Q3 2021 Diamondback Energy Inc Earnings Call

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I would now like to hand, the conference over to your Speaker today, Adam Lawlis, Vice President of Investor Relations. Please go ahead.

Thank you Tim Good morning, and welcome to Diamondback Energy's third quarter 2021 conference call. During our call today, we will reference an updated investor presentation, which can be found on Diamondbacks website.

Representing diamondback today are Travis stice.

Case, <unk>, 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 conditions 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 a variety of factors information concerning these factors can be found in the company's filings with the SEC. In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found the earnings release issued yesterday afternoon.

I'll turn the call over to try to size.

Thank you Adam and welcome to Diamondback, 's third quarter earnings call the.

The third quarter was an exceptional quarter for diamondback.

We were able to generate a record amount of free cash flow as we continued to demonstrate why we are an operational leader in the Permian basin.

Although we are seeing pricing pressure in many areas of our business, particularly with consumables and labor.

We've been able to offset these inflationary items through efficiency gains both in design and execution.

On the drilling side, we decreased the number of days it takes to drill to drill from spud to total depth by nearly 30% this year alone.

And we're now drilling two mile laterals in roughly 10 days in the Midland Basin.

On the completion side of the business, we've seen a step change in efficiency as we've transitioned the majority of our completion crews to assemble frac operations.

And are now completing wells in the Midland basin, nearly 70% faster.

Then when we were utilizing the traditional zipper frac design.

These gains drove a significant beat on capital expenditures this quarter.

The primary driver of our second consecutive decrease in Capex for the year.

The efficiencies gained this year will be permanent.

And while inflation may impact services prices next year.

Diamondback will be more insulated than our peers, given our control over the variable cost of well design.

They used to total depth on the drilling side and lateral feet completed per day on the completion side of the business.

As a result of these efficiency gains as well as timing associated with some of our ancillary capital spend.

We have lowered our 2021 capital guidance for a second time.

And now expect to spend approximately $1 5 billion this year.

A decrease of 10% when compared to our initial Capex guidance range, we published in April.

This includes approximately $4 35 to 475 million of estimated capital spend in the fourth quarter.

Moving to 2022, we are committed to holding our Permian oil production flat next year.

We expect to be able to maintain this level of production by spending similar capital on an annualized basis to our fourth quarter guidance.

This soft guidance accounts for both the efficiencies we've gained this year.

As well as the potential for service cost inflation in 2022 should activity levels increased in the Permian basin and oil prices stay strong.

The reason, we're committed to keeping oil volumes flat in 2022 is that we believe our capital discipline.

Coupled with our plan to return, 50%, 50% of anticipated free cash flow to shareholders.

He is the best near term path to equity value creation.

Diamondback is moving from a consumer of capital to a net distributor of capital.

Each will benefit long term return on capital employed and value creation.

In order to initiate a moderate growth plan.

We would need to see material changes to global oil and gas fundamentals along with shareholder support for such growth and we do not see either of those things today.

Until such time, we will continue to run our business for free cash flow generation.

Focusing focusing internally and ensuring we maintain our best in class cost structure and inflation face of inflationary pressures.

This will position us for success, regardless of where we are in the cycle.

At current commodity prices. This planned translates to significant free cash flow generation next year.

Our investor deck, we have a slide that shows illustrative 2022 free cash flow at various commodity prices.

At today's strip 2022 free cash flow was well north of $3 billion.

We plan to distribute 50% of this free cash flow using the combination of our sustainable and growing base dividend share repurchases and variable dividends.

We will use repurchases and variable dividends interchangeably, depending on which presents the best return to our stockholders at that time.

As a reminder, we plan to Opportunistically repurchase shares of our common stock when we expect the return on that repurchase to be well in excess of our cost of capital at mid cycle commodity prices.

Which was clearly the case in mid September when our board approved a $2 billion share repurchase program.

After that announcement, we've repurchased over 268000 shares at an average share price of $82 for a total cost of $22 million in the third quarter.

If we do not repurchase enough shares in the quarter to equal at least 50% of free cash flow for that particular quarter.

Then we will make our investors whole by distributing the rest of that free cash flow.

<unk> dividend.

This strategy gives us the ability to be flexible and opportunistic when distributing capital above and beyond our base dividend.

But importantly at least 50% of free cash flow will be returned.

We do not set our budget.

Drill wells or underwrite acquisitions based on a strip oil pricing when current strip pricing is significantly above the last five year average.

Therefore, we will underwrite repurchasing shares, which we see as an acquisition under the same assumptions.

Our base dividend continues to be our primary method of returning capital to our shareholders. We have grown our base dividend on a quarterly compounded growth rate of roughly 10% since initiation in 2019.

This quarter, we raised our dividend by 11% to <unk> 50, a share.

For $2 a share on an annualized basis.

Due to our low cost of supply our dividend is currently protected down to $35 a barrel.

As we have said before increases to our base dividend would occur simultaneously with absolute debt reduction.

And this year was a great example of that.

Year to date, we have used our 165 billion of internally generated free cash flow.

As well as proceeds from the divestitures to reduce our gross debt by $1 3 billion.

<unk> increased our dividend three times.

Our balance sheet continues to strengthen and we expect to end 2021 at just over a turn of leverage.

Yesterday, we fully redeemed our $650 million of senior notes due in 2023.

As a result, we no longer have any callable debt and our next material maturity is late 2024.

Because of this we're now in a position to accelerate our returns program to the fourth quarter of 2021.

This is a direct result of the combination of everything I've mentioned today, one strong operational performance to a supportive macro backdrop and three increasing financial strength.

Yet none of this would be possible without safe and efficient field operations. We continued to build on our safety track record and did not have a recordable employee safety incident this quarter.

We have also decreased our flared volumes on our legacy properties and continue to work with third parties.

To build out additional infrastructure to reduce flared volumes on our recently acquired assets.

In addition, we expect to continue our reduced continued to reduce our flared volumes as we move into 2022 in conjunction with the completion of our Bakken divestiture, yet, we're striving to be better and we recently announced our commitment and routine flaring by 2025.

Reducing our emissions and moving us towards our commitment of reducing scope one G. H D intensity by at least 50%.

And our methane intensity by at least 70% by 2024.

The third quarter was a record quarter for Diamondback.

We are proud to produce one of the cleanest and most cost effective barrels in the industry and are thankful to operate in a pro energy environment and the state of Texas.

Products fueled our local communities our state our country and the world.

We've continued to innovate.

The buying our environmental license to operate in the communities, where we and our families live work and play.

We will continue to operate reliably and safely.

And are uniquely positioned to take advantage of the current macro environment, but exercising capital discipline, keeping oil volumes flat and generating significant returns to our shareholders.

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

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Irwin GRM from JP Morgan. Your line is now open.

Preliminary I hear you.

Can you hear me now yeah.

Yep Yep Gotcha.

Alright.

Charles case.

Wanted to get your preliminary thoughts on the 2020 outlook.

In the deck you highlighted.

And operating cash flow outlook of $4 8 billion at $75 three plus billion at Adi you mentioned three to $3 5 billion of free cash flow.

That range of oil price.

This year, you're doing 270 gross sales. So I guess my question is what type of.

Do you expect in 2022 that underpins that one.

$1.8 million budget.

And I guess.

What would be interested to know what kind of cash tax rate, you're assuming in that the free cash flow guide.

Yeah, Thanks, and good questions you know from an activity perspective, not a lot's going to change and are still going to be 75% or 80% of our wells turned in line in the in the Midland Basin still at this kind of 65 to 75 wells a quarter run rate.

Big difference in 'twenty two versus 'twenty 'twenty. One is that you know remember we run a lot of rigs into the downturn in 2020 and decided to keep those rigs running to build ducks.

We drew down about 50 of those ducks in 2021, and you know now.

At a steady state Doc level so.

That has got a 50 duck.

Headwind in 2022 versus 2021.

A little more infrastructure and midstream spend on the sale of Robertson Ranch is that we acquired from QEP.

<unk> got on as we get into full field development there.

Cash taxes.

If the world stays where it is today oil price wise, we will have some cash taxes in 2022, you know kind of in the low nine figures.

<unk> $200 million, depending where we are.

Which is.

A good problem to have hopefully the hopefully the commodity prices stay where they are.

Great. Thanks for that and just as my follow up I wanted to see case, maybe for you. If you could provide a little bit more.

Retail around the drilling efficiency gains that you're seeing.

I think you highlighted on slide 11, 10 days now for a two mile lateral in the Midland Basin.

On the <unk> and also maybe describe what you're doing on the completion side and perhaps just the mix of time more frac in 'twenty two.

Yeah. So I'll start with final Frac, we picked up our first final frac crews in the second half of 2020 and.

Been running those ever since.

They've been extremely efficient probably saves us about 25 or $30 a foot, but more importantly in areas where.

You have offset production you can get in and complete those wells and get out and therefore limit your water out effect.

Large fields, which has been successful for us so essentially probably 90% of our wells next year, we'll be done with the final Frac crew.

We've been running three final Frac crews this year plus a fourth spot crew here and there and I anticipate that kind of pace to be similar in 2022.

And then on the on the drilling side, it's been pretty incredible putting the QEP drilling organization together with the Diamondback drilling organization and finding best practices.

And you know this is the first and we've kind of talked about this last quarter and the quarter before that but now fully converted all of our Midland basin rigs to the clear fluid drilling system that we're that we're utilizing and you can see.

Average of 10 days spud to TD has been a pretty large step change and as Trevor said in his comments.

We all use the same fixed cost in our wells, but basic.

Basic T D and amount of lateral feet completed per day are variable costs that we think we certainly differentiate ourselves with so that's been the driver of Capex reductions this year and in an inflationary environment, which we're seeing.

Given oil prices and activity levels.

Inflation is mitigated by controlling the variable costs, which our operations organization has been able to do and you know Arun just to add to that point. When you. When you look ahead in the future. It's always hard to to see a step change in performance like we have seen this year, particularly on the drilling side, but.

But just like I said before that.

Diamondback has been an operational leader and I expect us to maintain that position even going into the next several years.

Great. Thanks, a lot.

Thank you rune.

Yeah.

Our next question comes from the line of Neil Nida.

Nida from Goldman Sachs. Your line is now open.

Good morning team.

Travis.

You made a comment on the last call.

That you thought this was more of a seller's market than a buyer's market.

Can you provide an update on your latest thoughts around M&A and then if you still feel that that's the appropriate strategy and then prioritize and buying back your stock.

Returning capital makes sense relative to M&A.

Yes, the best way I can think about M&A right now is isn't share repurchases I think you know what I'll make some comments there about.

Trial, and we don't underwrite M&A or share repurchases at these high commodity prices.

And look you know right.

Right now it's.

It's not something that I'm spending my time on M&A is to spend most of my time of seemed like regulatory and policy related efforts and not the M&A, but yes as I said the comment in the past and it's probably still true today that it.

Still feels.

We suddenly smaller deals like a seller's market, but that's typically what you see what commodity prices run like they've done this year.

Thanks, Travis and then just to.

Continue to flush out the cost point.

A lot of talk about service cost inflation as we move into 'twenty, two and potentially some tightness in the pressure pumping market could you talk about how you're managing some of those inflation risks and confidence interval around that being able to execute on the capital budget I can't you start to pencil out here.

Yeah, I mean, let the benefit we have we talked about the efficiency gains but.

But you know this year has kind of been the year of raw materials going up on well costs, you know steel diesel sand, but its logical that the service piece given labor tightness starts to get a little traction now.

We're going to be dependent upon where the rig count goes you know we only added eight rigs in the Permian in October if we add 100 rigs and it's gonna be a lot tighter next year from here, but if we if we kind of find the steady state then it's going to be tougher to put the service guys to push price, but either way with the final frac crews running with three three crews running.

We have no intention of dropping any of those that kind of consistency for our business partners allows them to to boost their margin profile and know that they have consistent work with diamondback.

I think.

Yes.

Thank you Neil.

Our next question comes from the line of Doug Leggate from Bank of America. Your line is now open.

Thanks, Good morning, everyone. Thanks for taking my questions.

Guys I wonder if I could ask I guess, there's kind of a housekeeping question on cost guidance.

It looks to us.

Based on the guidance, you've given for the fourth quarter.

The Bakken or the Williston.

Looks like.

On a number of levels higher cash costs DD&A and so on would that be the right interpretation in which case could you give us some idea of how you expect maybe just qualitatively the run rate to look in 2022 are we looking at a step done because the wisdom is not on the longer part of the portfolio.

Yeah. Good question, Doug I mean, primarily low.

It comes down a couple of bonds from from where it's been.

And the last couple of quarters with the Bakken contributing.

So I think generally moving towards the low fours and.

At $4 a Boe.

On the LOE side, we did keep the Bakken for a little longer than we like but and that kind of impacted the transition employees on the G&A side. So G&A probably comes down a nickel or so and then gathering transportation certainly higher costs in the Bakken.

So you'd probably see a step change down or step down in <unk>.

Closer to that kind of 125 to $1 50 range.

On a go forward basis. So you know it was an asset that we when we bought it we bought QEP, we've put up for sale right away.

Fortunately the regulatory environment took a little longer to get it closed but.

You know generally I think we're happy with the deal it is happy with the deal and.

And in our cost structure comes down a little bit in Q4 and into 2022.

Okay. So I guess, what I'm really getting at it looks like a bit of an inflation all sat on the operating cost side God love them.

On the capital side I, just wanted to make sure I was interpreting that correctly.

So it sounds like coming out on the right track there.

Yeah.

Okay.

Guys I hate to beat up on the cash distribution policy is my second question, but I just wanted to get a little bit of clarification here. So.

Let's assume the current strip, you're running at probably a $4 billion of free cash number next year.

So half of that goes back to shareholders and half of that goes to the balance sheet.

Pretty much what you are seeing currently right.

Yeah at least half of that goes back to shareholders.

Okay. So when you when we think about that.

So the run rate if you like for buybacks the number could be pretty punchy and I just wanted to get a handle as to how you guys are thinking about that because on our numbers you could be buying back a substantial amount of your stock and I'm trying to think.

Do we run not $2 billion buyback over what period.

That's really what I'm trying to get out because it sounds like you'll get rewarded at some point.

Yeah, I mean, I think the key dogs.

The buyback is going to be opportunistic not programmatic and.

As John said in his prepared remarks, we think about the buyback in terms of what is our NAV at mid cycle oil prices now we can have a along debate about where mid cycle oil prices are going but one quarter and we're not willing to underwrite mid cycle oil prices higher than we've seen in the last you know in the last five years, So I think.

You know I think the key is that you know the buybacks out there as a weapon for us at our disposal.

Overall, 50% of our cash flows free cash flows getting returned and if we don't get through the buyback in a quarter. You know there are lots of ups and downs in this industry, we don't get through the buyback in one particular quarter, we're going to make our shareholders hole with a variable dividend.

The quarter following.

Well this is a food noise. When you go to oil it seems to US you've got a long way to go before the stock is fairly valued so.

I just wanted to understand how aggressive we should be on the buyback assumption, but yes.

That's a good problem to have you know that's a good problem to have and considering where we were this summer when we had low seventy's oil and.

And the stock was 30 or 40% below where it is I think we're in a great position right now and.

And you know I think there are opportunities on the buy back side, and we look forward to not being blocked out in a day or two and getting back after it.

I appreciate the answers guys. Thank you.

Yeah, Doug just to add to that it's hard to hard to think back just 12 months ago oil price was half of what it is today and so we know that we're in a volatile industry and.

We think being cautious and also providing our shareholders. The maximum flexibility is still the prudent way to run the business and I hope the answers to the capital allocation capital allocation question, you just asked demonstrate that they.

They were trying to be prudent and generating maximum shareholder returns.

Alright, thanks, so much.

Our next question comes from the line of Derrick Whitfield from Stifel. Your line is now open.

Good morning, all congrats on your quarter and update.

Thank you Derrick.

Perhaps for you Travis or case.

Early 2022 indications from industry like yourself seem to suggest the sectors broadly remaining capital disciplined.

In light of this discipline and the recovery in demand environment to bus continues to look very constructive for the commodity in this sector as valuations certainly remain attractive relative to the market.

What are the one to two potential developments for the sector that give you concern and could change the outlook to less favorable one.

Well, there's one thing that I think we have to watch very carefully.

The discipline that the public companies demonstrating the earnings goal now ended up getting in February.

Because.

It's really you know if a company comes out there and start to grow and even though it's been very demonstrative that the world doesn't need that growth right now, but if a company comes out of the starts growing and gets recognized in the stock market for that growth and that's going to change the calculus for our board and how we allocate capital towards growth again, I think if you look at the macro.

Conditions post pandemic, we need 100 million barrels a day of demand reestablished, we're probably getting close there.

More importantly, we need to see there is surplus capacity whatever that number is in the OPEC plus countries being absorbed in the world's energy equation, and then thirdly, you need to see.

The five year average of our global inventories.

<unk> and you know it's unlikely you'll see all three of those triangulate priest.

Precisely, but I think you need to look at the price of oil when those indicators are all pointing at each other and if the price of oil as you know 70 or $80 a barrel when those things are pointing at each other that probably means we're in good shape in terms of supply and demand if on the other hand oil prices significantly higher than those.

Indicators are pointing at each other than Thats, probably your first time that the world is calling for more for more oil, but even having said that you know our board is dedicated to two making sure.

Allocating capital that's going to generate.

The greatest return to our stockholders and as I've said in my prepared remarks.

Rapidly transitioned from a from a company that that consumes capital for growth to now one that is distributing capital and we're looking at we're looking at holding production flat and we're looking at growing per share measures.

While continuing to strengthen our balance sheet and we think that's a prudent way to run our business.

Great and as my follow up perhaps digging into your operational efficiencies and really following up on her in this earlier question on Samuel Frank Ops.

Do you have a sense I'm sure you do but what what percent of your wells today are seeing too well versus four well Samuel Frac and are the practical limitations that would limit for well implementation program line.

No I mean.

Most of all I can say, 100% of our Midland Basin pads are four wells or more and the benefit of some of Frac you've got to have an even number of wells given that you're running two basically two crews at the same time.

So it's been less less apparent in the Delaware the Delaware, we're probably.

You know, 50% to well or four well plus an 80% to well plus in the Midland That's almost 100 per cent for well plus.

Great update and thanks again for your time.

Thank you Derrick Thanks Derrick.

Our next question comes from the line of David <unk> from Cowen and company. Your line is now open.

Yeah.

Good morning, Travis and case, thanks for your time this morning.

Morning, David.

Just wanted to be a little bit more explicit around the well cost inflation I just wanted to confirm.

<unk> reached record points in the third quarter at $500 a foot in the Midland and 700 in the Delaware.

Are you all modeling that now as sort of the trough period for costs is that.

Already baked in at a higher level in the fourth quarter guide.

Yeah.

Yes, I mean look we had a really good quarter in the third quarter official.

Efficiency was not.

No no no.

Major issues on drilling.

Completion went off without a hitch not a lot of weather. So we certainly don't model for the best case scenario, but this is probably the base that.

You know, we're going to build off of in terms of inflation going into 'twenty. Two we went into 2021 guiding to kind of 7% to 10% to 10% well cost inflation <unk> been able to kind of go the other way, but let's try to set earlier in the call.

We don't we don't model in efficiency enhancements throughout the throughout the year in our budget, but you know.

Certainly the organization on the op side is is motivated to continue to push and push the limits, but but this feels like a pretty a pretty solid quarter in terms of costs that will be tough to replicate this kind of inflationary environment.

I appreciate that and just for my follow up.

Harvest, perhaps for you or your case chime in as well, but.

You referenced looking at per share metrics with the buyback you know before you talked about.

Looking at using a buyback on your expected return exceed your cost of capital.

Are you also looking at.

What your effective production.

Gross per share it looks like when you are considering buying back shares versus perhaps growing.

In the event that you see some of those early indicators coming back with the world calling for more oil.

Yeah. That's a good that's a good point you know part of the part of the buyback work that we did when we announced it was we looked at how much capital does it take to grow the business, 5% a year for the next five years or grow the business, 10% a year for the next five years versus.

Shrink the business by 5% or 10% a year in terms of share count over the next five years.

And the law of large numbers catches up to you on the growth side, but on the on the buyback side of the shrink side it starts to get easier to grow per share metrics.

Your two and three.

Obviously, the stock price dependent but that was a lot of the work that we did do our shareholders own more reserves per share production per share our longer inventory loss per share.

With the buyback versus you know versus trying to just plow it all into the ground and oversupply a market that's that's already pretty fragile.

Got it thank you guys.

Thank you Derrick.

Our next question comes from the line of Scott Hanold from RBC capital markets. Your line is now open.

Thanks, Good morning.

If I could return back to the shareholder return plan and and I think you. All said you know you're going to at least give 50% back to investors and could you just sort of give some color around that does that mean.

If they're not.

Take out opportunities you you'd potentially look at say, increasing the buyback or dividend above you know sort of that 50% threshold.

And then also on on you know if you can give some color on the fixed dividend.

Where could that go where were you all get to a point, where it just doesn't feel comfortable because of the sustainability of it more of a more of a mid cycle price.

Yes, Scott.

Conversations with large shareholders have basically said, we want to make sure there's dividends well protected below 40.

Our dividend breakeven for 'twenty, two is kind of in the $35 oil range.

Buying puts at $50 oil so I think we're still very well very well protected.

You know I think the dividend is going to continue to grow the board. The board talks about it every quarter, we hit the 10% CAGR since our introduction in 2018, that's probably a lofty goal and we continue for multiple years, but certainly something we're talking about continuing the dividend growth on a steady basis aggressive.

And.

As long as that breakeven stays in the mid to mid to high <unk>, we feel pretty good about it.

Okay and could you comment on on.

On on sort of the view on taken out debt.

You would folks a little bit more on variable dividends or buybacks, if theres not that to take home.

Yes, that's right sorry about that.

We still want to take down.

That you know we have a maturity in 2024, and we also want to keep a larger cash balance than we've run in the past just just for installation.

But yes, we were kind of saying hey, listen at least 50% of the free cash flow has got to go back to the shareholders and if we don't have anything else to.

To deal with it and I think it's logical that that more will go back so.

I'd like to have cash to take out the 24 hours and be in a position to not have any material maturities until 2029, but like we've done over the last five or six quarters, that's not being mutually exclusive from our shareholders getting more money back.

Okay, and then as you look into 2022.

How do you think and you know I know you all are talking about flat oil production into next year.

If you were to just outperform operationally would you guys.

Guess reduce your.

Well completions, you know say in the back half of the year to kind of maintain flat production or should we assume that you know you'll have that $65 70, well program next year and if there is operational performance, maybe you do a little bit better than maintenance maintenance slash flat production.

Well I think generally right.

We've got outperformed guidance on oil production, which we've done this year, but what we've said all year is that if we are doing better than we thought we're going to cut capital and that's what we've done in 2021 and I think that's that's essentially the goal for 2022, even in the face of some inflationary pressures.

Got it I appreciate it.

Thank you Scott.

Our next question comes from the line of Paul Cheng from Scotia Bank. Your line is now open.

Hi, Thank you good morning.

Sorry about that I want to go back into their.

Their cash with time.

Mkay Los Angeles, the volatility in the market that you put 50% of excess cash flow into the into the partnership but is that number at some point you're on that that will be at a point that you may be able to raise their casually time from 50% to 75% in Ohio.

Some of them, but that would be in mind that you guys are thinking or what that not really.

That you will go with and saying, Okay. If I don't have any additional use because that I no longer have any that you wipe away then I would just increasing that percentage.

Yes, Paul.

That's a great question you know I think what we're focused on is committing to the at least 50% right now I think as.

As this industry evolves and you see companies make these types of commitments.

You don't want to walk him back right. So the.

There will be quarters, where we distribute more cash and 50%, but also I don't want that to become a baseline for the next couple of decades.

Think.

We're focused on 50% right now and some quarters will do better in some quarters, we will.

Hit it that at that 50, but the 15th to the guarantee.

Okay.

And the second question is related to your midstream operation Raptor.

With a dividend yield of over 8% higher than this Fang Fang you sell one they argue that your cost of capital is actually very high over there. So it doesn't it seems like that that's really half split.

Which leads them to have that as a independent trade.

We have seen a lot of consolidation in the midstream business.

That's.

One of your peers that their midstream off that just recently at <unk> to merge with a private company and that's where you're going to if we do stay ownership so that they can consolidate.

So just curious how you're looking at that.

<unk>.

Fitbit and with at that.

You may want to do some alternative.

And they say hey, we need to disrupt that.

Yes, good question and we've seen a couple a couple of routes right we've seen.

Some parent companies.

By in their subsidiaries in some sell down I think for us.

It's more strategic to us to keep it.

Keep that cost structure, and we can address it more on the outlook call, but I think if if.

If you look under the Hood, we've been really trying to highlight the rattler story, we signed a new JV earlier this year or this month, that's going to be highly successful for us with a lot of diamondback exposure, we got that the water assets dropdown.

<unk>.

That's closed and another month, so you know.

Certainly the disc.

Strategy.

At the subsidiary hasn't changed and the importance of it to us hasn't changed so I certainly don't think we'd go down the cell route.

We look at cost of capital we look at.

Multiples then.

If the stock is not working we got to think about what to do but right now it seems like it's that was had a good year it doesn't have.

The commodity exposure to Diamondback, and Viper, haps, probably underperformed a little bit.

It's still generating a lot of free cash to its unit holders of which diamondbacks the largest.

Yes, I mean, the only thing I would say that the timing back half a quick story and he is probably one of the most attractive E&P names out there and I think that we'll have that to even further campus by the opex structure. So that when you start looking at you. They don't have to look at so many different.

Capex structure.

Just my almost feeling thank you.

Yes, we've heard that before Paul.

And we recognize it.

Fortunately the mothership has gotten very large until theres less leakage.

Our subsidiaries, but both have been.

Important to us over the last over the last half decade.

Thank you.

Yeah.

Thanks, Paul.

Yeah.

Our next question comes from the line of Leo Mariani from Keybanc. Your line is now open.

Hey, guys just wanted to.

Touch base a bit on third quarter production it looks like you're kind of outperformed here and just wanted to get.

Little bit of color behind that in terms of being a little bit ahead of the guidance. So this is pretty much just.

Well performance you did mention kind of a pretty clean operational quarter with no weather issues.

Yes.

Good quarter.

I think where we're very focused on hitting our numbers and the benefit of slowing down and not trying to grow as fast as possible is that.

The operations organization has gotten better you can see it on the well cost side. It's also happening on the production side. So.

Good quarter all around.

I think we feel really confident in the forward outlook and continuing to.

To hit our numbers here.

Okay.

And then just in terms of.

22, Capex I understand it said Lewis guide that you folks are targeted here if I take that.

Fourth quarter, Capex, and Capex range and annualize it kind of gives me $1 74 billion to $1 nine so.

Pretty wide there at the end of the day just wanted to get a sense.

What do you guys think perhaps.

The outcome can be on the inflation side, there I know.

It's still a moving target here and it went on 100% now how this plays out but any early indications.

What the inflation can be and is that kind of what would target. The top end at the one nine just trying to get to send somebody what's baked in there yes.

Yes.

I think I'd say, there's about 2022 is not going to be on November 2nd of 2021. So you know not one of the few companies talking about 2022, and we'll see what happens over the next couple of weeks, but.

Probably half.

About 10% inflation built into there with a little bit more infrastructure and midstream spend that we didn't need to go through this year.

But generally I think we can narrow that guidance as we get into 2022 and have more evidence you know I think the comment earlier, if the rig count goes up a 100 rigs from here, it's a different story than if the rig count it keeps creeping up five to 10 rigs a month.

Okay. Thanks, guys.

Thank you thanks Lou.

Our next question comes from the line of Charles Meade from Johnson Rice. Your line is now open.

Good morning, Travis and case.

Hey, Charles.

Charles I want to thank you for for your prepared comments, you really addressed a lot of the natural questions on.

On why you've adopted the stance you have for 'twenty two but.

Just one question for me and it's around the buyback.

When we look at the you know you guys announced that are on the 15th and.

We look at the average price you bought back in the <unk>.

And the chart of your share price. It looks like you you know you guys got after it for a few days and then.

And then wrapped it up probably in about a week.

And I'm curious is is the right inference to make is that that that low eighty's is.

Is.

Where you guys, where the where the scale to buy back just as far as the preferred way to return a return.

Alright, I guess increased returns to shareholders or alternatively isn't that that case, you mentioned, a blackout earlier and obviously that makes sense that this is that is that a function of.

Your your legal team, putting you in a black out a few days before the quarter.

Yeah, I mean, it's just purely we get blacked out right, we get blocked up 10 days before the quarter ends and we're blacked out until a couple of days after earnings. So we'll reassess where we are in a couple of days and.

And be back after it.

That's helpful. Thanks, guys.

Thanks Charles.

Okay.

Our next question comes from the line of Harry Mateer from Barclays. Your line is now open.

Hi, good morning, guys.

So I wanted to dig in maybe a little bit more on the on the debt piece of it you guys talked around it but.

Yeah as you noted nothing callable at this point given what you've taken out so far this year next maturity in 2024 and I guess first question is.

How do you how do you navigate that.

Because you know are you thinking about tenders make wholes that gets expensive, but then at the same time sitting with a.

A bunch of cash on the balance sheet waiting for the maturity at the end of 'twenty four might not be viewed as attractive either so how are you thinking about approaching that in the next couple of years.

Yeah, I mean, I think we're just going to keep following the prices of the bonds and try to get you know.

Below the May call. If we can if not you know the.

The make wholes not too restrictive on something like R. 20 fours as you get into late 'twenty, two but certainly not looking to take out you know anything past 2029.

Got it Okay and then on the on the cash balance what are you you mentioned wanting to run with a more of a buffer than you had in the past what what is that number for you.

I like 500, as a minimum we'd kind of said that over the last couple over the last couple of quarters and you know.

I think that's a good starting the starting point for us.

Okay, great. Thanks very much.

Thank you thank you Sir.

Our next question comes from the line of Paul Sankey from Thank you Research. Your line is now open.

Guy says a report in the Wall Street Journal this morning.

The EPA is going to massively increase methane emission limits can you just talk a little bit about what that means for you and for the industry.

Then I have a question from us.

A major investor who asked me.

If I heard from Diamondback that multiyear flat with volumes and now embraced by you and not just for 2022 is that what I'm hearing.

Yes, the methane rules. So I think we still have to see how the final document gets written down.

Diamondback continues as I've stated in my prepared remarks to focus on.

Methane intensity, we're going to reduce debt by 70% from 2019 levels by 2024, so it depends on where the threshold is but I've been very very pleased with the progress we've made already.

<unk>.

Reducing methane intensity.

In fact, we've got you know.

20, plus million dollars allocated next year to continue those efforts.

To reduce methane intensity.

We do things right, hopefully will be below the threshold by which that methane intensity.

The intensity of flaws.

And then Paul a multiyear plans, we've always we've always a huge multi year plans at Diamondback, we weren't we didn't buy into a multiyear growth plan in 2016, and you know we're not going to commit to multiple years at flat today, you know certainly 2022 and 2021 will both be.

But flat production, we think its work and capital discipline has worked for this industry.

I think this industry has tried a market share war with OPEC before and it didn't work out so why don't we let OPEC bring back their spare capacity in our stay flat and we'll see what the future holds in 2023 and beyond but right now we're committed to 2022 flat capital discipline is real over at Diamondback.

And as Travis.

As mentioned, we're going to become a net return of capital rather than consumer of capital and look opec's going to do what opex is going to do.

I've said, we've transitioned into diamondback transitioned very rapidly from consuming capital returning capital and are focused on the increase so the growth that we're seeing in per share metrics.

<unk> kind of a macro elements by which the world will be calling on more on more growth.

I think every quarter that we go through Diamondback.

<unk> is demonstrating our commitment to maximizing shareholder returns.

We're doing that right now about generating all this free cash flow. This this wave of free cash flow is coming to us and our commitment to return at least 50% of that back to the shareholders.

Understood. Thanks.

Thanks, Paul.

I'm showing no further questions at this time I would now like to turn the conference back to CEO Travis Stice you May proceed.

Thank you again to everyone for participating in today's call. If you've got any questions. Please contact us using the information provided.

This concludes today's conference call you may now disconnect.

Okay.

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Good day, and thank you for standing by and welcome to the Diamondback Energy third quarter 2021 earnings conference call.

This time, all participants are in a listen only mode.

The speaker's presentation, there will be a question and answer session.

Ask the question during the session you will need to press star one on your telephone please.

We advised that today's conference is being recorded.

Do you require any further assistance please press star zero.

I would now like to hand upon friends over to your speaker today, Adam Lawlis, Vice President of Investor Relations. Please go ahead.

Thank you Tim Good morning, and welcome to Diamondback Energy's third quarter 2021 conference call. During our call today, we will reference an updated investor presentation, which can be found on Diamondbacks website.

Representing diamondback today are Travis stice.

Case, Frank our 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 EBITDA, indicating these forward looking statements due to a variety of factors information concerning these factors can be found in the company's filings with the SEC.

In addition, we will make reference to certain non-GAAP measures the reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.

I'll now turn the call over to trash bags.

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

The third quarter was an exceptional quarter for diamondback.

We were able to generate a record amount of free cash flow as we continue to demonstrate why we are an operational leader in the Permian basin.

Although we are seeing pricing pressure in many areas of our business, particularly with consumables and labor.

We have been able to offset these inflationary items through efficiency gains both in design and execution.

On the drilling side, we have decreased the number of days it takes to drill to drill from spud to total depth by nearly 30% this year alone.

And we're now drilling two mile laterals in roughly 10 days in the Midland Basin.

On the completion side of the business, we've seen a step change in efficiency as we've transitioned the majority of our completion crews to sample Frac operations.

And are now completing wells in the Midland basin, nearly 70% faster.

And then when we were utilizing the traditional zipper Frac design.

These gains drove a significant beat on capital expenditures this quarter and all the primary driver of our second consecutive decrease in Capex for the year.

The efficiencies gained this year will be permanent.

And while inflation may impact services prices next year.

Diamondback will be more insulated than our peers, given our control over the variable costs of well design.

Days to total depth on the drilling side and lateral feet completed per day on the completion side of the business.

As a result of these efficiency gains as well as timing associated with some of our ancillary capital spend.

We have lowered our 2021 capital guidance for a second time.

And now expect to spend approximately $1 5 billion. This year, a decrease of 10% when compared to our initial capex guidance range, we published in April.

This includes approximately $4 $35 million to $475 million of estimated capital spend in the fourth quarter.

Moving to 2022, we are committed to holding our Permian oil production flat next year.

We expect to be able to maintain this level of production by spending similar capital on an annualized basis to our fourth quarter guidance.

This soft guidance accounts for both the efficiencies we've gained this year.

As well as the potential for service cost inflation in 2022 should activity levels increased in the Permian basin and oil prices stay strong.

The reason, we're committed to keeping oil volumes flat in 2022 is that we believe our capital discipline.

Coupled with our plan to return 50 50.

<unk>.

The anticipated free cash flow to shareholders.

First near term path to equity value creation.

Diamondback is moving from a consumer of capital to a net distributor of capital.

Which will benefit long term return on capital employed and value creation.

In order to initiate a moderate growth plan, we would need to see material changes to global oil and gas fundamentals along with shareholder support for such growth and we do not see either of those things today.

Until such time, we will continue to run our business for free cash flow generation.

Focusing focusing internally and ensuring we maintain our best in class cost structure and inflation face of inflationary pressure.

This will position us for success, regardless of where we are in the cycle.

At current commodity prices. This plan translates to significant free cash flow generation next year.

Our investor deck, we have a slide that shows illustrative 2022 free cash flow at various commodity prices.

At today's strip 2022 free cash flow was well north of $3 billion.

We plan to distribute 50% of this free cash flow using a combination of our sustainable and growing base dividend share repurchases and variable dividends.

We will use repurchases and variable dividends interchangeably, depending on which presents the best return to our stockholders at that time.

As a reminder, we plan to Opportunistically repurchase shares of our common stock when we expect the return on that repurchase to be well in excess of our cost of capital at mid cycle commodity prices.

Which was clearly the case in mid September when our board approved a $2 billion share repurchase program.

After that announcement, we have repurchased over 268000 shares at an average share price of $82 for a total cost of $22 million in the third quarter.

If we do not repurchase enough shares in the quarter to equal at least 50% of free cash flow for that particular quarter.

Then we will make our investors whole by distributing the rest of that free cash flow via a variable dividend.

This strategy gives us the ability to be flexible and opportunistic when distributing capital above and beyond our base dividend.

But importantly at least 50% of free cash flow will be returned.

We do not set our budget.

Drill wells or underwrite acquisitions based on a strip oil pricing when current strip pricing is significantly above the last five year average.

Therefore, we will underwrite repurchasing shares, which we see as an acquisition under the same assumptions.

Our base dividend continues to be our primary method of returning capital to our shareholders. We have grown our base dividend on a quarterly compounded growth rate of roughly 10% since initiation in 2019.

This quarter, we raised our dividend by 11% to <unk> 50, a share.

For $2 a share on an annualized basis.

Due to our low cost of supply our dividend is currently protected down to $35 a barrel.

As we have said before increases to our base dividend would occur simultaneously with absolute debt reduction.

And this year was a great example of that.

Year to date, we have used our $165 billion of internally generated free cash flow.

As well as proceeds from divestitures to reduce our gross debt by $1 3 billion and increased our dividend three times.

Our balance sheet continues to strengthen and we expect to end 2020 warm at just over a turn of leverage.

Yesterday, we fully redeemed our $650 million of senior notes due in 2023.

As a result, we no longer have any callable debt and our next material maturity is late 2024.

Because of this we are now in a position to accelerate our returns program to the fourth quarter of 2021.

This is a direct result of the combination of everything I've mentioned today, one strong operational performance to a supportive macro backdrop and three increasing financial strength.

Yet none of this would be possible without safe and efficient field operations. We continue to build on our safety track record and did not have a recordable employee safety incident this quarter.

We have also decreased our flared volumes on our legacy properties and continue to work with third parties.

To build out additional infrastructure to reduce flared volumes on our recently acquired assets.

In addition, we expect to continue our reduced continued to reduce our flared volumes as we move into 2022 in conjunction with the completion of our Bakken divestiture, yet, we're striving to be better and we recently announced our commitment to and routine flaring by 2025.

Reducing our emissions and moving us towards our commitment of reducing scope, one ghd intensity by at least 50%.

And our methane intensity by at least 70% by 2024.

The third quarter was a record quarter for Diamondback.

We are proud to produce one of the cleanest and most cost effective barrels in the industry and are thankful to operate in a pro energy environment and the state of Texas.

Products fueled our local communities our state our country and the world.

We continue to innovate.

The buying our environmental license to operate in the communities, where we and our families live work and play.

We will continue to operate reliably and safely.

And are uniquely positioned to take advantage of the current macro environment by exercising capital discipline, keeping oil volumes flat and generating significant returns to our shareholders with these comments complete operator. Please open the line for questions.

As a reminder to ask a question you will need to press star one on your telephone to withdraw.

Your question press the pound key.

Please standby, while we compile the Q&A of Archstone.

Our first question comes from the line of Aaron <unk> from JP Morgan. Your line is now open.

Preliminary I hear you.

Can you hear me now.

Yes, Yes got you.

Sorry.

Charles case, I wanted to get your preliminary thoughts on the 2020 outlook.

In the deck you highlighted.

And operating cash flow outlook of $4 8 billion $75 three plus billion at Adi you mentioned three to $3 5 billion of free cash flow.

That range.

Oil price.

This year, you're doing 270 gross sales.

My question is what type of.

70.

Do you expect in 2022 that underpins that one $8 million budget.

And I guess.

Be interested to know what is.

Cash tax rate, you're assuming in that free cash flow guide.

Yes, thanks, and good questions for.

From an activity perspective, not a lot's going to change and are still going to be 75% or 80% of our wells turned in line in the in the Midland Basin still at this kind of <unk>.

65% to 75 wells a quarter run rate a big difference in 'twenty two versus 'twenty 'twenty. One is that remember we run a lot of rigs into the downturn in 2020 and decided to keep those rigs running to build ducks.

We drew down about 50 of those ducks in 2021 and.

Now.

Steady state Doc level so.

<unk> got a 50 duck.

Headwind in 2022 versus 2021.

A little more infrastructure and midstream spend on the sale of Robertson Ranch is that we acquired from.

QEP and guide on as we get into full field development there.

Cash taxes.

If the world stays where it is today oil price wise, we will have some cash taxes in 2022.

And the low nine figures.

100 ish to $200 million, depending where we are.

Which is.

A good problem to have hopefully the.

<unk> prices stay where they are.

Thanks for that and just as my follow up I wanted to see case, maybe for you if you could provide a little bit more.

Detail around the drilling efficiency gains that youre seeing.

I think you highlighted on slide 11, 10 days now for a two mile lateral in the Midland Basin.

And also maybe describe what youre doing on the <unk>.

Please turn to slide and perhaps just the mix of time more frac in 'twenty two.

Yeah. So I'll start with final Frac, we picked up our first final frac crews in the second half of 2020 and.

It had been running those ever since.

They've been extremely efficient probably saves us about 25% or $30 a foot, but more importantly in areas, where you have offset production you can get in and complete those wells and get out and therefore limit your water out effect.

Large fields, which has been successful for us so essentially probably 90% of our wells next year, we'll be done with the final Frac crew.

We've been running three final Frac crews this year, plus a fourth spot crew here and there and I anticipate that kind of pace.

To be similar in 2022, and then on the on the drilling side has been pretty incredible putting the QEP drilling organization together with the Diamondback drilling organization and finding best practices.

And this is the first and we kind of talked about this last quarter and the quarter before that but now fully converted all of our Midland basin rigs to the clear fluid drilling system that we're that we're utilizing and you can see.

Average of 10 days spud to TD has been a pretty large step change and as Trevor said in his comments.

We all use the same fixed cost in our wells, but.

TD and amount of lateral feet completed per day are variable costs that we think we certainly.

<unk> differentiate ourselves with so that's been the driver of Capex reductions this year.

In an inflationary environment, which we're seeing given oil prices and activity levels.

That inflation is mitigated by controlling the variable costs, which our operations organization has been able to do.

Arun just to add to that point when you. When you look ahead in the future. It's always hard to to see a step change in performance like we have seen this year, particularly on the drilling side.

But just like I've said before that.

Diamondback has been an operational leader and I expect us to maintain that position even going into the next several years.

Great. Thanks, a lot.

Thank you rune.

Our next question comes from the line of.

EBITDA from Goldman Sachs. Your line is now open.

Good morning team.

Travis.

You made the comment on the last call.

That you thought this was more of a seller's market than a buyer's market.

Can you provide an update on your latest thoughts around M&A and if you still feel that that's the appropriate strategy and then prioritize and buying back your stock or returning capital makes sense relative to M&A.

Yes, the best way I can think about M&A right. Now is is in share repurchases I think you know what I'll make some comments there about.

Try and we don't underwrite M&A or share repurchases at these high commodity prices.

And look.

Now.

It's not something that announcement in any of my time on M&A is to spend most of my time on seems like regulatory and policy related efforts and not the M&A, but I have said the comment in the past and it's probably still true today that it still feels at.

At least on the smaller deals like a seller's market, but that's typically what you see when commodity prices were on what they've done this year.

Thanks, Travis and then just.

Does it continue to flush out the cost point, there's a lot of talk about service cost inflation as we move into 'twenty, two and potentially some tightness in the pressure pumping market can you talk about how you're managing some of those inflation risks.

Confidence interval around that being able to execute on the capital budget that you start to pencil out here.

Yes.

The benefit we have we talked about the efficiency gains but.

This year has kind of been the year of raw materials going up on well costs steel diesel sand, but but.

It's logical that the service piece, given labor tightness starts to get a little traction now.

It's really going to be dependent upon where the rig count goes we only added eight rigs in the Permian in October if we add 100 rigs then it's going to be a lot tighter next year from here, but if we if we kind of find the steady state then it's getting tougher for.

So the service guys to push price, but either way.

The final Frac crews running at three three crews running we have no intention of dropping any of those that kind of consistency for our business partners allows them to to boost their margin profile and know that they have consistent work with diamondback.

Thanks, Tim.

Thank you Neil.

Our next question comes from the line of Doug Leggate from Bank of America. Your line is now open.

Thanks, Good morning, everyone. Thanks for taking my questions.

Guys I wonder if I could ask I guess, there's kind of a housekeeping question on cost guidance.

It looks to us.

Based on the guidance, you've given for the fourth quarter.

The Bakken or the Williston.

Looks like.

On a number of levels higher cash costs DD&A and so on would that be the right interpretation in which case could you give us some idea of how you expect maybe just qualitatively the run rate to look in 2022 are we looking at a step done because the Williston is now no longer part of the portfolio.

Yes, good question, Doug I mean, primarily low.

It comes down a couple of dimes from from where it's been.

And the last couple of quarters with the Bakken contributing.

So I think generally moving towards the low fours and <unk>.

$4 a Boe.

Syed.

Keep the Bakken for a little longer than we like but.

Kind of impacted the transition employees on the G&A side to G&A, probably comes down a nickel or so and then gathering transportation certainly higher cost in the Bakken.

So you'd probably see a step change down or step down in <unk>.

Oser to that kind of 125 to $1 50 range.

On a go forward basis so.

It was an asset that when we bought it we bought QEP, we've put up for sale right away. Unfortunately, the regulatory environment took a little longer to get it closed but.

Generally I think we're happy with the DLA is happy with the deal in.

And our cost structure comes down a little bit in Q4 and into 2022.

Okay.

I guess, what I'm really getting at it it looks like a bit of an inflation offset on the operating cost side rather than on the capital side I just wanted to make sure I was interpreting that correctly.

So it sounds like coming out on the right partner.

Yeah.

Okay.

Guys I hate to beat up on the cash distribution policy is my second question, but I just wanted to get a little bit of clarification here. So.

Let's assume the current strip, you're running at probably a $4 billion free cash number next year.

So half of that goes back to shareholders and half of that goes to the balance sheet.

Pretty much what you are seeing currently right.

Yes at least half of that goes back to shareholders.

Okay. So when you when we think about that.

So the run rate if you like for buybacks the number could be pretty punchy and I just wanted to get a handle as to how you guys are thinking about that because on our numbers you should be buying back a substantial amount of your stock and I am trying to think.

We run not $2 billion buyback over what period.

That's really what I'm trying to get out because it sounds like you'll get rewarded at some point.

Yes, I mean, I think the key Doug.

The buyback is going to be opportunistic not programmatic and as John said in his prepared remarks, we think about the buyback in terms of what is our NAV.

Mid cycle oil prices now we can have a long debate about where mid cycle oil prices are going but one quarter and we're not willing to underwrite mid cycle oil prices higher than we've seen in the last in the last five years. So I think.

I think the key is that the buybacks out there as a weapon for us at our disposal, but.

But overall, 50% of our cash flows free cash flows getting returns and if we don't get through the buyback in the quarter. There are lots of ups and downs in this industry, we don't get through the buyback in one particular quarter, we're going to make our shareholders hole with a variable dividend.

The quarter following.

Well this is a fruit noise 70 global oil it seems to us you've got a long way to go before the stock is fairly valued so I just wanted to understand how aggressive we should be on the buyback assumption, but yes.

And that's a good problem to have and Thats a good problem to have and considering where we were this summer when we had low seventy's oil.

And the stock was 30, 40% below where it is I think we're in a great position right now.

I think there are opportunities on the buyback side, and we look forward to not being blacked out in a day or two and getting back after it.

I appreciate the answers guys. Thank you.

Yes, Doug just to add to that it's hard to hard to think back just 12 months ago oil price was half of what it is today and so we know that we're in a volatile industry and we think being cautious and also providing our shareholders. The maximum flexibility is still the prudent way to run the business and I hope the answers to the capital question capital case.

<unk> question, you just asked demonstrates that they.

They were trying to be prudent and generating maximum shareholder returns.

Thanks Thomas.

Our next question comes from the line of Derrick Whitfield from Stifel. Your line is now open.

Good morning, all and congrats on your quarter and update.

Thank you Derrick.

Perhaps for you Travis our case.

Early 2022 indications from industry like yourself seem to suggest the sectors broadly remaining capital disciplined.

In light of this discipline in the recovery and demand environment to US continues to look very constructive for the commodity in this sector as valuations certainly remain attractive relative to the market.

What are the 1% to two potential developments for the sector that give you concern and could change the outlook to a less favorable one.

Well, there's one thing that I think we have to watch very carefully and thats.

The discipline that the public companies demonstrating the earnings goal now and again in February.

Because.

It's really.

Company comes out there and start to grow and even though I've been very demonstrative that the world doesn't need that growth right now, but if a company comes out of the starts growing and gets recognized in the stock market for that growth and that's going to change the calculus for our board and how we allocate capital towards growth again, I think if you look at the macro conditions pose.

Pandemic, we need 100 million barrels a day of demand reestablished, we're probably getting close there.

More importantly, we need to see there is surplus capacity whatever that number is in the OPEC plus countries being absorbed in the world's energy equation, and then thirdly, you need to see.

The five year average.

Global inventories.

Turn and it's unlikely you'll see all three of those triangulate precisely, but I think you need to look at the price of oil when those indicators are all pointing at each other and if the price of oil.

$70 $80 a barrel when those things are pointing at each other that probably means we are in good shape in terms of supply and demand if on the other hand oil prices significantly higher than those indicators are pointing at each other than thats, probably your first sign that the world is calling for more for more oil but even.

Having said that our board is dedicated to two making sure.

Allocating capital that's going to generate.

The greatest return to our stockholders and as I've said in my prepared remarks.

Rapidly transitioned from a from a company that that consumes capital for growth to now one that is distributing capital and we're looking at we're looking at holding production flat and we're looking at growing per share measures.

While continuing to strengthen our balance sheet and we think that's a prudent way to run our business.

Great and as my follow up perhaps digging into your operational efficiencies and really following up on Rins earlier question on Samuel Frank Ops.

Do you have a sense I'm sure you do but what percent of your wells today are seeing <unk> versus four wall Samuel Frac and are the practical limitations that would limit for well implementation program line.

No I mean.

I'd say, 100% of our Midland Basin pads are four wells or more and the benefit of some of you got to have an even number of wells given that youre running two basically two crews at the same time, so it's been less less apparent in the Delaware the Delaware, we're probably.

50% to well or four well plus an 80% to well plus in the Midland that's almost 100% for well plus.

Great update and thanks again for your time.

Thank you Derrick Thanks Derrick.

Our next question comes from the line of David <unk> from Cowen and company. Your line is now open.

Good morning, Charles and case, Thanks for your time this morning.

Good morning, David.

Just wanted to be a little bit more explicit around on the well cost inflation I just wanted to confirm.

All reached record points in the third quarter at $500 a foot in the Midland and 700 in the Delaware.

Are you all modeling that now as sort of the trough period for costs is that already baked in at a higher level in the fourth quarter guide.

Yes, I mean look we had a really good quarter in the third quarter.

Efficiency wise.

No no.

Your issues on drilling.

Completion went off without a hedge not a lot of weather. So we certainly don't model for the best case scenario, but this is probably the base that.

We're going to build off of in terms of inflation going into 'twenty. Two we went into 2021 that into the kind of 7% to 10% well cost inflation.

Been able to kind of go the other way, but Bud light Trevor said earlier in the call.

We don't we don't model in efficiency enhancements throughout the throughout the year in our budget, but certainly the organization on the offside is.

Is motivated to continue to push and push the limits, but but this feels like a pretty a pretty solid quarter in terms of costs that will be tough to replicate this kind of inflationary environment.

I appreciate that and just for my follow up.

<unk>, perhaps for you or your case chime in as well, but.

You referenced looking at per share metrics with the buyback you know before you talked about.

Looking at using a buyback on your expected return exceed your cost of capital.

Are you also looking at.

What your effective production.

Gross per share it looks like when you are considering buying back shares versus perhaps growing in the event that you see some of those early indicators coming back with the world calling for more oil.

Yeah. That's a good that's a good point part of the part of the buyback work that we did when we announced it was we looked at how much capital does it take to grow the business, 5% a year for the next five years or grow the business, 10% a year for the next five years versus.

Shrink the business by 5% to 10% a year in terms of share count over the next five years.

And the law of large numbers catches up to you on the growth side, but on the on the buyback side of the shrink side it starts to get easier to grow per share metrics.

Year, two and three.

Obviously, the stock price dependent but that was a lot of the work that we did do our shareholders own more reserves per share production per share our longer inventory loss per share.

With the buyback versus versus trying to just plow it all into the ground and oversupply a market that's already pretty fragile.

Got it thank you guys.

Thank you Derrick.

Our next question comes from the line of Scott Hanold from RBC capital markets. Your line is now open.

Thanks, Good morning.

If I could return back to the shareholder return plan.

I think you all said you know you're going to at least give 50% back to investors and could you just sort of give some color around that does that mean.

If theyre not.

Debt take out opportunities.

You'd potentially look at increasing the buyback or dividend above sort of that 50% threshold.

And also on if.

If you can give some color on the fixed dividend.

Where could that go where were you all get to a point.

Where it just doesn't feel comfortable because of the sustainability of it.

More of a mid cycle price.

Yes, Scott.

Conversations with large shareholders base.

Basically said, we want to make sure this dividend well protected below 40.

Our dividend breakeven for 'twenty, two is kind of in the $35 oil range and were buying puts at $50 oil. So I think we're still very well very well protected.

I think the dividend is going to continue to grow the board. The board talks about it every quarter, we've hit the 10% CAGR since introduction in 2018, that's probably a lofty goal and we continue for multiple years, but certainly something we're talking about continuing the dividend growth on a steady basis aggressively.

And.

I think as long as that breakeven stays in the mid <unk>.

Mid to high <unk>, we feel pretty good about it.

Okay and could you comment on.

On on sort of the view on taking out that you would focus a little bit more on variable dividends or buybacks, if theres not that to take home.

Yes, that's right sorry about that.

We still want to take down gross debt.

Maturity in 2024, and we also want to keep a larger cash balance than we've run in the past just just for installation.

But yes, we're kind of saying hey, listen at least 50% of the free cash flow has got to go back to the shareholders and if we don't have anything else to.

To deal with it and I think it's logical that that more will go back so.

<unk>.

I would like to have cash to take out the 24 hours and be in a position to not have any material maturities until 2029, but like we've done over the last five or six quarters, that's not being mutually exclusive from our shareholders getting more money back.

Okay, and then as you look into 2022.

How do you think and I know you all are talking about flat oil production into next year.

If you were to just outperform operationally would you guys.

I guess reduce your.

Well completions say in the back half of the year to kind of maintain flat production or should we assume that you'll have that $65 70, well program next year and if there is operational performance, maybe you do a little bit better than maintenance maintenance slash flat production.

Well I think generally right.

We've got outperformed guidance on oil production, which we've done this year, but what we've said all year is that if we are doing better than we thought we're going to cut capital and that's what we've done in 2021 and I think that's that's essentially the goal for 2022, even in the face of some inflationary pressures.

Got it I appreciate it.

Thank you Scott.

Our next question comes from the line of Paul Cheng from Scotia Bank. Your line is now open.

Hi, Thank you good morning.

Sorry about that.

To go back into.

That cash return.

Los Angeles, the volatility in the market that you put 50% of the excess cash flow into the into the bonds. It but is that number at some point that that will be at a point that you may be able to raise the cash return from 50% to 75% in Ohio.

Some number in mind that you guys are thinking or what that not really.

Pat.

<unk> been saying that okay. If I don't have any additional use because that I no longer have any debt wiped away, then I, which is increasing that percentage.

Yes.

That's a great question I think what we're focused on is committing to the at least 50% right now I think as.

As this industry evolves and you see companies make these types of commitments you.

You don't want to walk him back right. So there.

There will be quarters, where we distribute more cash and 50%, but also I don't want that to become a baseline for the next couple of decades I think.

We're focused on 50% right now.

Some quarters will do better in some quarters, we will.

Hit it that at that 50, but the <unk> guarantee.

Okay.

And the second question is related to your midstream operation Raptor.

With a dividend.

Davidson yield over 8%.

That's higher than this Fang Fang a sale one day argue that your cost of capital is actually very high over there and it doesn't it seems like that that's really quick.

We need.

To have that asset in independent trade.

<unk> seen a lot of consolidation in the midstream.

That's.

One of your peers that the midstream market just recently at <unk> to merge with a private company and actually going to if we do stay ownership so that they can consolidate.

So just curious how you're looking at that.

<unk>.

It fits us and with at that.

You may want to do some alternative.

Initially we need to disrupt that.

Yes, good question and we've seen a couple a couple of routes right we've seen.

Some parent companies.

<unk> subsidiaries in some sell down I think for us.

It's more strategic to us to keep it.

Keep that cost structure, and we can address it more on the outlook call, but I think if.

If you look under the Hood, we've been really trying to highlight the rattler story, we signed a new JV earlier this year or this month, that's going to be highly successful for us with a lot of diamondback exposure, we've got the water assets dropdown.

<unk>.

That's closed and another month so.

Certainly the strategy.

At the subsidiary Hasnt changed and the importance of it to us hasn't changed so I certainly don't think we'd go down the cell route.

We look at cost of capital, we look at multiples and.

We got together if the stock is not working we got to think about what to do but right now it seems like it's that was had a good year it doesn't have.

The commodity exposure to Diamondback, and Viper haps, so probably underperformed a little bit.

It's still generating a lot of free cash to <unk> unit holders of which diamondbacks the largest.

Yes, I mean, the only thing I would say that timing back half a quick story and this is probably one of the most attractive E&P names out there and I think we will have that to even further simplified corporate structure. So that when the mess that looking at you. They don't have to look at so many different.

Opex structure.

Just my almost feeling.

Yes, we've heard that before Paul.

And we recognize it.

Fortunately the mother ship has gotten very large and so theres less leakage.

Our subsidiaries, but for both of them.

Important to us over the last over the last half decade.

Thank you.

Thanks, Paul.

Yes.

Our next question comes from the line of Leo Mariani from Keybanc. Your line is now open.

Hey, guys just wanted to.

Based on third quarter production, it looks like you've kind of outperformed here and just wanted to get.

A little bit of color behind that in terms of being a little bit ahead of the guidance. So this is pretty much just better well performance you did mentioned kind of a pretty clean operational quarter with no weather issues.

Yes.

Good quarter.

I think where we're very focused on hitting our numbers and the benefit of slowing down and not trying to grow as fast as possible is that the.

The operations organization has gotten better you can see it on the well cost side. It's also happening on the production side. So.

Good quarter all around.

I think we feel really confident in the forward outlook and continuing to.

To hit our numbers here.

Okay.

And then just in terms of 'twenty.

<unk> Capex I understand it's a loose guide that you folks targeted here if I take that.

Fourth quarter, Capex, and Capex range and annualize it kind of give me $1 74 billion to $1 nine so.

Pretty wide there at the end of the day just wanted to get a sense.

What do you guys think perhaps.

The outcome can be on the inflation side there.

It's still a moving target here and we went on a 100% now how this plays out but any early indications.

What the inflation can be and is that kind of what would target. The top end at the one nine just trying to get a sense of what he was baked in there yes.

Yes.

I think I'd say that 2022 is not going to be one on November 2nd of 2021, So not one of the few companies talking about 2022, and we'll see what happens over the next couple of weeks, but.

Probably half.

About 10% inflation built into there with a little bit more infrastructure and midstream spend that we didn't need to go through this year.

But generally I think we can narrow that guidance as we get into 2022 and have more evidence I think the comment earlier, if the rig count goes up a 100 rigs from here, it's a different story than if the rig count it keeps creeping up five to 10 rigs a month.

Okay. Thanks, guys.

Thank you thanks Lou.

Our next question comes from the line of Charles Meade from Johnson Rice. Your line is now open.

Good morning, Travis and case.

Hey, Charles.

Charles I want to thank you for for your prepared comments, you really address a lot of the natural questions.

On why you've adopted the stance you have for 'twenty two but.

Just one question for me and it's around the buyback.

When we look at the.

You guys announced that are on the 15th and.

If you look at we look at the average price you bought back in the <unk>.

And the chart of your share price. It looks like you guys got after it for a few days and then.

And then wrapped it up probably in about a week.

And I am curious is is the right inference to make is that that that low eighty's is.

Is.

Where you guys, where the where the scale to buy back just as far as the preferred way to return.

Return.

Alright, I guess increased returns to shareholders or alternatively isn't that.

In that case, you mentioned, a blackout earlier and obviously that makes sense that is that is that a function of.

Your legal team, putting you in a black out a few days for the quarter.

Yes, I mean, it's just purely we get blacked out right, we get blocked up 10 days before the quarter ends.

Blacked out until a couple of days after earnings So we'll reassess where we are in a couple of days.

And be back after it.

That's helpful. Thanks, guys.

Thanks Charles.

Yes.

Our next question comes from the line of Harry Mateer from Barclays. Your line is now open.

Hi, good morning, guys.

So I wanted to dig in maybe a little bit more on the on the debt piece of it.

Guys talked around it but.

Yes, as you noted nothing callable at this point given what you've taken out so far this year next maturity in 2020 for I guess first question is.

How do you how do you navigate that.

Yes.

Are you thinking about tenders make wholes that gets expensive, but then at the same time sitting with.

A bunch of cash in the balance sheet waiting for the maturity at the end of 'twenty four might not be viewed as attractive either so how are you thinking about approaching that in the next couple of years.

Yes, I mean, I think we're just going to keep following the prices of the bonds and try to get.

Below the May call, if we can if not to.

The make wholes not too restrictive on something like R. 20 fours as you get into late 'twenty, two but certainly not looking to take out anything past 2029.

Got it Okay, and then on the on the cash balance what.

You mentioned wanting to run with a more of a buffer than you had in the past what what is that number for you.

I like 500, as a minimum we kind of said that over the last couple over the last couple of quarters and.

I think that's a good starting the starting point for us.

Okay, great. Thanks very much.

Thank you thank you Sir.

Our next question comes from the line of Paul Sankey from Thank you Research. Your line is now open.

Guy says a report in the Wall Street Journal this morning that the.

It's going to massively increase methane emission limits can you just talk a little bit about what that means for you and for the industry.

I had a question from a.

A major investor who asked me.

If I heard from Diamondback that multi year flat with volumes and now embraced by you and not just for 2022 is that what I'm hearing.

Yes, the methane rules. So I think we still have to see how the final document gets written down.

Diamondback continues as I've stated in my prepared remarks to focus on.

Methane intensity, we're going to reduce that but.

70% from 2019 levels by 2024, so it depends on where the threshold is but I've been very very pleased with the progress we've made already.

On.

Reducing methane intensity.

In fact, we've got.

20, plus million dollars allocated next year to continue those efforts.

To reduce methane intensity.

We do things right, hopefully will be below the threshold by which that methane intensity.

The intensity of flaws.

And then Paul a multiyear plans, we've always we've always issued multiyear plans at Diamondback, we weren't we didn't buy into a multi year growth plan in 2016.

We're not going to commit to multiple years at flat today now certainly 2022, and 2021 will both be relatively flat production. We think its work and capital discipline has worked for this industry.

I think this industry has tried a market share war with OPEC before and it didn't work out so why don't we let OPEC bring back their spare capacity in our space flat and we'll see what the future holds in 2023 and beyond but right now we're committed to 2022 flat capital discipline is real over at Diamondback.

Back in.

As Travis mentioned, we're going to become a net return of capital rather than consumer of capital and look Opex is going to do what opex is going to do.

I've said, we've transitioned into diamondback transitioned very rapidly from consuming capital returning capital and are focused on the increase so the growth that we're seeing in per share metrics.

Outlines kind of a macro elements by which the world will be calling on more on more growth.

I think every quarter that we go through Diamondback.

Board is demonstrating our commitment to maximizing shareholder returns.

We're doing that right now generating all this free cash flow. This this wave of free cash flow is coming to us and our commitment to return at least 50% of that back to the shareholders.

Understood. Thanks.

Thanks, Paul.

I'm showing no further questions at this time I would now like to turn the conference back to CEO Travis Stice you May proceed.

Thank you again to everyone for participating in today's call. If you've got any questions. Please contact us using the information provided.

This concludes today's conference call you may now disconnect.