Industrias Peñoles, S.A.B. de C.V.

Thank you, operator. Good morning, everyone.

With me on the call this morning for the final time is Parsley's Chairman and CEO, Bryan Sheffield; and for the first time our Chief Operating Officer, David Dell'Osso along with President, Matt Gallagher, and Chief Financial Officer, Ryan Dalton. Our remarks today may contain forward-looking statements, so please see our earnings release for a discussion of these statements and associated risks including the fact that actual results may differ materially from our expectations.

We also make reference to non-GAAP measures, so please see the reconciliations in the earnings release. During this call, we'll refer to an investor presentation that can be found on our website and our prepared remarks will begin with reference to slide 4 of that presentation.

After our prepared remarks, we'll be happy to take your questions. And with that, I'll turn the call over to Bryan.

Thanks, Brad. It's great to conclude my time as CEO on a high note.

Q3 was a strong, clean quarter across the board. Efficient operations, strong production growth, cost compression, it's the kind of quarter we've been building for and the kind of quarter we've expected to deliver.

As many of you know, Parsley Energy recently celebrated our 10 year anniversary, and slide 4 captures some of our key accomplishments along the way. I started the company with Paul Treadwell in the summer of 2008 with nothing more than some operating contracts in the middle of the sleepy Midland Basin, no ownership, no production, just the responsibility to operate a set of vertical wells.

It's remarkable that a decade later, Parsley holds rights to 200,000 of the most coveted net acres in the world. We've grown rapidly over the years and that's by design.

This is a capital intensive business and it's tough to compete unless you're spreading your fixed costs over a large production base. Scale is important for other reasons too, including a lower cost of capital and the ability to secure services and equipment and takeaway capacity.

So we made the decision to grow aggressively through the downturn becoming the fastest oil focused operator to grow production from 10,000 Boe to 100,000 Boe per day. Today, we run the seventh largest Permian rig program.

So we've achieved the type of scale we think is necessary to compete effectively. We value scale, but at the end of the day, what we're really driving for is value.

We're proud to be one of the very few E&Ps to create shareholder value over the past few years, even against the challenging commodity price backdrop. I would never have felt comfortable handing over the reins until we secured a healthy future for the company.

And as you can see on the map, we've built a long runway of high-quality drilling inventory that positions Parsley for many years of value creation. Before I hand it off to Matt, I want to emphasize that I couldn't feel better about the state of the company as I transition to Executive Chairman.

We moved the company to Austin in large part to attract top talent. That certainly wasn't easy when Parsley was just getting started.

But at this point, we think the combination of assets and talent we've accumulated is second to none. We're excited to have David on board and the people in this room are just the tip of the iceberg.

So the assets are in place, the team is in place and the future is bright for Parsley Energy. With that, I'll turn it over the Matt.

Bryan, thank you. It's been a truly remarkable run and we're all happy for Bryan, and I'm personally grateful to be part of the story.

And I'm also glad he's going to remain involved and invested in the company going forward. With that, let's turn from the foundation to what's next for Parsley Energy.

On slide 5, we outline our investment approach. We have decided to accelerate our path to free cash flow.

Put simply, our job is to allocate capital responsibly. And this is the framework that will guide our thinking as we develop our premium portfolio.

The principles that will govern our approach include discipline, foresight and stability. Discipline means restraint, understanding that a strong average program return doesn't justify running an extra rig or spending an extra dollar if that particular project falls short of our return objective, or if it interferes with targeted free cash flow, financial risk or operational performance.

Foresight means being proactive and tactical when it comes to protecting against constraints and benefiting from reversion to the mean patterns. Stability means ensuring that we deliver what we promise and managing various risks.

This involves conservative leverage guidelines, strategic hedging and a measured approach to choosing our development pace. The bottom line is that we're evolving as a company and we hope that the industry is evolving as well.

Moving to our target outcomes, we think that following these principles will allow us to continue to generate top-tier returns and strong production growth per share and also position us to layer on free cash flow. We've always been attentive to returns.

And we show in the supplementary slides that over the past three years, we rank among the elite in terms of both debt-adjusted production growth per share and corporate returns. Growing free cash flow has always been part of the plan as well, but we didn't force this until we hit the scale thresholds we've discussed.

We certainly could have thrown off small amounts of cash flow at low volumes if that had been the objective. But we've now established a line of sight to significant and sustainable free cash flow.

The idea is to get there and stay there at a meaningful scale. So what does this look like in the near-term?

Coming off a steep growth ramp in order to build a self-sustaining model, you have to take steps to moderate your corporate decline. We started down that path this year, holding activity levels stable year-to-date.

And we plan to continue at a steady development pace as we move into 2019. By this we mean that we expect to deliver approximately the same amount of gross footage per quarter that we've averaged so far this year.

Along the way, we certainly hope that we'll continue to get more efficient, which might allow us to reduce equipment levels. In other words, if we can do the same with less, we will.

We will also be keenly focused on costs and hope to build on the favorable trends we've established in recent quarters. We expect this approach to result in genuine value creation with healthy corporate returns materially above our cost of capital.

In the current strip, we think this sets us up to fund our own growth by the end of 2019. You can see that our outspend has already been compressing.

It expanded as we accelerated development in a lower service cost environment and has tapered as we stabilized activity more recently. A couple of final thoughts on this framework.

One is that it is an organic path. We're not counting on asset sales to reach these inflection points.

They can be accelerants as was the case this quarter, but our path is forged organically. Second, this strategy aligns perfectly with the maturation of our model.

It's an evolution that we anticipated and have been building towards. So we're excited about where we are and where we're heading.

Moving to slide 6, as part of our 2019 approach, we believe steady activity will translate to ongoing progress on efficiency and cost. It's good for us and it's good for our supply chain partners.

Already, we're seeing favorable trends on both drilling and completions operations. Basically we're covering more ground in less time.

Clearly, the steep upward trend in stimulated feet per day is unsustainable, and Q3 was a particularly good quarter in terms of weather. But we've made some transformational improvements to our process and continue to be aligned with our frac partners to incent and deliver efficient performance.

We're seeing more moderate but still meaningful gains on the drilling side. One indication of increased drilling efficiency is a higher percentage of one-run laterals even as our average lateral length has increased.

On slide 7, cost control is an important aspect of the 2019 game plan and we're already making good strides. Increased operational velocity is one of the factors that drove the reduction in D&C cost per foot we posted in Q3.

Another is increased local sand use. Stable activity levels are also helping with operating costs as we continue to post peer-leading LOE per Boe and registered a company record low G&A per Boe as well.

All this adds up to high margins and strong capital efficiency. Turning to slide 8 and zooming back out to a broader context, we certainly don't want to downplay our track record of strong growth.

We think our aggressive development pace through 2017 was well-timed. Not only did it provide the necessary scale, it also took place in a more favorable cost environment and allowed us to build volumes into a higher oil price environment.

This is one example of what we mean when we say that foresight is one of our guiding principles. Among other things, foresight means not chasing the commodity.

Bryan exercised foresight when he bought a core acreage during an oil price trough. We exercised foresight when we added rigs at lower oil prices and service costs.

Generally speaking, this mentality just means investing strategically throughout the cycle and it means anticipating potential constraints like we did when we diversified our oil price exposure ahead of current takeaway bottlenecks. We certainly don't have a crystal ball.

However, we intend to be proactive and opportunistic. We'll do our best to buy and spend at lower cost and sell and harvest at higher prices.

Moving on to slide 9, during the third quarter, we finalized our previously announced marketing agreements with large oil purchasers, increasing our crew deliverability in 2019. We realized nearly $63 per barrel this quarter, a healthy premium over the average Midland price.

After leading the pack during the second quarter, we expect to set the pace again this quarter. And we think advantaged pricing will persist in the future as we show unhedged oil realizations holding above $60 per barrel through the end of 2020 using current futures pricing.

Before leaving this slide, I want to note that we're also posting really strong NGL realizations, as we show in the supplementary slides. So we're seeing a lot of positive developments and trends and we have a compelling plan to maintain this momentum.

And on that note, I'll hand off to our new Chief Operating Officer, David Dell'Osso, to highlight one particular area of our operations. David?

Thanks, Matt. I'm thrilled to be part of the team.

As I get up to speed on the assets, Martin County is a great place to start. As I've learned, these properties are among the cornerstones of Parsley's transformational acquisition in 2017.

As you can see on slide 10, on this acreage, we recently posted our strongest 30-day oil rate on record from a three-well pad. This is a firm endorsement of the rocks we ramp up development in this area.

I'm also excited about the work our groups have done above the surface, kicking off a water recycling pilot that helps reduce our water sourcing and disposal costs. We used recycled water during the completion of our company record Hayden pad marking an important proof of concept.

We currently have three rigs running in Martin County and we've recently began drilling a six-well project and we'll co-develop the Wolfcamp A and Wolfcamp B zones. As we gradually transition to larger pads sizes in Martin County and elsewhere, scaled-up water recycling capabilities will be an important tool in the toolkit.

I'm excited about this particular subset of our operations. More broadly, I'm encouraged by the quality of our personnel.

It's truly a top-notch group of folks who thrive on execution, and I look forward to building on Parsley's track record as a first-class operator. An now, I'll pass it over to Ryan to discuss recent transactions and our financial position and outlook.

Thanks, David. Turning to slide 11, we're always keen to streamline our acreage portfolio.

As you can see, we're raising about $170 million through recent divestitures. This is quality acreage, but for us, it wasn't part of our near-term development plan.

So we think it makes sense to raise cash that can be invested in higher priority projects. This cash also covers a good portion of our remaining outspend as we converge on free cash flow generation by the end of 2019.

There's some production going out with these properties, so that will impact our volumes in Q4 to the tune of a few hundred Boe per day. The full year impact in 2019 should be closer to 1,000 Boe per day, including several hundred barrels of oil per day.

As you can see on slide 12, our balance sheet is in a strong position with proceeds from recently announced divestitures adding to our cash position. We still possess a fully undrawn revolver and have no near-term debt maturities.

This translates to the advantaged liquidity position relative to peers. The strong execution that Parsley has shown in the field this year has translated to favorable trends in our bottom line, enhancing our already solid financial position.

For example, our trailing leverage ratio has compressed by roughly half a turn over the past six months and sits at a very comfortable 1.5 times after asset sales. A disciplined hedging program remains a key component of our financial strategy and I'd encourage you to review our latest hedge position in the supplementary slide.

I think it's worth reiterating that our hedge structure does retain upside to higher oil prices, which is a bit unique in the industry. It's also worth noting that since our last update, we've layered on additional hedges for Midland and Gulf Coast oil pricing over the next couple of years as we look to align our hedge book with our regional price exposure.

Turning to slide 13, we're maintaining our annual guidance across the board despite losing some production through recent divestitures. Even though our guidance is unchanged, I'll provide some color on our operational game plan for the fourth quarter.

Commitment to our 2018 capital budget remains a top priority. In light of increased operational efficiency during the third quarter and also in line with discipline as a guiding principle, we deliberately dialed back the utilization of our equipment in the field.

Similarly, as we look into the fourth quarter, adherence to the budget will remain a guiding force and our pace of drilling and completion may temporarily moderate as a result. To some extent this is already taking place naturally as we have experienced some weather related downtime already this quarter.

These weather impacts and other planned downtime will likely translate to lower volume growth in Q4 than we saw in Q3. Even so, we're on track to deliver north of 50% oil growth during a year in which we're holding our development pace constant.

So to conclude, we're pleased to have executed at a high level so far this year, magnifying the rewards of investment decisions made at the bottom of the cycle. And we're eager to build on this momentum as we close out the year and take the natural step in our corporate evolution.

With that, we'll be happy to take your questions.

Thanks. Good morning and congratulations, Bryan.

And I think you got a pretty strong team there to kind of take the path forward here.

Thank you.

My first question, obviously, you guys have, I think, made a pretty sound decision in looking to accelerate that free cash flow inflection point. Can you discuss the plan – and I know you do it at strip and if say commodity prices are stronger and/or by the end of 2019, you are delivering that free cash flow.

How do you look at sort of that next step, right? What is the next step?

Once you start generating that free cash flow, how do you think about like when to add activity or do other things with that free cash flow?

Yeah. Scott, that's a great question, and job one is to get there, which this plan starts to accelerate that.

So we want to start generating it in a meaningful way and that gets us to a menu of options to deploy the additional free cash flow to. And we're going to use these principles and use our investment framework, the incremental dollar over good returns.

And once we get there, obviously, one paramount reason will be return to shareholders or use would be return to shareholders. There's a big one sitting across the table from me right now that is looking forward to that day.

So we're excited about the plan and pulling it forward.

Okay. I appreciate that.

And then, how do you look at your development plan in 2019? Specifically what I'm looking for is the change inside of the well pads you'll be using.

And how will the concentration of the activity look? Because certainly there are some peers in the Permian that have run into issues with a little bit concentrated activity.

So if you could give us an idea of how that may shape up?

Yeah. There'll be a moderate increase in pad size, creeping up on average about 1 to 1.5 wells per pad as we feather in some larger projects, as we've mentioned in prior quarters.

And we're pretty evenly distributed among our footprint. That's one of the benefits of our large scale and kind of fixed operating areas, we can evenly deploy our rigs and they're all inside the core.

So we have a good stable runway to deploy those rigs on.

Good morning, guys, and congratulations, Bryan, on everything you've built in such a short amount of time.

Thank you.

The first question that I had, when you all talk about sort of deliberately kind of reducing the equipment utilization just given the efficiencies that you all have experienced, can you just kind of discuss how that sort of relationship with the service providers works when you in essence sort of reduce activity levels, but still want to retain those crews?

We try to be as transparent and have open discussions as possible. We've been in partnership with these providers for a long time since we've been started 2008 with many of them.

So you want to have long-lasting partnerships and work together and try to give visibility. As these efficiencies accelerate, as they did throughout the mid-part of this year, it caused them to – you have to have quicker conversations, but you try to tackle it as a team.

This is Bryan. We're very fortunate that it's not a tight market.

I don't think you could – it's harder to pivot when it's tighter, but it seems loose, you can bid out frac and find frac fleets. You can kind of swing back and forth on that.

Got it. And then, my follow-up question regarding your efforts, looks like on the water recycling to sort of scale that up on a targeted basis kind of going forward.

If you can kind of just maybe elaborate a little bit more on that in terms of how you identify, when you're going to do it, kind of potentially the capital involved? Does it materially change kind of the ratio you all have been running where infrastructure spend has kind of been around that 15% kind of ratio?

Just anything you can elaborate on that topic.

We actually saw a nice reduction in the infrastructure spend this quarter. I think you're starting to see the benefits of the pre-spend since IPO to get ready for this full scale development.

So we'd expect that from the 15% range to methodically grind down over the quarters. This quarter may have been a little low as a run rate.

And then, as we roll into higher usage of water recycling, we see enough offsets to where it won't materially impact the infrastructure spend. We have a really robust freshwater sourcing and usage platform.

And then, we'll target where we need to and where we can additional usage of the recycling. So we are excited about the initial pilot, very good success and had no operating issues on it and no productivity issues on the back side.

So we'll just continue to roll that out methodically. We don't see any impact to the broader infrastructure spend.

Morning, Bryan and Matt, and to the rest of the team there.

Good morning.

Morning.

Matt, I was wondering if you could go into a little bit more detail on what's happened with the efficiency, specifically on the completion front? And as part of that, if you could talk about whether you see more efficiency gains in front of you?

And to what degree either the gains you have in hand or the gains you see in front of you are durable?

Well, I don't think I want to go into competitive details, but I would just really like to tip our hats – or tip my hat to the operational teams in place. They've really made some structural improvements across the board that we feel are sustaining and are transformational.

So you saw it at the end of Q2 last year – I mean, Q2 last quarter, the uptick in our POPs and our CapEx as that went unbridled and then we had to moderate it throughout Q3 intentionally with the utilization rate. So it's actually a safer process and a process that is kind of good for both sides that keeps the daily utilization very high, high pump hours.

And we're very excited about it, it's sustainable going forward and think we're rolling that into our 2019 planning.

Got it. Well, definitely something going on there.

I appreciate you addressing it. And then, if I could turn back to kind of the big theme, I think, of both your call and the questions is this transition into a free cash flow mode.

You've said you see it by the end of 2019, but can you talk about other than the obvious variable being commodity prices? Are there other – what other variables are there that could affect that, the timing of that transition, either bring it closer or push it further out?

Well, we're baking in about 5% to 7% inflation in the current budget runs we have on the labor front. So that's one component.

We are heavily hedged with the structures that we've been putting in place since IPO, but obviously, you still have exposure there on the marginal barrel, so commodity prices will affect it. And you just need to make sure you stick to the budgets as tightly as possible throughout all the variables that come in.

Good morning, guys.

Hi, Jeff.

Continuing on the topic of the equipment utilization. I was curious if you guys think it's fair to think that the well cost reductions that you achieved in the quarter could have even been a little bit greater, given that maybe there were some hard and/or soft costs associated with not having the as high utilization as you had earlier in the year?

We haven't quantified that down to the dollar, but the structural improvements are roughly a net neutral on the active well. So then, you have the fact that we're using higher local sand and drove a big piece of the reduction quarter-over-quarter and then seeing an abatement in inflation actually across many line items, diesel being one of them.

So a combination of those things drove the unit cost down.

Okay. That's helpful.

And for my follow-up, Bryan, I think last quarter you said your BD team has the green light here on acquisitions and obviously, seen a lot of stuff here the last couple of weeks with these – the corporate deals and news of some private Permian players coming to market. So, just wanted to get your take on where you think Parsley's place is in those types of conversations?

And are these larger deals of interest to you guys or should we think of the acquisition focus to be more maybe strategic bolt-ons that are a little bit on the smaller end of things?

I got a lot of grief on that BD last call and I should've gone off on a little more detail on that talking about lateral extensions, increasing working interest and focusing on buying minerals under our own tracks that we're drilling on. And I think that that's what we're looking at and that's what we should be focused on.

I mean we acquired billions of dollars of acquisitions the past few years. We've increased our locations from 3,000 to 6,000 locations roughly on high priority locations with the Double Eagle deal and the Apache deal.

We're in a good place and there's a long runway. So, obviously, the BD (00:28:50) we divested also.

So, it goes the other way. So, we're just pruning and increasing our working interest, buying minerals and lateral extensions.

That's what we're focused on.

Yeah, good morning, everybody. I wanted to ask about the wells you highlighted Strain Ranch and Hayden pad.

I guess I was a little surprised that Wolfcamp B was part of that. I always thought Middle Spraberry in that area was one of the stronger zones there.

I though the Wolfcamp B was thinner. I guess, one, am I wrong on that?

And then two, wanted to see what kind of spacing those wells were drilled at?

It is thinner in that area, but we still have rich rock characterization that justified the target. So it's not an area that you're going to see stacked Bs in, but a good prolific B result out of that area and is worth highlighting.

And in terms of the spacing?

These would have been at traditional 660 feet spacing. That's pretty much our standard development on a lateral spacing between wells, and then a little thinner on a vertical spacing, anywhere between 200 feet to 300 feet between vertical targets.

Okay. And then, looking at your preliminary plan for 2019, looks like you're assuming flat activity levels, as you mentioned.

And Matt, you said to the extent you see further efficiency gains, maybe you can reduce equipment there and if you can maintain the completed foot per crew. I want to see if – does that preliminary plan, given what you saw in the third quarter, also anticipate something less than full utilization of the completion crews?

We would probably go to more normalized utilization and less equipment as we get to stabilized run rate is what – as we go into 2019. That's what we're evaluating.

Thanks. Good morning.

Matt, I was wondering on the D&C per lateral foot, 9% reduction, which is roughly $100 per lateral foot from slide 7. How much of that is sand and dollar per foot, any quantification?

Probably about 50% and we can follow up with that number, because it's different usage by basin. Let's say, 50% on that and the other is mixed between additional lateral length and then reduction in the inflation and actually calling back some unit costs there.

Got it. And then, on the comment on local sand usage you increasing, any way to frame increased usage in – or potential increased usage in 2019 versus this year 2018?

Yes. We want to continue to grind that northward.

We were roughly 50% on the quarter local usage and we have some limitations right now in Delaware. We're maybe doing a test here right now on local sand and we'll see how the performance post through.

We'd like to use it everywhere we can where we have higher specs in the Delaware that we need to utilize. So you could see that grind up to 60% and potentially 70% in late 2019.

Hey, guys. Good morning.

Matt, if I was going to play devil's advocate a little bit and let's say, given your depth of inventory of super high return projects, the best way to really max out the NAV in our model at least is for you guys to kind of ramp like hell on the activity fronts and not apologize to anybody for outspending free cash flow. That's kind of what the industry's done historically and worked out great.

But I just want to hear your thoughts of what's kind of wrong with that way of thinking in your opinion now?

Well, I think what we've seen as an industry is the multitude of variable inputs on the spreadsheet. So, yes, supply constraint – I mean on the labor side, you have takeaway constraints, you have geopolitical issues that you're all watching.

So even though these are short cycle time investments, as you go into these larger pads, you're still looking at 180 days or so before you deploy capital and see a return on that capital, and very few companies are 100% locked on their cost structure or on their hedging. So you do put capital at risk out there, so it's important to moderate.

And then, another thing you're seeing is the improvement on efficiencies when you moderate activity and that should just be a compounding effect across the industry. And then, the third thing that I think is important and there's a little bit of a debate out here over this summer in the industry is this quest for NAV per project or rate of return per project.

And what's paramount in that is you have to have a long inventory of high-quality locations. And if you do, you can lean towards rate of return per project.

I've seen examples of if you take a $60 million pad and let's call it all-in fully burdened with facilities a 60% rate of return, you can spend another $10 million and get another $1 million of incremental NPV on that project. That is a horrible use of capital.

It's 10% and it's below – but you're increasing and maximizing NPV. So I think that's the trap more so than accelerating that the industry has fallen into in the past and it's just the balancing act over everybody's portfolio and number one to the process is starting with a deep long inventory of high-quality locations.

That's a great answer. Appreciate that, the thoughts.

And my follow-up is, given this kind of switch in philosophy here, just interested in what kind of the second derivative consequences are for you guys in your strategy going forward? Do you feel like maybe you don't need to have as much inventory as you carry now or thoughts on M&A or bolt-ons?

If anything really kind of changed here now that you're going to more of this free cash flow approach? Thanks.

No, I think a healthy inventory is important. It ties into the earlier strategy.

And as times shift and you allow – allows you to develop that footprint methodically across a large inventory. And even as you're testing – we're still an innovative culture.

And as you're testing and finding out new results, you find out new things and beneficial things across your inventory that you can rotate to. And we have pruned essentially all the non-core stuff out of our portfolio.

We're very happy with the operating areas we have and we'll continue to look to do some lateral extension trades and some bolt-ons in those areas.

Congratulations, Bryan, and also to Matt and David on both of your new roles. I wanted to just explore on the cash flow front and your new spending approach.

How you might – set your budget in a lower price environment to, say, like a $50 environment, whether you would reduce activity and then within cash flow try to maintain those efficiencies you talked about?

It wouldn't be a knee-jerk due to our hedging structure. But, yeah, we would be governed by the budget and generate cash flow.

Okay. Thanks for that, Matt.

And in terms of the well cost reductions, you talked about using more local sand. How do you see that progressing over the next 12 months to when you have a good understanding of whether you can use it across the whole program?

It should be a methodical increase as we see more results from the test earlier in the year. Everything is looking fine.

And you can just continue to roll that out methodically. Again, we're about 50% on the quarter, so maybe that grinds up to about 70% by mid-next year.

Morning, guys. Matt, my question is looking at that slide 10.

It looks like you're doing a great job on that recycled water that you mentioned during the Hayden pad's completion. I'm just wondering is that going to be more commonplace do you think after the success you've had on this Hayden pad.

And then, just wanted to get an idea of what kind of savings that should mean?

This wasn't necessarily savings. We delayed rolling out a project for our company for a long time until we got the cost structure essentially cost neutral with some of the innovation and the equipment that they're running out there.

So I think now we have a identified tool in the tool kit that we can use wherever we need it, when we need it, but we wouldn't see – it's kind of a cost push for us.

Okay. Okay.

That makes sense. And then just lastly, continue to hear sort of end of last quarter, beginning of this quarter about a fair amount of weather still.

I just wondering if you could give us any color or quantify potential fourth quarter downtime due to weather?

Yeah. We saw Highway 158 washed out completely.

It's a blacktop road that was completely washed out, four-lane highway. So that was a shock to see.

Obviously, there's other roads to get around to do what you need to do. But it has been a very wet October for West Texas.

And fortunately, our teams have responded well and there isn't really a material impact to us, but it has kind of throttled some rig moves and some equipment moves, which actually ties in line with what we need to do anyways on pullback utilization to adhere to this budget in the fourth quarter.

Thanks. Good morning.

And I'd echo the congrats to Bryan and the rest of the team on the transition, on all fronts. I guess I wanted to maybe look at the acceleration of pulling free cash flow forward in the context of the principle of foresight that you talked about in the opening remarks.

I'm just curious what if any sort of scenario are you prepping for as you think about pulling this free cash flow forward. Should we read it as a somewhat more defensive posturing from you all, from a cyclical perspective here, or is this really more just about the maturation of the business model and kind of responding to investor preferences at this point in the cycle?

Definitely, we're at a healthier place now with the scale of our company. And I think when you get to this size, it's prudent to be able to have some of this cash flow to give you cushions for things that are unforeseen.

And so, we can only have a view so far out with all the same data that everyone else is publishing. The West could come to an agreement with Iran overnight and you have barrels back on the market.

Those are just unknowns that could occur, but the one thing that is constant is volatility in this industry. So it definitely allows you to weather more uncertain storms in the future.

On the flip side of that, there's a lot of bullish – this run-up is in a strong dollar and we're at $70 barrel – $70 a barrel or $80 a barrel Brent. So the takeaway constraints are about to be released in mid-next year for the Permian Basin.

So there's a lot of things from the bullish side. And then that just allows for a healthier corporate returns and returns to shareholders across the broad industry, I think, everybody's modeled that they're going to.

So it's really a win-win. The shale is allowing everybody to grow at healthy rates within cash flow.

It's really a unique thing as you compete against other industries for capital. And I think a lot of the companies are moving to this model justifiably so and it should be an exciting time for U.S.

shale players.

Indeed, a new chapter it seems. And then, I guess, you had also mentioned – talked about in your opening remarks kind of an eye on the corporate decline and kind of moderating that over the course of 2018.

I was just curious if you could maybe quantify like what that base level corporate decline looked like coming into 2018 as opposed to now exiting 2018? And maybe how we ought to think about that as we head into – as we think about like heading out of 2019 into 2020?

Just kind of those three snapshots in time, if you could?

Yes, sure, Michael. One of the paradoxes of growth is that the faster you climb, the faster you fall.

And we came into the year probably at around a 45% corporate decline rate on the oil side. I think going into next year, that will tick down a couple of percent to 42%, 43%, and you should see that continue to trend down by a couple of percent a year.

And then, on the gas side, that's more like the mid-20s. So certainly, something to be attentive to.

And if you just think about it in context, we've added 70 – our horizontal well count has grown by more than 70% a year over the past several years. So certainly fighting that and leveling off here is helping us to moderate that, but it's still going to be a gradual process over the next few years.

Good morning, everyone, and congratulations, Bryan. Best of luck as you enter the next stage.

Thank you.

Yeah, no worries. I was seeking some clarification on some earlier questions specifically on the free cash flow generation front.

So, when we look into 2020 and beyond, is Parsley entering a cash flow neutral production growth phase or is it a free cash flow generation and production growth phase? Just trying to understand how that looks in 2020 and the medium term.

Yeah. It's dependent upon what the commodity tape is, obviously, but if you just kind of take the strip right now in our current thought process, I mean, the objective is to have free cash flow and growth.

So, growing free cash flow, I guess, will kind of answer that question.

Got it. And then, Matt, you spent a decent amount of time discussing foresight as a core guiding principle.

And it's certainly feels like since we emerged from the downturn, the industry's been playing a game of whack-a-mole on operations, whether it's oil takeaway, gas takeaway, gas processing, NGL fractionation. And it just feels like the industry is in a bit of a reactionary mode.

And so I was just wondering if you had a thought on what the next challenge for the industry might be that you don't think many people in the investment community are currently discussing?

We're always impressed by the investment community. They see out in front across the globe, a lot of times quicker than a lot of the operational-focused companies in any industry.

So I wouldn't say that they're necessarily missing it, but we're focused on getting our barrels to and through the coast and to end user. So we would agree that next bottleneck that we really need to watch out for are the ports.

But then you have, okay, you solved the port problem on this side, is the port infrastructure on the collecting side keeping up. So it's a massive macro shift in this oil flow.

So that's a big piece of it. We obviously have currencies that are always driving in lockstep with the investment decisions.

So there's a lot of things out there. There will be other thematic topics that hit the quarters over the years.

And that's just another reason why this industry shift to free cash flow cushion and kind of stability on the equipment growth is so important.

Hey, guys. I wanted to follow up a little bit on what you all said about capital discipline here in 2018.

It looks like you're certainly ahead of schedule on your POPs this year. So just wanted to get a sense if we're going to see a pretty big reduction in well POPs in the fourth quarter to try to stay within that POP guidance or are you more just governed by staying within the CapEx guidance and maybe the POPs don't sort of drop as much here in the fourth quarter?

And then, obviously, they're probably going to be some reduction here, but just trying to get a sense, is there going to be a pretty sizable snapback in activity early in 2019? What you kind of tell us about that cadence?

Yeah. I think we'll need to step back a little bit in Q4 and that's happening naturally anyway.

As we've discussed with weather and some natural kind of frac holiday downtime toward the end of the year, we've said approximately 165 growth wells, that leaves 30 plus for the fourth quarter. And so, I think you'll see a step down by a few growth wells, but nothing dramatic in terms of the POP count.

We're still probably in the mid-30s to 40 growth count for the fourth quarter. That won't snap immediately back in Q1.

You're probably looking at a couple of months or so to get back to the kind of normalized steady state run rate for 2019. So if we're doing 400,000 plus lateral feet a year, it's probably going to be a little bit lower than that in Q1 and a little bit higher than that for the rest of the year.

Okay. That makes perfect sense.

And I guess just wanted to also follow up on a comment that you guys have made last quarter's earnings call where I think you mentioned, you're contemplating maybe a couple rig adds in 2019. But obviously today, you've talked a lot about prioritizing, getting to free cash flow by the fourth quarter.

So just trying to get a sense, are those rig adds sort of off the table at this point just in terms of the shift in thinking you've described?

I actually look at that as new sheriff in town, new bus driver and shifting strategy a little bit. I think in the history of Ryan always wanting to add rigs and grow, grow, grow.

And I think it's an awesome take on the team to slightly adjust the strategy. So that's what that was about on the view of the two rig comment I think.

Hi, good morning. In regards to the new focus on free cash flow neutrality and the continued focus on corporate returns, has there been any discussion on adding a corporate returns-based metric or drilling-based metric to the company's and management incentive plan for 2019, and to that end as well on a free cash flow incentive as well?

Yes, there's a fulsome discussion about corporate returns being layered into our incentive.

Okay, great. And then, I guess transitioning a little bit on the operations side.

Previously, there had been a transition to larger pads that had seen a few hiccups. As you guys move to larger pads in 2019 what are the lessons that you learned from last time to help smooth the transition this go around?

That's a good question. To clear the air on that that was in 2017, one of our large pad projects was an eight-well project that was a density test on 330 foot.

So it wasn't topside issue. It was really what was going on at the 330 foot testing.

But on top of that, it was the Upper B, Lower B. So there's about 150 feet between the same flow unit, I guess, and also spaced at 330 foot.

To this day, it's one of the highest density test in the Permian, still extracting useful data from that roll into our Earth modeling. But we don't see that as a ongoing concern for what we're doing with our larger six well pads as we feather in 2019.

Hey. Good morning, guys.

Hey, Eli.

Can you talk about – going back to the industry level bottleneck conversation, can you talk about how you expect Mont Belvieu NGL storage and frac capacity constraints to potentially impact industry level growth? And how Parsley is positioned on that front with regards to your relationship with Targa?

Yeah. You hit on it there, Eli.

(00:53:44) 80%-plus of our fractionation revenues – our NGL revenues are coming from our relationship and our connection points with Targa. They have the largest infrastructure gathering in the Midland Basin and very large, robust handling facilities in Mont Belvieu, but that doesn't preclude them from this massive ramp in throughput that we've seen following the big ramp in activity in 2017 and 2018.

So there are points in the future that could be one of the bottlenecks. And we're working very closely with all of our partners to try to assess when and how that might may come and how to mitigate it through different storage techniques or different types of rejection capabilities.

So, we don't think it will be anything that will put the brakes on activity, especially with this moderated activity that we have laid out in front of us here.

And then going back to the BD conversation real quick. Can you give us some perspective on what the royalty interest acquisition opportunity set looks like?

And are there any strategic initiative discussions going on internally with regards to your asset there?

Yeah. We have a massive mineral position, 7,500 plus net mineral acres and production is growing on that entity.

So a very valuable entity, high-margin, obviously. And I think there's a lot of value there, may not be fully appreciated in the market as it sits today, but it just needs to mature a little bit as still has a lot of growth coming over the next few quarters on that front.

Interestingly, we also have our water gathering midstream entity that is a very large in itself with roughly 1 million barrels a day of permitted disposal and gathering and sourcing capacity, hundreds of miles of gathering and transfer pipe. So you put these two things together, there's quite a bit of additional value on that front.

And then, just the broad marketplace, there might be 200 operators in the Permian basin and a little less today as you've seen some sales occur, but there is somewhere in the order of 70,000 to 80000 mineral owners. So, it's a per unit, smaller bite at apples, but a lot more apples to bite at.

So there's definitely a room to aggregate on the mineral front over time.