Q4 2019 Earnings Call
At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session thrust of course wondering, especially due to press star one on your telephone if you require any further assistance. Please press Star then zero as a reminder, this conference is being recorded I would not like you do see groceries conference call Mr., Adam Lawlis, Vice President Investor Relations, Sir you may begin.
Thank you Kevin Good morning, and welcome to Diamondback Energys fourth quarter 20 lighting conference call during our call today, we'll reference an updated investor presentation, which can be found on Diamondbacks website.
Representing Diamondback today are Travis guys see encase can't <unk> CFO.
This conference call. The participants may make certain forward looking statements relating to the Companys financial condition results of operations plant objective.
Future performance in businesses, we caution you that actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors information concerning these factors can be found the company's filings with the FCC.
In addition, we'll make reference to certain non-GAAP measures reconciliations would be appropriate GAAP measures can be found their earnings release issued yesterday afternoon.
Now I'll turn the call over to Travis Stice.
Thank you Adam and welcome to Diamond backs fourth quarter earnings call.
Before I start with my remarks.
I want to pause and recognize an individual who passed away last week Clayton Williams, who were truly a larger than life West Texas.
And the man, but paved the way for so many in our industry who came after him.
He was a wildcatter patriarch philanthropist into Texas AG.
Later today, we will like him to rest can celebrate a life well live but I couldn't start without reflecting on what quite he has made to so many people.
This waves and family our thoughts and prayers are with you today.
It's Pete Clayton Williams, you will be missed.
Turning to the fourth quarter.
Let me back ended 2019 in that position of strength.
Achieving 5% oil production growth quarter over quarter, along with our highest oil realizations are the year. This.
Combined with our industry, leading cost structure resulted in 18% quarter over quarter, EBITDA growth and 31% quarter over quarter adjusted EPS growth.
We repurchased 2.4 million shares in the quarter for approximately $199 million utilizing free cash flow and a $43 million gain from an interest rate swap that was unwound as part of our first and grip investment grade bond offering in November to repurchase.
There's a depressed valuation.
Further down the back did not slow operations in the second half of 2019 and to maintain.
Continuous operations with eight completion crews running consistently through the into the year.
Setting us up for continued growth.
And operational momentum in 2020.
Taking a step back to review the full year 2019 was a busy year predominant back.
We successfully integrated our merger with energen doubling the size of our company, while achieving greater cost synergies in the shorter period of time.
That originally promised at time of deal announcement.
We grew pro forma all production, 26% year over year from a 2.9 billion dollar capital budget.
Increased our dividends by 50% and repurchased 6.4 million shares were about 10% of the shares issued to complete the energen merger.
On the corporate development front, we sold noncore assets dropped down mineral interest to Viper and took our midstream business public.
In November we executed on the final piece of our synergy scorecard and refinanced 3.0 billion of the company's long term debt following our upgrade to investment grade.
At an attractive interest rate.
Well I'm proud of what we accomplished in 2019, we don't spend any time looking backward at our tracks in the sand, but rather looking ahead and concentrating on the future.
2020 has already bought.
Brought its own industry challenges and we're focused on navigating these challenges by staying disciplined.
Improving our industry, leading cost structure growing production, increasing environmental transparency and returning more cash to stockholders.
Our dividend remains our primary method of returning capital to stockholders and.
As evidenced through our announcement today, we are strongly committed to continuing to grow this dividend, which sits at a 2% yield at todays stock price.
We will continue to be opportunistic with our share repurchase program and outright debt reduction to maintain balance sheet strength.
But our dividend is considered first dollar out when it comes to capital allocation that diamond backs.
Looking to the year ahead of us Diamondback expects to grow oil production in the first quarter of 2020 on the Backerboard strong fourth quarter production en route to our 10% to 15% year over year expected oil production growth in 2020.
We expect to execute this plan within the same capital budget framework as 2019, while completing 7% more lateral footage with the same amount of capital.
Our oil realizations are expected to improve to nearly a 100% of WT I in the first quarter of 2020, which will be a nice tailwind for per share metrics.
Full service startup of the ethic and Grail pipelines in the second quarter.
We'll increase our exposure to the export and Gulf coast markets as well as increased cash flow through our 10% ownership, but each pipeline rattler.
We will also continue to work to drive down cash operating costs through the year with Ela, we expected to decline relative to 2019 numbers.
We believe this capital and operating plan reflects the optimal capital efficiency for achieving a peer leading combination of growth and free cash flow and 2020.
Should commodity prices declined further from current levels.
We will be prepared to act responsibly and cut capital further just like we've done multiple times in the past.
If commodity prices rally, we plan to use excess free cash flow to accelerate our capital return program and reduce debt.
With these comments now complete operator, please open the line for questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on your Touchtone telephone. If your question has been answered your stream of yourself from the Q. Please press the pound.
Our first question comes from Derrick Whitfield with Stifel.
Hey, good morning, all and congrats on your decision to reinforce your return of capital message for the substantial dividend.
Thank you Derek.
Perhaps for you Travis as we critically evaluate your inventory additions in the well performance trends by interval, it's clear to us at the middle Spraberry in the Delaware second bone spring animals are becoming more valuable in it intervals within your inventory side.
Focusing on the bone spring show and take us to what degree have you guys delineated the trend across your footprint and are there specific or any specific reasons. This interval can't account for a larger percentage of your Delaware allocation in future years.
Yes, there is certainly we're very encouraged of what we're seeing.
In the second bone springs across our Delaware position and look for continued results like we posted that we're going to continue to allocate more and more capital to the to the bone springs, but we're very encouraged about about that that inventory development and and also our existing inventory as we continued.
Yeah.
Drive down costs and improve returns on all of our Delaware position.
Sure and as my follow up I'll stay on the bone spring shell.
Imagine your operations team could could drive meaningful cost improvements on a full field development scenario.
Could you speak to your current completed well costs in comparison to the Wolfcamp, a and also comment on potential savings you could see in a full field development scenario.
Yes, Derrick I think I think from a drilling perspective, it's about 40 to $50 a foot cheaper. So assuming the same completion design the wolfcamp, a and pay cuts that would be about a half a million dollars cheaper on a 10000 foot lateral and I will say one of the benefits is there's been so much infrastructure dollar somebody infrastructure dollar spent.
In a pay cuts that you don't have to load up the bone spring pads with the same level of infrastructure spend as we did for the Wolfcamp a over the last few years. So no really excited about the results were seeing there, it's certainly becoming a a competitive zone to the Wolfcamp, a and we'll start to take a in a more of the capital dollars.
In that in that field.
Thanks, guys that's very helpful.
Thank you there.
Our next question comes from Neal Dingmann with Suntrust.
Ill try that's my first question is on an investor metrics.
Among the printing players we have a few all genereight among the highest combination of well drilled free cash for yield and dividend yield about over 15% already could you speak to your confidence on the sustainability to maintain this or potentially grow these metrics in todays or even the lower oil oil environment.
Sure near what made them up but make your comment in my prepared remarks that our board has is is a dead committed to continuing to grow our dividend.
The free cash flow yield and volume growth.
We feel confident that that those numbers are or multi year in duration and obviously, we've got an inventory that can support that so we're we're really pretty excited about.
[music].
Sustainable oil production growth as well as you know increasing free cash flow total free cash flow yield and ER and dividend growth as well.
Very good be remiss, if I didn't know second question on M&A could you. All just comment tried this for you a kase your view on the need for M&A, especially in such a continued volatile energy tape.
Yes look Miller, our shareholders expect us to no no everything thats going on out here in the Permian and with boots on the ground out here, we certainly do.
But they also expect us and they know that from our past performance that anything that we consider.
Needs to be accretive, which means you know on several metrics free cash flow cash flow per share as inventory quality and operational efficiency. So.
You know any deal that we are interested in its got to be extremely compelling from a from a price perspective, given our current stock price and the abundance of chief opportunities out there in the marketplace as I just was talking to Derek we're very confident with the with our inventory and that inventories going to drive growth for a for many years in the future.
But we also have responsibility to our shareholders to.
To continue to stay in the game in looking at looking at opportunities that are there that are really attractive.
Very good thanks for the details.
Our next question comes from Scott Hanold RBC capital markets.
Thanks, and maybe just a good tend to follow up on on that last question. Just just in general do you look at your lateral lengths.
And as you go to these longer lateral links I mean look at your average lateral link the inventory how do you see that progressing mean is there a lot opportunities yet to block up I know you talked about a northern Delaware transaction, but as you look at your footprint.
What should we expect that lateral lengths to look like say in the next year too on average.
Yes, Scott our asset teams or have their own little business development opportunities where.
They know that drilling longer laterals improved economics and increase our returns to shareholders through increased free cash flow generation.
That's part of our day in a day out business.
We would like to always drill longer laterals I think somewhere in that 10000 foot length is probably where our in store inventory is a typified by by today, but certainly we'll we'll look to always to push that.
Okay fair enough and it is you.
Just step back and talked about the.
Proposition you give for investors in that mid teens growth the strong free cash flow, yielding good dividend yield.
How do you see that growth rate that production growth rates.
So going forward and you got that low to mid teens number kind of set right now and this year, but as you look into say 2021 2022 do you would you like to maintain that rate does that maximize your free cash flow or do you think overtime. It it could fall to sort of that.
10 to 10% to 12%.
Well certainly the law of big numbers catches up with you and you know if you're going to maintain flat capex on a year and a year out basis, that's going to have an impact on your overall production growth. So we believe that that having that that double digit growth rate combined with the yield that we have provides.
Our investors a clear.
Differential investment thesis and.
We've got the inventory that we think we can support that for multiple years to come but as we continue to try to grow production on a larger and larger production base, you're going to have to see the capex numbers minus capital efficiencies.
Continue to increase.
Yeah, and I guess the bottom line a should have been more sensing syncing as you look forward to that free cash flow how does it get allocated between dividend buybacks and investing in the business to continue to grow like where did the out of that allocation change over time.
Yes, I mean, that's an important point, Scott really free cash flow should be defined as cash flow available above your sustaining capex and for US right now the sustaining capex to keep production flat exit to exit is about 1.6 billion now above that in the mid Fiftys oil price environment, we have.
A couple billion dollars of cash flow to allocate and today in 2020, we're allocating two thirds of that the growth in a third of that to shareholder returns you know so I think for us.
We shouldnt, we shouldn't capitulate on growth I think diamondback is still a growth story and now it's a growth with free cash flow story.
That's perfect. Thanks.
Our next question comes from Scott Gruber with Citigroup.
Yes, good morning.
Good morning, Scott.
Just a question on the the Midland Basin development died by zone.
You know you guys are pretty a fourth read here with the 2020 mix.
As the mix largely optimized at this point as we think about 21 and beyond is there much additional shifting between zones in and change in a percentage of total development beyond 20.
Yes, so I think the big mixed shift to co development happened in 2019 with a little carry on into 2020, the whole point of the co development strategy is to get the economic zones that are that are available today. All at the same time. So I think as you think about development strategy going forward the middle Spraberry.
During the Wolfcamp B will have a.
A bigger piece of the of the total pies versus past years.
Hopeful that it stays about consistent the 2020, but as we move across various areas, where some in some areas. The middle Spraberry is better in some areas Wolfcamp B is better but overall this development pace is going to be standard across the company and we are co developing everywhere in the Midland Basin.
Got it and you just starting back to the dividend great to see the doubling today.
We think about.
The go forward you mentioned continuing to grow the dividend.
How do you think about where.
We want to place the dividends, obviously the stock price will dictate the yield the near term is there a number that you're targeting over the next call. It.
Year to continue to grow that dividend and then longer term how do you think about a a proper payout ratio for the business just given the.
Volatility in the commodity price.
Yes, Scott So we've heard a lot of feedback from investors over the last 18 months, particularly around the dividend and growth in exchange for that capital return I think the the only consistent message we've heard from our large shareholders is that they want the dividend larger sooner. So for US we took a big jump this year as well.
We're fully shifting to growth plus free cash flow in 2020 and that was an important step for US now I think in the future dividend is still going to be the primary return of capital and going to need to grow we don't want to grow it to the point, where our implied yield or the payments, we need to make on that dividend our restraint.
On our business plan, but today, it's unfortunate that we got to a 2% yield via the stock price, but we were always focused on getting that dividend too.
A meaningful level, which as you know near a couple Bucks a share.
Okay. Appreciate it thank you.
Thank you Scott.
Our next question comes from real Nicholson with Stephens.
Good morning.
Can you talk about progression.
Throughout the year and then what specific project you guys, you're working on that will drive improvement.
Yes, So we took a nice step down in the fourth quarter.
Got it for 40 to 40 for the year I would say the first half of the year, it's probably going to be on the higher end versus the back half of the year, we start to see some benefit from.
Barge projects.
Particularly on the electrification side of our field right now we're renting a lot of power generation in field and all that.
With these turbans is better than.
Small diesel generators, it's not as efficient as being hooked up to to the grid. So as we progressed through the year, we should see.
A nice trend down in L. we.
Based on getting electric electrification in Howard County pay cuts county in and Northwest Martin County.
Great. Thank you and then on the infrastructure spending 2020, what percent of that is one time project versus normal course of business. How should we think about that trending in 21 forward.
Yes, I would say that to a one third onetime projects with the integration of Energen, we have learned that some areas are better for gas lift in our in our field. So there are some gasless projects that are onetime in nature and then the electrification as I mentioned will be some some onetime projects.
I think credit to our facilities team, we're going to complete 340 wells this year and about half of those needs $0 from an infrastructure perspective, So I think thats, a pretty impressive feet by by the infrastructure team.
Great. Thank you.
Our next question comes from Bryan singer with Goldman Sachs.
Thank you good morning.
When I wanted to follow up on my one of the earlier questions with regards to that trajectory between Capex died free cash flow and growth. When you look at your inventory and your expectations for further efficiencies on the cost side, how long do you see your ability to source double digit growth at flat Capex and where are you.
On the trajectory.
Of course versus growing capex in future years relative to seeing your growth rate decelerate to the low end or below the 10% to 15% range.
Hey, Brian it's important what service costs are going to do right I mean, if service cost stay flat.
Our midstream then infrastructure budgets will continue to decrease and therefore, we're able to get more net wells.
Within the same same budget framework. So I think we'll address 21 and 22 as we get closer and see what service cost an oil price does but we're not going to give up on.
No sustainable growth, but also that growth in the free cash flow on a gross basis year over year.
Look to the organizational emphasis has always been too.
To grow into as we mentioned earlier also grow the dividend in one of the ways that our guys differentiate themselves as in the way that we have become more and more capital efficient as we go forward and time and in what we know that that becomes somewhat asymptotic as you go forward in time, you know that's still part of war core competencies is to is to pick.
Pennies and nickels up where we used to pickup.
Don's in quarters and so.
Organizationally, Brian we're going to continue to drive efficiencies.
Well into the future.
Great. Thanks, and then can you add any color on how you see.
Production trajectory and Capex trajectory through the year and set up that that would provide going into 2021.
Yes, Brian I think I think the way we haven't set up is to be operate fairly consistently throughout the year.
As exhibited by 2019, we did not slow down in the second half of the year and we have no intention to this year, we're running 21 big rigs today to salt water disposal rigs and eight and a half frac crews essentially.
And that pace should should be pretty consistent I think.
We do plan to grow off of what was a very good number in Q4.
And then as you think about the rest of the year, we should have fairly consistent growth.
From Q2 through Q4, so really like to set up here and also the set up for 21 as we don't plan on slowing down in the back half the year, Yes, Brian just like I was talking about the organizational culture of.
As efficiency it didnt make sense to us to go to the operations organization in the back half of last year and say okay guys.
Started laying equipment down and then we're going to ask you to pick it back up in the first quarter in and immediately assume the same level operational momentum and capital efficiency. So that was the reason we decided to continue with with the efficiency and that's what's led to where we feel like is it was a good good growth.
In the first quarter as well, we're not having to catch up or.
Makeup ground that we lost from laying down activity in the fourth quarter.
Great. Thank you.
Our next question comes from Judy way with Barclays.
Good morning, everyone.
Hey, ginning already good morning, great. Thank you.
First question is on buybacks versus debt reduction just following up on some of the entire questions.
The 2% dividend yield now at the current share price.
Do you think about buying back stock versus specifically reducing debt.
That your dad is trading at a higher yields is getting three strategic flexibility in the future you've got some nice I'd Cowen going on for you as well.
I'll, let case answer that in detail, but I'll just say in general the higher the oil price probably the less you buy back stock in our in our business and likewise the commerce. So that's also true to the lower oil price the more you're going to buyback.
Yes, I would agree with that enough today, where we are we still have free cash to buy back stock, where we're not concerned with our leverage ratio or overall leverage certainly it's important for an oil and gas company to decrease leverage over time.
But no. Unlike other companies we also have.
A significant amount of equity in two subsidiaries that that is monetizable. It.
Not at a moment's notice, but but can be monetized. So I think for us on the balance sheet side, we're going to keep taking care of.
Converting our old a high yield notes into I'd notes throughout the year and.
Continuing to drive down the overall interest expense at the company.
Hey, Great. That's very helpful and my second question is on inventory.
How do you think about the cost of adding tier one inventory for example, how did the cost compare from moving current cherilyn current inventory into tier one bad exploration and appraisal or whatever else you might think of versus inorganic addition, either via M&A and acreage trades tend to be pretty and pretty high ROI.
Yes acreage trades or certainly the highest rate of return possible and we got about 40 of them done last year with the two combined combined businesses of Energen Diamond backs. So that was a lot of.
In a low hanging fruit for us to to improve now.
I'll, let Travis comment on the other piece, but all I would say is that any inventory additions today in the Permian are significantly cheaper than they have been at any time in our in our short history, yes, like I mentioned earlier.
We have a set of.
Metrics that that we have to be accretive arm and we'll continue to we've always done accretive deals and we'll always look at these accretive metrics.
You mentioned like three different ways and one one.
One of them was was exploration and while that's been a very small part of diamond backs history. We we did release results on our 25000 acre play that we entered in about three years ago with that are really really low cost on those and to do well and and well for a $20 billion company you know.
One well test is not particularly that significant but it sure was a good test for the first whether we drilled as entity will I think it IP thirtyth something over 100 barrels a foot and now were turned it over the to the execution guys. As we move into the up you know into the appraisal stage and and drive cost down and as we.
Drought costs down that's going to push up the returns for that and you know probably attractive one to two rig program in the in our future capital allocation decisions. So.
It's really all three of those things acreage trades are certainly a day in day out opportunity looking you know accretive acquisitions.
And extremely low valuations that we see today and then we sprinkled in a little bit of exploration success. So I think we're we're executing on all three of those strategies.
Great very helpful. Thank you for the detailed response.
Hi, good morning.
Our next question comes from Jeff Grampp, with Northland Securities or think capital.
Morning, guys.
Well suggests curious we've talked a bit on how you guys are thinking about her on the business going forward and I guess related to that was wondering if I'm looking at slide 10, I. Thank you guys reference both the PDP oil decline and be decline rates, how should we think about those changing given that you guys will still be growing the base did do those really moderate at all.
Paul.
Given that you are still growing or just kind of wondering high level like if we roll that forward 12 month, how do you guys think that maybe changes if at all.
Yes, Jeff it will moderate in much. The we are we will have a big tailwind from 2019 to 2020 on the decline 2019th decline was north of 40% on the oil side.
This year high Thirtys on the oil side, given that we're no longer maximizing growth within cash flow and accelerating or adding.
Five or six rigs this year, so that should help I can't guarantee that will keep going down.
I'm here, but but certainly don't expect it to ramp up significantly given the steady state development, we're heading towards.
Got it thanks, guys for my follow up.
Travis maybe for you guys in the prepared remarks, obviously had a substantial checklist of accomplishment that you guys did in 2019 I was wondering what's on the 2020 checklist and in terms of kind of more strategic objectives are goals for for the business in 2020 that maybe in 12 months you come back on now in the Fourq you 20 call until it's about.
Well certainly as we sit here today the level of.
Major corporate development objectives that we had in 2019 won't be repeated in 2020.
That was incredibly.
Busy year force, what we're really focused on this year is.
Growing the business, increasing shareholder returns and really.
Refining.
Our differential story of.
Growth and yield and we think we think we've got the framework exactly suited to tend to be able to do that.
Got it all right that's it for me thanks, guys.
Thank you Jeff.
Our next question comes from assisted with Bank of America.
Thanks, Good morning.
One for case and fallen off for Travis case.
Appreciate the update on sustaining capex, but historically youve talked about generating a 675 million.
Free cash flow and $55 oil could you.
Talking about the sensitivity of two this free cash flow to changes in when pricing and how would you think about adapting the activity program to lower on price to say in a $45 scenario.
Yes, that's it.
I'll take the second part first if we if we saw $45 oil for a couple of months.
We would do the right decision makers right decision and cut back on on capital spending I will say.
Is this addition of free cash flow to the story.
Now allows us to not whipsaw around our activity levels based on.
A weekly or daily or a monthly move in commodity price. So this gives us an operations organization.
The ability to continue to operate steadily and drive efficiencies through the year.
On the free cash flow side certainly.
But 55, we start to get a lot of the benefit of our three way collars or unhedged production. So I think it at amid the midpoint of our guidance on oil you know a dollar an oil price above 55 gives you a 65 or $70 million of free cash.
I'll just add to that from a from a general perspective, or maybe a higher level perspective.
On the back has always demonstrated that when returns.
To our investors go up we lean into that now weve modeled moderated that comment a little bit now because we're.
So focused on free cash flow generation, but what goes along with that is when returns to go down to our shareholders. We slow activity down and I think you go back in.
In early 2015 again in 2016, and even again in late 2018, we've got a track record of doing just that when the commodity tells us we're not getting paid for it we would moderate our activity accordingly.
Thanks, Travis a follow up for you you guys had been a leader in making changes to compensation structure and appreciate SG component as part of management scorecard, but could you provide some early examples of some of the matrix that you're going to track whats multi leading this move in.
Perhaps speak to the issue of flaring in how Trc is physician, Texas in your conversations with them.
Sure you know the one thing just I want to point out is that.
You did the transparency that we we try to communicate with our investors. We believe is best in class and we spend a lot of time talking to our large shareholders and some of the things that we instituted you know in in this release were.
As a result of direct communication with those shareholders things like holding ourselves accountable for us and GE measures.
We've got.
Up to 10% to 15% now every individuals compensation is going to be tied to yes, and geometrics things like water recycle still control total recordable incident rate flaring those are.
Not subject to discretion over quantitative measures that we will incentivize better performance on Thats, one thing that we've proven adama back is.
What gets rewarded gets done and and we intend to do that in our in our scorecard. We've we've also adjusted.
And again, we've laid it out in a very transparent way, but and we'll do so more when we release or proxy here in a month or so.
We've adjusted now our total shareholder return.
You know to where we have a modifiers you know for for anything below zero percent or negative TSR. We've now got to a modifier that takes down or long term incentive now the Conversely, Thats also true anything above 15% total shareholder return gets a gets an adder, but again that's in response to Conversely.
Patients that we've had with our with our shareholders. So we really have two objectives we have.
The first which I think is the most important news that we want to be best in class all of our year Sungy measures full stop and secondly, we want to be best in class on the disclosure associated with those things and we believe that what we released last night is the very very important first step in achieving both of those objectives.
And on flaring Travis.
Yes, so flaring is flaring in the Permian basin is an issue that.
That we as an industry have to have to address there's there's there's flaring that's that's voluntary flaring.
That should be eliminated as quickly as we can I mean companies have to put their balance sheets to work and.
Make sure the gathering system is in place prior to bringing on wells certainly Adama back we follow that to the strictest letter. There's also collaboration that we have to make with our gatherers. Even if we're tied into systems are gathers have to make sure that they've got contracts in place that allow.
Now that gas to be.
Custody transfer it at the wellhead and that gas move to market and so it's really it's not all on the upstream guys. It's a it's really a holistic.
Issue that needs to be addressed bye bye everyone to try to.
Eliminate.
Certainly routine flaring out here in the Permian as quickly as we can.
Appreciate the color kravis. Thank you.
And I'll just add to that assist that.
The scorecard that we've added in the us and GE has flaring in there and I can tell you from.
From a we talk about it on our executive meaning we have pretty rigorous reports that that a that we review every week and and we talk about creative ways that data back or rattler could bring their balance sheet to bear to cause.
Flaring to be eliminated quicker than than if we just relied on somebody else. So we're trying to be creative and are willing to put our balance sheet to work if need be to eliminate a flurry.
Thank you.
Our next question comes from David Deckelbaum Cohen.
Morning, guys. Thanks for the time.
Just wanted to ask a couple of follow ups on just the Picos activity I think the first half of the year. If you guys are running.
About six rigs there right now.
Is the plan does that does that slow in the back half of the year in and going into 2021 or should we think about that as kind of a steady state program.
Yes, David I mean, it's more about completion cadence rights in the first half of the year.
We do have more completions and pay just and then the back half I think overall a you know 2019, we completed almost 100 wells in that in that field and.
No I think the goal here as an organization has to get that down to 60 or 70 on on a go forward basis. So we are allocating capital in the second half of the year too.
Better return areas, one rate going to reward and one rig going to the northern Midland Basin.
Particularly as the held by production issues that we had in in pay cuts have subsided.
And we could have a more steady state plan there with five rigs are so running full time and David I'll tell you the the execution teams.
Particularly in take is county have done a remarkable job of.
Maintaining results are improving results some of which we talked about in the second bone springs, but they really driven a lot of costs out of the equation and so so now the returns continue to improve with.
The same or better eurs per foot, but much lower cost per foot, so, which it's again a good example of what down Novak excels at as you work on the numerator and denominator at the same time and we're driving rate of return positively for our shareholders.
For sure is encouraging to hear that it also sounds that as you get into the back half the 20 and going into 21.
Ups and everything else some of those HBP obligations, obviously subside going into 21.
Correct.
Okay.
And then I just wanted that just ask one more just framing this conversation around M&A.
You've highlighted a lot of priorities around sustainable free cash dividends growth when you screen now for M&A.
Do you start with a priority of a free credit free cash accretion because you did talk about obviously things have to be accretive you also talked about acreage being.
Discounted valuations right now.
Do you still see room for.
What would otherwise be NAV accretive M&A or does everything now have to become free cash accretive.
Well certainly that that has vaulted to the top of the category list of the things we look at but we really focus on several key metrics, if you're asking probably what we screen on the first certainly free cash flow per share is way up there also cash flow per share earnings per share and then the more traditional measures of inventory quality.
And what down them back can do with that property in the form of operational efficiency and then of course NAV as well too we still fundamentally believe that that is is an important valuation metric for our business, but those those are what we believe are the right ways to focus on Oneq.
Any anything you're looking at.
And right now if the stock where it is we're focused on buying back to stock because is trading at the deeper deeper discount to NAV than anything were seen in the market.
I agree with that.
Understood. Thanks are confirming we don't have to do either NAV model, just yet, but thanks, yeah, great yeah hold on to that.
Our next question comes from Michael Hall, with Heikkinen Energy Advisors.
Thanks, Good morning.
Just answer my question as it relates to how the stock price.
It looks relative to M&A opportunities. So thanks for that I guess, the second one I had just to follow up a little bit on on the evolution of.
Co development you addressed it in the Midland Basin.
I'm also curious in the Delaware is just kind of look on the on the slides the.
Proportion of the Wolfcamp a.
That's driving the 2020 program on Slide 14, I guess, how does that evolve over time.
We expect that to.
Kind of grind lower as a percentage as a total and 21 and beyond our.
Yes, any any color on that.
Mike I think Thats fair right I think the Theres a secondary zone in each of our three fields that we think.
Competes for capital today and pay cuts, it's the second bone spring, so thats going to get more attention and reward is the third bone spring, we're doing a lot more co development between today and the third bone spring.
In that acreage position in 2020 and beyond and then open up in the Birmingham area. The on third bone spring is good but also the the Wolfcamp b. It deserves some attention from ready to return perspective, so each of those each of those fields has a has a different a different development strategy, but.
Like the Midland Basin, where in the Midland Basin. The zones that are being co develop from a rate of return perspective.
Our in a narrow band the Wolfcamp a versus the other zones in the Delaware Basin had always said drill the wolfcamp a and go the other zones later, but with.
The second bone, particularly intake is getting better that's that's getting more attention.
Great.
That's helpful color I appreciate it thanks guys.
Michael.
Our next question comes from Trolls and meet with Johnson Rice.
Good morning, Travis just given your whole team there.
I want to go back to the.
There's a little bit change in some of your release I see some potential in your prepared comments you talked about how.
We've had a lot of volatility in late 19, and even in early 20 with the commodity price.
That's on one hand, but on the other Danny I get your message that the at the dividend Youre coming to the dividend is you're committed to it and those are the $1st out the door, but I'm wondering if in broad terms you can you can give us any insight into your thinking here the board's thinking.
Is there is there were up a limit maybe a soft limit on the percentage of your cash flow from ups that you would.
Did you wouldn't want to exceed it turns of a dividend payout.
If commodity prices.
Got a lower and yes commercially go ahead I'm sorry.
No finished I'm sorry.
Well I know I would say Conversely is there some some minimum level that you're targeting.
If.
Oil prices had art.
Yes, you can go back and look at some of my previous prepared remarks, where weve talked about the board wanting to to seek you know a dividend yield that approach approaches the S&P 500, and and get prescriptive you know much beyond that.
We don't think is the is the right way to communicate that message.
Okay. So outlines right now that you know what how we look at.
What to do with free cash flow above our maintenance capex, but I.
I think at the end of the day, Charles just simply said when we look when we look at capital allocation, we look at ways to drive not only current shareholder value, but also long term shareholder value.
And certainly the dividend and the growth of that dividend is very important that conversation.
We have seen is some companies that that get dividend the lift the dividend gets so high it actually can become an impediment to.
To doing what what oil and gas companies are supposed to do which is convert resource into cash flow. So we're ever mindful of that but it's a it's a discussion that we had at the board level on an annual basis and I can just tell you that we are laser focused on.
Current.
Shareholder value creation, and long term shareholder value creation.
Yes, that's that's helpful color. Thanks to my Travis and then going back to your your limelight.
Your line might well and I appreciate your your earlier comments that.
You guys are much bigger company now certainly the when you got to display three years ago, but that itself. You know, it's still it's still encouraging to get that kind of first well results, what what would you need to see.
Emanation between well costs from here in productivity from this year as well what would you need to see from this play to up to make it really compete in the top tier.
As of year overall portfolio for capital.
So we're pretty pleased with the with the oil profile that came out of it but we're seeing so far that in that first well in the decline profile looks looks actually are pretty good of course, we ever mindful that sort of single well in the section, but I think it's two things one you've always got to push.
Greater recoveries and we have to push a lower development cost, which.
You know is something thats right into wheelhouse of other Diamondback operations teams, both driving to you arent and producing well call. So.
I think there's Charles more to come on the story will probably drill one or two more appraisal wells. This year and then we'll talk about it more 20 to 21 if were successful in accomplishing those objectives on it and it starts attracting more capital in the in the allocation process.
Thank you for that Travis.
Our next question comes from Richard told Us with.
Capital one securities.
Thanks, Good morning, Travis real quick on Limelight, just you just to continue with that theme.
You drilled the Merrimack with agenda do well the the upcoming appraisals you anticipate going after any other targets they are in limelight area.
Yes, I'm going to let Dave answer that question, Dave Yes for the next two wells that we have upcoming for the appraisal project as we move to the south within the limelight trend, we're actually going to be targeting the upper portion of the Woodford.
And then we're going to be drilling a well close by Dan to do a further driving development efficiencies in the Airmax itself.
Okay. Thank you.
Lastly from me looking at the.
Northern Delaware Basin acreage swap referenced in the in the release how did that transaction.
Group of transactions come together and how much of a net acreage remains in new Mexico.
Yes, Richard.
Worked on probably almost 40 trade throughout the year. This was certainly the largest for us entering new Mexico as an operator to operate six or seven sections just didn't make sense.
Given that we didnt bolt on to other blocks of acreage that or you know that we operate in Texas.
You know that that's certainly you know that trade is one of many that that worked out really well today. We have about 2500 acres left in new Mexico, primarily non off with a one operated well.
Alright case, thanks, so much appreciate it.
Thank you.
Our next question comes from Leo Mariani with Keybanc.
After you guys just wanted to follow up on one of your earlier comments here just as a point of clarity.
I heard it correctly did you guys kind of say that.
Production growth.
On a quarterly basis in 20 would be maybe a little slower in the first quarter and then pick up in second quarter 20, and then kind of be steady for the rest of the year just wanted to make sure I understood that cadence.
Yeah, that's fairly else we plan to grow off of what was a very very good number in Q4.
Exceeded our internal expectations, but.
We do expect to the graph that number in Q1, and then have steady growth throughout the year.
Okay. That's helpful and I guess just.
With respect to.
Well cost wanted to see if you can kind of and give us anything.
Little bit sort of leading edge hearing in terms and maybe what you've seen.
In the last couple of months here just to kind of kicked off the year in 2020.
Maybe versus you know fourth quarter averages were yet able to continue to drive efficiencies mini benefit from some lower service cost deals that you might have negotiated in fourq you odd kind of start the year here in 20 comments around that.
Yes, So service cost service cost reductions are not things that we do we count on as we forecast a forecast or capital budget. Those are not permanent we know when commodity prices turns back around those go away. What we really are focused on is what type of cost improvements can we make that are more permanent in nature and and that's again, what I think the.
The down back operations organization, just just absolutely excels in and we were talking just this week about.
15000 foot lateral that we got drilled in 11 or 12 days in so we can continue to see.
Faster and faster well results from a from our operations organization, we expect that to continues to happen.
Throughout this year.
Okay. Thank you.
Thank you.
And I'm not showing any further questions at this time I turn the call back over to Travis Stice for closing remarks. Thank.
Thanks, again to everyone participating in today's call that you've got any questions. Please contact us using the contact information provided.
Ladies and gentlemen, does conclude todays presentation you may now disconnect and have a wonderful day.