how two of these objectives are evolving in a changing landscape in our strategic planning process.
Those two being providing top tier financial metrics and delivering sustainable peer competitive operating results. Should note, both are highlighted on the strategy slide.
This next slide highlights our ability to adapt around the two priorities I noted, particularly in a $50 oil, $3 gas world. Remember, we have a successful track record executing on our strategy over the last several years, and this has positioned us to remain focused on returns and pursue free cash flow.
Let me walk through some of the changes we are making. While we continue to understand the importance of NAV and balance sheet strength, our long-term business plan will be executed with the following new set of financial and operational components.
First, sustainable free cash flow; we have line-of-sight year-over-year growth in free cash flow exceeding $50 million of growth per year. Next, with consistent repeatable free cash flow or a significant asset monetization event we will consider returning capital to our shareholders.
Second, financial and operational discipline; line-of-sight, both G&A and LOE for the company, each to be under $3 per Boe. And very important, we believe we can achieve our cash flow neutrality goal even at $45 oil.
Third, return-on-capital. In a moment, I'll discuss our focus on cash flow margin while we pursue portfolio level rate of return threshold over 50% throughout our drilling inventory.
Fourth, growth; debt adjusted cash flow per share growth over 10% and production per share growth over 10%. As we will show you later in the presentation, these strategic priorities are achievable for many years to come and provide catalyst needed for adding value to our shareholders.
This next slide addresses changes to the corporate metrics for PDC which tied to compensation. We believe these proposed new metrics will further align management's compensation with the company's commitment to capital efficiency in generating sustainable returns for investors.
Five metrics, two important changes; let me quickly cover these. First, free cash flow margin has been added while leverage ratio has been removed; this is calculated as free cash flow divided by the capital investment of the company.
Second, cash flow per share has been modified to debt adjusted cash flow per share. Third, our total combined LOE and G&A per barrel as a cost structure measurement tied to profitability and productivity for the company.
Fourth, production; always a measurement of operational success but expect more moderate growth going forward. And last, our fifth corporate metric, capital efficiency; a one-year measurement of our drilling F&D [ph] for the annualized drilling programs.
What is most exciting for the company, we have the assets, the drilling inventory, and the organization to deliver on all the strategic objectives I have outlined. Last before turning the call over to Scott, I would like to address the recent filing by Kimmeridge Energy Management.
As we stated in the press release issued last week, we're open to the opinions of all shareholders and take constructive suggestions seriously. We have had numerous discussions with Kimmeridge just as we engage with other shareholders to better understand their views.
Our board and management team routinely review our portfolio, our strategy, and the structure of the company with the goal of driving shareholder value. We will continue to consider the suggestions and perspectives in the 13-D filing consistent with our commitment to advancing the best interest of the company, and all of our shareholders.
I would like to remind everyone the purpose of today's call is to discuss our financial results for the fourth quarter, year-end and our outlook. We ask you please keep your questions focused on our business plan.
Thank you in advance for your cooperation. I will now turn the call over to our COO, Scott Reasoner, for an operational update.
Scott Reasoner
Thanks, Barton, good morning. Before getting to the numbers, I want to take a moment and thank our employees for the tremendous work they do each and every day.
There were many challenges in 2018 that we're both, in and out of our control, and by constantly focusing on the safety and attention to detail we are extremely proud to be in the position we're in today and it's because of your efforts. Now on Slide 8, you can see our production for the fourth quarter averaged 128,000 barrels of oil equivalent per day which is a very impressive 17% growth over the third quarter.
Capital for the quarter came in approximately $210 million with about a 60:40 split between Wattenberg and Delaware. I want to point to our Delaware Basin acreage count, is now approximately 42,000 net acres.
Our year-end acreage count was approximately 51,000 acres. However, we had approximately 9,500 net acres expire in the first quarter and anticipate nearly 8,500 net acres to either expire or be monetized the remainder of this year.
These acres are primarily in Culberson County and have a pretty and material impact to our two focused areas of Block 4 [ph] and North Central. On Slide 9, you can see the strong growth in production in the fourth quarter and the positive impact LOE which is down to just over $3 per Boe.
On the production side of things, the Wattenberg saw very effective mid-stream run times including DCPs new plant 10 that pushed line pressure lower and our volumes higher, both of these trends have continued so far in 2019. In the Delaware, we saw strong growth in the quarter to approximately 31,000 barrel of oil equivalent per day.
As a reminder, we released the Delaware completion through in early October, so our turning lines were waited for the first half of the quarter. This downtime towards the end of 2018 plays into our 2019 guidance expectation of a slight decline of production in the first quarter.
Completion activity has resumed with the first couple of 2019 rolls [ph] turned in-line a few weeks ago. In terms of LOE, Wattenberg came in it $2.71 per Boe in the quarter, and under $3 per Boe for the full year, while Delaware is approximately $4.15 per Boe for both time periods.
This is strongly tied to the uplift in volume seen in both basins, and we expect this trend to continue as we move through 2019. On Slide 10, we detail our capital plans for 2019 which include capital investment excluding corporate capital of $810 million to $870 million.
At the midpoint this represents a reduction of approximately $150 million compared to 2018 capital. I'll note, this also includes $40 million of Delaware midstream investment.
We believe we are on-track to execute the divestment of these assets in the first half of this year, and that a portion of the 2019 investment will either be recouped or not spent. As you can see on the bar chart, we anticipate generating adjusted cash flow from operations of $840 million to $890 million assuming $50 WTI and $3 gas.
At the midpoint, this plan generates approximately $25 million of free cash flow. With pricing where it is today, our free cash flow quickly climbs north of $50 million before making any adjustment to the midstream capital outlay.
Finally, we anticipate this plan to generate production growth of approximately 20% year-over-year. In the Wattenberg, we're clearly in development mode with $2019 being all about efficiencies.
We expect to invest approximately $500 million in 2019 to turn in line between 110 and 125 wells. The pie charts on the top right of the Slide 11 show the breakdown by lateral length of our turn in lines this year compared to 2018.
As you can see, MRL and XRLs account for approximately 80% of 2019 turn in lines compared to less than 50% in 2018. In fact, we plan to turn in line approximately 20 fewer net wells in 2019 but reached a greater amount of lateral feet due to these efficiencies and our increased working interest.
This is most evident when looking at our remaining evident inventory, excluding ducks [ph] or year-end 2000 inventory was approximately $1,500 compared to approximately $920 at the end of 2018. However, the average lateral length has increased by 30% to over 8,200 feet; while the average working interest has also increased.
These efficiency gains are largely possible due to the tremendous work our land team has done in blocking up our leasehold for the last few years. Shifting over to the Delaware.
We anticipate investing approximately 40% of our total capital or $350 million in our 2019 plan. In 2019, we have modified our completion design to reflect increased stage spacing and slightly less profit per foot.
We believe these tweaks which will help save more than a $1million per well will not impact the productivity of our wells, thus improving economics. We also believe there is room to improve these costs as we continue to test more local sand and improve our drill times which have been averaging less than 30 days off late.
As we mentioned in our release, our plan assumes dropping the rig count from 3 to 2 around mid-year and turning the turning in line 20 to 25 wells compared to the 26 wells in 2018. Similar to Wattenberg, our mix of turn in lines is weighted towards longer laterals which in this instance completely eliminates us or else from the 2019 plan.
Look for us to try and continue this trend moving forward as the economic benefit of long laterals is more evident in the Delaware compared to the Wattenberg. I'd like to close by getting -- by going into more detail surrounding our Block 4 acreage and our upcoming plans for the area.
As you can see, we're showing a bit more detail in terms of our expected GOR than on previous calls by defining Block 4 into 3 sub-areas. As you're all aware, our Grizzly pad, which tested 12 wells per section in the Wolfcamp A was turned in line late last year in the area 3 as shown on the map.
As we indicated on our last call, the productivity of this pad was below our expectations due to localized rock quality and fluid properties not down spacing. These wells have since been placed on artificial lift and we have seen their production stabilize, and they are providing valuable data in terms of productivity differences between the upper Wolfcamp A and lower Wolfcamp A.
I mentioned all of this because in 2019 we plan to continue testing various spacing assumptions, and landing zones in an effort to find the right balance between rate-of-return and Net Present Value. One of the first tests is our 7-well 10-man pad that is planned in area 3.
Our guidance assumes similar results to the Grizzly pad. It is designed to test a variety of spacing assumptions between the Wolfcamp A and B zones.
Overall, we're excited about our plan in the Delaware this year and look forward to continuing climbing the learning curve. With that, I'll turn the call over to Scott Myers for a financial review.
Scott Meyers
Thanks, Scott. I plan to give a couple key highlights for both, the fourth quarter and the full year 2018 before giving detailed financial guidance for 2019, and an updated look at our 2020 outlook.
As a reminder, I plan to cover both, non-U.S. GAAP and forward-looking statements, and want to point out our disclosures and reconciliations of these metrics can be found in our slide deck.
Net cash from operating activity for the quarter was more than $300 million representing a year-over-year growth of 76% compared to the fourth quarter of 2017. This was largely driven by an increase in total sales between periods of nearly 40%, as well as positive changes to working capital compared to prior year.
In terms of G&A, we saw 40% increase in both terms of full year and fourth quarter numbers. We touched on this in the third quarter but it's worth mentioning again, G&A in 2018 includes $16.5 million in legal related costs and approximately $13 million for our government relations department.
Additionally, we made a strategic decision to upgrade our systems and processes at PDC during 2018 and 2019. We are currently in process of replacing our ERP system and streamlining our process so we are more scalable and efficient in 2020 and beyond.
G&A is obviously something that comes under a lot of scrutiny, both at PDC and across the industry, and I want to stress that we are extremely focused on driving these costs down while also positioning ourselves well for the future. As I'll show you in a few minutes, we project our 2019 G&A per Boe to decrease nearly 25% to just over $3 per Boe and target below $3 per Boe in 2020.
Quickly touching on non-U.S. GAAP metrics, the bar graphs show pretty steady growth in both, adjusted EBITDAX and adjusted cash flows.
These increases are largely production driven, and as you'll see in a few slides, we expect continued annual growth in both of these numbers despite the expected reduction in per Boe sales price. Moving to Slide 17; we give a detailed breakout of our production costs.
Scott has already touched on LOE but it's worth highlighting again that we've been able to deliver reduced cost on a Boe basis for three consecutive quarters. We are very pleased with Wattenberg LOE ending the year under $3 per Boe especially given the third-party midstream challenges we faced and the impact it had on both, in terms of higher costs and lower volumes.
In the Delaware we are similarly happy with LOE in the $4 per Boe area. We think there are some efficiencies to gain here but at the end of the day we think an all-in corporate-wide LOE per Boe of $3 is extremely competitive industry-wide.
We look to target a corporate-wide LOE per Boe below $3 in 2020. Quickly highlighting our financial position, you can see on Slide 18 that we're able to generate roughly $25 million of free cash flow in the fourth quarter.
Due to this, we exited 2018 relatively undrawn with our revolver with a total liquidity position of $1.3 billion with no near-term debt maturities. Our leverage ratio improved to 1.4 times compared to 1.9 times at the end of 2017.
In terms of hedges, you can see that we have approximately 50% of our 2019 oil volumes [ph] heads at approximately $55 per barrel. I think it's important to note that the majority of our Delaware barrels receive bent brace pricing meaning that this percentage is actually much higher in terms of our WTI [ph] Exposed barrels.
We also have a great start on our 2020 program with 8.6 million barrels hedged at nearly $60 a barrel. Shifting gears to 2019 we show our anticipated cost structure in commodity mix.
As you can see we expect our commodity mix and price realizations to be relatively unchanged from last year. In terms of cost we expect our TG&P to be relatively in line year over year.
Our LOE and G&A per Boe are both expected to decrease year over year. As I previously mentioned G&A per Boe expect to decrease 25% while our LOE per Boe is expected to decrease 5% to 10%.
We are very pleased with both these trends and plan to remain focused on moving forward -- moving this forward as can be seen by the inclusion in our compensation metrics. Finally moving to slide 20, we give our first look at our updated 2020 outlook at a constant $50 oil and $3 gas price deck.
Providing these multiyear outlooks is something we take great pride in at PDCE as we believe it differentiates ourselves compared to many of our peers. We believe this out with does a great job of showing that we did not sacrifice our 2020 outlook for our 2019 plan but actually improve year over year and many metrics.
Looking at the table you will see we highlight not only our projected free cash flow but also our free cash flow margin which we define as our annual free cash flow divided by annual capital investments. Both of these metrics spring competitively in 2019 and strong in 2020 as we project to generate $175 million of free cash flow between the 2 years at a $50 oil price.
Additionally, we show our production growth per debt adjusted share and an effort to emphasize our shifting strategic priorities. these calculations assume our average 2018 share price of over $51 per share and would further improve if we re ran it at the 2019 year to date price.
The last thing I'll add is our 2020 capital plan is currently projected to modestly increase compared to 2019 as our range includes the possibility of additional completions in each the Wattenberg and in the Delaware. These completions would likely be done if driven through efficiency gains and or improvement to our 2021 outlook and our ability to meet our strategic priorities that are already outlined on Slide 5.
In closing I want to stress that we intend to remain extremely disciplined with a long term focus on delivering value to our shareholders. With that I'll turn the call back over to the operator for Q&A.
Operator
Our first question comes from Mike Kelly from Seaport Global.
Michael Kelly
Congrats on fabulous updates thus far in 2019 and a lot of that kind of jump into that --the money land slips [ph] slide on page 20. it really ask if you look at this you know great trajectory 2020 over 2019, just wanted to get a sense even beyond this.
is there anything [indiscernible] that would really hold you back from you know being able to replicate these sort of results beyond 2020 and curious if there is if you see there's a potential upside to that free cash flow margin number if free cash flow number in aggregate as you go further while Maybe keeping that ability to keep growth on just per share basis at that you 10% or greater level? Thanks
Barton Brookman
We were really encouraged by our longer term outlook. we actually have a 5 year outlook we run which obviously we haven't shared with the market but the quality of our Wattenberg and Delaware assets, the front line returns coupled with some of the new tactical financial and operational things I talked about, Scott talked about, really give us line of sight as we go to 2021 and 2022 to continue advancing all of these metrics.
So obviously I think the thing you can expect is more moderate growth this free cash flow I think we have opportunity continue to build on it. And that capital spend is something -- obviously we have optionality based on what Scott Meyers talked about adding some additional [indiscernible] making sure we're not building too many dugs[ph].
We have optionality at some point in time of adding a rate but right now we've got this on a fairly flat rate outlook. So yes we've got a good strong 5-year outlook and then we have good optionality amongst the two basins as we continue to -- as discoveries are said to be in full development mode in Wattenberg.
And Delaware right now is obviously still emerging we're learning a lot but we're extremely pleased with the results we're getting right now, Lance jump in here and if you have anything that on this.
Lance Lauck
No, I think that -- that's a good projection outlook. there's a lot of optionality in our portfolio for the continued you know that adjusted cash flow per share growth as well as you know continue to improve the metrics of our shared on so I think we're in a very good position.
Michael Kelly
Great And switching gears to the midstream front kind of teased us a little bit on this potential sale. They expect first half of this year and I just have a 2 part question there, one; just trying to get my arms around how we should think about the potential for this asset i don’t know if you want to lay down terms of what you spent the day or EBIDA that you've generated.
But just trying to frame valuation there is some degree that you feel comfortable giving us and then the second part is just thoughts on the use of proceeds from that sale. Thanks guys.
Lance Lauck
As far as how we you know have spoken about our Delaware Basin midstream assets, what we've outlined to the market is that we've invested approximately $150 million through year end 20185. we spoke a few minutes ago about the budget around $40 million for 2019 a portion of that which we believe will be returned as part of this monetization We've not gone on to EBITDA metrics or numbers or multiples there Mike but we've only just spoken about the invested capital to date.
I think one of the things that we think about as part of this process, we've gotten some questions around you know just some of the timing that we're looking at the first half transaction now and just to share this insight [ph] to that. we spend on a lot of time with the finalists on the other side of this just walking through our plans for growth for the future, understanding how our assets get integrated into their assets as well and then talk into the operational conditions because this is a long term relationship that we're going to be putting in place here and so we spent that quality time making sure we understand those key components of where and how you know the terms are going to work you know going forward.
So we're -- the teams have done a really good job on that. and then finally just to kind of close it out as far as the use of proceeds, look we're going to consider a variety of options including the consideration to return capital to shareholders as part of outlined earlier in the presentation today.
So hopefully that answers your question there Mike on that.
Operator
Our next question comes from Welles Fitzpatrick from SunTrust.
Welles Fitzpatrick
On the kind of I don't want to call it guidance let’s say the theoretical 2020 plan, obviously focused a little bit more on the Wattenberg and the Delaware. So would you describe that as a function of the Delaware still emerging as you said in the prepared remarks or – or are you really trying to get to as much of -- trying to plaster as much of the Wattenberg now before any potential rule changes?
Another [indiscernible] still doesn’t sound like it's all that bad. And lastly, is it contingent on the corn FID [ph]?
Scott Reasoner
This is Scott, Wells and I'll start out with the way we've approached looking at our capital there and we're really excited about where Wattenberg is obviously continues to do what we expected to do pretty much every day and that gives us a really good feeling and moving the Delaware in that direction the maturity differences are really great in terms of the way we can balance those two and I think that's what we've been focused on is making sure we're doing all we can to generate a really positive rate of return at the same time still developing our Delaware and we're learning a heck of a lot as we're moving along there down spacing efforts but different benches. our ability to continue to test the additional zones that we have and relied on for the overall look of you know the Delaware well count that type of thing is really still something that we're focused on and so we're really trying to balance all of those factors including the idea that we love -- keep our motion and movement forward in the Wattenberg because of the -- you know current state of the regulatory world.
So I think we're in a good spot with where we are.
Barton Brookman
Just want to add Wells and then I'll put this over to Lance on the takeaway. I think Scott and the operating teams have done a really phenomenal job of pursuing optimum capital efficiency in both basins with the balance between the rate base and the frac crews and in Wattenberg particular it's probably a signature that is maybe leading in the country as far as our efficiency in our drill times followed by the efficiency in our fracs and pounds of sand per day that we're completing and that all lines up to some of the most efficient operations we clearly in the Wattenberg so in Delaware as Scott said we're making great strides over all of our drilling and completion.
So we kind of start with making sure we're not disrupting that machine in both basins and then we build it up to a total capital allocation. Lance you want to jump on the take away?
Lance Lauck
Yes. So Welles from Wattenberg is to look at the gas processing there with the ECP[ph] as you know first of plant 11 is scheduled in June of 2019 to begin operations and it's a projection that we have that's a ramp and volumes that go through that plant so it's a few months before you get up to the full 200 million cubic feet per day and that's how we've modeled in our guidance and that's just our start up procedure that they conduct.
Additionally there is a 100 million today bypass that's in August of this year that'll bring additional capacity to their system so they're in a good spot they're on track with this and so we're very pleased with the work that ECP is doing on plant 11 and then as you spoke of big [indiscernible] on plant 12 the ECP has targeting us second quarter 2020 start up for that plant and so we look forward to you know that plant coming online as well and adding additional you know capacity to their total super system.
Welles Fitzpatrick
Okay. No, that makes total sense and then just one last one.
Last quarter, I think is a little bit too early to get an update on maybe production and EOR's on the change methodology in the Wattenberg where you putting in extra stage at the toe and the heel. Can you talk to that at all you've seen about a 10% uplift that you might expect?
Scott Reasoner
Welles, I guess at this point it's still too early to tell with the line pressures are coming down somewhat but we still don't have a long enough round to really understand that. We do continue to do it because we have faith based on our history of extending our lateral lengths.
Allot of factors that go into that, where our teams have a lot of faith. We’re getting that but we still aren't able to measure it.
Operator
Our next question comes from Paul [ph] from Macquarie.
Unidentified Analyst
Could you touch on what your current corporate decline rate is and if there's any sizable difference between the Delaware and the Wattenberg.
Scott Reasoner
So this is Scott and I'll give a little run at this and then maybe Lance brings clarity if I don't cover the whole thing. We -- our corporate decline rate changes so much depending on the particular circumstances that we're in and every time we turn a pad on it's a different decline rate because they are such significant contributors to the overall productivity.
It's hard to give a current decline rate. it changes you know like i said is that we bring a pad on or don’t have one come on for a while so we've struggled to really give that.
Our reservoir team would say, do you want it this today or do you want it tomorrow is often times how we look at that how they would answer us.
Lance Lauck
Yes. And Paul, I can tell you that Delaware is probably steeper than the Wattenberg obviously we have a lot of legacy production.
we also have a higher line pressures right now that are as pressures come down we're able to un-bundle quite a bit of our legacy production. So that’s a -- that’s probably over time going to be flattening the decline and then in the Delaware obviously we're you know a few years into the development of those fields of mostly wells are new and at the very front end of the curve.
How that all looks when you roll it up again I think that's not a number we've put out in the market.
Unidentified Analyst
Okay, I appreciate it's challenging in varies on year over year versus [indiscernible] and timing of pads. Is there an underlying assumption within the current plan on what the PEP decline rate was for a replacement maybe on a 2019 over 2018 basis?
Lance Lauck
I think there is an assumption, I -- we'd have to go cut that apart and look at our model but it's not something we'd reveal to the market.
Unidentified Analyst
Okay. And Then I guess maybe focusing out on 2020 still pretty robust growth and certainly a robust free cash flow margin as well.
Could you maybe provide some color on how you arrived at this particular outcome as being the one as opposed to maybe higher growth or maybe one with lower growth and more free cash flow just kind of how you arrived at that plant you did versus the other considerations?
Scott Reasoner
This is Scott. I'll just take the first crack at it and I can turn it back to Lance or Barton, for some more color but if you look at what Bart outlined in the beginning of the presentation about $50 million of free cash flow being able to grow the company in the 10% rates.
What we're looking to do is be able to do this for multi-year approach. so you can see our numbers here especially on the free cash flow are probably a little bit higher than that but to go much significantly higher than that puts more of a strain on to be able to do this in 2021 and 2022 and beyond.
So what we're really trying to do is have steady consistent growth year over year improving our free cash flow, our free cash flow yield and still growing the company at what we think is competitive rates and driving down those G&A and LOE cost on a Boe basis at the same time. So that's kind of what we do when we mix everything together for what we are planning on doing in the next few years.
Barton Brookman
Yes, Paul. And I think back to some of the earlier comments we really -- we start also when we look out and really working with the operating teams and buying that operational balance is driving turning line schedules, not overbuilding ducts/frac crew efficiency behind the drilling rigs, midstream takeaway, DC capacities, oil takeaway.
We also consider netbacks, basis differentials, the capability of our operating teams and we put that all in a bucket and say what's best as we're trying to achieve strategic priorities that I outlined. So there’s Probably 20 different levers we were pulling at any given point in time, that's always a challenge.
The good news is the assets are quality and the teams are doing a phenomenal job. So we're extremely pleased with the Outlook but I think it's important.
we also have the ability to pull a lever here or there and move these metrics a little bit but I think what we're trying to provide is the quality of the assets and our ability in the sustainability of this outlook.
Unidentified Analyst
I just have one clarifying question is there may be for Scott Meyers. is that part of the reason the duct [ph] count increases in 2019 is a little bit lower CapEx that free cash flow but also set up for 2020 kind of balancing those items.is that have been interpreted correctly?
Scott Meyers
I think that's fair and also as we start going into our Wattenberg Field in our 3 different areas of development it's naturally going to lead to a little bit higher duct count from an operational standpoint for our teams, for safety of our employees too. But yes, that absolutely comes into play making sure that we're balancing our CapEx and our growth this year.
And again, as Scott has pointed out we are really operationally efficient with the 3 rigs running in a one full-time frac crew and so we feel very comfortable that leads to the best overall economics for the individual development of those wells.
Operator
Our next question comes from the Leo Mariani [ph] from KeyBanc.
Unidentified Analyst
I was hoping you could give a little bit more color around you know kind of use of free cash flow you guys certainly talked about returning capital to shareholders as a consideration to try to get a sense of what other considerations are let's just say prices do better this year you guys sell to the midstream you know properties, potentially recycle some of that proceeds into maybe adding some additional acreage just want to get a sense of how you're thinking about balancing you know potential new acreage purchases to return capital to shareholders.
Scott Reasoner
Leo, let me jump on this and Lance can add to this and I think everybody is fully aware we're always in the deal market we're always out looking at inventory abs I would say right now our motives were or not Maybe a big notch more finicky right now we're slowing down our drilling pace of stretches out your inventory gives us a little more line of sight of a longer runway on that. And we've been in detailed discussions as a management team them with the board around the use of proceeds we haven't finalized everything I think everybody on the call understands what that means and what our options are and I think when you ask a question what's the balance and I think that's probably the right word right now we're giving consideration to all of them.
We've got to continue to watch the market and I think the key in this is what I open with and what Scott reinforced. We want to be in a mode of generating free cash flow quarter over quarter and have confidence in that really understand where the markets are, understand our hedge book And have total confidence In this outlook which we do what we would like to be in the middle of it versus it being an Outlook and we're just emerging into that zone so more to come on okay.
So we are giving consideration on all of the above.
Unidentified Analyst
Okay, that's helpful. And I guess when you talk about return on capital to shareholders I guess you guys more focused on buybacks versus a potential dividend at this time.
Lance Lauck
I think we were given consideration to both and again I would go back to your question balance where I think we're having a balanced robust discussion on both of those and it's very interesting to hear the markets opinion on A versus B
Unidentified Analyst
And I guess can you guys maybe just also comment on how you see the current kind of Colorado regulatory development sort of going these days I mean obviously you've got a bunch of new folks in the legislature just wanted to get a sense of what those discussions are and continue to hear more about local control out there in the press in just want to get a sense of what you guys think that could mean for PDCE going forward?
Scott Reasoner
Yes, and there is probably not a lot to update from what we've communicated in the past obviously a new administration we're incredibly engaged. We have not seen an energy bill we have full knowledge that there is an energy bill being drafted we anticipate the next month we are going to see something and what that looks like we don't know what we do know and what we've heard is local control is one of the primary themes within the bill and I would just encourage everybody to really step back and look at that PDCE acreage position in Weld County which is very pro oil and gas.
We've operated there for over 20 years. we have a phenomenal reputation.
We have intense efforts to be engaged with the communities and be involved with the communities in. Almost all of our acreage has not overlapped with the [indiscernible] of the community.
so We feel like we've tactically got this very, very strong position in Weld County and have line of sight of development of our acreage so more to come on this it's a changing environment and I know over the state right now with the new governor and new legislative group they've got multiple different platforms that they're working on so it's probably been slower than we anticipated but we do think we'll hear some over the next month.
Operator
Our next question comes from Brian Downey from Citi.
Brian Downey
Thanks for taking the questions we appreciate the outlook and clarity on the plan to 2020. Can you discuss what the cost inflation assumptions are baking in those numbers it sounds like Wattenberg well cost range is flattish this year with some changes in lateral length and Delaware costs are falling due to completion design but wasn't sure if there are any answers embedded in the assumptions there?
Scott Meyers
At this point, we have not built any changes to that. The 345 for Wattenberg is what we're holding with and we're at about 11.5, 13 and we do have some double axles in our plans so 2.5-mile laterals that we're looking at about $15 million on so those are the numbers at this point.
Brian Downey
And can you talk a little bit more about the Block 4 area 3 development at Delaware it sounds like you'll have some learning from the grizzly pad with the plan in 2019 optimize development completion before really attacking area 2? Is that the right way of thinking about 2020?
Scott Reasoner
Yes we actually have a combination we're speaking to area three mostly because that's the near term work that we're doing what is we go through the latter part of this year we're growing and in that area two over the West in that -- no, I'm sorry, East as we go through that we are absolutely down spacing understanding the -- still debating exactly how to lay those wells out in terms of the spacing but what really getting to the area two to is our next step and I think when we look at that where we have two fairly large pads we're just not quite ready to say exactly what we're going to do there yet and I know even this morning the team was meeting on exactly how to relate these wells out in and what zones we're considering the Wolfe Camp C in this discussion as well as an additional Bone Spring well or two so all of that you have to come but all of that it will be an area two on the map there.
Operator
Our next question comes from [indiscernible].
Unidentified Analyst
I got to follow up on the [indiscernible] discussion. Can you talk a little bit more about how you're thinking about Replacing what looks like one of the highest quality inventories for landscape Specific how you preference to Bolt on and DJ compares to adding something at Delaware whether or not you look outside of those two areas and how they bid spread [ph] today compares to where it was, say in the third quarter of last year when oil prices were higher?
Lance Lauck
As we look across you know sort of the both our basins the DJ and Delaware, I mean we're clearly in the deal flow as far as you know searching those best opportunities to bring bolt on to the company to grow the inventory I think one of the key things that we want to continue to stress is that we have a you know very high threshold for you know for new acquisitions and we want to make sure what way would be acquired would be acquiring at the right place at the right price with the great rock quality that we have with our current inventory. I might also point out that you know organically it will continue to try to find ways to increase our inventory organically you know for example we've got some Wolfe camp C tests down on Delaware as well as Bone Spring tests in Delaware.
So things like that test in the new intervals so we think would be helpful for growing out that inventory also. As you look at this basin, the DJ versus Delaware you know where we're basically looking at both basins and it gets down to you know recognizing that you know scale it is important because with the scale it enables us to be more capital efficient and enables us to improve margins given the increasing economies of scale that you have and opportunities like that.
So we continue to stay you know in the deal flow. We’ve looked a lot of opportunities last year.
we didn't acquire anything last year because we didn't see you know the opportunities that best fit the lease where we are pursuing and what we are focused on so hopefully, Eli, that gives you kind of a high-level look at how we think about the bolt-ons. You know as far as you know adding inventory you know going forward.
Unidentified Analyst
It doesn't thank for the color, Lance. Just in terms of the bid a spread [ph] what do you see on that front and is it looking outside DJ and Delaware out of the question?
Scott Reasoner
It's hard to project sort of the spread, I mean right now, I mean clearly with the volatile oil prices that's gone from what was in 70s October last year down to I think as well as $45.50, that really puts everybody on edge as far I want to transact or not want to transact, that in and of itself tends to push somewhat of a pause button on pursuing opportunities like that. So that's something I always keep in mind as we go forward.
And then as far as other basins, we continue to look very hard at our two existing basins of course, but then if there was another basin that we at least start to look at some; we have looked at some things in the Midland basin but it was just very preliminary and not something that we saw the size and scale that we wanted to move forward with. I think what we're looking for is just to have the big thick reservoirs that's got the high oil content and a lot of opportunity for inventory in the future.
But look at us as focused on the Delaware and the DJ.
Unidentified Analyst
For my follow-up; can you give us more detail on what basin assumptions you're using the Delaware basin to get to the 365 locations or any differences that you're using in the East versus the Central and what exactly you plan to test with the 10-man?
Barton Brookman
Yes, I'll walk through the first part of that and then I'll turn over to Scott, maybe talk a little more about the 10-men specifically there. The space and assumptions that we used to drive the 365 locations they vary across our acreage position, East versus North Central, which are our core areas and the solid good quality rock, we really like these areas and we have a range -- if you look at everything out there between 14 and 20 wells per section, and these are oilier areas, and that's kind of the range and the locations themselves are predominantly; the Wolfcamp A, Wolfcamp Been, we've actually put a few select wells in there for the Wolfcamp C and the Bone Spring, some of what we are testing here this year.
Sort of the lower side of the spacings if you will is more of the north central area because it is a little higher GOR and then sort of the higher ends of that might be a little bit closer the eastern side which has higher oil mix there; so that's sort of how we look at it. We're still testing and looking at different opportunities there for these spacings but we feel comfortable with where we are at today.
And keep it in mind, the actual ultimate spaces on the geology, reservoir thickness fluid regime, parent wells, churn wells, all those types of things as it works south. And when you look at the Tinman [ph] itself, we're really looking at the interaction between the combined upper and lower A and the B, and it really is a fairly complex look at a variety of different things where we're testing there and something that we'll really be excited because when we integrate that B with it, obviously, you have to worry about what does that do to the lower B or lower A and that type of thing, and placing those wells properly is part of what we're trying to get to.
So a whole series of different tests we're looking at but when we look at the 10-man [ph].
Unidentified Analyst
Scott, from a horizontal perspective what spacing are you guys going to be testing?
Scott Reasoner
I don't know if I have those specifics with me, unfortunately.
Operator
And our next question comes from John Nelson from Goldman Sachs.
John Nelson
Congrats on the leadership to strengthen the alignment of management incentives with shareholder desires and a very thoughtful multilayer plan. If I can pick up on the former point, the free cash flow margin metric was a new one for me.
Can you just speak to how the board views the merits of this metric?
Barton Brookman
I think there is a lots of ways we've been trying to look at different metrics to try to get a return-based approach to our numbers and we're really looking at what can we really control and what can we really drive, and when you really look on cash-on-cash returns, we really think it's the best way to major companies. So we can continue to grow the cash that's coming out of PDC, in other words, our free cash flow is growing and we can control our capital investment, we really think that shows strength in numbers.
So we like this free cash flow margin and the ability to grow that when we're projecting basically 15% in 2020 compared to our capital. We just think that help differentiates ourselves to the peers, and it's something that's easily comparable between companies because you don't have to worry about historical cost basis of or impairments and a lot of the other things you have to do with some of the other metrics.
John Nelson
For my second question; I think our new director of the COGCC [ph] was appointed last month. I was hoping you can comment if you've noticed any change in the rate of permanent issuance since leadership transition and if you had an engagement with the regulator and are expecting any other potential changes down the line?
Scott Reasoner
This is Scott and we're obviously engaged, very interested in that exact discussion. There is more scrutiny being given to permits that are in and around normal -- as it's defined, I believe it's normally occupied buildings that type of thing.
And I believe they're looking at something around 1500 feet, precisely, they approach that are not completely schooled up on yet, and I don't know that anybody is in the industry yet but what they're doing is giving it more scrutiny. With that we're in a tremendous position because we've got permits that take us out into 2020, and so there is what I think is a little bit of a learning process between the industry and the new regulators, it's something that we can manage very effectively, we are -- even within the permits that we have submitted, we have a very short list that are being given additional scrutiny.
So, again, this is going to be a learning process, the thing I will say is, it's something that we feel like according to what our -- at least according to what our land team sees so far as they are approaching this. It's something that we can manage, it really is just a little bit more work on the front-end of a permit to get some additional approvals from some of the offset landowners.
John Nelson
And just to -- I guess follow-up on that as we all kind of sit and wait to see what local control means. That comment that you have permits through -- is it into 2020 or how many months I guess what I say -- is maybe the way to say it of a permit cover you have to the extent that there is a…
Barton Brookman
It puts us into 2020, I can't speak to how far with the three rigs is -- really I would just say the best -- the best thing I'd say is it puts us into 2020 before we need the permits that we have submitted today even approved; and so we've got a good long runway before it becomes an issue for us.
Operator
[Operator Instructions] And our next question comes from [indiscernible].
Unidentified Analyst
Barton, I was wondering if you could give a little more detail on Slide 11, it looked like the lateral lengths went up about 30% but the location count went down about 40%. Does that reflect -- I guess, you know, one year's drilling and I was just wondering if maybe you would fine tune the location count for maybe a lower oil price or something?
Scott Meyers
It really is a function of taking the locations we had. Obviously, we reduced those by the wells that we've drilled and turned in line, and then adjusting them for the lateral length but also the additional working interest; so as we've traded, we've increased the working interest in the in the average well that we have.
All of that are function of these consolidation efforts that we and the rest of the industry have done to really bring efficiency to all of us. It's something that -- really the math is around the longer laterals and the additional working interest, and again, that group of wells it's been turned in line this year.
Barton Brookman
Our total lateral fee for '18 versus '19 in Wattenberg.
Scott Meyers
Yes, I mean we're doing fewer wells but our lateral length is more than offsetting the reduced number of wells. So that is the typical math you're going to see going forward, and then it really is a more efficient -- more of we control our own destiny, we're not dependent on other operators typically, as you can see the working interest -- we just keep going up; that just reduces -- what that does is, it reduces the non-op portion that we would add in someone else's wells.
Unidentified Analyst
And I was looking at some data since the summer, and it looked to me like you're drilling kind of 20% better wells per foot than the Number 2 guy in the basin. And you know, kind of almost doubled the average of the base and I don't know if my numbers jibe with yours but, I -- how much do you give the problem per foot in the stage spacing in the Delaware but where are you in the DJ currently?
What have you been doing anything different then?
Scott Reasoner
I don't -- you know, we're getting to the point where we're pretty well settled in and part of it is where we're located, obviously, we're in great rock and that's an advantage over some of our peers but it's also -- hopefully, part of it's because of the excellent work that our team is doing, it's really hard to gauge unless you do direct offsets, it's exactly what brings that but right now we're at -- right at 1100 pounds per foot still in terms of sand, mostly 24 northern, there are times when we have to shift off of that if there is a bit of a shortage but it doesn't seem to overly impact or best we can tell impact the wells at all. And we're really looking at 170 feet between stages with about -- with some testing considered about 240 feet.
Again, the process -- we have these tests in mind for quite some time but because of the line pressure we really haven't been able to deal with that or didn't feel like was appropriate to deal with, we've really said let's hold until we can actually measure it testing that. And with that obviously, the 240 feet comes additional management of the cluster purse, it's not just adding stage-like, it's managing the perfect clusters as well.
Unidentified Analyst
And just one last one; the comment about the bypass in August of next year in the DJ; is that just gives you more options, more outlooks, it's truly gas; is that what it means?
Scott Reasoner
Yes, actually the bypass is there in August of 2019. So what it does is it just gives the produces more opportunities to produce greater volume because of the bypass.
And basically what happens there is, the raw gas comes to the plant but it gets compressed and send around the plant and mixes with tailgate of the plant to meet -- still meet stack on the other side of it. So what it does is, it's not processed volumes but it's volumes that are sold there on a raw/Btu basis; but when it does it enables the flow of all the volumes of the producers in the field to increase.
So it's more of a temporary solution; longer term, obviously it works then moving towards capacity construction to where that turns into process and capacity.
Operator
And our next question comes from Timothy Rezvan from Oppenheimer. Your line is now open.
Timothy Rezvan
Thank you folks for taking my call. I appreciate the strong update and the efficient outlook you gave through 2020.
But I think any of us analysts would notice PDC-E [ph] remains one of the cheapest AMPs on traditional valuation metrics. So I guess for Bart; do you think this is more because of the Colorado overhang or because of our inventory concerns.
And I guess, in the absence of clarity on either of those items, do you think you know this issue can be addressed.
Barton Brookman
The answer is yes I think if we continue to focus on the quality of our assets and the strategy we laid out, we can make strides in that. I think there is no question when you look at.
The multiples -- if you can't to call them multiples, depending on which multiple you tied back to your evaluations that the Colorado operators right now are depressed. I think it doesn't take a smart person to recognize, we have a very challenging regulatory environment and we've been we've been fighting that for several years.
So, I appreciate Ray's comments earlier about the quality of our rock, we still believe we have some of the best assets in the country, some of the most capital efficient projects. So our goal is to constantly looking at ways to change our business plan.
While we tweak some of our operational financial strategies that we outlined and we're hopeful that those will fuel ongoing shareholder value; so it's a very fair question. And obviously, when we look back at the multiples even a few years ago it was quite a spread between Colorado and some of our peers who aren't Colorado.
And we've had a compression all sector has come down; so the absolute multiple compression in the band between the Colorado operators and some of our other peer peers is more narrow today but at the same time it doesn't take away from our push to try to drive that up. So again, fair question.
Operator
Thank you. And I'm not showing any further questions at this time.
I would now like to turn the call back to Barton Brookman for any further remarks.
Barton Brookman
Thank you, Nicole and thank you, everyone for your ongoing support and taking the time to get an update around our strategy and what we think is a terrific outlook. So with that we look forward to seeing everybody on the road here in the future.
Thank you.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program, you may all disconnect.
Everyone have a great day [ph].