Pioneer Natural Resources Company (NYSE:PXD) Q1 2019 Results Conference Call May 7, 2019 10:00 AM ET
Neal Shah - Vice President, Investor Relations
Scott Sheffield - President and Chief Executive Officer
Rich Dealy - Executive Vice President and Chief Financial Officer
Joey Hall - Executive Vice President at Permian Operations
Conference Call Participants
Arun Jayaram - JPMorgan
Brian Singer - Goldman Sachs
Jeanine Wai - Barclays
Doug Leggate - Bank of America
Paul Sankey - Mizuho
John Freeman - Raymond James
David Deckelbaum - Cowen
Charles Meade - Johnson Rice
Ryan Todd - Simmons Energy
Bob Brackett - Bernstein Research
Welcome to Pioneer Natural Resources, First Quarter Conference Call. Joining us today will be Scott Sheffield, President and Chief Executive Officer; Rich Dealy, Executive Vice President and Chief Financial Officer; Joey Hall, Executive Vice President at Permian Operations; and Neal Shah, Vice President, Investor Relations.
Pioneer has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the Internet at www.pxd.com. Again, the Internet site to access the slides related to today's call is www.pxd.com. At the website, select Investors, then select Earnings and Webcasts.
This call is being recorded. A replay of the call will be archived on the Internet site through June 1, 2019. The company's comments today will include forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospects of Pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Pioneer's news release, on Page 2 of the slide presentation, and in Pioneer's public filings made with Securities and Exchange Commission.
At this time, for opening remarks, I would like to turn the call over to Pioneer's Vice President, Investor Relations, Neal Shah. Please go ahead, sir.
Thank you, Anna. Good morning everyone and thank you for joining us. Let me briefly review the agenda for today's call. Scott will begin by discussing our strong first quarter results and our solid execution, including our positive outlook for the remainder of the year. Scott will then comment on the many initiatives in progress to enhance shareholder value.
Further, Scott will review our strong performance in the Permian basin, specifically our best-in-class oil production and the benefits of our low-cost basis acreage. After Scott concludes his remarks, Joey will update you on our strong horizontal Permian well performance and Rich will then review the benefits of our firm transportation commitments to the Gulf Coast. Scott, will then return with a brief recap and commentary. After that, we will open up the call for your questions. Thank you.
So with that, I will turn it over to Scott.
Good morning. Thank you, Neal. It will probably take me a couple of quarters to get back in practice, but I think allow this already. But I spent the first 100 days interviewing and listening to over 150 employees and investors. I did have among the investor tour, I did have Ken Thompson, our Non-Executive Chairman and several outside directors and Ken share holder at meetings. And it's a practice we're going to continue to do an annual meeting like that where I invite the Non-Executive Chairman and some of our outside directors to listen to what investors are thinking and what they are saying. There is something that definitely has not changed since the 2.5 years since I have been gone, and that the company has great people and great assets.
The slide I have been impressed with when Neal came out with it last quarter, it's updated but you can spend the entire presentation really on this first slide, the importance of it. I think several of the key points here is that the company is achieving free cash flow now as we speak over $800 million estimated for '19 based on the strip prices. In addition -- and that is a primary focus of the company over the next several years. Also, the company has moved toward -- we've increased our dividend, it will be officially approved in August, record date to be late September, we are semiannually. But the Board has improved the intent to move to 1% yield, so about 260% increase. Long-term goal is to move toward the midpoint of our peers in regard to that dividend.
Also, key drivers improving capital efficiency, the company has already achieved over $300 million from '18 and '19. We are focused now on achieving another $400 million of capital reductions, including G&A, which break-down about $150 million midstream up to $100 million in facilities. A full year of sand -- if you remember we're not achieving all the sand and gel savings for 2019 but that’s another $75 million.
And then we're targeting up to $100 million of G&A savings. So that's how we get to the other $400 million. So when you look at a total of about $700 million, it's about $2.5 million per well when you look at assuming that we pop 300 wells per year, it's little bit less this year. But going forward, it will be about 300 going forward, and so it's about $2.5 million per well savings.
In regard to ROCE, it's a main focus of the company the company over a year ago put it in regard to one of the key focuses for the management team here and the company going forward. We are pure leading based on the results in 2018. We're targeting to hit 15% within the next five years at $60 Brent flat. If you look at strip pricing, we're targeting getting 20% in over the next five years.
In regard to buying back shares, the company has already started a practice of buying back shares, an average price of $136 per share. I wish I could have bought some after I returned, it was restricted by the company for two reasons; one, the Eagle Ford negotiations were in full steam negotiations; and then the G&A restructuring, which started fairly quickly. So we were able not to buy shares after high return. We will continue to seriously look at it, especially when we get to those type prices in buying back future shares.
Going to the next page on solid execution. I think the main point on the slide is the fact that we've had 6% increase from fourth quarter, and the fact we're the top end on both oil and BOEs from the Permian. We did have a great uplift, which Rich will talk more about on a project we started probably about six, seven years ago, to be able to export crude from the Gulf Coast. The Permian horizontal LOE is still one of lowest in the industry at below three dollars, and we still are left with probably the best balance sheet among all the public independents in the U.S.
Going to the next slide, '19 outlook. I think the most important thing here is that the capital is on track. This is the first time in over two years the company under-spent capital for the first quarter for the first time in over a two-year time period. We're 100% committed to spend within budget between the $2.8 billion and $3.1 billion, and the capital obviously will trend down the rest of the year before we go into 2020. On the $3.75 billion estimated cash flow, Rich will talk a little bit more about it. But we did put on some more hedges since I returned the Three-Way, we call them Three-Way Collars, 55 by 65 by $80 Brent. So we're up to 80% -- I mean 20% hedged for 2019.
Next slide on improving capital efficiency, probably one of the more important slides, again, I've summarized it on the first slide but we've already achieved a little over $300 million in savings going from '18 to '19, primarily on the completion side. We're looking at achieving another $400 million in savings going from '19 to 2020. And again I've summarized it already but it's made up between the full-year of sand and gel savings up to $100 million a year in facilities, $150 million a year in midstream facilities and up to a $100 million in G&A savings.
Going into Slide 7, the reorganization after listening to allow the employees and getting with the management team the first thing we did, we asked 30% of the officers to retire. We promoted six persons to the managed committee in their early 40s, so bringing up younger talent into the management committee. And now we're over 35% female on the management committee, which is something I'm proud of. We've basically had an organization that was dealing with our assets all over the world, and all over the U.S. that was the structure that we've had over the last several years. Simply, we were going to a very simple structure, flatten the organization, less managers, more functional, going back to a functional organization.
And simply the main focus is adding capital. The company had weekly reports on production. One of the things I found out but they were not focused over the last two years on the capital side of the business. And so now we're focusing, it's something that we have started and the company's already doing a great job, as shown in the first quarter, in regard to focusing on capital. So capital, focusing on that is just as important as delivery on the production side of the business.
Going through strategic direction slide, these are the four critical things, it's about execution. Execution, essentially we have to add capital to that. You have to be able to execute both on production and capital. Obviously, focusing on free cash flow going forward with the competitive dividend and opportunistic share repurchases. Again, we have the best balance sheet in business, and we will continue to build on that as we deliver free cash flow '19, '20, '21, we'll just continue to build up the balance sheet.
And then as we see downturns like we've had over the last several years, we will use that as an opportunity. These are drill to the cycle or buy shares cheap during those time frames. If you notice we have removed the $1.10 million but one thing just to let you know that I strongly believe our rock will deliver over 1 million BOEs over the next several years. It's just no longer a focus, especially with the commitment to a million or the time frame.
Going to next Slide 9, strengthening our value preposition, this is just a table of contents. I'll be a little bit more specific about G&A expense, optimizing our cash flow through monetization of midstream, assessing build facilities and water infrastructure and talk about accelerating value on our long dated inventory. Obviously, the focus is return on capital.
Next slide on improving cost structure of G&A per BOE. You can see we moved from little bit above the middle of the peers to the top quartile the lump. So up to $100 million probably takes about $1 per BOE, also our G&A per BOE. The long-term goal the next two to three years is get below $2. And interesting report I looked at yesterday. If you remember, Jim Parkman, who was partners with Tom Petrie, he put out an interesting report yesterday. He took the 76 public companies and basically put out a report showing that cash G&A and the cash interest. I know that we have the best balance sheet among all those 76 companies. We did not have the best G&A. Now, we're peer leading G&A. When you put both items together, we're probably peer leading number one or number one. What's interesting, the 76 companies he mentioned that over a half will either merge or go bankrupt over the next several years. And that's two drivers they are too high on their cash G&A and their cash interest.
In regard to the monetizing the assets, we will be opening up a data room shortly for our 27% interest in the Targa-operated Midland gas processing infrastructure. You can see the current throughput is about 1.8 bcf a day. Capital budget, we're spending about $150 million a year and we have been. It's our share of building two new plants. And you can see the EBITDA and you can just take that and make your own estimates on what our proceeds will be. Then in regard to field facilities, as I've mentioned already, we're targeting going into 2020 up to about $100 million a year in savings there.
In regard to water infrastructure, we are evaluating what's available out there. We're not 100% sure. We are going to divest to the water infrastructure. We're just evaluating opportunities. There has been some interesting deals that are being done out there. We are going to be reducing that capital significantly that $150 million a year drops down below $100 million next year, and gets down to $50 million. So at the end of the day, the $300 million that we've been spending on water and the infrastructure will essentially be disappearing over the next two to three years, probably over the next two years. And so it's something that a lot of our peers did not have to spend on.
So in regard to the Eagle Ford, you mentioned -- we closed the sale of Eagle Ford yesterday. I've read a lot of the analyst reports, and I'm surprised about the comments coming from Eagle Ford. We look at it as a great opportunity divest of an assets, really did not achieve the returns that we saw. And this taken a while but we're receiving up to -- potentially up to $435 million in proceeds contingent on future commodity prices. I looked like this as a rounding error. I'm famous for using the rounding error syndrome inside Pioneer over the last several years.
A simple way to look at this is that at current commodity prices of WTI between $60 and $65, we'll receive somewhere between $275 million to $475 million. You need to deduct somewhere between $200 million and $250 million for MVCs, and that's all dependent upon the drilling activity. The company that we sell to will be starting up drilling activity fairly soon and they will be accelerating that. And so it's a net positive for the company. We are moving a very low margin property. When you look back to the tables, it's about $12 margin per boe in a very high operating cost of about $14. So we look at it as a very big plus to move this asset out of Pioneer.
Accelerating value of long dated inventory. As most of you all know, we probably have a substantial amount of locations throughout the entire play in the middle of basin. Since 1/1/18, the cash market has been very weak. We're starting to see it come back some. In addition, we're looking at acreage that will probably we won't to get to between that 10 and 15 year range. We feel like it's a DrillCo structure. We'll be able to monetize it at somewhere between 25,000 and 30,000 per acre. And we expect to have something in place by the end of 2019. I didn't mention on the midstream asset sale. We do expect that to close by the end of also 2019.
Slide Number 13, enhancing shareholder value. Again, I won't go over detail but this is our -- obviously, we're focused on returns. We're focused on capital discipline, most on capital and production. Return on capital obviously seen significant improvement. Still have a great balance sheet. It will probably get better with time, especially as we deliver free cash flow. And again, we have the inventory of low-risk high-return wells to support our organic growth.
I have got two or three more slides before I turn it over to Joey. But these are some slides we used on our investor tour over the last few weeks. This first slide just emphasize the fact that we have a lowest cost acreage among all the players in the Permian basin due to the fact that we acquired most of this acreage back in 80s and 90s, and average cost is about $500 per acre. We average the last three years of recent Permian transactions. They averaged 38,000 per acre. And what's interesting, I've already seen some analysts reports that are backing out what Chevron and Oxy are looking at from the Delaware basin standpoint. And looks like that they are paying somewhere between 50,000 and 60,000 per acre. They're sitting on the premiums that they're offering at Anadarko for something in the Delaware.
Next slide, we probably see or asked this a lot about the parent-child relationship. We get down spaced early on back in 2014 since we drilled the first wells in the main play of the Mainland Basin in Martin, Midland and Upton Counties that we did go down to about 600 feet or less down in the northern part of Upton County and realized we did have interference starting in '15. We went to 850 feet. We've been there since then. And you can see the performance of our wells. So essentially with our -- number of locations we have in our footprint, we're not forced like a lot of our peers to down space, because they're running out of inventory. It will be a long time before Pioneer runs out of inventory.
Next Slide 16, delivering best-in-class oil production. You can see this is using drilling info information on the oil mix. It's a key slide that we have the best oil mix of any one of the peers in the Permian Basin on a two stream basis. All of our peers are listed below. And when you look at just oil production itself that we are the leading company among all those companies. This just an interesting factoid but all three of the companies -- what's interesting is if you look at paying 50,000 to 60,000 per acre for something in the Delaware, all three of the companies involved in the recent announcement with Anadarko, including Anadarko are in the middle of that pact. So just an interesting factoid.
I'm now going to turn it over Joey Hall to give you an operations update.
Thanks Scott, good morning to everybody, I'm going to be starting off on Slide 17. So last quarter, we updated you on the strong well result from our second Stackberry tests in Midland County. And now we've had very similar encouraging results from our third Stackberry test in Central Martin County. Here we have five wells drilled and completed as one project. The wells on this pad are currently outperforming previously drilled wells in the same area by about 24%.
So we've obviously advanced our completion strategies but the most important thing here is that we can continue to deliver strong well performance in full development mode. And of course this demonstrates our ability to implement more large-scale projects going forward as we will. We've also continued our success in the Wolfcamp D appraisal process. We popped another Wolfcamp D2 well pad in Western Glasscock County that's had great results. And we'll also continue our Wolfcamp D appraisal process in 2019 and beyond. So in total, we brought on 71 wells in Q1. Going into Q2, it is worth noting we will continue to bring on more larger pads, and so all-in-all for the Permian team another solid quarter of execution.
And now I'm going to turn it over to Rich.
Thanks Joey and good morning, I'm going to cover Slide 18 where you can see that we had a significant uplift this quarter from firm transportation to move our oil to the Gulf Coast, once again and we were going to get Brent related pricing. This did increase our oil price margin by over eight dollars per barrel during the quarter or added $150 million of incremental cash flow for the quarter.
During the first quarter, we've moved about 90% of our oil or roughly 200,000 barrels per day to the Gulf Coast, of which we exported 75% of that with roughly 60% going to Asia and 40% to Europe. Our firm transportation volumes do increase in the second quarter in May to 205,000 barrels per day. And based on our forecasted differentials between Midland and Brent pricing, we are forecasting a second quarter uplift from firm transportation of $50 million $110 million. Longer-term, our firm transportation increased over 250,000 barrel by the end of 2020, which is consistent with our forecasted production growth.
As a reminder, we try to move our other products to higher price markets as well. And today, we moved about 60% of our gas out west to price it off a SoCal index. And once Gulf Coast Express comes on in the fourth quarter, we will move about 300 million cubic feet a day of gas to the Gulf Coast. We'll re-price it on a ship channel price index. And with that, we'll have basically zero volumes in Waha, price of a Waha index. As Scott mentioned, we have added to our derivative position for 2019 and 2020 for oil. We now have 20% of our 2019 production and 5% of our 2020 production covered with Three-Ways. Those provide basically a 4 Brent prices about $65 or higher. And longer term, we continue to target to be more towards the 50% hedge position depending on commodity prices.
So with that, I'll turn it back to Scott for few closing comments.
Thank you, Rich. Again, the last slides one we've already gone through but you see the company has gone through just a key focus really on the cost side of the business. I think most people know that we have probably the best assets. We've had the best balance sheet. Now, we just need to achieve one of the best costs to be number one in regard to drilling and completion facilities and G&A costs. And that's one of the key focus has been since I've returned.
So I'm going to stop there. And we'll open it up for questions.
Thank you [Operator Instructions]. We will now take a question from Arun Jayaram with JPMorgan.
Scott, I wanted to get your perspective on Shale M&A when you took the reins back as CEO back in February. The press release clearly stated your commitment to the roll long-term, suggesting there's no M&A angle to your return in light of the situation with Oxy, Chevron and Anadarko. Just wondering to see if you can give us your thoughts on how the board thinks about M&A?
Obviously, I've told investors on my tour, I didn’t come back to sale the company. The stock was cheap. It's moved up obviously through a lot of our restructuring. I think obviously the industry has lost a lot -- all the energy stocks when the Anadarko announcement. My perception is I was surprised that Anadarko was the first company to be taken out. When you look at all the reports, they were probably cheap. They are trading at a very low EBITDA. And Chevron was able to go in and make a deal quickly. Now, Oxy is paying up for it, obviously. I personally don’t think that there is going to be a lot of M&A over the next one to two years, now over the next five years. I think the majors will definitely start running out of inventory. Things may happen. But I don't think there will be a wave of consolidation.
As I mentioned earlier, I think a lot of companies smaller companies in the Permian are going to have to consolidate and focus on the G&A and the interest. They go and get better balance sheets, they go and get a better cost structure and that's what's going to be working and what's focused on.
And my follow-up, I did have a housekeeping question, Rich, perhaps for you. Just how the accounting will go for the retained MVCs through the Eagle Ford transaction? We did note that you did lower your other expense guidance. But just trying to understand how the MVCs will flow through the income statement and cash flow statement?
So yes, we are -- in the second quarter, we'll have one month of Eagle Ford deficiency fees that's already included in the guidance of the $25 million to $35 million. But starting once we close the transaction in May, we will bring our estimate of those future MVCs that we're going to share with the buyer on our balance sheet. And so it's somewhat of an estimate, because we don't know how much we're going to drill. And the more they drill the lower those future MVCs will be to us. But we will make an estimate and bring that on our balance sheet, and then think of it like debt. So we will make those payments on an annual basis for our share of those, and those will be paid typically in the first quarter of each subsequent year after we know the exact volumes that were delivered. So that's how it'll run through the -- income statement will be one more quarter of one month and then after that, it will just be a balance sheet impact and working capital changes.
Will that flow through the interest expense line item if it's going to trade like that…
No, it will still flow through our -- the charge that we take initially will go through gain loss. And then after that, it will just be a reduction of a liability on the balance sheet. So, it won't go to through the P&L.
We will now take our next question from Brian Singer.
Scott, you mentioned the town halls that you are doing with your employees and as well some of the managerial changes that you've made. Can you talk about what you're emphasizing in these meetings and to the management committee that that wasn't being emphasized previously? And how are you building the incentive structure to deliver the results near-term such as the 2019 capital budget that implies step-downs as the year progresses and also longer-term, the goals that you put in your slide deck here?
I think the big change -- there was really nothing wrong with the 1.10 million when Tim came out with it. In fact, remember I mentioned the million barrels in my last quarter call in '16. So Tim came out in early '17. And the focus obviously inside the company last two years through all of the interviews was achieving 1.10 million barrels. And the focus was probably 90% more on the production side and less on the capital side. And so the big change is to create capital this is as important as production. And so each person that drilling will be held -- the drilling person over drilling will be held accountable. The person over completions will be held accountable for his capital. The person over facilities will be held accountable for theirs.
And so we are moving the accountability to each individual and up to the executive over those people. So that's probably the key driver in regard to -- the focus in regard to accountability. It will be tied all the way into the compensation side also, on compensation of each of those individuals. So that's production the key driver. And what out of that of course is driving the company down to be peer leading on drilling, completion facilities and G&A will allow -- when you take $700 million as I mentioned out of the capital side and on the G&A side, it drives -- what happens is that it drives up significantly free cash flow, which drives return on capital employed, which allows us to increase dividends and continue to increase dividends and give back capital to shareholders.
And then my follow up is over the years or even over the decade, Pioneer's participated in a number of different capital structures regarding monetization and production of reserves. Can you talk to why you see -- or what you see as the advantage of the series of DrillCos? And then how do you think your long resource play impacts the attractiveness of Pioneer to larger companies as you consider the level and the structure of some of the divestitures in the Permian that you are talking about? And I recognize the response you made on M&A in the last question. But I was just wondering longer-term.
First of all, the cash market -- we're probably just as open to do a cash market versus DrillCos. The cash market has been dead since 1/1/18. It's starting to come back a little bit, that's a combination of companies are probably still levered. They can't go to the equity markets like they used to. And the private equity companies are being consolidated, capital being reduced there. And so there's no exit mechanism now for private equity companies. And so you've had a total change. We were hoping that the Endeavor transaction will be your first cash transaction. I don't know the status of it, its acreage close by Pioneer's. But it's being going on for about six months now and nothing is happening in that regard.
And so there's not really a cash market up until -- I've seen some reports you'll have put out, people are putting somewhere between 50,000, 60,000, 70,000 per acre when you back out the African assets of Anadarko that both Chevron and Oxy are paying for. So that's probably the closest thing that I've seen. So the DrillCo structures probably the only potential structure today that can pay us the appropriate value of those assets. And so the goals probably start with one and make sure it doesn't affect us executing. We would probably start with two rigs at the end of this year going to 2020, very, very little capital increase, zero to maybe 10% of the typical well.
We will get carried. It would cut the well. It would payout in roughly a three to four year timeframe. And then it would add production growth after that payout as certain returns. And so it's just another way to raise capital and not lose acreage. Our acreage that has the -- so the value of that acreage today that I was referring to is probably worth about 35,000 per acre if we drill it today, but we are drilling more better quality type assets up in Martin, Midland County and Northern Upton County. And so it's the best way to monetize the value through a DrillCo structure. If somebody would pay us close to that in cash we would definitely go the cash route. So that's the only reason we're focused on the drill co structures. Your last question, Brian, what did you…
Yes, it was whether monetizing some of those longer dated reserves would impact the longer-term attractiveness that’s a Pioneer larger company value. Do you see the long reserve life as strength?
I see it as a strength, I don't see us about doing some DrillCos here and there on some acreage that we won't get to for 10 to 15 years. I don't think it would affect what any potential acquirer has on Pioneer. I mean, because they would be pick it up if they gave us the right price that the board thought it was better for shareholders to accept. I don't think a DrillCo structure will -- the company that buys it essentially will get that upside. So as I said, they'll get the upside anyway, after payout after three, four years they get to hold that asset for another 30-40 years.
We'll now take our next question from John Freeman with Raymond James.
On the G&A front, obviously, you've already made a lot of progress on the G&A front with a pretty high percentage of the officers that were asked to retire, the junior promotions, et cetera. And I realized it'll take several quarters before we probably see it in the numbers just the way that the severance payments et cetera work. I'm just curious of the $100 million target, how much of that do you feel like you've already achieved. It may not show up yet just because of the way the severance works. But how much of the $100 million has already been achieved?
In fact, I forgot to mention the timing on the G&A when I went through it. All those savings will go into effect by June 1st. The organization has already been chosen, the managers have been chosen already. So the new management team is in place. And throughout the organization, we had a voluntary separation program was the first thing we did, that's already in place and then we're going through the involuntary. So I can't give you any specific numbers in regard to people at this point in time, but everything will be completed by June 1st. And so you'll see the savings for the third quarter. So you're only going to see one month of savings for the second quarter, but you'll see the actual run rate going into the third quarter when we give out guidance.
And then just my follow-up question, I just want to make sure that I heard you correctly, Scott, on the Eagle Ford deal. So on the future potential contingency payments, you said the top end of the range was $475 million was based on $65 oil roughly. And then did you say the bottom end of the range was $275 million at $60?
The bottom end is $55, it will be less -- and I did not give the estimated proceeds from $55. But I was using current WTI price of between $60 and $65 to give you a $275 million to $475 million range.
We will now take our next question from Jeanine Wai with Barclays.
So the release indicates that you're accelerating free cash flow generation by adjusting to a mid-teens longer term growth profile versus previously you're at that 20% CAGR. And I was just wondering can you give us a sense of the magnitude of that acceleration by gearing down? For example, are there any other operational efficiencies associated with adjusting to mid-teens besides the $100 million of sales facility savings that you mentioned in your prepared remarks? Or maybe a hard question to answer. But how much as you compress the timeline through achieving your competitive dividend, and was that something that factored into your new rate?
The company had already come out with 12% to 17% production growth. And so they had already started moving down toward that. So just long-term, we're changing the 20% growth rate to a mid-teens production growth rate. And so some years, we may have 12% to 13%, some years we may have 17% to 18%. So we can't just hit 15% every year based on adding rigs, adding fleets, taking rigs off and taking fleets off. And so the $400 million of additional savings is what we're focused on now. So we've achieved the $300 million in savings from mostly from the completion side and steps we took last year with ProPetro and combining our assets with them. And then the next $400 million is what we're focused on now that I've already gone over.
We will now take our next question from Doug Leggate with Bank of America.
This is John on for Doug Leggate. Our first question is regarding the water business. If you did -- you already gave us an idea of how your CapEx plan is going to change over the next several years. But if you did pursue the path of divesting the business, how do we think about the potential impact to both production and well cost?
My first point, John, was the water capital is coming down significantly, we will completing the Midland water plant here early '21. So 2020 will be the last year. But it's coming down substantially from this year, number one. So, it's not going to be a capital issue, water going forward, you'll probably see the line item disappear and just go into DC over the next couple years. Number two, there has been some deals out there that have been done primarily on saltwater disposal wells. Pioneer has been out here for a long period of time. We put over $1 billion into water infrastructure. We probably have close to $1 billion into solar disposal and gathering lines.
And so one of the things that I talk to investors about on my tour was one thing we don't want to do is trade dollars. We don't want to divest to this water infrastructure, lose control and also in our operating expense goes up significantly. So, we're going to be careful on what we do, do we monetize it or not. But one thing we are doing in regard to the new organization and we are focused on adding third-party revenues.
And we have probably the largest water infrastructure system, probably the largest water recycling system, the largest disposal system is to turn it into a third-party business and start bringing in third-party revenue from other operators since we pretty much dominate the Midland Basin. So we're looking at that as a new strategy. And so the focus is understanding if people are going to start paying 18 to 20 -- I've heard of some deals being paid 18 to 20 times cash flow, that's different story, but we're not just going to trade dollars and increase our operating expense.
And then the second question, in your opening remarks you said it we got back to the levels we saw earlier in the year. You'd look back at buying back shares. Which raise the question about what do you do with incremental cash flow above your base plan, and also with potential proceeds from divestitures? I think you keep it on the balance sheet, you look at buybacks on an opportunistic basis, are you open to special dividends? How do you think about that?
Yes, that was a good point that was discussed on my listening tour with the long-term investors. And I think first of all, we're going to build the balance sheet and with free cash flow. Obviously, we got ProPetro shares, we got Vittoria system and we got free cash flow that's building up on our balance sheet. As I said downturns, I've mentioned seven downturns in my career, there's going to be some others over the next 10 to 15 years. And you need to save capital for those downturns, because that's the best time to be buying the stock. And secondly -- and history has shown that during the downturns is the best time be drilling wells. And so it gives us an opportunity. If we're running 25 rigs during the downturn but were up before it, it gives an option instead of shutting 10, 15 rigs down like most independents would have to do. We can keep running 25 rigs. We can cut five rigs. And so that's where -- and then the share price dips low like it historically has, but it's an opportunity to buy back shares at that point in time. Too many of our peer groups are buying back shares at too higher price in my opinion, and that's one thing Pioneer will not do.
We will now take our next question from Paul Sankey with Mizuho.
Scott, could you talk a little bit more about the acreage that you're planning? So how much are you talking about and what proceeds do you think you can get?
We talked about the math on proceeds, Paul. It's acreage that if we drill today, it's worth 35,000 an acre to us, by going through a DrillCo type structure, its worth somewhere between 25,000 and 30,000 per acre. A lot of it's going to be in our joint venture area with Sinochem down in the southern portion. So we'll have to get their approval in that regard. And so I don't think that the cash market is there. As I've mentioned already, we will start off with about two rigs on the DrillCo type structure. We're talking to a lot of private equity already. And we hope to put it in place by the end of the year. But it's generally acreage that we would drill, get to in that 10 to 15 year timeframe.
And could you continue then to talk a little bit about the balance that you see between growth and buying back stock? You've addressed this obviously as you've been talking. But again, would we expect you to be taking more buyback as the route forward to get the value of the stock up? And further to that could you talk about where you think the inherent value of the stock is? I mean you talked about waiting for it to get cheap. But could you talk about some ranges of where you think you're undervalued versus for example what price you might sell the company for? Thank you.
We don't give out our NAV or values, but I can -- you just point. You know the amount of acreage we have. You know that both Chevron and Oxy are paying somewhere between 50,000 and 60,000 per acre. So mostly of you all can do the math on what our acreage is worth based on that price deck. And so the focus during the downturn began, as I mentioned, has continue to build up our cash position. So we can live for the downturns and the downturns that we can -- as I said, drill through the cycle and buyback shares cheap. I think at $1.35 the stock is cheap.
And then finally, there's been some concern about your gas cuts. Can you just talk about whether there's anything to worry about? Thanks.
No, I think based on -- I was heavily involved in the analysis of an ex-reservoir engineering and what happened, I've come back and looked at a lot of the data. You can see with our slide that we're the leading oil company on cut in regard to the entire Permian basin that's both Midland and Delaware. And so there are essentially no issues. And over time, the gas oil ratio is going to increase, it will continue and it's a plus. So it has not affected the oil cut at all.
We'll now take our next question from David Deckelbaum with Cowen.
Just wanted to follow up on some comments earlier. So I understand I know you hedged yourself on evaluating the water business. Is it your belief at this time that it's just not the timing is not appropriate, just given the ongoing build out for the Midland plant that goes online in '21? Or that you believe that the market perhaps just not be amenable to selling right now?
No, it's neither. Over the last couple of years, I've seen two or three companies do salt water disposal deals. I've seen water infrastructure funds being created. So my goal is to myself and the management team to understand what's out there. If we do decide to monetize, inform our board and let them know and we all make a decision. But at the same time, our goal is to increase third-party revenues into our system. And also, we don't really have to do anything, because our capital is going down. I wanted to focus on the $300 million of capital in both midstream and water. It's too big a number. Our peers don’t have it.
And so a lot of our shareholders were taking the $300 million per year and divided it by the number of wells we were drilling, and they're adding $1 million to $1.5 million per well versus our peers. And you can't see it through the efficiencies. It's going to take a long-term to see it through the efficiency gains and also through our processing plant arrangement. And so it's best you to go ahead and evaluate moving the midstream, like I said by the end of the year and the water is going to come down. And so if someone is willing to come along and take 20 times some type of cash flow, that's a different story. But we're not just going to trade dollars and increase operating expense. So it's only about learning.
Have you articulated before the size of the opportunity for long dated inventory that you'd be willing to put into DrillCos?
The opportunity is probably in the 30,000 acre range to start off with. But as I said, I do not want to take any risk in regard to executing on the main program. And so that's why we're looking at essentially doing two rig deals. And a typical rig spends somewhere between $100 million and $130 million per rig per year, so you're looking at $200 million to $215 million type deal with private equity. We get it started and then if it's successful then we could add to it overtime.
We will now take our next question from Charles Meade with Johnson Rice.
You guys made really a rapid series of moves to simplify your structure. I mean the Eagle Ford assets that you're talking about, the midstream assets sale. And I think that's why it's so focused on water -- what happens with the water business. But are there any other pieces that you see or opportunities you see to further simplify or streamline your business? Or do you feel like you're pretty close to the finish line there?
I think by the end of the year, focusing on facilities and focusing on the midstream sale are really the last two items. And I think water -- the goal is to turn it into a profit center and making sure that if we keep it long-term that we can convince everybody that it's worth keeping and it does lower our operating expense as compared to our peer group. So that's the focus. We're really not doing anything else that we have.
Q - Charles Meade
And then, Scott, just going back to a couple of -- and I think twice you mentioned in the context of your strong balance sheet being able to drill through the cycle if we do get another downturn. And I want to explore a little bit what that means. Does that mean that at some point, if oil prices went back down, you guys would go back into an outspend mode? Or is there some other way we should interpret that, the ability or your intention to drill through the cycle?
No, the goal is to focus on -- you can take the 15% growth and see where our production grows over the next several years. But we know there is going to be a down or two in there, we had one already in late '14 we have one small one late last year. And so I think the entire -- I'm hopeful in regard to the changed mindset of the investor attitude with this free cash flow more capital back it's actually helping OPEC, it's a big plus, we need to bring U.S. Shale growth down. And so we don’t see the company -- I was told by several investors, just getting input on this tour that if we added any rigs at all this year, they would sell the stock. So I would like to see that capital discipline by the investors too. So it's helping with the real supply demand situation.
We will now take our next question from Ryan Todd with Simmons Energy.
Maybe one follow-up first on the water business, you mentioned a focus on adding third-party revenue in the water business and once the Midland plant up and running in 2021. How much excess capacity would you potentially have or would third-party volumes require additional capital investments?
Right now, I think we'll moving about 400,000 barrels per day. And so we are going to be using all that ourselves. And so we would have to actually increase throughput to be able to offload water. So, Joey or Rich, do you have any comments?
The only thing I would say is in that 400,000 barrels per day have ebbs and flows. And so we'd be accretive in how we formulated our contracts. So we can take advantage of downtimes and not affect our operations. And it's also points of opportunity in different areas where maybe we're not as active in drilling when we built that infrastructure. We will have the opportunity to deliver in those areas. So, I think it's a business model we haven’t quite worked through the details of, but there is certainly opportunity.
And clearly for areas adjacent to our existing acreage, so its minimal capital to basically then connected to all the adjacent.
And then maybe a follow-up on the dividend on the move to 1% yield. Is that should we expect that later this year? And then I think you mentioned in your comments, you talked about having a dividend yield at the midpoint of your peers longer-term. Should we think about that as your peer group is large-cap E&Ps in the broader market and what do you think the right -- as you talk with investors, what do you think the right comp is in terms of positioning yourselves versus E&Ps in the broader market?
The first question I think I already stated that in August, the Board will approve the dividend increase and be a record date late September. So I've already answered that first question. Long-term, the midpoint of the peers is also happens to be the same percent as the midpoint of this S&P 500. So, that's a long long-term goal. So if we get to the midpoint of the peers and the midpoint of the S&P 500, combined with growing mid-teens that it will be a stock that everybody has to hone.
We will now take our next question from Bob Brackett with Bernstein Research.
If private equity can't exit and if cash markets are dried up and if Pioneer has the best G&A and interest expense and the technology and free cash flow. Would you consider consolidating the Midland?
No, there is really no opportunities that would allow us to optimize our portfolio. And so, the answer is no.
Follow up would be this year -- 2018's return on capital employed was 9%. Where do you think that is a year from now and where you think it ends up long-term?
Bob, I've already answered that, but I'd say at a flat 60 Brent price will be up to mid-teens, 15% within five years and strip price will be up above 20%.
That concludes today's question-and-answer session. Mr. Sheffield, I would like to turn the conference back over to you for any additional or closing remarks.
Again, thanks. Look forward to the next quarter and we'll be out on the road over the next several weeks talking to more of the sell side and buy side. So again, we appreciate all your comments. Thank you.
And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.