Industrias Peñoles, S.A.B. de C.V.

Thank you, operator, and good morning, everyone. With me on the call this morning are President and CEO, Matt Gallagher; Chief Operating Officer, David Dell'Osso; Chief Financial Officer, Ryan Dalton and Senior Vice President of Land & Marketing, Stephanie Reed.

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 four 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 Matt.

Thanks, Kyle. Parsley has executed with a sense of urgency throughout 2019 and the third quarter was no different.

We turned the corner through sustainable free cash flows sooner then we had initially expected and started a return of capital program to shareholders with the initiation of our regular quarterly dividend program. Our capital efficiency continues to grind higher, once again, eclipsing our prior target.

And finally, we announced an accretive Delaware Basin transaction with our acquisitions of Jagged Peak Energy. As you can see on the map, this was a natural fit with our legacy Delaware position.

Let's move on to slide five. Before we look ahead, we have to focus on home-based first.

And that is what we have done with our 2019 action plan. Delivering on these targets is important to us personally, accountability is critical to us corporately.

This is another quarter of positive progress reports. A lot of good news here that is on the right-hand side of the page, with a couple of items in particular I wanted to highlight.

First, one of the Parsley's key goals this year was accelerating our time-line to sustainable free cash flow. Thanks to the high-level of execution delivered across our organization, we generated $21 million of positive free cash flow this quarter and initiated a regular dividend program.

The Jagged Peak transaction enhances this free cash flow profile in 2020 and beyond. Another key objective for us this year was to deliver improved capital efficiency.

I'm excited to report that strong cost controls coupled with our returns, focused development approach have indeed generated a step change in capital efficiency and we are again boosting our target. We now expect a 14% to 16% plus year-over-year improvement.

Again, the Jagged Peak transaction helps preserve and build upon these capital efficiency gains in 2020 and beyond. Finally, I wanted to touch base briefly on a strategic review for our water assets.

To start, we've had a lot of interest across the board and our team has evaluated an array of options. At this juncture we believe monetizing a minority state to a financial partner seems to be the best task for Parsley.

We are currently in exclusive discussion and consistent with our prior timeline expect to provide a more fulsome update in the next month to two. I will also note that Jagged Peak has built out a complementary water infrastructure which could provide additional optionality in the future.

I'm proud that our team has delivered across the board on our 2019 action plan. However, we recognize that in this market environment a company is only as good as its last quarter.

Thus we must finish strong and maintain the sense of urgency in 2020. Turning to slide six, I want to reiterate that Jagged Peak transaction is about more than color on a map.

Critically it enhances Parsley's competitive advantage in some key value drivers. We've shown this relative ranking graphic in the past and here we presented on a pro forma basis.

We have often talked about the importance of strong operating margins and supporting a sustainable free cash flow profile. JAG's oily, low cost assets are margin enhancing.

We view capital efficiency as another key value driver. A top-tier recycle ratio signals that when you put in an incremental dollar in the ground you are getting well more than that dollar back.

JAG assets reinforce our top-tier recycle ratio. Touching on scale for a minute.

This transaction makes us a better company not simply a bigger company. We have long said that efficient capital allocation within the Permian requires sufficient scale.

We work hard to achieve that operational scale during 2017 and 2018 and now we can apply our scale advantages to Jagged Peak's assets. And with 15 rigs running in 2020, we will remain in that shale scale sweet spot, and we will retain our corporate agility.

I think we're added scale structurally will help Parsley is on our cost of capital with our path to investment grade credit profile now likely accelerated. Finally, with one of the highest insider ownership position in the E&P space, we have a highly visible alignment of interest with shareholders.

Upon closing, I look forward to welcoming Jagged Peak representatives with the significant equity ownership to our board; which only strengthen this long standing alignment with our shareholders. To simply put, we are convicted, this transaction makes us more capital efficient and ultimately a more attractive company that can create incremental value for all shareholders.

Now, on to the slide seven. Accountability will remain front and center, and execution will remain paramount for Parsley in 2020.

We unveiled this synergy scorecard when we announce the Jagged Peak transaction and I believe it is important to highlight that achieving integration success will be build into go-forward incentive plans for all Parsley employees. Furthermore, I want to reiterate that the purchase price paid for Jagged Peak was a close to at the market deal, meaning these tangible synergies will become true value enhancers that accrue to all shareholders.

That said, it is clear again in this market that the burden of proof and a transaction is assumed to be weighted until proven otherwise. Internally, this is a motivator and our team is excited to track our progress on value creation in 2020 and beyond.

Ultimately, we remain convinced that Parsley will be a more capital efficient company with more free cash flow as a result of this deal. We have made major strides this year, solidify operational excellence.

I'll now turn to David to highlight, how we see this magnifying on a larger and complimentary asset based.

Thanks, Matt. A natural question on the Jagged Peak transaction might be why now and why these assets.

Matt has already step through a host of the answers here, but I want to adjust that questions specifically through a capital efficiency wins. Through a cost side, the productivity side of that equation, let's turn to slide eight and start with the cost side.

I think the graph of the bottom left to the page provides some useful context to start with. About this time last year, as we were buttoning up our 2019 capital budget, you can see where our Delaware costs were.

As you know rate of returns gears our capital allocation mix. As we finalized the 2019 budget, a higher Delaware cost structure resulted in a smaller capital allocation during 2019.

The costs are not frozen in time. Our team is consistently working on growing costs lower through wide-ranging efforts, shortening cycle times, optimizing well designs, leveraging scale benefits and improving supply chain management just a name a few.

And as you can see, we achieve the material improvement in our Delaware cost structure with well cost down more than 20% over the past year. These significant cost savings boosted the returns profile, our legacy Delaware basin assets.

So as we started to sketch out the 2020 budget on the standalone basis, the Delaware was poised to garner increased capital allocations and returns focused development plan. In the graph at the bottom center of the page you can see the Jagged Peak Delaware cost structure has also been on a nice downward trajectory, albeit with the 2Q, 2019 well cost that is still 10% to 15% above Parsley six months rolling average.

Importantly, the well cost differences is not consumables driven. As you'll know that Parsley's base design, proppant loadings are higher and typically consist of more Northern White Sand.

Rather this is where scale helps and we believe applying Parsley scale advantage will help drive well cost lower on Jagged Peak's asset based. On a combined basis we expect to register all in drill complete and equip cost in a low $1,100 per foot in 2020 providing a nice capital efficiency tailwind.

Turning to slide nine, let's now touch on the productivity side of the capital efficiency equation. As shown in the graph on the left, the well productivity of Jagged Peak's core assets have been consistently better than our comparable Delaware basin assets.

Simply put, the rock underlying Jagged Peak assets is similar to us. The Wolfcamp and 3rd Bone target ticket as you move Northwest from our Trees Ranch areas, making for more productive wells.

So again, tying back to the original question, why now and why these assets. Simply put, adding better wells at our existing cost structure makes us a more capital efficient company moving forward.

Let's move to slide 10 and tie this back to accountability. When we unveiled our returns focus 2019 action plan in February, one of our key objectives are recording measurable year-over-year capital efficiency gains.

We originally target an 8% to 10% plus improvement. Throughout 2019 we have continue to squeeze out more organic well production for less capital.

And for the second quarter in the row we are raising our 2019 capital efficiency targets. As shown in the graph on the left we now expect to deliver a 14% to 16% plus year-over-year improvement.

I'm proud that the measurable strides our team has made on this key objective in 2019 but our work is far from done. Looking ahead, we think that Jagged Peak transaction will preserve and sustain its new normal of capital efficiency in 2020 and beyond.

Finally, I think it's important to highlight that this go-forward capital efficiency outlook does not rely on future service cost deflation. With that in mind, let's turn to slide 11.

Things have gone well this year which may beg the question, does this deal now increase our operational risk going forward. It's a fair question.

It would not be intellectually honest for me to say, the integration risk is zero. But we believe that risk needs to be weighted relative to the reward.

That has already hit on the reward side of this transaction. Here we reiterate what this asset value creation looks like.

On the other side, we believer execution risk is sufficiently low, and we have a high degree of confidence in managing it. Our confidence tends from two primary courses; familiarity and activity pace.

On the former, there's a deep institutional knowledge based on the Jagged Peak assets residing at Parsley. The geology is familiar in some areas the natural extension from our legacy Trees Ranch assets and our teams are well verse with this particular asset.

On the second point, we're referring to both the activity pace of Parsley and the broader industry. On one hand, Parsley has done this before as we run 16 rigs throughout those in 2018.

Furthermore is always easier slow down slow down model that speed went up. We're not ramping activity on these newly acquired assets.

Instead, we are slightly moderating activity to prioritize free cash flow, and that has the knock-on effect of reducing our operational risk profile. Finally, as shown on the right assets for the right graph, we're in a deflationary service environment which should result in optimal service quality for operator of scale like Parsley.

So to conclude by circling back to answer the original question, we're excited that this transaction offers a favorable asymmetric risk reward outcome for our shareholders and look forward to making meaningful strides on the straightforward path of value creation. And now, I'll pass it over to Ryan to discuss Parsley's strong financial position and walk through our improved 2019 outlook.

Thanks, David. Turning to slide 12, David last comments were focused on operational risk.

But I'm more focused on the financial risk. A strong balance sheet is of paramount importance to us and we feel like the Jagged Peak transaction only reinforces that corporate strength for Parsley.

Not only do the assets that hand in glove, the Jagged Peak's conservative balance sheet management complements our legacy strategy. As we noted at announcement, our leverage profile hold steady after this all stock transaction on path to further deleveraging.

In recent weeks, Parsley has received an upgrades and improved outlook from the credit rating agencies and ultimately we believe this transaction accelerate our path towards investment grade profile. Finally, I will note that both Parsley and Jagged Peak have taken a proactive approach in mitigating oil price risk with the majority of forecasted 2020 oil production now hedge.

You can view our pro forma hedge positions in the supplementary slide. Turning to slide 13, I'm excited to walk through another positive guidance update where the numbers really speaks themselves.

We turned the corner to positive free cash flow. Net footage is once again up and capital budget range is once again tightened lower, oil production up and unit operating cost down.

All of this adds a continued improvement in capital efficiencies. Next, I wanted to provide a little more detail on our activity plan into year end.

During the third quarter, partially utilized three to four fracs spreads proactively managed its completion schedule. We intend to continue this practice to the end of 2019, and believe this steady capital investments pace will help avoid the operational friction cost associated with budget exhaustion and will facilitate strong organic oil production growth in early 2020.

In fourth quarter, we're guiding to oil production at 88.5 to 92,000 barrels per day. We expect to turn 32 gross horizontal wells to production slightly weighted toward the back of the quarter.

The working interest on our 4Q 2019 well is expected to average roughly 85%. Before I wrap up, I want to point out that the guidance on this slide speaks partially on a standalone basis of 2019, as a Jagged Peak transaction does not expected to close until the first quarter of 2020.

We provided a preliminary pro forma 2020 outlook when we announced the transaction in mid October and are reaffirming that high-level outlook today. You can find incremental details in our supplementary slide.

And now, we'll be happy to take your questions.

Good morning, guys.

Hi, John. First, my questions, I want to focus on slide eight and you've articulated how you drive the JAG legacy costs down about 100 per foot is sort of embedded in the 2020 guide.

But when I think about kind of the partly legacy wells and we think about the drivers that there would've been to drive the cost lower there, one of them that it doesn't look like it's necessarily being embedded in the guidance was a sort of a switch or increase use of local sand? And I know, last quarter you'd only done a couple of tests, it was pretty early.

You probably needs more tests, but I guess since JAG is 100% local sand, do you feel like given the data set you're inheriting that accelerates your ability to move over to the local sand?

Yes, John. It's David.

We certainly do expect to increase our original sand usage and its part of why you see the bottom into that range of $10.75 [ph] as an example there is potential to say more than what we've seen in our recent 2Q and 3Q results. Those results did have some regional usage, but it was a minority fraction.

So, you're absolutely right. It is an opportunity going forward and we're just – we're going to have see, we've got -- are going for stimulation which include the sand as well.

And so we're going to get a little more debt on that pretty soon.

Great. And then, my follow-up question, in the 2020 guidance outlook that you've given.

Do you assume that the latter length for JAG is sort of stays where it better. Do you factor in that obviously with the land synergies you've picking up in the deal that the latter length for JAG probably moves closer to what you'll all been it closer to 10,000 feet?

For 2020 in the near-term, don't expect it to change much. That we did highlight those land synergies, which will create benefits over the long-term and the very near-term though, it's based on a pretty comparable latter length that we show on this slide eight.

Yes. Good morning Matthew and your whole team there.

Matt, I wonder if we could go back to your prepared comments. You talked about the water infrastructure and that you guys have – I believer what I heard you says that you settled on a structure and you're working with a part of your -- couple preferred parties.

Can you elaborate a little bit on what led you to, I guess, you've picked this structure? I believe what you said is a minority – having in minority investors in the project.

And what timeline we should be thinking about?

Sure, Charles. Anytime we go into an analysis a lot of our assets, we cast to widen that possibilities and we funnel down based on what fits our needs the best.

And we really believe -- you can look at our lease operating expenses that we are a leader in operations of these assets. So this structure allows us to continue those operations across the basin and bringing in a partner, financial partner essentially.

I'll kick it over to Dalton for more of the timeframe on that.

Yes. Yes.

I mean, what came apparent versus we look through all these different options not to repeat, Meade that was – you know operation control is very important to us. It's an alarm goes off at night.

We know that is being addressed by Parsley employees. But again timeframes as Matt mentioned, hopefully within the next month or two we'll be able to go into more details.

But even though we'll say we're just monetizing a portion of the water assets we wouldn't be doing so if it weren't creating clear value for our shareholders.

Thanks for that added color. And then this question is perhaps for David.

And I appreciate you guys have a have a lot of slides with a lot of information you put together on this capital efficiency theme. It makes sense to me the way, David, you're talking about the productivity side and a cost side.

But does it also make that makes sense to perhaps think about it as what assets you have and how you prosecute those assets? And if separated that way and how -- of course it has effects on both the cost and the productivity side.

How much of this uplift you're seeing on JAG or pro forma Parsley? How much of that is just kind of better JAG rocks to work with?

And how much of that is how you're going to be doing it differently?

Charles, I think going forward there's a slide, little bit later I'm going to talk about widening the fairway. We can get a refresh on our inventories.

So I think with the JAG assets it allows us to sort of increase our capital allocation to the Delaware, but within the Midland, we're going to see a pretty similar 2020 pro forma look to what you saw in 2019. We'll have some continued trend there.

So, I take your point. There are going to be differences between certain areas in a higher allocation of the Delaware as part of it, but as we talk about more value per dollar invested with these new assets should help on the Delaware side and the lower cost structure a lot of it normalize it more with what we've seen in the Midland this year.

Good morning. Thanks for the color so far.

Could you all walk through, I'm looking at specifically that Slide 16 where you basically detail that that the proposed spend, about 35% of Delaware allocation next year post debt. I'm just wondering you know again how fluid is that and sort of the thought process behind the 35% spend there and the 65% in the Midland Basin?

Sure. We got to -- when you combine the two companies together that's where the rig map is essentially.

So you see essentially no changes in the Midland Basin. And then a moderation of activity in the Delaware just a flip to free cash flow as we've done corporately in 2019 hitting on in this quarter.

So then, as within horseshoe of percentages that is essentially what we foresee even throughout the budgeting process in a wide range of commodity prices. So I don't see that changing much.

We're coming down the home stretch of penciling in the final details on the schedule and on the on the physical rate moves. So I think what you see is essentially what you get there in 2020.

And then there's no reason to think that wouldn't be an approximate for a longer term capital allocation as well.

Great details. Thanks.

And then just cycling, Matt, I know you now talked about productivity sort of assumptions in the past. I'm just wondering could you comment how you all sort of view and look at sort of productivity changes maybe as you begin 2020 and how you sort of bake that in the year 2020 guidance.

I know you guys tend to be a little conservative there which I like to see. I'm just wondering anything you could talk about sort of these productivity assumptions not only as you start the year but through that whole 2020 guide?

One thing we do that maybe different just across the industry is as you look out over a longer-term and this whole basin is developed, we put what we call a 3% aging factor essentially on our long range planning in our modeling, so that you're always fighting against that on the productivity front. And I think that's fair when you look at a reservoir system based on all of our analysis to start off with some sort of degradation.

Obviously, we're going to be attempting to offset that year-in and year-out with technology and approach -- people processes and technology and we think we have a nice headstart on a lot of those items. And then you can see process this year the rate of change that we saw in the Delaware just from budget cycle last October into a six-month period following that was a material rate of change and that really kicked off the analysis going into this Jagged acquisition.

So you're going to have positive surprises along the way, but we think it's important to fundamentally could put an aging factor on productivity over the long-term.

Thanks. Good morning.

On slide six -- 20. I'm sorry, 16, appreciate all the color on 2020 outlook details.

But just wondering, Matt, if you could broadly speak to say a number of completions relative to 140 and in 2019 and working interest, how that changes relative to 93% -- 94% percent in 2019?

Well, the 140 is going to be on partially standalone and that should be about the same rateable assumption in this. We're pretty excited about this preliminary 2020 outlook when you think as the combined company we can reduce CapEx 15% and generate a 10% year-over-year oil production growth.

But maybe, Kyle, you may have some additional details on completion timing and the assumptions.

Yes. Asit, I would just use kind of similar 10,000 foot lateral as your base assumption there and we'll have more details, a higher resolution on 2020 outlook with the working interest, but I think 90% is probably a good place holder until hearing otherwise.

Okay. And Matt, you're pretty clear in budgeting at $50 oil, but just wondering how your strategy would change if oil prices were to hold that $60 a barrel?

And conversely if you had to cut back where would your reallocation likely change based on what you know so far?

I think a lot of the same as we promised going into 2019 that as oil prices rebound that would accrue to our balance sheet positively and cash on the balance sheet or likely pay down of debt. And then, so we don't see re-ramp in activity.

We think this model is sufficiently competitive not only in the industry landscape, but across multiple industries. So we think we would enjoy the benefits of the additional run up in revenues.

If oil prices recovered on the downside, we also think that we have some of the lowest breaking points in the industry. And so we think we're more resilient to the downside.

Add on top of that well over $1.2 billion of hedged cash flow on a standalone basis going into 2020. So there's some resiliency there.

You don't make capital allocation based off our hedges but it does give some insulation. So I don't see it.

It would have to be very low 40s or below before we aren't meeting our free cash flow objectives, so I think we -- that ballpark because we saw activity reduction. So I think we'd be one of the last to reduce.

We're committed to the dividend and committed to growing the dividend over time, so those are going to be the priority on the downside.

Yes. Hey guys.

I think you've obviously kind of outlined the fact that you expect your Delaware costs to be lower in 2020. Just want to get a sense on the budget for next year.

Are you assuming lower Midland costs as well or are you just kind of using sort of today's costs for 2020?

Yes. Leo, going forward in the Midland I would say we are using today's cost which are lower than they were when we budgeted 2019.

So we're not assuming further significant deflation in Midland, but we do expect our Midland costs to be lower, probably think in the -- say, 9.25-ish [ph] for DC&E for the Midland Basin and that's I want to mention that includes equip facilities and flow back in the past we've often reference our costs as the D&C, so I'm talking all in 9.25 per foot for the Midland.

Okay. That's helpful.

And I guess just with respect to rounding out 2019. So we still expect fourth quarter of 2019 to kind of be the low point for CapEx for this year?

Well, we've had between three or four frac spreads running throughout the year, that fourth spread is essentially a flexed spread, it allows us to manage our capital pace and our small dot bank. And so I would say, I wouldn't necessarily characterize 4Q as definitely a low point, because about half of third quarter we had flexed to three.

So we have third quarters three fractures half as four, we'll be at a higher proportion of four throughout the fourth quarter 2019. So that will reflect a little bit in the CapEx, just part of our what we baked into our guide.

Good morning guys. Going back to the water transaction, I'm curious how you guys are kind of evaluating, bringing cash in the door today versus maybe a capital carry on any future build outs.

Can you just talk about how you guys kind of evaluating those trade-offs and what use of proceeds might be for any cash proceeds upfront?

Sure. Yes.

You have to look at it holistically. That's exactly right.

And as to be a beneficial tradeoff for shareholders over a long term you have discount rate assumptions and there are going to be additional costs versus keeping it 100% in-house. So that has to be made up for in space and the valuation, then you have to take that capital and you have to deploy it to the shareholder friendly and valuation creation model.

So it's not without analysis. That's why it's been taking a long time and without the mechanical tradeoffs, but that should all be corrected for in the valuation.

And then, Jeff, you ask about use of proceeds. We will pick up a little bit of revolver debt with the Jagged Peak transaction.

So I'd expect the first use the proceeds would be debt pay down. Any proceeds beyond that really isn't earmarked at this time other than optionality.

It's never really a bad thing to have a bit of cash on the balance sheet.

Understood. Appreciate those details.

And my follow-up referencing slide 10 here, you guys reference kind of going to optimal project size [Indiscernible]. I think that's maybe a bit higher for memory serves than what you guys had maybe done in recent past.

So, I was just wondering, how fast can you guys transition to that? Is that something that maybe wait until merger closing and you do that from day one or do you kind of walk that up to that level over time?

Just wanted to know how you guys maybe thinking about that?

Yes, Jeff. I'll remind, we've actually executed projects at this scale before and we'll have a few of them even here in the back half of 2019.

I think really going from average of about three per pad to six per project in 2020. That's a shift up.

Certainly it allows us to achieve better surface level cost efficiencies, but it doesn't get into that mega projects go where you have significantly larger and more complex facility, which handle massive in some cases surges in production upon initiating flow back. So we don't see this as a major step change.

We've done it before. We have confidence we'll be able to do it effectively throughout 2019.

And it allows us to save some costs, but I think very much in the fairway of what we've done before.

Hi. Good morning everybody.

It seems like Jagged Peak had come to the conclusion, they needed to co-develop all the zones from the Third Bone Spring down through the Wolfcamp B on their properties. What are your thoughts on that and how you might develop those assets any differently than what they were doing with some of the new projects that they were working on?

I think when we look at our projects we have development slots that we've been doing since 2016 really, and we've been in two and three-well and two to three bench slices has been doing co-development. So that is the path where and we talk about these six and eight well as we envision co-development of multiple slots and you just keep you just keep growing that over time.

They do access the system. And you want to draw down in unison essentially.

So there might be some differences on the downstairs. We call it downstairs spacing.

You could pull out as a single well or a single slot here there. We do per project reviews based on our seismic and our interpretation of frac baffling and the geoscience associated with each project.

And there may be a slight difference in interpretation on a one or two well basis here and there, but I don't see anything dramatically different.

Okay. And I know it's early days in the transaction.

But I'm sure you've been following their projects. Just want to see -- I think they had some data on their coriander project.

Anything you can say as to how that has looked in terms of basing or anything else in terms of well performance there?

No, broadly there's still a separate company and they'll be reporting subsequent to us, so nothing to comment really on their operations.

Thank you. Good morning.

Good morning.

A couple of follow-up on some of the earlier questions, on the cost side slide and the productivity side, slide eight and nine. Beyond the local sand savings that you addressed earlier what opportunities and impact are there for you as a result of the acquisition or otherwise to further reduce your legacy well costs per foot?

And then on the productivity front on slide nine, what is the scope for opportunities if any to improve productivity on Parsley legacy acreage versus just blending in the higher productivity coming from coming from JAG?

I think on the cost side, Brian, we mentioned the frac that will include more than just a saying we're going to have to see that that part of the market's been soft but its increasingly soft as time has gone on through the end of 2019. So we're going to get some information on that.

As the basin slowed down broadly we continue to see some rig attrition in the Permian. Unemployment remains low.

We're going to keep watching that at some point other ancillary services could potentially see some additional softness and we'll be mindful of that we structurally RFQ several services and goods kind of throughout time. So there could be broader possibilities there.

And we're obviously always pursuing cycle time improvements and other things that can drive down the variable cost associated with our development. As far as the productivity side, we're going to go into this in a collaborative manner and we mentioned the improvement and rock quality particularly to the northwest there, but we're absolutely open minded about learning ways to potentially take some of what has been done is applicable and applying it to our legacy assets.

So I'd say, it's too early to forecast or estimate what if any in productivity improvements could be taken, but we'll certainly be seeking those where possible.

Great. Thanks.

Then my follow-up is with regards to slide 13, you make the point that you're facilitating steady organic growth into the first quarter of 2020. And I think you mentioned earlier that you have a modest inventory of DUCs or something that seemed relatively small.

Can you just talk about what you're doing on that front? Are there late in the quarter type completions that will help first quarter growth and how you see that evolving within your CapEx budget?

Yes, Brian. You just -- you kind of hit on regular at the end, the fourth quarter, the pops that we have are more backward, they're more toward the back half of the quarter, so you're going to see that in the first quarter of 2020.

As we've been at the fourth quarter frac cadence that will continue. So you're going to see some of that manifest.

That's why we expect to see that tickup in 1Q capture more flattish 3Q, Q4. The magnitude of that, as we mentioned earlier, we're still working through budgeting and finalizing all that.

So there will be more information on the magnitude later, but you'll see you'll see it tick up mostly for the reason that you stated.

Thanks. Good morning guys.

Just kind of wanted to follow-up. I guess some of your opening comments Matt around execution with the consolidation we've seen in the last couple of years certainly across the industry consolidation hasn't gone without any challenges.

I'm hoping you can maybe just describe a little more detail some of the specific things that you've learned from your past consolidation efforts that'll help derisk the execution of bringing in JAG into the fold in 2020?

Thanks. That is a great question and I think hitting on obviously one of our larger integrations in the past at a transaction Double Eagle that we did not achieve our stated forecast in the prior 12 months or in the subsequent 12 months.

When we looked back at that we were entering into eight new counties in a leasehold position without in situ operations from that operator. We added 188 people in the 12 months following the operation essentially building a company from scratch.

So there was -- and we were doing in an inflationary environment, 2017 and 2018 extreme rig ramps in the basin. That's why we thought it is important to show the reduction in activity, the fact that we have been at this activity level in situ to the company this time last year.

And then also we're in a deflationary environment. So those are nice tailwinds, but it doesn't take the onus away from elevating our game on the integration process which we are in full swing on right now.

When I look at our teams, when I look at the type of caliber of processes we have in place, analytics visualization of the business we are light years ahead of what we were at that time. One case in point we've gone live with what we call our integrated operations center, we happened to start that up in the Delaware in 2019, it's fortuitous that we'll be able to apply that oversight and insight into the Jagged Peak operations in fairly short order.

So that's a 24.7 [ph], 365 monitoring operation utilizing control systems, automated control systems and visualization. So, we have some tools at our disposal that we've been working on post that Double Eagle transaction.

It's a scar that has healed but. But we look at it and we remember it.

And as we mentioned you know we just really view this as a bolt on assets. We work these assets -- evaluated them essentially since we evaluated the Trees position in 2012.

So we have been intimate with it and it is right along, right next door to us, so things are in a comparable fashion. Things are stacked in our favor and now we have to go out and deliver on the execution.

Appreciate that color and the openness in discussing Double Eagle. Thanks guys.

I'll leave it at that. Appreciate it.

Hi. Good morning.

Thanks for taking my question. So look going back to the question on well cost in the Delaware base, I'm looking at slide eight.

I think you guys started out on proppant loading. It started lower and moved higher and I think JAG has gone in the opposite direction.

So now when you look at the two sets of data, do you see an opportunity to pull back on your proppant loading and save some well costs that way?

See, we're opened minded. We recognize the delta between the design that we've pumped on average and with Jagged Peak is pumped on average and you're recognizing the well performance they've seen.

We've got expanded data sets now that 2019 is progressed. So that is absolutely a variable.

When we talk about in that slide collaborative approach best practices we are constantly seeking to know where to turn those dials not only in terms of the profit quality or type, but also on the proppant loadings. So, I don't think it's -- bull's eye exactly where that lands.

But that is a variable we're looking at.

Got it. And my follow-up was on -- in the past you talked about compressed stages completions, and I think you had a few of them come online in during the quarter.

So first, any early read into the performance of those? And second I think in the past if I remember it, one of hesitation was sort of a higher risk profile.

And would -- if that's still a valid concern given sort of the state of the service sector and availability of higher quality providers?

In terms of compressed stages specifically if you're referring to the risk profile of that. I think the fact that we've been able to execute a number of those this year our sense of what the risk profile there is has diminished due to the performance that we've been able to accomplish.

As far as isolating, there's numerous variables to play in well performance and one of things that happens when you shift your capital allocation mix a bit, you develop multiple horizons, you change completion designs, deliberately all those are aimed at improvements in capital efficiency which we've seen broadly kind of evolving that data and isolating exactly what the compressed stage itself has contributed. It's like we still are going to need a little bit more data to get quantitative on that, but we are seeing the uplift.

So in terms of compressed stages, upsized stimulations, landing zones, spacing, all those things we're studying with our internal analytics group, but in the meantime we're pleased to have successfully executed these into seeing the broad improvements in capital efficiency, we'll continue to refine those, designs and decisions going forward.

Good morning everyone and thank you for taking my questions.

Good morning, Kashy.

So I was wondering if you could refresh us on where oil based declines might be headed in 2020 pro forma for Jagged Peak. And then how you think about maintenance DC&E spend for the combined entity?

Yes. We're going to be about 1% higher integrators than we were on a standalone basis on with Jagged Peak integrated on a declining profile.

So -- but even after that we will be lower on an annual decline than we were exiting 2018. So we kind of rinse and repeat the playbook from 2019.

We went from corporately. We went from call it 16 rigs down to 12.

And we had a higher decline -- slow the decline down in used free cash flow and worked on efficiency throughout the year. I see much the same happening in 2020 and beyond.

Makes sense.

So we have – about 40% pro forma is what we're looking at.

Thank you. It's helpful.

And I think earlier Matt you were talking about your intention to grow the dividend. I was wondering if you could just dive into perhaps a bit more detail.

Presumably are you trying to get to a market competitive yield? Do you have any thoughts on variable dividends?

Just the bigger dividend strategy would be helpful. Thank you.

Sure. Good question.

I think that's still a very robust and live discussion amongst the board and we'll be coming into a nice framework within that in these early days. We do see obviously the rate of change in the free cash flow generation is high and favorable.

And we need to keep up on the dividend in the early times, so 2020 increases. But over time it needs to be consistent and aligned to a strategy approximating some portion of your free cash as part of your capital allocation.

So I think early on it may be disproportionate, but over time it gets into a more linear and graduated increase.

Morning guys, and thank you for taking my questions. I just wanted to touch base on you know in 2019 if I remember correctly one of the things you change about your development schedule was moving to slightly wider spacing and focusing on those capital efficient.

Your costs have come down significantly that time and part the rate of return equation is the cost. So I'm just not understanding is there a drive or maybe a need to maybe revisit some of those tighter spacing.

Or are we looking at these latter spacings for now as you look at your inventory?

No. I think more of a good thing is a good thing and higher rate of returns have a nice compounding effect on the company model.

So I think we like where the spacing is at. You bring up a great point that there is room to down space and still more than sufficiently cover the cost of capital.

But again it goes back to the original analysis when we build out a long-term model against the runway and the compounding of high rates of return on capital allocation it just more offset the benefit of trying to extend the runway at the tail end of the decade or so on your inventory length. So as it sits right now, we feel we like the spacing assumptions that we're at.

We don't see any additional down spacing even though there is probably little bit of room in the rate of return profile.

Okay. Thanks.

And then as you just in terms of activity in the – you're managing your fracs schedule. Some guys are taking holidays.

We hear about the kind of the macro impact of the fourth quarter. As the basin continuous to get develop how much impact are you having from offset shut-ins or offset activity?

Just trying to understand the basin level dynamics right now from the operations?

Nitin, we've certainly seen it from in terms of frac interference, we've seen it from our own operations, we have good communication with offset operators and generally modeling for see those things and build in into our plan mechanically. And I think one thing that is going to be a positive about moving towards the bigger projects development is more geographic concentration, so you -- things like frac hits are going to be more kind of centralized in areas.

So a six-well project may not creating more frac downtime than a two or three well projects. So you have fewer larger projects.

So I see that as going forward broadly the more the basin moves in that direction. That's probably a good thing.

But at the end of the day we do take those things into account in our model and we have communications with offset operators and make sure from a safety standpoint and execution standpoint that those impacts are taking into account.