Sanchez Energy Corporation (SN) CEO Tony Sanchez on Q3 2018 Results - Earnings Call Transcript

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About: Sanchez Energy Corporation (SN)
by: SA Transcripts

Sanchez Energy Corporation (NYSE:SN) Q3 2018 Results Earnings Conference Call November 1, 2018 11:00 AM ET

Executives

Kevin Smith - VP, IR

Tony Sanchez - President and CEO

Cam George - Interim CFO

Scott Dunlap - VP, Operations

Analysts

Neal Dingmann - SunTrust

Ron Mills - Johnson Rice

Tarek Hamid - J.P. Morgan

Jacob Gomolinski-Ekel - Morgan Stanley

Sean Sneeden - Guggenheim

Dustin Tillman - Wells Fargo

Vivek Pal - Seaport Global

Joshua Gale - Nomura

Operator

Good day. Welcome to the Sanchez Energy Corporation Third Quarter 2018 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Kevin Smith, Vice President of Investor Relations. Please go ahead.

Kevin Smith

Thank you. Good morning, and thank you everyone for joining us.

On the call today are Tony Sanchez, President and Chief Executive Officer; Cam George, Interim Chief Financial Officer; and Scott Dunlap, Vice President of Operations.

Please note that we may make references during today’s call to certain non-GAAP financial measures, which are reconciled to their closest GAAP measure in our earnings release. Also, our discussion today may include forward-looking statements which are subject to certain risks and uncertainties, many of which are beyond our control. These risks and uncertainties are described more fully in our documents on file with the SEC, which are also available on our website.

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

Tony Sanchez

Thank you, Kevin. Good morning, everyone, and thank you for joining us.

Before we get to the quarterly results, I would like to start by discussing several organizational changes announced earlier this week. We recently realigned our organizational structure with the goal of driving increased focus, accountability and efficiencies across the Company. This new structure was implemented to clarify roles and responsibilities, drive operational discipline through the development of more comprehensive policies and procedures, and increase the pace of decision-making at both the corporate office and the field level. We believe these changes will help break down silos and increase individual accountability, ultimately increasing operating margins and cash flows.

In conjunction with this process, we named Cameron George, who many of you on the call know already, to the position of Interim Chief Financial Officer. Cam joined the Company in 2016 as our Senior Vice President, Capital Markets and he brings more than 15 years of industry and investment banking experience to this new position. Since joining our team, Cam has demonstrated tremendous leadership and he’s been an integral part of the management team. We’re excited that he’s taking a larger role with the Company as we continue to work through the transformation.

Additionally, we announced the appointments of Eugene Davis and Adam Zylman to the Board of Directors. Gene is the Chairman and CEO of PIRINATE Consulting, which specializes in turnaround management and strategic planning and advisory services for a broad range of domestic and international public and private companies. Adam, who is one of the cofounders of Sunland Capital has been involved in dozens of new platform company acquisitions and recapitalizations, as well as various other transactions in the energy and infrastructure sectors. We welcome Gene and Adam to the Board, and believe their technical knowledge and unique management and operating perspectives will be valuable additions to the Company.

Turning now to our results for the third quarter. As we anticipated and discussed on our last call, we continue to fight the high production declines on Comanche, brought on line during the second half of 2017 and during early 2018, which led to another quarter of underperformance from a production standpoint. However, I am pleased to report that the efforts undertaken to stand these high declines earlier this year, which include the reversion to a more conservative choke strategy, the implementation of the completions optimization strategy and an increase in artificial lift conversion in workover are starting to benefit us in the form of a more stable production base, which is returning us to growth profile starting in the fourth quarter.

For the month of October, the Company's production averaged in excess of 80,000 Boe per day. In fact, our production for the third quarter and October would have been even higher except for the negative impact of flooding from extreme rainfall in South Texas, which limited access to our facilities at Comanche and resulted in shutting in approximately 3,000 barrels of oil equivalent per day of production, starting in mid-September through the first week of October.

Catarina on the other hand, posted particularly strong results last month, reaching a production rate of approximately 49,000 Boe per day during October, matching the field’s peak production rate reached in March of 2016. In response to the favorable production performance this year at Catarina, we have elected to allocate additional capital to the asset and brought 16 wells on line during the third quarter with several of those wells reaching peak production rates in early October.

During the third quarter, from an operating perspective, we were focused on full field development at both Catarina and Comanche. Accordingly, during the quarter, we operated between six and eight drilling rigs and four frac spreads. At Comanche specifically, we drilled 26 gross, 7 net wells and brought on line 36 gross, 9 net wells. We have 33 gross and 8 net wells waiting on completion or currently being completed. The development plan across Comanche entails well spacing of at least 600 feet in-zone and is predominately focused on the lower Eagle Ford. For the third quarter, all of the Comanche wells drilled, targeted the lower Eagle Ford formation.

As discussed on the last call, we continue to modify our completion design at Comanche, based on the extensive completion testing we have undertaken in consultation with our working interest partners. During the third quarter, we tested a more cost-effective completion design on the Briscoe Cat West area of Comanche. To-date, these new wells are in line with or exceeding production from nearby wells. If the favorable production trends continue, we will have the opportunity to improve well economics through lower well costs and higher production profiles relative to some of the offset appraisal wells.

Also, as previously discussed, one of the initiatives undertaken to improve operations involves an increasing artificial lift and well workover activity. Earlier this year, we began installing tubing equipment on new wells that will allow us to convert to artificial left without the need for a drilling rig, thus saving the Company time and money. This new process enabled us to convert 75 wells -- Comanche wells to artificial lift during the third quarter as compared to only 30 wells in the second quarter of 2018. Additionally, we increased our quarter-on-quarter workover activity by roughly 30%.

With regards to capital spending, we elected to keep a drilling rig at Catarina during the third quarter in order to maintain operating efficiencies in our core areas as well as to position the Company for strong production growth leading into 2019. Given this added activity, we brought forward approximately 11 wells from next year's plan into the current year. With these additional wells, we now expect 2018 capital spending increasing roughly 10% to 12% to approximately 600 million for the full-year, a large portion of which is brought forward from 2019. The Company's production declines now begin -- with the Company's production declines now beginning to stabilize after shifting capital towards core areas, we’re realizing improvements in the Company's capital efficiency and operating margins. After peaking at 8 rigs and 4 completion crews in may, the Company has reduced drilling activity to 4 rigs and 3 completion crews. And we expect to drop an additional rig by year-end, resulting in an expected annualized capital run rate of approximately $350 million, heading into 2019. And though not yet finalized, we expect next year's capital budget to have a disproportionate focus on Catarina when compared to 2018.

The Company reported approximately -- the Company reported adjusted EBITDAX of approximately $123.9 million for the third quarter, including a realized hedge loss of approximately $31.8 million. Of note, during the first three quarters of this year, the Company's operating cash flow was negatively impacted by approximately $78 million in realized hedge losses, primarily from oil hedges. Most of the hedges which were priced around $50 per barrel roll off at the end of this year. And additionally, several of the Company's legacy oil marketing contracts which have unfavorable pricing, expired during the second and third quarters of 2018. Accordingly, we anticipate that in January of 2019, we will start to realize the benefit from current higher market prices, along with more favorable marketing alternatives and which should lead to higher prices per barrel and stronger operating margins.

With that overview of the quarter, I would now like to turn the call over to Cam George.

Cam George

Thank you, Tony.

The last two years, I have worked closely with Tony and I am honored to continue serving alongside him and the rest of the leadership team to address the challenges that lie ahead. In my prior year -- in my prior role as Head of Capital Markets and over last 15 years, I've been fortunate to build very strong relationships with many of you on the phone. I value those relationships and am eager to build on that foundation as we move forward together.

As discussed in our previous earnings calls, improving the Company's overall financial position remains one of our highest priorities. Given our high leverage, we’re reviewing all options available to us, both on the operations side with a number of initiatives well underway, as well as from a balance sheet standpoint. Keeping in mind the big picture, our primary goal is to become free cash flow positive over time while maintaining a strong liquidity position. Our entire organization is focused on executing on a strategic transformation, and we look forward to updating you as the work continues.

I will now turn the call back to Tony for some closing remarks.

Tony Sanchez

Thanks, Cam.

While the last several quarters have been very challenging, I'm happy to say that we have finally turned the corner and are seeing tangible results from the corrective measures undertaken earlier this year. In the quarters ahead, I look forward to discussing how the organizational and process changes have positively impacted our financial performance, allowing us to deliver the value our shareholders expect.

Operator, that finishes my prepared comments, and we’re now ready to start taking questions.

Question-and-Answer Session

Operator

We’ll now begin the question-and-answer session. [Operator Instructions] First question comes from the line of Neal Dingmann of SunTrust. Please go ahead.

Neal Dingmann

Tony, looking specifically at two things, Comanche -- kind of the Comanche areas, I guess just from a broad statement, when you talk about sort of the slight bump up in spend you’re talking about for next year. My first question is just when you look at Catarina versus Comanche, how do you see the allocation sort of different versus where they are now?

Tony Sanchez

See, overall, we’re going to put more capital proportionally, as per my comment, into Catarina. And part of that reason is we -- as you all well know, we spent a significant amount of this capital of this year testing and appraising over at Comanche, primarily well spacing and combination of well spacing with completion design, size along with the different zones. So, the collective partnership has largely decided that it would be a good time to reduce CapEx at Comanche until we had sufficient six months to a year of production history at Comanche from these tests. So, accordingly, we’re going to be reducing I would say -- we will be going to an equivalent about 3 rigs total and 1.5 to 2 rigs equivalent will be at Catarina with 1.5 to 1 rig depending over at Comanche. So, how that sort of flows through into dollars? I'm not really sure off the top of my head. But, I will see -- I will say, it's -- we’re moving more capital to where we have 100% working interest and moving capital away from where we have less working interest but primarily for the reasons of -- before we go into a more robust development program at Comanche, we think it would be prudent to get well test data on a lot of the capital that we spent this year. So, does that largely answer your question, Neal?

Neal Dingmann

This is what I was looking for from a standpoint. And then, just one follow-up. When I look at kind of how you’ve gone after as far as the spacing, like looking at Comanche 3 and 5 areas, how you look at the kind of tackle the upper and lower and sort of the spacing within each, could you about how you see that within now that you’re doing a little bit more again in South Central and maybe little bit in the North Central Catarina, how that kind of spacing -- number one, will you be doing the sort of the same, I forget if you’ll be doing the sort of the same upper and lower, and then how does the spacing sort of differ when you all think about it versus over at Comanche?

Tony Sanchez

Yes. I would say, so far our technical -- our technical conclusions are that at Comanche, the spacing had been too tight. We have a lot of wells at Comanche that we drilled at 300-foot spacing and that’s 300-foot diagonal spacing, so stacked and staggered with the 300-foot diagonal, 600-foot in-zone. So far, there’s been a marked difference between 300, 600-foot spacing; and 450, 900. We have tests at 450-foot spacing that are beating type curve across all areas, including -- especially in areas 3 and 5. They are working really well. But that said, we did put the spacing test away at 300-foot spacing, and we just haven't had enough time to make the determination as to whether the well results and the type curves nine months to a year out start to diverge from the wider tests.

So, in many cases, the answer is not obvious, early time. A tighter well with a bigger flat job may perform exactly the same as the 450-foot test. But, we don't see enough evidence to justify the added costs. So, it’s more of an economic decision, which means we have to wait to see how they produce before we go into a full-scale development. So, some of the conclusions that I'm saying I think are our in-house technical conclusions.

Stacked and staggered, at Catarina, we’re spacing a bit wider, might be 500-foot to 600-foot spacing at Catarina, largely because we do think that that's the optimal spacing in that particular area. Geology does change, even though the assets are next door to each other; it does change. If you recall, the first quarter of last year, certain pads that were we call it E34, E35, E36 pads that we drilled them tightly and stimulated more upside jobs, we overstimulated those. And so, didn’t [ph] quite work out, so we reverted to the way we were doing it before and it’s been doing just fine. So, we’ll continue to test at Catarina, but it will not be significant. It will be testing with the intention of not adversely affecting the overall Catarina production on a quarterly basis.

So, the stacked and staggered methodology largely still holds in the lower Eagle Ford in area 5 and in a large part of area 3. The upper Eagle Ford, in most areas, it hasn’t worked. It just hasn’t been economic. It’s a technical success that produces oil and gas, but not enough to justify the cost of the wells that these -- in this pricing environment. So, we’re not going to be drilling or we’ll not be participating in any more upper Eagle Ford test at Comanche, going forward. And what that means is, if one of the other partners wants to propose upper Eagle Ford wells, they’re more than welcome to do so, but the likelihood of us participating in those are going to be fairly low at this point.

So, in Comanche, the lower Eagle Ford certainly has two zones that work, the lower B zone which is the lower of the two zones, works better than the lower A zone. But, if we could get our costs low enough to lower A, could very well be highly economic as well.

Operator

Next question is from Ron Mills of Johnson Rice. Please go ahead.

Ron Mills

Question just on your activity levels. You talk about going to three rigs and $350 million spending rate. Given where you will be allocating more of that capital, is -- do you guys think that’s somewhere around maintenance CapEx, do you think there's still -- that that's enough capital to still provide growth? I am just trying to get a sense as to the -- around those three rigs?

Tony Sanchez

It’s not final yet, Ron. We’re working on that now. We don’t have a final budget. But, the run rate is that about $350 million. And it may actually end up a little bit lower than that, but not materially. We’re not in a position right now to give firm 2019 capital guidance, though that’s why we’re talking about it from a run rate perspective. All indications right now, Ron, is that that is pretty close to maintenance capital. I think, we could eke out some growth, but it’s not going to be a high-growth capital program. We’ll return to a high-growth capital program probably in the latter half of 2019 and planning for 2020. So, in our long-term planning models, we do have us reverting to something in excess of 350, probably back to where we were before in that kind of $550 million CapEx budget range. But, in the meantime, we do think it's prudent to slow up at Comanche, focus more on Catarina, maintain to grow production. And we think that that $350 million indicated capital budget, we will achieve that. But again, it’s early, and we’re not prepared to make it our final guidance for next year quite yet. But, we will be doing so in the next several months -- next couple of months.

Ron Mills

And then, a related question, as it relates to the next -- this current quarter and the next couple of quarters. Given the amount of completions you brought on line, and you clearly have gotten your production levels back up to 80,000, is your completion schedule set up as such where 80,000 barrels a day is a pretty good base running rate or is -- does that include a lot of flush production that could end up rolling over a little bit before you start to reach that maintenance level?

Tony Sanchez

It’s such a fine line, Ron, I’d air on the side of being a little bit more conservative. And I would target a maintenance production level in the high 70s. We’re going to have ups and downs. One of the biggest challenges with slowing up and going to a lesser amount of rigs is base loading production program. So, for instance we -- with a 4-rig program, we’ve moved rigs over to Catarina, drilled some wells and then have to move them back to Comanche, and it’s more of a lopsided production profile. So, one of the things that we’re really working on here is trying to level load as much as possible and keep consistency across both assets. So, I would say, some of the -- we’re in excess of 80 but we said in excess of 80 for a reason because some of that was flush. And whether that averages for the fourth quarter at 79, or 78.5 to 79.5 or something like that, it’s such a fine line, it’s hard to tell but there is the effect of flush production in there. But again, we’ve put a lot of emphasis on our workover activity this quarter and in the second quarter, and some of those efforts have really started to result in pretty stable production across the assets. And so, back when we were running our type spacing and our choke tests, we were always bottling flush production that would then fall off hard. That seems to be behind us. The assets are producing in a lot more stable manner. And when they go offline, like they did, when we got very heavy rains and we lost access to a lot of Comanche, at one point I think mostly Comanche was down and then for the extended period of time, part of Comanche that we call [indiscernible] was off line for like three weeks because we simply could not access the pads, they were flooded out and the water the remainder. So, back when were able to get back and turn pads back on line, they've basically reverted back to where they were before. And so, that indicates that a lot of the adverse effects where we may have put on the rock before when we were drawing them down more aggressively and spacing in tighter, those are largely behind us I think. So, there's more stability.

So, that's a long-winded way of saying I think that high-70s, could be 78,500, 79,500, or it could be 80,500 but somewhere in that range was I would expect the fourth quarter to come out at.

Ron Mills

And just one follow-up on that artificial lift workover. You did a lot of those here recently. Do you have a lot more of those to go spread across your program or did you work through a lot of what you had? Is that like you said back to be a little bit low hanging fruit and at the same time, create a more stable…

Tony Sanchez

Yes. We do have a lot more to go. I reviewed a presentation on that yesterday, off the top of my head, I don’t remember the number, but we are stepping up our efforts. Some of these workovers have four to 6-month payout. So, we're putting a lot of capital on that. Most of that workover activity is over Comanche. Catarina doesn’t really need workover activity. The workover activity is really a conversion from rod pump to gas lift. And so, we do have a lot more to go. And, I think you are going to see a significant more amount of that activity in 2019. So, it's not something -- it is low-hanging fruit but we haven't gotten through I'd say even a quarter of that low-hanging fruit here at Comanche because there’s 2,000 wells at Comanche or so, and of that, we have converted a 100, 100 or less -- 150, so about a 150. So we still have a ways to go.

Ron Mills

And then, one last one. You clearly used [ph] have a lot of liquidity with the cash on the balance sheet. But, any ongoing thoughts on ongoing processes in terms of potential non-core asset sales that remain?

Tony Sanchez

Yes. So, the processes continue, namely we've talked about Maverick in the past. We still have some groups that are looking at Maverick. And I think it would be a good fit. That Maverick asset has been hanging out right at about 4,000 Boe a day to 3,500 or so barrels of oil per day, and that's mostly oil, and it's stable. We've got our hands full with Maverick, and I mean with Comanche and Catarina right now. So, we are not really putting much capital into Maverick. But, it is a good asset and it's providing very good stable oil production. So, I’ve said all along, if we get what we think is a fair price and it’s an all cash price, we’ll do a deal. Anything short of that, we’re going to take it and use the cash flow to reinvest in our other assets. So, that process is continuing. There's a number of companies that are looking at Maverick and they continue to look at Maverick. And we’ve engaged in certain levels of negotiations with these groups. But, in terms of a firm asset sale announcement, there’s nothing to report yet, but we’re continuing to work it.

And then, I’ve talked about potentially looking at the possibility of monetizing a minority interest at Catarina. And Catarina has been doing great. It’s our key asset. If we can sell a piece of it to a financial buyer or somebody who would take a minority interest at a value that we believe to be fair, then we would go ahead and take that kind of a deal. So, we are in discussions with potential candidates for that. They tend to be strategic, strategic or financial buyers, strategic players that may want to hedge the production for other things that they have in terms of gas and NGL usage. So, we’re always open to selling assets at the right price. And, I think I've been consistent over the last several quarters saying that we’re not going to sell at a distressed price value. We will only sell if we get what we believe to be fair value.

Operator

Next question comes from Tarek Hamid of J.P. Morgan. Please go ahead.

Tarek Hamid

On UnSub, it looks like we declined about 300 a day during the quarter. Could you just talk -- is any of that sort of intentional, either shut-ins or whether for fracing purposes or putting stuff on artificial lift or is that sort of just the rate that we should we think about as the 3Q kind of rate?

Tony Sanchez

Yes. I think, look, UnSub production is all Comanche. And predominantly, the initial Comanche PDP. So, that production level was affected by the floods, substantially. So, yes, it is. And it’s also though affected by our workover activity. So, the primary effect on -- the primary targets of our conversion optimization strategies which are the workovers are at UnSub.

Tarek Hamid

And then, obviously, you’ve got bond prices at material a discount; obviously you’ve hired some board members with a lot of financial expertise. How do you think about sort of the discounting your bonds today, kind of are you comfortable using liquidity to take advantage of that, or are you sort of looking at some of the other possible alternatives?

Tony Sanchez

By and large, we’re looking at all alternatives. Our goal here is to reduce the annual -- the annual shortfall and to get us to a free cash flow position. I'm not sure that we would use our liquidity and only our liquidity to take advantage of a discount in the bond. However, that is one of the tools in the toolbox, but there's a lot of tools. There's everything from liability management type exercises to outright bond purchases, like which you just talked about to selling assets and using proceeds to restructure the balance sheet through bond buybacks and things like that. So, those options all range from strictly balance sheet type activities to A&D coupled with balance sheet or you go sell assets to buying assets and raising money and growing into a better balance sheet. So, we’re looking at everything, Tarek.

And I would say that a primary objective of when we look at these strategies, we’re not looking and we are not attracted to strategies or financial moves that necessarily provide a quick fix for a short period of time, band-aid type for a little bit. I mean, it's been out there publicly that some --one of our bond -- I don’t even know who it was and I didn’t get the proposal, but got lead or put in the press that they are proposing up tier [ph] exchange. That's nothing we would do; we are not interested in doing that. It's just moving stuff from one bucket to another. It doesn’t create value for the overall stakeholder group including the shareholders. So, I know there 's a lot of noise in the market about that. I think, with Cam in the CFO position and the rest of the team here, we’re -- we have the financial and capital markets firepower to look at everything. But, the key objective in anything we look at is putting the Company in a position to be free cash flow positive. We have a big size now. And we can generate free cash flow. We just need to fix the two things on the balance sheet. So, that's what we're looking at now.

Tarek Hamid

One last one for me. As you think about right sizing the balance sheet, what do you think the right total quantum of debt is? Sort of how much do you need to actually reduce do you think through various transactions, whether it would be A&D or otherwise?

Tony Sanchez

Yes. I don’t have an exact number. On a consolidated basis, we’re at 4.5 times or so right now, maybe 5 times, just depending on how you look at, whether it's LQA or LTM or going forward. So, certainly something less than that. Whether it's 2.5 or 1.5 times, I can't tell you right now. I think it's premature to peg a number right now. But, it probably would be in that range. And again, like I said, we've got a lot of tools to work with to achieve our ends. And as we look through these and sometimes we get these unsolicited proposals that come from left field, and then they are making no sense, but the overarching ideology here that we have is to put the Company in a position where it is sliding from a free cash flow perspective. And I think we can achieve it. We’ve built the asset base to do it. So, anything we look at has to get us into that position. Because I think once we are in that position, then, we are -- certainly we can grow organically at a significantly a higher clip than we are growing now, or we can couple that with further acquisitions or M&A activity. I mean there’s a seemingly wave of consolidation that’s already started. And we mostly likely be part of that game.

Operator

Next question is from Jacob Gomolinski-Ekel from Morgan Stanley. Please go ahead.

Jacob Gomolinski-Ekel

Just on operationally to start with, can you talk about -- and I apologize if I missed this, but how much wells are costing you this year and how much you expect that to go moving forward? I mean, just some simple math, it seems -- looks like they’re trending around $6 million a well versus some of the previous slides, low to mid-4s. So, just trying to get a better handle on that.

Tony Sanchez

Yes. They’re closer to 5.5, but those are wells with extended laterals and where the designs have been upsized to significant degree. And we can get some information here. Yes. Our type well is 4.5 but that’s a 6,500-foot lateral with a 1,700-pound per foot frac design. So, some of the wells that we’re drilling are 8,000, 9,000, 10,000-foot laterals with a 2,000 to 2,500 foot pound -- pound per foot design. So, the costs go up. On a unit basis, I'd say that our costs are a bit over where we had budgeted per unit but not significantly. And that's largely due to just bigger wells that we've been testing through 2018.

Now, that said, I would expect an optimization of well costs starting -- starting in the third quarter, certainly in the fourth quarter into 2019 as we center on optimal lateral lengths. So, at Catarina, it’s 7,500 feet or so, even though we could drill longer wells, but mostly drilling these at 7,500 feet because we think that's where we’ve reached the point of diminishing returns in terms of lateral lengths. And early last year, we tested the really big frac jobs at Catarina and they didn’t work. So, we reverted to a more standard design. And now with replication, we could achieve scale and drive per unit costs down at Catarina. So, the number is not 6, it is more like 5.5, but that’s for longer laterals and bigger frac jobs. I think by and large, assuming service costs kind of stay where they are, I’d expect a kind of steady decrease in our average well costs going forward.

Jacob Gomolinski-Ekel

And I apologize, I must be missing something here. But just from the September slides, it looks like the 8,000-foot lateral was guided to like 4.6 million -- and you mentioned the 6,500-foot lateral, and then I think some of the other ones were sort of in the 7,200-foot range and like the low 4s. So, just trying to make sure from a modeling perspective I’m not missing anything how to kind of think about that versus…

Tony Sanchez

Yes. What you really don't have insight to is the completion design, and those range, and the ranges could be pretty significant. We’ve got -- I’ve got -- somewhere around here, I’ve got a list of all the completion designs that we’ve tested in the past. And there's a pretty broad range of outcomes in terms of -- in some cases, it is 2x, on a cost per foot basis could be as low as 400 or $350 per foot all the way up to over $600 per foot. So, I think that the divergence from the generic type curves that are in the presentations that you are using for modeling, much of that cost was found in the completion design. And then, of course, in September we did have a lot of trouble with the wet weather and it caused us to incur mobilization charges and rebuilding the pads and things like that that stung us. But, I wouldn’t say overall that's the trend and it's not a material number. Most of what you are talking about is in the completion design.

Jacob Gomolinski-Ekel

And then, maybe just one sort of hierarching strategic question. As you think about Comanche slowing down development there, what do you sort of see as the long-term vision for that asset now as you' shift focus to Catarina? And I know you -- I mean, you talked about maybe non-core assets sales, like do you view Comanche as something that falls into that bucket as something as a potential monetization candidate or just trying to -- how should we think about Comanche in the next call it three to five years out?

Tony Sanchez

Well, three to five years is a long time. And I would put in there that we would either -- we certainly would be open to selling Comanche at the right time, I’m not in favor of selling it today, but at the right time and for the right price, we would monetize it. I think we've got a long way to go at Comanche. We need to show that asset is working like we have at Catarina. These assets are right next door to each other. At Catarina, in early 2017, production was in the low 30s, 32,000, 33,000 Boe a day. Now, we are pushing 48,000, 49,000 Boe a day. And the assets are right next to each other. So, we just haven't seen -- we haven't been in a position yet from a development perspective to drive production growth at Comanche. There is no reason why we can't. We haven't done it yet because of all the things that we’ve talked about to-date, the testing, the wells that were too tight in that testing, the more aggressive choke strategies coupled with the tight spacing that hindered us. So, I would like to get into a position where we can show consistent production growth out of Comanche where we can use that to a point to a higher valuation. Now, we would be buyers of Comanche assets in the next three to five years as much as we would be sellers of Comanche assets in the next three to five years. So, I know that's kind of two ends of the spectrum. But, I do think that depending on what the outcome is, it could go out of the way.

Jacob Gomolinski-Ekel

And then, last question for me just. I know it's not the -- you mentioned there is not a ton of interest in an uptier [ph] exchange but just for the -- so we have a sense, do you know what existing first lien and second lien capacity is? I appreciate that's not the base case, but just in case what that kind of capacity is currently?

Tony Sanchez

Off the top of my head I don’t know what it is. I think you’d have to just -- pretty easy to calculate would be my guess. So, I don’t want to pin a number right now. But, I will reiterate, we didn’t give you the uptiers [ph] back two years ago when everybody was uptiering and layering. We didn’t do it then, because I didn’t think it was the right thing to do for a variety of reasons. And we’re not going to do it again currently. We never really -- even I never really saw personally a proposal that supposedly was reported on. Clearly that was unique. But, I could tell you, I read I think it was Deadwire, I read that article. And based on the way they described it, we would have -- no wonder, it never made it to my desk. We turned it down so quickly. So, I just -- I’ve got an aversion to that kind of a transaction. And I don't think it benefits the whole. I think, it benefits very specific parties, and it’s not in my opinion beneficial on a standalone basis to the equityholders, nor the broader bond group. So that's been my aversion to it for the last several years. And I think you can -- if you look at our actions back in 2016 whenever is the -- it was the flavor of the day back then, and we didn’t do it, we could have but we didn’t.

Operator

Next question is from Sean Sneeden from Guggenheim. Please go ahead.

Sean Sneeden

Tony, you guys mentioned that you’re starting to see signs of the declines easing at Comanche. And I was wondering if you could give us a sense of that PDP decline looks like now versus, kind of where it was earlier in the year? And I guess, are those -- the cheaper completions that you were referencing earlier, are those designed specifically to have a flatter decline or how should we think about that?

Tony Sanchez

I’ll answer the second question first. The cheaper completions were just another completion design that we threw into the basket, and those are really targeting economic returns. There’s a whole concept of tube development and then maximizing SRV. And we just wanted to look at something that said, let me maximize my dollar profit, which I think is what I really care about. So, we put in some small completions that have just been tracking right on with the bigger jobs so that we could see dollar for dollar, which was more economic, so -- on a tighter spacing. So, we did many -- virtually all of the tight spacing wells that have bidden us at Comanche were on -- were completed with the large jobs except for a small handful of smaller jobs. And we wanted to prove that, actually maybe you can drill tighter but you got to complete it with a smaller completion design. And we made more money dollar for dollar with that approach, rather than the other which of course would add quite a bit in terms of drilling locations, if they were to prove out to be true. So, that’s -- and to your first question in terms of PDP declines. I think it’s too early to tell a significant amount. There is more stability in overall production. We had forecasted and I think mentioned publicly back in Q2 that we thought Q3 was going to be the bottom. And it looks like Q3 was the bottom.

So, with $280 million of revenue and $125 million or $124 million or so of EBITDA counting hedges, that's the bottom, I think that if oil prices hold in where they are come January, we’re going to have a significant amount of cash on a monthly basis retained on the balance sheet that is currently getting paid out compared to those hedges that we put on. So, we’re not completely unhedged next year. UnSub is hedged in part as per that -- the contractual of terms of that entity. But our restricted group will see an influx of cash monthly from exposure to higher commodity prices. And those come -- as you all well know better NGL pricing, and better oil pricing overall have helped. And so, those literally a month and half -- two months from now, we will start to see that benefit.

Sean Sneeden

And just one clarification. When you're talking about kind of cheaper completions tracking the larger jobs, are we talking about that in terms of EUR or is it an IRR basis that you are kind of making that comparison?

Tony Sanchez

IRR, what really IRR -- EURs at this point, larger the smaller, seem to be -- it’s still early time, but they seem to be tracking on top of each other. So, it's too early to tell that the series with a smaller job, you may not -- you may get the same IP 30 or IP 90, 180 days or 365 days out, you’re going to see a divergence in the curves in favor of the larger job. We haven't really seen that yet. But, it's still early time. But, that said, if the production profile from the two wells largely tracks on top of each other for six months or a year, you're going to make more money with the smaller one.

Sean Sneeden

I think that makes sense.

Tony Sanchez

And the other anything about it from a technical standpoint, the issues that we think we've been dealing with or a function of tighter spacing with larger completion jobs. So, it's not to say that it's the tighter spacing on a standalone basis hasn’t worked. What we're trying to do is we're optimizing the completion design to the well spacing by dialing back the completion size to the tighter spacing tests.

Sean Sneeden

And then, I guess with the focus kind of shifting back towards Catarina, presumably we should think about some Catarina growth and perhaps Comanche is kind of flat to down next year. How does -- if that ends up playing out, how do we think about the ability to pay down the UnSub revolver overtime, and does that impact your thoughts about any potential consolidation of UnSub?

Tony Sanchez

Well, I don’t think it has much slowing down at Comanche. Remember, Comanche from a development -- sorry, UnSub, from a development perspective only takes 40% of our quarter of the -- of our overall quarter. So, it's not going to have a huge effect. The same way that drilling a lot is not going to have a huge effect on UnSub, slowing down drilling is not going to have a huge adverse effect on UnSub because it's such a heavy PDP production base. So, UnSub is going to do is what UnSub is going do. If we slow it up a bit overall at Comanche, you may get a few 100 barrels of reduction at UnSub. But, we don’t think it’s going to be anything significant that would cause us to rethink our plans for consolidation or timing around that type of a transaction.

Sean Sneeden

And then, I guess just one clarification on the $350 million of your kind of run rate CapEx that you’re talking about, you kind of described it more of a maintenance type of program. When you think about maintenance, is that like a Q4 to Q4 type of concepts? And then, I guess when you think about kind of a longer-term 550 to 600 that you referenced before, would that be designed to grow beyond the kind of call it 80,000 a day or how should we kind of think about that?

Tony Sanchez

Yes. I’d say, maintenance -- the process of coming up with a maintenance number is not an exact science. And so, the way I think it should be thought of in this context is $350 million or so of capital, could be 325 or it could be 360, we don’t know, but call it 350, should maintain production in the high 70s. Could be low 80s. We don't know yet. So, we think that we’ve got a pretty good idea of where Q4 can come out, based on where we’re trending, and it’s 80,000, 79,500, 79,000 around there. We’re going to give ourselves some leeway of 1,000 to 1,500 barrels in either direction. So, I don’t know exactly but it is that concept that we’re targeting right now. And it just so happens that the broader working interest group at Comanche is on board with slowing up while we get production results from all the capital we spent on it in 2018. So, it works out quite nicely actually for us wanting to reduce capital. While we look at the balance sheet, we could reduce it out at Comanche and not have to take much out of Catarina if any at all. And those Catarina wells where we’ve got a 100% working interest are much more impactful to our overall quarter-to-quarter production profile. So, we sized it at a level where we think we could maintain a good amount of production in the high 70s, maybe even get lucky and be in the low 80s.

Sean Sneeden

And I guess the kind of longer term number that you gave of 550 to 600, is that -- that's more of growth concept that..

Tony Sanchez

Yes. Yes. If we were to go back, to $550 million, $600 million of capital, we’d definitely be growing production.

Operator

Next question is from Dustin Tillman of Wells Fargo. Please go ahead.

Dustin Tillman

So, you alluded to the JDA, you needed to a proposal in front of the group in October. Everyone is comfortable with the reduction in spend at Comanche?

Tony Sanchez

Yes. I’d say the large consensus of the Comanche working interest partners -- again, we are 25%, so there's another 75% out there spread over four other partners, by and large on board with a reduced capital program.

Dustin Tillman

How do you see the negative working capital trend as you spend less there? When you bought the assets, you took on a large additional amount of negative working capital that's built over time. So, how much is that going to affect cash flow next year?

Tony Sanchez

I don’t have an exact number, but a reduced capital spend particularly at Comanche helps on working capital. But, we do have a variety of initiatives across all of our -- all of the areas of the business that are meant to optimize that working capital deficiency. We have -- I think we had something like on a gross basis -- this includes Catarina but 1 to $1.2 billion of capital coming through the organization, and the large part of that on a gross basis is towards Comanche. So, stretching out our payables and accelerating our receivables has a pretty material effect on our working capital. So, we've been working on that. There were some improvements and I would expect there to be some continued improvement. Now, just simply slowing up a little bit at Comanche is in and of itself is going to help on the working capital front.

Dustin Tillman

But, it’s a negative working capital balance, so that should be a use of cash, right?

Tony Sanchez

Yes. But, lowering the use of cash, it's kind of the onetime thing. So, if you are carrying a negative working capital balance, you’re essentially funding the overall operations on a 30-day basis. So, you can reduce that amount. I think we can even get close to eliminating it. It does take considerable amount of timing and logistical from an accounting standpoint to achieve that. But, I do think we can -- we've been making strides to better -- make better use of working capital.

Dustin Tillman

And then, one last one for me with -- talking about $350 million of capital to maintain production, you spent 600 this year and production has been down slightly. Is decline rate moderating that much or is it incremental improvement on the incremental wells, is that that more capital efficient? How would you attribute the changes?

Tony Sanchez

It's a good. And the answer is it’s a combination of both. The a lot of the capital that we spent in the second half of 2017 and the first quarter really of 2018 or even the first half of 2018 was capital that was spent on wells that were spaced very tightly, 300-foot spacing with upsize completion jobs. Those so far have not proven the work. And unfortunately, once the quarter is done, it affects the wells -- or the adverse effects of the wells don't go away, they linger. But, quarter-after-quarter, the effect is less and less. The flip side is -- so, you have a reduction in the contribution and the negative contribution of those kinds of investments. The flip side of it is, new wells in that wage as we’re slowing them back more conservatively, we’re holding back pressure on the wells, which means we draw not for longer. And we think that we are completing them in a more optimal manner, and therefore they are just simply performing better. So, it’s a combination of time passing in the adverse wells coupled with new wells coming on line that are produced more conservatively.

Operator

Next question is from Vivek Pal from Seaport Global. Please go ahead.

Vivek Pal

Hey, Tony. In the third quarter, your cash burn was roughly $70 million, based on your CapEx guidance for the year in fourth quarter, should be assume close to $60 million?

Tony Sanchez

Let me get that number here for you, Vivek..

Vivek Pal

And while you’re getting that, just on ‘19 itself, assuming 350 CapEx, 180 in interest expense, high-70s production and using the strip, what should we expect on cash burn? I am getting roughly like 750, [ph] is that a fair number?

Tony Sanchez

I don’t know what’s in your model. So, I am not going…

Vivek Pal

Just maybe 350 CapEx that you said and 180 in interest expense and high 70s production that you said you could do at 350?

Tony Sanchez

Yes. Again, I don’t have my model in front me. And so, if that’s what your model puts out, then, I think that’s what you should go with. In the fourth quarter this year, remember, we moved some wells from next year into this year. That’s capital that’s moved forward and coming out of next year. So, we’re reducing capital next year, and bringing it forward to this year. So, I don’t know the number you said, $60 million, $70 million for this year, I’d probably take it closer to $85 million, $95 million.

Vivek Pal

In cash burn for fourth quarter?

Tony Sanchez

No. Capital.

Vivek Pal

Okay. And are you still getting with the cash burn estimate for fourth quarter?

Tony Sanchez

Sorry. What’s that?

Vivek Pal

The potential cash burn in the quarter?

Tony Sanchez

We don’t project our cash burn in the fourth quarter.

Vivek Pal

Now, Tony, Blackstone and GSO have roughly $1.7 billion in Catarina, right? And are you -- what is the relationship now? I mean, can you go up to them and say, look, it’s not working out as good as we thought, maybe you should give us a break on the preferred and use the free cash flow to get there to pay down the bank first? Are they working with you? How is that relationship right now?

Tony Sanchez

I am not going to comment on the relationship. We could have any sort of conversation, but I don’t think it’d be appropriate. I’d say the relationship is by and large good. But, I am not going to comment on the details of relationships like that on a call like this. So, we -- I’d say, by and large, we have a good relationship, and we’re aligned in terms of our objectives. And so, they come to us with ideas all the time; we go to them with ideas all the time. And we find ideas that are actionable and make sense for them and for us, we’re both incentivized to put them into practice and do a deal. In this case if that’s an amendment or a restructuring of an arrangement or a document, then I think we’ll do it. [Multiple speaker] And so, then the private equity level, we didn’t anticipate everything when we did the deal and set up the private equity.

So, look, the relationship is one of I think mutual respect. We are working at the same end, we are communicating openly, and we are always talking about these things. So, I'm not going to comment necessarily on specific details of our discussions. But, the relationship is one that's open and flexible and where both want to make the asset work, absolutely. We both still believe in the asset.

Vivek Pal

Absolutely. I meant, are they onboard in terms of reducing the CapEx to see just how things are or there is -- like let's spend some more sometimes? You spend some more, you kind of get a better idea. I was just talking about the context, not necessarily the relationship, it’s like, do we spend more, do we spend less, do we need to get more people in?

Tony Sanchez

Definitely, we are aligned and we agree on spending less capital right now at Comanche. Like I said -- that's why I’ve said it several times during this call. It is not only Blackstone and that side, it's the other working interest partners. We share technical ideas all the time.

Operator

Next question is from Joshua Gale from Nomura. Please go ahead.

Joshua Gale

I just wanted to get a clarification on the working capital commentary from previous question I think, it's reasonable to assume that when you're going from a run rate of roughly $600 million in annualized CapEx to $350 million or slightly lower for the calendar 2019, as you said that your outstanding payables will decline in accordance with your pay to spend, and it's a onetime for cash outflow or the cash payments catch up with the incurrence. And your total current liabilities excluding debt and derivatives is about $422 million on a consolidated basis as of the second quarter -- sorry, as of the third quarter. And I guess, the question is what additional cash outflow should we assume over the next five quarters, let's say from 4Q ‘18 to 4Q ‘19 in accordance with the decreased pace in spend?

Tony Sanchez

I don’t think you should assume anything another than what we’ve provided to you. So, I’m not sure how you’ve got the models working through. So, I'm not going to comment on that. But, what we have provided is a high level CapEx run rate of $350 million. And how that affects and flows through working capital here, I think you’re just going to have to rely on your own model. But, I would say that it should be steady state here for the next four or five quarters.

Joshua Gale

Okay. I have one additional question related to liquidity. I was hoping to get clarification on the cash balance. One quarter stale on this question because I'm going off the latest 10-Q, but just using the last quarter figures, there were on the consolidating financials, it showed that you had $438 million in total cash, $353 million was within the parent and guarantor group and $84 million in guarantor subs. And I think without more disclosure, some people that are tracking liquidity may be assuming that all of that $84 million is kind of trapped in UnSub. And so, I was wondering if you could discuss, of that $84 million or whatever the figure will be for third quarter, once you file the Q, how much of that is in UnSub and how much that maybe in other entities that are not guarantors? But to the extent it was advantageous to you, you could put it back into the restricted group, perhaps as part of some refinancing negotiations. And I think it’s less than the full $84 million as an UnSub, it would give the market perception you’ve a little bit more liquidity runway in the restricted group that you're getting credit for right now?

Tony Sanchez

Yes. Look, I think that's a good question and I see what you're looking at. But unfortunately, I am not going to comment on the specifics. I know the answers to them but we will only go so far as disclosing what we provide in our financial statements. So, you’ll have to dig through those and figure out what cash lies where and whether it's restricted or unrestricted, and whether an unrestricted cash balance lies at the current company or at UnSub. So, we haven't provided that kind of detail in the past. So, I think for the purpose of your analysis here, and I know exactly what you’re trying to get at, and I wish I could help you. But I am going to be consistent in our disclosure for the past. Unfortunately, I can’t give you an answer to that.

Joshua Gale

I understand, sticking with the public disclosure. Just one more final one. Someone else did ask about potential first and second lien capacity. And you didn’t want to provide a specific figure, but one of the data points that’s actually necessary for us to calculate that is what the SEC PV 10 is for the unrestricted subsidiary and to sort of net that out from the consolidated figure, which was 1.86 billion as of the end of ‘17. And totally understand that there is capital incurred new production on, PDP slowing down. So, there’s huge amount of entry year changes. But, just consistent with that figure, is it -- do you think it's fair to say that the UnSub PV 10 was about 600 million on the SEC deck for that calculation?

Tony Sanchez

I would classify that question similar to your first one, which is I think it’s a great question. But, consistent with what we have disclosed in the past, I can’t give you necessarily that level of detail on the call. But, I would say you’re probably on the right track there. And in terms of what first lien and second lien capacity is right now, we’ve got a pretty good handle and know exactly what it is. But we -- we’ve never disclosed it in the past and we’re not going to start now. But, I think you're getting in the weeds and things, you may be coming up with -- you’re in the right ballpark.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Tony Sanchez for any closing remarks. Please go ahead.

Tony Sanchez

Okay. Yes. Thank you everybody for joining us. We look forward to our next earnings call and wish everybody a good day. Thank you.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your telephone.