2018 Annual Report

Focused on a Synergistic Portfolio of Assets

Following the streamlining of our asset portfolio, we currently hold approximately 122,500 net acres in the cores of the Eagle Ford Shale and Delaware Basin, two of the highest-return plays in North America. This provides us with a high-quality inventory of more than 2,000 net locations to fuel our future growth. While these drilling locations are in two plays, their geographic proximity makes it relatively easy to shift activity between them, and we believe their synergistic development provides us with a number of advantages.

Though there are geological differences between the two plays, there are also many operational similarities. As a result, we have been able to utilize the same drilling and completion equipment and teams in both plays with great success. This allows us to transfer lessons learned from one play to the other. In the Eagle Ford Shale, where we have drilled more than 580 horizontal wells since 2010, our commitment to operational excellence has led to continued reductions in cycle times. During 2018, we drilled more than 2,500 ft. of effective lateral per day; this represents a 93% increase from our 2015 pace. And our dedicated completion crew in the basin continues to rank among the most efficient teams in the region. As we shift our program in the Delaware Basin to primarily multi-well pad developments, the application of processes we have developed in the Eagle Ford Shale should allow us to shorten the learning curve and generate material efficiency gains.

Having assets in two basins also allows us to develop each asset at the appropriate pace. Our position in the Delaware Basin contains up to 10 potential targets across a 3,800-ft. section, and we believe a multi-layer co-development will be required to optimally develop the resource. However, the industry has limited data on multi-layer co-development in the region, so the optimal spacing is not yet known. Since we can generate a predictable and profitable wedge of incremental production from the Eagle Ford Shale to fuel our growth, we don’t need to rush the development of our valuable Delaware Basin position. This provides us with more time to study our position and optimize our development spacing in order to maximize the value of our asset in full-scale development.

Continued Efficiency Gains

Process improvements and the shift to larger multipads have contributed to improved Eagle Ford Shale cycle times. We expect to achieve similar efficiencies over time as we move to full-scale pad development in the Delaware Basin.

EAGLE FORD DRILLING IMPROVEMENT

EAGLE FORD COMPLETION IMPROVEMENT

Positioned to Generate Long-term, Competitive Returns

With assets in the cores of the Eagle Ford Shale and Delaware Basin, we believe we have one of the highest-return portfolios in the industry, with wells capable of generating very strong economics at current commodity price levels and below. This puts us in a strong position to generate top-tier returns for years to come.

One of the key drivers of our top-tier returns is the strong margins we generate relative to peers. During 2018, our average unhedged EBITDA margin was over $5/Boe higher than the peer average. The consistent margin advantage we have enjoyed relative to peers is the result of our focus on the core of the plays where we operate, as well as the premium pricing we receive in the Eagle Ford Shale, which accounts for approximately 60% of our total production. During the fourth quarter of 2018, our operating margin in the Eagle Ford Shale was approximately $44/Boe, which helped drive a corporate EBITDA margin of more than $32/Boe. This ranked as one of the highest margins in our peer group. And given the Eagle Ford Shale’s proximity to export facilities on the Gulf Coast and extensive midstream infrastructure, we expect the play to retain its premium pricing in the future, providing us with a continued margin advantage.

Having assets in two basins also allows us to react quickly to changes in regional commodity prices, ensuring our capital dollars are allocated to the highest-return opportunities. In 2018, the perception of tight pipeline capacity caused regional prices in the Delaware Basin to weaken significantly relative to the Eagle Ford Shale, with the price differential between the two basins peaking at more than $20/Bbl during the year. We were able to quickly shift our capital from the Delaware Basin to the Eagle Ford Shale to capitalize on this opportunity, yielding a materially-higher return on our 2018 capital employed than if we had left the activity in the Delaware Basin.

We have also been able to translate these advantages into corporate returns that historically rank in the top tier of peers, and our long-term target is to deliver a double-digit ROCE for our shareholders. We plan to accomplish this by prioritizing capital allocation to projects that are the most accretive to our corporate return goals assuming a mid-$50s oil price environment as well as having a more balanced spending plan throughout the commodity price cycles.

Oil-Focused Assets Drive Outperformance

Over the last six quarters, our portfolio has generated margins more than $5/Boe higher than our peers.

Incremental Unhedged EBITDA Margin vs. Peers

  • HISTORICAL PERIOD
  • SIX-QUARTER AVERAGE

Committed to Responsible Growth

We are committed to generating sustainable growth for our shareholders. This means not only delivering on our financial goals, but also doing so in a responsible manner that accounts for our impact on the environment and communities where we operate.

Social and environmental risks can manifest over the longer term, often affecting businesses on many levels. Managing these risks requires making investment decisions and adopting operating strategies today that will benefit us in the future. We recognize the value of creating solutions and optimizing processes that result in reduced operating costs while also mitigating environmental impacts. This concept of “shared value” has the potential to increase business opportunities and profitability while creating social and environmental benefits. When we reduce energy use and waste in our operations, operating and material costs decline. When we improve employee satisfaction, productivity increases.

A great example of shared value is the treatment of water, one of earth’s vast, yet limited resources. Many industries depend on water, but inefficient use of this natural resource can result in resource depletion risks. This can translate to higher costs, which, in turn, lower corporate returns. We recognize that water is an essential natural resource for the communities where we operate. And while the oil and gas and mining industries combined only account for approximately 1% of the water used in the United States (5% in Texas where we currently operate), we recognize that our industry’s demand could have an outsized impact on communities where we live and work. As such, we believe the management and protection of this resource are key components to the long-term success of our business. Through our water recycling initiative, we have been able to meet up to 20% of our water demand in the Delaware Basin through the use of recycled water as of year-end 2018, and we have plans to further increase this percentage. This initiative is just one of the many ways we operate and grow responsibly. Other initiatives include reducing our carbon footprint and energy use, resulting in lower operating costs. We also engage with local communities to understand their concerns and interests, learn their expectations, and develop mutually-beneficial relationships. More information regarding our sustainability initiatives and reporting can be found under the Sustainability section of our website.

Our shareholders trust us to do the right things environmentally and socially. By including these factors into our long-term strategic plan, we are better positioned to anticipate and react to changes, helping to manage the risks inherent in our business.

Strategic Process

Acting responsibly is a key part of a value-maximizing strategy.