Good day, and welcome to the XEC Fourth Quarter 2020 Earnings Release Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Caterina Papadimitropoulos. Please go ahead..

Thanks you, Chuck. Good morning, everyone. Thank you for joining our fourth quarter 2020 earnings conference call. An updated presentation was posted to our website yesterday afternoon. We may reference that presentation on our call today. As a reminder, our discussion will contain forward-looking statements.

A number of actions could cause actual results to differ materially from what we discussed. You should read our disclosures on forward-looking statements in our news release and in our latest 10-K for the risk factors associated with our business. We plan to our 10-K later today.

Our prepared remarks include an overview from our CEO, Tom Jorden, followed by comments from Cimarex CFO, Mark Burford; Blake Sirgo, VP of Operations. We also have John Lambuth, Executive Vice President of Exploration on the line.

As always, and so that we can accommodate more of your questions during the hour, we have allotted for the call, we'd like to ask that you limit yourself to one question and one follow up, feel free to get back into the queue if you like. With that, I'll turn the call over to Tom..

Thank you, Caterina. Good morning, everyone. And thank you for joining us in this call. I want to begin by expressing our well wishes for any of you that may have been impacted by the recent severe cold weather; we were all caught by surprise at the severity of the event and the collapse of infrastructure that resulted from it.

Like many of our peers, our operations were significantly impacted by the extreme cold weather. The good news is that our organization - our operations are almost back to normal after an unbelievable effort by organization. Mark will provide more detail on the impact of Cimarex.

Despite the tremendous challenges in 2020, and in many instances because of them, Cimarex is a much stronger company as we look ahead, we enter 2021 with a lower cost structure, better asset performance, our commitment to financial performance, our continuing focus on meeting today's ESG challenges and with our recent dividend increase our reaffirmation of our commitment to the evolving business model of Shell 3.0.

We generated good operating results in 2020 and are optimistic about the recovery in oil and gas demand and pricing as we look ahead. Fourth quarter 2020 oil production came in at 68,000 barrels of oil per day, which was 3.5% above our guidance midpoint. Total capital for 2020 was $577 million, which was below our guidance of $600 million.

We generated $279 million of free cash flow after our dividend and exited 2020 with $273 million cash on hand. Blake will comment on our cost structure and John is on the call to answer any questions regarding asset performance.

Delivering in our commitment to return cash to our owners we increased our dividend 23% to an annual rate of $1.08 per share. Although future increases will depend upon market conditions. We approved our recent increase with an analysis that included the potential downside of a $35 flat oil price.

Our plan for 2021 reflects our commitment to financial prudence and free cash flow generation. We expect to invest $650 million to $750 million in 2021 with oil production forecasted to grow 2% at the midpoint.

More importantly, at $55 oil our plan calls for us to invest less than half of our cash flow, generating approximately 48% free cash flow after the dividend. At a $35 oil price, free cash flow after dividend is projected to be 9% of our total cash flow.

Last year, we discussed our commitment to shale 3.0 including our long-term intention to annually invest 70% to 80% of our cash flow. Clearly our 2021 Capital Investment Plan undershoots this range; we view 2021 through a lens of caution.

Although there are many reasons for a constructive outlook on both oil and gas prices, we would like to see a robust restart of the world economy and a balance of supply and demand fundamentals before we would consider the 70% to 80% investment range. At Cimarex, Capital Planning has always been about investment returns through the cycles.

Our goal is long-term profitability, the generation of significant free cash flow and returning cash to our owners, moderating our growth in response to supply and demand fundamentals is the best way to achieve these long-term goals.

We think that our 2021 capital investment plan is prudent, balanced and will leave us well positioned with great flexibility for future years. In a cyclic commodity business, flexibility is the coin of the realm. Our 2021 plans involve a significant amount of New Mexico work, most of which is on federal lands.

On the heels of last month's executive order which suspended federal permit decision making authority and regional offices. We redirected all New Mexico activity towards Texas projects.

We have a deep inventory of top tier projects in Texas and fortunately, there were several that were shovel ready, owing to the executive order coming at a fortuitous time. When we were mobilizing between projects, we were able to pivot from New Mexico to Texas within 48 hours of the executive orders publication.

After further analysis, we are confident that permit activity on existing federal leases will continue relatively unabated, and we have restored significant New Mexico activity into our 2021 program. We look forward to working with the state and federal government as we develop our leasehold.

We're also continuing our emphasis on environmental excellence in 2021. In 2020, we set aggressive high pressure flaring and methane intensity goals, linking executive compensation to their achievement. As outlined in our investor presentation, our organization crushed both goals.

They accomplished this through diligence, creative engineering and Advanced Data Analytics. Our environmental goals for 2021 will continue to challenge our organization and comprise 30% of the executive team annual incentive metrics.

Before I turn the call over to Mark and Blake, I want to comment on the tremendous challenges we faced in 2020 and acknowledge how proud we are of organizational response.

It was easy to be humbled in 2020 by the hardships that so many of us face and by the valiant efforts shown by health care providers, emergency responders, essential workers and educators. At a time when our offices went to remote work, our field personnel got up each and every morning and provided critical attention to our assets.

They kept our production flowing and continued to bring new wells online. They had the same health concerns for themselves and their loved ones as the rest of us had for our own. But they did not have the luxury of working remotely.

Although, we are deeply grateful to all of our employees who gave it their all to keep Cimarex healthy and prosperous during 2020, none of us deserve our gratitude as much as our field staff. They're an example of what excellence and dedication look like. With that, I'd like to invite Mark to discuss our financial results and outlook..

Thank you, Tom. Good morning everyone. I'll first discuss our 2020 financial results and then move on to our 2021 outlook.

As Tom described Cimarex's 2020 operation performance generated substantial amounts of free cash flow, further strengthening our investment grade financial position, we exit 2020 with net debt of $1.73 billion, a decrease of $178 million from 2019.

In the fourth quarter, we also repurchase 55% of the outstanding 8.125% preferred stock for $43 million.

We remain focused on maintaining and improving our strong financial position, generating free cash flow and providing cash returns to our shareholders, as demonstrated by the 23% increase in a regular cash dividend to an annual rate of $1.08 per share.

Our fourth quarter top total capital investment was $136 million, including $101 million of drilling completion capital. Full year 2020 capital investment was $577 million, which was a 56% decrease compared to 2019 and 4% below our guidance range.

Our 2020 total cash operating costs comprised of LOE, workover, transportation production taxes and G&A total of $7.46 per BOE which decrease on a per unit basis 8% as compared to 2019. On an absolute basis, total cash costs in 2020 decreased to $134 million or 16% as compared to 2019.

Adjusted cash flow from operation the fourth quarter, total $257 million and we generated $97 million of free cash flow out of dividend. For full year 2020 adjusted cash flow from operation was $944 million with free cash flow of $372 million and $279 million after the dividend.

Moving on to 2021 outlook; we expect 2021 total capital investment of $650 million to $750 million, bringing on 73 net wells on production. The majority of the capital is being directed to the Permian, despite less than 10% to be invested in Anadarko Basin.

Oil production in the first quarter of 2021, is expected to average 65,000 to 69,000 barrels per day, with total equivalent production to average 205,000 to 225,000 BOE per day. First quarter guidance includes an estimate for the weather impact on production volumes in both Permian and Mid-Continent regions.

We currently estimate on average, our first quarter volumes are being negatively impacted by 5% to 7% from winter storms, which is around 4,000 barrels of oil per day.

For full year 2021, our oil production is projected to average 75,000 to 81,000 barrels per day; we expect to run two frac crews in the Permian for most of the year, resulting in projected oil exit rate growth from fourth quarter 2020 to fourth quarter 2021 of over 30%.

Total production is expected to average 235,000 to 255,000 barrels of oil equivalent per day.

Looking at the 2021 plans in terms of capital investment rate and potential free cash flow, we illustrate on slide 5 of our investor presentation two price scenarios a $35 WTI and $55 WTI to give perspective on reinvestment rate and free cash flow generation. At $35 WTI, we project our total capital investment rate to be 79% of our cash flow.

At $55 WTI which approximates recent four strip prices, our capital reinvestment rate is 45% with 55% free cash flow. That would be free cash flow of approximately $850 million for the year, and we'll exit - estimate exit the year with more than $900 million of cash on our balance sheet.

Our recent chip prices we achieve our goals this year of having sufficient cash to retire our 2024 notes of $750 million, positioning us to evaluate other options returning cash to shareholders to further sustainable growth or regular dividend and or instituting a variable dividend.

Our asset quality, cost structure and organization put us in a great position to generate significant returns and free cash flow for owners in 2021 and beyond. With that, I'll turn the call over to Blake..

Thanks Mark. We ended 2020 with and are currently running five rigs and two completion crews in the Permian and one rig in the Anadarko, a marked difference from the one rig and no crews we had running last June. Our 2020 Permian Basin operated DNC capital cost per lateral foot came in at $944 per foot, which was down 15% from our 2019 average.

Late in 2020, DNC costs average $800 to $850 per foot, and we expect to stay within this range throughout 2021. While we have recently seen some increases in service rates and have incorporated those into our go forward cost, we expect some of the inflation to be offset by efficiency gains.

Our operations teams continue to deliver in 2020 with our average drilling feet per day up34% and completed feet per day up 29% compared to 2019. These efficiency gains were driven by many factors; including continued multi well pad drilling, offline cementing and tank battery commingling.

Hats off to all our operations teams who continue to find new ways to increase efficiencies, lower costs and challenge the status quo. A new initiative we are currently pursuing is the electrification of our DNC operations as well as fuel compression.

Of note, we have been working closely with Halliburton to develop electric frac pumps driven directly from our Cimarex own power grid. Three grid powered frac pumps have been in operation since November of 2020.

We have gathered valuable data on fuel savings and emission reductions, while also observing a 30% to 40% increase in pump rate, due to the on-demand power available from our grid.

We are incorporating this data into other projects, including the electrification of drilling rigs and compression to guide development of our power grid in Culberson, Henry's counties, Texas. These large contiguous assets that include Cimarex owned and controlled power grid provides the scale and inventory needed for these electrification projects.

We plan to continue to invest in our power grids during 2021. As we firmly expect, these grid investments will lead to a lower cost structure and substantial emission reductions for many years to come. Our 2020 lifting costs came in at $3.09 per BOE and we are guiding to a 2021 lifting cost of $3.10 to $3.60 per BOE.

Our 2021 LOE includes increased work over activity, along with newly instituted maintenance programs focused on limiting emissions, reducing spills and improving asset reliability. And lastly, a few operational comments regarding the recent storms that impacted our operations in both the Permian and Anadarko.

Almost two weeks ago when it became clear that these storms could be significant weather events, our operations teams began putting plans in place to keep our operations running during the storm. We mobilized our entire field staff, which worked diligently and safely through extremely tough conditions.

Our teams brought in road clearing equipment to keep trucks hauling, obtain steamers and heaters to deal with freezing issues, and worked closely with our midstream partners to maximize product flowing to market.

During the storm, we did encounter frac downtime due to logistical issues with sand, but our drilling rigs maintain operations throughout the storm. Thanks to these efforts, Cimarex was able to safely keep a significant portion of our operations running throughout the storm. This was an all-hands-on deck event for Cimarex.

And our field staff efforts are truly commendable. And with that, we will now take questions..

[Operator Instructions] The first question will come from Arun Jayaram with JPMorgan..

Yes, good morning. Arun Jayaram from JP Morgan. Tom, how are you? Doing well. Just a quick question here. Mark, in your prepared comments you talked about perhaps the board evaluating a variable dividend policy, we didn't have the dividend increase.

So could you provide a little bit more meat behind the bone? And obviously, I think you said $850 million of free cash flow this year on your updated guide at $55. So just want to get some more color around that variable dividend commentary..

Yes, Arun, with our current emphasis on tuning cash for having sufficient cash to look to retire those 2024 notes is our first priority, as we discussed, and second priority that has been going to increasing a regular dividend on a sustainable basis. So we're checking the sustainable dividend growth this year, and we'll see how prices really do stay.

And we're very optimistic that $55 case you ran could come true. But we've seen enough volatility in commodity prices, we're not going to make any decisions around that at this point, we'll make sure we see the cash, cash flow come through and our cash came in our balance sheet and then we'll make further decisions then.

But definitely our board's been open to discussions on our steps, certainly a sustainable regular dividend growth, very supportive that and further open to discussions on a variable dividend..

Great. And, Tom, my follow up, as you mentioned, how Cimarex had been kind of just, had been potentially pivoting activity between New Mexico and Texas just given some of the rulings from the Department of Interior the temporary suspension.

So I was just wondering why you guys were considering pivoting from New Mexico, because it was our understanding that if a project been permitting, that you could continue to operate that project, so maybe a little bit of color around your discussion around that pivoting of activity between both states..

Well, sure. And I think in hindsight I would say we overreacted. And that's exactly the reaction I would have wanted this to have. If I can go back to ancient history a full month ago. This was 24 or 48 hours after the Keystone XL discussion. And we had two rigs in route to drill a fairly large project.

And we did need additional right away the drilling permit is only one of multiple permits or approvals that one needs to execute a project on federal lands. The drilling permit is often issued or applied for 18 months before the well spud.

If anything changes as either a cementing program casing program, fairly immaterial change, you need a sundry, you follow sundry notice and you need approval. And then often while a project is underway, you're still securing right away, which involves federal permit approval, even to the extent of laying water lines on the surface for your frac job.

If you cross federal lands, it requires federal approval. So when they suspended all local decision-making authority on permitting, we were in a fortuitous position. We were still in the middle of a project; we were about ready to mobilize rigs in Mexico.

And again, on the heels of that Keystone XL decision, we said we are not putting $100 million of pipe in the ground until this situation clarifies. Since then, I think it has clarified, as I said in my remarks, we're very confident that existing permits on existing leases will be allowed to be developed.

But it was an extraordinary opportunity for us to pivot to Texas while we figured this out. So yes, we overreacted and my opinion and bully for us for that..

Well, it's great to have the flexibility towards Texas. Thanks, Tom, for clarifying that. Appreciate it..

The next question will come from Jeanine Wai with Barclays..

Hi, good morning, everyone. Thanks for taking our calls or questions. Our first question is on kind of oil trajectory and our follow up is more on kind of medium-term growth. So in given the timing of completions for 4Q 2020 plus the freeze off in Q1 2021. It looks like before your oil guide implies quarter-over-quarter increases from 2Q onwards.

So I guess first question is do you have any color on the 4Q to 4Q for the exit rate growth for this year?.

Hi, Jeanine. Yes, we do expect second, third and fourth quarter sequential growth lead a little bit more towards the third and fourth quarters. The fourth quarter 2020 to fourth quarter 2021 rate of growth is targeting 30%. So we do expect a significant year-over-year change in fourth quarter to fourth quarter growth in oil.

But again, it's a fairly steady growth in both ways to dip more towards the third and fourth quarter..

Okay, great. And then my follow up is when we do the math on like a higher exit rate. It looks like you could be implying double digit year-over-year oil growth in 2022. If you just kind of held flat at that exit rate because it is so much higher. Is this a reasonable scenario? I know there's some variability on the year-to-year growth.

But the overall medium-term outlook is for a low single digit growth. So just wanted to maybe get some clarity on that because it could imply pretty good capitalization save for 2022 given how strong you're entering the year..

Yes, I mean so certainly with that trajectory where state coming into this year, right back to the matter of just reactivating two frac crews in the Permian running the five rigs, we are resuming getting back to levels more we saw in 2020.

But in 2021, and going into 2022, with that particular exit rate we see in the fourth quarter, we don't expect that we will ultimately just absolutely have to maintain that fourth quarter rate will be evaluating the 2022 plans, and evaluating where we invest in the pace of investment, we expect to have steady rig and completion cadence going into 2022.

And we don't have a targeted growth rate in 2022..

Jeanine, this is Tom. Let me just comment on that. Let me comment on that if I could. Our challenge here is 2020 saw such a huge disruption not only in our capital program, but also our production. And so it's kind of hard to look at quarter-to-quarter and make any kind of inference that that would be a steady state number.

We are full of very good projects. And I want to reiterate what I said in my opening remarks. Our long-term goal is really driven by cash flow generation and not production increase.

But when you come off a year, like we've had in 2020, and we have the kind of projects we have to say, oh my goodness, you don't want to have fourth quarter increase is rather like asking a thoroughbred to pull a milk truck. I mean, we've got tremendous assets and it just that's just the way the numbers flow fell out.

And given that we're investing less than half our cash flow this year. That's just provides us tremendous flexibility and we can react to the marketplace as the year goes on. But when I see that Q4 to Q4 accelerate change, I think, wow, we have unbelievable flexibility, both financial and operational for 2022..

The next question will come from Doug Leggate with Bank of America..

Thank you, Tom. I wonder if I could just ask you for a little help on your comments around your comfort that existing leases and permits will be allowed to be developed. I know you talked in your prepared remarks.

But I just wonder if you could offer some colors to what you're seeing, what you're hearing what discussions you've had that lead to that conclusion. Then I got a follow up..

Well, I don't know that I can offer you any inside baseball that's not already widely circulated.

We have had lots of discussions with elected officials at the federal level from New Mexico, both senators' offices, and in addition to the governor's office, and we're confident that cooler heads will prevail, and that the tremendous, not just value, but lifeline that the oil and gas industry provides to Mexico will be kept alive and well.

We do expect a new regulatory environment, we expect many of the Obama era regulations from federal level to return and be strengthened. And for that we're ready. We're a better company in every respect, including environmentally than we were four or five years ago.

But every indication that we have been given and again, I don't claim to be the Oracle on this, but every indication we've been given has led us to be optimistic that we're going to be able to develop our assets in a very prudent manner..

Great. I appreciate the answer. Tom, I wonder if I could just - my follow-up is really on the capital allocation, Shale 3.0 moderate and growth type story. I mean, obviously, at your scale, 80,000 barrels a day give or take. 5% growth doesn't really move the needle at the macro level.

And your free cash flow yield in our numbers at least is getting well into the mid-teens. You've got a ton of options just to what to do with that cash and your balance sheet is in great shape.

So I just wonder if you can walk us through how well you are in the spectrum of that discussion over, can you grow, do you return cash on our variable dividend and that has been touched on already, but your debt is already kind of in a good place.

I'm just thinking about how - it's a nice problem to have, but what are you doing next, assuming this super cycle, as you see not a lot of people are talking about does, in fact, play out?.

Well, it's like what are we doing on uncertain futures when the topic of discussion for the last 18 months? But Doug, we're, look, we've paid a dividend since 2006. So, culturally, I think the idea of returning cash to our owners is not that - we don't have to blink an eye for it to be embraced in our boardroom.

But we and Mark said it well, at the outset, we have made a tactical decision that we would like to have cash on our balance sheet sufficient to call those notes due in 2024.

Now, you could argue, well, that's too conservative, you ought to be returning cash in some other fashion, because it certainly looks like you're going to go well beyond that goal of matching that cash required to call those notes. Well, yes, it does.

But we were remarking before the call this morning, how optimistic we were about 2021 one year ago today. And so reality has a way of intervening. And right now, we would like to just get that cash on our balance sheet, have that defensive posture, quite frankly, that will allow us to have the flexibility to call those notes.

And then and only then, is there something to talk about as far as other avenues of returning cash to shareholders. But we're deeply committed to it. I will tell you there's not a blink of an eye in the boardroom when we talk about this. And we're also watching some of our peers, there have been some creative, gophers out there. We respect very much.

We're really interested to see what other people do. We do not necessarily want to volunteer to be the first heroes in this campaign. So we're very willing to looking at best practices in the marketplace.

Mark, you want to comment on this further?.

Yes, no, I think your last point is very valid there too, Tom. I think it'll be interesting to see how the market starts trying to value some of the variable dividends. And obviously, you want to give some visibility to that, the mechanics of it, and seeing how others do that. And evaluating was the best avenue to do that is I think, will be important.

So and then even having a first goal and having the cash on our balance sheet for those notes, I think gives us some time to evaluate that..

Well, Tom, you've led the market in this, just a comment really, my hope is that the market, my competitors and observers generally start to recognize the free cash flow visibility you and the industry are now generating as appropriate cases for evaluations appreciate everything you are doing for us. Thank you taking my questions..

The next question will come from Brian Singer with Goldman Sachs..

Thank you. Good morning. I wanted to further follow up on Jeanine's question with regards to the implications of the production trajectory as it would relate to the end of this year and into next year, because going from a mid-60s type production to what could be 80 to 90 plus, in the second half of the year is pretty significant.

And it seems like you raise the possibility of trying to maybe stabilize next year's production at a more materially higher level than this year's.

And I wondered if you can kind of talk more about maintenance capital, and how you expected that to evolve if, a new range of production is more 80 to 90, or relative to the $650 million to $750 million of CapEx for this year..

Yes, Brian, the maintenance capital is obviously something that is a lot of different discussions around that and what the definition of that means. But as you just said, if you're thinking in terms of maintenance capital of somewhere around 80,000 barrel oil per day, generally, kind of our midpoint of our guidance for annual 2021 is 78,000.

So if you think of terms of that, you were looking at probably as low end of our guidance range of something $650 million is probably less for just trying to maintain that 80,000 feet per day..

Do you think the low end of this year's guidance would be able to stabilize at 84 in 2022?.

Yes, that's right, Brian..

Got it. Great. And then my follow up is just a quick one on the use of cash, because I think that's been talked about here, you did spend some capital buyback preferred shares.

And I just wondered if you could talk about whether that's a needed further use of cash to close that out prior to the consideration of returning cash income more incrementally than what you're doing with the dividend to shareholders?.

Well, yes, the preferred it's 8.125% preferred. So as we have opportunities to purchase that and we'd want to do that just on our capital structure being fairly expensive. The window for which just to do that is uncertain.

It'll obviously depend a lot on interest rate yields and other things to see if we have opportunity to purchase more, yes, I put that 8.125% preferred in the same bucket is the having cash available for retirement in 2024 notes..

The next question will come from Michael Scialla with Stifel..

Yes, good morning, everybody. Mark, you brought up an interesting point, with Brian's question in terms of maintenance CapEx albeit sort of the low end of the range to call it whole production flat in that 80 day, whatever 84,000 BOE per day range.

This year, though, you didn't hold your reserves flat, I look at reserve additions relative to production last year, I should say.

Is that a consideration when you're thinking about maintenance capital as you go forward? Or how you think about your reserves relative to maintenance CapEx?.

Yes, Mike certainly with the significant drop in our capital in 2020, down 56%, we did see a 14% decrease in our reserves.

As we look at in this current year plan and then a maintenance plan, we would view those reserve additions to be kind of paralleling or flat with kind of if you're in a maintenance mode, or we do pursue our review our reserves have been relatively flat.

And this year, we expect with the kind of current plan that we have that we'll see growth in approved reserves. Again, more trailing towards the activity levels with that activity of a couple of frac crews and five rigs in the Permian, that we would see our reserves growing this year.

And again, in a flat world, we would see our reserves be maintaining flat..

Okay, good. And, Tom, you mentioned meeting the ESG challenges on your competitors, talked this morning about purchasing carbon credits, and investing in kind of income generating projects to get to carbon neutral scope on emissions, just wondering if Cimarex and the board have been considering anything like that..

We have not discussed that today; we're pretty focused on the engineering aspects of our own assets. And we have as Blake nicely said; we have a lot of opportunity in our own assets.

I mean I wouldn't put some kind of carbon offsets off the table, but I can't imagine us doing the next few years, we've got tremendous opportunity to make material progress through Blake mentioned electrification, we've got certainly a lot of opportunity and high- and low-pressure emissions and we have our best minds on this project.

And I am wholly confident that we're going to really make tremendous progress. So now, the direct answer question is no, we have not discussed the offsets..

The next question will come from Leo Mariani with KeyBanc..

Hey, guys, just looking at your 2021 CapEx budget fairly decent range there $650 million to $750 million.

And I guess $100 million on that is let's just call it I don't know, circa 2016 or so percent range there top to bottom, can you just give us a little color around what's dictating the top and the bottom of the range? Is this budget potentially allowing for maybe slightly higher activity at the end of 2021, to get a little bit of a head start on 2022, is there significant service cost component, but there might be a lot of uncertainty there, what can kind of tell us about the range?.

Yes, I'll tee it off, and then hand it over to Mark. We won't leave ourselves pretty wide range, because there is a lot of elasticity and things, we'd like to do this year, certainly a number of things around ESG, we have some really good opportunities to make some facilities modifications and reduce our emissions.

And that will involve a little bit of capital. I will also say that as we reenergized our New Mexico program, we're not sure the degree of partner participation we're going to have on some projects, we do have projects where our working interest is a little lower than it is in Texas.

And so we may find ourselves with little more working interest on projects we absolutely love. And we want to give a little flexibility for that.

But Mark, why don't you give a better answer?.

Yes, Tom, I think you hit on a couple of points, I was going to make that we do have some variability there. One other point, Leo, that we are midpoint of our guidance as we typically provide capital guidance kind of our current status of where we see AFEs are at.

And we have incorporated some initial - early time data for some increases for later to stand as far as hauling and other components there. But we have some room, hopefully in our budgets, because we see some additional inflation, we will also maintain our current range.

So really the working interest component, maybe potential little inflation and just that and ESG type work to really the upper end of the range..

Got it, okay, so it sounds like you're basically not really planning on kind of changing the activity that you've laid out in the plan for 2021, you pretty much keep that steady. And then obviously these other variables will dictate kind of where you fall, just wanted to confirm you're not really looking at increasing activity, latency or anything..

That's right, Leo, that's right..

That's helpful. And I just wanted to follow up a little bit on the dividends question, obviously, you guys talk about this a couple questions already here.

But obviously just to very healthy increase this year at 23% very chunky but to start the year, certainly sounds like you'll have those bonds paid off, I think we plan I think it's a call them in early 2022. I know the board will still have to come and go out there and make some decisions about things.

But is it fair to say that the preference today would be to have just a very solid, long-term growing base dividend is kind of the foundation for similar acts over the next several years?.

Well, Leo, let me just clarify one point on the - yes, we do expect if $55 oil with the current strip then we would have sufficient cash in our balance sheet. But those notes aren't callable on 2022, we could have some options on tendering other things, but they're not callable until the first quarter of 2024.

So we will - we just have to evaluate what our options are to maybe chip away at those in the meantime. But as far as the dividend increase, yes, certainly, we want to have a pattern of increasing dividend, which we've had throughout our history, certainly want to stress tested to make sure it's sustainable.

And that's how we depicted it in our slide five, even a $35 oil, that dividend only represents 12% of our cash flow. And at the current strip, it's led only about 7%. So in that range, and somewhere around 10% of our cash we will feel very comfortable that dividend sustainable.

And when we look at future increases, we'll be doing the same evaluation to make sure that whatever we raise that regular dividend by that it would be sustainable through the cycle..

Okay, great, very helpful. Thank you..

Yes, let me just add to that, we love our regular dividend, but as Mark very aptly said, we do want it to be sustainable. And so the beauty of a variable dividend is in its very name it's variable. And so where as we said earlier, we're watching different models roll out, but we would love to find a sustainable dividend philosophy.

I'll say that, and I think the combination between ordinary and variable is intriguing to us. But we were delighted to increase our dividend. We thought it was the right time; we wanted to do a significant increase if for no other reason, just to put our money where our mouth is, and just demonstrate our commitment to our owners..

The next question will come from Brian Downey with Citigroup..

Good morning, thanks for taking the questions.

Following up on Blake's comments on your electric grid completion and electric rig experiences, any sense for the magnitude of efficiency or cost benefits if those become more wide scale? I guess what's the size of the opportunity pie there both on the subset of projects those could eventually be used on? And what's the potential magnitude of the cost and efficiency savings?.

Sure. Thanks, Brian, a lot of is dependent, of course, on what service rates do in the future. We're all watching that closely. But I think we've gathered enough data to think we're probably chasing $25 to $50 a foot on our cost structure, which is pretty significant. And then also, we have fuel savings on the OpEx side when we look at compression.

And then you bring in some horsepower efficiencies on top of that. So on the capital side, $25 to $50 at today's prices, and then go forward on OpEx. We'll see as we gather data, but we expect our OpEx as well..

Great. That's helpful. And then maybe for Tom or Mark on the free cash flow scenarios, you show on slide five, any changes in how you're thinking about approaching your hedging program on either commodity front as you're building cash to the 2024 notes, and in any shareholder return beyond that..

Brian, we've had a pretty steady methodical hedging program for the last several years. And obviously, in 2020, that was to our benefit, as we look at our hedge position for this year, as we layered in hedges through 2020 for 2021, we'll be having some cash payments.

But that's kind of a natural component of a true hedge program, as you hedge through the cycle. But we'll continue to maintain a kind of a quarter-to-quarter hedge program, where we target 10% per quarter for five quarters for allows us to get to about 50% hedged for the preceding for 12-months.

And we'll continue to be methodical about it, and not being speculative or optimistic, but just sampling that force drip periodically every quarter through the year..

The next question will come from Noel Parks with Tuohy Brothers..

Good morning.

Not sure if you touched on this already, but have you - if you could talk a little bit about where the strip is for oil and gas and just the economics out in your different Oklahoma projects? And also, what sort of working interest do you think you'll be looking at for the activity you have there this year?.

This is John. We're currently developing right now in Anadarko one of our Lone Rock projects where we're drilling five wells. We model currently at strip very, very attractive returns, returns that competes heads up with a number of our premium projects, which is why we're making this investment right now.

But the reality is, we need to see those results as good as it looks on paper, we'd like to actually see it in the performance of a well, we think at five wells per section, we will have the kind of performance that will lead to those results. And if we see that, then that might spur us to want to even for more capital runway.

But this kind of our putting our toe in the water there, we really want to see this development come on, see what kind of results we get from it, and then we'll move from there. And in terms of any further investment. As far as the working interest there, it's quite high. We've done a very nice job of accumulating other interests in there.

I mean, right now we show about 94% working interest..

Oh, wow.

That's considerably above where it's been for some of your activity, right?.

Well, quite frankly, over the last year with a lot of people not really paying much attention, we've been able to accumulate more interest in that area. And it's an area we really like, and we think it's going to deliver great returns. But again, the proof will be in this particular development and the results we see..

Great. And just for my follow up on it.

Do you just have any thoughts on NGL piece of the puzzle as far as pricing and what you think that might look like at the wellhead and also your marketing as the years go on?.

Yes. No. We - with our NGL component of our realization in the fourth quarter, we were at 33% of WTI, seen the benefit of higher propane prices. Propane inventories have been very positive. And we've seen - we'll see how exports continue to trend here going forward, but inventory levels there are very reasonable. And we're optimistic about NGLs.

We're not really probably the person to ask. Most for NGLs are marketed at the tailgate of our plants, so we don't really directly market our NGLs, but we're optimistic about the overall NGL component of our barrel or of our commodity..

Great, thanks a lot..

Noel, this is Tom. I just like to - I just want to make a quick comment that the 2020 and including the weather events that we just went through, have reaffirmed in us why strategically, we've always wanted to be a multi-basin, multi commodity type company.

Our marketing group had some valiant times in 2020, where markets were locked up y'all remember the tremendous pressure on WAHA. Having diversity of assets was a tremendous benefit to us as it was in the recent storm event.

So John and his team have done a phenomenal job of bringing forward some fantastic investment opportunities in the Anadarko Basin that that are at the very top of our forced ranking on returns. And that's strategically consistent with how we want to manage the company..

The next question will come from Neal Dingmann with SunTrust Securities..

Good morning. So of my questions, or I guess maybe for you or John, just looking at slide 9, I liked the new well designed.

Can you talk a bit when you think about now does that essentially eliminate any of the interference between the x, y and the a versus the previous design or maybe just talk a bit about the upside and what you're seeing with that news on?.

This is John. I'll take a stab at it. I'm sure Tom will want to follow up, I think the slide you're referring to is what we will be doing with our calculate development, Culberson and where we have relaxed or upsize the spacing in terms of the well count. But as you did point out as well as the vertical spacing twin landings.

And again, this is just all lessons learned from multiple developments that we've already undertaken. We've talked about this there was clearly greater communication or what we say permeability going on between our well, more so than what we originally modeled and expected. We have adjusted to that.

And what this slide demonstrates, as we think at going from 10 to 7 wells per section, we will essentially save the cost of three wells but essentially achieve the same total recoverable reserves for that section does greater capital efficiency and higher overall project returns.

And this has been carried across all of our projects, not just here in Culberson but in Reeves, Lee and even what I mentioned earlier in Lone Rock where there was a time of Lone Rock, we thought we'd be at eight wells a section.

Now we're at five we see at five, we do a much better job of keeping our condensate yield, having less of a decline and again, just better economics..

Now the spacing is going to vary across our asset. For example in Culberson the map that's on slide 9, you're going to see six to eight wells per section on the western side and 8 to 10 walls per section on the eastern side. But the important thing is, as John pointed out, we're trying to maximize the value of that section.

And the beauty of a deep inventory, as you all know, we have a very long deep inventory, is we can make decisions from going from 10 wells per section seven wells per section, solely considering maximizing our value.

And we don't have a concern of inventory overhanging that decision, and it gives us just the financial flexibility that bleeds into the financials that we report..

Okay, and then one just follow-up also kind of completions, I think you mentioned doing just a couple fracs for most of the year, maybe two or three, do you think is that still kind of an optimal completion? if you're looking at thinking about optimal completions in the Permian, is just even if you have a little bit reduced activity or the limited activity like that, are you losing any of these - any of that optionality? Or is it - would it be more I guess my question is, would be more optimal if you happen to be running maybe run more frac spreads and add some same effects and such..

I'm going to Blake handle that. We spent a lot of time modeling program efficiencies, and what the right mix of field assets is to maximize our efficiency.

Blake, you take that question?.

Yes, sure. We look at all kinds of efficiencies, and what scale it takes to achieve them. And a lot of it requires thermal frac, for example, greatly limits our flexibility in certain cases. So that's not always the optimal result when we look at that.

So between the different sides of projects, that's what we think really drives efficiency more than anything, well prepared is the number one driver for efficiency, and we're maxing that out every chance we get..

The next question will come from Paul Cheng with Scotia Bank..

Thank you. Good morning. I have to apologize for my first question. Because I think people have been asking that when I'm looking at your fourth quarter exit rate a 30% growth that's about 88,000 barrels a day. So even if we assume that going to stay flat for the next three years to 2024. That's about 4% growth.

So when I look at your presentation on page 6, you say, oil volumes expect to be flat to slightly up year-over-year from 2021 to 2024. So is that statement still correct.

That is the intention you make just keep it spread for the next several years, or this is based on the assumption commodity prices, perhaps less, much less robust than where we are today.

So trying to understand what extended that statement means under what condition?.

Yes, Paul. So yes, on slide 6, we were trying to depict what a free cash flow framework could look like even at a lower price case, which were describing there $35 oil. And suddenly, at that level, we would be much more conservative in our capital reinvestment.

And we would also be looking at our debt retirements as being a very high priority, and have that kind of world at $35 WTI and even at $35 WTI we believe we would be in a position to have flat and maybe maintenance capital, slightly up volumes, even a $35 oil. And we believe we'd have sufficient cash over that time period to pay off the 2024 notes.

That's what we're trying to describe in that framework.

Certainly at higher prices that are 2022 and beyond type world, we will have to continue evaluate, we don't are signaling that we would want to go to any kind of growth mode, but we will continue to evaluate our capital plans each year they go into the year looking at capital plans based on conservative price decks.

That is realistically well below where the current strip is kind of setting that capital plan level and looking at making sure we have 20% to 30% of free cash flow available after our capital plans. And the reason that firstly, we're investing 70%- 80% of our capital, our cash flow and our capital.

So it's a mixture of kind of how we're trying to describe there with $35 oil versus, again, kind of ongoing plan with a more current stock pricing and current pricing involved..

And the only comment I would make is I think slide 6 is built more with a viewpoint to where we want to land steady state. And because of the huge production decline, we saw 2020 as I said earlier it's kind of hard to throttle back.

I mean we're going to - with any kind of even very modest investment, and I think this year below at 50% of our cash flow, you would use the word modest. We'll see some Q4-to-Q4 reasonable growth rates, but we're not managing over growth. That's not what we're doing. We're really managing around our long-term financial targets..

Okay.

Last question for me on the CapEx trajectory because the numbers of well you have come on stream is much less in the first quarter compared to the remaining? Should we assume that it's going to be followed that or is going to be pretty steady?.

Paul, our quarter-to-quarter production profile, is that what you asked?.

The CapEx?.

Oh, CapEx, sorry CapEx. We'll have a little higher CapEx in the second and third quarters. But it's on a relative basis is fairly steady. But we do have a little bit more completion capital in the second and third quarters..

This concludes our question-and-answer session. I would like to turn the conference back over to Thomas Jorden for any closing remarks. Please go ahead, sir..

Well, thank you. I just want to thank everybody that joined us this morning. We're very optimistic about 2021. Appreciate your great questions. I think we are pretty pleased with the shape Cimarex is in. And I'll say as I said at the beginning, we're a much better company entering 2021 than we've been.

And that's a testament to the challenges we faced and the organizational response. And I know we've all had some challenges in 2020. I hope you're all doing well. And again, thank you so much for your interest and your great questions this morning. Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..