Q2 2020 Diamondback Energy Inc Earnings Call
Ladies and gentlemen, and welcome to the Diamondback Energy second quarter 2020 earnings Conference call.
All lines have been placed in mute to prevent any background noise I.
I think it's because you might still be a question answer session.
If you would like to ask a question. During this time seem to be passed by the number one I need telephone keypad, if he would like to meatball Your question plastic County.
We might there this conference is being recorded.
I'd now like to introduce your host for todays conference Adam Lawlis, Vice President Investor Relations, Sir you may begin.
Thank you are good morning, and welcome to Diamondback Energys second quarter 2020 corporate school.
During our call today, we'll reference an updated investor presentation, which can be found on our website.
Representing Diamondback today are Travis Stice, CEO, UK, Spain <unk> CFO.
This conference call. The participants may make certain forward looking statements relating to the company financial condition.
Results of operation plan objectives future performance in business.
We caution you that actual results could differ materially from those that are indicated in these forward looking statements state a variety of factors.
Her Mason concerning these factors can be found in the company's finally put the at the thing.
In addition, we will make reference certain non-GAAP measures reconciliations would be appropriate that matters can be found in our earnings release issued yesterday afternoon.
I'll now turn the call it a travis stice.
Thank you Adam and welcome to down the boxes second quarter earnings call.
Before we get started.
I'd like to take a minute to continue to extend our thoughts improved to all of those both directly and indirectly affected by the Corona bars pandemic.
This year as broad unprecedented challenges and I'm proud of how our organization responded given the obstacles presented.
Our teams reacted quickly to the commodity price volatility.
<unk> adjusted operating and capital plans in real time.
We're seeing the benefits of this work today with all time low cash operating cost and capital cost per lateral foot.
Well below all time lows in both basins.
This is also accompanied by high graded forward development plan weighted towards the Middle Basin, where we had high mineral ownership lower midstream and infrastructure capital requirements and higher returns due to the quality of our acreage accompanied by industry low drilling and completion cost.
Turning to the second quarter, we dramatically reduced our operated rig count in the second quarter from 20 rigs on March 31st to six rigs today.
In response to historically low commodity prices experienced in the quarter. We made the decision to complete as a few wells as possible in the second quarter with zero wells turned to production in the month of June.
We also curtailed 5% <unk> oil production during the second quarter.
This curtailed production has been restored and is now receiving significantly higher realized prices then it would ever see when the decision was made to curtail.
We have three completion crews working today to stem production declines and to meet our fourth quarter production target of between 170, <unk> hundred 75000 barrels of oil per day.
Importantly, diamondback decreased activity levels throughout the second quarter, well not spending access to dollars on early termination fees or other onetime expenses that are headwinds to cash generation.
Looking ahead production is expected to continue to decline in the third quarter, but rise to meet our fourth quarter guidance. As we began completion operations in June in June with two crews and ended the third completion crew in July.
We expect to run between three and four completion crews for the rest of the year and are currently running six operated drilling rigs, which is our base case for the rest of the year.
In 2021 sure the maintenance capital scenario become the base case.
Diamondback can hold fourth quarter 2020 oil production flat, while spending 25% to 35% less than 20 twenties capital budget.
Which is also expected to include lower midstream and infrastructure budgets.
The second half of 2020, and 2020 ones capital programs will benefit from the drawdown of some of the duck build from the first half of 2020 as we worked down our operated rig count as contracts rolled off.
We ended the second quarter with 1.9 billion of Standalone liquidity and have only 191 million of our September 2021 notes outstanding after tendering for 55% of the original 400 million issuance during the second quarter. This was our only major term debt maturity.
Before 2024.
Without reduction and Ford capital spending and expect expectation for true free cash flow generation at current commodity prices and the second half of 2020 and 2021.
We will look to reduce both gross and net debt, while continuing to return capital to our shareholders through our base dividend.
This dividend remains our primary return of capital to our equity holders in the board of directors has decided to maintain the dividend based on the current forward outlook.
To finish.
Diamondback has further adjusted downward our already low cost structure and is prepared to operate successfully in a lower for longer oil price environment.
A lot of the efficiency and cost gains made during this downturn will become permanent.
We will benefit diamondback shareholders in a recovery.
Interest expense low leverage industry, leading low cash operating cost downside hedge protection strong midstream contracts and the benefits of Viper and rather will allow diamondback to operate effectively through an uncertain forward outlook.
With these comments now complete operator, please open the line for questions.
Absolutely. Thank you, Sir ladies and gentlemen, if you have a question at this time, we've passed a start and then the number one key arnie touched on Palestine. If your question has been answered all your question move yourself from the Q piece plastic town.
So your first question will come from the line of Neil Dingmann. Some truest Securities. Your line is our life. Please go ahead.
Well My first question just for your case I guess, we've heard a lot. This year about how activity in pricing has impacted everybody's free cash flow, but again, what we've noticed for you all.
You mentioned this the press release several times that you've touched come down notably again in Twoq. So my question is how your cost control sets you up for free cash flow generation better as it appears to me you're out you know you're out spend is now behind you all.
Yes, certainly all agree that the outspend is behind this and as I articulated the third quarter fourth quarter and throughout next year, there will be will be generating significant free cash flow you know the cost construction remains one of Diamondbacks significant advantages you know you've heard me say before that.
Our main focus is used to convert resource into cash flow at the most efficient margin, while we drill really drilling complete really good really good wells the cost savings and the cost reductions that were seen right now through this downturn, we believe that a high percentage of those will continue throughout the four development plan.
Historically when you go through a cycle you will see service cost concessions of 10% to 15%, we're now down over 25%.
Over the last 12 months and you know as long as rig count stays below 200 rigs out here in the Permian and and a commodity price stays the shorter range bound where it is right now.
We feel pretty confident that the execution and cost metrics that we're seeing today will be part of the future part of our future operating plan.
Okay leads in the second one just on that plane I was wondering on the future activity cadence and leverage specifically you guys have now mentioned a couple times or you can keep 21 activity flattish with I think you've said valued at 25% less cost. So the question would be if prices stay about at today's level into next year or even go a little bit higher.
Would you still to potentially keep activity levels flattish type debt or.
How would you think of value to the certainly it sounds like you have the ability with these costs to come in a little bit better. So I'm just wondering if prices do rallied a little bit is as all others seem to be cutting production out there what's what's the thought of.
Lastly, debt or looking a little bit more activity.
Yes, certainly we're not seeing any signals that growth is needed.
Don't Diamondback war for a more industry in general So you know growth.
Today's world.
It's pretty much off the table you know the.
You know the comments I made in my prepared remarks, echoing the board's viewpoint that we're going to working our primary form of returned to our shareholders is in the form of our dividend and our board's committed to maintaining that dividend and hopefully growing that into the future as well.
Beyond that excess free cash flow as I as I said, it will be using to reduce debt.
Of.
Both continue to lean into the dividend and also reduce reduce total debt net debt at the same time, yeah. Neel I think we're really focused on this Q4 exit rate number on on oil of 170 to 175000 barrels a day and maintaining that that number in 2021, the lowest capital required whether that's.
On the midstream side, the infrastructure side as well as the the DC knee side. So we're continuing to refine that and and put some guide posts around 2021, but as Travis said, you know growth isn't top of mind today instead, it's how capital efficient can we be to keep production flat in 2021.
Great. Thanks, the detailed Scott.
Thank you.
Thank you Sam.
Your next question will come from the line of Derrick Whitfield from Stifel. Your line is now let go ahead.
Thanks, Good morning all.
Good morning Derek.
I wanted to follow up on Nils first question.
Perhaps for yourself, Travis or Danny could you speak to the repeatability of your recent operational records with the completion of the Spanish Trail four well pad tend to have days in the horizontal wells you drilled.
And 8000 foot and 24 hours.
And if possible help us kind of quantify the savings associated with that degree of efficiency versus your average well.
Travis we understand that every well cambia pacesetter, well, but we're just trying to get to fill for.
The degree of cost savings and how repeatable that could be for you guys in the future.
Yes, Derrick days in the room this morning and on the let Danny answer those specifics.
Eric yet you know first on the kind of repeatability a point of the on the completion side I mean really that's a you know.
Kind of an operational procedural changes from one of our service providers and and a new.
Kind of way of attacking a zipper completion, so no that's repeatable on each pad we go to that.
You know that we have does the Simon frac crews rigged up on its certainly something we anticipate going forward.
Then as far as on the drilling side, the Oh, 8000 foot and 24 hours, while that's a leading edge kind of a metric and certainly the basin record in a diamond back record.
I don't expect us to to be beating records on every well that that we drilled but certainly we will keep edging closer to those.
Those types of results and.
While that that's the leading leading edge markers you know, maybe the midpoint moves closer to that and.
As we continue to utilize technology that our partners are bringing us or not and start pushing the bound to what we can do.
And then I think Derek on the cost side, you know the tool.
Completion crew that completes too well done wants and can did that Spanish trail pad, you're paying more for the horsepower, but you're also saving a lot of money on the you know the variable cost so you're probably saving somewhere in the range of 20 or $25 a foot and I think tangentially that benefits areas, where you have high water out.
Hi production you water watering out your production for a lot shorter period of time and getting that production back online. So that's that's a accrue that we're going to use in areas, where we have a lot of existing production throughout the basin.
Thanks very helpful guys as my second question I'd like to shift to the evolving regulatory environment, perhaps for you Travis.
Correctly outlined your minimal exposure to federal land has the potential competitive advantage in the event. There is not supportive finished your legislation with permits and or fracking.
The understanding that you guys are one of the more progressive BMP companies on MSG matters that are not exposed to federal lands could you speak to your greatest regulatory concerns in the current environment.
Yeah sure Derek it's it's a lot of.
We don't have a lot of clarity on what is this the.
With the regulatory environments can look like.
If we fast forward to administration change.
But what we do know is that it won't speed up things won't become more efficient.
And so we're trying to do is.
Be as much on our front foot on.
Things that require.
Regulatory approval now you just echoed and we have articulated that are we have essentially no exposure to federal acreage, but we're going to see with the new rules of engagement or should they get rolled out and you can expect dialing back like you said to be progressive in the way that we navigate through those through those new.
Rules of engagement, we listen we we support sound science that drives regulation and you've heard me say that before and our sustainability report and we'll continue to we'll continue to support regulation, that's backed by sound science, where when those two things deviate is we're doubling back in our industry.
Likely going to have a problem with the with the regulation.
Thanks, all well done guys.
Thank you there.
Thank you Sir your next question will come from the line of Scott Hanold from RBC capital markets. Your line is now let go ahead. Please.
Thanks.
You all in your presentation.
Pages that gets tenant 11 provide you your current inventory can you do have that.
Economic sensitivity it looks like the Midland Basin is pretty resilient in this assessment down to at least 40 to $45 a barrel could you give us some sense of what causes that resiliency as it is it is it is that the current well costs and maybe if you can give a little bit a color around that inventory.
Where do you think that relative I guess I'll call quality is versus what you've drilled to date and maybe versus what you see with compared to other peers.
Yes, Scott I think its misunderstood how good our Midland Basin inventory is kind of put our our Midland basin inventory, particularly with our cost structure up against anybody and that's.
That's just proven based on on the number so you know with current well costs below $600, but on the Midland Basin side.
We have a significant runway of quality inventory ahead of US you know I've been I think we wanted to get ahead of that.
That discussion topic, which which seems to.
Okay set out once in awhile. So you know really on the Midland basin side, putting $0 a value on on the gas side at $35 a barrel year over 3000 locations economic today, and I think that speaks to the quality of inventory and the cost structure behind that inventory.
Yeah, and I guess my specific question would be.
When you talk about well cost and you obviously of the World you read advantage, but can you talk maybe about the like you are productivity say relative to see some of your peers or is it really the cost in the royalty advantage.
It's really a combination I mean, so some of our peers.
But mostly the peers that are larger than us that have a significant amount of inventory their spacing their wells wider and doing bigger frac jobs that are getting a little more you are per foot, but the costs are higher we tended to space our wells relatively tighter at eight wells across 660 foot spacing in the Midland Basin, and that's partially due to.
The completion design being a little bit smaller frac job, but also the cost being lower and therefore getting a little lower you are per foot, but off from the returns perspective.
Drilling and completing those wells for multiple hundred dollars per foot cheaper.
Got it. Thank you and then my follow up question is on the conversation of maintenance spending into next year.
How many wells does it take to maintain your your production and to maintain that 170 to 175 I'm on the oil side would would your your oil cuts stay flat go I mean, what does your oil cut due to its you're like 2021 on a maintenance planned.
Yes, I think oil cut comes up a little bit from where it wasn't the second quarter because of the curtailments, but we'll probably spill somewhere in the in the low Sixtys now our maintenance plan in 2021 is moving more and more towards the Midland Basin.
So that probably means a few more wells.
Then if you were 50 50, Midland, Delaware, but I think something similar to our gross operated well count this year with with.
Two thirds or more focused on the Midland basin is kind of where our heads that and I think as we're doing our work right now to refine that analysis and refine that 25% to 35% less capital number.
We'll update the market when we when we have that data.
Appreciate it thank you.
Thanks Scott.
Thank you said your next question will come from the line of Gail Nicholson from Stephens. Your line is now let's go ahead. Please.
Good morning, you guys have had a nice improvement and we can you just talk about how you think hourly trend physically in the back half of 2020, and then more importantly, and 21 and what drive or do you have done.
And that further improvement.
Yes.
Really credit to the team in the field organization you went from.
Wrapping up in April two curtailing in may and bringing that that curtailed production in June to keep Ela, we as low as it did in the second quarter below $4. I think I think that that naturally that number is going to come up a little bit in Q3 in Q4, but but still probably be somewhere in the lower half of of the force.
And then as we think about the next year you know our large capital spend on the infrastructure side in terms of electrification of some fields as well as.
Going to gas lift projects.
I will help l., we stay in that kind of low fours range as we head into 2021 No. Every every center at current production is about a million dollars a year of cash flow. So we're picking up pennies and going to stay focused on.
Being it's close to that $4 bogey is as we can.
Great and then in 21, your take or pay obligations. There from sales increase at the start up a week to left there I was just kind of curious on how you guys are thinking about price realization expectations in 21% of WPC I and the importance of having that exposure to grant I think going forward in time.
Yes, I think exposure to Brad stays about the same 2020 to 2021 about 60%, but once wink to Webster comes on that contract moves from a Midland based price to an NVH based price.
I think I think our our mentality their thought process is.
As these these pipes commitments and the long long term.
Sales agreements are essentially large insurance policies for when things when things go bad.
Right now with Brent VTI as narrow as it is you were probably losing a a few cents versus selling those barrels in mid one, but if Brent WTI blows out.
Four or $5 a barrel than than we're probably receiving somewhere close to 100% of WCS.
Great. Thank you.
Thank you Gale.
Thank you ma'am.
Your next question will come from the line of ATSI Sendmail from Bank of America. Your line is now like go ahead.
Thanks, Good morning.
The DUC count of 110 to 140 at year end 20, and you talked about drawing those what's a good way to think about normal duck level and in this scenario and if he could I know, it's it's a little early if I'm thinking about maintenance capital into 2022 at current strip.
How should be conceptually think about Midland, Delaware split and capital needs for infrastructure.
Yes, so I'll take the second part first off it you know I think overall infrastructure you know is.
The line that we define as infrastructure will be cut almost in half going into 2021, and I think that number we've had a large infrastructure build across our position over the last three or four years and there's a lot of scrutiny on that number to not do not.
Come back up so as we have.
Executed on our onetime projects on electrification and gas lift.
And we have very few new batteries to build instead, we expand our existing batteries that infrastructure a budget is going to keep being driven down you know even even in 2022.
The long way from today, but I think our goal is to try to be.
These two thirds Midland basin weighted for the foreseeable future and whether that's in a growth or a stay flat scenario I think we have the inventory to do that.
Great and then my follow up question is on the heat and he has few front Travis you've you've emphasized the SGN on slide 20 flaring.
As a percent of net production has come down pretty nicely year over year could you talk about strategies, enabling doesn't again remind us on the compensation matrix as it relates to yesterday.
Yeah, you know specifically.
Field organization and operations organization.
Jumped ahead.
And took advantage of some of the slowdown in our drilling activity to kind of get caught up on some of the.
The dominant back required drilling and completion operations, particularly in the Delaware Basin.
In some instances, we brought our balance sheet to bear where we spend dollars to eliminate flaring, but it's it's essentially across the board you know a heightened emphasis to.
No not flare.
At all and.
We do need the times help from our gathering partners.
So to to make sure that once we are hooked up to that they can move the gas, but but in general we've adopted a policy of.
Of every well is connected to a to us gas sales point before it's brought on and that's that plus working closely with our gathering.
Oh and processing partners housing has allowed us to really.
Substantially reduce our or flaring yen and office you mean, we havent taken the matter in their own hand by converting some of these contracts that we the legacy contracts that we have from.
PLP percent of proceeds over to a 100% fixed fee and that's what's driving our our gathering and transportation cost going up by a little bit. This this quarter now we catch the benefit of that on the realized price side on the gas front. So it's really a neutral trade and not the higher Das goes up the more works from exposed.
To that on the diamond backs side, so you're using to the legal on the contract route to incentivize, our gatherers and processors on a fixed fee basis to take our gas.
And we've got on the on the in fact, you can read it let's sit on slide 21, some of the some of the changes we've made to up to our short term short term incentive compensation program and as a reminder, vis vis.
This scorecard this corporate scorecard that weve presented our proxy that makes up half of every employees a short term incentive compensation on an annual basis. So we've got a 15% waiting on or.
Yes, and GE measures and and you can see what you can see with those are all forms on slide 21.
Listed there a safety metrics are flaring greenhouse gas emissions the percent of recycled water will still control in the t., our IR or total recordable incident rate. So there's five measures that that make up that he is angioscore now.
I appreciate the color. Thank you.
Thank you Sam.
Your next question will come from the line of Cathy Graham from Northland Capital. Your line is more like go ahead. Please.
Morning, guys.
You guys as communicated freight clearly you know at aspiration to reduce debt here on an absolute relative basis over the next few quarters. So I was wondering if you guys have kind of targeted either absolute or relative level on on the debt side that you guys would want to get to before setting increasing returns to shareholders.
Jeff I don't think they're mutually exclusive you know we've raised our dividend every year since since putting in place three years ago and I think.
That being the primary return of capital we're going to look at that very closely at the end of the year and see what 2021 holds on on that front you know the one consistent theme, we received from our largest shareholders over the past over the past few months is to protect the dividend and in exchange for protecting that dividend cut capital.
And Thats, what I think we're going to do I think.
Overall, we would like our debt to be lower than than higher and I don't want to put out a two year a five year target on that front because a lot can change in this business as you've seen in the last in the last three months, but I do want to also emphasize that at the parent company and we still have three companies right in each of those three companies had debt that's manageable off.
Three companies will be generating free cash flow, starting the third quarter going forward and on top of that Diamondback has a lot ownership in those two subsidiaries, which while won't.
You can't sell all that in a day at some point that is a safety valve for.
You know how much debt you think you have at the parent company.
Got it purchase that case and my follow up.
Travis one of the pick your brain on the M&A front, maybe from a couple of angles versus just generally your comfort level of taking a serious look at any deals in this environment and second is just.
Any level of interest.
In terms of diversifying the asset base outside the Permian do you see benefits to that for from Diamond backs perspective, or do you think it's more of a competitive advantage to have the concentration on the knowledge base that you have in the permits.
No look of the in terms of the first part of your question you know M&A. We're so internally focused right now on the on doing the things that we need to do look our or industry has been rightly criticized for all kinds of noise that have distracted from returns in our focus.
Right now is singularly trying to deliver the highest returns and cash flow for every single dollar we invest and.
And we'll go from the from the public guys. That's trading so so poorly for for the public guys that that could potentially be targets. It's just doesn't make any sense for us right. Now. So that's that's kind of my view on the that's my view on M&A and then.
I just don't think I, just don't think that it makes sense for for diamond back to be looking at other basins.
We are.
One of the core.
Philosophies, we talk about here is no what you're good at Diamondback is really really good.
Good.
Permian basin extraction of hydrocarbons and thats borne out by our cost structure in or execution metrics and you know.
That's that's all that's that's our emphasis that's what we do that that's what we know we're good at and that's what we're going to maintain.
Alright, I appreciate it guys. Thanks guys.
Thank you said.
Your next question will come from the line of Ivan.
From JP Morgan Your line is not like go ahead.
Yeah. Good morning, a Travis your guidance implies a call. It a 60 40 split in footage between the men the Delaware basins. This year I was wondering if you could give us more thoughts on how that mix could look as we head into the back half of the year and perhaps any.
Preliminary thoughts on 21.
Sure and I'm going to lift a formula case antibodies goes bridge in front of.
Yes.
60 40.
Really is driven by a lot of the first half of the year being in the Delaware Basin and.
Looking to the back half of the year Q3, Q4 and into 2021, we've really moved the rig schedule on the frac schedule to about.
70 30.
Midland Delaware and.
Why don't I My spreadsheet in front of me.
That's kind of the path forward is let's let's get more focused on the Midland Basin, where we have less infrastructure needs less midstream needs lower Ela, we and it probably better returns and an overall cost structure. So I think for US six rigs operating four of them are in the Midland one and two in the Delaware.
Yes, and case, if you were going to characterize what the spread and call. It we'll break even is today kind of using.
You know leading edge well costs, what what would you say the spread is.
Let's say, it's less than five but somewhere around $5 a barrel. Your your breakeven in the Midland a little bit lower than than the Delaware I mean, I just think if you're running five 575 or 580 Azure as your cost per lateral foot.
Thats, a pretty pretty good return project with some of these Midland Basin Wells in the you know 80 9100 barrels a foot.
Our range.
Okay. That's helpful and just my follow up.
Quite a few of incoming questions just on next year's.
Capex.
Thoughts obviously you releases a couple two three weeks ago, but just the 25% to 35% decline however year to keep Fourq you own a flat you did highlight some lower infrastructure costs, but what type of well cost is kind of embedded within that range are you using basically.
The 2020 updated.
Outlets for well cost, but maybe just a little color on mall.
Yeah, I don't think we would use the 2020 updated outlook. The you know the real time costs to drive that number we're really kind of using the the lower end of our full year 2020 guidance range. We I think Travis mentioned in early in the call LOE costs are down 25% year over year, probably 50% of that service costs related.
But I think for us to guide to all time low well costs in 2021 wouldn't would not be a prudent idea.
Got it got it thanks, a lot case.
Thanks Aaron.
Thank you Sir your next question will come from the line and Jim why from Barclays. Your line is for like go ahead.
Hi, good morning, everyone. Thanks for taking my questions.
My first question following up on something up higher than the productivity and activity allocation can you tell us how you anticipate the corporate wide productivity per foot to trend and 2021 relative to 2020 and and I guess, we're asking to thank you know that there's.
Then some change recently and then there's some preference between high grading, though in a more modest price environment versus our co development versus kind of leased retention.
Well I think Janine overall with more Midland Basin.
As a higher percentage of your total capital your Midland Basin.
You are per foot is lower than the Delaware, but your well costs are significantly significantly lower so while I can't give you an exact productivity on on on well.
You are per foot I do think in general you know the the couple of hundred wells, we're going to complete in 2021 will be.
Higher productivity on returns basis than than 2020, because you know in 2020, we were heading into the year to complete 350 wells and and we have slowed that machine down to to complete a 185, this year and and something close to that next year and and I think just in general our next 80 85.
Well I see on the schedule for the second half of 2020 are significantly better than the first half of 2020, and then we expect that.
A level of detail on on drilling our best stuff first to carry into 2021.
Okay, great. Thank you that's really helpful.
My second question is just back on Capex.
I know you clearly see update affection and Capex Guide I'm last night, you provided the helpful break out between the different components, which are kind of reset the higher end.
Not to rehash old news or anything like that but I still think that there's a lot of questions.
Pieces.
Tony Tony update I'm, especially on the DMC side, given that you're completing the same amount of that wells as you previously planned and exiting with unless duck. So maybe just a little bit of color. There for some clarification would be helpful. Thank you.
Sure Janine.
I think what's unique about how diamondback reports capex is that it's a number that actually matches the cash flow statement and sometimes that that's been to our detriment, particularly in the first half a year or so in general.
We came into the year running 23 rigs in a completion crews and we're going to exit the year running.
Five or six rigs in three or four completion crews and and that results in a and then net cash outflow and a cash drag of 250 or $300 million on on the budget and I think for.
Others, who report accrued capex that doesn't match their cash flow statement. We on an activity based basis are going to do you know kind of 155 to one six of capital this year with a with a large cash outflow drag a you know heading into next year.
Okay, great. Thank you very much.
Thanks Jenny.
Thank you. Your next question will come from the line of Leo Mariani. Some Keybanc. Your line is I'll. Let go ahead. Please.
Hey, guys wanted to follow up a little bit on the cost side.
Certainly looking at your leading edge well costs that you guys are talking about in your slide deck in both the Midland and Delaware I certainly does appear to be below your 2020 guidance in terms of cost per se, but.
Just trying to get to get a sense there.
Do you think kind of the full year 20, Midland and Delaware D.C. any well cost per foot guide my end up being a little bit conservative or you just kind of maybe being in.
A little reluctant to kind of just change things sort of in your here.
Yeah, I think we're a little reluctant to change it just because there's others half half the years gone in the way we report Capex, probably three quarters of the year is essentially gone on on well cost perspective, but.
These lower well costs that we're seeing today in real time will benefit.
The company in the in the fourth quarter and into 2021. So I think I think it's prudent for us not to not to change that guidance, but certainly we expect the trend to continue.
Okay. That's helpful and I guess I'm clearly you guys are very focused the seems to be on maintenance mode, and a $40 oral world and rightfully. So Travis you certainly talked about not having kind on the right signals in this current environment to really indicate for any wanting industry to pursue production growth I guess what.
Do you think the right signals might be.
For the kind of Fang and the U.S. industry in general to come maybe start thinking about returning to production growth.
Well certainly got to have a you got to have a lot a lot higher commodity price I don't know what higher means, but certainly materially higher than where you see today you also have to have.
So I'd have to have access to capital, which right now has been theres been a capital starvation for a number of quarters for our industry and rightfully. So as I mentioned earlier because of our industries and ability to generate true returns, but you know.
So it's it's it's a it and then the last part of that would be the in certainly investor sentiment would have to change.
Dramatically from where it sits today, so there's quite a bit of quite a bit of headwinds I think for our industry.
As you look ahead to try to think about any kind of meaningful production growth.
Okay. Thanks, guys.
Thank you said your next question will come from the line of trials need. Some Genkey why is your line is now let's go ahead. Please.
He drives case and the whole team there.
I wanted to ask jumps in this goes back to two to a comment you made earlier and responsible your earlier questions about the.
The rig count staying under.
200 in service costs.
Actually ended last week couple that the up the bigger operators out there to majors.
Hi, everyone expected them to be dropping rigs, but they did they really you indicated that they can be dropping quickly.
Or dropping a lot of rigs into your end and I'm curious is as you look forward to the back half of 20.
In into 21 as that rig count continues to go down how how do you see things changing for for you as an operator or or maybe just in your in your environment or the greater ecosystem out there.
Well certainly you know if we continue to have this environment as I mentioned earlier will cost really going to stay the same or they're going to go lower.
And I think it's reasonable if commodity prices increase you'll start to see the service sector of the service sector.
The service sector respond but.
Look this the Permian basin is going through those.
Seismic shift in in a capital allocation from from all the operators and you can see it in the production responses were now below 4 million barrels oil per day production.
And so I just it's just hard to see in this environment any meaningful change in the current in the current operating situation that that all the companies are faced with here in the Permian.
Got it that's it for me thank you.
Charles just to add to that though us with this continued.
Reduction in activity and and even in this environment I can't emphasize enough that the diamond backs clear advantage is not only the number of.
Number of locations, we have that we laid out on our flaws in terms of inventory, but it's it's our cost structure and so you know the lower in the lower the price of the commodity goes the more the margins get squeezed the more.
Really efficient high margin companies.
Good highlighted and certainly diamondback is evidenced by numbers in this release.
Falls into that category.
Big jobs.
Thank you.
I am just next question will come from the line of spine singer from Goldman Sachs. Your line is already. So go ahead. Please. Thank you. Good morning till can you talk to how this year and the run up to this year have changed your views if at all longer term on the oil price on the right amount of production to hedge.
And then if we are in a lower diamond back plus industry growth environment in the Permian the strategic value of secure interests in denim and rather.
No.
Brian the the you know the case mentioned earlier about how the back has a large ownership position in both our subs and that that continues to you know to literally and figuratively play did dividends to the diamondback shareholders and and you know, it's something the neo something to dial back.
Board is aware of but it's we're comfortable that our position in our ownership of those subs today.
No I think on the hedging side you know most most of our hedges, we structured as a two way callers and so.
We have a 500 deck, where we are exposed to the upside here and you know we have a good amount of 2021 production hedged we haven't added.
As much on that front, it's actually restructured and lowered the total exposure in 2021, but overall I think if we're moving towards a true free cash flow model that distributor a lot of cash to shareholders.
Diamond that should emulate.
What Viper in Rottler I've done over the past couple of years, which which is distribute a lot of cash back to back to their shareholders one being done in back but more hedging I think is probably in our future you know and making sure your dividends protected on the bottom end and you print a bunch of free cash on the on the top end to those those two way call.
Yes.
Great. Thank you and then my follow up is what are you seeing from outside operators in the Permian and if oil prices do rise do you have a sense if the level of discipline from the outside operators will will be lower grade or then you're on.
Well certainly you know our industry doesn't have a good track record of that the discipline, but.
No I believe that there has been a there has been a change in C level in terms of disciplined and.
I'm confident that.
All operators there no but that the at least have any awareness of.
Our industry are going to be very judicious in trying to resume you know activities that generate production growth.
Okay.
Great. Thank you.
Thank you Sir your next question will come from the line of Michael Hall from Heikkinen Energy. Your line is more like go ahead.
Thanks, guys I appreciate the time I just wanted to do a I guess follow up on one thing and then also ask I guess on on base declines maybe first on on the declines.
Im just curious as you guys have slowed down a bit here. This year, what how would you think about the impact of that on.
The base decline profile as you look at 21.
Exiting 20, entering 21 relative to how things look.
Exiting 19 heading into 20, what's the change in base decline right there.
Michael on the on the oil side, you know we release high Thirtys was our base decline exiting 2019 going into 2020.
I think that probably goes go somewhere into the mid Thirtys I can't guarantee the low thirtys, yet, but but probably the mid thirtys on at least on oil so probably.
Three or 400 bits of a benefit.
On the be OE side, we were at a low thirtys kind of 30 to 33 this year.
From 19 going into 2020 and that probably goes down and you know a couple of hundred that's lower end of the near the 30% range.
Okay. That's helpful.
And then I guess the follow up was on the M&A commentary.
It seems like maybe Travis you're referring to the public space in that commentary I just wanted to follow up.
Is your view M&A doesn't really make sense is that applicable in both public and the private space or is it worth differentiating between the two but at this point well it all its all about the rock right. So I mean, if you find good rock you know you shouldn't care, where those public or private but the problem that we're seeing on the public.
It is how afforded the debts trading for public companies and <unk> that that has a significant detriment on the on acreage valuation on the private side, there's just not that many opportunities out there truthfully of tier one acreage I mean.
We're not going to.
There is no there.
There is no there's just not a lot of tier one tier one rock that's out there and.
That does kind of how we differentiate it.
Okay. That's helpful.
Appreciate it guys. Thanks much.
Thanks, Michael Thanks, Thanks, Mark.
Your next question will come from the line never Rich I tell them from capital One Securities. Your line is no less so go ahead. Please.
Thank you good morning.
Okay.
It was mentioned a couple of times, it's a dividend as the primary vehicle for returning cash to shareholders well just wanted to get your thoughts on potentially diamond back implementing say a variable dividend that paid out a certain percentage of.
Excess cash flow yearly.
Yes, I mean Richmont my opinion is I I've heard a lot of talked about the variable dividend and the only variable dividend I've ever seen is at Viper.
In our space, but for us the fixed dividend is a priority and I think in the conversations are our largest shareholders. They want to be running kind of a dividend growth model as as how they're getting cash back from from their investment in Diamondback and I think you know overall.
It's a good concepts, but it's just not a concept that we're focused on right now we're focused on the base dividend, which you know in in our peer group is the highest yield today and.
You know I think investors knowing that safe is important and knowing that that's going to grow.
In the future is also important.
Sure.
And then just as a follow up looking at the base case 2021 budget of around six rigs.
Maybe for Travis or Dan do you envision allocation of some level of capital in that scenario to continue testing your acreage such as going back to align light area or other intervals.
Oh, there might be a little bit in their richard but but it's going to be as muted as possible. I mean, I think I think given the shocks that the industry has gone through over the last four months.
Just just exemplifies how precious capital isn't and I think a lot of or landowners had been pretty pretty accommodating through this and and we're going to do what we can to hold acreage, but but also only drill our our best off with the majority of the capital Richard We remain singularly focused on delivering the highest return.
Turns and cash flow per share for each dollar thats invested in every capital allocation decision that we make runs through that aperture and we will be consistent minute on go forward basis.
All right well I appreciate it thank you.
Thank you Richard.
Thank you say I am showing no further questions at this time I would now like to turn the conference back to C.L. mistake Travis Stice.
Thank you again to everyone for participating in today's call. If you've got any questions. Please contact us using the contact information provided stay will.
Thank you say thank you so much beginning send again. Thank you everyone Cobank disappearing. This concludes today's conference you may now disconnect Stacey and have a levine.
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