Concho Resources Inc  (NYSE: CXO) Q1 2020 Earnings Call Transcript

Concho Resources Inc  (CXO) Q1 2020 earnings call dated May 01, 2020

Corporate Participants:

Megan P. Hays — Vice President of Investor Relations and Public Affairs

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

William Giraud — Executive Vice President and Chief Operating Officer

Analysts:

Jack F. Harper — President

John Freeman — Raymond James — Analyst

Doug Leggate — Bank of America — Analyst

Scott Hanold — RBC Capital Markets — Analyst

Brian Singer — Goldman Sachs — Analyst

Arun Jayaram — JPMorgan Chase — Analyst

Paul Cheng — Scotiabank — Analyst

Leo Mariani — KeyBanc — Analyst

Derrick Whitfield — Stifel — Analyst

Neal Dingmann — SunTrust — Analyst

Michael Hall — Heikkinen Energy Advisors — Analyst

Jeffrey Campbell — Tuohy Brothers — Analyst

Charles Meade — Johnson Rice — Analyst

Gail Nicholson — Stephens — Analyst

Richard Tullis — Capital One Securities — Analyst

David Deckelbaum — Cowen — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 Concho Resources Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Megan Hays, Vice President of Investor Relations and Public Affairs. Please go ahead, ma’am.

Megan P. Hays — Vice President of Investor Relations and Public Affairs

Thank you. Good morning, everyone, and welcome to our first quarter conference call. Joining me on the call today are Tim Leach, Concho’s Chairman and CEO; along with President, Jack Harper; Chief Operating Officer, Will Giraud. Tim is going to begin with an overview of the COVID-19 impact on our business and strategic focus. Jack will review first quarter’s results as well as our approach to the capital program, our cost structure and our financial position. Then we’ll take your questions. Please limit yourself to one question and one follow-up. As a reminder, during this conference call, we will provide forward-looking statements based on our current expectations. I’ll call your attention to the forward-looking statements and other disclaimers that are provided in the earnings release and presentation. Our comments today may also reference non-GAAP financial metrics. And reconciliations for these metrics can be found in our earnings release. As always, our earnings materials are available on the Investor Relations page on the Concho website.

With that, I’ll turn the call over to Tim.

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Thanks, Megan, and good morning. Before I talk about the business, our priority right now is ensuring the health and safety of our team. seven weeks ago, we implemented mandatory work from home for employees who can work remotely. Our strategy has four principles, which I’ll talk about in a minute, but the first principle is always our team. Their commitment to our business has been excellent during these unique circumstances. Our operational performance this quarter reflects their focus. Although the Permian is big, it’s a small close-knit community, and our health professionals, first responders, teachers and philanthropic community have shown courage and compassion during this crisis. I want to thank them for their dedication.

With half the world’s population under some kind of shelter-in-place restriction, we’ve seen a collapse in oil demand, record-setting inventory and a test of oil storage levels. The uncertainty has pushed oil prices to record lows, even trading negative as the May contract expired, and about $400 billion has been erased from the stock market value of energy companies. The landscape, the players and the duration, which is the biggest unknown, are all fundamentally different from anything that we’ve seen before.

We started Concho in 1997, which also wasn’t a very good year for oil prices. We built the company around four principles: team, assets, returns and balance sheet. It’s a simple set of principles, but we believe all four of them are critical to thrive when oil prices are high and to do more than just survive when oil prices are low. While our principles have not changed over the last 20-plus years, today’s economic environment changes our tactics. We continue to respond to what the market is telling us through low oil prices. So we’re further reducing our capital spend rate. We spent roughly $550 million in the first quarter and plan to spend around $1 billion in the remaining three quarters of the year as we focus on four priorities. First, optimizing our cash flow by adjusting our spend rate, production and cost structure. Second, maintaining a strong balance sheet. Third, continuing to return capital to shareholders through our dividend. And finally, maintaining flexibility to cut further while also preserving our operational capacity.

The world’s population continues to grow. So I don’t believe that reduced demand is the new norm. Demand for oil will return. However, the shape, whether it’s a V or U is unknown. Well, there’s a great deal of uncertainty regarding demand, we believe the current market signals will result in substantially less supply. Over the last seven weeks, U.S. producers have laid down 305 oil rigs, bringing the current oil rig count to 378. More than half of the losses in the Permian where the oil rig count is down 40% to 246 rigs. More than $35 billion of planned capital expenditures have been cut from upstream budgets in the U.S. so far. We believe these capital and activity cuts will likely have a long-term impact on U.S. supply. In addition, like many U.S. producers, we are curtailing and shutting in volumes, which will also have an impact in the near term on U.S. oil supply. We’ve long said that oil prices are going to be more volatile, not less, and oil prices have made a significant departure from the normal trading range. The significant drop in demand and current oil supply have amplified commodity price volatility, but we don’t believe today’s current price represents the future of our industry or business.

We recognize that every dollar we spend is an investment. We’re investing to build value, not volume, and we find long-term value in keeping our machine running although at a much lower level. We still have levers we can pull if conditions deteriorate further, and we will maintain flexibility to make additional cuts to our spending. Even as we operate under challenging business conditions, we’re not losing focus on sustainability efforts, especially flaring and water recycling. We’re committed to this work in advancing our progress even in this difficult time. I’m proud of our team and the operational results they delivered in the first quarter. Our machine is running well, and I’m confident of our position today. The investment case for Concho becomes especially clear during times like these. I expect this not only to survive but to emerge stronger and even more competitive when we’re on the other side of this.

With that, I’ll turn it over to Jack.

Jack F. Harper — President

Thanks, Tim. Today’s broader economic situation is unclear, which makes it impractical to provide detailed quarterly and annual guidance at this time. However, we are more focused than ever on positioning the company to be competitive in every environment. To this end, we expect to realize combined LOE and G&A savings of $100 million this year. Additionally, due to strong operational performance and lower cost, we expect DC&E cost per foot to be below the low end of our prior guidance range. And finally, we are quickly decreasing activity by reducing rigs from 18 to 10 in the second quarter and then to eight for the remainder of the year. This level of activity allows us to predict our strong financial position and preserve our inventory and our ability to lead in a price recovery.

As Tim mentioned, we now anticipate $1.6 billion in capital spending, which, absent additional curtailments, could sustain full year 2019 divestiture adjusted oil volumes of about 200,000 barrels per day in 2020. While our lower spend rate demonstrates our commitment to capital discipline, it also highlights the efficiencies our team has captured over the last nine months as well as cost savings, allowing us to do more with less. However, I do want to emphasize that conditions are changing daily, and we are likely to curtail additional volumes and possibly in meaningful quantities. I am confident that our continued progress on costs, combined with our operating performance, will translate into better margins and capital productivity when commodity prices improve.

Turning now to the first quarter’s results. Oil volumes totaled 209,000 barrels per day which exceeded the high end of our guidance range. Controllable costs, which includes lease operating, cash G&A and interest, totaled $8.68 per unit. This is below the midpoint of our guidance range and our combined per unit cost target of $9. On an absolute basis, controllable costs in the first quarter were about $255 million, which based on our outlook for reducing operating and G&A costs by $100 million is a reasonable run rate for the remainder of the year.

The quick drop in commodity prices and equity markets, including our share price, led to an impairment of $12.6 billion across proved and unproved properties in goodwill. For a third consecutive quarter, we generated free cash flow. Operating cash flow before working capital, less capital expenditures, was $188 million. The cash went to funding the increased dividend and reinforcing the balance sheet. In January, we repurchased $100 million of shares, which delivered on our commitment to apply 40% of New Mexico Shelf sales proceeds to a buyback. On last quarter’s call, we said that our business allows Concho to deliver free cash flow across a wide range of commodity prices. At the time, we didn’t envision oil going to 0, that our large hedge position absorbs the impact of the volatility. And even at 0, we can continue to accrue cash to the balance sheet.

First quarter cash receipts from our hedges totaled $201 million, and we ended March with a $1.5 billion asset. slide nine of the earnings materials highlights the potential receipts we could generate in 2020. While our hedging strategy serves us well in today’s environment, our hedges are intended to protect our cash flows and balance sheet from commodity price volatility and not to justify investments or production decisions. The economics of those decisions are stand-alone and today undergo more scrutiny than ever. We’ve made the economic decision to curtail some of our highest cost properties already and continue to evaluate the need for larger curtailments. Many inputs go into these decisions. But rest assured, we are navigating these uncertain times, focused on maximizing near-term cash flow and the long-term value of the company. Finally, regarding our balance sheet. We’ve long maintained a strong balance sheet. And in fact, at the end of the first quarter, our net debt-to-EBITDAX ratio was one of the lowest it’s ever been for a trailing 12-month period. Our maturity profile is long dated, and we remain investment grade. We ended the period with about $200 million of cash on hand, which combined with our credit facility, gives us $2.2 billion in total liquidity and is further supported by a strong cash flow generation.

In summary, I hope you come away with a few important messages. First, the health and safety of our employees and communities comes first. Second, our performance in the first quarter builds on the prior two quarters and provides a good foundation as we confront a challenging and uncertain period. Third, we’re focused on all the things we can control. We’re cutting capital, reducing our cost structure and positioning for a recovery. And last, our hedge book, balance sheet and overall strategy are differentiating advantages that provide comfort that we will persevere and emerge from this current situation as a stronger company.

With that, let me turn the call over to the operator for Q&A.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from John Freeman with Raymond James. your line is open.

John Freeman — Raymond James — Analyst

Good morning, guys. And John Deere. The first question just regarding the voluntary shut-ins of the lower margin wells. Can you give a ballpark number of kind of what percentage of your production that entails?

William Giraud — Executive Vice President and Chief Operating Officer

John, it’s Will. As we sit here today, it’s about 4% to 5% of our volumes. But I think we expect that number to grow as we get in further into the month.

John Freeman — Raymond James — Analyst

Okay. And then just I guess along that line, when you think about these wells, obviously, these legacy vertical wells are not a meaningful percentage of your total production, but they are fairly meaningful from like an LOE impact? And just maybe sort of the thought process, you all go through on the other side of this kind of post the COVID-related demand hit, kind of how you all think about the decisions on whether or not to bring some of these wells back online?

William Giraud — Executive Vice President and Chief Operating Officer

Sure. I think we will be guided kind of as we are going into this curtailment, the same way coming back out, which is by the underlying economics of producing those wells. And so the highest cost things, which are what we have curtailed at this point, those are the first to come off. And then depending on how pricing plays out here over the month of May, you could have incremental curtailment. But then on the other side, it would work the same way. And so to the extent the commodity prices justify producing those wells will come back.

John Freeman — Raymond James — Analyst

Great. And then just last question for me. You all are obviously way ahead of schedule on the cost front in terms of what especially what you did on the G&A and the LOE side. And I’m just trying to get an idea of the $100 million of targeted cost reductions this year. Can you kind of give a ballpark number on how much of that you feel like you’ve already achieved?

Jack F. Harper — President

Yes, John, this is Jack. It’s going to be an evolving process. But as I mentioned in the prepared remarks, that run rate in the first quarter is a good run rate. So I think we’ve achieved some of them. There are more to be achieved throughout the year. And I think importantly, I think at least half of these, if not more, are sustainable cost reductions that we can carry forward.

John Freeman — Raymond James — Analyst

Great, thanks a lot guys. I appreciate it. Well done. Thank you.

Jack F. Harper — President

Thank you.

Operator

And our next question comes from Doug Leggate with Bank of America. your line is open.

Doug Leggate — Bank of America — Analyst

Thank you. Good morning, everybody. I hope everybody is doing okay out there. Tim, I got a couple of questions. Maybe one is operational and one is more kind of philosophical, I guess. My operational one is really to see if you can give us a little bit more color on how the production trajectory evolves through the back end of this year and then to 2021? It looks to us that your a number we’ve always asked you guys for, it looks like you’re spending around maintenance capital levels. But can you give us an idea how the exit rate looks? And what you would expect, I realize there’s a lot of uncertainty of what you’d expect that trajectory to look like going into next year?

Jack F. Harper — President

Doug, it’s Jack. I’ll take that one. So as we mentioned in the prepared remarks, this lower level of capital will get us to that sort of maintenance level of capital for this year. Importantly though, the trajectory of that spend over the last three quarters of the year is lower than it was in the first quarter. And when you look at the math of around the 200 average for the year and the first quarter was 209. I think a good way to think about that is just resetting closer to that average number throughout the rest of the year and then being able to maintain that.

Doug Leggate — Bank of America — Analyst

That’s really helpful, Jack. My follow-up is probably a little bit more philosophical. Obviously, you guys had written to the Texas Railroad Commission. You’ve seen what Wayne has come out with. And I’m sure we’re all watching to see what happens next week. But my question is probably, Tim, for you. When you come out the other side of this, what does Concho look like? You’re very early to try and balance cash returns with growth. And I know it’s a long way, we I expect. But when you come out the other side of this, what is the right business model growth rate balance or maybe reinvestment rates, the right way to think about it in terms of cash flow? How will Concho manage its business going forward in light of I guess, what is now a headline of wasteful production from Texas, you could say, based on the case has been put forward by Pioneer?

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Yes. Well, that’s a great question, and I have a long answer for it. But I think the short part of the answer is, I think what Concho looks like and the strategy going forward will be a continuation of what we were building going into this. And it’s more of a model of moderated growth and cash flow generation. It will be companies, and our company with a stronger balance sheet with less leverage. And I think that we have shown that the U.S. shale production is the swing production in the world. And we’ve talked a lot with you and others about how that’s going to be sloppy going forward because we’re not a cartel. We’re a bunch of individually managed private companies. And that from time to time, we will get strong price signals that will cause us either to add production or curtail production. And so we’re strong believers in the market working. You asked me about the lane and that. And I think the market is working. And I think the reaction you’re going to see throughout the industry is going to be more timely and probably a greater reaction than what you would see from if we had regulation.

Doug Leggate — Bank of America — Analyst

I appreciate the answer. I know it’s not easy to answer. If I could maybe just squeeze one quick one in just for housekeeping. Your cost benefits, obviously lower costs that you’re achieving. Is that is the stuff you’re shutting in higher cost? Or how should we think about the LOE mix? And I’ll leave it there.

William Giraud — Executive Vice President and Chief Operating Officer

Sure. Doug, it is the higher cost things that are shut in right now.

Doug Leggate — Bank of America — Analyst

Great stuff. I can’t get you to quantify that, Will?

William Giraud — Executive Vice President and Chief Operating Officer

Probably not.

Doug Leggate — Bank of America — Analyst

What drive good luck guys. Well done, and thank you more to give interest in this kind of environment. Thank you.

Operator

Our next question comes from Scott Hanold with RBC Capital Markets. your line is open.

Scott Hanold — RBC Capital Markets — Analyst

Yeah, I think you all are in a little bit of more of a unique situation with your cash flow generation and certainly a strong hedge book this year. And I think that chart that you had in your slide deck that shows that those receipts is pretty telling. But when you step back and look at that cash balance and where your stock price is, how do you think about that cash balance going forward? Is that something where in this environment you’d rather just be a little bit more cautious? Or would you be opportunistic on stock buybacks here? And can you just talk about like shareholder returns going forward? And again, I understand it’s a tough situation right now, but you guys are uniquely positioned.

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Yes. Let me take a first stab at that, and Jack will probably come in and correct me. But I would say that you use the word caution. I think we’re kind of in unprecedented times right now. So as we generate more cash, I don’t think it would be unexpected to see us to continue to add cash to our balance sheet and be cautious, both in adding back activity, but also how we manage our balance sheet. And we still our bargain with our shareholders involves return of capital, and we still are committed to that. And but I do think that generating increasing amounts of free cash flow are a part of the investment thesis with Concho.

Scott Hanold — RBC Capital Markets — Analyst

Great. And my follow-up question is pricing of various types of crude. Can you just give a sense on what your exposure to WTL is? And what you see on that market here right now?

William Giraud — Executive Vice President and Chief Operating Officer

Sure. Thanks, Scott. It’s Will. A portion of the barrels we produce in the Delaware are classified as WTL or West Texas Light. Most of them are only about a degree or so above that breakpoint between WTI and WTL. And so our marketing team historically has done a fantastic job managing it such that our realized pricing has not been impacted by WTL at all. Going forward, we think we’ll be able to continue to manage around that and not be meaningfully impacted in our realized pricing, but we also do recognize the next couple of months could be difficult to predict with any certainty, just kind of given midstream logistics becoming more challenging, likely. But I think we’ve done a good job. And I think if you look at our realized pricing, for example, in 1Q and compare that against other peers of ours, including Midland Basin players, I think it compares very favorably.

Scott Hanold — RBC Capital Markets — Analyst

Fair enough, thanks.

William Giraud — Executive Vice President and Chief Operating Officer

Thank you.

Operator

Our next question comes from Brian Singer with Goldman Sachs. your line is open.

Brian Singer — Goldman Sachs — Analyst

Thank you. Good morning. Wanted to follow-up on Scott’s question and a couple of the earlier questions. When you talked, I think, in response to Doug’s question of what Concho looks like, stronger balance sheet, less leverage, didn’t necessarily hear consolidation in there. And I know that’s been an area that Concho has participated in the past. When you think about that cash, in response to Scott’s question and potentially building cash, where does consolidation rank? And if not, do you just leave the cash on the balance sheet, or do you think about allocating more to special dividends or any other activity?

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Yes. I do believe that consolidation is going to be a narrative that you hear more about just because we have to continue to drive down cost in our industry. But I can tell you right now, consolidation other than executing on the trades that we’ve been doing to kind of clean up our asset base, consolidation is kind of the furthest thing from our mind right now. And we have all the necessary components to run a business for multiple decades. So I’m really happy with my position when we come out of this. And having cash on the balance sheet, having a strong balance sheet, being able to return increasing amounts to the shareholders, I think that is kind of the what you can expect.

Brian Singer — Goldman Sachs — Analyst

Great. And then my follow-up is, if we look back at the last down cycle 2015, 2016, 2017. This was the time in which the Permian really started to differentiate itself on the cost curve, and we saw some secular reductions in the shale cost structure. When you look at the Permian today in this down cycle, do you see the opportunity for more secular cost deflation or supply cost reductions? And where does that come from if you look out on either the cost or productivity side?

William Giraud — Executive Vice President and Chief Operating Officer

Sure. Brian, it’s Will. I do think I mean you’ve seen pretty dramatic improvement in our cost structure on like a DC&E basis. Over the last couple of quarters, I think the teams have done a fantastic job, doing that both on a kind of sustainable efficiency gain side, but also to your point, on more of a cyclical, absolute service cost savings side. 1Q was a continuation of that. We’re comfortably below that low end that we had previously guided to of $850 to $900 a foot in the first quarter. And I think from April going forward, we will continue to drive that down modestly, and it’s a blend of both. It’s a blend of secular and cyclical. And I would say from here, probably the absolute cost savings are outweighing some of those more sustainable efficiency gains just because activity levels have gotten so low.

Brian Singer — Goldman Sachs — Analyst

Great. If I could sneak one last one in. Were the wells that you brought online positively impacting well performance in the first quarter at wider-than-normal spacing or normal spacing?

William Giraud — Executive Vice President and Chief Operating Officer

The wells that are coming online in the first quarter still have a fair amount of kind of the 2019 spacing still. You’re starting to see that batch of up-spaced kind of from our where our design had evolved coming on. But you probably didn’t see that many of them in 1Q versus what you’ll see here over the course of the rest of this year.

Brian Singer — Goldman Sachs — Analyst

Thank you.

William Giraud — Executive Vice President and Chief Operating Officer

Thank you.

Operator

Our next question comes from Arun Jayaram with JPMorgan Chase. your line is open.

Arun Jayaram — JPMorgan Chase — Analyst

Good morning. Maybe just a bit of a follow-up to Brian’s question. Well, your DC&E costs you mentioned are coming in below your $850 to $900 foot target. So wondering if you could give us maybe some thoughts on where costs are in the Midland versus Delaware Basin? And at what oil price would Concho consider kind of reacting restarting activity? What type of price signal would you need to perhaps move up from I think you’re going to be running eight rigs in the back half of the year, given where your cost structure is trending today?

William Giraud — Executive Vice President and Chief Operating Officer

Sure. I may take the first part of that and let Tim or Jack take the second. But yes, we had previously said that, that blended $850 a foot $850 to $900 a foot that we had guided to, you could kind of add $100 for the Delaware Basin and subtract $100 for the Midland Basin. And I think that relationship still holds true.

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Yes. I think as far as the activity level and pricing signals and things like that, I think it would generally, you’re going to see us be cautious, I think. I think we will enjoy putting more cash on the balance sheet rather than starting up activity. And I think it would require something that would be approaching sustainable pricing in the old normal ranges and us generating new budgets in the future rather than adding back activity in the short term.

Arun Jayaram — JPMorgan Chase — Analyst

Fair enough. And just my follow-up is the guidance assumes 120 gross operated wells over the balance of the year. I was wondering if you could give us maybe, Jack, some thoughts on the cadence of those completions over the balance of the year. I know there’s a lot of uncertainties and maybe some thoughts on how many completion crews that you plan to run over the balance of 2020?

Jack F. Harper — President

Yes. Thanks, Arun. I’m going to punt that one to Will.

William Giraud — Executive Vice President and Chief Operating Officer

Well, yes, I think it generally follows that rig cadence that you see. So we’re coming out of the first quarter, we’ll be a little bit higher here in the second quarter than we will in the third and fourth. And I think it would follow that same pattern. And then I do want to mention I saw in your note this morning, there was a piece around some potential incremental well costs, I think the issue there is just around the modeling and the assumed working interests and the inclusion of nonoperated capital as well. But we may circle up with you offline on that.

Arun Jayaram — JPMorgan Chase — Analyst

Yes. Happy to do that. And just well, just on the frac fleet assumptions for the balance of the year? How many crews?

William Giraud — Executive Vice President and Chief Operating Officer

It will get down. It’s still in the three to four territory, but the back half of the year, it will be in the three is our current plan.

Arun Jayaram — JPMorgan Chase — Analyst

Great, that’s super helpful. Thanks a lot.

William Giraud — Executive Vice President and Chief Operating Officer

Thanks, Ron.

Arun Jayaram — JPMorgan Chase — Analyst

Thank you.

Operator

Thank you. Our next question comes from Paul Cheng with Scotiabank. your line is open.

Paul Cheng — Scotiabank — Analyst

Thank you, Gentlemen, a simple accounting question. DD&A, how’s that unit depletion rate is going to look like after your write up?

Jack F. Harper — President

Yes. Paul, this is Jack. So you saw that with the impairment, we marked down our property roughly 50%. So I think that’s a good proxy. And that gets you somewhere in that plus or minus $10 range or less, but there will be more moving parts between now and then, but I think that’s a good start.

Paul Cheng — Scotiabank — Analyst

Okay. And that I think that when Doug asked the question, and you’re saying that your business model will remain the same. But in terms of the actual operating or financial parameters, is there any guidance that you can give that? I mean, how before an after the COVID, this incident, that may change. Like previously, I think you were talking about the 7% to 10% production growth. Is that now still the number or that, that actually being revised downward further? And also, what’s our balance sheet, do you even want to be more conservative and keep more cash on the balance sheet going forward?

Jack F. Harper — President

Yes. Let me take a shot at that. As Tim well, first off, we’re reacting to the current situation we’re in right now. And we’re balancing maintaining production, being responsive to today’s environment, but also preserving the ability to operate and to run our company more like we had, had in the past. And as Tim mentioned, we still believe that on the other side of this, that combination of some amount of growth and increasing returns to our shareholders is the proper model. And I don’t think we will get back to that model until we know what the other side of the situation looks like. But in the meantime, I think we are doing that with perhaps more free cash flow at the moment.

Paul Cheng — Scotiabank — Analyst

Okay. All right, that’s fine. Thank you.

Jack F. Harper — President

Thank you.

Operator

Our next question comes from Leo Mariani with KeyBanc. your line is open.

Leo Mariani — KeyBanc — Analyst

Hey, guys. I wanted to get back to the shut-in question a little bit more here. Just trying to get a sense, obviously, you talked about 4% to 5% of volume shut in and more to come. Just wanted to feel you guys out. I mean do you think that’s going to be primarily just second quarter in terms of when the shut-ins are necessary? And any color in terms of the interaction with your marketers? Are you starting to hear from your marketers that they don’t really want to take volumes later in May or into June? Just any more color would be helpful.

William Giraud — Executive Vice President and Chief Operating Officer

Sure. Leo, it’s Will. I think it’s important to note. We believe today, we’ll be able to flow all of our barrels through this period, but that’s not really our goal. I mean as Jack mentioned, our goal is to maximize cash flow. And so we’re going to be very responsive to the pricing that we see. And I think it’s also important to just get out there that Jack referenced that our hedges don’t justify producing a barrel that’s otherwise uneconomic on an unhedged basis. And so that all allows us to be very thoughtful and reactive in our decision-making. We have a tremendous amount of flexibility as it relates to our contractual situation. We have some limitations here in the month of May, just around the nomination process and all of those things. But as you move further into this into June, we have tremendous flexibility to curtail significant amounts of volumes.

And as to the duration question, I think that’s one of the hardest things to try and estimate. I do think we see May and especially June as the most challenging period of this and then expect as the restrictions on kind of commerce and things, allow demand to come back that you come out the other side to some regard, but then you still have a pretty significant amount of oil and storage that you’re going to have to deal with over a period of time. So I think time will tell. I think the next couple of weeks will be helpful to see how our industry is responding in terms of curtailment and the supply side of the equation.

Leo Mariani — KeyBanc — Analyst

Okay. That’s very helpful color. And I guess just with respect to activity levels, you guys obviously gave a good cadence in terms of how things progress in 2Q into the second half. But I wanted to ask around new well turn-in-lines. You’re continuing to frac here in the second quarter. Are you looking at maybe delaying those turn-in-lines to kind of more the second half? How can we sort of think about when new volumes from new wells start to come on to Concho?

William Giraud — Executive Vice President and Chief Operating Officer

Yes. Just to be totally transparent, that’s one of the big discussions we have here today because. Again, you’re looking at the price signals the market’s giving you for May and June. And so that could certainly be one of the strategies for managing through this is to not produce those wells for a month or two.

Leo Mariani — KeyBanc — Analyst

Okay. And I guess would there be any concerns around if you frac those wells and let them sit for a couple of months with the frac water in them, that there could be any issues? Or do you think that operation, that’s not really a problem?

William Giraud — Executive Vice President and Chief Operating Officer

Yes. We feel pretty confident based on looking at previous examples where we’ve had to do that for a variety of operational reasons. You don’t have a gas line in, in time. Both on that and I’m sure the related question, I’ve seen a lot is around shutting in producing wells and what’s the impact on that. And in both of those circumstances, we’ve got a pretty robust data set of horizontal wells that have been shut in or not produced to your specific question for one reason or another. And we don’t see any negative impact when they are turned on or returned to production. Admittedly, it’s not a perfect data set, but it gives us a lot of comfort as we head into this period.

Leo Mariani — KeyBanc — Analyst

Thanks. It’s very helpful.

William Giraud — Executive Vice President and Chief Operating Officer

Thank you.

Operator

Our next question comes from Derrick Whitfield with Stifel. your line is open.

Derrick Whitfield — Stifel — Analyst

Thanks, good morning all. Hi, there. Perhaps for Will, with regard to your revised capital program, does the lower price environment encourage you to further change your development approach to pad size and/or spacing in an effort to improve returns?

William Giraud — Executive Vice President and Chief Operating Officer

It probably does not, given where we were already headed. Certainly, as we continue to reduce our budget, we are high-grading the things we’re targeting, the zones and so. I think it’s important to note that, that $1.6 billion budget. That’s our third budget of the year. And so I wouldn’t again, trying to be extremely transparent. That’s our plan today, but we will continue to watch the overall situation and react accordingly. But no, it probably doesn’t change the components as it relates to spacing or project sizing.

Derrick Whitfield — Stifel — Analyst

Great. And as my follow-up, referencing your $100 million in operating and G&A cost reductions on Page eight, can you speak to how much of that is fixed versus variable?

Jack F. Harper — President

Sure, Derrick. Well, when you think about that total, it’s broken into both of the components, as you mentioned, probably a little more weighted on the LOE front in that 60-40 range. And fixed costs are typically more closely associated with labor. And as I think I said earlier, of that total, we think that half or more of that are sustainable changes that will be made and have already been made in some cases.

Derrick Whitfield — Stifel — Analyst

That’s great, thanks.

Operator

Our next question comes from Neal Dingmann with SunTrust. your line is open.

Neal Dingmann — SunTrust — Analyst

Well, I guess My first question is really just on the 2020 operation plans. It looks while none of your peers seem to be focusing more activity, I’d say, primarily more in the Midland Basin, you all appear to be still producing both Delaware and Midland, in fact, maybe even a bit more in the Dela. Could you just speak to for any of you guys, I guess, how do you sort of view the regional decisions this year going into 2021?

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Yes. They’re both very competitive. And it seems like our program is kind of a 50-50 balance between the two basins.

Neal Dingmann — SunTrust — Analyst

So it’s Tim, a lot of guys had a question about cycle times and such that, for you all, that still doesn’t necessarily come into play, that economic still will rule will be the primary focus?

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Yes. I’m not sure I’m tracking with your question though.

Neal Dingmann — SunTrust — Analyst

Well, some others some peers had said that they’re doing a little bit more in the Midland Basin only because of the cycle time for some of the pads are a little bit quicker there in this type of environment. But again, you all see, indicate you’re sort of seeing equally as positive economics.

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Yes. Yes. I don’t see any difference based on that.

Neal Dingmann — SunTrust — Analyst

Okay. Okay. And then my second question is just based on the new CARES Act, I’m just wondering, will you all be eligible for any AMT tax credits in 2020 or 2021 that you could accelerate this year? And just wondering if there’s any other new government programs you all might qualify for?

Jack F. Harper — President

Yes. Certainly, if we are eligible, we will take advantage of tax help. Otherwise, we’re not looking for any financial or other help.

Neal Dingmann — SunTrust — Analyst

Very good, thanks.

Jack F. Harper — President

Thanks.

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Our next question comes from Michael Hall with Heikkinen Energy Advisors. your line is open.

Michael Hall — Heikkinen Energy Advisors — Analyst

Thanks, good morning. I appreciate the time. A lot of mine have been addressed, but just kind of wanted to follow-up a little bit on some of the questions around cadence and trajectory, and just better understand your thought process and kind of how you’re thinking about evaluating the forward program? As we look at the forward activity profiles, one observation is that the deeper you cut today, the bigger the hole you have to climb out of and the harder that is to then balance the kind of cash flow and capex equation in 2021 and coming out of 2020, both for you as well as just broadly and the industry. Just kind of curious how much that sort of dynamic is at play as you evaluate the forward program and trying to balance, cutting appropriately today but not too much to where you kind of impair the ability to bounce back and play in the future?

Jack F. Harper — President

Sure, Michael. It’s Jack. That’s exactly I think the point you’re making there is what we think we are uniquely able to do in this environment, which is react to the situation we’re in, but maintain not only our production levels, but our organizational capacity to be on the ground, at least at a fast walk, if not running when that seems appropriate. And so that is we think we have struck that balance with this plan. And but as we’ve continued to say here, all the variables seem to be changing weekly. So we will keep both hands on the wheel.

Michael Hall — Heikkinen Energy Advisors — Analyst

Of course. And then I guess last one is just kind of housekeeping. Are you all going to be building any sort of DUC inventory over the course of the year, do you think? Or will that be pretty balanced?

William Giraud — Executive Vice President and Chief Operating Officer

Yes. As we sit here today, I think it will be pretty balanced, but that could change.

Michael Hall — Heikkinen Energy Advisors — Analyst

All right. Well, good luck out there and they say, I appreciate the time.

William Giraud — Executive Vice President and Chief Operating Officer

Thanks, Mike.

Michael Hall — Heikkinen Energy Advisors — Analyst

Thank you.

Operator

Our next question comes from Jeffrey Campbell with Tuohy Brothers. your line is open.

Jeffrey Campbell — Tuohy Brothers — Analyst

Good morning, congratulations on the quarter. Thank you. As a result of the reducing investment in response to the current market, do you have any sense as to how much your decline rate might be reduced as you continue this maintenance-type spending?

Jack F. Harper — President

Sure. What we talked about in the previous quarters is an oil decline rate that was in the low 40s and moderating even with the previous capital budget amount. And so most certainly, at this lower amount, we will see that moderate even more quickly as we go into next year. So that is another benefit towards a better capital efficiency and maintenance level going forward. So I expect it to get better more quickly is the short answer.

Jeffrey Campbell — Tuohy Brothers — Analyst

Great. My second question was, the second half 2020, it looks like you’re going to average eight operated rigs. Is this an approximate rig count or we should assume as being associated with maintenance mode until the market demands greater supply?

Jack F. Harper — President

Oh, I mean, that’s a pretty good proxy in the back half of the year. So yes, I think that’s a good way to think about it right now.

Jeffrey Campbell — Tuohy Brothers — Analyst

And if I could ask just one last one, I’ve been listening to the call today. You’ve talked about both G&A cost reductions as part of your drive to reduce costs and also maintaining operational capacity to return to growth when the market supports it. Those seem a little potentially a little bit contradictory. So I was just hoping you could give a little color to give us some insight as to how that all balances out?

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Well, I would just say that, as I started the presentation, our team is one of our core strengths of our strategy. And so our ability to execute in the field in the Permian Basin is one of the things that differentiates us, I think. And that’s one of the things we’re trying to preserve for the long term. I’ll say as we roll through all this, though, if you see that we’re going to be in an environment that has a long-term lower level of activity that has a direct implication to G&A.

Jeffrey Campbell — Tuohy Brothers — Analyst

Okay, thank you.

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Our next question comes from Charles Meade with Johnson Rice. your line is open.

Charles Meade — Johnson Rice — Analyst

Good morning, Tim and Jack and the whole team there, you guys have already covered a lot of ground this morning, and I appreciate that. I just wanted to ask one question that goes back to a comment, I believe, Will made, in I think in response to earlier question. You mentioned that you expect so I think you said maybe about 4% or 5% is currently curtailed. That’s high-cost vertical production, but that you see that, that curtailment is probably growing in May. And I’m curious, will the possible curtailments that you have in front of you, are they going to be of a different character than kind of than the curtailments behind you? In other words, the ones that may happen, are they going to be are they going to perhaps be in one geography or another, perhaps related to the APIs you’re producing there? And are you even looking at maybe some older vintage horizontal wells as possibly shutting in, in this difficult period of May and June.

William Giraud — Executive Vice President and Chief Operating Officer

Sure. I think in May, the next step will be to get into the horizontal well, the older higher cost horizontal wells next. And as we’ve kind of talked a lot about on this call, one of there’s a lot of things we’re trying to balance between our contractual commitments in May and other leasehold issues and whatnot. And so one of them also is a mindset towards what can you bring back. And so that’s where that conversation around is would you consider not producing a brand-new completed well for a month or two, you may get into that as well. But like we’ve said a number of times, we have a lot of flexibility. We are not going to fight the need to curtail. We’ll be guided by that cash flow goal on an unhedged basis. And so I do think it will be meaningful, and I think it will increase from here with getting into horizontal production.

Charles Meade — Johnson Rice — Analyst

Got it. And actually, and let me follow-up with one question. So when you guys talk about curtailing production, is that shutting in wells? Or is that just dialing back wells to 10% of maybe what they were able to do? And in the case of where you actually might consider shutting in a well, what’s the does it make sense to think of a minimum duration that you would shut in a well for? I mean to kind of put some on balance on it, you wouldn’t just shut in a well for a day, right? There’s going to be some minimum length. It would seem to me that you if you went out there and you send your lease operator out there to turn all the valves that you have to be planning on doing it for at least some length of time?

William Giraud — Executive Vice President and Chief Operating Officer

Sure. It’s a blend of both reducing production, but also in some cases choosing to shut in. And the decision matrix on it is complicated and related to decisions around leaseholding obligations and other economic decisions.

Charles Meade — Johnson Rice — Analyst

Hi, thanks for the digital guys. Appreciate it. Thank you.

Operator

And our next question comes from Gail Nicholson with Stephens. your line is open.

Gail Nicholson — Stephens — Analyst

Good morning. Taking my question. Most of mine have been asked, but I was just curious on workovers, and how the lower pricing environment has changed your thought over thoughts on your workover program? And then how does that workover program potentially change as if oil prices do increase over time?

William Giraud — Executive Vice President and Chief Operating Officer

That’s a good question. It certainly has impacted our workover program. And again, it’s going to be guided by economics. And so at these commodity prices to the extent of higher cost well goes down, you will not rush out there to do much work on it. And so the longer this goes, I would imagine the more of that you start to have, but I don’t expect it to be a huge component of this process over the next couple of months.

Gail Nicholson — Stephens — Analyst

Great. And then just on the standpoint on the LOE side. Looking at LOE, do you know what the current LOE is for the horizontal program versus the blended basis?

William Giraud — Executive Vice President and Chief Operating Officer

Yes. It’s in the ballpark of $5 for the horizontal.

Gail Nicholson — Stephens — Analyst

Great, thank you.

Operator

Our next question comes from Richard Tullis with Capital One Securities. your line is open.

Richard Tullis — Capital One Securities — Analyst

Hey, thanks, good morning everyone. Two quick questions. Probably the first for Will. Looking at rates of return currently, Will, using current lower D&C cost and maybe a higher oil price, but say, a $30, $40 sort of realized price, what sort of rates of return for your main operating areas would you estimate?

William Giraud — Executive Vice President and Chief Operating Officer

Sure. As I mentioned, we’ve been working pretty hard at each time we have reduced the capital budget to high-grade, the investment decisions we’re making. And so they’re an acceptable level as we sit here looking at the strip today, which those prices you mentioned, kind of I would say roughly is where you can get, ultimately. And so they’re acceptable today, but they’re probably in the 30% rate of return, just plus or minus ballpark. And there’s some that are higher and some that are lower.

Richard Tullis — Capital One Securities — Analyst

Okay. That’s helpful. And then probably for Jack, regarding the impairment, what were the oil price what oil price was used to arrive at that amount? And did you run it, say it at a higher oil price as well to see what the impairment would be, say, a $40 oil?

Jack F. Harper — President

Richard, we use the prevailing commodity prices at the end of the quarter and that first year averaged in the 20s.

Richard Tullis — Capital One Securities — Analyst

All right. Well, that’s all from me. Thank you.

Jack F. Harper — President

Thank you.

Operator

And we have a question from David Deckelbaum with Cowen. your line is open.

David Deckelbaum — Cowen — Analyst

Thanks guys for sneaking me in. Jack, I wanted to follow-up on the comments you had made around prioritizing cash in this environment. Obviously, by slowing the program now with the benefit of the hedge book, you have a huge free cash generation number this year. One, I guess, how do you think about using that cash this year? Is there anything opportunistic to do? Is there a threshold at which you’d start paying down debt early? And how are you thinking about just the use of cash now? And given that you’re not using the hedges to justify operating decisions or field level decisions, has there been a thought to monetizing that hedge book early?

Jack F. Harper — President

Okay. David, in the near term and really most likely for the rest of the year, we would like to see cash continue to accrue to the balance sheet. And really, that’s the way we envision monetizing those hedges. It’s just moderating our spending and letting the cash come on to the balance sheet. At some point, though, I think we’ll get to the time where we want to have some baseline level of cash on the balance sheet, but the rest would be used for debt reduction in the near term that we’re really even better set up the company for delivering on the business model that we’ve outlined of balancing growth with more return to shareholders.

David Deckelbaum — Cowen — Analyst

Thank you.

Operator

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to Mr. Tim Leach for any closing remarks.

Timothy A. Leach — Chairman of the Board and Chief Executive Officer

Thank you for great questions and participating in this call. And I look forward to talking to you next quarter, hopefully, in a better environment. Thank you very much.

Operator

[Operator Closing Remarks]