Q4 2021 Diamondback Energy Inc Earnings Call
Yeah.
Good day, and thank you for standing by welcome to the Diamondback energy fourth quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require assistance during the conference. Please press Star Zero I would now like to hand, the conference over to your Speaker today, Adam Lawlis, Vice President Investor Relations.
Thank you Amy good morning, and welcome to Diamondback Energy's fourth quarter 2021 conference call during.
During our call today, we will reference an updated investor presentation, which can be found on Diamondbacks website.
Presenting diamondback today are Travis Stice, as chairman and C case, van <unk>, President and CFO and Danny Wilson.
During this conference call. The participants may make certain forward looking statements relating to the company's financial condition.
Lots of operations plans objectives future performance and businesses.
Caution you that actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors.
Information concerning these factors can be found in the company's filings with the SEC.
In addition, 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.
I will turn the call over to Charles.
Thank you Adam and welcome to Diamondback 's fourth quarter earnings call.
2021 was a great year for Diamondback indoor industry with higher product prices, allowing the vast majority of our industry to warm repair and improved balance sheets quickly too.
Accelerate returns to shareholders and three like <unk>.
Significant progress on environmental objectives.
At Diamondback, we reduced our absolute debt by $1 3 billion.
Increased our base dividend every quarter and initiated a return of capital framework and announced ambitious environmental goals.
To help us earn our environmental license to operate.
In the fourth quarter alone buoyed by commodity price strength.
Ambac generated $772 million of free cash flow production and capital both Paul.
<unk> exceeding expectations.
We returned 67% of this free cash flow to stockholders, which was above our commitment to return.
Leased 50% of our free cash flow to shareholders quarterly.
This return was made up of 106 million allocated to our growing base dividend now.
Now $2 40, a share on an annualized basis, which represents a current yield of approximately 2%.
And $409 million in share repurchases.
As we bought back nearly three 9 million shares at an average price of just under $106 per share.
We were at the beginning of an incredible period of value creation for the industry.
And I'm confident that the capital discipline demonstrated by us and our peers in 2021, and we'll continue putting returns and therefore shareholders first.
We believe this is the best near term path to equity value creation.
As our shift from a consumer of capital to our net distributor of capital cements itself as a long term business model.
Two months into 2022.
<unk> are rapidly reopening around the world stoking demand.
Which we believe to be close to if not above pre.
Pre pandemic levels.
On the supply side.
We're witnessing some underperformance from OPEC plus to meet this increasing demand calling into question spare capacity.
With global inventory numbers now approaching 2010 to 2014 levels.
We cited both global oil inventories and OPEC spare capacity as impediments to any discussion around U S public company oil growth.
And those issues appear to have subsided for now.
However, the global balance remains tenuous at best.
2 million barrels per day of additional Iranian barrels potentially coming online sometime this year and U S growth expect expectations continuing to climb higher led by private companies and more importantly, or more recently majors.
Both of these supply factors could be bearish signal oil therefore, diamondbacks team and board believe that we have no reason to put growth before returns our shareholders. The owners of our company agree and as a result, we will continue to be disciplined keeping our oil production.
Flat this year.
As such our plan for this year is simple.
Maintaining oil production of approximately 220000 barrels per day by spending between 175.
And $1 9 billion.
At current strip pricing.
This production and capital spend equates to nearly $4 billion of free cash flow, which.
For our returns framework.
A minimum of $2 billion of cash back to our investors.
At the same time, we are committed to permanent returns to our investors, which is why we continue to lean into our base dividend increase it again by 20% this quarter.
Our growing base dividend as our primary means of returning capital.
And we've increased it by quarterly CAGR of over 10% since it was initiated in 2018.
Today.
We have line of sight to get our dividend to $3 a share by the end of this year if market conditions remain favorable which would mean, 25% of our 2022 distributable free cash flow would be allocated through this constant predictable form of shareholder return.
History has taught us that oil is a volatile commodity and that the macro environment will not always be this favorable so.
So we continue to work towards protecting our base dividend down to $35 <unk>.
With the view that this dividend is really just a form of debt.
Plus our maintenance capital budget has to be protected to the extreme downside.
By continuing to focus on our fortress balance sheet and layering on strategic derivatives positions to our hedge book.
We are confident in our ability to perform in any environment.
While the base dividend as the primary tool of returning capital. We will also utilize share repurchases and potentially variable dividends to reach at least 50% of distributed free cash flow on a quarterly basis.
We continue to repurchase shares opportunistically.
Taking advantage of volatility while generating returns on these repurchases well in excess of our cost of capital at mid cycle commodity prices, which today is assumed to be around $60 <unk>.
Through the end of the fourth quarter, we spent $430 million or 22% of the 2 billion program Our board authorized last September .
If the free cash flow returned through our base dividend and repurchase program does not equal at least 50% of free cash flow for that particular quarter.
Then we will make our investors hole.
While distributing the rest of that free cash flow.
A variable dividend.
This strategy gives us the ability to be flexible and opportunistic when distributing capital above and beyond our base dividend.
And most importantly allows at least 50% of free cash flow to be returned.
However, it is important that the board board also retains discretion on what to do with the other 50% of the free cash flow generated.
As was the case in the fourth quarter, we have the ability to distribute above and beyond the 50% threshold.
If we feel comfortable with our balance sheet and associated cash balance and do not have a use for excess cash we will return that cash aggressively to shareholders. Some quarters, we will distribute 50% of free cash flow.
But in others, we will have the ability to return more.
Just like we did in the fourth quarter.
Going forward, we fully expect to differentiate ourselves not only by our returns framework.
But more importantly through our consistent execution in the field.
Last year.
Our clear fluid design lowered our average drilling days in the Midland basin by approximately 35%.
That's an astounding achievement for our drilling department.
On the Frac side, our sawmill Frac operations continue to reduce our time on pad.
As we are now averaging 3200 feet per day with our four wheel sawmill Frac design.
As we've laid out in our investor deck.
These operational efficiencies have helped us mitigate the substantial cost pressures, we've seen related to consumables and labor and as we noted last quarter. These gains will be permanent.
Given us more variable cost control than our peers due to these industry, leading drilling and completion times.
Now when you bake in these cost increases.
And offset them with our efficiency gain this equates to about 10% of additional capital spend year over year, which is baked into our guidance.
We will try to offset this inflation by doing what we do best innovating implementing new technology and drilling more efficient and better wells.
As mentioned, we were able to offset a vast majority of pricing increases we faced last year through this type of innovation.
And we're confident we can maintain our best in class capital efficiency and cost structure. This year.
At the same time, we are fortunate to have multiple pieces of our capital cost structure locked in with contracts and dedications like our water and sand supply.
As the rig count in the Permian clients, we will.
To work to control other components of our cost structure, particularly services labor and consumable products, while continuing to be the leader in cash margin and capital efficiencies.
Finally, I'd like to close by detailing the strides we've made in our environmental social and governance practices.
To begin we met four or five environmental goals in 2021, which had a 20% weighting in managements short term compensation this year.
And included specific targets related to flaring water recycling ghd emission intensity.
Produced liquid stools, and total recordable incidents.
Unfortunately, we did not meet our expectation of flaring less than 1% of gross gas produced.
While we met this goal on legacy Diamondback acreage, which was how the goal was set we missed our target when incorporating our acquired QEP assays, which included a QEP Bakken assets, we divested in October .
We will continue to improve our takeaway on the acquired Permian acreage and partner with our midstream companies to not only structure contracts, then incentivize takeaway and price agnostic environments.
But also apply performance based incentives and penalties related to flaring.
All of our progress in 2021 positions us well to hit our long term goals of reducing our <unk> and methane intensity by 50% and 70% respectively by 2024.
And recycling over 65% of our water and eliminated all routine flaring by 2025.
These environmental goals hit close to home as we hold a unique title of being the only publicly traded E&P headquartered in Midland.
And the heart of the Permian Basin.
As such we feel an enormous social responsibility to better the community in which we live work and play.
We recently committed $2 5 million to a complete redesign of Midlands largest public park as.
As well as $500000 for Midlands meals on wheels program.
Arguably more important however, our employees continue to give their time to sponsor and host camps reading and instructional programs in public work projects.
Im incredibly proud of our team's efforts.
2021 was a great year for the company.
We generated record free cash flow and distributed over 30% of it to shareholders.
<unk>, our balance sheet by substantially reducing our absolute debt load and.
And continue to produce one of the cleanest and most cost effective barrels and the industry looked.
Looking ahead.
We're confident in continued consistent operational execution and the ability to generate peer leading returns.
With these comments now complete.
Operator, please open the line for questions.
Thank you, Sir and as a reminder to ask a question you will need to press star one on your telephone.
So let's draw your question press the pound key please standby, while we compile the Q&A roster.
Your first question is from Iran.
Tyron from J P. Morgan.
Good morning, Travis and team.
I wanted to just get some broader thoughts on your plan Travis.
Allocate free cash flow in 2022, obviously have buybacks variable dividend.
And that well.
Assuming you want to keep some powder dry.
For A&D opportunities, but with the stock trading above.
The valuation of the stock assuming a mid cycle deck.
We think you are probably going to pivot a little bit more to variable dividends, but I wanted to get your thoughts on that and how.
The $4 billion if the strip holds could be allocated this year.
Sure Arun it's good good business with you again listen I will tell you to depending how much on share repurchases, we bought it in may.
If any but what hasnt changed Arun is our commitment.
However portion of our free cash flow that we don't spend on repurchases, we're going to return that free cash flow to our shareholders look when it comes to share repurchasing we view that as just like any other investment decision to drill a well M&A activity. We do so like you mentioned at a mid cycle world for us which for us is around.
$60 $60 a barrel.
And it has to generate it has to generate a positive return.
And when you go back and look at what oil prices average since the fall of 2014 has averaged $53 a barrel.
And if you can guarantee that the price of oil is going to be $90 or above then I'll tell you that our shares are undervalued.
But we're going to be disciplined we're going to be opportunistic.
When it comes to our share repurchase programs, just like any other form of capital allocation and what we don't repurchases shares we're going to return back to our shareholders in the variable dividend every quarter.
On top of that Arun, we certainly want a fortress balance sheet.
I think there is some stuff for us to do with our 2020 for US in 2025 notes this year.
Pay down debt when things are good and I think that that could open the door for higher returns I think I think the key is 50% of free cash flow is going back to the shareholders and if we don't have anything to do with the other 50, it's coming back as well and we prove that in the fourth quarter.
Great and I had one follow up on the Permian in general.
Just thinking about the industry one of the potential headwinds for future growth will be gas takeaway.
Current.
Grapes or just around 14 Bcf a day.
We estimate there's about 17 Bcf a day of takeaway capacity and.
So I wanted to get your thoughts Travis your net production is approaching half of be and how do you think diamondback is positioned to manage this tightness that could occur in late 'twenty three are early 2024.
Yes, I mean, I think Arun. Unlike the past I think we have the size and scale now to contribute to pipelines and make sure. It happens.
We're certainly doing our part not growing I wish other people would grow less than the Permian too, but that's a different topic, but generally we committed to the Whistler pipeline just announced that this with this earnings and that was with RW TG commitment on gas gathering and processing committed to the bangle pipeline, which is NGL takeaway.
I'm really just trying to put our balance sheet to work to make sure you know.
Pipeline capacity is strong coming out of the basin I think we will see some announcements here pretty soon.
A couple of things last week on new pipes, but.
I think generally the industry is.
Aligned that we can't go back to the way we were all when it comes to flaring, particularly with gas prices up we should all be incentivized to make sure gas flows out of the Permian. So.
It's going to be tight if growth continues through 2023, but I'm pretty optimistic on 2024 case are you looking to add capacity on those those two pipes one of the two pipes.
Yes, we would.
Well you have to have taken kind rights to be able to do that and so we're putting a lot of pressure on our midstream partners to either relinquish are taking congress to us. So that we can contribute to the pipeline like we did on the Whistler pipe, we're putting our balance sheet to work or incentivizing them to contribute themselves. So it's a little bit of a.
Came a chicken with our GNP, but no I think messages, we both need to figure this out as a group and we would be willing to put our balance sheet to work to make it happen.
Great. Thanks, a lot.
Thank you Ron Thanks Arun.
Your next question is from Neil Mehta at Goldman Goldman Sachs.
Good morning team and congratulations to everyone on the new promotions over at Diamondback.
The first question is is the hedging strategy Travis you talked about a long term $60 WP I view curves, obviously trading well through that does it makes sense to opportunistically layer in hedging and.
Thereby lock in more of more of the capital returns or do you think given the strength of balance sheet.
You can run the business more open.
Yes.
As our balance sheet sheet strengthens I think your comment about running the business a little bit more open makes sense, but having said that though we have to make sure that that.
We protect the extreme extreme downside look the impossible happened in 2020, while we don't ever think thats going to happen again, we want to make sure that we've got insurance to provide the accordingly.
I think I think.
We tried to we tried to do.
Deferred premium puts as our preferred hedging strategy, which kind of sets that protection in place for a while accomplishing.
Given our shareholders all the upside on price as well.
I think we hope for the best but prepare for the worst and preparing for the worst is behind us.
We've got $50 for balance sheet doesn't blow out dividends, well protected still have free cash flow above that.
And you know try to leave as much upside for the best as possible.
Yes that makes sense.
Follow up is Travis.
Your family Silly said I think it was last August that your view was there was a seller's market.
Stock has obviously done very well since then and your equity value has strengthened.
What's your thought on the M&A environment in the Permian do you view Diamondback is a logical consolidator and how do you think about the timeline of that especially with oil above mid cycle prices.
Yes, Neil that's a good question and it's really hard for me to see how kind of the excess of G&A that still exists in the Permian.
How all of that gets consolidated I wish I could articulate clearly.
What's the catalyst is going to be that allows consolidation to occur because it's needed in our industry.
That being said.
There's a lot of companies that.
<unk> had one foot in the.
Whistling through the graveyard is one with one foot in the grave and now a couple of years later holes at 90 Bucks a barrel and they are expecting to sell out and get value or future cash flows at 90 Bucks a barrel and as I mentioned, it's the same strategy on our share buybacks if.
If the mid cycle oil prices $60, a barrel and then it's going to be hard to close the spread between bid and ask.
The much needed.
M&A activity that has to occur here in the Permian, So while I'd like to think diamondback could create unreasonable value for our shareholders like we did with the QEP and guide on acquisition.
Hard with these frothy expectations on oil price that we're seeing today.
Yeah, that's very clear thank you Travis case.
Yes.
Thanks Neil.
Your next question is from Neal Dingmann of Securities.
Good morning, guys. Thanks for the time.
Question, maybe for your case is my first a little different angle on shareholder return.
I'd say there is no I'm glad to see you all had really not gotten caught in this group. Thank you suggest that you have to pay out all your free cash flow.
I'm getting from investors is how do you all think keep that show investors that you will continue to be the best allocators of capital that you have.
Okay. As you mentioned really anything is out there on a lot of possibilities with one of those allocation choices at some point include higher production.
Yeah, Neil good good question I think.
I think the.
The Street has lost sight of value creation for for E&ps I get that there's a lot of cash flowing back to shareholders, but at the end of the day. If you can generate more free cash flow with the same expectations out of the business, you're creating more value over a long period of time.
Execution is going to matter metrics matter controlling cost matters, PDP F&D matters and for US all of those inputs create more free cash flow and that means more free cash flow is going to shareholders, whether it's 50% of free cash flow in one quarter or 67% in another.
We kind of think about this.
It was a partnership it's just that the partnership has a commitment to return 50% of free cash flow. If we have something to do with the other 50% that creates unreasonable value.
Keep it but we're not going to sit on cash and we're going to distribute a ton of cash to partners. Just the only commitment is at least 50% of that cash is coming back.
Good to hear and then kind of as my second question, probably for you as I liked the slides 10, and 11 on margins and costs I'm. Just wondering specifically can you give maybe a little more color on the primary driver of that leading cash margin is at that.
That sort of newest 10 day drilling well design, that's driving that or maybe just talk about what you're primarily point too.
Certainly we've got we've got.
The benefit of the improvements that we made in 2021.
As I mentioned, 35% improvement in drill times, and we're going to get a full year impact of that this year, which is helping us helping us offset the.
Offset the inflationary effects.
Data points Neal.
That.
We just saw it has found out about yesterday's reviewed and updated.
Our weekly meeting.
We drilled a well in the Delaware basin, it's a 50000 foot lateral we drilled to TD in nine days, which is which was a record for us and.
So that area just a just an outstanding occurrence and even on the Midland Basin side, where we've been drilling the most we drilled another three mile lateral with 15000 foot lateral and seven five days, but what's amazing about that and Thats to T. J, what's amazing about that is we only spent $3 five days in the lateral now we used rotary suitable and sometimes rotors durable.
Technology is a little harder to replicate but that's what's possible. So we've got an organization that continues to lean into this variable.
And what I can't emphasize enough is that that's ground thats taken and never given back when you become more efficient is something.
That's always on your side of the table and it's for the good guys. So I know what kind of a little bit off topic, there, but it's really important.
It's important to hear that our organization is is locked and loaded in <unk> and this machine is running very very efficiently.
You want more you could want to machine humming more more efficiently than we are right now in an inflationary environment.
No I was wanted to hear those thoughts update thanks, Rob and thanks guys.
Thanks Neil.
Your next question is from Derrick Whitfield with Stifel.
Hey, good morning, all and congrats on your quarter and update.
Thank you Derrick Thanks Derrick.
With my first question I wanted to focus on the flaring you experienced in Q4 with the full understanding of its importance to you based on.
Your ESG mandate and incentive compensation could you speak to the higher than expected flaring your experience and what steps you guys can take to mitigate that in the future even with your partners.
Yes, if you look on slide 18.
Derrick we laid it out.
We laid it out with quite a bit of detail just as an aside you've heard me say this before.
Our board expects management to not only lead the industry in an environmental measures, but also lead the industry and disclosures and I think I'd say, it's a pretty good slide, but let me just to something specifically.
If you look in the top right of that slide.
Talks about flaring by source and if you take third party plant maintenance and third party unplanned maintenance, that's 80% of our flaring volumes.
In.
In 2021.
And particularly on the unplanned side, which is which is something that we've just got to do a better job with our business partners on.
Now I said in my prepared remarks, we've actually changed contracts, where we can that both incentivize and penalizes flaring performance. So we're looking to expand that concept across all of our gathers but we're also intentionally asking.
Our midstream gathers to help us as an industry on this effort.
And that's part of the reason that we're calling attention to this.
Their performance on.
On slide 18 now.
Particularly to the Miss.
Ride to lay that out we set the goal for our flaring.
Before we before we bought QEP and guide on and we didn't adjust.
Adjust our goal just because we acquired assets that had much worse flaring statistics than than we did we tried to absorb it we did absorb it but it cost us on our annual performance.
But thats, we felt like that was the right way to the right way to treat it once the global CIT we are.
Yes, one thing to add we also deferred half a million barrels of oil last year I mean, we're trying to do our part here Derrick.
Deferred 850000 Boe.
Half a million barrels of oil because of flaring, we're just kind of asking that both sides midstream and upstream get together to solve this industry issue.
And that shouldn't be lost Derrick that's a very key point thinking about that we've deferred over a half a million barrels last year.
Just to avoid flaring.
And that's a behavior that's.
That represents a substantial pivot for diamondback and a substantial if our peers follow suit for our industry.
What I believe youre seeing.
Derrick is youre seeing environmental stewardship.
More of more companies are viewing it as a operating philosophy.
As opposed to an experience, which was historically or hit the volumes and I think that's an important that's an important narrative for our industry to get out there and push as an operating philosophy, environmental stewardship, particularly around eliminating flaring and eliminate and methane emissions.
Is simply the way to operate a business on a full cycle basis, when I hope that makes sense.
It does and your commitment to it is quite clear.
As my follow up I wanted to dig in a bit more on the macro side and ask if you could share your expectations for growth in the Permian in 2022, and ask if the growth rates outlined by the majors in the Permian.
If that's a concern for you.
Well look.
Wanted to ask a global sense, the supply demand is pretty tenuous and even with the announced growth from the majors. So I'm not sure that the total barrels that they are producing are growing into the global equation. So that's kind of a plus now right here as I look out my window I know that the Permian is running about 300 rigs right now.
Sure.
We're probably on our way to 350 to 400 rigs by the end of this year and and a large portion of that.
Those rigs have been operated by Permian, but I think some of the growth you're seeing on a go forward basis.
Will be from the majors, we've already talked about gas gas pipeline takeaway.
Issues in a little bit on Ngls, which I think diamondback has been on our front foot getting in getting a getting some strategic alliances there and oil takeaway is in great shape, but it is going to create inflationary pressures, but that's what you're charged to us and all of our industries charge is how to manage capex and an installation.
Dairy environment.
Put your shareholder return program at risk, that's kind of how I think about the the total Permian playbook.
Great and you guys have done a great job with that so thanks again for your time.
Right here.
Your next question is from Doug Leggate with Bank of America.
Thank you good morning, everybody.
Johnny's post the deals I guess, the clean up of last year it looks like you've.
<unk> gone through a little bit of an inventory high grading on your latest disclosure I just wonder if you could kind of walk us through what that looks like it looks to us that youre sitting on about.
Better than 15 year inventory, if you define just the quarter thoughts.
Slightly longer lots of inventory you laid out today. So can you just walk us through what that process was income thinking about it.
Yes, I mean generally does close deals we do a lot of trades to block up extend inventory and extend extend laterals, sometimes at the expense of.
A lower working interest inventory, but that may.
Not the operator have shorter laterals. So that's that's the blocking and tackling piece that that we're very focused on.
Second on inventory, we've gone a little wider in both the Midland and the Delaware basins I think our updated inventory numbers reflect that you know kind of moving towards 6% to seven wells per zone per section in the Midland basin versus eight being the tightest 660 foot spacing and the <unk>.
All aware move into kind of four to five wells per section in the in the primary zones versus six and I think what we found is they're not sacrificing a ton of.
<unk> from the from that unit by going a little wider but we are generating much better returns and much better capital efficiencies. So I think the offset from a present value perspective.
The loss of a couple of locations.
So is it the right way to think about this on you guys maintain your next growth outlook, we're looking at better than 15 years of drilling.
Yeah.
Little bit too precise, but I'm trying to just think about the longevity of the portfolio strategy Youll see inventory you have today.
Yeah, that's fair I will add that you know it's.
A small number but we are completing five less wells at the midpoint in 2022, and we were in 2021 and the <unk>.
Base decline shallows out when we get active on selling Robertson ranch, where we have a significant percentage of minerals, helping us out that capital efficiency is going to look at a little better here over the coming years.
Okay. Thank you for that my follow up I hate to do it but it's the variable dividend buyback balance sheet question.
When you pay out our variable the cash has gone.
At the top of the cycle, let's say on M&A opportunities fall by the wayside.
And then you've got a correction in oil prices and the cash has been paid out as a variable.
I'm just kind of curious your commentary you mentioned variable that's differentiated you bet you.
Haven't gone down that path.
What should we take from those comments as to how Youre prioritizing.
Cash on the balance sheet, continuing to buy back stock or do you see intrinsic value or indeed.
Giving a variable dividend that you don't really get a chance to get back.
Yes, so it's really it's really pretty straightforward, Doug, it's leading to the base dividend, which we've shown every quarter since we initiated the dividend back in 2018.
And we are going to get that up to three bucks a share.
Conditions don't change.
The second is share repurchases, but again, there's a calculus involved an investment decision for share repurchases. So to the extent, we can consume 50% of our free cash flow at a good return on share repurchases. Then that's what we'll do but if we see a dislocation between commodity price share.
Repurchases.
We'll pivot quickly and within the quarter to pay out the remaining up to $50 or at least 50% of the free cash flow in the form of a variable dividend. So.
In some quarters, it's at least going to be 50% in some quarters it could be as much as like we did this last quarter, 67% or more.
Just trying to maintain at the end of the day, we're trying to maintain the greatest flexibility to generate the best shareholder return.
Tavis I apologize what are you doing with the other 50% you did 67 in the fourth quarter.
Well right now you know what we'd like to continue to work on having a fortress balance sheet and having cash on that fortress balance sheet for the inevitable down cycles. So I think we're focused on kind of a mid mid decade maturities. If we can.
And some of them, but also pay down most of them that clears the way for a lot more cash to be put on the balance sheet.
And and then step up the overall shareholder return from there, but not others.
I don't think we're there yet.
Alright, thanks, guys.
Thanks.
Your next question is from David <unk> with Cowen.
Good morning, guys. Thanks for your time this morning.
Thanks, Dave.
Just wanted to revisit that last point on the balance sheet you talked about the mid decade maturities is there can you remind us is there an absolute sort of debt target that you have if you're factoring in a $60 mid cycle price.
Yeah, I mean, I kind of think about absolute getting down to $3 5 billion ish at Diamondback and a billion ish at the subs. So four and a half total I think that keeps you very well protected even if a mid cycle price Turner, so, but more importantly, you know.
Average maturity.
<unk> extended is going to be important because that clears the way for more shareholder returns between now and 2029 when our next big note would be due.
I appreciate that and then just my second question.
The slide where you were referencing cost inflation looked like it rolled up to about 15% overall and the reference point was the third quarter of 2000, where I think we were paying people stick away on swimming pools, so 50% seems relatively benign since then.
I'm curious what your outlook is on what you can do and what you are factoring in in terms of cost inflation.
And to the 'twenty three 'twenty four timeline.
And would you do you think that there's still room to offset that with efficiencies and are you changing how you are contracting for services right now.
Well you always you always want your organization to continue to look for the efficiencies on the variable side and it's hard to forecast what those are but it's not hard to try to incentivize the culture that looks for those efficiency gains and what theyre going to look like in 2023, and 2024 can't tell you, but I know we're going to.
We look forward and I know if past performance is a good indication will continue to lead the pack on these type of efficiencies.
Contracting long term long term.
Long term for more of the consumables on the fixed side of the equation.
Typically it's been very difficult for our industry because.
Tom that you the time that the operator wants to lock in at the time that the.
The service provider doesn't we're always at opposite ends of the spectrum, So like right now.
This consumable guys on the service side would love to lock in these all time high prices operators are reluctant to do so so.
Diamondback has the size and scale to have very meaningful conversation with our business partners on the service side and we have those quarterly or every six months and.
That's the way that we've chosen to manage that relationship and most of our service providers. We've had now for over five years and we've got a really good business relationship with them look there margins have to expand we understand that but.
But our commitment to be best in class.
And the highest margin remains unchanged as well too so it's not a it's not a straightforward calculus, David it's I can lay out for you what I can tell you that the organization, where we continue to lean into it.
And.
I am very confident certainly for 2022.
We'll be able to do so well and what one comment on slide 10, David.
<unk> tells you exactly what what what we're saying right rig the rig line in the stimulation line rig rates are up frac rates are up but the efficiencies that have been gained as seen in the top half of the page means that those pieces of the well costs have not risen like fixed costs like fuel or cement or.
Casing.
Absolutely and thanks for pointing that out and congrats on all the promotions. Thanks for the answers.
Thanks, David Thanks, Dave.
Your next question is from Jeffrey <unk> Pickering Holt.
Good morning, and thanks for taking my question just one from me on ESG, obviously, a lot of progress made on the initiatives that you set out in September with your sustainability Airport just looking at that section of the slide deck that you highlighted I was wondering if you could just talk a bit about what you're focused on this year I know you hit on flaring already and then thinking further out it would be interest.
And to hear about sort of projects you could see yourself investing and they continue to make progress in offsetting emissions.
Yeah, you know we've been pretty clear that we.
We're committing $20 million or so per year for the next several years to eliminate flaring and to significantly reduce methane emissions and tactically thats translated on the methane side, the overhauling and Reconfiguring a lot of our old mostly acquired tank batteries that.
Yes, Matt.
Got a slide in there that excellent points that out yet.
And Matt if you can see what that is on slides 19 and 20.
But thats been the first focus area is the gas <unk> and Danny we're probably halfway through getting those batteries changed a third to a halfway through yes.
We kind of laid out the framework to get through them. All in three to four years couple of years ago. So we're about halfway through with the battery upgrades in and still working on.
On leak detection and repair initiatives.
And then you know flaring as our main drivers of methane emissions and then Jeff on methane emissions.
Yeah.
So it's just an amazing amount of innovative.
Technology, that's coming out from the service side and we're not we haven't picked the winner yet I don't know that there's been a clear winner, but our approach has been to field test all of them, we've probably got five or six leading edge.
Technology.
Methane sensors in the field in order to monitor these things monitor methane emissions real time. So we're investing alongside these technology companies on methane emissions and then as Dan had mentioned flaring is.
It's something we're really leaning hard into and I can't emphasize enough that we can do everything we can on our side, but if we don't get our midstream partners on the G&P side to participate.
Going to be very difficult for our industry to meet.
Our goal of reducing or eliminating routine flaring as defined by the world Bank. So.
There is a reason were being pointed in our presentation today about asking to work collaboratively with our G&P partners on the flaring side.
Great. Thank you.
Thanks, Jeff.
Your next question is from Nitin Kumar with Wells Fargo.
Hi, Good morning, guys. Thanks for taking my questions.
A lot of ground has been covered on the cash return side, but I put it.
Check on the base dividend you mentioned earlier that it could be about 25% of free cash flow in.
Recurring portion of free cash flow in 2022, how are you.
Just thinking about it beyond the $3 per share is that a good limit.
Or could we see more increases than what would drive that.
Well you know it really depends what the market conditions look like at that point I mean, we can't continue to grow 10% per quarter forever right at $3 a share that's over $500 million a year of financial distress.
How I look at it so I'm not saying, that's a limit, but I'm, saying that that's certainly what our near term focus is to get to the $3 or $3 a share.
And I guess, what I was asking was is there.
Percentage of cash flow that you are targeting or something like that at mid cycle price and how do you come up with that level.
Yes, we look at it more on the breakeven side.
So pre dividend breakeven right now $30 $30 a barrel.
I think that number stays fairly consistent here over the coming years as capital to capital efficiency stays strong base declines.
Our reduced.
Above that.
Large shareholders University, who said they want a base dividend that's protected below $40 oil right now based on who is protected at 35, you know that'll go up over time, but you also might have less shares overtime unless that so that frees up some more cash to go to the dividend, but overall no.
Cash returns have been widely discussed over the last couple of quarters and the only thing we are universally heard from large long island leaves us more base dividend sooner and that's why Travis is making a commitment to get to three by year end with forward support should conditions remain.
Got it.
And Travis.
Quick question here, but you I think you mentioned 400 rigs in the Permian.
Or so.
We've talked here, a little bit about Permian takeaway on the gas and NGL side, but what are the other challenges that the basins would face if we do see that kind of growth and.
How are you positioned to be ahead of ahead of that.
Well I think if you're asking what are the what are some of those constraints are going to be if you get to 400, what diamondback is doing to prepare for that well again.
Part of it goes back to the longstanding relationship we have with our service partners.
Secondarily.
Anything that requires boots or tires in the Permian basin is going to continue to be tight and that means we're going to have to attract as an industry, we're going to have to attract.
More workers into the Permian basin like we did in the in.
In 2018, 2019, and that's going to Youre going to see that translate to an increase in labor costs.
But again those cost increases are going to paint.
Pretty much all of those with the same brush.
And we will focus like I tried to highlight earlier, we'll focus on the variable side of things, we can actually do something about that but you know 400, what do we pick that Danny out here in the Permian, particularly like for $90 and we exited.
Pre pandemic around 400 rigs. So we're even though I think those rigs are a little bit more efficient today than they were then we're approaching it.
We'll approach by the end of this year sort of where we were at the end of 2019.
Okay. Thanks for the answers guys.
Thanks Ben.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Question is from Leo Mariani of Keybanc.
Hey, guys just wanted to.
Ask a question on the potential for Fang to return to a little bit of production growth at some point you probably mentioned that here in 2022.
Let me thread of Iranian barrels.
Certainly one of the key issues that was keeping you guys away from growing and also based on your comments, maybe we're not quite back to pre pandemic demand, but but very close so as we look into <unk> into next year. If we are above pre pandemic demand levels and the Iranian situation has resolved itself.
One way or the other could that be the time, when maybe we see some modest growth.
Bang and how do you think about what the right level of growth is eventually.
Yeah, I don't know.
What's the right level of growth will be or when it's going to occur I can tell you definitively right now what's being valued by our investors is a shareholder return program and no one wants to see that shareholder return program.
Put at risk with volume growth not not for Diamondback, specifically for our industry in total so you know look this.
The world will be calling for oil growth at some point in the future and our industry is going to have to figure out the right way to respond well not put into shareholder return program.
At risk we've spent the last decade consuming capital and now we know we've got a little bit of Sunshine and else, where we can where we can return that capital to our investors that have been waiting.
And sometimes inpatient length of this return so it's a good question to ask Leo.
But I can't give you I can't give you the time at which diamondback or the industry is going to respond to growth, but I'll tell you. When we do it's going to be in conjunction with creating an unreasonable value for our shareholders.
If we do if we do.
Okay understood and then just.
Wanted to ask quickly on the 2022 guidance here.
Starting with the Capex, it's probably good range $1 75 to $1 9 billion you did describe having percentage of some of the services locked in for the year here.
So just definitely wanted to get your thoughts on kind of what the $150 million variability.
It could be here in 'twenty two it sounds like youre not going to change the program and it really won't be production growth and then just additionally, looking at the production side of the guidance.
Math is right. It looks like you guys, either we're kind of at the very high end of the oil every quarter in 2021 are actually beat it. So as you kind of looking at that guide in 'twenty, two should we be thinking that.
We have a slight bit of conservatism to allow for things that could go wrong in the field just wanted to get a little bit more color on the production and Capex guidance.
Yes.
I think we always bake a little conservatism for the good guys into our into our plan.
You know.
And completing 280 wells at the <unk> number for a year is not an easy task you know it might look easy for me and my Excel model, but actually doing it in the field.
Darn impressive so we certainly want to give give some room for you.
Guys to do what they do in the field, but also.
<unk> costs are going up I mean, Travis mentioned, a very high rig count number in the Permian if that number comes to fruition.
There's going to be pressure on on all the all the variable costs and the fixed cost in this and this and the spacing. So unfortunately, we have to 12 rigs we need and we have the three final frac crews. We need this is not a year, where we need to go find eight or eight rigs and three crews.
We might have to pay them a little more to keep working for us, but that's the risk to the high end and the back half of the year.
Okay. That's definitely helpful. Thanks, Scott.
Thank you.
Your next question is from Charles Meade with Johnson Rice.
Good morning, Travis and case and to the rest of the team there.
Charles.
Does it goes it goes back to.
Some of your earlier comments about the.
Really what seems like a linchpin for your strategy or is this idea of a mid cycle oil price.
Why why is $60 the right price.
Yes, we asked that question every day, but one of the component of the things that's.
When I asked that question one of the responses I got was what do you think the average price was for the last seven years, and it's $53 a barrel so right.
It is.
It's really easy to.
You for about $90 plus oil.
And in fact, I've seen I think I've seen some of that new for you in our industry right now certainly in the commentary that's out there.
But we know geopolitically theirs.
That are in today's oil price that you got.
Well it'll be resolved without armed conflict.
We know that Theres.
Iranian barrels that are probably coming on I said by the end of the year, but it might be but at the end of this month and we've got this fervor in the Permian basin, that's continuing to lift U S production forecast.
And while OPEC Hasnt perf.
<unk> performed up to their 400000 barrels per day per month production increases.
I think they are getting closer to it and I don't know what their surpluses, but its not zero yet so all of those things to me.
If you add them together.
Actually seem to be a little bit more bearish for crude in it than it does then it has to be to be optimistic and the other thing is.
If we're wrong and oil price is higher.
We're going to generate a lot of free cash flow and our investors are going to get a lot of that return to <unk>.
And if I'm right well then we've protected our investments and we've made the right decisions. So 60, I don't know that it's a hard and fast number, but it's kind of the aperture, which we start all of our decisions on investments, whether it's M&A or or drilling wells or or share buybacks.
That's helpful. That's helpful chart. It seems it seems as good as any other number but I just wanted to hear more of your thinking quick.
Quick follow up I noticed that you guys said you drilled that are I think we've drilled and completed our barnett well in the quarter, which was that on the I'm guessing that was on the limelight acreage. It is there is there any kind of rate of change there.
It was worth highlighting.
Yes, we would.
A couple of wells there I think we have a couple of planned this year, it's still early in the testing phase but.
At $90 oil, it's certainly competes even at $60 oil, including the low entry cost it competes on a full cycle basis, but not.
Not not yet does it compete with our core Midland and Delaware Basin position and I think one added to that is that right now we're drilling single wells and there's a huge cost inefficiency when you're drilling single wells trying to delineate the play.
Once you move into full cycle development and you can drill four wells frac operations and combine that with efficient drilling operations you can drive a lot of cost out of the equation, which raises the economics of a play like Lamar and actually makes it start to compete for capital with the other other items in our portfolio.
Got it thanks for the detail guys.
Thank you Charles.
I will now turn it back over to Travis Stice CEO for closing remarks.
Thank you again to everyone listening today, if you've got any questions just reach out to us using the contact information provided.
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