Extraction Oil & Gas Inc. (NASDAQ: XOG) discusses Q2 2018 Earnings, Operation updates, and thoughts on Initiative 97. Excerpts from the earnings call are below:

Q: Could you guys provide your thoughts on Initiative 97 in the news stream from this week?

Extraction Chairman and CEO Mark A. Erickson: Firstly, I would like to just say some cautionary words with respect to the indicated 170,000 signatures. I mean, that basically is the people that gathered signatures, that’s their estimate. I would say that they haven’t always been the most reliable source of information in the past. And so that’s something that I would kind of think about.

There’s also going to be very vigorous challenges in validating signatures and looking at this. So it’s quite a process just to get the initiative on to the ballot, and we’re not going to know for probably two or three weeks just on counts of signatures and maybe early indications on kind of what percentage will be valid. And then in the event that it does get on the ballot, this is state-wide across all business lines, just a material impact in the state of Colorado and there will be a very vigorous effort in educating the voting public with respect to the major massive economic impacts to the state of Colorado.

And when you look at kind of messaging and, of course, we’ve done this in anticipation of this, when you get that message out about reducing revenues to the schools by 20%, the $30 billion of economic impact to the state from the industry, the massive amount of income taxes, employment taxes, severance, ad valorem taxes, property taxes that come from the oil and gas industry. The polling indicates that the voting public once they understand those impacts are pretty solidly opposed to this referendum. So there’s a lot of different fronts here and there’s a lot more to be seen and learned as we move forward through the process. It’s still not certain that it’ll end up on the ballot.

Q: [Looking at] DCP, on slide 16, you obviously have an uptick in those constrained average wells, supposed to get less constrained. Is that more a function of the compression that was put on and does that give you guys confidence that these higher EURs that you’ve been seeing or I guess I should say, the higher curves that you’ve been seeing on the unconstrained wells is going to be pretty broadly applicable across your acreage position?

Extraction President Matthew R. Owens:  So on that slide 16, I’d say really from about day 240 on, that slower increase was more due to the compression coming online. And then the last couple days where you see that jump up, that would be a combination of the compressor station being online, and the initial effects that we’re seeing from the plant helping reduce line pressures slightly at that pad. So we’re very encouraged by what we’re seeing every day as the line pressures continue to ease up a little bit and we’re able to open the chokes ever so slightly more on those wells to be on the same choke settings that the wells that make up the blue line are.

Q: You’re talking about kind of tweaking guidance. Should we think of that – I mean, if I remember correctly really aside from this next slate of wells that you’re bringing on, the next two or three quarters are largely outside of the DCP system, should we think of this kind of effect that’s being illustrated on slide 16 what it does to your existing wells? Is that really the biggest sort of lever on what’s going to shift guidance?

Extraction Chairman and CEO Mark A. Erickson: The major impacts from DCP, I mentioned already the two Greeley pads and the high potential deliverability from those pads. The other major impact from DCP was on our base production, our kind of legacy production, that had come off its peak rates and has the nice stable base with shallow decline. That’s tough. Because it had a little bit higher percentage of gas, we choked those wells back substantially in order to make room for new wells that had higher oil cuts. That’s one of the ways that we were able to manage our production to optimize our oil sales. So, those are really the two keys on DCP that really can provide us with a big uplift as that plant ramps up.

Q: I know you guys are kind of looking into the fourth quarter and the rest of the year. Mark, you mentioned kind of aiming still for being free cash flow positive in the fourth quarter realizing that operations kind of take time to move around. Is the goal still to be free cash flow positive if oil is a little bit more constrained? Is it kind of operation and if that flips into 1Q 2019? Just trying to understand how you guys think in the short-term tactical side on operations with some of the constraints on DCP up there in Greeley?

Chairman and CEO Mark A. Erickson: We expect really the DCP plant to be in full swing in Q4 and, knock on wood, that our production responds accordingly. When we originally looked at hitting free cash flow on Q4, that was with like a $55 price deck. With $55 though, we had the benefit of higher natural gas production. Right now, if we can hit our volume figures in Q4, and even with a lower commodity price, we would have a very high likely that we’ll be able to achieve free cash flow. With the higher oil price and hitting our oil numbers, we should be able to achieve it as well. So, we still feel good about that. Obviously that’s one of our management incentives. We get paid to live inside a free cash flow and we’re going to do it.

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