Earthstone Energy Inc (ESTE) 2019 Q4 法說會逐字稿

Good morning, and welcome to the Earthstone Energy's conference call. (Operator Instructions) As a reminder, this conference call is being recorded. Joining us today from Earthstone are Frank Lodzinski, Chief Executive Officer; Robert Anderson, President; Mark Lumpkin, Executive Vice President and Chief Financial Officer; and then Scott Thelander, Vice President of Finance.

Mr. Thelander, you may begin.

Thank you, and welcome to our fourth quarter conference call. Before we get started, I would like to remind you that today's call will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Although management believes these statements are based on reasonable expectations, they can give no assurance that they will prove to be correct. These statements are subject to certain risks, uncertainties and assumptions as described in the earnings announcement we released yesterday and in our annual report on Form 10-K for 2019. These documents can be found in the Investors section of our website, www.earthstoneenergy.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially.

This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings announcement released yesterday. Also, please note, information recorded on this call speaks only as of today, March 12, 2020, thus, any time-sensitive information may no longer be accurate at the time of any replay. A replay of today's call will be available via webcast by going to the Investors section of Earthstone's website and also by telephone replay. You can find information about how to access those on our earnings announcement released yesterday.

Today's call will begin with comments from Frank Lodzinski and Robert Anderson, followed by remarks from Mark Lumpkin regarding financial matters and performance and then a discussion of our current environment and upcoming operations from Robert Anderson.

I'll now turn the call over to Frank.

Thanks, Scott, and thanks to everybody for joining -- everybody with -- joining on this call. Listen, before I address the recent and sharp declines in commodity prices and our 2019 performance and outlook for 2020, I want to address the management changes that will take effect at the end of this month. As previously announced, Robert Anderson will take over as CEO, and I will remain with Earthstone as Executive Chairman. Our board and officers and staff could not have more confidence in Robert's ability to lead Earthstone going forward. As many of you recognize, he is a dedicated and capable executive who has proven that he can lead our company and has a skill set that spans multiple disciplines, including technical and financial. He's really been instrumental, along with our other outstanding staff in methodically building Earthstone despite poor market conditions and the one we're in right now to keep us in the enviable position that we are. Many of our staff have been through this drill, Robert's been through this drill, and we're going to do well during this downturn.

It's important to emphasize that Robert and many of our team have been with me through a number of these collapses, most particularly thinking 2008, 2009 and 2016. We're a very healthy company, as we have been since 1986, when I first got started. We will be a survivor, and we will be a consolidator. We continue to run our business not only to survive in times of turbulence, but to thrive and create value for our shareholders over the long term.

We focus every day on effectively dealing with the significant volatility that is constantly present in our industry, while pursuing long-term profitable growth. And we will not abandon our fundamental and demonstrated strengths of maintaining a strong balance sheet, cost control and operational efficiency.

Robert will briefly mention that we've made great progress in the last 3 years since a similar downturn in 2016, and we'll continue to build scale organically or through value-enhancing mergers. We're simply not going to end up like many of our competitors, unfortunately, with inadequate inventory, high cost and too much leverage. I want to stress that we have the complete support of our board and major equity sponsor, and we'll work diligently on the M&A front. But we are not going to simply bail out any other entity and sacrifice our balance sheet for scale.

Before I turn the call over to Robert, I want to wrap up with a couple of other points, and that being our alignment, our management and staff alignment with our shareholders. We've always structured our compensation packages to be at or below the midpoint and to make our money through equity incentives. In the last couple of years, we modified our equity incentives to be performance-oriented, based on relative values with our peers.

For 2020, we further enhanced our alignment with shareholders by having approximately 75% of our management equity awards vest in 3 years based on absolute stock price increases, which requires an average return of about 15% over a base of $6 per share in order for us to realize target levels. In other words, aside from the significant reputational motivation that we have, we are also clearly incentivized to increase our stock price. The more money we make for you all, the more money we make for ourselves.

With that, I'll turn the call over to Robert.

Thanks, Frank, and thank you to you all on the phone and listening on the Internet with us today for attending. I also thank the board and our executive team and management team and staff and employees for this opportunity. I guess I will get baptized by fire in the current environment. But we've been through this before. And as we go through the rest of this discussion this morning, we'll tell you how we're going to continue to create value going forward.

I intend to build on the strong foundation we have created and also to maintain the high standards that drove our progress and success of prior companies. Those standards and the fundamental strengths you mentioned are embedded in our company culture here at Earthstone, and I believe that our strong performance in 2019 is a direct result of our clear focus on shareholder alignment and performance. Earthstone is well positioned for a solid future, and I'm excited to be taking over the CEO role here to make that happen and continue building value for all our stakeholders.

With that said, I want to take a few moments to provide an overview of where we have been and where we're going. I'll let Mark cover our fourth quarter and 2019 annual results, but I want to point out a few summary statistics that highlights our progress.

Over the past 3-year period ended in 2019, we've increased our adjusted EBITDAX by 680%. We've increased our production by 235%. We've lowered our direct LOE per BOE, excluding taxes, by 47%. And lastly, we've lowered our cash G&A per BOE by 40%. We accomplished this during a pretty volatile market, maybe not quite as bad as today, while maintaining low leverage, and we ended 2019 with a net debt to adjusted EBITDAX ratio of less than 1.1. So a pretty fantastic company over the last 3 years.

Further, as in our prior successful public entities, we've built an organization from the field to the boardroom that can effectively deal with major downturns, but continue this progression and handle a great deal of added activity with only moderate incremental costs. We intend to do even better in the future. Our clear intent is to be a consolidator, but as Frank mentioned, we're not going to abandon our fundamental practices and over-lever our balance sheet. Our conservative approach to the use of debt, along with strong hedge position and quality asset base positions us with flexibility to adjust our plans to respond to the current environment without seeing acceleration of leverage, and we can actually delever considerably if we curtail our capital spending plan.

From a guidance standpoint, in January, we set out a 2020 capital budget range of $160 million to $170 million. Based on that plan, the midpoint of our production guidance is 16,000 BOE a day, comprised of 64% oil, 83% liquids. This implied expected production growth of 20% on 20% lower CapEx compared to 2019, while inflecting to free cash flow in the second half of 2020, assuming existing service costs and a $50 WTI oil price. Obviously, the commodity price environment has drastically changed, not only since we put out that guidance in January, but just in the last 5 days. We are reevaluating our plans for 2020, and we are going to curtail material activity in the next couple of months, absent a significant improvement in oil prices.

From a practical standpoint, we have no long-term service contracts, we have no minimum volume commitments, and our land team just informed me, we have negotiated extensions on all our 2020 drilling obligations. And therefore, we can wind down our capital spending pretty quickly. So we will update our 2020 guidance in the near term and communicate all that accordingly, but we are going to cut our capital materially.

I will now turn the call over to Mark and let him discuss our balance sheet and financial results, and then I'll come back and give you a brief operations update.

Thank you, Robert. Well, let's start today actually with a recap of our balance sheet and liquidity, just given the focus on that in the current environment.

As previously discussed, we did enter to a new credit agreement with respect to our senior secured revolving credit facility in the fourth quarter of last year, which extended the maturity date by a little over 2.5 years to November of 2024. The initial borrowing base on that facility of $325 million is the same as in our prior facility. As of December 31, 2019, we had $170 million of borrowings outstanding under the credit facility, which resulted in a remaining $155 million of undrawn borrowing capacity. Additionally, we had a cash balance of approximately $14 million, resulting in total liquidity of $169 million. Obviously, in the current environment, liquidity is the focal point, and we're absolutely focused on that as well.

While we would like -- while we would expect our lending banks to reduce their assumed price decks, which likely will result in borrowing bases going down across the industry, it's really a little too early to get granular, as they kind of figure out what that looks like, and we figure out what it looks like. But our expectation is that our practice of not taking funding on the credit facility to extremely high utilizations will give us ample headroom for any scenario.

I would also like to add that we, as you can imagine, have been running a bunch of different scenarios in the past few days around capital programs and assumed commodity prices. And I'll just say that from all of our analysis, we don't come anywhere close to any financial covenant, irrespective of what scenarios we run from a capital or pricing standpoint, even assuming flat oil at $35 in perpetuity.

While in the context of the continued volatility in commodity prices and in particular, given the recent dollar moves in oil, it's important to consider the impact of our hedge strategy. We continue to benefit from a strong hedge book with realized gains in the fourth quarter of $2.2 million, bringing realized commodity gains for the full year 2019 to approximately $16 million.

In 2020, we have about 78% of the midpoint of our previously released production guidance or 8,000 barrels a day swapped at a WTI price of just over $60 per barrel, and we've got a decent bit of oil hedges in 2021 as well. Similarly, though not as impactful, we also have attractive natural gas hedges for 2020 at a net price of $1.79 per Mcf after the WAHA differential on about 43% of the midpoint of our previously issued gas production guidance. These hedge quantities and price levels, and particularly on the oil side, significantly insulate us from the downside prices we're experiencing in 2020 and to a decent degree in 2021 as well. Based on prices as of March 9, the mark-to-market on our hedge book is estimated to be approximately $80 million. I would also highlight for you that 100% of our hedge program is via swaps. So we don't have any of the downside exposure associated with other hedging strategies, such as three-way collars or put spreads.

Okay. Now looking at our fourth quarter financial metrics and starting with the top line, revenues for the fourth quarter were $66.8 million with oil contributing about 90% of the revenues. From a production standpoint, due to the execution efficiency and reduced cycle times, our fourth quarter sales volumes exceeded our expectations by a decent bit and averaged 17,571 barrels of oil equivalent per day, and were comprised of approximately 66% oil, 15% natural gas and 20% natural gas liquids. For the year, this put us at an average of 13,429 barrels of oil equivalent per day, which was approximately 10% above the top end of our 2019 guidance range.

In terms of commodity pricing for the fourth quarter, our realized prices were $56.92 per barrel, realized natural gas prices were $1.24 per Mcf, and natural gas liquids price were $14.92 per barrel. Fourth quarter realized prices increased on a quarter-over-quarter basis for all 3 products with realized natural gas and natural gas liquids prices having significantly increased by 71% and 39%, respectively.

From an income standpoint, we reported a GAAP net loss in the fourth quarter of $5.6 million or a loss of $0.09 per share, which reflected the impact of unrealized loss on our derivative contracts of $26.5 million. We recorded adjusted net income, a non-GAAP measure of $18.2 million or $0.28 per adjusted diluted share for the fourth quarter. Please see our earnings release for explanations and reconciliations of non-GAAP measures.

We recorded a company record adjusted EBITDAX of $49.9 million in the fourth quarter, which was a 67% sequential increase from the third quarter. For the full year, adjusted EBITDAX grew 51% to a company record $146.3 million. On the cash cost side, we achieved our targeted sub-$10 per barrel of oil equivalent combined lease operating expense and cash G&A expense in 2019, coming in at $9.72 per barrel of oil equivalent, and we guided towards the midpoint of $9.25 per BOE for 2020 in our January guidance release.

Our capital expenditures for the fourth quarter totaled $58 million, resulting in full year capital expenditures of approximately $210 million or about 3% above our guidance. As Robert mentioned, we are and will continue to evaluate adjustments to our capital plan. As it relates to the fourth quarter and really even prior to any potential changes to our capital plan, we expect the first quarter to be our largest spend for the year. And this is really driven by running a frac spread for most of the quarter beginning in mid-February and by the completion activity on the 15-well non-op project that largely occurred in the first quarter.

From a production standpoint, we expect 2020 to be much smoother than what occurred in 2019 with the back end of the loaded completions we had then.

Broadly speaking, we expect the first quarter production to be down a decent bit versus the fourth quarter of 2019, given the flush production we experienced then, and which peaked around the middle of the fourth quarter. And then beyond that, we expect the second quarter to be relatively flat compared to the first quarter. And really, the balance of the year is, of course, depending on what we ultimately do on the capital side. Our prior plan had some sequential growth expected over the course of the year. But with the expectation of curtailing capital, that obviously changes the slope of the production curve.

So with that, I'll turn it over to Robert.

Thanks, Mark. Okay. Let me start by saying our technical and operations team did a terrific job last year with great performance. We had some great strides in the efficiency of our drilling and completions in 2019, which, when combined with generally reduced service costs, allowed us to significantly drive down drilling and completion costs from over a $1,000 per lateral foot to approximately $850 per lateral foot from 2018 to 2019. This reduced -- it resulted in reduced cycle times. And as Mark pointed out, we got more wells online a lot sooner. And all of this contributed to the company's record production and EBITDAX levels and achieving our targeted sub-$10 per BOE, cash G&A and LOE costs.

In terms of proved reserves, the successful drilling program has resulted in a 33% increase to improve developed reserves on a year-over-year basis. This 2019 operational performance has positioned us with some meaningful momentum heading into this year. In 2020, our drilling and completion program is solely focused on our Permian Basin acreage. We just finished drilling on a 5-well project in Upton County on our Hamman 30 Unit, and we are keeping the rig in Upton County drilling a 6-well pad on our Ratliff project, which will take us into May, during which we plan to reevaluate our drilling program based on current prices and expected reduced capital costs.

In February, as Mark mentioned, we picked up the frac spread to complete 3 wells on our WTG project in Reagan County that were drilled back in 2019, with these wells coming online in the second quarter. Upon concluding these wells, we will consider delaying our future completion activity based, again, on near-term forecast for prices and the potential for reduction to costs. We continue to focus on wellhead economics. With this in mind and given current oil prices, we would only drill in our highest return areas in Midland and Upton counties, focusing on the Wolfcamp A, B as well as the Lower Spraberry up in Midland County.

In 2019, we ended up with average operated lateral length of over 10,000 feet, which really helped drive some cost efficiencies.

We continue to work on trades and acquisitions to increase lateral lengths in areas with shorter laterals to maintain or increase this efficiency in those areas. As we've discussed with you in the past, the majority of our acreage position has not been densely drilled. In most of our projects, we are just now coming back to areas that were previously drilled. As such, we view each area individually and determine spacing as appropriate. So we've reduced some of the locations that we had from our prior year based on updated spacing assumptions. Generally, Reagan County is spaced at about 1,100 feet between wells in the same target, whereas Upton and Midland counties average about 900 feet between wells in the same target. A lot of factors go into this determination, including rock quality, reservoir pressure and existing producers.

So in summary, during this volatile time, you can rest assured that our practice will continue to, first and foremost, protect the balance sheet. We will also pursue value-enhancing acquisition opportunities with our normal financial discipline. Our acreage and inventory provide drilling locations with attractive economics for many years to come, however, we will be cautious in utilizing capital in the near term. We expect to continue to demonstrate our ability to generate peer-leading margins and during this recent drop in oil price, look for opportunities to build value.

With that, operator, we'll now turn it over for questions.

(Operator Instructions) Our first question has come from the line of Dun McIntosh from Johnson Rice.

This is actually Austin filling in for Dun. I just want to say congrats on a great fourth quarter. And my first question is, if you have any -- if you can provide any additional color on the 2020 outlook yet?

Well, give us a couple of weeks, definitely, with no long-term commitments, we can ratchet down activity. However, and being in the middle of operations, it's a little hard to shut down a frac or shut down a drilling crew in the middle of a pad. So give us a few weeks, and we'll come back to the market with some updated guidance, both on the production for the year as well as the capital program.

It's fair to say that absent some significant change in oil prices in the next few weeks, we're going to pretty significantly cut activity.

Makes sense. And then, I guess, do you have any idea of what the 2020 corporate decline rate would be?

Our PDP wells, given a whole bunch of new wells that came on at the end of the year is in the 30-ish percent range, 32% to 34%, something like that. And that's what those PDP wells look like year-over-year. We continue to add wells, kind of balance out that. But again, we'll -- as we look to figure out our capital plan exactly for the year, we'll come back with some adjusted production numbers.

Dun, this is Frank. I can ask some of your associates over there, your colleagues, that teasing you a little bit, my usual response is, give me a price deck, and I'll tell you exactly what we're going to do. And that's what we're struggling through. I will say that a bunch of our folks -- Robert's been with us a long time as well as a bunch of our folks. We can gear down fairly quickly, and we can gear up fairly quickly. If you take a look at '16, we phased down -- as I recall, we had a couple of rigs running and a frac crew. We phased out a rig. We cut our fracs, and we ended up probably with 13 or 14 DUCs at the end of the year, and we were able to re-kick up pretty quickly going forward. And that's the elements of the plan that we've had forever. So a little bit more color for you there.

All right. I appreciate it. And then as a follow-up, I was wondering, I mean, you said you exited 2019 a little under 1.1x leverage ratio. I was wondering if you -- how do you all expect to change that? Or how do you expect it to change over 2020 with I assume less activity, with the commodity price?

Yes. I mean, honestly, because of the hedge position, does it matter, yes, but it's just not a huge impact. And certainly, assuming some pretty significant curtailment of activity, we -- kind of the math right now is we've got hedges on 78% of oil production based on the midpoint of guidance. If we cut activity pretty significantly, the guidance is going down. So we've probably got -- I mean, it's a higher percentage hedge than 78%. So while it's not -- what matters some, it just isn't a big impact for us because we got -- we get fixed price swaps on so much of the oil production that we actually delever. If we see some activity, we're going to delever.

It isn't -- the ratio isn't going up.

Right. And then as a -- I guess, my final question is, do you all see -- in the next 12 to 18 months, do you all see any M&A activity with your strong balance sheet in this, I guess, the price collapse?

Well, we're actually excited about the opportunities that are out there. And we will be able to probably grow easier in times like this, given our balance sheet and our track record and things we've done in the past than when oil is $100. So I don't wish bad luck on anybody, but we're going to continue to be diligent in looking at opportunities, and I think there's going to be a lot of opportunities over the next 12 months.

Our next question has come from the line of Neal Dingmann of SunTrust.

Robert, on just -- 1 question, it was just kind of a 2-part, and that's all I've got is just on the non-op. I'm just wondering what -- number one, what kind of color do you all usually get on that as far as how much advance on that? And if you could talk about just -- you talked a little bit in the release of how much activity, and then sort of my second question, also related to that is, are there scenarios, either because financially or operationally, you would think about going non-consent there?

We've had discussions with a couple of our parties that have thought about doing -- having some activity this year. We've got this 15-well project completed and online. And so that is behind us and everything else going forward from a non-op perspective is on hold. So we have nothing staring us in the face, anything material. I think -- does that answer both parts?

Yes. And really, Neal, I would just add, we weren't expecting a whole lot of activity on the non-op side before. But even what activity we were expecting, nobody's excited about drilling right now. And there's nothing in progress either.

Okay. And 1 more, if I could. Just on -- Rob, can you just talk about -- or you and Mark. I know you definitely were talking about, and I know you'll make a more detailed decision down the road depending again what these prices do, but the 1 versus 0 rigs sort of operated scenario, it sounds to me like you're pretty confident you could generate some free cash flow in either. Maybe just talk a little bit on the confidence you had on both of those? And number one, if that's the case? And number two, into 2021 if overall growth would still kind of be -- the trend would still be positive?

Yes. I mean there's a lot of modeling in your question there. So some of it is a philosophical thing and the efficiencies we've gained over the last year to 18 months makes it somewhat difficult to want to let our rig go because our team is just -- we're on fire and doing really well. But at the same time, we've got to be cognizant of where these prices are. None of this has any impact on our financial wherewithal. I mean our balance sheet is in such great shape. If we don't continue to run a rig, we're just -- with the free cash flow, we pay down debt. And then we'll have some inventory to start next year or whenever the prices improve to frac wells and quickly jump back onto the production growth train as it makes sense. But it's all going to be under the idea of profitable growth with a view of future prices.

The next question has come from the line of Noel Parks of Coker & Palmer.

Sort of along the same lines, just wondering, it sort of feels like the world has changed in a week with the Saudi Arabia, Russia standoff on the production cuts. And in this really strange week, I was wondering, are you hearing from service companies, checking in to see just in case you wanted to do something later in the year? Or have they been hanging back all this volatility? I'm just thinking about as you look at the trade-off, sort of, the stability of running and keeping a rig and then efficiency versus conserving capital. I'm just wondering is there [any fuel] that there's even more geared back on the service side that could move the needle on your decision either way?

Well, there's definitely some service guys who are nervous. Those with strong balance sheets probably are less nervous, and they can weather the storm, much like the E&P guys. Our guys, we're communicating with them every day because they do want to know what the plan is. They recognize in low prices that we will probably cut back activity and when we see a clear view of where prices are headed, we may jump back to activity faster than others because of our balance sheet. So it's -- I expect that they may come hat in hand saying, hey, we'll reduce prices or costs, if you guys will keep activity going, but there's a balance between all that. So we're communicating with them every day. It's a team sport. We need them to stay in business to be able to grow and be efficient. So we picked the best players to go on the team. And at some point, we'll take a breather if we need to.

Noel, it's Mark again here. I would just add a couple of things to that. I mean one thing you guys who have known Frank and Robert for a long time and follow them, whether it's in Earthstone or prior entities, know that we're not kind of a group that panics. And we came in Monday morning, knowing the world is rapidly changing, and not knowing exactly what all the answers are. And we still don't know exactly what all the answers are. What we do know is that we've got the balance sheet and liquidity and the cost structure and the hedges to weather the storm. Honestly, I came in Monday morning, we ran with some downside scenarios. And I thought they would look good and they looked even better than I thought.

There's a lot changing, whether it's service cost or the dynamics between OPEC and Russia or the demand shock on the coronavirus piece. All those things are still unknown and very new. What we're not going to do is have a knee-jerk reaction and overreact when -- what changes over the next 2 weeks? We don't know. The next 2 months? We don't know. But things could change, and we're going to do the prudent thing because we want to drill economic wells. And we're going to do all of those things and assess those changes both in real time, and as we go along, which isn't to say that it's not encouraging to see the industry go make the changes that a lot of folks have announced. And even as we've talked to, private people have talked about cutting Capex. It's encouraging to see that, and we're going to cut too if oil sticks where it is. But we're going to be measured about how we do it, and we're not backing to the corner where someone else is make a decision for us.

Great. And just trying to think, did you say that you would -- I heard something about private companies cutting Capex?

I would just say, just anecdotally, it's public guys and private guys, they're all having the same conversation in their offices. And making decisions about what you're doing right now given the quick changes we've seen.

Okay, great. And I was wondering, I was thinking about -- from sort of out and out acquisition, I was thinking about farm-ins. And usually, I think of those as people looking to let an outside party drill to earn interest. Is that because you're -- or anyone would sort of let you complete DUCs for them in return for an ownership interest? I'm just thinking that you having $5 million, $10 million, $15 million to spare on your credit line could be meaningful to some other parties in the next few months, just depending on what their situation might be?

I don't know where you're getting $5 million or $10 million or $15 million on our credit line. Our liquidity is a lot more than that. But the answer to that -- Noel, this is Frank. The answer is that without sounding cocky here, we've always had our plans in our pockets. You just never know how rapidly the industry and the commodity prices are going to deteriorate like they did here. If you want to take a look at how we reacted, probably reviewing our quarterly activity in 2016 is a good gauge. And we will phase down as we need. And with our operations staff that has been with us forever, we'll gear up.

Now your question was, is there opportunities to drill to earn acreage to completions, things along those lines? I'll tell you after 47 years and 35 being an independent, there -- I anticipate there will be opportunities to that. But I think everybody that's holding those opportunities right now is shell-shocked, and they're just not going to do anything. They try to get their acts under control. In some cases, it's probably going to take them longer than we do. And I do think there's going to be opportunities. So one thing that's been in the back of my mind is essentially taking over meaningful acreage positions with a drill to earn. But as I said earlier, we're not going to sacrifice our balance sheet. In other words, we're not going to go draw on our lines of credit for noncash flowing assets. Drilling to earn or things like that might be something we'll consider. But I think everybody is in shell-shock right at the moment. And I think we'll see opportunities, but it's going to take some time to sort up.

Great. And just drilling on it a little bit more. In your current operating areas, as far as the folks offsetting you, is there anybody who's got significant drill to hold HBP issues these days? Or have most folks pretty much caught up on that?

I'd say most folks are under HBP status for the most part, other than continuous development clauses that are in some of those leases. So there could be some activity that has to occur because of those continuous clause -- drilling clauses. But operator -- mineral owners and leaseholders are quite paying attention here to what oil prices are, and they probably don't want a whole lot of activity, new wells coming online at $30 oil also. And so like I said in my prepared comments, we've got a couple of obligation areas that this week, we got negotiations done, and we're pleased that we can extend those into 2021.

Our next question has come from the line of Gail Nicholson of Stephens.

In regards to expenses, you guys did a really good job driving down expenses in '19. And when you look at 2020, do you see that there's potential room for further improvement, typically on the LOE side, which you posted a really good BOE rate in the fourth quarter '19?

Well, oil prices did drop $20 or so, maybe more. So those same concessions from companies, whether it's a drilling contractor or a chemical supplier, those guys see what's going on. And this will create some opportunities, I think, for cost to come down a little further. And we work on it every day, and now we're going to be even hyper-focused on our margins given that, hey, we may not have as much new activity, but we've got a bunch of wells out there, and we've got to figure out how to operate them even cheaper given where oil prices are.

And Gail, in the fourth quarter, we obviously had the flush production. So a big denominator there on the cost per BOE. We obviously won't have that in the balance of this year. But from a kind of -- to Robert's point, a service provider performing x activity, we think there's some potential downward pressure there.

Great. And then just like on the standpoint of hedging, you guys have always had a phenomenal hedge program. This is a different environment, and things will change, but how are you just thinking about hedges as you progress through this year and in regards to '21?

Yes, we're thinking about it. If we knew that this was going to happen, we probably should have hedged everything we could have. We didn't see this black swan event or whatever you want to call it, but we continue to be diligent and look at options that we have for putting more hedges on or considering hedges as we go forward.

Our next question has come from the line of Andrew Bond of Alliance Global Partners.

This is Andrew Bond calling in from the line of Bhakti Pavani. My first question is, what kind of CapEx level should we be thinking about, if you would want to maintain production at around like 12,500 BOE per day?

We're just not ready to come out with that. I mean, we're still running scenarios in real time. Yes, we've got some idea. I think our focal point is on making the right decisions in terms of activity as it relates both to wellhead economics, but also as it relates to, yes, just the disruption of shutting down and starting back up. Give us a month or so, and we'll give you more clarity then.

That makes sense. And then my second question is, with the COVID-19 situation now being called the pandemic, how are you as a company preparing for this? And do you see this impacting your operations in any way?

We work pretty remotely or have the ability to work pretty remotely as it is, and we actually had -- have had discussions over the last couple of days of who is absolutely necessary to come into the office. And probably, the person who has to print out a check to pay a vendor is probably the only person who has to be here, and everybody else can work remotely. So our operations teams are all in the field. Obviously, that's remote. They don't need to worry about being in big groups. And unfortunately, we have a group of us in the room here today, but we're all going to go self-quarantine for the weekend after this past week. So.

(Operator Instructions) Your next question comes from the line of [Peter Ernst.]

It's [Peter Ernst]. A quick question on clarity regarding Hamman 30 that came up late last year. I know you drilled vertically and then were planning -- I think I remember the last guidance was you complete the horizontal parts of that well at the end of Q2. I thought I heard earlier in the call that those were -- those horizontal segments were completed already. I just wanted to ask clarity. I missed that part.

Sure. Yes, it's quite easy. So we were -- we had drilled the Ratliff wells to the intermediate section. And then because of some surprised offsetting frac activity, we took the safe route and went and drilled our Hamman 30 wells. And now we're back on that Ratliff. So those all 5 Hamman 30 wells are drilled, waiting on completion, and again, that's under review of that timing. And then Ratliff wells, we're back over there with the rig right now and we'll finish drilling those 6 wells out and then we'll figure out both timing of completion and what to do with the rig.

Got it. So the timing of completion for both Ratliff and Hamman are subject to the capital decisions that you guys are in the process of making now?

That's right.

We have reached the end of the question-and-answer session. I will now turn the call back over to management for any closing remarks.

Thanks to everybody for listening and asking questions, and we'll be updating you all here shortly with capital and everything like that, and we appreciate your interest in the company. Have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.