Energen (EGN) Q2 2018 Results - Earnings Call Transcript

Energen Corp. (NYSE:EGN) Q2 2018 Earnings Call August 7, 2018 8:30 AM ET

Executives

Julie S. Ryland - Energen Corp.

James T. McManus, II - Energen Corp.

John S. Richardson - Energen Corp.

Charles W. Porter, Jr. - Energen Corp.

Analysts

Neal D. Dingmann - SunTrust Robinson Humphrey, Inc.

Brad Heffern - RBC Capital Markets LLC

Leo P. Mariani - NatAlliance Securities

Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

Gail Nicholson - KLR Group LLC

Biju Perincheril - Susquehanna Financial Group LLLP

Charles A. Meade - Johnson Rice & Co. LLC

Operator

Greetings, and welcome to the Energen Second Quarter 2018 Financial and Operating Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Julie Ryland, Vice President of Investor Relations. Thank you. You may begin.

Julie S. Ryland - Energen Corp.

Thank you, Michelle, and good morning. Today's conference call is being held in conjunction with Energen Corporation's announcement this morning of its operating and financial results for the three months ended June 30, 2018. The slide deck to be used in today's call can be found on Energen's homepage at www.energen.com.

Today's conference call will include comments expressing expectations of future plans, objectives and performance. Such comments constitute forward-looking statements made pursuant to the Safe Harbor provision of the Private Security Litigation Reform Act (sic) [Private Securities Litigation Reform Act] of 1995. All statements based on future expectations are forward-looking statements that are dependent on certain events, risks and uncertainties that may be outside the company's control and could cause actual results to differ from those anticipated. Please refer to our periodic reports filed with the SEC for a more complete discussion of the risks and uncertainties that could affect Energen's future results.

At this time, I will turn the call over to Energen's Chairman and CEO, James McManus. James?

James T. McManus, II - Energen Corp.

Thank you, Julie. 2Q 2018 highlights another quarter of outperformance for Energen. Gen 3 continues to deliver another strong quarter of growth. Second quarter 2018 production of 97.4 mboe per day beats the guidance midpoint by 7% and the top end of the guidance range by 3%. 2Q production increases 5% from first quarter 2018. Importantly, oil production in 2Q 2018 of 56.7 mboe surpasses the guidance midpoint by 7%.

Continued outperformance drives a 5% increase in the calendar year 2018 production guidance midpoint and a new guidance range of 97 mboe to 104 mboe per day. At the midpoint, the company would accomplish the feat of averaging 100 mboe per day, which would be a record. Cal year 2018 production now estimated to increase 32% year-over-year at guidance midpoint, and 3Q 2018 and 4Q 2018 production guidance midpoints increased approximately 6.5% and 4%, respectively. The exit rate now 4Q 2017 to 4Q 2018 is estimated to increase 14% at midpoint guidance.

We also had good success on per-unit SG&A expenses which are at $2.47 per boe, beats the guidance midpoint by 8.5%. Per-unit net SG&A expense in 2018 is estimated to further improve to $2.40 per boe at guidance midpoint, reflecting a 21% year-over-year decline.

Second quarter 2018 adjusted EBITDAX totals $244.8 million, exceeding our internal expectations by 11%. 66% of estimated oil production and 58% of estimated oil basis differential importantly is hedged for the remainder of the calendar year. We also initiated significant hedges related to the differential. We now have 18.1 mmboe in place for 2019 at an average price of $5.13 a barrel. We initiated in 2020 and have now hedged 15.1 mmboe at an average price of $1.20. Both of these hedge positions significantly decreased Energen's exposure to the differentials in 2019 and 2020.

We also had some small bolt-on acquisitions. We added 670 net leasehold acres for $9.5 million. Importantly, 10 new Generation 3 Wolfcamp wells in the Delaware delivered peak 24-hour IP rates in excess of 300 boe per day per 1,000 foot, which puts them in the top quartile of Delaware wells.

We also had great success in Howard County with eight Wolfcamp A wells which we highlight in the Midland Basin results an average peak 24-hour IP rate of 283 boe per day per 1,000 foot that are 90% oil.

If you're following on the slide deck, I'm now going to slide number 4. Again, graphically, our 2Q 2018 production exceeds the guidance midpoint by 7%. Total production exceeds the top end of the range by 3%. We increased over first quarter by 5%, and then oil, again – so the beat was driven primarily by oil production.

If we then go to slide 5, you can see graphically where we are in LOE, from the guidance midpoint, down 5.2%. And then if we move to the right-hand side of the slide, net SG&A down 8.5% from the guidance midpoint.

If we then go to slide 6, talk a little bit about the Delaware Basin. You can see the map on the left. We've circled the areas where Energen has been active. The primary targets have been the Wolfcamp A and B. You can see we turned nine net wells to production in the second quarter of 2018; currently running five rigs out here with two frac crews during the quarter. 20% of the wells, as you know, a small number in the Delaware this year are pattern wells. And we're looking at a DC&E cost for 10,000-foot lateral at $1,100 per lateral foot.

If you look down in the well performance table to the right on slide 6, you'll see that we brought on five Wolfcamp A's, four Wolfcamp B's, one Wolfcamp BC, and again, at 313 per 1,000 foot on a 24-hour IP and 238 on a 30-day rate, we just continue to see a fantastic performance from our Delaware Basin wells that we keep bringing on with Gen 3.

If we then go to slide 7 and look at it graphically, what we've got here is we've graphed our entire body of work, 2016 and 2017, for Gen 3. And you can see down at the bottom of the graph, we show you the well count that we've got included in the number of days, and we're building a pretty extensive – we've got a pretty extensive number of wells included in this. And we continue to show strong outperformance versus the type curve that's 2.2 mmboe and 1.3 mmboe of oil. For those of you that are state data junkies, the Gen 3 line that we've put on here is not normalized for downtime. It's the actual production that we report to the state in terms of what Energen has for these wells. So that will match up as soon as that particular data is posted.

If we then go to slide 8, talk a little bit about the Midland Basin. Primary targets over here have been the Wolfcamp A and B plus the Spraberry package in the Northern Midland Basin. We turned 10 wells to production in the second quarter of 2018. Just like the Delaware, we've got five rigs out here, currently two frac crews. 64% of these wells were pattern wells where you know we've been in pattern development for quite a while in the Midland Basin, and we now estimate the DC&E costs for 10,000 foot lateral to be $900 per lateral foot.

If we look down at the well performance, you can see the Wolfcamp A's that we brought on, which were primarily in Howard County, outstanding performance at 283 boe per day per 1,000, 30-day rates were good as well. We've got a Lower Spraberry well in there, and we've got one Jo Mill that had a mechanical issue, and we don't think is indicative because we've got a lot of excellent Jo Mill wells in the area.

You can also see with the circles, where we've been active and you can see we continue to be active down in Glasscock. But the wells we're turning on this particular quarter are in the Northern area, and you can see up there in Howard and Martin County.

So if we then go to slide 9, look a little bit about how the body have worked, again, of all Gen 3, not normalized for downtime, is performing against the type curves. And you can see on the left there, the Northern Midland Basin, Wolfcamp A/B wells, and the Central Midland Basin were performing extremely well versus the type curve on both of those. And again, the well data is starting to become a pretty significant body of wells.

If we then go to slide 10, look at the Spraberry, Middle Spraberry and Jo Mill, again, we continue to be very pleased with those two zones. We think they're highly economic. We have quite a few of those to drill throughout the footprint. And then the Lower Spraberry, on the right-hand side, continues to show a very good outperformance against that type curve as well. So, couldn't be more pleased with the way Gen 3 is stacking up.

If we then go to the Cline, which is something we talked about in the first quarter. We continue to track both of those wells on slide 11. On the left-hand side, the Northern Midland Basin well continues to track well against the 1.2 mmboe type curve with 800,000 barrels of oil. And then in the Central Midland Basin, our well over there continues to do well. It's also tracking against the type curve of 1.5 mmboe with 700,000 barrels of oil.

Obviously, the Cline is not something we're going to go into full-scale development on. But we think that this proves up something that we're going to have to do in the future as a company. We think that these wells will be economic and be a formation for us.

So, if we then go to slide 12, not a new slide here, we feel very good about Energen's Basin-wide flow assurance. 85% of our Permian oil is on pipe, 80% of the Midland and Delaware oil is sold to Plains. We're a top five producer there. We've never had a problem moving oil there. We stay in constant contact with them. We believe that they have the capacity to continue to move our product without interruption.

We're an anchor tenant on Vaquero Midstream for firm transportation and plant capacity in the Delaware Basin. So, we're not concerned about moving gas. There's an extensive network of gas gathering and processing in the Midland.

If you look at the second check from the bottom, I think importantly now, very importantly, we've added to our hedge position in 2019, and we've now got 18.1 mmboe hedged at a negative $5.13, which is better than the market right now.

And in 2020, in order to protect in case that situation more to drift into 2020, we thought it prudent to go ahead and take a decent hedge position since the differential was only $1.20 for 2020 when we instituted this position.

Again, 95% of all of our produced water is on pipe, and we have a significant amount of permitted disposal at 1.4 mmbmbow (sic) [mmbw] per day by the end of year-end 2018. So, we feel very good about where we are in terms of differential protection and flow assurance.

If we then move to 13 and look at the production guidance, again, we raised cal 2018 by 5%; a fairly significant production raise. I won't run through all those numbers on the left-hand slide, but on the right, we give you the turn-in lines. You'll see a little bit of change. We're going to have more turn-ins in the third quarter of 2018 than the fourth quarter of 2018. We've been a little bit more efficient there. It won't be super significant. We're talking about a matter of weeks where stuff is shifting to 2018 – third quarter 2018 versus fourth quarter, but it is a little bit of a movement to the positive side in terms of timing.

If we then go to slide 14, just to show you how the outperformance drives our estimated production growth, you can see our prior guidance, 93 mboepd on the left; revised guidance 99 in terms of mboe per day. And then you can look at how we've grown in the middle slide from fourth quarter of 2017, what our prior guidance is, what our revised guidance is now for 4Q 2018.

And then if you look at calendar year 2018, you can see in 2017 76.1 million boepd, prior guidance 95.5 mboepd, and our revised guidance at 100.5 mboepd, which shows the significant growth that the company has driven with high rates of return and very, very good capital efficiency during this period of time. And, of course, as I mentioned, the midpoint guidance of 100 mboe per day would absolutely be a record and a great accomplishment for the company, and we expect to do that.

If we then go to slide 15, our capital guidance remains unchanged at $1.1 billion to $1.3 billion. We do note that we expect to be in the higher end of the capital guidance range, and we've graphed the capital breakdown and the capital by area based on that higher number. You can see that on the capital by area, we continue to concentrate most of our capital in the Delaware Basin and the Northern Midland Basin where we have our highest rates of return. If you look down at the bottom, you can see kind of the lateral lengths of the company and the working interest percentages that we're drilling.

If we then go to slide 16, we've updated our 2018 expense guidance in general. Most of these expenses have gone down a little bit as production has run extremely well. And we project it to run extremely well for the year. I won't read through those numbers, but we've kind of updated them all. Again, in general, they're down a little bit.

If we then go to slide 17, not a lot of changes here on the balance sheet. We do project being in the higher-end of capital, so we're using the 1.1x as our net debt-to-EBITDAX right now in our calculations for year-end 2018. As you can see on the right-hand side, we don't have any significant maturities till 2021. So we continue to maintain a very strong balance sheet. We think that balance sheet allows us to do what we've told investors that we wanted to do, and that is bring forward value. We've got extremely high rates of return. We've got the balance sheet that can handle it. So we expect to continue to do that.

If we then look at 18, again, I'm not going to read this slide. Obviously, a lot of numbers on here. I would point out if you look at the Midland WTI-Cushing to WTI Sweet differential, which is kind of in the middle of the page, again, to highlight the fact that we're very hedged for the remainder of calendar 2018. We've initiated a very strong hedge position for cal 2019, again, at 18 million barrels. And we've also protected a good bit of 2020 with a hedge position at 15 million barrels.

If we then go to 19, and sort of summing it up, as most of you know, pure-play operator, 150,000 net acres. We believe we have top-tier acreage. We continue to be committed to bringing shareholder value forward by bringing forward our NAV in a responsible manner. We've been focused obviously on returns throughout the company's history, and we've done all this by maintaining a fairly conservative balance sheet. We like to keep that net debt-to-EBITDAX in the range of 1x to 1.5x. We've announced a three-year plan previously. We don't expect any major changes to that at this time. Attractive three-year production CAGR of approximately 28% from 2018 to 2020.

We have been, as most of you know, an early leader in pattern development that tends to avoid the parent/child well degradation. Current Gen 3 frac design has been outstanding for us because it has delivered stand-alone performance in pattern development. Again, we feel good about our takeaway capacity, and we've got an outstanding water disposal network. The team that's been working on this is very experienced and has been exposed to the Permian since 1997.

All in all, a great quarter for Energen. I look forward to taking your questions. And at this time, I'm going to turn it over to Michelle. Michelle, if you would take care of the Q&A.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. One moment, please, while we poll for questions. Our first question comes from the line of Neal Dingmann with SunTrust Robinson Humphrey. Please proceed with your question.

Neal D. Dingmann - SunTrust Robinson Humphrey, Inc.

Good morning, James, and outstanding new guidance. James, let me ask you a – just on your prepared remarks, you mentioned here that about 43% of the wells placed on production this last quarter were in this multi-zone pattern. Could you just talk a bit about that? Will that continue to increase? I mean, I don't know if you call it mowing the lawn and whatever you want to call it, is that...

James T. McManus, II - Energen Corp.

Yeah. Let me do this. So, I'll let Johnny Richardson comment on that. As a general rule, Neal, it does move around a bit. And before he comments, I would just say, as you know, the majority of that has been in the Midland where we've been in pattern development for a longer time. In the Delaware, it's been a little bit – particularly this year, the lateral lengths have been a little bit shorter because we're doing a little bit more drill the hole work and it hasn't been as much pattern work, but Johnny can comment a little bit more about how he sees the future on that.

John S. Richardson - Energen Corp.

Yeah. Neal, we'll continue to see our percentages move up, as James pointed out. We've been on the learning curve in the Delaware. We're liking what we see there with our pattern test. Others are beginning to contribute to that body of data. And we like our process and procedure in developing our acreage on the patterns. We think it is definitely the way to go with a parent/child relationship. And I think you'll see that percentage continue to climb as we move forward.

Neal D. Dingmann - SunTrust Robinson Humphrey, Inc.

Got it. And then, James, this is my last follow-up. You've been adamant about just sort of going forward, if you would, in increasing production despite sometime prices coming on with the diffs going on in the Midland Basin. My thought is you guys do an excellent job with the flow assurance and you have some basis hedging. But I do see that Midland Basin, as you've probably seen, right now, I see prices around $52. Any comment you could have around that if that will, even though having the flow assurance – will the- if realized prices get to a certain level in the Midland Basin, will that impact your plan?

James T. McManus, II - Energen Corp.

No, Neal. I think at this time, we have to have something down in the 40s on a net basis before we would even sort of think about scaling that to plan. I mean, the returns we've got on the types of wells we're drilling are pretty high. I just don't really envision that. My thought is that we need it to stay low for a sustained period of time because we've got a strong hedge position again, we've got a strong balance sheet. So, I mean, certainly, there's a level at which everybody I think in the business would think about their activity, and we saw that before in 2016 and we keep an eye on it. I don't anticipate that being a problem for us, however.

Neal D. Dingmann - SunTrust Robinson Humphrey, Inc.

Very good. Thanks so much. Great quarter.

James T. McManus, II - Energen Corp.

Thank you.

Operator

Thank you. Our next question comes from Brad Heffern with RBC Capital Markets. Please proceed with your question.

Brad Heffern - RBC Capital Markets LLC

Hey. Good morning, everyone. Just in terms of the new guidance, I know you guys talked about how part of the reason that it was going up was because of outperformance versus the type curves you'd originally assumed. I was just curious if you could talk about how much outperformance you're assuming. Is it consistent with sort of the zero-time plots that we're seeing of actual well performance or is it somewhere between there and the originally assumed type curve? Any color there?

James T. McManus, II - Energen Corp.

Yeah. I'll let Johnny add onto this. I mean, obviously, at the end of the year, Ryder Scott put together some type curves for us. That's what we've used to book our reserves. It's also what we used in the budgeting process. And for the most part, we've been very pleased that we've been kind of outperforming those curves, but Johnny, I'll let you add some color.

John S. Richardson - Energen Corp.

Yeah, I mean, the outperformance has been both on the initial rates and the longevity of the well. So we're just, I mean, very pleased. We were hoping that Gen 3 would perform in this manner, and it has pleased and met and exceeded our expectations, as you can see by the curves and by our increase in guidance.

Brad Heffern - RBC Capital Markets LLC

Okay. And then I guess any new thoughts on M&A? Obviously, you guys have been doing a lot of fill-in work. It seems like you add a couple of hundred acres every quarter. How much more potential is there for that? How much longer could you go on laterals if you continue to be able to block up?

James T. McManus, II - Energen Corp.

Well, it's been a strategy of the company to try to continue to core-up the acreage and lengthen the laterals. I suspect we're going to continue to be able to do some of that as we move forward. I don't think it's going to be on the order of magnitude of close to what we did last year. If you remember last year, we did in excess of $200 million of leasehold acquisitions, but there continue to be opportunities. That set is growing a little bit smaller. But I think we'll be able to continue to push forward on that. We also do some ground-floor leasing. And we've been able to, not necessarily this quarter, but in past quarters, we've added a little bit up in New Mexico. We do like that particular neck of the woods, and we continue to look for opportunities to add to that position up there where we've had some good drilling results as well.

Brad Heffern - RBC Capital Markets LLC

Okay. Appreciate the answers.

Operator

Thank you. Our next question comes from the line of Leo Mariani with NatAlliance Securities. Please proceed with your question.

Leo P. Mariani - NatAlliance Securities

Hey, guys. Just want to get a little bit more granularity on the CapEx trend here in 2018. I guess you guys certainly said that it's trending a little bit towards the higher end of the range. It sounds like wells are – you're drilling faster. It looks like you guys actually picked up your Delaware completion activity, but also I was hoping you could kind of discuss cost trends as well, and just give us a little bit more color around that, that CapEx trend.

James T. McManus, II - Energen Corp.

Yeah. Good question I think. So, like others, we've seen driving that kind of move to the higher end of that capital range, it's been a fairly significant increase in non-op activity for us. So we've had that. Other well-known Permian names I won't name have kind of decided to develop in areas that we didn't anticipate in the beginning of the year, so there's been that kick up. We're also anticipating an increase in steel costs. As you might be aware, I think others are probably seeing that too in terms of steel tariffs. And then we've seen a general increase in all the ancillatory (23:36) services kind of across the board. I think that's been seen by a lot of other companies as well. And so, that's really what drives us to feel like we're going to be in the higher end of the capital range.

Leo P. Mariani - NatAlliance Securities

Okay. That's helpful. And I guess just...

James T. McManus, II - Energen Corp.

One second. Just to follow up, I forgot one thing. We have had a situation also where our working interest were increased as well. I'm sorry. Go ahead. Follow up.

Leo P. Mariani - NatAlliance Securities

Okay. No, that's a good add-on for sure there. Just can't help but to notice that I guess we've seen some notable activist investors take some larger positions in the company. And just wanted to kind of get you all's thoughts on that, and whether or not you've been engaging in some active dialogue with these folks.

James T. McManus, II - Energen Corp.

Yeah. So, in terms of the strategic review, I'm not going to really have any comment on that. In terms of dialogue, we obviously don't discuss any of the conversations that we had with any shareholders. But it's our practice to reach out to our largest shareholders and to offer to have discussions with them. And from time to time, we have discussions with all our largest shareholders.

Leo P. Mariani - NatAlliance Securities

All right. Thanks.

James T. McManus, II - Energen Corp.

Thank you.

Operator

Thank you. Our next question comes from the line of Jeffrey Campbell with Tuohy Brothers. Please proceed with your question.

Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.

Good morning, and congratulations on the outstanding quarter. Jim, I thought I'd just ask, I mean, the performance of your Gen 3 wells are so top of mind at the moment. But I thought I'd ask if you additionally make any specific efforts to try to manage your base declines?

James T. McManus, II - Energen Corp.

Well, we have an ongoing program to manage the base decline. I'll let Johnny talk about that a little bit. But we have an active group of people that are working every day to try to optimize and stabilize and increase the production from the extensive wells that we have currently online. And I can let Johnny give you a little color on that. There's many things that they do to optimize that production.

John S. Richardson - Energen Corp.

Yeah. We are constantly looking to optimize our lift, making sure that as we move from one lift means to the other, a timely method of making sure that we keep all those wells top of mind. We have a group – several groups dedicated to that. Their responsibility is to maximize the performance from all the wells, minimize downtime with both corrosion programs. We are proud of our failure rates. They're very low. We try to also look at shut-ins from offset operators and even on our own impact on our wells as we're fracking new wells to constantly try to fine-tune that and reduce that shut-in period. So, you're right that the historic and the wells that are producing today are the ones that are contributing. And so, we try to keep those maximized the whole time.

Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.

Okay. Great. I appreciate that color. And, Johnny, you mentioned earlier in the call that you've done some multi-zone completion tests in the Delaware Basin. Could you just quickly review or remind us where those have taken place?

John S. Richardson - Energen Corp.

Well, pretty much in the, you know, our remain O (26:56) area, as we call it. I mean, we are continuing to look at pattern work relationship between wells as we develop those, primarily Wolfcamp A and B. But as you – as we note, we do test BC and C wells occasionally to look at their impact to where we think we can develop the A and B sort of independent of those deeper parts of the Wolfcamp. But we continue to learn. We continue to look at spacing relationships and both laterally and vertically.

Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.

And, I mean, could you also – I'm just kind of looking at the map, can you just indicate where that area was that you've done most of that testing just in terms of location in your portfolio?

John S. Richardson - Energen Corp.

Yeah. It's been the Reeves County.

Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.

Okay.

John S. Richardson - Energen Corp.

And pretty built generally across most of our Reeves County holdings.

Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.

Okay. Great. Thank you. I appreciate it.

James T. McManus, II - Energen Corp.

Thank you.

Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.

And we'll see you – we'll see you...

Operator

Thank you. Our next question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

Good morning, all, and congrats on a strong quarter.

James T. McManus, II - Energen Corp.

Thank you, Derrick.

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

James, perhaps for you, going back to your growth guidance, some might consider the second half growth guidance to be conservative, particularly when you think about how much you grew in Q2 relative to Q1 based on 21 gross completions. You're effectively guiding to about 2,500, 2,600 barrels of growth in Q3 based on 42 gross completions. Are there any specific risk factors or timing effects in your plan that would limit your growth sequentially?

James T. McManus, II - Energen Corp.

Well, I mean, there's always things going on, and obviously we looked at a full re-projection. Johnny, I may get you to comment on that because I don't really know of – I guess what I would say is there's a lot of things in the mix. We're projecting every well. We're projecting the timing they're going to come on. And I think it's a little bit difficult to just do the kind of simple math around the completions.

John S. Richardson - Energen Corp.

Yeah, timing is of course the big contributor. When they come on in the quarter, how many days they can produce during that quarter and the remainder of the year, the actual turn-in line date, but you've got to build up time. You've got to – your fluids coming back to get you to your high oil percentages, all those things contribute. They're all engineered out. We also have to look at offset shut-ins. There's some things going the other way that you don't really see in these numbers with offset shut-ins and frac impacts. And so, we look at it holistically and come up with that projection.

James T. McManus, II - Energen Corp.

And we've probably seen a little bit more impact of offset shut-ins with the level of activity that everybody has got around us, and we've built a little bit more of that in, and that's one of the factors.

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

Got it. That makes sense. And then perhaps for Johnny, if we could dig into the 10 wells referenced on page 6 a little further, relative to our numbers, the wells were slightly gassier than expected. If you look at that population of wells, were there any that were meaningfully different from the average in productivity or oil composition?

James T. McManus, II - Energen Corp.

And you're looking at the Delaware Basin, right?

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

That is correct.

John S. Richardson - Energen Corp.

Well, you're going to have your well mix. B wells are always going to be a little bit gassier than A wells. That's just their character. And so, you can see there that we're almost at – we are at 50/50 if you consider the BC wells. So, your A wells are your strongest oil contributors, the B wells are going to have a little higher GOR. They're great wells. They're just going to have higher GOR. And so, from time-to-time, according to the well mix, you may see some of those characteristics.

Derrick Whitfield - Stifel, Nicolaus & Co., Inc.

Great. Thanks. Thanks for taking my questions.

James T. McManus, II - Energen Corp.

Thank you.

Operator

Thank you. Our next question comes from the line of Gail Nicholson with KLR Group. Please proceed with your question.

Gail Nicholson - KLR Group LLC

Good morning. I'm just looking at the Delaware. You did a BC well this quarter and you did a BC well last quarter. How do you kind of perceive that on a go-forward basis in the program I guess in 2019 forward?

James T. McManus, II - Energen Corp.

Yeah. I think I'd say this about the BC. That's not going to be a big, huge part of our program. A lot of times, that's the deeper formation that we drill the holes. I mean, it's not that those wells are not good wells, but they're a little bit deeper, they're a little bit gassier. And so, I don't think that's going to be a big part of the program over the next three years, although we'll do some.

Gail Nicholson - KLR Group LLC

Okay, great. And then just looking at – I mean, you guys have done a phenomenal job blocking up acreage. When you look at the ability to pick up incremental parcels on just swaps and trades, is it easier in the Midland versus the Delaware? Is there a delta there?

James T. McManus, II - Energen Corp.

Well, I think it's easier in the Delaware. The Midland has been locked down for a while. We continue to see small opportunities there. But if you look at where most of our acquisitions of acreage have been over the last couple of years, it's been the Delaware. It's just been a better opportunity to trade and block up out there. It's not as much of it was previously held by production like the Midland Basin was.

Gail Nicholson - KLR Group LLC

Okay. Great. And just one last...

James T. McManus, II - Energen Corp.

Yeah, there just wasn't as much, you know, it was a rawer basin. There weren't as many HBP situations around the acreage, which makes it a little easier to get more opportunities.

Gail Nicholson - KLR Group LLC

Okay. Great. And then just – it looks like on – looking at the Midland execution this quarter, you did a couple wells, I guess, right nearby the potential acreage addition that's in the legal dispute right now, how do those wells look?

John S. Richardson - Energen Corp.

Our Howard County wells are great wells. They look – very strong wells.

Gail Nicholson - KLR Group LLC

Okay. Great. Thank you.

James T. McManus, II - Energen Corp.

And Gail, the Wolfcamp A, of course, is probably the best formation over there at least in the area that we're in.

Operator

Thank you. Our next question comes from the line of Biju Perincheril with Susquehanna. Please proceed with your question.

Biju Perincheril - Susquehanna Financial Group LLLP

Good morning. James, obviously, the Gen 3 wells are coming in pretty strong and you're getting more confidence with the results. And you have talked a three-year outlook, I think a 28% CAGR. Wondering how you're thinking about maybe at a high level at this point, are you think – when you look at the next few years, are you thinking about sort of delivering the same production with a slightly lower level of activity, or are you thinking about sort of keeping the same level of activity as you've planned and delivering more on the production side, any thoughts there?

James T. McManus, II - Energen Corp.

Yeah. Not a lot I'm sure really there at this point. I mean, obviously, when we get closer to 2019, we'll re-look at all that. I think the good news is that we're very confident about the ability to have really strong production growth at high rates of return. But in terms of knowing exactly how that's going to shake out, I think we've got a lot more to learn about how our wells perform.

But the good news is everything seems to be going according to plan. And again, I think we can still deliver really high rates of return with an under-levered balance sheet and good growth. So, I mean, I just can't get that granular with you right now as to knowing exactly what may happen. I mean, couple positives, outperforming the type curve, being more efficient and effective in terms of getting things online, and all those things bode well for the company.

Biju Perincheril - Susquehanna Financial Group LLLP

Okay. That's fair. And then looking in slide 10, the Spraberry well performance, are most of those wells in pattern development or is this in Middle Spraberry and the Lower Spraberry, are they all stand-alone wells?

James T. McManus, II - Energen Corp.

Actually, all of those are primarily pattern. There may be a few in there, but it's mainly pattern wells, all of them.

Biju Perincheril - Susquehanna Financial Group LLLP

Oh, that's great. Thank you.

James T. McManus, II - Energen Corp.

Sure.

Operator

Thank you. Our next question comes from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Charles A. Meade - Johnson Rice & Co. LLC

Good morning, James, to you and your team there.

James T. McManus, II - Energen Corp.

Yeah.

Charles A. Meade - Johnson Rice & Co. LLC

I wondered if you could give us a little refresh on your thinking with regards to capital spending and cash flows. I know that you guys are I guess a kind of an increasingly rare mode in the group in that you're outspending cash flow, and your debt metrics are fine because you're growing EBITDA so strongly, but – excuse me?

James T. McManus, II - Energen Corp.

I didn't say anything, Charles. Go ahead.

Charles A. Meade - Johnson Rice & Co. LLC

I'm sorry. Could you give us a refresh on your thinking on when you foresee transitioning or perhaps transitioning to a mode of being a dividend increasing – establishing and increasing a dividend or otherwise returning cash to shareholders, or if that's really off the – over the horizon at this point?

James T. McManus, II - Energen Corp.

Yeah. So, Charles, we don't have a dividend, so we have to institute one to be able to increase it. But as you know, we don't have one. I think our view – I'm going to let Chuck comment a little bit because we've got some numbers out there in terms of when the company might be cash flow neutral. But I guess our position has been relative to the – at least the next year, including this year, that again, with a highly under-levered balance sheet and really, really strong returns that investors wanted this company to bring its NAV forward. And I think we made the right decision.

Now, out in the future when we go cash flow neutral, we'll be open to a number of things. I don't see that happening necessarily this year or next, but we did give some guidance relative to a certain price we could be cash flow neutral, and I'll let Chuck talk about that a little bit.

Charles W. Porter, Jr. - Energen Corp.

And sure, Charles, to just add on to what James said, we've got the three-year plan that we've put out there. We're not necessarily updating that on a quarterly basis, but it's order of magnitude correct. We've got a debt-to-EBITDAX ratio of about 1.1x at the end of this year. And with the productivity and returns of the well, the company is a little bit naturally de-leveraging, if you will. And so, we plan to continue to add some rigs as we go through time in the next couple of years. We do envision an outspend in 2019. But, as it relates to 2020, we've guided that we would be cash flow neutral at around a $57 price, and that was as of last quarter. Again, there's a lot of moving parts, but on a order-of-magnitude basis, we would envision kind of converting to cash flow neutrality and then having cash flow positive from 2020 onward.

James T. McManus, II - Energen Corp.

And, Charles, I think – so I think we've given some really good visibility around when we would be cash flow neutral. I think in terms of what we might do and how we might decide to deal with that, we're open-minded in terms of items that might return capital to shareholders. But I think for now, in 2018 and 2019, we see bringing NAV forward as the perfect course of action, and that's our view.

Charles A. Meade - Johnson Rice & Co. LLC

Thank you, James. That's the update I was looking for.

James T. McManus, II - Energen Corp.

Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. McManus for any closing remarks.

James T. McManus, II - Energen Corp.

Michelle, thank you, and thank you all for being on the call, and have a great day.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.