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Pioneer Natural Resources Company (PXD) Q4 2020 Earnings Call Transcript

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Pioneer Natural Resources Company (NYSE: PXD)
Q4 2020 Earnings Call
Feb 24, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Pioneer Natural Resources' Fourth Quarter Conference Call. Joining us today will be Scott Sheffield, Chief Executive Officer; Rich Dealy, President and Chief Operating Officer; Joey Hall, Executive Vice President of Operations; and Neal Shah, Senior Vice President and Chief Financial Officer.

Pioneer has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the Internet at www.pxd.com. Again, the Internet site to access the slides related to today's call is www.pxd.com. At the website, select Investors, then select earnings and webcasts. This call is being recorded. A replay of the call will be archived on the Internet site, through March 22, 2021. The Company's comments today will include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospects of Pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Pioneer's news release on Page 2 of the slide presentation and in Pioneer's public filings made with the Securities and Exchange Commission.

At this time for opening remarks, I would like to turn the call over to Pioneer's Senior Vice President and Chief Financial Officer, Neal Shah. Please go ahead, sir.

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Neal H. Shah -- Senior Vice President and Chief Financial Officer

Thank you. Orlando. Good morning everyone and thank you for joining us.

During today's conference call, we will be discussing our strong fourth quarter results in addition to providing our 2021 outlook, detailing our strong financial position and discussing the initiation of our variable dividend policy. We will also include an update on the synergies we are achieving through our Parsley transaction and our significant ESG momentum with new goals and targets set at the end of last year. After that, we will open up the call for your questions.

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

Scott D. Sheffield -- Chief Executive Officer

Thank you, Neal. Good morning.

We're going to start off on Slide Number 3. We had very, very strong free cash flow generation of approximately $300 million, driven by strong production and low capex due to continued efficiency improvements from the operational teams at all levels. We're announcing our formalized long-term variable dividend structure, which we have several slides, we'll be returning up to 75% of post base dividend free cash flow to shareholders and we'll give you some examples later on, significantly improving return of capital to shareholders.

We generate significant free cash flow generation with approximately $2 billion expected in 2021 at $55 WTI. Currently, the strip is about $60 WTI. So, we hope to beat that, driven by peer-leading corporate breakeven in the high-$20S per barrel range.

Synergies from Parsley acquisition are exceeding previous guidance, especially on our recent bond deal, interest savings of additional $25 million and we expect to achieve better savings on G&A as we go into the second and third quarters and we expect synergies there of about $100 million. We also expect to realize our full operational synergy run rate of $150 million per year by year-end '21. Rich will talk more -- give more detail about that and fully benefiting 2022 and thereafter. We remain focused on environmentally responsible operations with new emission reduction goals announced during our fourth quarter '20 with the release of our comprehensive Sustainability Report.

Going to Slide Number 4, our execution continues to remain strong, both total production and oil production in the upper half of our guidance ranges for both fourth quarter and for full year. We generated $700 million in free cash flow, despite averaging $39 WTI oil price during 2020. In addition, we're continuing to gain on lease operating expenses. They were down 15% from 2019 levels.

Going to Slide Number 5 on outlook. In 2020, obviously, many E&Ps experienced year-on-year production declines. Pioneer continued its trajectory of strong performance setting up a robust '21 and especially going into '22. As seen on Slide 5, we're expecting to generate approximately $2 billion in free cash flow at $55 WTI. Again, the strip is about $60. So, we hope to beat that. Our 2021 production outlook was impacted by the harsh winter weather in Canada across the State of Texas last week that left millions without power for extended period of time. Our 2021 production outlook reflects these impacts, which amounts to approximately 8,000 barrels of oil per day on a full-year basis a little above 2% of our total oil production.

With our announced capex range of $2.4 billion to $2.7 billion, we're expecting to produce between 307,000 and 322,000 in '21, which includes the impacts of the winter storm and also excludes 11 days of Parsley production from January 4 to January 11, prior to the close. Our current production trajectory will drive strong exit-to-exit growth of approximately 8%, which sets up a very highly capital efficiency 2022 and beyond.

Going into Slide Number 6, the framework for the variable dividend and to discuss more detail over the next several slides. Top-tier inventory supports a low maintenance capital breakeven price of about $29 per barrel. And as you look, our maintenance capital is about $2 billion now with both companies combined together. At $55 oil, the 2021 plan generates $2 billion of free cash flow, that's WTI. As I've said already, the strip is about $60 for the rest of the year, allowing for substantial return of capital to our shareholders via a base and a variable while concurrently further strengthening our balance sheet.

Going to Slide Number 7, we've been talking about this for 18 months. We've been exploring it with shareholders, both long-term and short-term for about 18 months. We're happy to announce the initiation of our variable dividend policy which significantly enhances our long-term shareholder returns. Specifically, after the base dividend is paid, we expect up to 75% of the remaining annual free cash flow to be returned to shareholders in the form of variable dividend which will be paid out quarterly the following year. To further strengthening Pioneer's balance sheet, which we think is critical and has been critical long term for us, the 2022 variable payout will be up to 50% of the '21 post base dividend free cash flow. We believe that a strong capital return strategy, one that encompasses a stable and growing base dividend, paired with a significant variable dividend, presents an attractive value proposition for our shareholders.

Now, I'm going to go into some mechanics for '21 and '22 to make sure it's clear. In '21, let's assume we do generate the $2 billion of free cash flow. We have a base of about $500 million. We're left with $1.5 billion. We're going to split that 50-50 for '21 payable in '22. So $750 million will be for the variable and $750 million will go to debt reduction. The $750 million will be split equally into four equal payments paid in the quarter -- each quarter. It will be offset -- it will be a different part of the month of that quarter. So, we won't -- each shareholder receive eight checks a year from Pioneer. The estimated dividend yield based on the current stock price is about 4.5% when you add the base plus the variable.

Let's go to 2022. Right now, at the current strip, we expect to generate about $3 billion of free cash flow. Take away about $500 million for the base, you're left with $2.5 billion. Now, we we split that 75-25. That's $1.9 billion as a variable and $600 million for debt reduction. That equates at the current stock price to 7.5% dividend yield. So, we hope that is clear as we move forward in '21 and '22 in those examples.

Going to Slide Number 8, our long-term thesis. We've had this slide before. It remains the same, remains focused on driving free cash flow generation and creating significant value for shareholders. At the current strip, our long-term reinvestment rate is 50% to 60% of cash flow, which supports a program that delivers approximately 5% annual growth, adding one to two rigs per year long-term. We expect this framework to generate approximately $16 billion in free cash flow during '21 through '26 at $52 WTI, which is greater than 50% of our current market capitalization. We believe this differentiated strategy positions Pioneer to be competitive across all sectors and a leader within our industry.

Let me now turn it over to Rich.

Richard P. Dealy -- President and Chief Operating Officer

Thanks, Scott and good morning.

I am going to start on Slide 9. And with the combination with Parsley, we are the only 100% focused Permian E&P of size and scale. You can see from the map that on a combined basis we have a footprint of about 920,000 net acres with a substantial inventory of high-return wells and importantly zero exposure to federal lands.

Looking at the specifics for the 2021 plan, we plan to run on average 18 to 20 drilling rigs and five to seven frac fleets. As you can see in the bar chart there, we are continuing to move toward larger pads, which helps drive efficiencies and can be applied to the Parsley acreage position. Other than the larger pad sizes in 2021, our development plan in 2020 is very similar in both lateral length and well mix compared to the 2020 program. As Scott mentioned, the winter storm last week did impact our first quarter production by approximately 30,000 [Phonetic] barrels oil per day. The vast majority of this production is back online and we expect to see the remaining production back online in the next week or so. I would like to take this opportunity to thank all of our employees and especially our field employees, supply chain team, and our service company partners for all their efforts to restore production and resume drilling and completion activities. They've done a terrific job while many of them have been dealing with their own personal home repairs from being without power and having broken products. So, I want to personally thank everyone for their hard work and most importantly for doing it safely.

Turning to Slide 10, you can see that we are increasing our initial Parsley synergy target from $325 million annually as Scott mentioned to $350 million. In January, we completed the refinancing of the Parsley debt and savings on an annual basis of $100 million of interest, exceeding our target of $75 million by $25 million. In aggregate, post the refinancing, this lowered Pioneer's overall average coupon interest rate to approximately 2%. We expect to realize the G&A synergies of $100 million in the first half of the year and we're well on our way toward that. On the operational synergy target of $150 million, we expect to achieve that by year-end 2021, which will drive a recurring benefit beginning 2022.

To give a little color on the work in progress, we are in the process of optimizing our field Production operations given the adjacent operations in the Midland Basin. We are consolidating our supply chain activities and we're looking at further capital efficiency improvement associated with tank batteries, water systems and water disposal systems, just to name a few of the initiatives under way.

As Scott will discuss as well, achieving these synergies is part of our 2021 compensation incentives. If you look at the right side of the page, you can see these synergies when coupled with our unmatched inventory of high-return wells, which supports our free cash flow model.

Turning to Slide 11 and controllable costs, we are continuing our journey to reduce our controllable cash costs and you can see here, we've decreased them 23% in 2020 and expect to decrease them another 8% or so in 2021. These costs are comprised of cash interest which I just mentioned being now to -- low average cash cost of 2%. The second component is cash G&A, which we expect to be around approximately $1.20 per BOE in 2021. And then thirdly, our industry-leading horizontal LOE costs. We won't stop here and we expect this trend to continue to improve through time.

So, with that, I am going to stop here and turn over to Neal.

Neal H. Shah -- Senior Vice President and Chief Financial Officer

On Slide 12, you can see Pioneer's premier asset base position positions us as the only E&P to have a corporate breakeven below $30 a barrel WTI within our peer group, enabling Pioneer to have a low reinvestment rate and drive significant free cash flow generation. This low breakeven price reflects the quality and the resilience of Pioneer's portfolio, underpinning our operational and financial strength. In addition, our unmatched high-quality asset base has no exposure to federal lands.

Turning to Page 13, to the right you can see the graphic that demonstrates our best-in-class breakeven price with our low leverage that supports substantial return of capital to shareholders as well as providing Pioneer both operational and financial flexibility. We witnessed the benefits of our strong balance sheet during the downturn in 2020 and it was Pioneer's strong financial position that facilitated the refinancing of Parsley's debt from an average coupon of greater than 5% to an average coupon of less than 1.5%, driving our interest savings synergies of $100 million that Rich discussed earlier.

With our investment framework, our net debt-to-EBITDA will continue to trend lower while concurrently returning significant capital to shareholders through our base and variable dividends, creating value for shareholders while bolstering our fortress balance sheet.

With that, I'll turn it over to Joey.

J.D. Hall -- Executive Vice President, Operations

Thanks, Neal and good morning to everybody.

I'm going to be starting on Slide 14. We came off our best year ever in 2019 and the drilling and completions teams committed to demonstrate similar gains in 2020 and the graph on the left shows they delivered on that promise. The chart on the right hand side illustrates the significant progress also made in reducing our facilities cost. Our construction and operations teams partnered together to decrease the initial cost of our facilities by 40% since 2018. All this has been accomplished without compromising our commitment to safety and protecting the environment to the contrary and most importantly, we improved on all safety metrics in 2020. These gains would not have been possible without the hard work of our entire staff, supply chain team, and great collaboration with our suppliers and service companies adding the complexities introduced by the pandemic and this has been a truly remarkable year by any measure.

Now, moving on to Slide 15, often get asked, what's driving all of these improvements. We're certainly very proud of the engineers and field staff that have worked hard to make these gains possible, but they did so in partnership with our technology solutions and data science teams. Their expertise has allowed us to effectively use our extensive data to make better decisions and to leverage technology. This represents a very small subset of examples in different areas where we have used advanced analytics and technology to improve performance.

Just a few examples as I move from left to right on the slide. By creating digital twins of our drill streams, we can use predictive analytics to push the performance envelope and reduce failures. Machine learning has allowed us to reduce costs by optimizing our proppant and fluid systems without compromising the deliverability of stimulation or well performance. Mobility projects have allowed us to put more applications in the hands of our field staff to ensure they have convenient access to the information they need to perform their jobs and minimize driving time and improve uptime. And to further progress our best-in-class emissions performance, we are deploying various sensor technologies that will allow us to detect emission events in real-time and reduce cycle time for repairs. Ultimately, we are using our vast dataset and the best available technologies to create more value while improving safety and environmental performance. Coming into 2021, our teams remain committed to keeping our people safe, reducing our environmental footprint and demonstrating top performance when compared to our peers. Congratulations to the entire Pioneer team for their contributions to our safe and efficient execution in 2020.

And now I'll turn it back over to Scott.

Scott D. Sheffield -- Chief Executive Officer

Thank you, Joey.

Starting on the Slide 16, developing low emission barrels on -- being in the Permian Basin and the actions that we have taken as a company. We are at the lowest -- one of the lower CO2 emissions per BOE produced worldwide. This is an interesting chart that we have found. It's essentially all state-owned oil companies, majors largely in the business. So, it's the largest global operators in the world making up over 64 million barrels of hydrocarbon liquids per day. Pioneer's operations produce barrels that's on the lowest associated CO2 emission intensity globally. Our low-cost low-emissions barrels continue to be desired around the world.

Jumping to Slide 17 we continue to make changes in our executive compensation going forward. One of the first things we've done, we did this last year, was tying myself, the CEO, for 100% on any LTIP based on performance. So, it's all based on performance. So, Pioneer has to perform for myself, the CEO, to be paid anything in the long term. We started that program last year. Right now, we're the only company that is doing this. Most CEOs average about 51% in the S&P 500. We added the S&P 500 Index into our TSR peer group, beginning in 2021. We've also added some new goals and increasing goals. We increased ESG and HSE from 10% to 20%. We have now ROCE and CROCI combined weighting of 20%. And last year, we didn't remove any production and reserve goals going forward. As Rich mentioned, we do have 20% as strategic. We mentioned that in that strategic, we do have to achieve our Parsley synergies to make that number work on any annual incentive in that regard.

Going to Slide Number 18, strong focus on ESG. Pioneer continues to hold all pillars of ESG of great importance. Our new sustainability report was released last quarter reflects our significant strides in reducing both Scope 1 and Scope 2 greenhouse gas and methane emissions. It incorporates emissions intensity reduction goals in both. Inclusive of Parsley, we have a very low flaring intensity of 0.7% compared to the peers' average of 1.4%. We continue to promote a diverse workforce, which reflects community in which we live and work.

Finally on the last Slide Number 19, we're committed to driving value for our shareholders and we're looking forward to finally commencing with our variable dividend structure. Again, thank you. We'll open it up now for Q&A.

Questions and Answers:

Operator

[Operator Instructions] And we'll take our first question from John Freeman with Raymond James. Please go ahead.

John Freeman -- Raymond James -- Analyst

Good morning, guys.

Scott D. Sheffield -- Chief Executive Officer

Hey, John.

John Freeman -- Raymond James -- Analyst

Appreciate all the extra details, Scott, on the variable dividend policy. And I just wanted to make sure -- just to clarify a few things. So, when we think about like long term, the strategy to distribute up to 75% of the prior year's free cash flow after the base. And then -- but this first year, it will be basically up to 50% of the '21 free cash flow after the base. Just maybe sort of how to think about in any given year how you all are deciding between if it's 50% and 75%. Obviously, your leverage metrics are already really low, but just if there's anything that we should be thinking about how you'll are kind of coming to that conclusion.

Scott D. Sheffield -- Chief Executive Officer

Yeah. I think, first of all, John, we use the word up to give us flexibility. Our goal all along is to pay 50% for this year and 75% of the free cash flow for '22 and beyond. We do up to simply because of the volatility nature of our industry and the commodity prices. So our intention -- true intention is to do 50% and 75% long term. That's our goal. And at some point, I didn't make this point, but if you look at the numbers over six years, our debt-to-EBITDA targets even get better than 0.75. We -- actually, after a 6-year time period, we get our debt essentially down to zero. So at some point, the Board will reopen whether or not we continue at 75%, we could go higher because at some point, if we have no debt, no balance sheet.

And the reason we're doing that, as you have heard me talk, we're not a firm believer of buying back stock annually long term. But we think when you have extreme downturns like we experienced last year, which we had the firepower to buy a lot of stock at $50. So we'd like to have a great enough balance sheet to go into any future downturns to be able to buy back stock one-third of the current price. And so, you'll see our balance sheet get better and better over time. We just think it's better to have a great balance sheet due to the volatility of our industry. So, I hope that helps.

John Freeman -- Raymond James -- Analyst

That does, thanks. And then, just a follow-up on how to think about the operational synergies, which I know a good bit of Neal Shah talked about would really occur in the second half of 2021. But as we think about sort of the different synergy kind of leverage, let's say, whether it's sharing the tank batteries, water infrastructure, some of the continuous acreage, maybe just some additional details on sort of which of those you're able to kind of realize pretty quickly versus those that may take later on into the year to fully realize.

Richard P. Dealy -- President and Chief Operating Officer

Yeah, John. I think the field optimization in terms of just the operational side and the production side are things that we'll capture quickly. The supply chain stuff are things that I think we'll capture quickly in terms of just leveraging our suppliers and maximizing our best contracts. So, I think those are the easier ones. I think as we've talked about the integration capital that we have in the budget, connecting the water systems, getting the disposal systems connected and optimizing the tank batteries, those will take a little bit longer. So, those are probably more second half related and into 2022. So, I think that's really the timing of those things of what comes first and what kind of comes later.

John Freeman -- Raymond James -- Analyst

Thanks. I appreciate it. Well done, guys.

Operator

And up next, we'll hear from Brian Singer with Goldman Sachs. Please go ahead.

Brian Singer -- Goldman Sachs -- Analyst

Thank you, good morning.

Scott D. Sheffield -- Chief Executive Officer

Hey, Brian.

Brian Singer -- Goldman Sachs -- Analyst

My first question is with regards to the reserve report. You had substantial upward revisions in natural gas and NGLs. You had downward revisions to oil. I realize there may be price adjustments driving some of this and I wondered if you could comment on the drivers of the reserve report and revisions beyond price. And what implications, if any, there are for Pioneer's production mix in the area and the ratio going forward as [Indecipherable] deliver it.

Richard P. Dealy -- President and Chief Operating Officer

Yeah, Brian. Great question. I think as you mentioned, clearly, oil prices were a driver, which I'll get on to the NGL and gas ones. But as you know, oil prices, I guess, using the SEC pricing was down 30% from 2019 to 2020 and starting from $56 WTI down to about $40 WTI. So, that's really driving the negative revisions on oil for the most part. When you look at the positive revisions that we're seeing on gas and NGL, it's really coming from a couple of things. One is just our enhanced completions continue to improve our fracture networks. And so, that's leading to better recoveries from the wells, not only on oil, but NGLs and gas as well. We've also seen improved infrastructure out there, and so better capacity, which has reduced line pressures to allow more gas to flow and therefore, added more NGL and gas reserves. So, if you kind of strip those out, that F&D that was in the low $4S, probably even closer to $7. And so, I think that's kind of the background of what the reserve changes were during the year.

And I think in terms of long term, you're thinking in terms of long-term mix. I think we've been running in that, call it, 57%, 58% range on oil. And we still anticipate that to be longer term at this lower growth rate to be the right level.

Brian Singer -- Goldman Sachs -- Analyst

Great. Thank you. And then my follow-up, risk of -- Scott, of asking a question that I think you've been asked a few times over the last couple of months. When you think about where production this year is going to exit, I think you said it could be up -- you might have said up about 8%, but something that's above the 5% threshold. The plan, when you announced it, you had some materially lower oil price views than where we're at today. And I just wonder if -- how you're thinking about that flexibility into 2022 and the torque between growing at an above 5% rate versus reducing or potentially reducing activity to increase free cash flow and stick within the 5%.

Scott D. Sheffield -- Chief Executive Officer

Brian, I still are -- we're committed to the long-term growth rate starting in '22 and beyond of about 5%. Some years, we may be 6% or 7%. Some years, we'll be 3% or 4%. And unless we get into another extreme downturn, we have the flexibility to go back to zero growth, like we did in 2020 or '21, too. And so we're not going to let the growth rate jump up. If it turns out, we're achieving -- if Joey and his team continue to achieve great capital efficiencies and it looks like we're going to grow 8% to 10% in '22, we're going to dial back to capital for going into '22.

Brian Singer -- Goldman Sachs -- Analyst

Great. Thank you.

Operator

And up next, we'll take a question from Jeanine Wai with Barclays. Please go ahead.

Jeanine Wai -- Barclays -- Analyst

Hi. Good morning, everyone. Thanks for taking our questions.

Scott D. Sheffield -- Chief Executive Officer

Hi, Jeanine.

Jeanine Wai -- Barclays -- Analyst

I think just following up on -- hi, good morning. Just following up on response to John's question, you mentioned getting to net zero, and I think -- or sorry, not [Phonetic] zero, getting the net debt of being zero and I think you said six years. And at what point do you consider the Company to be under levered? Is it at zero net debt? Is it at 0.5 times, 0.25 times? So how are you thinking about that level?

Scott D. Sheffield -- Chief Executive Officer

I mean at this point in time, seeing three downturns in 11 years, to me, I just think it's better to have the best balance sheet in the business. It gives you so much flexibility. We have choices like -- I gave one choice. We have zero debt. We can buy back stock in extreme downturns. If the Board wants to continue a high variable dividend for a year or two, even though our free cash flow may not be as strong, they have that flexibility. So, it gives you so many more choices.

Sticking around -- I mean we thought we had a great balance sheet for '20. We were even afraid to buy back our stock at $50. So, we had no idea how long the downturn's going to occur. So I just -- I've gone -- I've probably been through more downturns than any CEO out there. And I just think it's better to have a great balance sheet, an even better balance sheet. So, we have the flexibility also, as I said, to take the 75% up higher the Board does to 80% or 90% or 95% or 100%. So we -- you have so many more choices when you have even a better balance sheet than debt-to-EBITDA of 0.75 times. So, we don't have a stated target. I prefer to have -- eventually, at some point in time, zero debt would be my ideal target. So...

Jeanine Wai -- Barclays -- Analyst

Okay. Options are good. We like that. And then, my follow-up is just on hedges. And so how does your new kind of net debt projections, how does that factor into your hedge philosophy going forward? Could we see less hedging because I know we're kind of walking a fine line here in some respects. But generally, hedges are for risk protection, balance sheet protection. And generally, we see companies with the better balance sheets having less hedges. So, that reserves some more upside because you have the balance sheet for protection. So, just wondering if your hedge philosophy is evolving going forward as well. Thank you.

Scott D. Sheffield -- Chief Executive Officer

It's still evolving. The big change, we used to spend 100% of our capex. Now, we're only spending 50% to 60% of our cash flow as capex. And so, that's a big change. We may hedge. We may limit it just to protect that going forward. We may hedge enough to protect the base dividend but because the market's in extreme -- the way Saudi and OPEC has engineered this latest rise, it's an extreme backwardation. And the volatility and less liquidity in the market makes it tough to do any floors, to do any collars. So, when you used to be able to do a collar on each side of the strip, $5 on each side or $10. So, they give you very little upside anymore. So it's really -- as long as it's an extreme backwardation, you'll probably see us do less hedging.

And then lastly, the variable dividend is something that's going directly into the shareholder base. So, if we try to hedge that guess, it's a direct reflection on what happens to that variable dividend. And so, I'm going to guess, long term we're probably going to do less. But at the same time, we continue to see spikes of the backwardation that's taken out of the market. You may see us do a little bit more. So, we're going to remain opportunistic.

Jeanine Wai -- Barclays -- Analyst

Very helpful. Thank you.

Operator

And our next question comes from Arun Jayaram with JPMorgan. Please go ahead.

Arun Jayaram -- JPMorgan -- Analyst

Yeah, good morning. Scott, Rich, I was wondering if you could maybe help us better understand the shaping of the 2021 production and capex profile just given some of the weather disruptions that you highlighted. And that -- and we're estimating, based on that 8% exit rate, we had around $335 million [Phonetic] for oil for 4Q. So, just wondering if you can walk through the progression.

Richard P. Dealy -- President and Chief Operating Officer

Yeah, Arun. I think when we look at it, setting aside the first quarter because of the weather impacts, we'd said that it was going to be more toward the back end just because of the rig ramp that started late last year and just takes 180 days to kind of do that. But I think as you move into the second quarter through the fourth quarter, it is a ratable increase in production over that three-quarter time period. And I think your exit rate is, in the ballpark, it may be slightly higher than that, but it's in that zip code. And then on capital, I think we were pretty good about getting the activity to the average rig and frac fleet rates starting in January. So, I would think your capital is pretty ratable throughout the year. So, I think really from a perspective that it's ratable on capital and ratable Q3 -- or Q2 through Q4 on production.

Arun Jayaram -- JPMorgan -- Analyst

Great. Great. And just my follow-up. One of the questions that's kind of come in as Pioneer obviously delivered on legacy in terms of the fourth quarter, but some of the Parsley volumes as you 8-Ked a few weeks back were a little bit light of what the market was thinking. Have you done a bit of a postmortem there? Any conclusions there regarding the Parsley 4Q performance?

Richard P. Dealy -- President and Chief Operating Officer

Yeah, a couple of things. One, they sold their Big Tex acreage that had about 1,400 barrels a day of oil production associated with it. So, that was one piece of it. And then, I think the other piece of it was just reduced activity. They just didn't get the activity started back up on the frac fleet quick enough. And so, they had a limited number of pops in the fourth quarter relative to what they had in the third quarter. And so, it really was just production just didn't come -- stay at that level given the decline. And so really, that's -- our assessment of it just really driven by activity levels, but the well performance has been fine. It's nothing hidden there [Phonetic]. It just was activity.

Arun Jayaram -- JPMorgan -- Analyst

Got it. Got it. And that's all baked into your updated forecast, right?

Richard P. Dealy -- President and Chief Operating Officer

That's correct, Arun.

Arun Jayaram -- JPMorgan -- Analyst

Okay. Thanks a lot, guys.

Richard P. Dealy -- President and Chief Operating Officer

Sure.

Operator

And the next question will come from Charles Meade with Johnson Rice. Please go ahead.

Charles Meade -- Johnson Rice -- Analyst

Good morning, Scott, to you and the whole team there. I apologize for belaboring this point a little bit. But on -- again, the shape of the '21 kind of production curve, it looks to me like you guys are going to have -- obviously, there's going to be a big bounce back. And it's not really a valid comparison to go 2Q versus 1Q because of all the weather downtime. But it looks like in the back half of the year, you guys are going to be showing 3% to 4% sequential quarterly growth. Is that kind of close to what you guys are looking at internally?

Richard P. Dealy -- President and Chief Operating Officer

Seems a little high to me, but just because I think the exit-to-exit Scott talked about was kind of 10%. So, it would seem to be fine. But in general, I mean, it's directionally in the right place.

Charles Meade -- Johnson Rice -- Analyst

Got it. Thanks for that, Rich. And then my second question, this isn't really a new one for you guys, but it's highlighted again by the 5% capex allocation to the Delaware. That's -- again, it's not new. That kind of seems like it either needs to grow or -- as a percentage term, you guys would be sellers. So can you offer us any kind of refresh to your thinking on how the Delaware is going to play in your asset portfolio longer term?

Richard P. Dealy -- President and Chief Operating Officer

Yeah. I think, Charles, it's -- as we've talked about before, Delaware acreage is very attractive for a number of reasons, the higher oil cut that's there. We have a high NRI and we've got good infrastructure over there. So really, the 5% for 2021 is really driven by the program that Parsley had outlined early in the year. And so, we will be looking at that program. Given the run-up in oil prices, the economics are very favorable for the Delaware. And so, we'll look at how do we, back half of the year or into 2022, reallocate capital from Midland over to the Delaware. So, we're still extremely pleased with that acreage and look forward to developing it as we get a chance to get our hands on it and move forward.

Charles Meade -- Johnson Rice -- Analyst

Thanks for that detail.

Richard P. Dealy -- President and Chief Operating Officer

Perfect.

Operator

And our next question will come from Scott Gruber with Citigroup. Please go ahead.

Scott Gruber -- Citigroup -- Analyst

Yes, good morning. First question here on LOE. Will the storms have any material impact on 1Q LOE? And then, as production normalizes into 2Q, full contribution from Parsley, how should we think about LOE in 2Q in the second half? Are there any extra production costs early on as you integrate Parsley that's not captured in the incremental capex? And if so, how those roll off?

Richard P. Dealy -- President and Chief Operating Officer

Yeah. I think if you look at our LOE guidance for the first quarter, we did adjust that up about $0.25 a BOE, just to take into account the repairs that we're seeing on -- they're minor in the grand scheme of things, but repairs on our wells and facilities due to the storm. And so, we did factor that into our first quarter guidance range. And so, if you take that range and back it down $0.25 per BOE for the Q2 and beyond, that will give you a good guidance range.

Scott Gruber -- Citigroup -- Analyst

Got you. And then, any kind of incremental process we should be thinking of kind of above and beyond the incremental capex that made the production here early on the portion?

Neal H. Shah -- Senior Vice President and Chief Financial Officer

No, I don't think so. Scott, I think that we wouldn't anticipate any.

Scott Gruber -- Citigroup -- Analyst

Got you. And then just a follow-up here on simul-frac. A few of your peers have gotten excited about the technique and the opportunity to drive another leg here of completion efficiency gains. Can you talk about your interest in the technique and potential deployment?

J.D. Hall -- Executive Vice President, Operations

Hi, good morning, Scott. This is Joey. We actually just finished our first simul-frac right before the winter storm hit. Great success there and we have plans to do more as the year goes on and then tether them into our operations over time.

Scott Gruber -- Citigroup -- Analyst

Okay. Any color on kind of rates of efficiency improvement or savings on the D&C side in your first program?

J.D. Hall -- Executive Vice President, Operations

Yeah. From a -- of course, we just completed it so I don't have all the assessment on the cost side, but from a time perspective, we did reduce the typical time that we would take to do a four-well pad by about a third. So, significantly reduced the amount of time on location. So, we'll continue to evaluate that. We'll get a look at what the cost savings were, which, of course, will be material, and then we'll continue to evolve that into our operations.

Scott Gruber -- Citigroup -- Analyst

Got it. Appreciate the color. Thank you.

Operator

And up next, we'll hear from Doug Leggate with Bank of America. Please go ahead.

Doug Leggate -- Bank of America -- Analyst

Thank you. Good morning, everybody. Scott, first of all, I think the way you've laid out this morning is really pretty prescient. So, congratulations on the framework. I am sure Mr. Shah has got his fingerprints all over this. So, congratulations, guys, on laying this out. My question is really a couple of things about the longer term. You've talked about 5% plus as a growth trajectory. I just want to make sure that hasn't changed with the 75% of the free cash beyond the dividend because it's probably a bit more than market is expecting. I'm just wondering what that means then for the 5% cost? That's my first question.

And my second question is, I wonder if I could press you to think more about -- you spoke about a five-year view from a capital activity standpoint. I wonder if you can give us some thinking as to what that would look like in terms of rig activity and spending because, obviously, you talk about 2022, but if you think what the capex on [Indecipherable]. So two questions, one on the 5% plus and two on the longer-term trajectory. Thanks.

Scott D. Sheffield -- Chief Executive Officer

Yeah, Doug. The second part, I've talked about already, but I'll go over it again. But the first part, when we say 5% plus, we're just leaving the flexibility. So, we can't get 5% exactly. Some years, we may be 6%, 7%. Some years, we may be 3% or 4%. So our goal is to really average 5% on the production growth. If we go through down periods, I gave examples of low oil prices like we did last year, we're going to be flat growth. And so, the goal is really not to exceed 5%, but we do have to have the flexibility based on rig cadence and POP cadence to have that flexibility some years to go to 6% or 7%. But some years, we may be 3% or 4%. And so as stated, I think -- a couple of the analysts have already asked me about '22. So, if it looks like we're going to be too capital efficient going into '22, and we're going to hit 8% to 10% production growth in '22, we'll reduce capital to get it back closer to 5% or 6%. So, I hope that answers your question. So, the target is really 5% long term.

In regard to long term, I gave out some numbers going out the next six years and I've seen some other projections by sell side. Over a 10-year time period, we basically will throw off enough free cash flow that's equal to our current market cap. At current strip, that $52, $51 WTI or $55 Brent. Over a six-year time period, it's $16 billion. And so, of that $16 billion, we'll be paying out about 75% of that as a variable and 25% actually goes toward debt reduction. And so, that's why I made some comments about our debts actually going to be going down over the next six years to almost zero after a six-year time period, for the reasons I gave.

So, I'd rather have a much better balance sheet. It gives us more options in regard to whether we buy back stock during extreme down periods like we had last year at $50, are examples where we want to pay a higher variable than our free cash flow during a given year. And also is that also gave the optimism that -- as our debt moves toward zero, that we could increase the 75% up to a higher amount obviously, up to 90%, 95% or 100% of free cash flow. So, hopefully, we're trying to give the Board various options and flexibility, obviously, in this fluctuating commodity price market.

Doug Leggate -- Bank of America -- Analyst

Yeah. I apologize, Scott, if I missed some of the nuance. But just to be clear, I'm trying to get a rig trajectory or maybe a POP trajectory that goes along with a -- maybe that's too detailed [Speech Overlap].

Scott D. Sheffield -- Chief Executive Officer

Yeah, we added -- I said in one of my earlier statements -- on one of my slides that we're going to -- our long term is that we're adding one rig to two rigs per year. So long term, you can figure adding one rig to two rigs per year long term from the current 18 rigs to 20 rigs.

Neal H. Shah -- Senior Vice President and Chief Financial Officer

[Speech Overlap] 5%.

Doug Leggate -- Bank of America -- Analyst

Got it, Neal. Got it. Thank you. Okay. That's really helpful, guys. And maybe just a quick follow-up then. Does your hedging philosophy change with such a robust balance sheet, and let's say, upside risk to the oil price seems to be the growing consensus, how do you think about hedging going forward? Thanks.

Scott D. Sheffield -- Chief Executive Officer

Yeah. We're only spending about 50% to 60% of our cash flow now. So, we don't need to protect the capex as much as we needed to before. We do have a great balance sheet. The market's in extreme backwardation. Due to liquidity, less liquidity, the volatility of the market, we can't get any upside on collars or three-ways anymore. So, you'll probably see us do less hedging for that reason.

But if we see any type of spikes, we'll probably go into the marketplace. So, we're going to be opportunistic, obviously. But the market is strong. I'm still a strong believer that demand's going to come back strong, both on airlines and also driving around the world once we get herd immunity. So -- and I'm confident that we can assort the Iranian barrels into the marketplace over time, and that U.S. shale is not -- no longer going to be a threat to OPEC and OPEC+.

Doug Leggate -- Bank of America -- Analyst

Appreciate your comments, Scott. Thanks again.

Scott D. Sheffield -- Chief Executive Officer

Thanks.

Operator

And our next question will come from Neal Dingmann with Truist Securities. Please go ahead.

Neal Dingmann -- Truist Securities -- Analyst

Good morning all. Scott or Neal, maybe I missed this. Could you talk a bit around just -- Scott, you just were talking about -- even that 10-year about what the potential could be on the variable. What -- and you've talked about -- I know you've been pretty specific about the production growth. Could you talk about the dividend -- the base dividend growth? Kind of what -- will that just continue to flow with the other overall growth? I just want to make sure I'm clear with how you are sort of assuming that base dividend growth as -- with conjunction with the variable.

Scott D. Sheffield -- Chief Executive Officer

Yeah. It will be a small increase every year is our goal. So, it will be minimal. It will be something from -- something minimal, 1% to -- in that 1% to 3% range is our expectations.

Neal Dingmann -- Truist Securities -- Analyst

Got it. Got it. And then, Scott -- you, Rich or Joe, I'm just wondering on what you saw or experienced with this, the outages and now the production downtime that you saw around the storm. Have you all started or will you think about or thoughts about permanent structural changes? Or anything around either, I don't know, if it's just infrastructure or tank battery, you sort of name it, are the things that you've started or would think about doing to -- I know, obviously, here in Texas, it doesn't happen to us quite often. But just your thoughts about if there's things that you could do to, I don't know, better prevent that going forward.

Richard P. Dealy -- President and Chief Operating Officer

Yeah. I think we'll take lessons learned from and see what things happen. But in general, it was such a 50-year event or 100-year event, whatever you look at it. We still want to be capital-efficient about it. And so we'll to have assess that. So not a -- no decisions today, but we'll definitely look at it just from a lessons learned. But I would say that given the freak nature of it, at this point, we don't see any substantial changes that we would make.

Neal Dingmann -- Truist Securities -- Analyst

And everything is back online now?

Richard P. Dealy -- President and Chief Operating Officer

Not 100%. We've got the vast majority back online and probably next week or so, we'll get the rest of it.

Neal Dingmann -- Truist Securities -- Analyst

Very good. Thank you.

Operator

And next question will come from Derrick Whitfield with Stifel. Please go ahead.

Derrick Whitfield -- Stifel -- Analyst

Thanks and good morning all. Perhaps for Scott or Rich, one of your peers recently committed to a plan to offset Scope 1 emissions through direct investments in CCS and/or renewable projects. From an ESG perspective, could you comment on the Company's desire to pursue something similar to this as a means to offset direct carbon emissions from your operation?

Scott D. Sheffield -- Chief Executive Officer

Yeah. In general, we're evaluating what companies like that and another company like Oxy is doing on carbon capture long term. We're assessed -- a couple of our also peers have stated they have ambitions -- they used the word target and ambitions to go to net zero by 2050. So, we're assessing that also. So -- we're assessing everything -- everything is on the table in regard to get better and better. So -- and then, we'll have to see what the Biden administration does with their upcoming climate -- after the stimulus gets passed, they're going to focus on infrastructure and climate next. And so, we'll have to evaluate that also. And so, everything's on the table in that regard.

Derrick Whitfield -- Stifel -- Analyst

Makes sense, Scott. And for my follow-up, perhaps for Joey. Referencing Slide 9, as you think about the progression of your D&C operations with regard to pad size and lateral length, can you comment on where you feel the efficiency limits are today and how this slide looks two years to three years from now?

J.D. Hall -- Executive Vice President, Operations

Specifically, on pad size and project size, I would say that I wouldn't expect that to continue to increase. But certainly from a consistency perspective, as we do more co-developments and full stack developments, more so and more so that we'll continue to have, on average, more wells per pad. From an efficiency gain perspective, as I said in my comments, I would have never expected for us to basically achieve in 2020 what we've done in 2019. And then continuing on my other comments that the benefits of technology are having significant improvements. The thing that I would say that's different now is that there aren't very many big wins to be had. Simul-frac may be a big win, but for the most part, when I look at the waterfall charts, it's lots of small, incremental wins that add up to significant improvements. So, we're certainly not finished on that journey. And we'll continue to work at it relentlessly to continue to drive our cost structure lower and lower.

Derrick Whitfield -- Stifel -- Analyst

Very helpful. Well done, guys. Thanks.

Operator

And next, we'll hear from Bob Brackett with Bernstein Research. Please go ahead.

Bob Brackett -- Bernstein Research -- Analyst

Good morning. Quick question, then a maybe a little slower one. The quick question, what is the timing of the decision on the variable dividend payout? So, if we're sitting in 1Q of 2023, is that when the decision is made about the free cash flow payout from 1Q of 2022, for example?

Scott D. Sheffield -- Chief Executive Officer

Yes. Bob, this is Scott. We generally have our Board meetings in late January or early February, early to mid-February. And those -- that's generally when we discuss increasing the dividend, and that's when we would make the final decision at that point in time. So, you're correct.

Bob Brackett -- Bernstein Research -- Analyst

Yep, that's clear. The second is the trade-off between the variable dividend and share buybacks. So, you clearly expressed eagerness to buy back shares sitting in the middle of last year, let's say. At some point, the shares are valued to the point where buybacks make less sense and the variable dividend makes more sense. Do you use an internal NAV to make that decision? Or is -- what sort of thought process would go into that?

Scott D. Sheffield -- Chief Executive Officer

Well, first of all, I talked to over 100 shareholders over the last 18 months. And I would say 99.9% preferred that they would -- long term, they would prefer us to pay a variable dividend versus buying back any stock. That's long term and buying stock year after year. As you know, the industry has a terrible track record of buying back stock at the top of the market. And so, people that are talking about buying stock now, we're back at the -- close to maybe at top of the market. And so, that's the wrong time to be buying. And so, everybody is in favor of a great balance sheet, if you can afford it to buy back in those dips. We had a chance to buy back at $50 last year. We didn't [Phonetic] have great enough balance sheet. So that's the -- so that's generally our feelings long term. Buy it back only during those downturns and not buy back shares and then focused on the variable dividend as the best way to return capital long term.

Bob Brackett -- Bernstein Research -- Analyst

Okay. Very clear. Thank you.

Operator

And up next, we'll take a question from Paul Cheng with Scotia Bank. Please go ahead.

Paul Cheng -- Scotia Bank -- Analyst

Thank you. Good morning. First, Scott and the team, just want to complement you guys that for resist the temptation just to spend all the free cash and put some on the balance sheet, I think is the right thing for the E&P industry for oil companies in the -- when you have excess cash flow to put into the balance sheet, and at some point that gets you to net zero on the net debt.

Anyway, two questions. First, with the lower growth rate that you guys are targeting now, you have a great inventory backlog. So does that make sense that -- for you to look at some of the really long-dated inventory that it may take you 20 years from now before you get to trying to either monetize it to sell it or that through joint venture have someone else to develop and you receive the royalty or some other form? The second question is that...

Scott D. Sheffield -- Chief Executive Officer

Yeah, no. Yeah, go ahead.

Paul Cheng -- Scotia Bank -- Analyst

Go ahead, Scott, sorry.

Scott D. Sheffield -- Chief Executive Officer

Okay. I generally can't remember two questions. So, it's better to give me one question at a time. On the first question, about long-dated inventory, the -- it's the same policy we've had. We will continue to take our Tier 2 acreage that we have and try to divest of it over time. And I think with the oil price moving up, there could be more opportunities where people will approach us like we've -- and we've done that consistently over the last five years.

Secondly, we've entered into a DrillCo arrangement as we have stated back in 2019 when I came back, that we would look at doing things like that. And that got put into place. We've drilled nine wells already. That's very positive and we're looking at extending that. So, those are some of the examples that we're looking at and we'll continue to do that. What's your second question?

Paul Cheng -- Scotia Bank -- Analyst

The second question is that Permian is clearly in excess takeaway capacity and probably that will -- this situation will be here for maybe a number of years. So, how that impact on your marketing effort? And also, how you deal with your existing take-or-pay contracts? Is there any way that -- to maybe modify those?

Richard P. Dealy -- President and Chief Operating Officer

Yeah, Paul, it's Rich. Yeah, I'd say our contracts for firm transportation and move things to the Gulf Coast really are -- we have those now. And so, with the lower growth rate, we have some extra capacity. But with the Parsley transaction is -- a number of those roll off -- their marketing arrangements roll off contract. In a couple of years, we'll be able to move those barrels onto that pipeline commitments and plus that we have plenty of barrels that we can get in the Midland Tank Farm.

So there's no concern on our part in terms of being able to get the volumes and move those down and get to the higher -- we'd hope it would be a higher-priced market with Brent prices in the refinery markets on the Gulf Coast. I mean, clearly, where our differentials are now is that, yeah, we've been slightly negative in 2020 and so far in '21. But long term, we still would think that prices on the Gulf Coast and export market will be better, but we'll have to continue to assess that. And -- but given where the capacity is, I don't see us taking on any new commitments at this point, but we'll continue to honor the ones that we have.

Paul Cheng -- Scotia Bank -- Analyst

Thank you.

Richard P. Dealy -- President and Chief Operating Officer

Sure.

Operator

And that concludes our Q&A session. I'll turn the call back over to Scott Sheffield for additional or closing remarks.

Scott D. Sheffield -- Chief Executive Officer

Again, thanks, everybody. Hopefully, we'll get a chance starting in summer, late summer, early fall, where we can actually have some visits among all of us as we reach herd immunity here in the U.S. So again, we look forward to next quarter. Again, thank you very much for tuning in to us. Thank you.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Neal H. Shah -- Senior Vice President and Chief Financial Officer

Scott D. Sheffield -- Chief Executive Officer

Richard P. Dealy -- President and Chief Operating Officer

J.D. Hall -- Executive Vice President, Operations

John Freeman -- Raymond James -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

Jeanine Wai -- Barclays -- Analyst

Arun Jayaram -- JPMorgan -- Analyst

Charles Meade -- Johnson Rice -- Analyst

Scott Gruber -- Citigroup -- Analyst

Doug Leggate -- Bank of America -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

Derrick Whitfield -- Stifel -- Analyst

Bob Brackett -- Bernstein Research -- Analyst

Paul Cheng -- Scotia Bank -- Analyst

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