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Unit Corp (UNT) Q1 2019 Earnings Call Transcript

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Unit Corp  (NYSE: UNT)
Q1 2019 Earnings Call
May. 02, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Unit Corporation's First Quarter 2019 Earnings Call. My name is Paulet and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. During the course of the conference call today, the speakers may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. The Company's actual results could differ materially from the results anticipated or projected in any such forward-looking statements.

Additional detailed information concerning the important factors that could cause actual results to differ materially from the information given today is readily available in today's press release under the heading Forward-Looking Statements. Additionally, during the conference, the Company will be discussing certain non-GAAP financial measures. The reconciliation of those non-GAAP measures to GAAP measures can also be found in today's press release. This document is available on the Company's website.

I will now turn the call over to Larry Pinkston, CEO and President. Larry Pinkston, you may begin.

Larry D. Pinkston -- President and Chief Executive Officer

Thank you, Paulet. Good morning, everyone. Thank you for joining us this morning. With me today are David Merrill, Les Austin, Frank Young, John Cromling and Bob Parks. Each will be providing you with updates about their areas of responsibility and we will take questions at the end of the call. The first quarter 2019 was influenced by several different factors. David and Les will be explaining these items as they provide you with their comment.

Our plans for 2019 are for drilling activities to be mostly accomplished during the first half of the year. We are currently operating six rigs in our exploration and production division and plan to begin reducing our operating rig count in the third quarter. We will monitor commodity prices, drilling results and debt levels at mid-year to determine the appropriate level of activity -- drilling activity for the second half of the year.

Our oil and gas production should remain relatively flat during the first half and then ramp up in the second half of the year. Commodity prices during the quarter were very volatile, crude prices bounced back prior to year end levels. However, natural gas prices continue to deteriorate during the first quarter. The differentials on natural gas pricing continue to widen in Western Oklahoma and Texas Panhandle. We believe these differentials should start to improve during the second half of the year as new infrastructure is put into place. We have altered our drilling plans for the year due to these wide differentials.

I will now turn the call over to David Merrill.

David T. Merrill -- Chief Operating Officer

Thank you, Larry. There has been a lot of publicity around the Permian natural gas takeaway constraint in certain indexes such as Waha has gone temporarily negative. That issue however is not isolated to the Permian Basin. Natural gas associated with crude oil production is seeking any possible outlet and as such some has moved into the Mid-Continent region negatively impacting prices in western Oklahoma and the Texas Panhandle and in some cases leading to takeaway constraint.

Relief is on the horizon with the Gulf Coast Express pipeline a 2 Bcf per day pipeline project targeted to be completed in late 2019 or early 2020. Offering further relief is the Midship pipeline a 1.4 Bcf per day pipeline scheduled to be completed late this year going from Western Oklahoma to Bennington Oklahoma for further connection to east Texas and Louisiana. As Larry has discussed, weak natural gas prices has heightened negative differentials validate the approach we follow by having multiple core areas for our oil and natural gas segment. With what we believe are temporarily reduced rates of return in our Texas Panhandle core area, we have relocated our rig activity from the Granite Wash play to Western Oklahoma, where we will target more oil from prospect.

The unanticipated shut in on the third party processing plant for our East Texas will cost play production significantly impacted first quarter production. Without the field shut in, daily production would have increased 1% quarter-over-quarter. Furthermore, Wilcox production with approximately 40% liquids and 60% natural gas composition is priced at some of the best index prices of all our production.

The third party processing plant is now up and running at normal rate and we expect recovery should improve with the completed repairs that were made. Our contract drilling business placed two new BOSS drilling rigs into service during the first quarter, bringing our BOSS rig count to 13. We continue to pursue long-term contract opportunities to begin building our 14th BOSS rig. The midstream business saw a significant increase and gathered volumes primarily from the new pad coming online at our Pittsburgh Mills gathering system. Further growth is anticipated as the new reading processing plant has recently come online at the Cashion system and incremental volumes have begun to flow.

I'll now turn the call over to Les Austin.

G. Les Austin -- Chief Financial Officer

Thanks, David. We reported a net loss attributable to Unit for the first quarter of $3.5 million or $0.07 per diluted share. Adjusted net income attributable to Unit for the quarter which excludes the effect of non-cash derivatives was $4.5 million or $0.09 per diluted share versus $13.8 million or $0.27 per diluted share in the fourth quarter of 2018. The primary factors contributing to the quarter-over-quarter change included production declines from the third party gas processor plant shut down, 9% lower natural gas prices, 18% lower natural gas liquids prices and lower rig utilization, somewhat offset by early termination fees in the contract drilling segment. Our non-GAAP financial measure reconciliation is included in our press release.

For the oil and natural gas segment, revenues for the first quarter decreased 19% from the fourth quarter of last year, with lower natural gas and NGL prices as previously discussed. Equivalent production also decreased 5% in the first quarter from the fourth quarter of last year due to a third party gas processor plant shutdown resulting in lost Wilcox production of 1,65,000 barrels of oil equivalent.

Operating costs for the first quarter increased 5% over the fourth quarter of last year, primarily due to higher saltwater disposal and the absence of production tax credits. For the contract drilling segment, revenue for the first quarter decreased 3% from the fourth quarter of last year due to 5% fewer rigs operating in the quarter, partially offset by increased day rates and a $4.8 million in early termination fees. Operating costs for the first quarter were 12% lower compared to the fourth quarter of last year primarily due to less rigs operating.

For the Midstream segment, revenues for the first quarter decreased 6% from the fourth quarter of last year primarily due to decreased natural gas, natural gas liquids and condensate prices, somewhat offset by increased gas volumes gathered. Operating costs for the first quarter decreased 9% from the fourth quarter of last year because of decreased purchase prices. We ended the first quarter with total cash and cash equivalents of $3.9 million and long term debt of $685 million. Long term debt consists of $645 million of senior subordinated notes net of unamortized discounts and debt issuance costs and $40 million outstanding on Unit's revolving credit agreement. The Unit credit agreement borrowing base remains unchanged at $425 million and our $200 million superior credit facility remained undrawn at the end of the first quarter. Our net leverage ratio was two times at the end of the first quarter.

At this time, I will turn the call over to Frank for our oil and natural gas segment update.

Frank Young -- Executive Vice President of Exploration and Production

Good morning. Daily production for the first quarter averaged 45,800 barrels of oil equivalent per day, a decrease a 1% percent compared to first quarter 2018 and 2% compared to the fourth quarter. Production was hurt by unplanned downtime associated with emergency repairs of a third party processing plant that forced 90% of Unit's Wilcox wells in the Gulf Coast area to be shut in for 14 days, reducing quarterly production by 165,000 barrels of oil equivalent. The processing plant was back to full operational capability in early April. Without this downtime, daily production would have been approximately 47,600 barrels of oil equivalent per day, roughly a 3% and 1% increase over first quarter 2018 fourth quarter 2018 daily production respectively.

As David mentioned, during the first quarter we suspended Granite Wash drilling operations in the Texas Panhandle in response to the current low gas price environment and our expectations that gas prices will improve later in 2019 when Cheniere's Midship Pipeline and Kinder Morgan's Gulf Coast Express Pipeline come online. These pipelines should decrease the amount of gas competition in the Texas Panhandle coming west from Oklahoma stack and scoop plays in northeast from Texas's Permian Basin, providing us better Granite Wash Drilling economics in 2020. Our land position in this area is largely held by production allowing us to drill pricing warrants. We had three extended lateral Granite Wash wells in various stages of being completed at the end of the first quarter with all expected to come online during the second quarter flowing to superior Unit's midstream subsidiary.

In conjunction with suspending drilling in the Texas Panhandle, we are accelerating drilling operations in Western Oklahoma to take advantage of the better economics associated with the more oil prone nature of our Thomas field Red Fork Play and our SOHOT Marchand play both located within our Penn Sands Prospect area. Unit is currently running four rigs in this prospect area with expectations of bringing 10 new wells online during the second quarter or early third quarter. Of the 10 new wells, four are in various stages of completion or are currently being drilled into our remaining on the drilling schedule.

During the first quarter, Unit completed one Red Fork well with a 4,100 foot lateral that had an IP30 of approximately 300 barrels of oil equivalent per day with 65% being oil. Although, we were pleased with the oil component percentage, typically we would drill a longer lateral located in better part of the Red Fork reservoir than this well. However, the commitment to drill this location was part of the acquisition in 2018 of acreage in the Thomas field. Unit's initial Red Fork well in Thomas field which came online in September of 2018 continues to exceed expectations.

On a gross basis, the well has cumulative production of 325,000 barrels of oil equivalent and the latest production is 475 barrels of oil per day and 3.9 million cubic feet of gas per day. While we continue to have high expectations for the Red Fork play, our top curve is based on a limited data set of four horizontal wells. However, we will be gathering additional data throughout the year allowing us to provide further clarity of what to expect from future wells. Unit also completed one Marchand well with an IP30 of 175 barrels of oil equivalent per day with 70% be in oil. This well is poorer than expected due to the reservoir being thinner at this location than anticipated.

Overall, our Marchand well results have continued to be outstanding in our top curve for a 5,000 foot lateral remains in the 600,000 barrels of oil equivalent range with 65% of that being oil. We have been successful in adding approximately 8200 net acres at an average price of about $900 per acre within the Penn Sands prospect area since the beginning of the year. This acreage focuses on oily targets and adds approximately 19 operated and 12 non-operated potential horizontal locations into our drilling inventory.

In our Gulf Coast area, we drilled three development wells in the Gilly Field that are currently in various stages of completion. We are also continuing delineation of our Shoal Creek prospect discovered in 2010 when we drilled the Blackstone G-1 exploration well. After seismic reprocessing the prospect appeared to have significant upside and we drilled the Blackstone G-2 encountering multiple stack pay intervals in the lower Wilcox. After being completed in mid-December in three of the lower stack pay intervals, production has varied between six and eight million cubic feet equivalent per day with 25% of that being oil during the first quarter of 2019. The size of the Shoal Creek prospect will be further evaluated in the second quarter with the drilling of the Blackstone G-3 that if successful will lead to more delineation wells. Also during the quarter, we drilled the Wing(ph) North exploration well and while it found the objective pay interval the current production of 1.7 million cubic feet per day has been disappointing.

However this well improved our geologic understanding of this area and resulted in the identification of an additional high potential prospect. In our Cherry Creek prospect, we drilled the first delineation well, the Wolf Pasture number 1 located approximately 7 miles southwest of the Gilly field. Fracture stimulation of the lower Wilcox pay interval in this well is scheduled for the second quarter with a potential to add additional pay later in the year. We are optimistic about the exploration program in the Gulf Coast continuing in the second quarter with not only the activity at Shoal Creek and Cherry Creek prospects, but also with the drilling of our Menard Creek prospect. These prospects provide Unit with exposure as a significant resource potential.

We continue to be successful in executing our strategy of adding acreage and prospects at low cost in our western Oklahoma and Gulf Coast operating areas that provide drilling inventory at competitive finding and development costs and cash flow margins, our drilling activity is concentrated in the first half of the year and we will begin reducing activity levels throughout the latter half. Longer-term, we will continue to evaluate both organic and acquisition opportunities in areas that provide competitive cash margins.

At this time, I'll now turn the call over to John for the Drilling Company update.

John Cromling -- Executive Vice President of Drilling, Unit Drilling Company

Good morning. The commodity pricing fluctuations during the fourth quarter of 2018 continued during the first quarter of 2019, thereby affecting our drilling rig activity. We were able to maintain a relatively stable number of active rigs throughout the quarter. We began the year by placing our 12th BOSS rig in service in Wyoming under a long term contract and also extended term contracts on two additional BOSS rigs already drilling for the same operator. In mid-February, we completed our 13th BOSS rig and that is operating in the Permian Basin. The regional operator for this rig decided to reduce the rig count due to commodity pricing and terminated contract before completion of the rig. This contributed to most of the termination fees was collected during the quarter. Because of the reputation of the BOSS rigs, we obtained a new contract almost immediately and did not suffer any lost time. We began the year with 32 rigs operating, rising to a higher 34 rigs and finishing the quarter with 32 rigs operating. We presently have 31 rigs operating. All 13 of our BOSS rigs are operating and nine of them are on term contracts. The average day rate for the first quarter was $18,339, an increase of $292 per day over the fourth quarter.

The average total daily revenue before intercompany eliminations was $20,339, an increase of $2,104 over the fourth quarter. Our total daily operating costs before intercompany eliminations increased by $575 for the first quarter, as compared to the fourth. The increase was primarily due to labor cost due to certain employment taxes rolling over and higher indirect cost resulting from workman's comp settlement. The average per day operating margin for the first quarter before elimination of intercompany profits was $7,376 which is an increase of $1,517 over the previous quarter. Our non GAAP reconciliation can be found in today's press release.

Interest in our BOSS rigs remains very high and we are evaluating the possibility of another long-term contract to grow our BOSS rig fleet. We will also continue to upgrade SCR rigs. However, at this time this will be restricted two particular items on rigs rather than a total refurbishment of a rig. It is important to note, that all these projects are being financed by operating cash flow and within our CapEx budget. We continue to be optimistic in our opportunity to grow during 2019.

At this time, I'll turn the call over to Bob for the Superior Pipeline update.

Robert H. Parks -- Manager and President of Superior Pipeline Company

Thank you, John. Following an outstanding year in 2018, the Midstream segment is off to a good start in the first quarter of 2019, producing solid financial results. We had a 14% increase in total throughput volume over the fourth quarter 2018, driven by adding seven new long lateral wells to our Pittsburgh mill system in the Appalachian area and continuing to expand and add new wells to our Central Oklahoma Cashion facility. Operating profit before depreciation was $13.1 million for the first quarter of 2019, which was a 6% increase over the fourth quarter 2018.

This increase was due to the additional throughput volume of our Pittsburgh Mill and Cashion facilities. We invested approximately $15.3 million in capital projects during the first quarter of 2019. The majority of these expenditures were spent at our Cashion facility constructing the new 60 million cubic foot per day reading plant and by continuing to expand and connect wells for our Cashion system. Additionally some of the capital expenditure were complete connection of the new seven well pad to our Pittsburgh Mill system.

I'll now discuss several of our key midstream assets. At our Pittsburgh Mills gathering facility in Pennsylvania during the first quarter of 2019, our average total gathered volume increased to approximately 197 million cubic feet per day. This increase in gathered volume was due to adding the new seven well pad during the first quarter 2019. The construction of the new pipeline to connect this pad was completed in January and two other wells began production in late January and the five additional wells began production in the first week of February.

Initial production from these new wells increased our total throughput volume by approximately 115 million cubic feet per day and we expect them to continue to produce around 100 million per day for the next several months. This new well pad is connected to our Kissick compressor station located on the southern portion of our gathering system before we deliver the gas in to our DTI pipeline. At our Hemphill facility in the Texas Panhandle, the average total throughput volume for the first quarter of 2019 was approximately 73 million cubic feet per day and total production of natural gas liquids was approximately 251,000 gallons per day.

During the first quarter, we did not connect any new wells to the system, but we're in the process of connecting the three new Unit Petroleum Buffalo Wallow wells in the second quarter. At our Cashion processing facility located in Central Oklahoma, the average throughput volume for the first quarter 2019 increased to approximately 54 million cubic feet per day and natural gas liquids production increased approximately 264,000 gallons per day. This continues to be an active area and during the first quarter of 2019 we connected seven new wells for the Cashion system.

We are continuing to expand our Cashion system and expect to connect additional wells during the rest of 2019. With the reading plant addition, our total processing capacity on our Cashion system increased approximately 105 million cubic feet per day. In summary, we are pleased with both the operational and financial results for the first quarter for the Midstream segment. With the addition of the new well pad in the Appalachian area and with the continued expansion of our Cashion system, we are producing positive results in several key areas. Additionally having established a $200 million stand-alone credit facility for Superior, we are well-positioned to continue to expand and grow the mid-stream segment during the rest of 2019.

I will now turn the call back over to Larry for his final comment.

Larry D. Pinkston -- President and Chief Executive Officer

Thank you, Bob. As we close out another quarter, our three business segments continue to progress in each position very well as we move through the remainder of 2019. The advantages of our oil and natural gas segment portfolio will allow us to direct capital efficiently. Our contract drilling business continues to see opportunity to grow, our BOSS drilling, Creek Fleet, our Midstream segment has been able to take advantage of organic growth opportunities, while we continue to see growth through prudent acquisition. While we continue to see many opportunities, we remain committed maintaining our disciplined approach, keeping our capital spending in line with anticipated cash flow. This will ensure that we maintain a strong financial profile today and tomorrow.

Paulet, I'd like now turn the call over for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Marshall Adkins from Raymond James. Please go ahead.

Marshall Adkins -- Raymond James -- Analyst

Good morning, guys. I want to start on the drilling rig side. John, the -- help me understand where you see demand shaping up for rigs both in Q2 and the back half of the year?

John Cromling -- Executive Vice President of Drilling, Unit Drilling Company

Marshall, that's hard to guess right now as we've alluded to in several other comments already, the drilling rigs are going to follow of course the operators activity. We know that subdued right now because of the constraints on the natural gas. So for the next quarter I think it's going to be very much the same as what we've seen in the first for the Mid-Continent and even for the Permian seems like Rocky Mountains, Wyoming, North Dakota probably stay pretty constant, maybe a little bit better. Then we're hopeful as has been mentioned about the pipelines relieving the differential on the gas that will see activity increase again in the Mid-Continent region and even in the Permian. So...

Marshall Adkins -- Raymond James -- Analyst

Okay. Larry, let me throw that kind of same directional question to you. I mean you have -- you've seen it from a lot of different perspective. Let's just say all stays here in the 60, 65 range, we're hearing all kinds of differing opinions right now up there from the broad spectrum with E&P and services. And clearly there's capital discount on a lot of the public E&Ps, but the smaller private guy seem to be -- I mean obviously the economics are very good and they're looking at increases in the back half of the year. How do you see it playing out, let's say if all stays here in $60, $65 range the back half of the year?

Larry D. Pinkston -- President and Chief Executive Officer

I think you see for the all directed, I think you see a steady to upward movement on rig utilization, I think second half is going to be somewhat solid, but I mean in the second quarter -- second half I think is going to be a stronger quarter. And if we'll get some stabilization in the out months on crude, it's not so much that crude is $60 today, it needs to be $60 for next year. And where you could -- you actually lock in some prices for those out years. And when that starts to happen, I think you then you'll see a much more rapid increase in the oil prices, best part of (inaudible).

Marshall Adkins -- Raymond James -- Analyst

Yeah. That's helpful. Last, I'm going to shift gears over to Frank. Frank, could you give us some indication of where your hedging sits today, number one. Number two, I'd like to get some thought, I mean obviously this plant being offline being the quarter pretty good, is this something that was really totally all base is not going to happen again or should we kind of start modeling in possibilities or things like this in the future?

Frank Young -- Executive Vice President of Exploration and Production

I'll answer the second question. The question on hedging I think Les will answer. But as far as the plant goes, we have modeled a five day shut in into our budget projections. We had modeled that occurring in July. And the issue that happened with the plant was discovered -- they decided to move their routine maintenance part of the plant up. And when they did that, they discovered this problem, the problem that they discovered resulting in them having to get equipment fabricated in Canada. And that took several days to get done and this still happened at the piece of equipment that they needed, they didn't have a replacement for the plant couldn't operate without, it was in the A main tower. So we don't expect anything like that to happen again, but you're correct in saying that in general we'll see every other year, they'll have some kind of plant maintenance that will -- that we do generally will plan for in our budget.

G. Les Austin -- Chief Financial Officer

And Marshall, we did file our 10-Q earlier before the call. And in there we disclosed at the average production rate that we had in the first quarter were about 52% hedged for the balance of the year on oil and about 51% hedged for the balance of the year on natural gas.

Marshall Adkins -- Raymond James -- Analyst

And how about 2020, anything big in 2020?

G. Les Austin -- Chief Financial Officer

No nothing, nothing really in 2020.

Marshall Adkins -- Raymond James -- Analyst

Okay. Thank you, all.

Operator

Our next question comes from Neal Dingmann from Suntrust. Please go ahead.

Neal Dingmann -- SunTrust -- Analyst

Good morning, guys. Just a broader question, I know you guys or maybe Frank definitely to focus on increasing the oil content. I'm just wondering, when you kind of look at the breakdown of the components today, I mean you know is that something that may start to shift a bit noticeably by the end of the year. I'm just wondering how the pace of you know again it seems like you're certainly actively addressing this. I'm just wondering when we'll start to see some changes on that overall mix?

Frank Young -- Executive Vice President of Exploration and Production

Good morning, Neal. Our current first quarter production rate for oil comprise about 16.7% of our total flow stream. And as the year goes along, we expect to see a significant increase really beginning in the third quarter and continuing into the fourth quarter. I expect to see our daily production rate increase in excess of 20% as the year -- as we go through the year.

Neal Dingmann -- SunTrust -- Analyst

And Frank, externally just to be add on to that, I like that there's a nice pickup in the Pan Sands. Are there other additional pieces you're seeing out there that you can continue to bolt on here remainder of the year?

Frank Young -- Executive Vice President of Exploration and Production

Yes, we have other areas identified and we're in talks with several companies to have that acreage. They're all like you said bolt-on, smaller type of deals that we were, but together like in the first quarter they can make a significant difference to our drilling inventory.

Neal Dingmann -- SunTrust -- Analyst

Okay. And then just lastly maybe -- go ahead. I'm sorry.

Frank Young -- Executive Vice President of Exploration and Production

No that's all I had.

Neal Dingmann -- SunTrust -- Analyst

Okay. And then just one last question maybe for John. John, your thoughts on -- nice move on the rig operating margins per day. I'm just wondering if you could kind of give us what you're seeing quarter-to-date, how you're thinking about that including any potential termination fees we should be thinking about this quarter?

John Cromling -- Executive Vice President of Drilling, Unit Drilling Company

Well, we know the rig rates will go up -- go with the activity level. And if the rig count and the land rig fleet overall continues to decline, the day rates will go down. What we saw in the first quarter were not significant decreases, but they are decreases on the spot market. So that will continue until we see the overall rig activity increase, just no way around it.

Neal Dingmann -- SunTrust -- Analyst

Got it. Thank you, all.

Operator

Our next question comes from John Wong from RBC. Please go ahead.

John Wong -- RBC Capital Markets -- Analyst

Hi, thanks for taking my question. You mentioned earlier in the call that and you referred to your longer term outstanding debt, the six and five eights time once just down to power this past month per call. Given the relative favorable market conditions, have there been any discussions about potentially opportunistically extending out their final maturity?

Larry D. Pinkston -- President and Chief Executive Officer

No, of course, we're starting to look at it and we'll be in a position in that. When the market opens up to where we think it's timing, I think it's prudent for us to go and get something done, certainly not in any emergency, but it's more of a market timing issue, but, yeah, we need to give them -- we need to give them extended out here some time.

John Wong -- RBC Capital Markets -- Analyst

Okay, thanks. Is there like any part take -- are you waiting on a potential target as far as funding rate on that? Or like what would catalyze a movement from your guys side? Thanks.

Larry D. Pinkston -- President and Chief Executive Officer

Well, the thing we're watching for right now with our advisors continually reminding is, the energy market for financing really hasn't opened up much. I mean there's been one or two -- the broader market has been pretty wide open, but we're waiting for the energy side of the bond market to open up more -- toward more activity and investors are ready to get back into the energy side, but now that's kind of what we're waiting on this for that segment of the financing to open up.

John Wong -- RBC Capital Markets -- Analyst

Okay. Thanks.

Operator

(Operator Instructions) And our next question comes from Craig Gilbert from Linden advisors. Please go ahead.

Craig Gilbert -- Linden Advisors -- Analyst

Hi, thanks for taking my question. Can you talk about your free cash flow expectations for the remainder of the year. And I guess any update on your capital spending? And similarly along with that, you mentioned potentially purchasing assets additional acreage. How you plan to fund that? Is that something that you would fund with additional draws on the revolver?

Larry D. Pinkston -- President and Chief Executive Officer

Well, you know we set our budget each year basically at the end of the previous year or early on in the year we establish what our budget was at the beginning of this year. We'll review that again at midyear, but our budget is always what we expect what we anticipate our cash flow to be. So we don't anticipate using from beginning of the year to the end of the year, we don't anticipate of being any outstandings on our revolver.

During the year, there may be outstanding because of the timing of our drilling operations, but year-to-year we don't plan on any increases on our revolver. So anything that we buy acreage wise, lease acreage wise or just our drilling operation will all be within our budget, any kind of acquisitions or producing properties more larger acquisitions of course wouldn't be under our budget immediately. We would have to use the line for that, but nothing other than acquisitions would be used in line for if the acquisition was large enough that we were uncomfortable with the amount of borrowing, we'd slow down on our drilling operation and pay down pay the line back down. So, we don't go into the year anticipating borrowings under our line. Again, on a year end -- the year basis during the year, yeah it could work out that way, but not over the 12 month period.

Craig Gilbert -- Linden Advisors -- Analyst

So does that mean we should, I'm sorry.

Larry D. Pinkston -- President and Chief Executive Officer

Well, I mean I was just going to follow-up with your question about free cash flow. I mean we don't -- we use all of our available cash flow that we have for our budget each year. We'll grow hopefully grow our reserves, oil and gas reserves this year, we've already added two new drilling rigs to our fleet this year. So you know, there's a certain amount of growth that's factored into the -- our capital expenditures, but I mean that answers the free cash flow number. We plan our reinvesting of our cash flow into the growth of the Company.

Craig Gilbert -- Linden Advisors -- Analyst

Does -- is the free -- spending to free cash flow, does that include interest expenses or is that mainly just CapEx?

Larry D. Pinkston -- President and Chief Executive Officer

That's everything. Again, it kind of comes back to debt. We don't expect any debt, I mean we expect to end the year with the same amount of debt we had at the beginning of the year. So, that covers everything, incurs G&A (inaudible).

Craig Gilbert -- Linden Advisors -- Analyst

Okay. So we should expect to see the 40 million drawn, repaid throughout the year?

Larry D. Pinkston -- President and Chief Executive Officer

Yes.

Craig Gilbert -- Linden Advisors -- Analyst

Okay, thanks very much.

Larry D. Pinkston -- President and Chief Executive Officer

You bet.

Operator

And we are showing no further questions. I will now turn the call back to Larry Pinkston for closing comments.

Larry D. Pinkston -- President and Chief Executive Officer

Thank you for joining us this morning. We appreciate your questions. They are all good questions and we hope to see many of you in the next few months as we travel around. Thanks again.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. And you may now disconnect.

Duration: 40 minutes

Call participants:

Larry D. Pinkston -- President and Chief Executive Officer

David T. Merrill -- Chief Operating Officer

G. Les Austin -- Chief Financial Officer

Frank Young -- Executive Vice President of Exploration and Production

John Cromling -- Executive Vice President of Drilling, Unit Drilling Company

Robert H. Parks -- Manager and President of Superior Pipeline Company

Marshall Adkins -- Raymond James -- Analyst

Neal Dingmann -- SunTrust -- Analyst

John Wong -- RBC Capital Markets -- Analyst

Craig Gilbert -- Linden Advisors -- Analyst

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