DENVER Aug 6, 2015 (Thomson StreetEvents) -- Edited Transcript of Cimarex Energy Co earnings conference call or presentation Wednesday, August 5, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Karen Acierno Cimarex Energy Co. - Director - IR * Tom Jorden Cimarex Energy Co. - CEO * John Lambuth Cimarex Energy Co. - VP of Exploration * Joe Albi Cimarex Energy Co. - COO * Mark Burford Cimarex Energy Co. - VP - Capital Markets and Planning ================================================================================ Conference Call Participants ================================================================================ * Drew Venker Morgan Stanley - Analyst * Brian Gamble Simmons & Company International - Analyst * Phillip Jungwirth BMO Capital Markets - Analyst * Irene Haas Wunderlich Securities - Analyst * Jason Smith BofA Merrill Lynch - Analyst * John Nelson Goldman Sachs - Analyst * Ipsit Mohanty GMP Securities - Analyst * Jeanine Wai Citigroup - Analyst * Jeb Bachmann Howard Weil Incorporated - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the Cimarex Energy second-quarter earnings conference call. (Operator Instructions) Please note, this call is being recorded. I would now like to turn conference over to Karen Acierno. Please go ahead. -------------------------------------------------------------------------------- Karen Acierno, Cimarex Energy Co. - Director - IR [2] -------------------------------------------------------------------------------- Thanks. Good morning, everyone. Welcome to this Cimarex second-quarter 2015 conference call. Last night, an updated presentation was posted to our website. We will be referring to this presentation during the call today. As a reminder, our discussions will contain forward-looking statements. A number of actions could cause actual results to differ materially from what we discuss. You should read our disclosures on forward-looking statements in our latest 10K and other filings and news releases for the risk factors associated with our business. Today's prepared remarks will begin with an overview from our CEO, Tom Jorden; followed by an update on our drilling activities and results from John Lambuth, VP of Exploration; and then Joe Albi, our COO, will update you on operations, including production and well costs. Paul Korus and Mark Burford are also here the room to help to answer any questions you may have. With that, I will turn it over to Tom. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [3] -------------------------------------------------------------------------------- Thank you, Karen, and thanks to everyone who's participating in today's conference. We appreciate your interest in Cimarex. I'd like to take a few minutes to share my thoughts on the current environment before turning it over to John and Joe for the details of our first-quarter results and our plans for the rest of 2015. During this call, you will hear about new wells that are outperforming our expectations, leading to another production beat. We now have 18 long laterals with over 30 days of production in the Delaware Basin Wolfcamp, several of which have been online for more than 6 months. We are gaining a much better understanding of the production characteristics and potential of these longer horizontal wells. The data we gathered has strengthened our enthusiasm for the long-term potential of this play for Cimarex. We have always been a Company that emphasizes science and innovation, and this emphasis is yielding results in spacing pilots, well design, completion design, and unraveling geologic complexity. The second quarter was punctuated by advances in each of these areas. Of particular interest, subtle changes in our horizontal landing zone have had an enormous impact on well optimization. We are now at a point where we're ready to move ahead in our first development project in the Wolfcamp D in Culberson County, with drilling scheduled to begin in January on a 6-section project. More about that in a moment. Also in the Delaware Basin, Second Bone Spring results continue to impress. These wells are among the best in our portfolio with multi-year running room. We will also update you in our continued success in the Woodford Shale and the Meramec Play. The Cana-Woodford Shale and Meramec continue to be a laboratory for continuing improvement and innovation. We have further delineated our acreage, optimized our simulations, and are testing new landing zones. We remain quite bullish on the long-term multi-pay potential of our Cana and Delaware Basin assets. To that end, we see the opportunity for a modest acceleration as we move into 2016. We have $730 million of additional capital following our issuance of equity in May. As a result, our 2015 capital expenditures have been increased by $100 million, which will fund the beginnings of several exciting projects, including a Wolfcamp A downspacing pilot in Culberson County and more Bone Spring and Meramec activity. Perhaps most exciting is what we have on tap for 2016. In addition to Cimarex beginning its first Wolfcamp D development in Culberson County, the first development in Reeves County will begin as well. We are also planning additional infill in the Woodford and Meramec, including the possibility of a long-lateral development later in the year. We will conduct downspacing pilots in the Meramec, as well as stacked testing of the Woodford and Meramec for future development. These development projects in the Delaware and Anadarko basins are complex and require considerable planning. The multi-zone spec potential of our assets provide tremendous opportunity and challenges. We have the opportunity to significantly increase capital efficiency by exploiting multiple zones within a single development project. We have challenges in that this requires careful planning and understanding of the geologic complexity. You cannot always back up and capture a zone that was missed in the initial development. Our organization is hard at work for preparing for effective execution of these projects. John will provide additional color on these efforts. We intend to live within our current capital structure and with the recently added equity funding to not incur additional debt during 2015 or 2016. We view debt as long-term commitment, and we're hesitant to make long-term commitments in this volatile environment. We have seen service costs further decrease. Looking at current well costs in two of our most-often drilled well designs, a Cana-Woodford infill well and Wolfcamp D long lateral, we have seen total well costs decline in 30% and 20%, respectively, from their peak in 2014. We have also made significant progress in lowering lease operating expenses, driven primarily by reducing saltwater disposal costs. Joe give additional detail on this during the call. Since our last call, the recovery we saw in oil prices was short lived, and natural gas prices remain depressed. Despite this negative backdrop, Cimarex is moving forward, investing in our exceptional assets. The conversation since last fall has been dominated by discussions regarding the commodity price cycle and expectations of a recovery. I said at the time that Cimarex was adapting this new environment and figuring out ways to survive and thrive in it. Our challenge is to adapt our business to be sustainable in this new normal. There is good news to report. With a reduced cost environment and advancements in well performance, we have a deep portfolio of opportunities that offer very attractive returns. Regarding our plans for modest acceleration, we have been asked, why now. Isn't it more prudent to wait for the macro environment to settle out and recover? To that I would say, we have no special insight on the future direction or time of commodity prices. We view the world through a lens of rate of return, and through this lens, we see the opportunity to modestly accelerate projects that offer outstanding returns, provide a cushion against further commodity downside, and strengthen the foundation of the Company as we look ahead into 2016, 2017, and beyond. We have the wherewithal to fund these projects and are ready to go. Although we would enthusiastically welcome a recovery in commodity prices, we have always managed Cimarex with commodity cycles in mind. We'll survive and thrive through this one. Finally, as always, our focus is on creating shareholder value. We are uncompromising in this focus. We have the organization and the assets to continue to deliver shareholder value through the cycles. As I tell our employees, we are building an ark, not a party boat. With that, I will turn the call over to John Lambuth who will provide additional detail. -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [4] -------------------------------------------------------------------------------- Thanks, Tom. I will start with a quick recap of our drilling activity in the quarter, before getting into some of the specifics of our latest results and more color on our planned activity increases. Cimarex invested $190 million during the second quarter drilling and completing wells. 66% was invested in Permian region, and the rest went toward activities Continent region. Company wide, we brought 45 gross, 23 net, wells on production during the quarter. Our Permian operations are in the Delaware Basin, where we brought on 16 of those 23 net wells during the second quarter, meaning we have worked our way through the backlog of completions we had built up at year end. That backlog was caused by some severe weather in the second half of 2014, in addition to a lot more activity overall. We had 18 rigs running in the Permian region in 2014. We then dipped to a low of two in the second quarter, and are now operating three rigs with plans to add more. I will share some of those details a little later. But first, we continue to have exceptional results drilling Second Bone Spring wells in the Culberson/White City area. We have drilled several wells using a larger, 15-stage completion with very favorable results, which you can see in the presentation on slide 17. Cimarex recently completed a 7,000-foot lateral in the Second Bone Spring sand section called the Klein 33 Federal number 5H. This well had an average 30-day peak IP of 2,753 barrels of oil equivalent per day, which included 1,870 barrels of oil per day. This outstanding well result gives us greater confidence that a combination of our outsize completions along with extended laterals in the Second Bone Spring can generate superior rate of returns. Our long-lateral program in the Wolfcamp D in Culberson continues to provide solid results. We have 30-day peak IPs averaging 2,255 barrels of oil equivalent per day from 11 long-lateral Wolfcamp D wells. We continue to work on optimizing our frac design to both maximize IP rates while paying close attention to cost. As Tom mentioned in his remarks, optimal landing of the horizontal leg can be the chief difference between a good well and a great one, which is clearly illustrated by one of our most recent long-lateral well results in the Wolfcamp A interval in Reeves County. The Big Timber 57-25 Unit number 1-H had an average 30-day peak production rate of 3,309 barrels of oil equivalent per day, of which 50% was oil. This well was drilled and completed in the upper Wolfcamp A zone, the first Cimarex long lateral in Reeves County to be landed in this zone. We now have plans to drill a number of additional long laterals in this upper A in order to determine repeatability of this very economic zone. In Culberson County, we have results from our second downspacing pilot in the Wolfcamp D. As you can see on slide 15, these 5,000-foot laterals have strong 30-day initial peak production rates that average 1,340 barrels of oil equivalent per day. This pilot was drilled on 107-acre spacing, the equivalent of six wells per section. It is fair to say we have learned a lot from these two spacing pilots, and when coupled with the data from the stacked CD test completed in first half of 2014, we are now ready to move forward on our first development in the Wolfcamp D. As illustrated on slide 16, this will be a six-section development that would be drilled with 7,500-foot laterals. Essentially, four 1.5-mile sections of development each. Drilling will begin in January on the southern sections. First production isn't expected until early third quarter, as completions will coincide with the startup of the recently announced MarkWest processing plant in Culberson. We plan to drill fourteen 7,500-foot development wells in the Assault and Sea Hero 1.5-mile sections, bringing the total well count to 16 when you include the two existing current wells. These infill wells will be staggered in the thick D interval. The two northern sections, which we call Sunday Silence and Silver Charm, will began drilling in the third quarter 2016, with completions set for early 2017. As you can see in the wine-rack illustration on slide 16, the Silver Charm 1.5-mile section will include an additional row of wells in the Wolfcamp C, whereas the Sunday Silence 1.5-mile section will test an increased density of 10 wells per section in the D. As far as Wolfcamp capital plans for the rest of 2015 is concerned, we plan to start a six-well Wolfcamp A spacing pilot in Culberson County later this year, with the rest of the capital allocated toward meeting our lease hold obligation in Reeves County. Now, on to the Mid-Continent. You will recall that we begin drilling on the Cana-Woodford row four infill development program late last year. Completions on this 57-gross wells covering 7 sections has finally began. In preparation of these completions, we recently completed eight wells in the Haley section with a variety of frac designs. Total sand pumped ranged from 9 million pounds to 12 million pounds, or put another way, 1,800 pounds per foot to 2,400 pounds per foot, and we varied the stage count from 24 to 30 per well. As seen on slide 21 of our presentation, the Haley wells achieve 30-day average peak rate of 10.3 million cubic feet equivalent per day, with a 90-day average of 8.8 million cubic feet equivalent per day, very good results. Based on learnings from these wells, we plan to make use of primarily a 30-stage frac design on our row four wells and will pump between 13 million to 16 million pounds of sand, or again, the equivalent of 2,600 pounds per foot to 3,200 pounds per foot. In our emerging Meramec play, we now have enough production data on ten 5,000-foot laterals. These wells have an average 30-day peak IP rate of 9.3 million cubic feet equivalent per day, with oil yields that vary from 15 barrels per million to 330 barrels per million. Our first 10,000-foot lateral in the Meramec is in early flowback, while our second one is drilled and awaiting completion. We plan to provide you with an update on these wells during next quarter's call. In the meantime, we will be participating in our first downspacing pilot in the Meramec as well as drilling our first two wells' stacked test in the Meramec, which we've actually commenced operations on now. Additionally, we now have plans to drill a stacked/staggered pilot within the combined Woodford and Meramec intervals. All of these are critical data points as we think about development of this potentially vast resource. In closing, I would like to summarize our capital plans for 2015 and 2016 as we see it today. There are two slides in the presentation that illustrate this. First, on slide 7, you'll see our capital allocation for 2015. As Tom mentioned, we've added $100 million to our capital investment plan this year. This is really the kickoff to the increase in activity we have planned for 2016. Slide 8 shows how we see allocating capital in 2016. While we haven't given you a dollar amount, we've based this allocation on what we project our cash flow will be based on the current strip, and then adding in the remaining equity proceeds of $630 million. The Wolfcamp and Woodford make up 90% of our 2016 drilling and completion dollars. While that may come as no surprise, the complexion of the Wolfcamp capital has changed, with about half of the investment in 2016 being earmarked for development drilling. With that, I'll turn the call over to Joe. -------------------------------------------------------------------------------- Joe Albi, Cimarex Energy Co. - COO [5] -------------------------------------------------------------------------------- Thank you, John, and thank you all for joining our call today. I will touch on the usual items, our second-quarter production, our Q3 and full-year production outlook, and then I will follow up with a few comments on LOE and service costs. Q2 was another great quarter for us. With little impact from weather or pipeline downtime, we proudly surpassed the 1-Bcf-a-day mark for the first time as a Company, with our total Company second-quarter net equivalent volumes coming in at a record 1.026 Bcf a day. That's up 22% from the 839 million a day we produced a year ago, and it handily beat our second-quarter guidance of 965 million to 995 million a day. Our guidance beat comes as a result of two areas. One, the strong new well performance that we should see in our completions, in fact, they way outperformed our projections, in particular in the Permian; and then strong execution from our Production Group operating our base properties with their focus on minimizing downtime and optimizing production from the wells. As a result, our Q2 2015 Permian equivalent production hit an all-time high of 595 million a day, up 202 million a day, or 51%, from Q2 2014, while our Mid-Con production came in about as we expected at 419 million a day, virtually flat to Q2 2014, which we reported 425 million a day. And we anticipated the production in the Continent to hold flat as we waited for our Cana-Woodford well four completions to begin here in late Q3. As we've mentioned in our last few calls, with the geographic focus of our drilling program and the timing of our new well completions as we move throughout the year, we forecasted our early 2015 production growth to come from the Permian, and we saw just that. Our second-quarter Permian equivalent volume came in at a record 595 million a day. That's up 107 million a day, or 22% from the first quarter, all the while setting new region record marks for oil, gas, and NGLs; with our Q2 Permian oil production of 48,448 barrels a day, up 12% over Q1; a Permian gas production of 189 million a day, up 26% from Q1; and our Permian NGL production of 19,169 barrels a day, up 46% over our first-quarter volumes. With the significant production growth, Permian now makes up 58% of our total Company equivalent production, and more impressively, 86% of our total Company oil production. As we also discussed in our last few calls, with fewer net Mid-Continent completions planned for the first half of the year, we've projected our Mid-Continent volumes to drop somewhat through mid Q3. Our Q2 Mid-Continent production came in accordingly at 419 million a day. That is down slightly from the 444 million a day we posted in Q1. We're still on track with our plan, projecting our Mid-Continent production to pick up here in late Q3 as we bring on our Cana infill project. We completed just nine net Mid-Continent wells in the first half of 2015, as compared to our projected 30 net wells to be completed during the second half of the year. As we look forward, with our strong Q1 and Q2 results, our current model projects our 2015 total Company net equivalent production to be in a range of 960 million to 980 million a day. That's reflecting 11% to 13% growth over 2014, and it's up from our previous guidance for the year of 920 to 950 million a day. As was the case in our beginning-year forecast, our projections reflect the geographic focus of our activity, with the Permian driving production in the first half of the year and our Cana infill project providing the catalyst for production during the last half of the year. Our Q3 guidance of 920 to 940 million a day reflects our anticipated slowdown in Permian completions, along with approximately 20 million a day of planned Permian pipeline and facility maintenance here in early Q3, and just modest late Q3 contribution from our Cana infill completion operations, which will begin late in the quarter. With our current drilling schedule and the anticipated Q4 production contribution from our Cana row four project, we project our Q4 2015 production rate to be up from Q3, with us exiting the year slightly above our Q2 2014 average of 949.5 million a day. Jumping over to OpEx, Tom mentioned a little about this. We had a great quarter from an operating expense standpoint here in Q2. That was really driven by both strong production results and our Production Group's diligent focus on LOE. Our Q2 lifting costs came in at a very strong at $0.76 per Mcfe, and that was well below our guidance of $1.00 to $1.10. It was down $0.20 from our Q1 2015 average of $0.96 per Mcfe and down $0.32 per Mcfe from our 2014 average of $1.08. We're extremely proud of the effort our Production Group has put forth to reduce operating costs. Over the last six months, they realized sizable reductions in items such as rentals, [STDE], compression, and well servicing, and they are resolved to continue to progress. As we look forward into the last half of the year, counting for a number of items, including our Q1 and Q2 results, our forecasted production in Q3 and Q4, and the variable nature of workover expenses, we're guiding our remaining-year lifting cost to be in the range of $0.90 to $1.05 per Mcfe, down from the $1.00 to $1.10 range we quoted in our last call. On the service cost side, with the slowdown in industry activity, we continue to see a somewhat soft market in drilling and completion cost. Although we see our overall total well costs that we'll quote in this call somewhat flat since our last call, we do feel that on both the drilling and completion side, service companies understand the importance of market share, which is helping to maintain a soft competitive market, and perhaps more cost relief as we continue into the latter half of the year. On the drilling side, since our last call, we have seen the majority of our cost component stay flat. All the while, supplier cost for tubulars have come down slightly. Day rates for idle, I'll call them top-notch rigs, 1,500-horsepower rigs are more negotiable today than they have been in a long while, down significantly from the rates of $26,000 to $27,500 per day quoted last year, to levels today of $17,500 to $18,000 a day. On the completion side, as we mentioned last call, beginning about February, we started seeing 10% to 40% decreases in all of the major frac cost components, whether it be sand, transportation, chemicals, or service cost. The end result was that at the total Company level, our average Q1 per-well frac costs were down 15% to 20% from Q4, with us pumping an average 12% more fluid and 20% more sand. In Q2, we kept our average Company per-well frac costs in check, while pumping bigger jobs at 30% more fluid and 16% more sand than we did in Q1. The bottom line is today we are pumping much bigger jobs than we did in Q4, perhaps 45% more fluid, up to 40% more sand, and we're pumping them at a reduced cost. The end result is we've kept our total well costs flat while pumping the bigger jobs, the current total well costs down 13% to 20% from where they were at the end of 2014. Our current Cana core one-mile lateral well, our Woodford well, is still in the range of $6.7 million to $7.1 million with our larger frac. That's down approximately 15% from the $7.9 million to $8.4 million range we quoted last year. In the Meramec, as we continue to get more wells under our belt, we expect to see our current single-mile lateral wells fall closer to the lower end of a range of $7 million to $7.4 million, and that range is down about 13% from where we were in Q4 of last year. In the Permian, our primary focus, as we've mentioned this year, is are long-lateral development in the Culberson Wolfcamp program. Our gained drilling efficiencies are hitting the chart, and market cost reductions have kept our two-mile lateral costs in check, and we're running anywhere from $11 million to $11.8 million per well with our AFEs. That is down 17% to 20% from where we were in Q4. In closing, we had another great quarter. Our strong first-half results and operating efficiencies resulted in a nice production beat. We are proud to be over that Bcf-a-day mark. Our drilling program is generating positive results despite the lower commodity prices, and we've seen some excellent cuts in our LOE. Our organization is focused on keeping our department cost in check all the while we are optimizing our program results. With that, we'll turn the call over to question and answer. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) Our first question comes from Drew Venker at Morgan Stanley. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [2] -------------------------------------------------------------------------------- Good morning, everyone. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [3] -------------------------------------------------------------------------------- Good morning, Drew. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [4] -------------------------------------------------------------------------------- Tom, I was hoping you could just provide a little more color on when we would get to that 16 rig program. Is that by January 1? And then if you can provide maybe just some bookends or general thoughts on volumes for 2016, whether we should be accelerating growth somewhat similar to 2015, could you help us there? -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [5] -------------------------------------------------------------------------------- Well, partially, yes. The rig ramp we have, I'll let John comment on. We had a plan to ramp up so that we would be essentially at 16 rigs as we enter the year. We're obviously working our developing projects, and it's a flux issue. John, why don't you comment on that? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [6] -------------------------------------------------------------------------------- Yes. As Tom said, we're not talking, of course, single, individual wells now. We're talking lots of wells that we have to plan for. I think our latest schedule will have us at 16 rigs right pretty much at the beginning of February next year, but that can slide our move forward. Just depends on how well we put those plans together. But that's what it would show right now, as of today. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [7] -------------------------------------------------------------------------------- Mark Burford is here. I'm going to let him comment on production next year. -------------------------------------------------------------------------------- Mark Burford, Cimarex Energy Co. - VP - Capital Markets and Planning [8] -------------------------------------------------------------------------------- Drew, in terms of production, with the fact that -- not to mention that at Permian, half our capital is going now, transitioning from single well, individual wells, but half our capital now will be going towards infill development. You can look in Culberson County itself. (Inaudible) at oil camp D in Culberson County, three-quarters of our capital beat contributed to those infill development projects. So the major shift in complexion of our capital compared to 2015 to 2016, as we point out on slide 16 of our presentation, that six-section development, the first completions don't occur on that until June of 2016, and the northern sections don't complete until first-quarter 2017. We definitely have a mixture change in our complexion of our programs, so the previous capital efficiencies probably don't hold true going into 2016 as we transition to infill development, and as (inaudible) [production] is delayed in those areas, maybe even in Reeves County, at the infill development at Reeves County. So overall Permian programs, half of it now is infill development. So it does have an impact, makes our (inaudible) more lumpy and more back-end loaded. -------------------------------------------------------------------------------- Joe Albi, Cimarex Energy Co. - COO [9] -------------------------------------------------------------------------------- This is Joe. Just a couple of comments there, too. When we have these development projects, depending on how many wells per section and how many sections, we won't begin completion operations typically until all the wells are drilled and completed. And Cana row four is a great example of that. We drilled those wells all throughout the first half of this year. We're not going to see the production in the tail half of next year. To the extent our development program becomes the majority of our capital expenditures, we're going to start to see this roller coaster-type production profile that may not coincide with the January 1 to January 1 time frame. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [10] -------------------------------------------------------------------------------- So maybe just to -- just so I make sure I have it right, due to the timing and completions in these big pads, does it make sense to think about 2016 as potentially a little bit slower growth and then 2017 probably much stronger growth? -------------------------------------------------------------------------------- Mark Burford, Cimarex Energy Co. - VP - Capital Markets and Planning [11] -------------------------------------------------------------------------------- Drew, that's logical. Yes. That's the way -- yes. If today's (inaudible) plans work, yes, that would be logical. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [12] -------------------------------------------------------------------------------- Drew, we're on a strong growth profile. It's going to be lumpy, but I think that's probably fair. Our acceleration into 2016 is going to be quite a bit back-end loaded because of the nature of these (inaudible) projects. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [13] -------------------------------------------------------------------------------- Okay. That is all very helpful. Maybe we could just dig in on the Culberson County Wolfcamp C and D infill program a little bit. I was somewhat surprised to see you're already going into development mode with two zones in the Wolfcamp D. Can you provide some color on how you settled on that configuration? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [14] -------------------------------------------------------------------------------- This is John. A lot of debate, I would say, internally. What's nice is, as I mentioned, we have those two spacing pilots. In addition, we have the stacked pilot. We've incorporated those results. In addition, we have a lot of individual parent wells that have been landed in different zones within the B itself as well as the C. When we take all that information, we come away with a model that would clearly suggest to us that we have plenty of room within the D itself to stagger and stack, which is what we intended to do to start with, and feel very confident with that initial design, again, based in our spacing pilot results and based on them leveraging that to 7,500-foot laterals, that we're going to achieve very nice rate of returns. The way the schedule sets up then is we will get those online. We'll get early production from it. If it is meeting our expectation, then that just gets us even greater confidence to move forward to even more tighter as you see in those follow-up sections. So I would say that the two sections we call Sunday Silence, Silver Charm are somewhat dependent on the results of the Assault and Sea Hero, and that is why we built that schedule that way. But again, we really are looking at the results of those pilots and looking at our landing zone results from a member of other parent wells and come away very convinced that this initial design is going to work very well for us in this interval. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [15] -------------------------------------------------------------------------------- I want to remind you that the Wolfcamp is a really thick zone, and every play is different and has its own attributes. But in some plays you worry about resource and place and the overall storage capacity. That is not the concern here in the Wolfcamp. The Wolfcamp is really a mechanical issue, and what's the best way to poke straws in there, frac the wells, and space them to recover it. So based on our experience, we're highly confident that this rock can support this development plan. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [16] -------------------------------------------------------------------------------- Just wanted to clarify again, I know in the past you had done a C and D stacked test. Have you tested two lateral stacked or staggered in the D as of yet, or is this the preliminary test of that? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [17] -------------------------------------------------------------------------------- Let me put it this way. I would love as we go forward that we don't even call it the CD; we just call it lower Wolfcamp. Really, C&D is more of a geologic marker. What you really should think about is it being a very thick, over 500- to 800-foot thick interval, and that going forward, we're going to start with initial stack of two wells that we feel good about, and then based on results, then potentially add a third level to it with the next set of development. That's really what we're talking about here. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [18] -------------------------------------------------------------------------------- But Drew, we have tested stack in the Wolfcamp A in Reeves County, and so the analogy is direct here. And John is absolutely right. In fact, our technical team is discouraging us from even using the nomenclature CD. It is really one large section. -------------------------------------------------------------------------------- Drew Venker, Morgan Stanley - Analyst [19] -------------------------------------------------------------------------------- Thanks for the color, guys. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Our next question is from Brian Gamble with Simmons & Company. -------------------------------------------------------------------------------- Brian Gamble, Simmons & Company International - Analyst [21] -------------------------------------------------------------------------------- Hey, guys. Maybe we can jump to the other exceptional results for the quarter in either the Bone Spring or the Wolfcamp A, which ever one you want to tackle first. Particularly on the Bone Spring well, can you [draw] us up there? Anything other than the stages going up you did differently in that well? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [22] -------------------------------------------------------------------------------- This is John. No. That one made use of what would be equivalent of a 15-stage per 5,000-foot lateral, the difference being is it was 7,000 foot. It's just an outstanding well, and it's a replication of what we have been able to do in other areas with that particular design. I think what is exciting to me is we don't think we're optimized. We still think that there's perhaps still room to go with that frac design, and so we do have further wells planned in the area to land in test the limit of that design. So the way I look at it is, again, a nice confirmation that we can take it and go a little bit long with the lateral and still get a very good result. -------------------------------------------------------------------------------- Brian Gamble, Simmons & Company International - Analyst [23] -------------------------------------------------------------------------------- Essentially, confidence in the repeatability is pretty high. Is that is what you are saying essentially? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [24] -------------------------------------------------------------------------------- In this immediate area, yes. We feel very good about our acreage position and the well results there. That's why that was the first incremental rig we added was immediately to this type of drilling program. -------------------------------------------------------------------------------- Brian Gamble, Simmons & Company International - Analyst [25] -------------------------------------------------------------------------------- Great. Same thing on the Wolfcamp A. You mentioned trying some more landing in the upper part of the A. Was this its first landing in the upper, or was this just the first long-lateral landing in the upper part of the A? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [26] -------------------------------------------------------------------------------- This would be our first long lateral, but I will remind you that we did have our spacing pilot, which was the Anaconda, which was a stacked/staggered pilot where we had upper A and lower A. And right away from those results, we could tell that that upper A zone was giving a superior performance to the lower A. Even, as you recall, we've talked about issues with the landing in lower A, but even in the wells where we did not feel we had an issue, the upper A was clearly performing. I will tell you that when we planned this well, we had high expectations for it, to the point that we even worked very hard as a collective group to make sure our production facilities, everything was in line for this well because we had high expectations, and it's met those expectations. We have been very pleased with that well result. We have a nice, large continuous acreage position there where this well is. And yes, we have plans now to go and see if we can't duplicate this result with a few more long laterals. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [27] -------------------------------------------------------------------------------- But like the CD, it is not either/or. That A is a very thick section, and I anticipate multiple landing zones in the development scenario. -------------------------------------------------------------------------------- Brian Gamble, Simmons & Company International - Analyst [28] -------------------------------------------------------------------------------- And then one last one from you guys. The extrapolation of your comment, cash flow (inaudible) $630 million, and/or using the 16 rig count, that puts your capital, by my rough math, at least 30% next year. Is that a reasonable starting point year over year? -------------------------------------------------------------------------------- Mark Burford, Cimarex Energy Co. - VP - Capital Markets and Planning [29] -------------------------------------------------------------------------------- Brian, this is Mark. I'm sorry, 30% what? Increase in--? -------------------------------------------------------------------------------- Brian Gamble, Simmons & Company International - Analyst [30] -------------------------------------------------------------------------------- Total capital. -------------------------------------------------------------------------------- Mark Burford, Cimarex Energy Co. - VP - Capital Markets and Planning [31] -------------------------------------------------------------------------------- Capital year to year. I should probably (inaudible), the constructed eight-rig program actually is based on a $50 oil price deck and a $3 gas price deck, and even at that price level, those price decks, we'd expect to have some remaining cash, in the neighborhood of $100 million extra at the end of the year. The $630 million, right now the eight-and-eight-rig program doesn't contemplate quite using all the equity proceeds. We expect to have some remaining cash at the end of the year and from that program from (inaudible). So the [passthrough] capital, still, I'd like to maintain some flexibility in that, but the eight-and-eight rig program of $50 and $3 price deck, we wouldn't expect to quite use all the remaining proceeds. -------------------------------------------------------------------------------- Brian Gamble, Simmons & Company International - Analyst [32] -------------------------------------------------------------------------------- That's helpful, Mark. Thank you. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Our next question is from Phillip Jungwirth at BMO. -------------------------------------------------------------------------------- Phillip Jungwirth, BMO Capital Markets - Analyst [34] -------------------------------------------------------------------------------- Good morning. Does the Wolfcamp CD development section you laid out in the presentation, I know it's focused in the northeast corner of your acreage block there in Culberson County. I know the past you've talked about how the D had higher GOR as you moved west. So as development eventually does move west and south, do you think this configuration of laterals and spacing is going to be applicable across the position, or is it going to vary? And can you provide some preliminary thoughts on that? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [35] -------------------------------------------------------------------------------- This is John. It will vary. I should point it out, we do recognize yield variations, and that will have to factor into our both our rate-of-return and PV calculations as far as development plans. The overall thickness itself is pretty consistent, at least on the entire eastern side of our block, and then we do thin a little bit as we go to the west, but not to the point that I think we would lose a row necessarily. Again, I think it would be more a matter of economics because it is fair to say, we do tend to lose our yield a little bit as we go to the west, but that would just be a decision we would have to make at that time. That would be how I would answer it. -------------------------------------------------------------------------------- Phillip Jungwirth, BMO Capital Markets - Analyst [36] -------------------------------------------------------------------------------- Okay. I think you've talked also in the past about the C bench in Culberson being a bit lower return than the D or the A. Is there a reason the C is included in the initial infill development as opposed to a DA development? And then can you still come back at a later time and target those A bench reserves? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [37] -------------------------------------------------------------------------------- I'll take a stab at that, and I know Tom is itching to answer, too. Let me just make clear that from our well results, the Wolfcamp A in Culberson is mutually exclusive from the lower Wolfcamp CD. We can come back at any time and layer in wells in these developed sections in A and not worry about any type of impingement on those wells. That we clearly have establish from our drilling program. In regards to the CD, it is fair to say that our well results do indicate that Cs tend to have a little bit lower rate of return, but we are fairly convinced that if we were to develop, we would need to do it all at the same time. That's why we have the plans you see there with those upper northern sections that we would like to move forward with that and demonstrate to ourselves what kind of returns we would generate in that full development-type scenario because I don't think we are convinced that we could come back and necessarily go in with the Cs at a later date. That is why we're stepping into this the way we are with this plan. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [38] -------------------------------------------------------------------------------- The challenge here, as John mentioned, is we really pushed our organization to say we want to take a long-term view of how we optimally develop this asset. And so to the extent that we can't go back later and get a layer, even though it may have a lower rate of return, we don't necessarily want an orphan it and abandon it for all time. We're making those decisions on a case-by-case basis. But we're really try and develop this asset with multi-year look so that we don't find ourselves in a position five or seven years from now looking back and saying, boy, I wish we would have done this differently. That requires a lot of forethought, a lot of planning, but we want to get that while we can. -------------------------------------------------------------------------------- Phillip Jungwirth, BMO Capital Markets - Analyst [39] -------------------------------------------------------------------------------- Great. Can you talk about the reason why the Culberson CD development is going to be based on 7,500-foot laterals as opposed to the 2-mile laterals? Do you think medium-length laterals are optimal development, or does this just have to do with the acreage configuration? -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [40] -------------------------------------------------------------------------------- This is strictly based on the way that our JDA was set up such that these particular sections were just three sections, so for long laterals, we have to divide it up in a section and a half. Nothing more than that. Our plans for the rest of the acreage is 10,000 foot. It's just matter of geography, just the way the section is laid out. -------------------------------------------------------------------------------- Phillip Jungwirth, BMO Capital Markets - Analyst [41] -------------------------------------------------------------------------------- Great. Thanks, guys. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Our next question is from Irene Haas at Wunderlich. -------------------------------------------------------------------------------- Irene Haas, Wunderlich Securities - Analyst [43] -------------------------------------------------------------------------------- My question has to do with the Reeves County, upper Wolfcamp A. Is this a typical shale, or are you looking for better porosity streaks within upper Wolfcamp A? And if yes, how continuous would the interval be? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [44] -------------------------------------------------------------------------------- This is John. This is a shale. The Wolfcamp, of course, is a shale with interbedic carbonates, the way we see it. There is some definite variability to it, but for the most part, I would say, in the immediate area from our well results, we tend to see some consistency in well result from section to section. So we do expect some repeatability. When we make a good well in a particular landing zone, if we were to move a section over, our expectation would be we that we would still be able to achieve that type of result. As far as the upper A itself, I'm just going to say we do a lot of work with our rock data, our log data, and coupling that with frac design and well results that help us internally get more comfortable with that upper A being an attractive target. And I will just leave it at that. -------------------------------------------------------------------------------- Irene Haas, Wunderlich Securities - Analyst [45] -------------------------------------------------------------------------------- What do you see in specific that makes these wells so much better? -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [46] -------------------------------------------------------------------------------- To be honest, I'm not really going to answer that question. That's something we do internally. We work very hard with our technology to understand this, and so I'll just say be happy with our result and leave it at that. -------------------------------------------------------------------------------- Irene Haas, Wunderlich Securities - Analyst [47] -------------------------------------------------------------------------------- Okay. I understand. Thank you. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- The next question is from Jason Smith at Bank of America. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [49] -------------------------------------------------------------------------------- Good morning, everyone. On the Avalon, can you just talk about the test you performed there and the results you have seen so far? I am trying to see if there's a significant difference, particularly between the six- and eight-well sections that you guys have tested. -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [50] -------------------------------------------------------------------------------- This is John. We did update our slide -- for those who have the presentation, slide 19 -- although we did not add comments in our opening remarks. But we are very pleased with the results from our pilots that we've drilled in the Avalon. As we have mentioned, we tested a variety of spacing throughout the Avalon, and I just would tell you that on a go-forward basis, based on these results, we are very comfortable with eight wells per section within an individual bench, and in fact, see multiple benches as being opportunistic on quite a bit of our acreage. We're very happy and pleased with that play. As we have mentioned several times, our acreage position is HPP. There is no obligation drilling we have to do there, and it's a really nice thing to have in our back pocket that if we need to, we can control rigs added at any time. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [51] -------------------------------------------------------------------------------- I might add there that in testing and delineating optimum spacing, there is an approach that says you test it til you break it. -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [52] -------------------------------------------------------------------------------- We haven't broken it. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [53] -------------------------------------------------------------------------------- We have not broken it yet. So there is a debate that eight wells is not tight enough. -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [54] -------------------------------------------------------------------------------- That is a fair comment, Tom, that eight is minimum. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [55] -------------------------------------------------------------------------------- Eight or more. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [56] -------------------------------------------------------------------------------- Got it. Maybe, John, to follow up on that. In your comment on HPP, I understand that, but your mix of CapEx for 2016 shows nothing, at least at this point, for the Avalon. Are you guys doing anything the balance of this year? And as you said, what changes your opinion, and what makes you go back to work and ramp in that area relative to somewhere else? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [57] -------------------------------------------------------------------------------- I will say we do have plans for another Avalon test where we're once again going to the land with a pad well and test a newer frac design that we think could even leverage better rate of returns. Outside of that, again, I think it is nice to have the flexibility having that acreage that there because quite frankly, not everything goes as planned. It's nice to be able to throw rigs over to it when we need to, or more importantly, if we need to, to put in our capital. It's sitting there waiting for us, and that's how we look at it right now. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [58] -------------------------------------------------------------------------------- I might say, the way it looks from my desk is, as we manage our capital expenditures and come up with our overall capital plans, these development projects take a lot of capital, and so not every great project is getting funded. Please do not infer from the fact that Avalon doesn't have a bigger slice that it means we like it any less. It's just, you prioritize, and these development projects are our top priority right now. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [59] -------------------------------------------------------------------------------- Thanks, Tom. I appreciate that. On Ward County -- I feel like I get to ask this question every quarter. Given the improvements you've seen in Reeves County, what, if anything, are you thinking about implementing there? I think you guys have mentioned before you have some HPP requirement in 2016. Is there any capital going there, or is that something that maybe you consider letting expire? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [60] -------------------------------------------------------------------------------- As of today, we've really not come up with a way to achieve sufficient rate of returns in Ward County. It is just as simple as that. We always constantly monitor. There are still wells being drilled there by competitors. We keep a close eye on what they are doing relative to frac design, landing, length of lateral. But to be honest, we just haven't been able to come up with the right recipe today that makes that an attractive rate of return for us. So unless we see a major breakthrough somewhere, there is a good chance that we will not be able to hold that acreage next year. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [61] -------------------------------------------------------------------------------- I want to add to that. And Ward County is our poster child for why we want to do forethought in our development. Our Ward County, a lot of our acreage was developed in that Third Bone Spring. We had to drill horizontal wells prior to the ultimate potential of that upper Wolfcamp being understood. Had we not done that, I think we would be developing Ward County, and we would be developing at Third Bone Spring and at upper Wolfcamp. The problem with most of our Ward County position is we are drilling into a depleted fracture network and that Third Bone Spring. Not to say we are disparaging of Ward County; we're not. If we didn't have that Third Bone Spring there, we'd be having a whole different conversation. -------------------------------------------------------------------------------- Jason Smith, BofA Merrill Lynch - Analyst [62] -------------------------------------------------------------------------------- Appreciate the color. Thanks, guys. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- Our next question is from John Nelson at Goldman Sachs. -------------------------------------------------------------------------------- John Nelson, Goldman Sachs - Analyst [64] -------------------------------------------------------------------------------- Good morning, and congratulations on a great quarter. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [65] -------------------------------------------------------------------------------- Thanks, John. -------------------------------------------------------------------------------- John Nelson, Goldman Sachs - Analyst [66] -------------------------------------------------------------------------------- Also, congratulations to Mark in his new role, and best of luck to Paul. My first question is, you talked about transitioning into 2016 into a development program. I'm just curious if there's any guidance and how we should think about infrastructure spend either over the back half of 2015 or as we move into 2016. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [67] -------------------------------------------------------------------------------- I will let Joe comment on that specifically, but we are studying that long and hard. There's a lot of issues around infrastructure with gathering systems, how you develop your facilities, and how you handle your water sourcing and water disposal. We're looking at the full cycle model in trying to really optimize the return on these projects. We are very wary of paving the future with gold bricks on infrastructure. We want to balance having the efficiency of taking advantage of the development and not over spending on upfront cost. So it's a bit of a balancing act, and we haven't decided where we're going to land there. But I will say this, we are trying to optimize our capital efficiency and minimize our infrastructure spending wherever we can. And Joe, you can comment. -------------------------------------------------------------------------------- Joe Albi, Cimarex Energy Co. - COO [68] -------------------------------------------------------------------------------- Tom, you hit it right on the head. In some ways, it's a matter of where we develop in these areas. A majority of the big-dollar infrastructure items have already been put in the ground, our major trunk lines, our laterals, and so forth. To the extent these development projects lie along those existing laterals, there's a minimal amount of infrastructure associated with it. To the extent they are further removed, it obviously becomes a little bit more pricey. So what John, the midstream, and the production guys are doing, they're working in concert to try to develop these areas in such a means and such a way that we're optimizing our capital spending. If you ask me for the budget we have this year, I would say it would probably line up pretty close to what we did this year with our infrastructure dollars, primarily because a lot of that is driven by compression. -------------------------------------------------------------------------------- John Nelson, Goldman Sachs - Analyst [69] -------------------------------------------------------------------------------- This year's number was $50 million to $80 million? Is that correct? -------------------------------------------------------------------------------- Mark Burford, Cimarex Energy Co. - VP - Capital Markets and Planning [70] -------------------------------------------------------------------------------- Yes. (inaudible) in 2014. We spent off $35 million this year. We're probably going to spend about $50 million for midstream projects. So I would say somewhere between last year and this year is probably a good run point for starting looking at 2016. -------------------------------------------------------------------------------- Joe Albi, Cimarex Energy Co. - COO [71] -------------------------------------------------------------------------------- It all depends on the timing, when we need compression. Compression is a big part of it. A lot of that existing trunk line or what have you is already in place. But as far as an overall percentage of our total Permian CapEx, I would say it is a small part. -------------------------------------------------------------------------------- John Nelson, Goldman Sachs - Analyst [72] -------------------------------------------------------------------------------- Okay. And just to interpret some of those earlier comments, is that to say that you guys don't necessarily want to overbuild a production handling facility such that we might think about, especially in something like that Wolfcamp CD development area, some of those wells maybe being facility constrained early on but ultimately still having on a positive standpoint, have a flatter (multiple speakers) longer production profile? Is that what you're saying? -------------------------------------------------------------------------------- Joe Albi, Cimarex Energy Co. - COO [73] -------------------------------------------------------------------------------- We've looked at a number of wells. Our 7,500-foot Bone Spring lateral was an example of that where what was the cost to design for peak rate versus what was the cost to not to design for peak rate, and it was a very valuable exercise to our team. We are trying to understand all of the efficiencies that need to come into play that gives us a maximum rate of return. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [74] -------------------------------------------------------------------------------- But there is an argument for that, that used to be, in five or six years ago, the well was always the driving force. We would drill a well, and we would build drill facilities in order to produce it at the maximum allowable -- the maximum rate we could do. Today, where we have potentially 12, 16, or more wells a section, we are studying, is it better to optimize our facility size and then drill to keep those facilities full and that peak capacity. And it's a trade-off. And we are modeling the rate of return very carefully so that we get the greatest capital efficiency. It doesn't necessarily do us any good to drill a dozen or 16 or 24 wells, build facilities for peak production, and then find six months down the road those facilities are underutilized. That would be very wasteful. We don't have the answer on this call, but that is what our organization is hard at work studying, not only studying economic models, but we are starting our competitors carefully, how they've done it, where they've had success, and where they've had failures. -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [75] -------------------------------------------------------------------------------- And just to follow up on that, facility in this case doesn't necessarily make this mean the battery. It can mean the pipe size; it could be the compression, a variety of factors that need to come into play. -------------------------------------------------------------------------------- John Nelson, Goldman Sachs - Analyst [76] -------------------------------------------------------------------------------- That is very helpful and good problems to have. Second one for me, I can appreciate that you guys don't want to give out a 2016 CapEx number, but just when I think about your working interest levels in those two areas you highlight, it is getting nearly 90% of the CapEx. It can be a wider or lower band. Is the 2016 rig number, is that purely operated? Is that a minimum, or is there some level of non-op spend that you also envision happening in 2016, or any color when we think about relating what's on that slide up to an aggregate number? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [77] -------------------------------------------------------------------------------- Yes. This is John. When we quote 2016, that is 2016 operated. It is fair to say we definitely anticipate quite a number of non-operated partner wells in the Woodford as we always have. Typically, they have been running around six weeks recently, so that certainly factors into our capital model as well in terms what they plan to do in addition to what we will do. -------------------------------------------------------------------------------- John Nelson, Goldman Sachs - Analyst [78] -------------------------------------------------------------------------------- Great. Congrats on the quarter. -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [79] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [80] -------------------------------------------------------------------------------- The next question is from Ipsit Mohanty at GMP Securities. -------------------------------------------------------------------------------- Ipsit Mohanty, GMP Securities - Analyst [81] -------------------------------------------------------------------------------- Good morning, guys. Congrats on (inaudible). Just a quick -- I couldn't help but notice comparing slides of 1Q over 2Q that your Permian was a tad gassier in 2Q than 1Q. Could you comment why? -------------------------------------------------------------------------------- Joe Albi, Cimarex Energy Co. - COO [82] -------------------------------------------------------------------------------- I will take a stab at it first. I think you are seeing, number one, as I think about the different programs, quite a bit more drilling in Culberson and the Wolfcamp, especially Wolfcamp D, and so that does tend to be a little bit more gassier than, say, Reeves County or other areas. Secondly, even the Bone Springs for us -- traditionally, a lot of our Bone Spring wells were more in New Mexico in terms of (inaudible). We're still in New Mexico, let me be clear, but western New Mexico, White City, and Culberson, they tend to be a little more gassier. But I will tell you, there are far better wells from a rate-of-return standpoint in terms of the type of productivity we get from those wells. I think that's just what's driving that slow change you are seeing and getting more gassier. It's just we're -- the nature of our rigs have been on that western side of the Delaware Basin. -------------------------------------------------------------------------------- Ipsit Mohanty, GMP Securities - Analyst [83] -------------------------------------------------------------------------------- Okay. I think you alluded to this in a separate question, but when you look at slide 7 and 8, 2016 over 2015, you said Avalon would be missing because you have HPP and you have that description going into 2016. But when I look at Meramec and Bond Spring, two regions that you've highlighted in your presentations, and seeing improvements, you see them shrinking in terms of your (inaudible) as a percentage of capital allocation. Is there something to read into that? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [84] -------------------------------------------------------------------------------- Yes. Development versus single well. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [85] -------------------------------------------------------------------------------- Number one, again, as we keep saying, when we go to development, whether it be Wolfcamp or Woodford, that's a major investment from a standpoint of deploying 17 wells or 20 wells. The Bone Spring itself, from a capital standpoint, I don't think it's much different from year over year. You are seeing just that our capital -- the pie is bigger. We still plan to have a similar type healthy drilling program. The Meramec, I would say yes, it's going to slow down because we have reached the point where we've delineated. We think we feel comfortable where we have good rate of returns from an individual well standpoint. But as I said in my comments, now need to understand, how do we develop it? And so we have a number of major pilots ongoing between us and our partner, spacing pilots, stacked/staggered pilots so we can better understand on our acreage, how do we develop the Meramec concurrent with the Woodford, and so that's why, prudently, we will be slowing down some in the Meramec while we get those pilot results and understand how we move forward to get that acreage properly developed. -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [86] -------------------------------------------------------------------------------- I also want to add that this is a snapshot in time, and we want to give you color directionally as to where we see the remainder of 2015 and 2016 going, but it is by no means set in stone. For example, there is a chance that in this Woodford development, we may have a layer of Meramec to add to it, and so we may increase Meramec along with the Woodford development. We are still working our way through that, but we wanted to give you our best read today on the direction. We maintain a lot of flexibility as we work our way through this. -------------------------------------------------------------------------------- Ipsit Mohanty, GMP Securities - Analyst [87] -------------------------------------------------------------------------------- I appreciate it. And then seems like as you go over quarter over quarter, having followed you, it seems you have gotten comfortable with the longer laterals across your asset base. Going on from here, as you go forward the remainder of 2015 and 2016, what percentage of your drilling are longer laterals across Bone Spring, Wolfcamp, and Woodford? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [88] -------------------------------------------------------------------------------- I will take a stab at that. This is John. Essentially, all the Wolfcamp is extended laterals, pretty much where we can. The lone exception might be the occasional pilot where we find that we can achieve the answers we need from a capital standpoint through 5,000-foot instead of 10. Outside of that, almost every Wolfcamp well, if the acreage allows us, is an extended lateral of at least 7,500 to 10,000. Woodford, traditionally, we have been at 5,000-foot lateral developer, but I will tell you, because of our comfortableness with drilling 10,000-foot, a lot of our future development plans that we review now incorporate 10,000-foot as our go-to for development. Now, that's not going to happen right away, but as Tom mentioned in his comments, we are looking at some areas, probably mid to later next year, that we will move toward long-lateral development even in the Woodford. Again, I think that just speaks to something you mentioned, we're getting comfortable with our ability to drill and complete and flow back those wells. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [89] -------------------------------------------------------------------------------- We have taken a little different approach than some of our competitors. To the extent we're delineating or we're testing spacing, we prefer to do that with 5,000-foot long horizontal wells, get the results a little quicker, and spend a little less per well while we are doing experiments. In particular, if you look at our Meramec program, Cimarex, our wells are dominated by 5,000-foot wells. Many, if not most, of our competitors have chosen to go straight to 10,000-foot wells. We're fairly confident that that was the right decision for Cimarex. -------------------------------------------------------------------------------- Ipsit Mohanty, GMP Securities - Analyst [90] -------------------------------------------------------------------------------- Thanks. Congrats on another great quarter. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [91] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [92] -------------------------------------------------------------------------------- The next question is from Jeanine Wai at Citi. -------------------------------------------------------------------------------- Jeanine Wai, Citigroup - Analyst [93] -------------------------------------------------------------------------------- Good morning, everyone. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [94] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Jeanine Wai, Citigroup - Analyst [95] -------------------------------------------------------------------------------- In your prepared remarks, you mentioned that you built your 2016 program around rate of returns, given that you don't have a crystal ball on future prices. So I was wondering if you just could give us an update and rank in order of rate of return your plays. I know in the current presentation, you gave an updated 78% rate of return for the Culberson Wolfcamp D. So how can we slide in the other programs like the Wolfcamp A, Reeves A, Bone Spring, Cana, [Enzel], et cetera? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [96] -------------------------------------------------------------------------------- This is John. Before I answer that, again, there are so many moving parts that go to building that program that clearly, yes, rate of return is one of the first things we look at. But there are obviously other mitigating factors, such as takeaway concerns, obligation drilling, the whole acre, acreage, so there are many things that go on in that program. I want to be clear about that. But rate of return is certainly one that we focus on strongly. From the program perspective, right now, first and foremost, White City, Culberson, Bone Spring wells generate by far superior rate of returns, and we are very pleased with where we are with that program. Once you step from there, the long-lateral Culberson program, as you mentioned, is very healthy. Looks very strong far as going forward both in the A and in the D, which we have gotten very good results recently from the A now, so we literally have to different intervals generating very strong results. I would argue now with the latest results from Reeves, with the well we just spoke about, if we can continue to duplicate that type of result in that upper A, then Reeves becomes extremely competitive relative to Culberson with that type of result. Finally, you get to Woodford, where Woodford right now are very good rate-of-return results. What excites us about the Woodford is what I mentioned earlier, when we started thinking about it from a long-lateral standpoint. When we look at Woodford and we look long lateral, then those returns all of a sudden get to a point we get very excited about relative to, say, a Culberson long lateral. So that would just be my take on it based on the current commodity price and what we see going forward. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [97] -------------------------------------------------------------------------------- I also want to add, and I think everyone knows this. When we've talked about rate of returns, to the extent we quote a number, those are what's being called half-cycle returns. Those are drilling-only returns. They're not burdened by all the other things that make up a true investment profile, but they're the incremental decisions that we make every day. -------------------------------------------------------------------------------- Jeanine Wai, Citigroup - Analyst [98] -------------------------------------------------------------------------------- Great. That's all for me. Thanks very much. -------------------------------------------------------------------------------- Operator [99] -------------------------------------------------------------------------------- Our last question is from Jeb Bachmann at Howard Weil. -------------------------------------------------------------------------------- Jeb Bachmann, Howard Weil Incorporated - Analyst [100] -------------------------------------------------------------------------------- Good morning, guys. Just a few on the Meramec. Just wondering, there is a private doing an A-acre downspacing test that you guys had an interest in, and if you had any feedback on that result yet? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [101] -------------------------------------------------------------------------------- This is John. No. We have no comments to make about that pilot as of yet. We are carefully monitoring, but no comment. -------------------------------------------------------------------------------- Jeb Bachmann, Howard Weil Incorporated - Analyst [102] -------------------------------------------------------------------------------- Okay. John, I guess the location of those downspacing and stacked tests in the Meramec, are those, again, be in the updip were down dip sections? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [103] -------------------------------------------------------------------------------- They are in the updip. As far as the spacing pilot as well as the stacked test, they would be in what we have called the updip. Yes. That is where they are located. -------------------------------------------------------------------------------- Jeb Bachmann, Howard Weil Incorporated - Analyst [104] -------------------------------------------------------------------------------- All right. And just the last one for me. There's been some talk about variability of the geology in the Meramec across the play. Just wondering if you guys think that your acreage is going to be fairly consistent on the characteristics? -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [105] -------------------------------------------------------------------------------- This is John. I would say, again, to date, we have been pleased with the results of our wells. But I will point out we have 10 wells that went to our average. It is fair to say of those three new wells, one of them was quite a bit of a step out for us, and yes, it underperformed relative to the rest of the wells. That's what happens when you try to delineate your acreage. And so it is no surprise that we have reached a point where, at least with that well, we would start to think maybe that particular area is not as prospective as others -- from a 5,000-foot standpoint, let me be clear. We do recognize there is a very ability to this, but I would also, again, point out that we have been pleased with the overall consistency of our result to date. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [106] -------------------------------------------------------------------------------- John mentioned the three new wells. Two of the three were choked back during a significant portion. -------------------------------------------------------------------------------- John Lambuth, Cimarex Energy Co. - VP of Exploration [107] -------------------------------------------------------------------------------- Yes, so to be clear, of the three new wells, one of them was a significant step out that definitely underperformed relative to our average. The other two wells, just to give you a little color, are wells that are in an area that we consider very prospective. We upsized the fracs quite a bit on both those wells, and because of that, trying to manage the flowback on those wells from a standpoint of both water and sand control, those wells were more conservative on their choke settings. Thus, we didn't achieve the same 30-day average rates that the other wells have. But we are very pleased with those well results of those two wells based on what we're seeing today. -------------------------------------------------------------------------------- Jeb Bachmann, Howard Weil Incorporated - Analyst [108] -------------------------------------------------------------------------------- I appreciate it. -------------------------------------------------------------------------------- Operator [109] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back to Management for closing remarks. -------------------------------------------------------------------------------- Tom Jorden, Cimarex Energy Co. - CEO [110] -------------------------------------------------------------------------------- I want to thank everybody for joining us. And in closing -- and I'm glad it was mentioned on our call -- I want to congratulate Mark Burford on becoming our CFO. He is ready for the job and will just do a fantastic job. But I especially want to commend Paul Korus for the contributions he has made to this organization over time. Many of you on this call know Paul well. We're going to miss him deeply. It would be impossible for me to overstate what he has meant to this organization, for our shareholders, and to the building of Cimarex. It's with a lot of bittersweet that we let him go. We're going to miss him. And part of the great contribution that Paul has given us is grooming and choosing a successor. Paul's contribution is something that we're very grateful for, and I know many of you share me wishing Paul all the best and just deep gratitude for the role he has played as a Founder of this Company. With that, I want to thank you very much. -------------------------------------------------------------------------------- Operator [111] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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