It sort of weighs on our returns and I’d rather put it to use to generate higher returns if we can. Right now, having no real net debt is, obviously, very comfortable and it makes people feel better, but you don’t necessarily need to have that much cash sitting around.
Zach Parham: Got it, thanks for that color. And my follow-up just on LOE, can you give us a little more detail on what you’re doing to reduce LOE and maybe any thoughts on what LOE looks like in 2Q before declining in the back half of the year?
Chris Stavros: Yes, we’ve already started on this. I mean, we’re first talking about it now, but we’ve already been at it here for a little bit. And so my hope is that you’ll start to see some improvement even sooner than in the back half of the year and frankly into the second quarter. But I think the larger improvement gains should be more evident in the third and fourth quarters of the year. But I’m very confident that the first quarter would have been the highest on cash operating cost per BOE for the year. As I said, we’ll employ things like some of this field management systems that will lead to improved efficiencies and optimization across the field, well optimization, contract field labor, surface repair, maintenance, procurements, synergies from the acquired assets.
I mean, there’s a lot of low-hanging fruit that I think we can capture. So this is — you could call this a little bit like spring cleaning. We’ve been at this for a while in terms of operating both Giddings and Karnes over the last six years. And we’ve learned and grown with it, but I think this is an appropriate time for us to pursue it. And we’re in a portion of the cycle that I think is a little stronger. And so the organization can look at areas to improve in a more thoughtful way rather than being forced to make more knee-jerk reactions or draconian decisions if we were in a much weaker environment. So I think this is a good time to do it. Our field folks have embraced it and everybody is onboard, and I think it’s starting to work out pretty well.
Zach Parham: Got it. Thanks, Chris.
Chris Stavros: Thanks.
Operator: Our next question comes from Noah Hungness with Bank of America. Please go ahead.
Noah Hungness: Sorry, I was on mute. I just wanted to ask a quick question here on the deal again. It looks like it fills in a lot of acreage gaps. Does it — does this allow you guys to potentially have longer laterals than the 8,500 feet that you guys are drilling this year or does it unlock potentially stranded acreage? And then also, are there any contingency payments associated with this deal similar to what we saw with the November — the deal that closed in November?
Chris Stavros: No, there’s no contingency payments whatsoever. The cost of the transaction is as we stated. The answer on longer laterals and unlocking additional acreage, yes, and yes. I’m not going to tell you that all the wells or locations will be longer than what we’re currently drilling this year on average, which will be about 8,500 feet. But certainly there would — I expect that there will be some longer for sure. We’re taking a closer look at that in terms of what it may be able to unlock as far as lease lines, et cetera. But, yes, I think there’s more opportunity for that.
Noah Hungness: Great. And then just switching over to the oilier assets you guys are looking to drill later this year. How do those economics compare to core Giddings today, just given how the forward curve has moved up? And could you give any color on maybe when you think those wells will come online 3Q or 4Q?
Chris Stavros: Yes. I think you can probably be able to see that later this year in the datasets that are out there. I — there’ll be some data, some production that you’ll be able to quantify. As far as the returns, I mean, it’s very oilier obviously than core Giddings or general Giddings. But again, an important point is that these are shallower wells, they’re 3,000 to 4,000 feet shallower than our typical Giddings well. So the D&C costs are lower. So the economics, frankly, are very similar to what we see in the core Giddings.
Noah Hungness: Great. Thank you. And I’ll hand it back there.
Chris Stavros: Thanks.
Operator: Our next question comes from Ati Modak with Goldman Sachs. Please go ahead.
Ati Modak: Hi. Good morning, team. Just a quick question on the cost reduction. Sounds like you’re beginning with your cost reduction plan at this point and obviously, there are a lot of your peer that have been doing several things overtime to reduce costs. So maybe help us understand where you will be after this initial phase on that journey versus others and so that — just so that we can gauge how much room there is to go after this?
Chris Stavros: Well, I think, the 5% to 10% is a very good starting point. We’ll sort of see how it goes. We — as I said, we haven’t really done a lot of this. So I think there’s low-hanging fruit. We’ve been at this six years and I was joking with the guys. I mean, it’s almost like taking a spin in the dryer where you — the longer you’re in the dryer, the more lint you pick up and occasionally you got to shake off the lint. And so, there’s a lot of things that we can go after and we’ve accumulated more understanding of the assets. We’ve obviously drilled a lot of wells in Giddings. We have a better understanding of it. There’s some, I think, synergies with the focus that we have within our core and the application of some field management systems that will really help us out here in managing some of the processes in the field.
So we’ll see how things go, but I am optimistic that we’ll start to see some early gains here before the back half of the year, and we’ll just continue to see how it goes. The objective here is really to improve our operating margins at the end of the day. I mean, the cash cost will come down, the operating margins would pick up all else equal and provide us with better earnings and more free cash flow. That’s really the objective.
Ati Modak: Awesome. And then, I guess, taking that as queue, like how does this plan tie into the long-term sort of efficiency objectives — capital efficiency objectives? And as you free-up more capital, how should we think about that allocation strategy?
Chris Stavros: Well, this is a less of a capital exercise as it is really more of a field exercise. At the end of the day, both of the actions or activities amount to money. So the capital side just gets folded into your F&D costs and your DD&A. And so that at the end of the day is your biggest cost. And so the more you can do on your well costs will provide greater drilling efficiencies over time and more-and-more free cash flow as well, requiring a lower reinvestment rate with same outcome. So they’re clearly tied together, but we’ll look at some things, there’s probably some overlap in terms of things that we were able to do well on the capital side that could — that may apply in terms of what we’ve learned that we could apply in the field.
Ati Modak: Got it. I appreciate that. I’ll turn it over.
Operator: Our next question comes from Hanwen Chang with Wells Fargo. Please go ahead.
Hanwen Chang: Thanks for taking my questions. I want to follow up on the investment rationale behind the new Giddings acquisition. Could you perhaps provide some colors on some of the key valuation metrics of the acquisition? Thank you.
Chris Stavros: Yes. Well, you didn’t get a whole lot of volumes. So I’d imagine if you back out just the value of the current PDP, you’re looking at 3,000 to 3,500 an acre something like that. I’m not sure what else I can say I think that’s pretty attractive frankly.
Hanwen Chang: Got you. And do you have any preferences regarding oil ratio for future acquisitions? Thank you.
Chris Stavros: No, I don’t look at it like that. I look at it just in terms of how it’s going to improve our business and financial outcome and how it sort of continues to extend the capability of managing our model — our business model, which is completely designed around being the most efficient operator and drilling the best wells at the lowest cost to provide as much free cash flow that we can return to shareholders and reduce the share count as we have over time and we don’t — we’re not looking to increase our debt levels or we’re not sellers of stock. And so we’ve done everything we’ve done pretty organically here just through cash generated by the business. So that’s the plan.
Hanwen Chang: Thank you.
Operator: Our next question comes from Sean Mitchell with Daniel Energy Partners. Please go ahead.
Sean Mitchell: Thanks for fitting me in, guys. Sorry, I was on mute. Congrats on the deal. Deals are not easy to come by these days. So congrats to you guys for getting something done. Several of your peers are doing refrac work and I think there’s more buzz today than there has been in the Bakken and the Eagle Ford. How are you guys thinking about this opportunity, if at all?
Chris Stavros: Yes, it’s more in the if at all category.
Sean Mitchell: No, that’s fair. I mean…
Chris Stavros: I appreciate the question, Sean. I hear you. It’s way, way too early for us to really think about this for us in a broad way. These are early science projects, frankly, there’s lots that we are focusing on far and away from things like that. It’s too much of — too many things for us to do and drill before we ever get to that. So I just can’t see that in our mix in any substantial way for a long time.
Sean Mitchell: Yes, fair enough. And maybe a follow-up. On the bolt-on, I think, I probably know the answer, but were these guys running a rig or no?
Chris Stavros: They were not to my knowledge.
Sean Mitchell: And then of the two rigs and one frac crew you guys have today, remind me, are those on spot or do you guys have those contracted?
