SilverBow Resources, Inc (SBOW) CEO Sean Woolverton on Q4 2019 Results - Earnings Call Transcript

SilverBow Resources, Inc (NYSE:SBOW) Q4 2019 Earnings Conference Call March 5, 2020 10:00 AM ET

Company Participants

Jeff Magids - Senior Manager of Finance and Investor Relations

Sean Woolverton - Chief Executive Officer

Steve Adam - Executive Vice President and Chief Operating Officer

Christopher Abundis - Executive Vice President, Chief Financial Officer, General Counsel & Secretary

Conference Call Participants

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

Dun McIntosh - Johnson Rice & Company LLC

Jeff Grampp - Northland Capital Markets

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the SilverBow Resources Fourth Quarter and Full Year 2019 Earnings Conference Call. At this time, all participants' are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Jeff Magids, Senior Manager of Finance and Investor Relations for SilverBow Resources. Please go ahead.

Jeff Magids

Thank you, Sydney. And good morning, everyone. Thank you for joining us for SilverBow Resources fourth quarter and full year 2019 conference call. Joining me on the call today are Sean Woolverton, our CEO; Steve Adam, our COO; and Chris Abundis, our CFO. Yesterday afternoon, we posted a new corporate presentation to our website and will occasionally refer to it during this call. We encourage listeners to download the latest materials.

Please note that we may make references to certain non-GAAP financial measures, which are reconciled to their closest GAAP measure in the earnings press release. Our discussion today may include forward-looking statements, which are subject to 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 the website.

And with that, I’ll turn the call over to Sean.

Sean Woolverton

Thank you, Jeff. And thank you, everyone, for joining our call this morning. A year ago, we spoke of how we expected 2019 to showcase the efforts of our pivot to liquid Strategy and SilverBow shift to a more balanced Eagle Ford oil and gas company. I am pleased to report that we have made significant strides in implementing this strategy. On today's call, I will review our exceptional fourth quarter and full year 2019 results, in addition to providing a brief overview of our 2020 business plan and forward strategy. Our commitment to driving long-term shareholder value is focused on building a well balanced Eagle Ford asset base and leveraging our in basin experience to diversify our product mix and to drive down costs.

We're executing on our pivot to liquid strategy which we began implementing at the end of 2018. We are rapidly growing our oil production, improving operational efficiencies and driving down costs. Today SilverBow differentiates itself by its ability to adapt its development program in response to commodity price fluctuations and to reallocate capital towards the highest return projects. Additionally, our Eagle Ford assets are competitively advantaged given access to our premium Gulf Coast pricing and Mexican export markets.

Starting with fourth quarter of 2019, net production averaged 234 million cubic feet of natural gas equivalent per day, a 3% increase over the fourth quarter of 2018. Net oil production for the fourth quarter averaged approximately 4,800 barrels per day which more than doubled the rate of oil production a year ago. Oil and NGL comprised 25% of the company's total net production and 45% of total sales. Fourth quarter activity was primarily driven by our six well pad in Webb County, which we referred to as our La Mesa project. This unique transaction provided us with an opportunity to acquire acreage directed adjacent to our Falcon property. What was even more impressive was our ability to deliver first sales in approximately six months highlighting the agility of our organization.

This project achieved peak gross production of 100 million cubic feet per day with per development costs --well development cost of $6.3 million. Additionally, improved cycle turns resulted in extra calendar days available to us and we were able to opportunistically drill and complete an incremental well in December, while still remaining within our full year capital range. 2019 full year results reflected the successful execution of SilverBow strategy in key objectives. We increased net liquids production by more than 80% year-over-year and our net oil production more than doubled compared to 2018. Full year liquids production grew to 24% of our total net production, up from 16% in 2018.

Liquids revenues comprised 41% of total sales, up from 29% in 2018. Realized oil and gas prices were 101% of both WTI and Henry hub pricing. On the cost side, total cash operating expenses for the year were $0.96 per Mcfe down from $1.03 in 2018 and adjusted EBITDA of $233 million increased 38% year-over-year and total net production increased 25%, reflecting the impact of our focus on liquids production growth. Adjusted EBITDA margin increase to 74%, up from 71% in 2018. Our total proved reserves increased 6% to 1.4.Tcfe and our approved oil reserves increased 34% to 17.1 million barrels.

We successively grew our productions, reserve base and adjusted EBITDA while at the same time reducing our CapEx by 15% year-over-year. Importantly, SilverBow is free cash flow neutral over the second half of 2019. Given these accomplishments, we reduced our leverage ratio from 2.35x to 2.06x year-over-year. Our year-end net debt of $478 million decreased by $1.5 million from the third quarter of 2019, and we ended the year with $122 million of liquidity. As the shale industry has matured, the mindset for oil and gas operators and investors has shifted to a focus on returns as opposed to growth. For several years, SilverBow has consistently delivered some of the highest returns on capital employed in the industry. For 2019, we generated an impressive ROCE of 18% for the second year in a row and our trailing three ROCE is 19%.

SilverBow competes not only with peers of similar size but with operators across all basins. Having a returns focused mindset to us goes hand-in-hand with protecting our downside exposure. We are focused on greater cash flow stability and increasing our liquids exposure through our oil production growth. Additionally, maintaining a strong hedge book helps us mitigate the impact of periods of low price environments. In 2019, realized hedges provided a $25 million offset to lower prices. Based upon the midpoint of full year 2020 production guidance, 56% of our total production is hedged. Chris will go into more detail about our hedge position in his section.

Moving to our 2020 outlook. We are maintaining full year, our full year CapEx guidance range of $175 million to $195 million, a 30% decrease year-over-year at the midpoint and a 40% decrease from 2018. As it stands today, 100% of our drilling and completion stent will focus on liquids rich areas as we continue to expand and diversify the company's production base. Full year production is expected to average to 215 to 228 MMcfe per day and notably we're targeting net oil production growth of 70% year-over-year based upon the midpoint of our oil production guidance of 7,300 to 7,600 barrels per day. On an exit-to-exit basis the company is aiming to double its net daily in fact, we're aiming to reach a high-water mark of 10,000 barrels of net oil per day and look to exit 2020 with 35% or more of total liquid production. These would be significant milestones for SilverBow further demonstrating our move to a more balanced commodity mix. SilverBow's primary focus in 2020 is generating free cash flow. Our drilling development program is flexible. In fact, our preliminary 2020 budgets called for net oil production growth of 25% with an initial CapEx allocation of 70% liquids and 30% gas. In light of low gas prices, we are now allocating 100% of our D&C CapEx to liquid.

And as I mentioned earlier, we are now targeting net oil production growth of 70%. SilverBow retains flexibility within its schedule to reallocate capital accordingly should commodity prices shift materially from today's outlook. Additionally, the company maintains multiple playbooks on-hand for navigating the inherently volatile commodity price environment we live in. As the component of our liquid production mix grows, we will likely see an uptick in our operating expenses per unit.

For the full year, we continue to target all in cash operating expenses of less than $1 per Mcfe despite the increase in liquid production. Financial discipline is integral to our strategy; our proactive balance sheet management prioritizes debt reduction as the initial use of free cash flow. While I've detailed our 2020 outlook, we are not simply focused on one year. We are taking the necessary measures to best position SilverBow for the long term. Our organizational culture is empowering our team to unlock value on a daily basis. We have a demonstrated track record of meeting or exceeding our stated objectives and will continue delivering on our corporate strategy in the years ahead.

With that I will hand the call over to Steve.

Steve Adam

Thank you, Sean. Moving on to our operational results. 2019 marked a year of execution and performance. The company implemented a number of detailed technical reviews with our vendors to optimize all aspects of the drilling process. From mud systems to downhole assembly. These resulted in higher penetration rates, parallel operations, and lower cycle times and reduced costs. All said we greatly improved our operational efficiency. We drilled 32% more lateral footage per day while lowering costs by 24% as compared to 2018. Specific to drilling this removed approximately $400, 000 of costs per well on average over the past six months.

On the completion side, improved well site management has more than doubled the number of stages per day as compared to 2018, while reducing completion costs by 26% or nearly $1.3 million of cost savings per well on average. Our well site management procedures are driving shorter cycle times between rig release to first stage pump and we've been able to increase pump times which are driving the increase in stages per day. On average, these efficiencies representing reduction of six days in cycle time thereby accelerating time to first sales.

On an overall basis, the average time from spud to first sales reduced significantly from 71 days in 2018 to 43 days in 2019. These efficiency gains along with SilverBow's continued success in cost reductions are a direct result of SilverBow's operational and supply teams working closely with vendors to negotiate the best prices and logistical considerations for services and materials used in our operations. During the fourth quarter of 2019, the company brought six net wells online inclusive of the additional well we were able to add as a result of faster cycle times.

For the full year, the company drilled 27 net wells, completed 30 net wells and brought 32 net wells online. The company's drilling activity was focused primarily on our liquids rich areas namely McMullan oil and LaSalle condensate as well as the completion of our first two wells on SilverBow's new acreage block in Dimmit County. Together the McMullen oil and LaSalle condensate areas comprised approximately two-thirds of our net drilled and completed wells for the year.

In the McMullen oil area, the company brought seven oil wells online in 2019. Two of the longest laterals in the company's history were brought online during the second quarter and are continuing to perform. Utilizing that experience SilverBow drilled two additional 10,300 foot laterals in 21 days, further emphasizing the drilling teams focus on executional performance. These wells were brought online in late January 2020 and are performing in line with expectations. In the LaSalle condensate area, the company brought 11 net wells online in 2019. These wells were identified in an under exploited area of the company's position as part of our pivot to liquids development. The wells continued to perform and are achieving much higher per well recovery than historical wells in the area, which we show on page 18 of our presentation.

In Dimmit County, SilverBow added 16,000 net acres at favorable entry costs during 2019. The company brought two net wells online which have performed in line with expectations. The team is focused on early delineation and Geoscience work to identify optimal targeting and large-scale development planning. With the continued strong results from identifying developing under exploited areas in our portfolio, the company expects to remain active in our liquids rich areas predominantly McMullan oil with some additional development plans for LaSalle condensate. Also planned in 2020 is delineation drilling in Dimmit County as we further test the acreage position to assess the best path towards unlocking the full potential of this area.

In Webb County, the company brought 11 net wells online in 2019; five of the net wells were brought online early in the year. No further activity was expected until the company opportunistically closed a farming transaction directly adjacent to our highly productive falcon area, which is detailed on page 21of our corporate presentation. This allowed the development of a six well pad with each wells lateral extending to 10,000 feet. As a direct result of the new planning processes, the company was able to close the La Mesa project and turn this six wall pad to sales in just six months, achieving peak gross production of 100 MMcf per day in December.

SilverBow utilized two completion spreads for the La Mesa major project to most efficiently complete and bring the pad online. The two frac crews completed 18 stages per day on average and at a peak efficiency achieved rates of 28 stages per day at £2,500 per foot. In the Southern Eagle Ford gas area, we brought three wells online. These wells once again highlighted our continued drive to increase operational excellence as the team was able to reduce the average per well cost from $12 million to $8 million, a 33% decrease from the prior year. Year-over-year our proved reserves increased by 6% with our proved oil reserves increasing by 34%. Included in the annual changes to our reserve base were 191 Bcfe of negative revisions due to gas locations being replaced with liquids rich locations as a result of the SEC five-year rule.

Additionally, 84 Bcfe of negative revisions were included due to forecast revisions and changes in SEC pricing. Our pivot to liquid strategy has offset this impact as we improved well performance, reduced cycle times and decreased development costs. Year-over-year the 34% increase improved oil reserves compared to a 6% increase in proved gas reserves, provide SilverBow with a more diversified portfolio and as such a more resilient reserve base. For full year 2020, we expect to drill approximately 25 net wells and complete 27 net wells. Building on the gains we made operationally in 2019, we expect further efficiencies in drilling times and costs along with stages and profit pumps per day.

This efficiency gives us optionality in our development schedule and an ability to adjust the cadence of our operations throughout the year. As we work to optimize the timing of our activity in relation to capital requirements.

With that I'll turn it over to Chris.

Christopher Abundis

Thanks Steve. In my comments this morning, I will highlight our fourth quarter financial results, as well as our operating cost, hedging program and capital structure. Fourth quarter oil and gas sales were $70 million with liquids representing 25% of production and 45% of sales. During the quarter, our realized oil price was 98% of NYMEX WTI. Our realized gas price was 96% of NYMEX Henry Hub and our realized NGL price was 26% NYMEX WTI. Our cash gain on settled hedged contracts for the quarter was $8 million. As of February 25th, SilverBow has 56% of total estimated production volumes hedge for the full year 2020 using the midpoint of guidance, of production guidance. Our expected oil production is 85% hedged with a weighted average price of $55.26 per barrel.

Our expected gas production is 56% hedged with a weighted average price of $2.66 per MMBtu. Again, these hedge positions reflect our current position as of February 25th as we have executed additional oil swaps thus far in 2020, given opportunistic price spikes in February. In addition, we continue to use basis swaps to manage our exposure to differentials. For 2020, we have gas basis hedges on 129 MMcf per day with a weighted average differential of negative $0.04.

Turning to cost and expenses. LOE was $0.26 per Mcfe for the fourth quarter, 7% below the midpoint of guidance. On a per unit basis, LOE has increased slightly from a year ago as a result of higher cost liquids production within our portfolio. Transportation and processing costs were $0.33 per Mcfe for the fourth quarter while production taxes were 4.1% of sales or $0.13 per Mcfe in below the low end of our guidance range. Adding our LOE, TMP and production taxes together, we achieve total production expenses of $0.72 per Mcfe down from $0.74 per Mcfe last quarter and which we believe stands out amongst our peers.

Cash G&A of $4.6 million for the fourth quarter compared favorably to the midpoint of guidance of $5.1 million. For full year 2020, we are guiding for cash G&A of $19.5 million at the midpoint which is slightly higher compared to our 2019 cash G&A as we absorb one-time costs in relation to recent right sizing measures. Even with these one-time items, our cash G&A per unit is set up to be peer leading again this year. Total cash operating expenses including cash G&A totaled $0.94 per Mcfe in the quarter, well below the $1.00 per Mcfe target we set at the beginning of last year.

In total, strong production to end the year and efficient operations resulted in adjusted EBITDA of $58 million, up 2% compared to a year ago. Capital expenditures totaled $54 million in the quarter bringing full year 2019 CapEx to $262 million. As Sean said, our 2020 capital budget is $175 million to $195 million. With 90% allocated to D&C capital. 100% of our D&C spend is focused on liquids projects. For first quarter 2020, we are guiding for average production of 231 to 238 MMcfe per day and for full year we are guiding for average production of 215 to 228 MMcfe per day. Specifically on oil, we published first quarter oil production guidance of 4,550 to 4,700 per day. And full year guidance of 7,300 to 7,600 barrels per day.

On a full year basis our guidance implies 30% of net production will come from liquids, up 24% from full year 2019. Additionally, we have elected ethane rejection under our processing arrangements during the first three months of 2020 and have assumed ethane rejection in our full year production guidance. This reduces our NGL volumes and impacts of equivalent volumes by approximately 3 MMcfe per day while adding incremental revenues. I encourage you to review our corporate presentation on our website for our latest expectations as it relates to production, pricing and cost guidance.

Finally, looking at our balance sheet, we had $279 million outstanding under our revolving credit facility at the end of the quarter. And our liquidity position was $122 million. As of the end of February, the mark-to-market value of our hedge book was approximately $50 million. All of this is to say that our balance sheet remains strong, flexible and has strategic optionality under current market conditions to navigate the near-term environment. We expect the fully fund our 2020 capital program with cash generated from operations and borrowings under our credit facility. At the end of the fourth quarter, we were in full compliance with all of our financial covenants and had significant headroom.

And with that I will turn it over to Sean to wrap up our prepared remarks.

Sean Woolverton

Thanks Chris. To summarize, 2019 proved to be in another exceptional year for SilverBow. We entered the year running two drilling rates before dropping down to a more steady pace of activity in the spring and through the remainder of the year. Currently, we feel confident in our ability to generate value, while running just one rate as we continue to prioritize our highest return projects and focus on furthering our efficiencies and cost structure. Given the current natural gas backdrop, our focus is on efficient oil production growth centered around building long-term, intrinsic returns through diversified commodity based. SilverBow will operate with discipline capital allocation, proactive liquidity management and as always a return focused mindset. Currently, we will remain patient and opportunistic toward strategic M&A opportunities. I am extremely proud of the accomplishments of this organization, outperforming internal expectations is not easy, cost reductions and operational efficiency gains are not a given. I have asked a lot of our team and our team has risen to the occasion.

As I look ahead, I see the early of SilverBow's transformation that extends well beyond 2020. The company is expanding its balance commodity portfolio and has repositioned itself to no longer be considered a gas company, but a unique, diversified company that has exposure to oil and gas in a single basin. As we establish ourselves as the partner of choice in the Eagle Ford, we continue to look for opportunities large and small to further our successes in expanding our balanced inventory at favorable entry costs. While our liquids growth strategy is rapidly improving our results, the steps we are taking are positioning the company for sustainable free cash flow and shareholder returns. We continue to drive greater profitability and strive to be a leader amongst our peers.

Just to recap, 2019 was a great year and we are excited for what 2020 has in store. We're well positioned to generate free cash flow, continue our oil group and manage our balance sheet. Thanks for joining us for today's call. And for allowing us to share our results. We look forward to our first quarter and providing further updates on the next call.

With that I will turn the call back to the operator for the QA portion of our call.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from Neal Dingmann with SunTrust. Please proceed with your question.

NealDingmann

Good morning, Sean and team. My first question is on capital discipline activity. I'm just wondering you run this, had run a 1-rig program in fourth quarter when looks like oil average about LLS average about 60 and with that you generated a slight free cash flow for the statement. And I was just wondering my question is really with LLS down about 20% currently versus 4Q and I'm just wondering if oils sort of stays in this. What -- we all just, I'm just wondering what would sort of consider -- what you'll consider? What's the primary driver that would potentially cause you to change and maybe go to a parcel rig, no rigs? I'm just sort of curious I mean I saw it today. I mean obviously Exxon for other side decides to materially change their plan. They'd announce that this morning. So I'm just wondering what it would take for you all to cause you to change that and I guess the second part of that sort of long-winded question is that and I get your plan Sean so far but it's just the way this irrational market is going. Do you think that's enough judging by your stock price obviously being down about 70% year-to-date?

SeanWoolverton

Yes. Neal, for us, Neal, we are definitely returns focused so what we always look to is can we generate returns 30% to 40% at the prevailing commodity prices. We have an asset base that allows us to shift capital as oil prices increase or decrease relative to gas prices. So we'll be really focused on our returns. What we've done for ourselves this year had we have locked-in pricing is very favorable levels that generate those return targets that I mentioned. Of course, the other thing we'll always look at is managing, proactive management of our balance sheet to ensure that our capital program is funded within levels that we are comfortable with.

So it's difficult in this environment, but we're more long-term focused versus reacting the short-term swings and volatility in the market. And we position the company to really thrive in a low-cost environment. Our cost structure being below $1 in Mcf sets us up to really make money in this environment and then as crisis move up it exposes investors to a significant increase in share performance as commodity prices return to what I think will be necessary levels to continue development. I had not seen the Exxon announcement but it kind of speaks to just what I was saying, low prices usually pick low prices as the companies probably take the same view that we do you, only can invest if you're generating returns over time that will reduce the amount of commodity in the market. And will move prices up to where we can start drilling again.

NealDingmann

Yes. Makes sense. Okay. Great details. And then my second question is on M&A. And you hit a little bit of this. I'm just wondering we've heard a bit about this. So I'm just wondering how y'all would consider it. Are there potential accretive deals out there that I'm just wondering obviously would make sense if you could find something that you could combine step into, add whatever you want to call it that immediately would be a accretive to even bring leverage down more. I'm just wondering is the bid-ask still too wide and again you guys see a 100 more of those in a week than I'll ever see. So I'm just kind of curious to gauge the temperature of the market on that, if we're just too far away still.

SeanWoolverton

Yes. No. I think that the volatility in the market is going to make transactions difficult bid-ask continue to be having some spread to them. With in terms of being accretive, a deal that's accretive; our mindset is that we've positioned ourselves through our operational efficiency gains. Our lower cost structure that assets that are in other companies that don't generate returns because of more inefficient assets that's where they're positioned to take control of those assets and generate returns that others can. The only -- and the last component I'd add on to it is funding of transactions is very challenging in this market. Capitalist scarce and so findings attractive deals where you can get to an agreement on the bid-ask is then further complicated by access to capital.

Operator

Our next question comes from Dun McIntosh. Please proceed with your question.

DunMcIntosh

Good morning, Sean. I think those falling on the story should be pretty pleased with the big emphasis on the liquids and oil this year. Wondered if you could give us an idea around inventory kind of in LaSalle and McMullen and then with Dimmit becoming a bigger part of the picture this year a couple more delineation wells. Maybe if you could talk a little bit about what you're hoping to find there? And do you think that becomes a bigger part the program in 2021?

SeanWoolverton

Yes. As we think about our liquids inventory, our focus remains in LaSalle and McMullen where we have though several years of inventory that meets our returns thresholds at current prices. And when I say current prices, we're thinking around the $50 market and 250 price mark on gas. So we'll stay focused there but we also want to always be expanding or liquids inventory. The Dimmick County position we acquired that block because of our beliefs in a tremendous amount of oil in place. Our first two wells confirmed our IPs, our production profile that we expected as we test the block further and expand the delineation of the block in 2020, our goal is to really start moving capital down.

Ultimately, we envision being able to drill that block at oil costs below $4 million if not even below $3.5 million and our strategy or plan is to stay focused on LaSalle and McMullen over the next few years really set up Dimmit to go into full development mode probably more in the 2022 timeframe and beyond.

DunMcIntosh

Okay. Great. Thanks. And then, obviously, liquidity is going be a big point of emphasis or a big focus as we go into the spring. On slide 31, you mentioned non-core asset sales. Just wondering if you could give us a little more color on that and kind of your confidence in the ability to get some things down there to maybe give you a little more on the liquidity front.

SeanWoolverton

Yes. As we look through our asset base, we actually from our legacy position have some assets outside of the Eagle Ford primarily located in the Powder River Basin, smaller position mainly overrides, and we currently have those in the market and expect that we'll be in a position to announce a transaction on that first quarter call.

Operator

Our next question comes from Jeff Grampp with Northland Capital Markets. Please proceed with your question.

JeffGrampp

Good morning, guys. I was just kind of wondering, Sean, if maybe you could take us through maybe from a high level kind of how you guys are expecting that ramp to play out on the oil side up to that 10,000 a day mark that you mentioned for a peak for the year. And maybe more in kind of the medium, longer term as we think about that number, can you just talk about a little bit maybe the sustainability of that. Is that something for example you could get to in 2021 from an average basis or just kind of wondering I guess how we should think about that number in the context of more of a longer-term trajectory for you guys?

SeanWoolverton

Yes. Appreciate that the question is something that we obviously are very focused on. Let me maybe walk you through how we positioned ourselves is being in a position to see this ramp. Really two drivers behind it; our operational efficiency gains. We've reduced cycle times both on the drilling and completion portions of our business by over 30%. So the first half of the year relative to our budget that we outlined during our third quarter call really changed from bringing projects forward. To provide an example, we had a three well pad that we had anticipated bringing on in April that came on February 15th. So a good portion of the first half of the year's ramp is being driven by acceleration of capital programs. The continued ramp into the second half of the year then is being driven by our decision to allocate 100% of our capital to oil and liquids projects.

So we are taking advantage of more efficient operations and then increasing capital towards oily projects. As we look into 2021, we'll exit this year at a level higher. It essentially double where we exited 2019, so we'll exit instead of 2019 at 4,500 barrels will be at 9,500 barrels or so that the initial base and at this point we will plan to allocate the majority of our capital in 2021 towards oil. We should be able to continue to grow the liquids percentage. Ultimately, our goal is to get to a 50/50 liquid gas balance sometimes in the 2021 -2022 timeframe.

JeffGrampp

Got it. And maybe some more specifically on that kind of bill on the mix front. Does that shift to kind of a more balanced next come as a result of gas declines or does oil, can you continue to grow oil volumes with a one rig program off of that 10,000 a day marker to things kind of stabilized at that level?

SeanWoolverton

Yes. I's a component of both our gas not drilling any gas is declining. What we'll see though is as we move a year, two years out away from gas drilling, we will have come down to decline curve and see a more stabilized gas base that we'll be able to ramp in the future, if gas prices predicated and so the percentage increase to liquids is driven by that declining gas, but it's accelerated further as we put more and more capital to work on the oil side. So it's a combination of both.

JeffGrampp

Got it. Okay. Perfect. And then last one for me on the just kind of parent/child in field development front. Can you guys just give us a sense in terms of the 2020 program? How you guys are kind of you in the split as you guys kind of maybe wanted to find parent child or I guess how you guys are maybe risking the model or observing any kind of production implications associated with obviously kind of being in some of the areas like McMullen that have some legacy wells you guys obviously have to be cognizant of?

SeanWoolverton

Yes. As we've done a lot of our subsurface work and come to you lot of detailed reservoir analysis. We really are honing in on well spacing at about 500 foot for inner well spacing. We really haven't drilled much in the company at lower levels, but have looked at offset operator's tighter spacing to come to that conclusion. So we believe that at 500 foot spacing you may see some interference, but it's going to be pretty limited and for the most part we're accessing new reserves. One benefit that we are encountering is areas that we've gone back into developed back in the 2012 and 2013 time frame. So in some instances we actually are seeing a re-stimulation of the offset well and seeing an uptick in volumes there.

End of Q&A

Operator

Thank you and this concludes our Q&A session. I will now turn the call over to Sean Woolverton for any further remarks.

Sean Woolverton

Thank you. Appreciate everyone's listening in on the call. We feel like we're delivering the significant value at the company, making tremendous operational strides and are really excited about 2020 and look forward to catching back up with you in May. Thanks.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.