Q3 2020 Diamondback Energy Inc Earnings Call

<unk> earnings conference call at this time, all participant lines on a listen only mode. After.

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I like to hand, the conference to your speaker today.

<unk> Vice president of it.

Relations. Please go ahead Sir.

Thank you Victor.

Good morning, and welcome to Diamondback, Energys third quarter 2020 conference call.

During our call today and your reference an updated investor presentation, which can be found in dialing back like that.

Representing Diamondback today are Travis Stice, CEO NK fantasy epic.

During this conference call. The participants may make certain forward looking statements relating to the company's financial condition.

Yes, good operations plans objectives future performance in business.

We caution you that actually gets could differ materially from those that are indicating they see a difference. They just did a variety of factors.

The commission concerning these factors can be found in the company's guys the deficit.

In addition, we will make certain ones that matter.

I can say something about the equivalent GAAP measures can be found in our earnings release issued yesterday after that ill now turn the call over to Travis.

Thank you Adam and welcome to the Diamondbacks third quarter earnings call.

No I'm about continued with or trend of cost reductions in the third quarter.

With L., we and GE and I remain near all time lows and capital cost per lateral foot continuing to decline to new records.

Our drilling and completion operations continued to gain efficiencies and current well costs are now 30% lower than 2019 levels in both the Midland and Delaware Basin.

We're also beginning to see the benefits from high grading our development program since the downturn started in our latest well result, and have all the impact of curtailments from the second quarter in the rear view mirror.

As a result of this high grading and improved capital efficiency.

We're on track to meet our fourth quarter average oil production target of between 170970 5000 barrels per day.

And expect to carry this momentum into 2021 as the baseline for our maintenance capital development plan in 2021.

We expect to execute on this capital plan with 25% to 35% less capital than 2020.

And this plan implies a reinvestment ratio of about 70% at $40.

To be clear this maintenance capital scenario, which currently the base case for our operations through the end of 2020 more.

But if commodity prices weaken further.

So staying that weakness for an extended period.

We will exhibit capital discipline and industry leadership by cutting capital and activity levels further.

The conversation the industry has moved towards how the reimbursement ratios and corporate breakevens, but it shifted away from answering the question of whether or not an operator's development plan is generating sufficient returns and.

Creating net present value for that company's shareholders.

Well, our 2021 corporate maintenance capital break even of low thirtys WT before playing or dividend should be considered best in class.

That's an area will not happen, if we're operating at or near breakeven.

We will be spending less than maintenance capital to preserve upside for our shareholders and will instead conserve cash flow to pay our dividend and to pay down debt put.

Good very simply or forward capital allocation philosophy has not changed.

We will protect our dividend spend maintenance capital at most and use excess free cash flow to pay down debt.

Before expected free cash flow will not cover our dividend then we will cut capital to ensure our dividend as predicted.

The third quarter of 2020 provided a preview of this new operating model as we generated 153 million of consolidated free cash flow in the quarter most of which was used to produce consolidated net debt $137 million. Looking ahead, we had only one material term debt maturity due in.

The next four years 191 million that remains outstanding or 2021 maturity.

We expect to have cash on hand to retire this node by early 2020 more to further reduce absolute debt.

After this maturity, we do not have any material outstanding obligations until the end of 2024.

We also have a legacy high yield bond due in 2025 is currently callable, providing optionality for future gross debt reduction.

Turning briefly to DSG diamond.

Diamondback is committed to environmental stewardship, and delivering best in class performance and reducing our carbon footprint.

While owning and operating assets that are positioned on the low end of the global oil cost of supply curve is most important to our stockholders. We recognize it's also important to own and operate assets that are also positioned on the low end of the greenhouse gas emissions cost to supply curve.

Diamondback supports public policies that eliminate routine flurry and as long as those policies protect the safety of our operations and consider flaring contributions from all segments of the oil and gas industry.

Upstream and midstream operators must continue to work together to address the flaring issue for our industry.

Diamondback has been proactive in reducing our flaring by using our balance sheet to build infrastructure to ensure every development well completed is ready to be connected to each respective midstream gathering and we will we will not flow back a well if that's not the case, we've also restructured gathering and processing contracts at all.

Expense.

Converting contracts for my personal proceeds contract to a fixed fee contract. So be gathered does not have an economic excuse not to take I guess, that's puts all of the commodity exposure on us as the operator, but ensures that our gas is not flare.

Flooring was responsible for over 50% of Diamondback scope one emissions in 2019.

With flaring per net be a we produced down 54% year to date or scope on emissions have materially declines this year, demonstrating our commitment to environmental responsibility.

Next on the topic of industry consolidation and M&A, we believe that consolidation in our sector is necessary as our sector is too fragmented, but that's changing rapidly industry consolidation has long been anticipated in U.S. shale.

It has been touted as an avenue to create scale and improve cost efficiencies.

Today.

On the back is a leader in cost and efficiency. This.

The success of the acquisitions, we've executed to date were largely driven.

I realize in hundreds of millions of dollars of savings through lower costs and higher returns than from the previous operators.

A well drilled in the Permian basin by Diamondback today will be quicker less expensive and operated with the lowest cost structure in the business.

So we do not need to increase our scale to further reduce our cost structure.

We produced 300000 barrels per day at the lowest cash and capital costs in the industry.

We also have an investment grade balance sheet with a proven access to capital even through this pandemic.

Theres not a piece of the supply chain that would be better for down the back. If we are bigger than we are today for midstream contracts to service the base availability to access to capital.

These factors should proved investors that we have the scale necessary to compete in this industry.

Touting, an arbitrary number such as a level of production or market cap deemed to be relevant in our space is both species and self serving.

This commentary is only coming from companies with those arbitrary characteristics and its not based in fact, well proven through operational metrics.

The back is not getting left behind if we don't do anything today, we prefer not to make rash decisions at the bottom of the cycle.

Patients will be rewarded at the end of the day.

Have the balance sheet cost structure and asset based asset.

Our asset base to be patient and ride out this downturn as brutal as it may be.

Getting bigger does not always translate to getting better better is what should matter to shareholders and better does not mean that financial metrics are improved in that first year.

Better means to acquire AD inventories that competes for capital right away at a relative value that's accreted to the acquirer shareholders not the targets.

Whether the transaction is an animal we.

Selling the company or buying something the transaction must translate to be better for our shareholders who own the company.

If that is the case then that's what we'll do.

To finish we.

We operate in a cyclical business and while this downturn has been as severe as any industry history.

Diamondback has the size scale balance sheet asset quality and cost structure to weather, a prolonged downturn and thrive in the inevitable upcycle.

We're generating and expect to continue to generate free cash flow.

We will allocate that free cash flow to our dividend.

And debt reduction until commodity prices meaningfully recover from current levels.

With these comments now complete operator, please open the line for questions.

Thank you as a reminder to ask the question you only need to press star one on your telephone to withdraw your question just press the pound key please.

We send vialli composite can a roster.

My first question on tougher line of our own Jiwon from JP Morgan Chase you may begin.

Yeah. Good morning, Travis it's clear from your commentary that you believe you have sufficient scale to effectively compete.

In the Permian without you know M&A you.

That being said I was wondering if you could give us your views on the a and D market 'cause. It does appears to be what you know several of your.

Peers have characterized as a buyer's market, we saw a natural gas do you obviously not in the Permian, which was recently transacted at a PV 17 valuation. So maybe just start what's your thoughts on a on what you're seeing in the market.

Well, let me just let me just circle back to the you Reemphasize My point on scale you know, there's not a single service company this calling us up and saying Hey, you know you're you're not big enough, we're not going to be able to do business with you.

I think weve laid out a pretty a pretty good case for for how you should think about diamond back in terms of size and scale and balance sheet and execution metrics, but as it pertains to M&A you know it's hard for me to forecast M&A I think you got to go back and just focus on the words that I said you know, we're going to we're going to grow our asset.

Our asset base, just like we've always done.

Only when we can show that we can drive shareholder value and that that has been the same sense that in October of 2012. When we took the company public that's what we come in to work for thinking about every day is how can we drive shareholder value and if it comes through execution or comes through M&A.

That's what we'll do.

Great and just my follow up is one of the drivers of the reduction in your cash cost.

Guidance was lower allo, we and I think that some of that Travis has been a shift towards.

Gas lift from E.S.P., there's just one maybe if you could articulate.

How your artificial lift strategy has evolved and any implications for go forward, a L.A. Hello, Lee and decline rates.

Sure you know I'm really proud of our operations organization and particularly this skill set on on gas lift really came through the legacy energy folks and its attributed to those guys.

They showed us how we could accomplish our lift mechanism using gas lift as opposed to what Diamondbacks legacy operation practice was was the ASP no. We still have a lot of dsps and the ground, but we've been making mental shift in going from Dsps to.

The gas lift and we're seeing a significant reduction in cost savings and and at the same time, we're not seeing any detrimental impact on performance. So something we're really excited about in a.

I mean, if you just step all the way back from its easiest fees, while it's pretty easy just to crank to reduce that up or down in response to volume volume needs at the end of the day, you're hanging of electric motor and water Marlin has on the ground with an extension cord and there is nothing to bad things can happen in that scenario, so that they're still going to be a part of our operate.

We plan to use fees will be but we're really excited about some of the leading edge technologies, we're deploying with them with the with gas lift and listen just on the expense side.

You know our focus has always been you know to be to be the lowest cost offering a Permian basin, but we've got an organization that understands that for every penny.

That we say.

In costs, whether it's Delaware GE night that translates to a million dollars of cash flow that we can return to shareholders or whatever so when you have a mindset that is focused on pennies you know from the boardroom outdoor field organization. That's how you ultimately end up driving.

Our best in class cost structures, which is was down by consistently delivers long yep. It shows in the numbers. Thanks, a lot like you're right.

Thanks.

Thank you.

Our next question will come to finance, David Deckelbaum from Cowen you may begin.

Morning, Travis in case, thanks for taking my questions today.

Thanks, David.

Hi, curious you reference the the high grading benefits that you're seeing right now and execution of this 2020 plan.

Can you talk about how you see high grading influencing 21 plan.

You sort of pegged this free cash flow at 525 million at 40.

Are you seeing further benefits going to 21 from high grading and.

And how long I guess as you think about you emphasize the scale that Diamondback has you know how how long do you think you could sustain had a maintenance level. This high graded program floor.

Yes, David I think we made some very tough decisions and at the end of Q1 and into Q2 as we ramp down from 23 rigs to five today.

While we did that we did move the drill schedule to a higher Midland basin percentage of our total capital. We've we've kind of put the worst of all.

Our lease obligations behind us in the Delaware Basin, and now can focus on drilling and completing our best stuff first and while you're in a world, where we're completing 350 wells a year and running 23 rigs that might be a little more difficult than today, when we're running six rigs and and completing you know less than 200 wells a year.

So.

Finally, seeing the well results in the productivity improvements from from moving to a higher Midland basin percentage of capital combined with high Viper interest as you saw on the Viper results for for this quarter and lower midstream infrastructure spends all that results in a little more capital efficiency and and I think a nice.

Set up from a well result rate of change story heading into a into next year and then on your second comment you know how long can we sustain that I think we've been as transparent as anybody in this industry on what our location count looks like and how did in our deck for the last three years and with well costs coming down to where they are today.

Okay.

Midland Basin productivity can kind of stay at or at or above.

You know 2021 levels for for me.

Multiple multiyear period I don't know what the exact number of years it depends what happens with oil pricing and activity, but we're confident we can stay flat with less capital going forward as decline rates come down and productivity.

Productivity goes up.

David I can tell you from my chair and looking at the looking at this kind of two thirds Midland Basin, one third Delaware or three quarters, 25% that capital allocation.

Looking out for the for the next I don't know four to six quarters, you know how much.

Confident our forward plan as I've ever been I mean, we're really we're really really firing on all cylinders on execution on on on cost reductions and very confident in this in this forward plan to be able to deliver what what our shareholders expect.

I appreciate that and just my follow up just on that 21 plan I think you mentioned midstream and infrastructure spending coming down next year.

Can you clarify those comments, a little bit more and maybe talk about.

Some of the benefits or value creation, you see evolving out of.

Viper and rattler back to saying holders.

Yes, David So I think we've kind of said that midstream infrastructure will be down another 50% or so next year from from this year's levels and.

You know that if you look back to two years ago, that's about 25 or 30% of the levels that we we hadn't from 2019. So all of that's coming down it allows us to spend more capital on the drill bit.

Versus the ancillary stuff that does does have a benefit and does reduce our cost structure, but you know with the slowdown we're not having to add a lot of disposal capacity or oil gathering capacity or you know a lot of new batteries, because we were utilizing our existing infrastructure efficiently. So.

Looking forward to that continuing to decrease.

Then as you mentioned on the on the Viper and Rattler side, you know those those two businesses are still very strategic to us. They provide a lot of free cash flow up to the parent in the form of distributions or both of them are fine from a leverage perspective and therefore.

You know you're going to get more cash up to the parent and 2021 from those two companies them than even 2020.

Hey, David I, just want to circle back on your question of inventory.

Case articulated a you know that we're only going to burn might be 150 wells per year in the Midland basin side of things.

That translates to years of future inventory when I talked about confidence in the next several quarters that doesn't mean that I'm not call them. The next several years.

We've got 350000 acres, you know here in the Permian and the slower we go the more the more towards maintenance capital, we and the industry goes just extend whatever the perception of inventory life is that just extends it out because we're just not plan to at the same pace. We were last year when we were on.

On a 20 plus rigs so I hope that clarifies that a little bit.

These travis thank you.

Thank you Chris.

Yes.

Thank you. Our next question will come from the line of Gail Nicholson from Stephens you may begin.

Good morning, you guys are entering a phase of very attractive free cash flow generation at a myriad of oil prices. When you look at debt pay down on the.

The appropriate amount of media that hey, down burst is making sure you have cash on the balance sheet of the commodity price continues to be volatile.

Yes.

I think first and foremost from new dot $191 million on our balance sheet to pay off our September 2021 note and as Travis mentioned in his opening remarks.

And to have that cash by early Q1 of next year.

On top of that we do have the the fortune of having a former high yield bond and our 2025 bond that's callable. So unlike the RG bonds that we have outstanding or bullet maturities, we do have some flexibility and paying down.

That bond by calling it you know I don't know when thats going to happen, but that's the logical next step and overall I think.

Well, we're not big quarters of cash we should keep more of a cash balance than we have in the past given given the volatility as well as.

You know the the issues that come up with bullet maturities you got to have cash on the balance sheet to be able to handle those and and you know I think our plan is to make sure. We we have a little more cushion and rely less on on bank financing overall.

Great and then looking at your free cash flow scenario on page seven of the presentation you guys are using a 95%.

There I believe by the fourth quarter, 60% of your volumes should be getting Brent pricing. So I was just curious what Brent.

So you're using for that 95% Debbie Kaye realization.

Yes, so we're using $3 there.

That ratio is a little tighter right now and because we're more exposed to Brad you know the narrower Brent Ti I or Brent Midland spread has has hurt us a little bit I.

Im ignoring the fact that we do pay ourselves.

VR ownership in the pipelines to get to the Gulf Coast, but.

Should that Brent Ti spread widening will naturally benefit. So I think you know on our brand realized pricing.

We're kind of realizing a brands last five or $6 and and for the rest you realizing an Emmy age price there or a.

Midland direct price for now.

Okay, great. Thank you.

Thank you Gail.

And our next question comes from the line of Neal Dingmann from Truest Securities May be good morning.

As for you in case, you were talking about the productivity your confidence I'm. Just wondering is that would you will say the largest driver of this productivity. I mean is it is it more driven by the asset location or just operational efficiencies or is just kind of all the above and kind of what gives you that confidence. It sounds like you have now for the next few quarters.

Yeah, I think it's all the above Neal I mean, I I don't think anyone's ever question Diamondbacks cost structure, our ability to execute on on the capital side, but.

But overall I do think you know the street does look at these curves intently and and I think were particularly on the Midland Basin side focused on on putting out some better curves over the next over the next few quarters, if not years and you know weve seen that drive a positive rate of change.

Stories and on the Street, and we help the street picked that up as well.

Okay. Okay, and then just follow up you know try to see what you're saying on scale.

Can you believe we continue to hear a lot of chatter you have to have more scale is that more I don't know I guess I've heard folks say that about having a more.

Turning out more optimal pads, having more optimal areas in place.

Maybe maybe you could comment around that I mean again it seems like there's still a lot of chatter around that I just want to hear because more of your color around.

You know how you view you all versus sort of the pure is when it comes to.

Again, maybe some others might have a bit more scale, but when it comes to.

Optimal design and those sorts of things.

Yes, Neil listen.

That that commentary that that commentary that's out there is just up its not based in fact I mean at the end of the day Diamondback is we're completing we're completing these wells as fast as anybody in the basin with two pads at the same time things some will frac operations.

All of our supply chain is tight you know we're we're we're not we're not at any disadvantage based on size and scale and.

I think I think some of the commentary is because you know people are struggling with why their cost structures disconnected from from diamond backs cost structure and so the commentary navigates toward size and scale because it's difficult to point to why down if that can do it you know so much cheaper and so much faster I don't know I mean, you need to ask you need.

Ask the people that are that are making those comments you know why they're making those comments because it certainly for my shareholders perspective, our shareholders perspective, that's not what we're seeing or hearing.

Very good very good thanks for the details thanks guys.

Thanks.

And our next question comes from the line of a net and Kumar from Wells Fargo.

[music].

Listen case, thanks for taking my question.

Well revisit the whole concept of industry consolidation.

You know a lot of your peers their commentary not only mentioned scale to talk about just maybe a little bit of a tough environment will update and.

Your comments suggest a bit of optimism knowing that you don't have a crystal ball just kind of maybe talk about your macro view from here and what you are seeing that gives you the confidence to go it alone.

Well there is that Theres certainly some significant headwinds you know on the commodity space right now I mean, we've got the election uncertainty in lending policy changes if there's an administration change we've got co viewed that still we're still struggling to how to contain that and is there going to be a vaccine anytime soon and what does that mean to the supply demand.

Recoveries, we've got OPEC plus meet and then in December to talk about talk about whether they maintain jobs are starting using those cuts. When then we've got you know a global inventory overhang that's still there.

All of those are macro issues that I cant control and we can't influence, but what we can do is continue to focus on the cost structure and how we execute our development plan, how we how we.

Constraint confidence in our base in our base dividend.

And how and an improving commodity price world, we take advantage of an increasing share increasing increasing our shareholder friendly returns program.

We've already addressed we are addressing our debt issue right now. So you know look this this 2020.

Let's be clear this has been a global apocalyptic event not only for citizens at large, but certainly for our industry and you know.

You know, we're we're at a point now where we feel very confident in the business plan that we have in place we feel very confident in it.

And our ability to execute and consistently deliver on that business plan and we also feel like were enough of an adult and the way that we look at things if they get worse from here will change our behaviors and will slow down and preserve capital. So you know.

There's there's there's nothing for me not to be confident in and there is an uncertainty.

Ahead of us in the commodity price world, but.

But I'm confident people, we have a down back and I'm confident in the in the communication we have the shareholders about what it is we're trying to accomplish this business is not easy right now there's no denying that but that doesn't mean, we're going to capitulate at the bottom of the cycle I think Travis said it in his prepared remarks that.

We're not going to make a rash decision at the bottom of the cycle and anything that that happens means you have to get better not necessarily bigger to ride out a store. You know this is not an easy business. We have plenty of our production hedged on the downside and 2021 and as Travis said, if things get worse, we'll have to make make the tough decision.

It's like we have already in 2020.

And then just one other point yes.

At the bottom of the cycle, which I don't know for completely at the bottom of the cycle novid, but even as bad as things have been.

In 2020, Diamondback is still a profitable company, we generated a $153 million worth of free cash flow in the third quarter were paying our base dividend, which is yielding above the S&P 500, and we're reducing debt at the bottom of this cycle and so if we can accomplish all of those things at the bottom of the cycle.

Think about what's going on with the world's going to look like for our for our shareholders as we start coming out of the other side of the cycle, which we know is inevitable and we know that that that oil prices will increase in the future. We just don't know when but if were profitable like this at the very bottom of the cycle.

We've.

We're on the other side, we're we're good.

Thanks, guys I appreciate those comments and certainly.

You know, it's a tough market, but you've done a great job, maybe maybe turning to that great job for a second here and.

Every quarter, you reported sightings better DNC costs I mean, they are down 30% from just a year ago.

In 2021, you have about 110 to 140 Ducs to help those capital efficiencies, but at what point in 21 do you think you need to add costs and more importantly, what do you think what that might do to your DNC costs.

At that point.

Yeah, I mean, there's there's no real signs that there is upward pressure on.

On DMC cost today, certainly knitting, if we guide to 2021, we're not going to guide to all time low well cost and we do have about a 50 ducs tailwind, helping us out in 2021 that will be a nice nice benefit to us but.

I think overall, what what we focus on is how many of these cost savings are permanent versus temporary and while a good amount of of these cost savings have been temporary we have learned a lot in terms of drilling design in the Delaware basin as well as completion design in the Midland Basin with the final Frac crews that.

Now that we're going to keep cost savings for the long term so.

Well, we're not counting on service prices, increasing anytime soon we recognize those guys.

Our dealing with a very tough down cycle, just as we are and at some point service costs will go up but that would probably coincide with with higher commodity prices.

Great. Thanks for the answers this morning guys.

Thank you Dan.

Thank you.

Our next question will come from the line of Derrick Whitfield from Stifel.

You may begin.

[laughter].

Thanks, and good morning all.

Hey, good morning, Derek Hey.

Hey case, perhaps staying with you on your cost comments could you comment on how much of the DNC and permit between 19 and current structural versus market.

Yeah, I mean I.

I'd say in the Delaware Basin, probably 50% is structural and 50% market.

And then on the Midland Basin side, I'd say, probably a third of structural and and two thirds market we'd already been.

Pretty low on the on the cost curve, if not the lowest in the Midland basin going into this downturn and and we have made some improvements with final frac and some cementing technology that that we're implementing but you know the Delaware has been where we've made significant progress I mean, we drilled a second bone spring well under 10 days 10000 foot well under 10 days.

And take its county, I think our first wells in that area were 30, plus consistently so those are the savings that are going to accrue to our shareholders long term and and those are the things we focus on rather than the pick.

Picking up the phone and reducing the service costs.

Understood and then shifting to your 2021 out outlook would it be fair to assume there could be a downward bias in your maintenance capital projections for 2021 as we walk.

This equation forward in time with the significant reductions in capital costs, you've achieved to date and the macro.

Backdrop that likely will not change or at least the first half of next year.

Yeah, but you know I think Derek the conversation needs to be is maintenance capital. The REIT. The REIT scenario I think if we stay in the in the mid Thirtys and we get closer to our corporate breakeven.

I think the discussion needs to turn to art are you generating positive NPV for your shareholders that at those prices. So certainly there's a lot of headwinds on the commodity side and we're going to keep that 25% to 35% range out there and you've kept it out there just due to the uncertainty rather than a.

Lowering it or changing it through this year.

Hey, Derik I just wanted to follow up on some of the comments case made about those permanent cost savings, 50% of Delaware and a third in the in the Midland Basin.

No you shouldn't lose sight of the point that those are structural cost improvements.

On an operated that's all it is already the lowest the lowest are the best in class.

Those execution measure so you know, it's not a casual exercise from our operations organization to continue.

When they're already leading to drive costs out, but I'm I'm, just really proud of what they've been able to accomplish.

Appreciate it I know that Travis great update thanks again for your time guys. Thank you Derek.

Our next question will come from the line of said Sen from Bank of America, you may begin.

Thanks, Good morning scope, one emissions reduction of over 50% year over year was pretty significant and impressive just wondering what your plans are on emissions going forward.

The low hanging fruits already.

Been addressed and how you're thinking about.

Handling the policy change for the potential.

The New administration, and how you plan to navigate the regulatory framework that looks like a change.

So I'll I'll, let Travis handle regulatory after I talk to clarify one thing you know flaring down 50% or sorry, a little over 50% year to date and flaring makes up about 50 or 60% of our scope on a mission. So I think overall, you know scope on probably down 25% to 35% in 2020 versus 20.

19 is more of a realistic number.

We have made progress with our sustainability report put out targets I think we'll probably next come out with long term targets, you know four or five year targets on all of the metrics that matter to our environmental scorecard, which we implemented this year, but overall you know that's just concerted effort between us and our midstream operator, who you know reduce.

Flaring overall and I think you know, we'll have a little bit of a tailwind as well with lower activity levels versus years prior which makes up a smaller portion of those scope on emissions.

I think as a general statement Haas It American energy producers, we've got an important role in meeting the challenge of global climate change. We believe the climate policy has got to facilitate meaningful greenhouse gas emissions reductions, but its also at the same time got a balanced economic environmental.

In energy security needs and we've got to promote innovation solutions to this climate challenge as case highlighted this year, we adopted emissions targets and as part of our executive compensation plan and we also uniquely all of our employees all 737 employees the dialing back they share in that same bonus plan. So.

Those environmental.

Measures or part of their cash bonus so and I can also tell you why we've not finalized incentive comp for 2021 emissions targets are going to continue to be included in our comp plans and we're likely to set multiyear emissions reduction targets and listen I hope all that industry I hope all of the energy producers can contact is a challenge to.

To step forth and take a stand on on what it is that we're trying to accomplish we have an environmental and the social license to operate in the areas, we live and work and non banks trying to we're trying to stand up and take a leadership position in that you know.

And again just back to that scale comment. We're doing this you know don't have to be big to do this we're doing what we're doing in our current scale. So you know getting big to accomplish to accomplish environmental goals again, we're proving that that's a that's not the case I think if you look at our flaring.

From this time a year ago, even year to date were down 50, some odd percent from this time a year ago were now almost 75%. So we've we've we've.

We've done what we needed to do and we will continue to to lean into that until Weve eliminated all routines learn and we expect that to be sooner rather than later is as long as we can work collaboratively with our midstream providers.

Appreciate that Travis and Travis on on the cycle, you talked about it tough down cycle that fuel facing right now and yet you talk about and inevitable up cycle. What gives you the confidence and an upside just wanted to get your medium term thoughts on the industry sure. There was a couple of things I mean, the pick your energies pick your.

Pick your energy expert forecaster I mean, the world is going to continue to meet energy from liquid hydrocarbons for many many years to come and up in our population is continuing to grow we understand that there's going to be you know the world that striving for energy transition but.

But but in the near term supply.

Supply and demand is going to rebalance and when it does that that's going to that's going to lead to the inevitable rise and commodity price I don't know when thats going to occur but.

But that but I think it's probably going to crude occur sooner rather than later.

But but we're positioned we're positioned to win like I said the.

Whether the storm as brutal as it's been and will continue to do what's the best thing for our shareholders, but I am constructive on commodity price long term because of the supply demand fundamentals.

Appreciate the color. Thanks.

Okay.

Thank you. Our next question comes line of sight Gruber from Citigroup you may begin.

Yes, good morning.

Hi, Scott.

So you guys have completed a few Simon Frac wells now what level of savings are you realizing on the summit Frac wells and is there any incremental benefits still to come from simultaneous back in your DMC figures or is that fully incorporated.

As we sit here.

Yes, Scott I mean, it's fully baked into our leading edge Midland well cost country put DMC. It at 450, a foot I mean.

I think we are pushed continuing to push the envelope on final frac and and I think even recently in the in the third quarter, we completed two pads separate well pads at the same time with the SEC final Frac crew.

Those those pads for about 1000 feet apart so pretty.

Engineering fees from the from the team overall.

Certainly can get more efficient, we're completing about 3300 lateral feet a day.

Some days were getting up to upwards of 4000 lateral feet a day, so as those crews get more efficient we will continue to push the envelope there.

But I also think the ancillary benefit is how quickly you can get into an area with existing production complete a large pad and get out of that particular area that you're watered out production is watered out for a shorter period of time. So that's an unseen efficiency, but that's something that that has been a positive rate of change for us since implementing side.

We'll frac crews and on cost side.

Maybe it's about 25 or $30 a foot of savings pro.

Per well on the completion side.

Got it so obviously a lot of operational savings.

Do you see any benefit on bulk performance in aggregate from the two wells given the creation of two side by side fracture networks at the same time.

It's certainly fair to assume that you're completing a larger tank at the same time and therefore not not.

Having as large of a parent child. The fact, I mean I can't put a number on it but we do we do agree that more wells completed at the same time is better for the reservoir and if you have the infrastructure and facilities in place we're not spending large dollars. There then it's a you know.

It's a logical path for let's say Scott the other kind of knock on effect of that is that.

The modeling that we have to do which is <unk> has gotten more and more complex over the years is what we call the water out effect because we're completing these wells so much faster almost twice as fast.

That water out effect has really been positively impacted in terms of its linked in duration and its overall impact because we're getting off these wilson much faster.

Not something we really contemplated when we started some of what I believe we're seeing the benefits of that now.

Got you I appreciate the color. Thank you.

Thank you Scott.

Thank you. Our next question comes line, Jeff Grampp from Northland capital.

To begin.

Yes.

Yes.

Sure is on the on the dividend front it seems like given the free cash flow that you guys are projecting next year, certainly fundable at low prices and seem safe. So how are you guys assessing the right time to maybe look at at growing that it seems like Travis as you pointed out that the yield on its obviously very competitive so perhaps that's something that.

Take a kind of rectified organically before looking at dividend growth or kind of your thoughts there would be great.

Yeah. That's a good that's the reason I made the point earlier was the fact that our yield was already what over 5%. So I'll.

I'll just tell you that our board is committed to to that dividend as the primary form of our shareholder return program and and we talk about it at least every quarter, if not more frequently than that but I've been I've tried to be very clear what our strategy is right now is to pay that base dividends that.

At a button house above and S&P S&P 500 yield.

And reduce debt and as commodity price rises will then we have we have options to do do thanks, Ruth with it with excess free cash flow above above the dividend and debt reduction, yes, Jeff I think it's important to to look back at it earlier this year and the conviction that talk to maintain that dividend through.

Uhhuh.

The down cycle or the worst of the down cycle that was not an easy decision, particularly after we doubled the dividend in February so I keep hearing about for return of capital and what people are going to do I think looking at our history and what weve leaned into in order to maintain that dividend, while others have either suspended there's caught it or even sold.

The company's you know should be should be.

Should be reviewed by our shareholders.

Yes, good point case I appreciate that my follow up looking at slide five here on the new deck you guys are suggesting.

34 to 64 completions in Fourq you I know, it's just kind of the implied based on the guide. So just kind of wondering if you guys can give us kind of indication of where you expect fourq you completions to fall in that range and maybe it's kind of a related point and the maintenance world for 21.

Fewer wells do you guys think get a get completed 21 versus 20.

Yeah I.

I think overall Q4, probably you know at the midpoint, if not a bit above for for completions now it is dependent upon when when those wells are turned to production you know when you do have eight days of of holidays at the end of the year. So there could be some noise and in the amount of wells, but certainly the midpoint ish.

<unk> is a good guide and then in 2021 I do think we are moving to more Midland Basin. So you do need more wells to keep production flat in the Midland Basin than you do in the Delaware those wells cost significantly.

Significantly less but they produce less in that particular year. So I think a range around the upper half of what we put this year is likely.

But we're still doing all the engineering and hydrating the development plan to to get those numbers out.

Got it really helpful guys I appreciate the time guys.

Thank you Jeff.

Operator next question.

Okay.

Sorry about that I was on a.

Neil Scott Hanold your <unk> from RBC capital markets. Your line is open.

Yeah. Thanks, Yeah.

Just a couple follow ups that are more specific to some of the community that already occurred but you talked a few times about seeing some better well performance recently can you quantify some of that and tell us how.

How you feel confident that that's what you expect going forward.

Yeah, Scott I mean, obviously, we look at production every day and we look at individual.

It was a while result of everyday and.

What we're seeing is some some really good pads that are coming on in the Midland basin and outperforming our expectations.

As well as a few pads in the Delaware, particularly in the Birmingham area that are also exceeding our expectations. So while I'm not going to give a number out I think the the messaging is increased.

Increased confidence and 2020 is going to tough year, where we were running 20 rigs in Q1 and completed a lot of wells in.

In the southern Delaware, and then had to curtail a lot of wells in Q2. So I think we're starting to finally see the benefits of that reallocated capital plan in Q3, and Q4 and expect that to continue into 2021.

Okay Fair enough and then you know going back obviously too.

The planned in 2020, and maybe beyond but you talk about obviously prioritizing the.

The dividend and debt pay down can you give us can you walk us through.

What oil price or what amount of free cash flow gets you guys to look at things like a shareholder return or like growth or how does that conversation happened I know it feels like a long way from there, but you know certainly.

Certainly.

Irrelevant kind of topic to think about like where is that point that it comes to do one or both of those and how does that work.

Well I think we need to clarify that it can increase shareholder return right. Because we already are returning capital to shareholders in the form of our base dividend, which has the highest yield in the space. So I mean, I think that gets lost in the shuffle of some of this.

Analyst commentary today, but but I think Scott we got to see.

Our demand recovery and some some stability in the forward outlook and right now there's about as many things working against us as an industry as there ever have been and once those get clarity and.

Lets say were safely into the high Fortys W.P.I. with a strip that you know its comfortably in that range, but I think we can have that conversation, but I don't want to have that conversation that at 37 going to 38 today.

Is there a leverage level that you need to see first.

No because you know leverage is a function of both EBITDA and and.

Gross debt, so I think as long as we're comfortable that we are reducing gross debt consistently you know the the additional return of capital is not mutually exclusive to our ability to reduce gross debt and I think I think the one thing that is off the table is is significant growth and those days are are probably.

Behind us.

Then as a bigger grower as anybody in this industry, but I think shareholders want cash they want it now and therefore, we're going to do that through our growing base dividend and also reducing the leverage issue.

You know to reduce our equity cost capital and therefore all in.

For the stock price.

Thank you.

Yes.

And our next question.

Charles Meade from Johnson Rice, you may begin.

Good morning, Travis Encase, Scott kind of kind of a front ran my question, a little bit there, but but I will try to push it a little bit further bye bye.

Looking at your slide six in your presentation and I just wanted to see if I'm interpreting this the right way when I look at that that graph you guys have for your investment framework on left hand part of slide.

To me the message I get is that you guys wouldnt.

Wouldn't add any growth directed capex into.

Until we were over 55, but that it's on the table over.

Over 55, Debbie is that is that the right interpretation or or is there something else there.

Yeah, Charles It may not be a really good day versus where we've been doing for the last nine months. So I'd be happy to have that conversation. If we start to see a five handle on crude but I think I think you've seen a lot of companies make a pledge that they're not going to grow over a certain amount and I think it's hard to put this industry in a box given how volatile.

It is but what I can say today that that growth is off the table for us until we see significantly higher oil prices and and then that growth will be muted and somewhere in that single digit range rather than you know.

The high double digits that we are sorry, the low double digits or even teams that we've had in the past.

I think the more germane question should be asking those operators that are that are touting.

Does this this future 2022 and beyond returned to shareholders. As you know I think more important question should be how does that look at a 36 dollar world you know as opposed to what we do in all $55 a barrel.

Right, Yeah, Travis I I've I've appreciated the themes you've tried to you've tried to amplify in your and your comments on that front I think maybe you know this is I think this is a kind of a big picture question more familiar territory, but but when I talk to so when I talk to people aren't involved in the space one of the one of the Pushbacks again it's.

As they say well these maintenance capex plans don't really seem to make sense, if it's not attractive to invest and grow your volumes why do you want to invest to keep your bogs flat in and what is what are the other pieces of the picture that that you put out there to.

To try to answer that question about why it's important to keep production flat if you can.

Just just generally I think you're raising the right question. The right question should be.

What kind of returns you generate on your capital program, if its maintenance capital what kind of returns you generate in that 35 $36 a barrel and if the answer is little to no returns to investors and why would you even keep volumes flat and that's what I tried to raise.

I tried to raise a point my prepared remarks look the conversation should not be about growth. It should be that if we remain range bound around $35 a barrel how much and how fast do you cut capital inlet volumes decline.

On top of that.

What's been lost is what does the word return of that program I think Travis said that.

And are you breaking even or are you actually.

Returning cash and you know I look forward to tell their company to answering that question and this and this cup and commodity price environment.

All right. Thanks, guys appreciate it.

Thanks Charles.

Thank you. Our next question comes from the line of Brian singer from Goldman Sachs. You May begin. Thank you good morning.

I wanted to follow up on the topic of decline rates, it's come up a couple of times on the call, but I wanted to see especially given that it was brought up as a reason for consolidation by by by another company. How you see your decline rate this year and into maintenance capital plan next year on a oil and be a weekly basis and your confidence in.

The ability to execute a free cash capital returns model from the perspective of a Permian pure play.

Yes, hi, its very good question, its very topical right and I think.

Companies have reasons for why they do things I, you know I'm only going to speak about diamond back and I know that you know slowing down as much as we have is reducing our base decline.

Based upon is going to go down from kind of high Thirtys oil to mid Thirtys oil and 2021.

I'm going to be always slightly below that but you know really smart investor told me as long as you're running the treadmill at the right pace and generating free cash above that capital.

This business model can work and you know as long as we're setting that that target and making sure that we're not moving activity levels up down all around guidance.

Distantly and consistently generating free cash I think you know people are going to pay attention to that and ER and prove that you can return capital and generate sufficient returns to be successful in U.S. shell. It's just really difficult to to look at an acquisition or a merger and try to justify it on.

On decline rates.

I get the math behind that but I think case articulated you know the way, we think about decline rates, but it's unlikely.

I'll stop there.

Great Great. Thanks, and then my follow up is also a little bit on the M&A discussion, but but more from a diamondback look back perspective, you done M&A before energen I think about two years ago, it closed or so maybe a little bit less than that.

And I Wonder as you look back and you highlighted a little bit some of the benefits from.

Yes, Pete is in some learnings, but how do you look within the framework that you set for what makes good M&A to the buyer.

The in house, how energen, where the other deals you've done have been impacted diamond Diamondback today, and then what you see as the pitfalls that you've learned that maybe you may or may not be applicable for others.

Brian We spent a lot of time post antigen acquisition to articulate what the synergies were and what our progress was on delivering overhauls and we created the industry's first synergy scorecard, so that our investors could hold us accountable on a quarterly basis on how we delivered on those things and look we delivered on every one of those things, including becoming it.

Doesn't grade.

Full year ahead of time, you know dollar amount so from the things that we can control you know all of these acquisitions have have worked out well for US now use the oil price assumptions that we made at the time of the acquisition acquisitions have those those played out we'll certainly not in 2020 have the development plans, but adjusted in some cases because of.

Warnings, yes, and that means accelerated and decelerated in some cases well look at the end of the day, we've got to deliver on what we can control.

You know and and I think we've been able to do that and we're still demonstrating that today.

No.

I think I think yes, we've done or look backs and we realized that the commodity price you know moved away from us on some of those things.

We have talked about our hedging strategy relative to acquisitions should we take a portion of commodity price risk off the table at acquisition time, but their hedges, but other than that you know.

The operational measures the cost saving measures the jeannine LSV reductions those things of all we've delivered on all those and you can go back just just a couple of quarters and look at our what we call their synergy scorecard and our accountability towards our to our shareholders for delivering on those.

Great. Thank you very much.

And I'm not.

I think listen.

Bottom line Brian.

Yes, if you can do it you know we deliver on it you know and if you can't do you come up with all these different kind of excuses and so you know we hold ourselves accountable for what a what we promised to our shareholders and and we'll always do that on a go forward basis as well.

Thanks Travis.

Our next question will come offline Leo Mariani from Keybanc you may begin.

Hi, guys wanted to follow up a little bit on the high grading comment I think if I wind the clock back a little bit to 2019, you guys said it basically said that we will be working in some lower IR zones into our development plan to make sure those resources, where it was.

Properly captured over time and not left behind just wanted to get a sense. If you're kind of recent comments about high grading indicated that maybe you're moving away from giving some of that in the near term just given the lower oil price environment that we're in here.

Well I mean, I think you have to look at that at the margin I certainly don't think were abandoning co development at all I know, we do think developing more zones together at the same time should those onto the economic at.

Today $40, a barrel you know, they're going to get get develop spacing assumptions between zones can can change and should widen as as commodity prices weakened, but but I think the high grading is really more about the consistency and deliverability of Midland Basin rock at low costs and you know we were.

Shifting to the Midland Basin before this downturn, but but the downturn certainly accelerated and moved us more to a two thirds, one third or 70 30, Midland Basin, Delaware basin than a 50 545 or 60 40.

Okay. That's helpful and I guess, just a follow up on your.

Maintenance Capex range for next year, you guys, you're certainly seeing comp and you can actually keep this at a kind of a 25% to 35% lower.

Lower budget, just wanted to kind of get a little bit of clarity on kind of what gets you the 25% lower versus 35% lower is it really just not well cost and obviously you guys articulated that leading edge well costs have come down.

Quite a bit here recently.

Yeah, I think it's I think it's well costs and and you.

A number of wells completed we also.

Our Oh, we're not thinking about it today, you do need to plan for 2022.

In 2021, particularly from rig count perspective so.

Looking to keep the guidance wide today, and and and narrow it as we finalize the development plan over the next few months.

Thanks, guys.

Thank you Leah.

Thank you. Your next question Sam for line of Jeoffrey Lambujon from Tudor Pickering Holt you may begin.

Good morning, Thanks for taking my question I guess, one from me on the corporate structure specific rattler, just looking at relative valuation between that in Bakken Rattle I'm. Just curious if there is an opportunity there any consideration internally potentially pull that structure and.

Yes, Jeff we are certainly looking at it rattler is a.

New company in its infancy, and I think this kind of ties to our commentary on M&A. You know, we're not looking to do anything rash at the bottom of the cycle. You know certainly rattlers gone through a large you know phase of growth through all of the equity method investments those are behind us that business is generating.

Free cash.

It's not getting a lot of credit from the market, but you know.

I think we have studied the GP LP relationships throughout SMP land very very closely and I think for US you know, we see our Lps as partners and therefore you.

Aren't going to make a rash decision, even though you know the two multiples are trading on top each other today.

Appreciate it.

Thank you Jeff texture.

Thank you and our next question comes line of David Heikkinen from Heikkinen Energy Energy you may begin.

My Grandpa would be pop really proud of that hakan and pronunciation of our name that's actually correct.

The.

Question I had was.

Thinking about Permian being over piped and.

So we can start thinking through the whole industry.

As we get into 21.

Yeah, David that's a good that's good question you know we are probably in the 220% to 30 gross range from a production perspective, so you're not having to pay take or pay commitments, which I think we set up those contracts in a way that half of our.

Pipeline space is take or pay and the other half is from.

Acreage dedications and trying to avoid cash outflows for take or pay commitments and marketing arrangements certainly the Permian Dover pipe today I think we see these these commitments and our space on the pipelines as as long term insurance policies and and wall Brent Midland has gone against us for the last.

A couple of quarters.

The volatility in this industry has been been dramatic and and you know there were some phone calls that we can make in March and April to know that our barrels are going to move in and exit the water it floating storage because of our commitment to those pipelines. So certainly over pipe, but but I think the legacy pipelines need to reduce their tariffs before ours.

We're on a you know which are the lower tariff pipes in the basin.

You know get hit more so.

Thinking about sub $1 tariffs is that reasonable for some of the new re contracting so we.

Yeah, I think that could be fair law, not well we're not.

Involved in that process certainly the that the market will dictate in the market spreads will dictate what new tariffs look like.

That's helpful.

Thanks, guys.

Thanks, David.

You know one last call comes from the line of Jinming inlays from Barclays You may begin.

Hi, good morning, everyone. Thanks for taking my questions.

Good morning. My first question is on the maintenance Capex and my second question is on spacing.

For the maintenance Capex in terms of just trying to understand all the moving pieces here, you've done a really great job that meaningfully reducing well costs year over year, and I think I heard you say earlier in the call that maintenance or inside that midstream and infrastructure capex would be down about 50% as well next year.

So in terms of the Workovers I think before you mentioned that you reduce the number of workover rigs by as much as 80% at one point a responsive prices and so can you just comment on how workover costs may trend next year at different oil prices and how are these cost split between capex and operating expense.

Yes gene I mean, there's a very distinct different stream workover rigs that are used for you know opex, which is our traditional l. are we and then what we call capital Workovers, which is basically converting your yes piece to their final form of left which is usually a rod pump. So we did spend a little bit of capital.

So you know quarter million dollars or so.

Per well that goes through its final form of left and that will be part of the 2021 budget. It's never been a big issue for us are a big piece of our budget because.

We've also completed more wells than.

Then years prior and the capital budget continue to expand but heading into 2021. If you think back three years ago. We completed about 300 wells pro forma on those wells in 2021 are going to move to their final form of work.

Okay, Great. That's very helpful. Thank you and my second question is on spacing and in terms of the inventory and development strategy is there any change to how you're thinking about inter lateral or vertical spacing between zones in either of the basins going forward.

I think I heard you mentioned earlier that the things that probably widen that lower oil prices and then we noticed kind of like at a slight change. This line. So we just wanted to check in thank you.

Yeah, I mean, I think I think in the Midland Basin, where you have more economic zones that are getting co develop we're getting smarter about both vertical and horizontal spacing.

Those those spacing assumptions vary versus you know Howard County versus Northern Martin County versus versus Midland County, So you know continuing to refine our development program I think secondary zones will be spaced wider than than primary zones that are the highest rate of return.

In the Delaware Basin, it's less of an issue because you have you know.

Less zones that are economic or comparable.

That compete for capital today, but in the Delaware or in the Midland.

You know we are refining spacing and you know.

Well, it's not wanting to widening significantly I'd say secondary zones should get wider as oil prices go lower.

Okay very helpful. Thank you.

Thanks James.

Thank you and I'm not showing any further questions at this time I'd like to turn the call back over to Travis Stice CEO for any closing remarks.

Thank you it's not lost on me to today's election day, and I think and I can't help but be reminded the one of the enduring legacies our founding fathers left us was a system for no.

You know a a peaceful transfer of power and I, just pray for our country.

That we can remain calm and his upcoming days and weeks as we move through this process of electing or our next leader. Thank.

Thank you everyone for a for listening in today and for the good questions.

You've got any additional questions or follow ups, just reach out to us using the contact information provided thank you and stay will.

Ladies and gentlemen, this consistent ASE conference call. Thank you for participating you may now disconnect.

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