West Texas pure-play Callon Petroleum Co. is trimming its 2019 capital spending and tightening its rig count, but it still expects to increase production by 20%, the Houston independent said Tuesday.

In the capital expenditure (capex) plans issued for the year, operational spend was pegged at $500-525 million, with total capex estimated at $600-630 million, down about 5% year/year. Output for this year is estimated at 39,500-41,500 boe/d, which would be more than 20% higher than in 2018. More spending is slated for the Delaware sub-basin as multi-pad development begins.

"Our 2019 capital program highlights our commitment to generate free cash flow in the near term as we transition to scaled development of our high quality asset base,” CEO Joe Gatto said.

“Strong cash operating margins underpin our plan and are complemented by capital efficiency improvements resulting from multi-well pad development in the Delaware Basin, increasing lateral lengths across our portfolio and a significant reduction in facilities spending.”

Even at a flat West Texas Intermediate oil price averaging $50/bbl, “we expect to be free cash flow positive in the fourth quarter of 2019 with a full-year outspend that is almost half of our 2018 projection,” the CEO said.

The production growth rate is slowing, but the emerging impact of large pad development in the Delaware, combined with holdings in the twin Midland sub-basin, position Callon “for a sustained trajectory over the longer term with capital expenditures within or below internal cash flows."

By maturing the business in recent years, Callon now is able to benefit from “repeatable well investments” that have scaled efficiencies, reduced facilities needs and improved production decline rates overall, Gatto said.

“Any improvement in commodity prices would further enhance that return on capital profile, as we have no plans to increase capital investment in 2019 with higher oil prices,” he added.

Five drilling rigs on average are slated to run this year, with 47-49 net wells placed onstream. Of the total operational capex, infrastructure and facilities spend should comprise about 15%.

The Delaware is budgeted for a 60% capex hike as larger pad development begins in Callon’s Spur area, with the average pad size expected to more than double relative to 2018.

As a result of the spending shift, completion activity in the first half of the year primarily would be focused on the Midland, with a shift in the last six months to multi-well pads in the Delaware.

“The program is also designed to optimize production and resource recovery from multiple zones through various co-development concepts that are tailored to specific operating areas,” Gatto said. “As a result, we will target seven discrete flow units in 2019, but the largest amount of wells are scheduled for the Wolfcamp A,” in the upper and lower intervals. The Wolfcamp runs through both the Midland and Delaware.

The plan incorporates a 15% increase in lateral length to around 8,400 feet.

“We are currently operating six rigs and one dedicated completion crew,” Gatto said. “We expect to reduce the number of active rigs from six to four by mid-year after building a sufficient inventory of wells awaiting completion to provide operational flexibility for an increased proportion of larger pad concepts.”

Callon began this year with one dedicated completion crew, with a second set for reactivation to reduce cycle times on large development pads once the necessary drilling activity has been completed.

If bolt-on opportunities are identified to add to the portfolio, “we expect that these nonorganic capital costs would be funded by divestitures of noncore properties or monetization of infrastructure investments,” Gatto said.

In addition to operational capex, the 2019 capitalized general and administrative expenses are estimated at $25-30 million.

Year-end 2018 proved reserves totaled 238.5 million boe, 54% proved developed and 76% oil. Total proved reserves were 74% higher than in 2017, with proved developed up 85%.

Fourth quarter results are scheduled to be issued on Feb. 27.