Q2 2021 Diamondback Energy Inc Earnings Call
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Good day, and thank you for standing by welcome to the Diamondback Energy second quarter 2021earnings conference call. At this time, all participants are in a listen only mode.
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I would now like to hand, the conference over to your Speaker today, Adam Lawlis, Vice President of Investor Relations. Thank you. Please go ahead.
Thank you Chelsea good morning, and welcome to Diamondback Energy second quarter, 2021 conference call, Gary I'll call the guidance.
An updated investor presentation, which can be found on done best website.
If there's any diamondback today are Travis Stice, CEO case day, its all CFO and Danny Wilson EVP of operations. During this conference call. The participants may make certain forward looking statements relating to the company's financial condition results of operations plans objectives future performance and businesses.
We caution you that actual results could differ materially from those that are indicating these forward looking statements due to variety of factors Inc.
Information concerning concerning these factors can be found in the company's filings with the FCC unit.
Additionally, we'll make reference to certain non-GAAP measures the reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon, and I will turn the call over to Trust us.
Thank you Adam and welcome to Diamondback <unk> second quarter earnings call Diamondback had an outstanding second quarter, extending its track record of operational excellence.
I am proud of everything our team has been able to accomplish this year by pushing the boundaries of our current thought processes and embracing new technologies and Playbooks, many of which have come from the personnel we've added through our acquisitions.
Nowhere is that more evident than on the drilling and completion sides of the business will.
Well, we continue to lower costs and improved cycle times.
We decreased our drill times from spud to total depth of over 30% and are averaging just over 10 days to drill a true model well in the Permian and the Midland Basin.
On the completion side, we're now running 3 sawmill, frac crews, which lower our downtime and improve our pad efficiencies.
We are currently completing approximately 2800 lateral feet per day in the Midland Basin.
An improvement of nearly 70% as compared to our early zipper frac designs.
All of these operational advances translate to our ability to do more with less.
Well, we are seeing some inflation on diesel fuel and other materials, our ability to continually improve operationally and become more efficient has more than offset these cost increases.
And our leading edge <unk> costs continue to be at the low end of our guidance range.
As a result, we are decreasing the number of rigs and crews we need to execute this year's capital plan.
And are reducing our full year capital guidance by $100 million or down 6% from prior expectations.
On the production side, our wells have outperformed expectations. This year as a result, we are slightly increasing our Permian oil production guidance, which should not be taken as a conscious decision to growth.
As we look at supply and demand fundamentals oil.
Oil supply is still purposefully being withheld from the market. We continue to believe that there is not a call on U S shale production growth.
We will continue therefore to target flat oil production for the foreseeable future and P.
Plan to do that by completing less wells than originally planned this year.
These operational highlights coupled with a supportive macro backdrop led to record free cash flow generation for Diamondback.
During the second quarter.
We generated $578 million in free cash flow or $3.18 per diluted share.
To put this into perspective, we.
We entered 2021 anticipating roughly this amount of free cash flow for the full year.
We've already put this cash to work by calling and paying down over $600 million of callable debt. So far this year with over $600 million more expected later this year when our 2023 notes become callable.
In total this debt reduction will reduce cash interest expense by almost $40 million annually.
We continue to emphasize that reducing debt and increasing shareholder returns are not mutually exclusive.
We proved this point again by increasing our quarterly dividend by 12, 5%.
From 40 since this year to 45 cents this year or $1.80 annualized.
This puts our year to date dividend growth at 20% above 2020 levels.
At Diamondback.
Refer to talk about our current performance rather than future promises.
However, our performance has allowed us to accelerate our debt pay down and increase our base dividend.
And we now feel it's appropriate to put up some goalposts as it relates traditional return of capital in 2022 given.
Given the current free cash flow outlook at strip pricing.
Our plan is to distribute 50% of our free cash flow to our shareholders in 2022.
This form of additional capital return will be decided by the board at the appropriate time, but we intend to be flexible based on which opportunities. We believe presents the best return to our stockholders the owners of our company.
Remember our strategy is unchanged since 2018, when we initiated our base dividend.
This additional clarity is simply a evolution of our guidance and also reflective of the maturation of our business.
A lot can happen now between now and the end of the year, but we feel we are well positioned to take advantage of the current commodity price environment.
And to deliver differential free cash flow in 2022.
Our capital efficiency improvement allows us to maintain an elevated base level of Permian oil production through 2022.
By spending approximately 1.7 to $1.8 billion of total capital.
The continued improvement in our realized pricing in our low cash cost structure combined to form a best in class cash margin, which.
Which we plan to protect as we layer on hedges that are focused on protecting the extreme downside.
Allowing our shareholders to participate in commodity price upside.
Turning to ESG, we continued to make progress on our ESG initiatives flaring continues to be 1 of the biggest drivers of our C. O 2 emissions and while we've made significant progress since 2019.
We still have work to do our target in 2021 is to flare less than 1% of gross gas produced.
And then the first half of the year, we were above that number.
Now this is primarily due to the integration of the QEP assets.
And we expect this metric to improve as we build out additional infrastructure in the Midland Basin and close the Williston divestiture later this quarter.
We have also began to pilot projects utilizing tankless and limited tank facility designs.
While the first Tankless facility is expected to be installed in the fourth quarter. We've already had 2 successful limited tank design pilots.
On average this design reduced our cotwo emissions for more storage tanks by more than 90%.
Because of the success, we've elected to extend this pilot to another 5 facilities in the back half of this year and expand to an additional 15 facilities in 2022.
Lastly, we are continuing to build out our electrical substations, which will help minimize emissions from combustion equipment.
Primarily the generators and gas engine driven compressors.
We are working to remove or replace over 200 of these units by 2023.
The combination of these efforts position us well to meet our commitment of reducing our scope 1 G HG intensity by at least 50%.
Reduce our methane intensity by at least 70% as compared to 2019 figures by 2024.
The second quarter exceeded our expectations and exemplified why diamondback as a leader in the industry.
Our people continue to innovate, making us more environmentally responsible and deficient uniquely.
Uniquely positioning us for the future.
Our record free cash flow generation allowed us to accelerate our debt pay down and increase our dividend all the while positioning us for robust shareholder returns next year.
We are delivering on our exploit and return strategy continuing to focus on maintaining Permian oil volumes, reducing debt and returning cash to shareholders.
With these comments now complete operator, please open the line for questions.
As a reminder to ask a question you will need to press star 1 on your telephone to withdraw your question press the pound or husky.
Your first question comes on it Brian.
<unk> with J P. Morgan.
Yes, good morning, Travis and team.
Travis I wanted to start a.
A little bit maybe away from the print, but to get a little bit of your thoughts.
On kind of the A&D market, we sensed a bit of a fear factor.
Your stock and the potential for diamondback to engage in larger scale M&A with some of the larger packages apparently on the block. So I just wanted to maybe you could start and maybe remind investors on your approach to a N D and how you kind of balance it.
The general scarcity.
You know tier 1 opportunities in the A&D market versus just <unk>.
Economics and rates of returns.
Sure a lot of questions contained in there, but just generally it feels like a sellers' market out there our M&A focus is really intense around selling non core assets and looking.
1 of the most important jobs that we have as management is allocating capital to them. When you look at you know kind of a mid cycle oil price and we kind of use 50, 15 for Ngls and $2 per gas.
<unk> of our stock price as you know is much higher than where we are today, so with that backdrop.
Persist best use of our capital is not in the M&A market is rather than the.
And the buying back our own stock, but look we've been very clear what forms you know what our decision framework and our acquisition framework look like and we've articulated that in every earnings call, but today just doesn't feel like that's the right thing to do so our focus is.
Simply around monetizing non core assets.
And really looking hard at our business are really like the way our forward plan looks with our existing inventory.
Great. Thanks for that and then just my follow up.
You did raise your production guidance for the back half of the year.
Relative to consensus and kind of our model. If you if you even if you back out the Bakken I was wondering Travis and Tim If you could comment on what drove that and just general your expectations around.
2022, it sounds like.
It's a.
Call. It $1.8 billion to hold you know call. It 220 flat next year, but wanted to get your sense around.
Your your second half outlook and thoughts around 2022.
Yes, I'll take I'll take this your first.
We are going to close the Bakken a little bit later than we expected.
Due to external approvals and so therefore, we kind of raised our full year guide by about 2.5000 barrels a day, which is which is 2 months of the Bakken contribution but above that we also raised our overall guide for the year up 2% and Thats really on an apples to apples basis versus our Q1 guide.
And really you know I think the impetus for that is some Permian outperformance.
Early in the year, and therefore, I think we're comfortable raising our Permian guidance on oil to $2.18 to $2.22 from $2.16 to $2.20, and as Travis said, you know, we're not in growth mode, but but the wells this year have outperformed and we cut more capital.
On the Capex side than we have raised the production side. So generally completing 10 fewer wells this year than originally planned in the Permian production.
Production up a couple percent, but more importantly capital down 6 or 7% from from where we were before.
And that translates to the 2022 plan, which.
Which as you know in <unk>.
Our pencil right now, but you know flat is kind of the case for modeling and I think generally holding that $2.18 to $2.22000 barrels a day in the Permian flat, although there is little capital as possible as to how we see it today.
The number we posted yesterday kind of baked in a little bit of service cost inflation as we know our business partners on that side.
We're going to be able to push price a little bit, but generally really excited about behind Midland basin percentage of wells completed next year that keeps production flat in a very capital efficient manner.
Super helpful. Thanks.
Thank you.
Your next question comes the line of Neil Mehta with Goldman Sachs.
Thank you Travis maybe we could start on the 50% 2022 number that you threw out there in terms of the.
Return of cash flow.
The potential for that to grow over time as the balance sheet strengthens and then any early thoughts in terms of what the right mechanism is to return that capital, whether it's through dividends or buybacks, especially with the stock yielding.
The free cash flow yield that it is right now.
Yes, certainly what we've tried to do is allow the flexibility to make that decision when that point. It occurs because we want to make that decision of what creates the greatest.
Returns for our shareholders and if you look at 2022, and you've got plus 20% free cash flow yield.
That would tend to think it's you know.
It's more of a stock buyback, but look we're going to we're going to maintain flexibility and try to do what we've always done which is great to create the framework.
Generates the greatest shareholder returns.
That number does over time look.
Electric not be more excited about the forward outlook of the company.
You know what.
<unk> like I said it at mid cycle, the oil price breakeven cost of around 32 Bucks a barrel, we're making a lot of really good free cash flow on a daily basis, as we look out into the future and we'll make that decision.
When that when the when that when the cash comes through the doors as to what we're going to do with it but you know we've we've signaled very clearly an evolution in our guidance by talking about 50% going back to the shareholders in that evolution and guidance is also reflective of a maturation of our business.
And Travis can you talk a little bit about the cost structure of the business. How do you see that evolving over time, not only the back half of the year, but as we get into 2022 and all the different moving pieces.
As it relates to both cost and capital efficiency.
You know I'll have to be honest our operations organization. Just continues to surprise me I mean, we were.
We've.
I feel like we're already the best in doing what we do out here and drilling and completing these wells and and these guys came up with.
With some with some clear fluid drilling technology that came over quite honestly from the QEP acquisition and they've knocked out significant.
Significant cost I think it's on slide 10 of our deck.
And that just continues to surprise me, because we're able to back out capital.
In the next 6 months of the year, because improved capital efficiencies against the backdrop of increasing cost of goods and services. So you know I.
I don't know that its reasonable, but you can always you know forecast efficiencies going up in costs going down and certainly I don't think it's prudent to issue guidance that way, but I'm really I'm really impressed with the way our organization continues to lean into doing more with Louis I think generally the step change.
Team has made in drilling times.
It's going to be permanent right, that's going to stay stay with us through 'twenty, 2 and beyond and basically we can do.
What we once had to deal with 10 rigs with 8 now and in the in the Midland Basin, and that's where the majority of our capital can be allocated for the foreseeable future.
Thanks, Steve.
Yeah.
Your next question comes the line of Neal Dingmann with tourists securities.
Good morning, guys. My first question is also around your time out of your plan to return 50% of free cash flow next year really Travis for you or case I'm. Just wondering I'm wondering will this be more of a backward looking formula or I guess more specifically what approach you know well you all used for determining the timing and the type of shareholder return.
Yes, good question.
It really comes down to a variable dividend or share buyback and I think if it's a variable dividend it'll be backward looking.
The quarter.
We announced will pay for the quarter prior but.
If it's a buyback.
I think we'll do a little math on how much free cash flow generating essentially per day and buyback that much stock.
On a consistent basis so.
I think the board and Travis.
We are very focused on what which 1 of those provides the best return to shareholders at the time and I don't think the answers.
1 of the other 4 are permanent period of time, there's going to be flexibility to go between those I think I think the only thing that is sacrosanct.
There's the base dividend and continuing to grow the base dividend.
Great glad you're staying flexible there and then my second question pertains to your comment in the release over the flat 22 production expectation versus the <unk>.
Slightly higher spend you know I guess on that while I understand some of this was driven by a change of dots in QEP going for acuity P and guide on I should say going forward could you speak to your expectations for 'twenty 2 baseline production decline and maybe the rigs Reagan crack spreads involved in this and any other notable drivers sort of net.
Expectations are you using to achieve this.
Yes al.
Start with the with the number 10% to 15% more capital while that's an increase versus this year I think what's forgotten is that guide on in QEP closed at the end of Q1. So we didn't have a full quarter of their capital contribution so.
That's a portion of the 10% to 15% increase I would say about half of it and also the other half as you know we did have a nice stuff benefited P. C. We're completing 270 wells and drilling to 20. This year. So thats about another $100 million benefit because when we were running.
Many rigs as we were into the downturn, we decided to not pay early termination fees and instead build a DUC backlog, which you know what the best use of Investor dollars at the time and we're taking advantage of that a little bit. This year. So I think generally from a P.
From a crew in.
And rig count perspective, we dropped 2 rigs this quarter.
We bring those 2 rigs back, but we'll probably need somewhere around 11 or 12 rigs next year.
And 3 simultaneous crews and maybe a fourth spot crude to execute on that plan.
As a testament to how efficient the operations team has gotten here.
Very good thanks for the details guys.
Thanks Neil.
Your next question comes from Gail Nicholson with Stephens.
Good morning, you guys have demonstrated a very strong.
On the water recycling.
All the above the 'twenty 1 target already can you talk about the future progression of water recycling and can you remind me of that.
Cost savings.
In that world.
Yes, that's an important question I think the you know.
We are above our targets so far this year with a shift to the Midland Basin, we are going to need to build out some permanent infrastructure on the recycling side to be able to.
Not only recycled water, but also store produced water so that we're not.
Using our freshwater intensity will go down on the on the Midland Basin side.
That process is underway and I expect that we have a nice solid connected system across kind of our sales Robertson ranch in Martin County positions by the middle to the end of next year, and that's going to allow us to up that number significantly so.
We used a 100% recycled water in the Delaware Basin.
Usually youre just pulling off the existing system, but on the Midland side, you have less water production. So I think storing that produced water and being able to use it and reuse it downhole as the next step in the evolution and that should allow that target percentage to come up pretty dramatically over the next couple of years.
Great and then on the electrification.
Parts that you guys are doing can you talk about thoughts on the utilization of electric Frac fleets and drilling rig and then on the electrical substation work. There is an allo the benefit that as well correct.
Yes, I mean, the electrical substation work is pretty obvious by inspection because not only as a positive for ESG and run times, but a cost the cost significantly less an infield power generation. So yeah. We've been working on that for the last few years now I think generally we've been ready to take power, it's taken a little bit of time for the co ops to get to oil.
But by the end of this year I think what line of sight to all of them.
You know all of our major fields being on infield electrification.
The issue we have on the Frac and the drilling side as you know I think I think we're testing some drilling rigs online power.
I'll use up as much power as a as a frac crew.
I think right now our Frac crews are more focused on dual fuel and tier 4 engine capabilities versus tying them along polymer Danny if you want to add anything to that no I think thats right.
The on the E frac side of things the issues.
Generally been on the power generation side, and how do we how do we provide.
Provide enough power to the fleet to run and there are some some stuff you know our friends on the service side of working on hard.
To solve that issue, but we were certainly watching it close and to be advancing there in the next couple of years.
Great. Thank you.
Your next question comes from Doug Leggate with Bank of America.
Good morning, everybody. Thanks for taking my question.
Guidance, 1 of the easiest ways to return value to investors is to pay down debt, where do you see the right absolute level of debt when.
When you consider the free cash flow this moving off right now.
Yeah, Doug that's a good question I.
I think I think in the near term you know P.
Paying off our 2020, threes and having enough cash to pay off our 2020 fours.
I kind of into next year 2 years ahead of schedule.
Is feels like a very good place to be.
With the breakeven as low as it is and with the.
The delta between that and current oil prices and us not stepping on the accelerator to grow that does give you more flexibility on the free cash side too.
To build the cash balance and take out these.
Bullet maturities when they come due but I think in the near term handling everything prior to 2025 puts us in a really good position. So theres been a gross debt position you know when the in the low 4 billions in basically a turn of leverage with a lot of free cash coming to both the shareholders and to debt reduction.
Great. Thanks for that and I think this slide 10 is terrific. So thank you for including heart attacks.
And kind of my question in case, I guess slide 10, my follow up if.
If youre not growing production, if you're moving to the sustaining capital.
As a model for the time being 1.
<unk> has some margin the underlying declines moves down the zone.
So bottom line is what happens day knocked 32 global breakeven.
If you hold the line on production going through the end of 2022.
I'll leave it there yeah yeah.
Yes. It's a good question also Doug I think I think it goes down, albeit you know less dramatically then than it has in the past years I think.
Oil or oil decline rate, you know quarter quarter end to quarter end is kind of in the mid to lower <unk> right now I think it moves down kind of a percent or 2 a year.
If we keep continue to stay flat, but then also you know the other spend.
On infrastructure and midstream you know, we're gonna have a little tick up in infrastructure and midstream next year with the sale and Robertson Ranch development that we're going to have that came with no no real infrastructure. So that spend comes down as well. So I think you know.
Generally, we'll keep pushing it down by.
You know a buck or 2 a year and and that gives us a lot of flexibility to do a lot of things with debt pay down and free cash returned to shareholders.
Terrific. Thanks.
Thank you Doug.
Your next question comes from Scott Gruber with Citi.
Yes, good morning.
So being the scrip dividend.
That's been a core pathway for diamondback to return cash to shareholders. So definitely nice to see another bump today, how do you think about the appropriate level for the base dividend over time is there a certain percentage of cash flow that you target a certain oil price.
This percentage change as you Delever, how do you think about the base dividend.
Yes, Scott when you go back and look at our the way the board as previously communicated this commitment.
We've talked about having a base dividend that somewhat approximates the S&P yield and then anything above that.
As another form of shareholder returns so.
You know 2.2.5% something like that base yields you're just sort of what we target for that base dividend, Yeah, I think on top of that you know.
We think about our breakeven to rightsize, our breakeven comes down over time that gives you a little more flexibility to pay the dividend right now 2022 dividend breakeven at $35 a barrel WTS.
As I alluded to in the last question if the breakeven comes down a little bit that gives you a little more flexibility on the base because.
Like we said earlier in the call that the base dividend is sacrosanct in net.
It needs to be protected at all at all costs.
Got it.
And then just turning back to the 'twenty 2 plan or at least the maintenance plan.
May have missed it earlier, but is there a telco.
Obviously, there will be but what what is the til count.
The maintenance.
Program, given the acquisitions and productivity gains that you guys have seen.
Yes, I mean, it's generally flat to where we are right now and where our pace will be in the second half of the year. I mean, you know plus or minus a couple of percentage points, but you know.
Generally you know we're in the kind of 65 to 75 pills.
A quarter.
75% or 80% of those are going to be in the Midland basin.
Got it appreciate the color. Thank you.
Thank you Scott.
Your next question comes the line of Derrick Whitfield with Stifel.
Good morning, all and congrats on your strong quarter and update.
Derek.
Perhaps for Travis or case regarding your volume outperformance. During Q2 are there 1 or 2 factors that you would attribute to that production outperformance.
Derek I think generally the new wells that we brought on on the legacy Diamondback position.
We are seeing the benefits.
The downturn last year and reallocating capital to.
1 the Midland basin, but to our best returning assets across the portfolio. So generally we're seeing early time is outperformance there.
A good quarter all around I mean, you know even the base production base was was you know.
It didn't didn't suffer from a lot of weather or unforeseen events.
I think generally the on the positive side the capital efficiency not only on the cost side, but on the performance is improving and we're pretty excited about what the rest of the year in 2022 holds given the the.
The development, we're going to have on the assets that we acquired from QEP and guidance.
Great.
As my follow up perhaps for Travis.
How concerned are you with the recent ramp in private activity in the Permian Permian from the perspective of inflationary pressures and from the perspective of a potential breakdown in industry capital discipline.
So that's a real interesting question there is no doubt that the privates are out here in the Permian oil.
Really leaning into this to this higher commodity price notwithstanding the fact that the forward curve is $20 disconnected from today's price but.
There's a couple of things that that Oh.
That I think should be considered 1 as you know while some private its do have tier 1 assets a lot of the privates were more in the tier 1 and a half or tier tuition theyre not quite as productive.
But the reality is is that.
Is that.
The effect on both Permian production and on costs increases is not zero.
Just going to be.
A little bit too early to see what the effect is going to be but I think the more quarters that pass where public companies or exercising the discipline of flat production.
I think as what are what are what our industry needs and the privates.
We will have an impact on the overall equation, but I think the the macro element will it won't really change and hopefully the longevity of that impact as well given the depth of inventory in there on the private side.
Yeah.
Okay, that's great great update and thanks again for your time thank.
Thank you Derek.
Your next question comes from Leo Mariani with Keybanc.
You guys wanted to jump in a little bit to the expense side of equation here.
Certainly I know that you guys closed QEP and guide on later in <unk>, but certainly noticed that some of your expense items in the second quarter on a per BOE basis kind of picked up versus <unk> I guess, most notably your cash G&A.
And even your transport cost I, just wanted to get a sense, whether there's some kind of.
1 time items as you kind of flushing through the integration here that might have hit some of those numbers and we'd expect the per barrel cost to start to kind of drop in all of those categories. In the second half any help you can give us there.
Yes, certainly a good question.
The addition of the Bakken assets those assets come with.
A much different cost structure than our traditional Permian assets. So on the low and the G. P and T side, you know a little pick up there some contribution on the Bakken from.
From the Bakken excuse me.
I will say Permian LOE.
Still remained in that $4 ish range. So you can get a feel for what the Bakken contribution was in the quarter I would expect that to continue in Q3 on the G&A side, we did have a transition period for a good amount of the QEP employees.
That transition period kind of waned off in the back half of the year. So I think generally you know G&A ticked down slightly in the back half of the year.
Okay No that's helpful for sure.
And I guess just to take a harder look at your production guidance here.
Looking at your third quarter oil guide if I, just compare that to kind of your actual second quarter 'twenty, 1 oil number it looks like volumes come down a little bit I know you guys have kind of talked about holding flat is that maybe just kind of some.
Seasonality or just some kind of random variance there and the number but generally speaking you're trying to do your basket was flat.
Yeah, I mean, I think Q2 was a great quarter, Leo and I think we've been very vocal about no production growth needed from from the U S. So I think we're resetting the baseline back to where we were.
Originally in Q2.
So I think there's a little bit of outperformance.
And I think like we've said kind of through the year, we'd rather sacrifice capital are cut capital and in lieu of growing production.
So if you know if you keep beating production estimates.
And raising your baseline for staying flat you know that's really.
You know growth and so we really don't want that so generally you know I think we're pleased that we can use the 2018 to $2.22 oil baseline for the Permian.
For Q3, and Q4 into 2022, and and hopefully the ops teams continue to outperform expectations and under promise and over deliver a bit.
Okay that makes sense. So it sounds like there is some element of.
You folks basically had very strong well performance in the last couple of quarters and that's just not something you can necessarily guidance every quarter as well.
That's right I mean, I think I think we expect to continue to do well.
And we expect.
Continued capital efficiency improvement, particularly with.
The new development, we have planned in the Midland basin, but but.
You know this industry is about under promising and over delivering.
No that makes a lot of sense and then just lastly on asset sales.
You folks, obviously talked about it being a bit of a seller's market I know you're working hard on closing the Bakken divestiture, but is there anything else in your per view that youre looking to maybe prune late this year or into next year.
I mean, I think I think we've had some inbounds on some on some noncore assets that don't compete for capital in the next.
10 years of our development plan and so I think generally.
You know there is surprisingly a lot of private capital looking to do things again in E&P and you know what.
What a twist from 6 or 9 months ago, but I think generally if someone wants to.
Pay for value for something that has no value to our shareholders on a P V basis will take that call and I think theres a couple a couple of areas that that Mike.
You know would be the case and no guarantees where we're not a forced seller, but what we would do what's right for our shareholders on selling some of these noncore assets.
Okay. Thanks, guys.
Thanks Leah.
Your next question comes from Jeffrey Limbu Jones, with Tudor Pickering, Holt <unk> company.
Good morning, Thanks for taking my questions. My first 1 is on hedging if you could just remind us on your philosophy overall, there. There's obviously a lot of capacity to add as we look to the back half of next year with.
With the bulk of the additions earlier in the average maybe speak to the strategy already as well as to how the curves stats, but just wanted to get the latest as you continue to improve the balance sheet, which obviously serves as a natural protection of volatility as that gets better and better.
Yes, Jeff Great question, you know I think you know we see the backwardation in the curve. So it's hard for us to hedge.
Further out in front of the next 9 to 12 months. So I think generally we'd like to be close to 50, 60% hedged.
Going into a quarter and built that relatively consistently over the 3 or 4 quarters prior to that quarter.
Have done is tried to keep these.
Why 2 way callers.
Not takeaway upside for our investors and I think you know as we get closer to <unk>.
Quarters in pound volume money goes down.
You know some sort of deferred premium puts you know make sense to layer on top of of the wide 2 way collars I think generally we feel really good about where the balance sheet is going to be at the end of the year on the free cash flow generation, even at $50 Ti next year and so that's kind of a downside we're trying to protect.
Yeah.
Got it thanks, and then secondly, just wanted to see if Theres anything you could dig in on a bit more on the moving pieces on the cost inflation that you spoke to.
Just if there's anything incremental you can speech on what's moving currently on the services side of things in particular.
Well, it's been very visible on the steel diesel side in the raw materials side, you know I think I think generally the steel inflation in our opinion needs to slow down at some point, but but but I think that the cost inflation is going to slip to the more service oriented lines.
<unk> side and on the the.
Pieces of the service World that go up with rig count So I.
I think we've held off long enough on that front and I think the service.
Industry is able to push a little price here on on that on that side, but I think most importantly, what we've done on the Midland Basin side as you know the lowering days.
Days to P. D has counteracted any of that increase so far.
Okay I appreciate the color. Thanks.
Thanks, Jeff.
Your next question comes from Charles Meade with Johnson Rice.
Good morning, Travis in case in the rest of the team there.
Uh huh.
I'd like to ask 1 more question, maybe from a different direction on that on the 50% of cash.
Cash free cash returned to shareholders in 'twenty 2.
I recognize that you guys got to keep your options open and you're going to have to observe.
The conditions present, you now than when you when you make that decision, but can you share any.
And he kind of your preferences or maybe even a framework since that's a that's an idea that you guys have used on how youre going to approach that decision I'm kind of thinking along the lines of.
The books will tell you that that share buybacks are more tax efficient.
But share buybacks have a little bit of a bad reputation not just in the E&P business, but also in other industries is being.
Pro cyclical. So so how are you guys going to approach that question nor are there any.
Preferences for how for for how you do it.
Yeah, I mean, that's a really good question Charles.
Highly debated topic internally on on you know pro cyclical share buybacks I think what's what's changed a little bit in the business as you know we're no longer grow.
As fast as we can and spending capital to grow and return cash to shareholders. I think generally now with capital being constrained to maintenance you have a lot of flexibility above that.
At the end of the day, we fundamentally have to look at what our <unk> looks like on a mid cycle oil price in mid cycle of commodity price environment, and if we're trading below that even with oil where it is then the buyback makes sense because that that return.
On a P V basis is a better return to buy in stock market and buy in the ground.
So that's kind of the analysis, that's going to go into it you know today.
It feels like you know a buyback is the right way to go but but again, it's still August August 2nd and third today and we have some time to to make that decision yet Charles I can't emphasize enough from the board's perspective that decision is going to be made on what drives the greatest shareholder value and yeah, theres technical questions that needed.
To be addressed but at the end of the day, our our responsibility is to generate differential shareholder value and that's that's still the problem statement that that will solve with our shareholder return program.
That is helpful. Thank you for that and then a follow up.
This.
You keep freed up to punt on this if you don't think it's productive, but perhaps you spent a fair amount of your.
In your prepared remarks talking about your ESG and specifically I was I was Oh I was my my attention was caught by you were talking about this this new Tankless. This tankless design and and I'm curious when you look at the cost the incremental cost of that have you have you match that up against the.
The cost of perhaps you know you guys talked in past quarters about buying carbon offset credits is that is that does.
Is that a comparison you guys make any if it if you do how do they stack up.
Yes.
It's part of the calculus, but its not an either or right.
The fundamental decision to move into the carbon credits was a recognition that we're doing things operationally in the field, that's going to get us to where we want to be over the next couple of years, but this is much more tactical. This is a specific strategy that we're deploying that has meaningful.
2 in Florida and reductions are associated with it and that's why we shared the statistics of reducing unit.
Emissions by 90% on our atmospheric tanks. We think it's we think it's a it's really a good way to go and we want to try to be as communicative as we can on this because this isn't a diamondback secret nor is it something that we're trying to position that.
Donald back favorably for this is an industry wide issue and I think the solutions needed to be industry wide as well and we want to be as collaboratively as collaboratively as we can be ensure they share. These learnings that we have and this is a very good form to be able to share. This assure this techniques in fact some of these.
Came probably from ideas that we that we got from other operators. So.
Look I'm.
Very very proud of the efforts and the results that Diamondback has generated particularly since we drew a line in the sand in 2019.
And I'm also really proud about what our industry is doing as well and the narrative has certainly moved away from us or maybe we didn't take advantage of it as an industry to control the narrative, but we've got to do a better job of saying we recognize what it is we're doing.
As an environmental impact and and more importantly that we are spending dollars and applying that same innovative thought processes that got us horizontal drilling and fracking and the success. We've enjoyed by that so we're really good problem solvers, and we're going to we're going to communicate each quarter.
Ways that we're solving this problem on a you know on oil.
Our environmental responsibility objectives.
Great Thanks for that commentary.
You bet. Thanks Charles.
There are no further questions I will turn the call over to Travis Stice CEO.
Thank you again for everyone participating in today's call. If you have any questions. Please contact us using the contact information provided.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.
Yes.
Okay.
Moving forward.
Okay.
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Okay.