Q1 2022 Diamondback Energy Inc Earnings Call
Good day and thank you for standing by welcome to the Diamondback Energy first quarter earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
To ask a question during the session you may need to press star and the number one on your telephone keypad.
Please be advised that today's conference call is being recorded.
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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 Amanda good morning, and welcome to Diamondback Energy's first quarter 2022 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, Chairman and CEO , Keith <unk>, President and CFO and Danny Wilson T O N.
During this conference call. The participants may make certain forward looking statements relating to the company's financial condition results of operations plans objectives future performance and businesses. We caution you that actual results could differ materially from those that are 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 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.
And now I'll turn the call over to try to assess.
Thank you Adam and welcome to Diamondback, 's first quarter earnings call.
In February .
Russia launched an unprovoked invasion of the sovereign nation of Ukraine, we.
We have diamondback strongly condemned Russia's actions integration.
Our thoughts and prayers are with the millions of men women and children affected by this unjust.
And while we desire a quick and peaceful resolution to this conflict.
We recognize that this war could go on for quite some time.
We will continue to support the innocent victims of Ukraine, just as we did earlier this year.
And we announced a $10 million commitment to various nonprofit entities, providing vital humanitarian support.
Russia's actions have points to the global energy markets and the terminal.
As the world and especially our allies in the European Union grapple with the potential loss of a major source of their energy supply.
And rethink their respective energy policies.
This was magnified the interconnectivity of the global energy equation.
Impact post Cold War globalization has had on all supply chains.
It is also reminded the world of the importance of the traditional oil and gas to the global economy.
We are witnessing the impact high energy costs can have on the consumer and the economy in real time.
As the warm crane and the resulting governmental sanctions continue.
Rush's oil production is expected to be impacted by shut ins natural declines storage limitations and lower exports crew.
Creating a global shortage of ore.
Over the next few years.
We will need to make up for this lost production and we believe that the U S oil and gas industry is best suited to provide the low cost <unk>.
Environmentally friendly barrels needed to ensure global energy supply.
However, today, we are operating in a constrained environment with inflationary pressures continuing to increase across all facets of our business.
Also labor and materials shortages are now present across the supply chain we.
We have diamondback, we're fortunate to have secured the necessary equipment personnel and materials, our 2022 capital program.
But an increase in activity now would result in capital efficiency degradation. It will not meaningfully contribute to fixing the global supply and demand imbalance.
On the oil market today.
Therefore, diamondback remains committed to maintaining our current oil production levels of approximately 220000 net barrels of oil per day.
While we believe that efficiently growing our production base is achievable over the long term.
We do not feel that today is the appropriate time to begin spending dollars that would not equate traditional barrels into multiple quarters from now.
We continue to focus on capital efficiency.
And strive to operate with the highest level of environmental and social responsibility.
At Diamondback, we plan to invest approximately $60 million to reduce our direct emissions and lower our carbon intensity.
<unk> routine flaring by 2025.
This figure does not include the one hundreds of millions of dollars. We spent to electrify our production fields and to build pipelines to ensure we produce and transport fluid with the lowest emissions intensity possible.
These investments are not only good for the environment.
But also smart economic decisions that we expect to lower our operating costs.
By investing in infrastructure and our high activity levels.
We now have the ability to run a dedicated electric fleet for the foreseeable future.
Partnered with Halliburton to secure our first electric Frac fleet, which will run in our Martin County acreage of power generated from a central location and delivered via existing lines, reducing our scope one emissions profile.
This partnership will also lower our cost per foot, primarily due to fuel savings decrease our footprint on location and increase our operational efficiency as a result of lower maintenance and nonproductive time.
We expect this fleet to be operational in the fourth quarter.
In 2021, we also announced initiatives to reduce our scope one greenhouse gas emissions for GHT intensity by at least 50%.
And reduce methane intensity by at least 70% from 2019 levels by 2024.
In 2021 alone we reduced our scope, one ghd and methane intensity is about 15% and 21% respectively from the 2020 levels.
Lastly, we launched our net zero now strategy under which as of January one 2021 every hydrocarbon produced by Diamondback.
Is anticipated to have zero net scope, one GHT emissions as.
As we offset these ambitions with certified carbon credits.
Moving to first quarter performance or production of 223000 barrels of oil exceeded the high end of our guidance range, creating one 4 billion in operating cash flow.
We were able to keep our capital costs in check.
Spending $437 million in Capex during the quarter.
Nearly hitting the low end of our guidance range of $4 35 to $4 75, and pushing our free cash flow for the quarter to $974 million.
We returned $555 million of cash back to our stockholders or $3 <unk> per share representing 57% of Q1, 2022 free cash flow and 50% of adjusted free cash flow, which we calculated by adding back the $135 million in cash.
Used to terminate.
Certain future hedge positions this.
This return was made up of stock repurchases the base dividend in our first variable dividend.
As we've said in the past our share repurchase program is opportunistic and we start with our plan of evaluating our share repurchases just as we would with any acquisition or buyback must generate a return well in excess of our weighted average cost of capital assuming a reasonable mid cycle oil plays.
In the first quarter, our price deck was approximately $60 a barrel.
Such we were able to take advantage of some of the volatility in the market and repurchased 57000 shares at an average price of $117 a share.
Through the end of the first quarter, we spent about $440 million or 22%.
The $2 billion program, our board authorized last September .
Additionally, we once again increased our growing base dividend, which we view as our primary constant and predictable former shareholder returns.
It's now at $2 80, a share on an annualized basis up 17% quarter over quarter and approaching our target of $3 a share.
We have now increased our base dividend by quarterly CAGR of over 11% since it was initiated in 2018.
Today. This represents a current yield of just over 2%.
Finally, with the free cash flow return through our base dividend and repurchase program does not equal to at least 50% of our free cash flow for that particular quarter.
And we've committed to make our investors hold 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.
And most importantly allows at least 50% of free cash flow to be returned.
Per our strategy, we allocated $422 million through our first variable dividend this quarter or $2 35 per share putting our total dividend payout in the first quarter at $3 five per share or nearly a 10% total dividend.
We met our commitment to return at least 50% of free cash flow to our stockholders and use the remaining cash to strengthen our financial and operating position.
In the quarter, we fully redeemed $500 million of notes due in 2024 and $1 billion of notes due in 2025.
We also took advantage of the flat long end of the curve by pricing $750 million in new 30 year senior notes at four 5%.
This liability management exercise reduced our absolute debt by 750 million decrease annual interest expense by $20 million pushed out the average weighted maturity of our debt profile by five years and kept our average weighted cost of debt flat.
With only one tranche of near term maturities outstanding.
We're pleased with the progress we've made to improve our investment grade balance sheet and are nearing our leverage target of approximately one time at $50 oil, which would equate to approximately $3 $5 million in absolute debt at the parent level.
We also continue to put our cash to work by high grading our existing inventory position through small bolt on acquisitions.
We're excited about blocking up our reward position with the acquisition we completed in January .
This bolt ons added approximately 6000 net acres in Ward County, and gave US an additional 60 long lateral locations with an 85% net revenue interest in a high rate of return area. In fact, we've already begun drilling the position, but do not expect to have production until late this year.
As we look to our outlook for the rest of 2022 are simple plan has not changed.
Maintaining oil production of approximately 220.
<unk> thousand barrels of oil per day by spending between 175 and $1 9 billion.
At the current strip pricing this production and capital spend equates to approximately $404 5 billion of free cash flow.
Which per our returns framework.
Gives us a minimum of $2 billion to $5 billion of cashback for investors.
We're off to a good start for the year.
Mitigating inflationary pressures, while justifying our social and environmental license to operate.
We believe our capital discipline and returns profile is still best near term path to equity value creation, while our operational execution provides differentiated returns to our shareholders with these comments now complete operator. Please open the line for questions.
Thank you as a reminder to ask a question. Please press star and the number one on your telephone keypad.
Our first question comes from the line of Neal Dingmann from TD Securities. Your line is now open.
Good morning, all.
First question really the obviously just on shareholder return at all specifically.
Well I guess, maybe talk a little bit different I'm, just wondering what levers would you all think about Poland. If oil were to go potentially in a super Spike.
Scenario, whereas Russia oil would decouple or if oil until it goes the other way enrolled.
Moving something happens to put in so I'm really just trying to get a sense of what.
Quarterly changes you would or would not make.
This were to happen down the line.
Well certainly from a quarterly perspective from an operational perspective, we're pretty set on this year's plan that we have the ability obviously to ratchet things down, but as I tried to lay out in our prepared remarks ratcheting things up right now is not really the right answer.
<unk> a question specifically about buybacks, Neil we're going to stay disciplined.
Our approach to buying our stock back.
When we look at mid teens returns on mid cycle pricing. So that's really not changing I think what matters. Most o'neill is that we're returning cash to shareholders and were given given our shareholders a flexibility to do with that cash is basically strip.
That's kind of how I view the world right now.
No I like that flexibility I think it makes a lot of sense is I think investors know that my second question just on the new capital guidance.
Looking at the 150 of inflation in the 125 death benefit and then the 60 of midstream incremental moves that you've talked about since 'twenty. One really just wondering is there a potential for each of these to move further this year and then does this sort of 'twenty two spin.
Fred stable 23 production.
Yeah, Neil I don't see any any changes I mean, I think we're seeing inflationary pressures across across the value chain. Fortunately, we baked a lot of that into our guidance for the year and Fortunately, we had a strong Q1, which if you annualize Q1 you'd be towards the low end of the range. So it.
Gives us a little flexibility in the back half of the year.
Second to that I think.
We're debating internally, what the 2023 and beyond look like we're not ready to give an answer to that.
Today, but it doesn't mean that the plan is zero growth forever I think we have the flexibility.
<unk>.
Ramp up a little bit if we needed to if that was the decision.
Late summer for for 2023 and beyond.
Great to hear thanks, guys great results.
Thanks Neil.
Our next question comes the line of Iran. Xyrem from Jpmorgan. Your line is now open.
Arun there youll mute.
Yes, I'm, sorry, I didn't hear my name I am sorry about that yeah yeah.
Yes, good morning Gents.
Travis I wanted to get your thoughts obviously looking at the near term performance of the stock.
Clearly lagged your oil beta.
As well as you know our sense of execution, which has been good in the field. So I was wondering.
If you in our case could talk a little bit about that.
The bear thesis on the stock.
As you know there is a number of properties on the market in the Permian and the market appears to be concerned about diamondback.
Executing perhaps partly cyclical type of M&A deal.
This type of environment as the buyback pace has waned a bit. So I was wondering if you could maybe talk about.
That and just your broader thoughts on M&A in this kind of 100 plus dollars oil environment.
You know Arun if if I could control the price of stock it would be a lot higher than it is today granted but I can't but what we can control is how we allocate capital how we execute in the field, how we can generate more cash per barrel than anyone else. So those are the things that we really can't control.
We do hear a lot about this narrative that diamondback is a serial acquirer and let me just put it simply large scale M&A today is quite frankly off the table. We've got nothing on our DLC, that's considered more than a tuck in like the one that was just announced in my prepared remarks.
This remains a seller's market and we're not going to underwrite M&A at today's oil prices, just like we're not going to underwrite repurchasing stocks.
At today's oil prices, so I hope that's clear.
And both of those two.
Points that Arun.
Great Great and it sounds like large scale M&A is off the table today.
If I if I based on those comments.
Yes, let me reiterate that pharma large scale large scale M&A off the table I'll reiterate that point.
Yes.
Yes, that's clear.
The second point I wanted to make.
Just looking at the cash flow statement for calendar 2022.
Model, which is a bit below the strip.
Court.
Six two to $6 $4 billion of CFO .
A little under $1 9 billion of Capex, if we go through all of the.
The uses of cash, including nearly 800 million in debt reduction year to date, we'd still get.
One one over $1 2 billion of cash build this year.
Was wondering if you could talk about some of the priorities for this excess cash I think you highlighted maybe.
Target for Fang Standalone at $3 5 billion, but I was wondering maybe you could talk about uses of cash at this high commodity price environment continues.
Yes.
Good question I wouldn't say 335 billion is a hard and fast number before we ramp up shareholder returns, but certainly would like to take advantage of this market.
Taking out our 2026 months and therefore, not having any near term maturities before 2029, which opens up the door for accelerated cash returns and I think that's going to happen sooner rather than later.
Just generally we do want to keep our cash balance, but we're not going to sit on a large cash balance and we think.
No that isn't the right answer so.
We're not going to sit on it and therefore, we're going to return it.
This is a active discussion we have the board every quarter on cash returns and I think generally.
We're going to be supportive of more cash returns.
As the balance sheet is putting fortress shape.
Great. Thanks, a lot.
Our next question is from the line of Mitten Tomorrow Wells Fargo. Your line is now open.
Hi, good morning, gentlemen, and thanks for taking my questions.
I want to start with.
Permian takeaway on the gas side has been a topic of discussion over the last three months or so.
I just wanted to see what you guys are seeing on the ground and maybe if you can talk a little bit about your flow assurance 843, and 'twenty four.
Yes.
I think I think people are.
On the midstream and the upstream side are coming together to solve this problem.
A couple announcements on expansions.
A couple of existing pipes in the last couple of weeks, we still think there needs to be a large pipe.
When you go five.
Which hopefully happens here in the next month or two from an announcement perspective.
And generally growing.
Going back to what we said last quarter.
We have we don't have taken kind rights for all of our all of our gas, but we do have flow assurance for all of our guests. So we are exposed to wall Hall, we've hedged much of our exposure in 2023, and we think thats the tight spot.
The guest is going to move its just a matter of price and I think there is a lot of constraints on Permian growth right now as we've seen anecdotes from others on trying to ramp activity into this constrained environment. So generally I think the gassing get solved I think.
Both sides are as incentivize as ever to build the pipes.
And that should clear the way for Permian growth in the out years.
Great Thanks for that color.
As my follow up you know inflation did not features prominently in your release as it did for others, but you did talk about some screens.
You also mentioned, possibly looking for growth are there any.
Ossific areas.
As you look into 2023 that are tighter on the supply chain side and.
And maybe talk a little bit about.
How you're contracting for those services right now.
Yeah, I would say right now everything's tight across the board whether it's sand.
Casing, new high spec rigs and Frac crews everything is very very tight.
We're doing our part by keeping our activity levels flat running 12 rigs, we need and running the three simultaneous factories, we need with the fourth spot through but youre hearing anecdotes of.
Not being able to get casing I think it will get.
And these are things that.
We've done our best to secure and I think we're in a really good position.
Right.
Travis was saying as you know.
If you're going to bet on somewhat of an inflationary environment. It's diamondback, we control costs as well as anybody in this business and that's what we're laser focused on in 2022.
Great. Thanks for the color guys.
Thanks.
Our next question is from the line of Scott Hanold from RBC capital markets. Your line is open.
Thanks.
I look at the kind of flashback to the shareholder returns kind of strategy here and I think you guys have been.
Pretty articulate and how you think of a big picture Budd.
And trends I know you made a point of mine.
Once here earlier in this call about.
It doesn't make sense to buyback dam back stock at this point in time so.
When we think about how you return that cash going forward.
Should we anticipate that kind of heightened oil price levels, you are going to stick to see that $60 mid cycle price and.
The <unk>.
Large quantum of return.
He is going to be in a variable dividend is that how we should think about it until there's a more material pullback in in sort of the equities here.
Yes, I think that's a reasonable approach, but Scott I also think you have to be cognizant of what our industry has done over the last 10 years with respect to.
To share repurchases.
Typically as an industry.
Chase to oil price and repurchased shares back all the way at the top we're trying to be mindful of that and disciplined in our approach and have tried to be as articulate as I could about the way that we think about share repurchases as any other form of capital allocation with that mid cycle oil price mid.
Mid cycle oil price is a mid cycle oil prices doesn't change now what could change as we continue to accumulate cash.
That's going to have an influence on our all of our future capital allocation both in the form of share repurchases and increased variable payout yes.
I wouldn't say, we haven't had opportunities I mean, we've had opportunities even in Q2 to repurchase shares given the volatility in this in this space. So theres enough volatility out there to give us opportunities.
I would say the share repurchase is more defensive and offensive and when things are going really really well like they did in the first quarter. You know, we make up the difference with the variable dividend.
Got it appreciate that and on.
The first quarter results.
To me you stood out.
Was your oil price realizations were extremely strong and can you talk about the dynamics specifically in the quarter and if thats continuing at this point in time. It looked like you all got a average premium to <unk> pricing.
Yes, I would.
Say it was more one off in anything but does the volatility in Brent and dated Brent in particular versus <unk> benefited us I would say about 30% of our oil production receives a dated Brent price per barrel is going to Europe and that was that was in our favor. There in Q1, So I think generally.
And we've always guided to 95% of <unk>.
As a realization.
I might need to move up a little bit, particularly with <unk> going up as much as it has.
But it can be tough to hit 100 consistently.
I appreciate that thank you.
Thank you Scott.
Our next question is from David <unk> from Cowen. Your line is now open.
Thanks, Travis and case, Danny Thanks for squeezing me in.
Of course.
Travis I wanted to just follow up on your comments that you made.
Around capital efficiency degradation for deploying capital in today's environment I guess.
How do you think about those conditions.
Resulting in improved capital efficiency over time, I guess it sounds like the variables are that there really just isn't very much availability of equipment.
Significant delays I know that you guys are benefiting from.
Pre purchased a lot of some of the raw materials for this year's program, but.
I guess are we to think about when you talk specifically around the capital efficiency. If you stood up a rig today that the free cash payback period on that would be.
Significantly longer than a year.
Yes, I think there are two points.
The first was correct that capital efficiency those does imply that the payout for that investment as much there's much longer notwithstanding the fact that the production from that the way we develop these assets with multi well pads.
As quarters away.
The second thing is is that in the hyper inflationary environment luck ran in the Permian right now.
Ending up the reviews in your example, really means that we're in most in most instances, we're going to be taking that rig away from somebody else. So.
And that applies to its really all services and so if you're looking to increase the total barrel production out of the Permian, you're just really be reallocating. So it's not really Hilton the global supply demand equation, because that's really outside the services are out here today, yeah. It was more of a macro comment that the service market.
Zero sum game right now and all of us stepping.
On the accelerator will result in someone else not and so we wanted to maintain that capital efficiency that we have.
The trust we've earned with investors that this is the plan.
We've seen in the past in this hyper.
Inflationary environments that that supply chain ultimately normalize, but it takes time.
For that normalization to occur which is measured.
And quarters, if not years for it to normalize and when it does then then you start to have a greater opportunity to grow without degrading your capital efficiency.
I appreciate the responses Travis.
The last one for me is just on the Ward County acquisition. It sounds like you guys are already drilling some of those locations there I guess when you're making a.
When you're making an acquisition right now I know you said large scale is off the table, but are these smaller deals should we think about these locations moving to the front of your program.
Yes.
Some pretty high returning locations mainly because.
The acreage has an 84% NRI so an extra 9% NRI. So it was about a third of the deal value and subordinated.
Completely undeveloped unit in the Delaware basin very competitive with.
Midland Basin unit so.
This deal is the exception versus the norm you know degrees here about six months ago.
But.
If other opportunities like that come about I think it's a good use of cash so long as we're not impacting our cash return program.
Yes.
Thanks, guys best of luck going forward.
Thanks, David.
Our next question is from Derrick Whitfield from Stifel. Your line is now open.
Hi, good morning, all and congrats on your quarter and update.
Thanks Stuart.
Following up on David's first question could you broadly outline the macro and investor conditions that would supported a decision to pursue growth over 5% per annum.
I think what you are asking us to do to start forecasting 2023 growth rates.
No.
We're not ready to talk about 2023, I think if you look at the macro uncertainties that are still out there. Let me try that numerous some of those you've still got you still got already barrels whether theyre going to find their way to the market you get Venezuela, you've got linear.
You've got continued a little bit of surplus capacity in the OPEC plus those are all volumes that can come onto the equation.
The supply demand equation, you've also got the continued demand impacts of.
Covid, particularly in the Asian markets right now.
And then lastly.
To say.
Bluntly.
The administration's comments are certainly.
Causing a lot of uncertainty.
In the market both in the terms of regulatory taxation legislation and negative rhetoric towards our industry and that creates uncertainty in our and our owners our shareholders bonds about about about what what the future of this industry really is and so I think this.
This represents all of that for us a pretty generic and call them to have a sober assessment of what a energy policy really needs to look like for the United States. One that recognizes all forms of energy while at the same time.
Aspirational goals about a more sustainable future.
Thanks, Charles I, certainly appreciate the comments and understand those.
And my second question I wanted to follow up on gas egress and more specifically your view on how you'd like to position diamondback in the value chain for LNG offtake with.
With the understanding that you are an oil company at the core have you evaluated or would you consider direct offtake contracts with European utilities to better position Diamondback for higher realizations.
I think we consider it's Eric I, just want to have control over enough molecules.
Or anything meaningful you must go back to them, taking Congo HIV cell we exchanged.
You have the of the molecule at the wellhead outside of you know 200 million a day, we have on the Whistler pipeline going down to Katy in South, Texas, So really don't have control over a lot of gas.
The companies.
Well through acquisitions, a lot of times the gas came dedicated already with no taking contracts for that operator.
Alright, great update thanks again for your time guys.
Thanks Derek.
Our next question is from the line of Scott Gruber with Citigroup. Your line is now open.
Yes, good morning.
I guess just listening to the conversation here. This morning, and you guys mentioned E frac fleets coming in during Q and how that'll help efficiency.
And there's obviously been various drilling optimization software.
Develop too.
Help trimmed the drill times.
Is there an ability for diamondback to grow volumes modestly without adding an additional rig or two and more frac time or was that just just not possible.
I think it's certainly possible Scott and certainly part of our assessment of where we're headed and also ties into this you know mantra of capital efficient growth or capital efficient maintenance and.
It's amazing what the what the organizational Don in terms of efficiencies three some frac fleets.
Doubled our efficiency on the Frac side and on the drilling side, but like you mentioned the clear fluids drilling system as well as now moving on to electrification has reduced cost and.
And our cycle times, so I certainly think it's possible.
And we continue to see improvements throughout this year.
And then certainly going into our calculus for the next few years look like.
And Scott when you when you think about the improvements with that.
The case, just talked about that are operationally and execution focus those are made irrespective of commodity prices or service calls and what's exciting about those and what I am So proud of organization about is those are permanent.
Permanent savings that go forward.
And when you start doing a relative game.
Diamondback versus others performance, that's what creates the spread and this is not just a recent phenomenon our organization their stock in trade has been.
These types of incremental improvements year over year, regardless of the economic or commodity price backdrop, and I think it's fairly we're going to continue to do that it gets harder in times like today.
But it doesn't mean that we still can't find differential ways to do more with less and the second point is that as we fully.
Embraced the more than.
More of the Midland Basin.
With the assets that we acquired through <unk> coming on to coming out of the production mix back half of this year and fully into 2023. Those wells are so good you will see a natural uptick.
Capital efficiency, because we those wells deliver more per dollar spent.
Gotcha, Yeah, I guess that was the heart of my question is.
Is there enough kind of incremental gain on the kind of process efficiency.
Coupled with you know the Martin County program hitting its full stride.
Is there enough combination there that you could actually achieve call it 5% growth without adding.
And additional rate.
Let's say, it's still early so we'll see I think we're really focused on.
And getting through the rest of this year in a very tight deflationary environment.
Okay.
Okay. Thank you.
Thanks, Joe.
Our next question from the line of Jeffrey Lin Magellan from Tudor Pickering. Your line is now open.
Good morning, everyone and thanks for taking my questions.
Firstly I'm just.
My first one is just a follow up on some of the cost commentary from earlier and if you wouldn't mind sharing some additional insight that you have got just given your history in the basin, but with your outlook for well cost per foot for the year in particular, staying consistent with the initial guide even as other operators are talking up quarter to quarter changes with uncertainty beyond that as you go through the year.
<unk> I just wanted to ask about what you are doing in the field to mitigate higher costs you might be experiencing.
Just plants.
Productivity in the field to mitigate expected costs in the future just in terms of flexibility around a few contract with for services, while still maintaining and upholding the low cost operations at Diamondback is known for.
Yeah. Good question, Geoff I mean, we've obviously baked in some inflation into these costs and went into the year at a lower well costs. When we went into 2021.
Even in the face of an inflationary environment last year.
But generally there are there are service providers pushing price and sometimes we decide not to keep working with those particular service provider. So I think.
Our ability to control cost is because we control a lot of the process.
With our business partners on the service side.
Recognize they need to make margin but.
If there is another provider that can provide the same service for less cost. We'll go that route and we've done that a few times. This year. So that's you know that's helped us control things a little bit and Geoff those are true strategic comments. The case, just made but look tactically.
We continue to see as our operations organization.
Getting to TD faster.
Quarterly basis.
It goes back to the comments I made earlier this is what we do so.
Getting the TV faster translates to cost savings that that'd become permanent.
Also completing more lateral feet per day as an efficiency getting this year is another one of those tactical things that we're doing that's helping us hold the line on an increasing cost backdrop. So.
Just just to emphasize it.
We always get the question I asked what is it that makes the secret sauce of Ambac and our low cost operations as you just pointed out and it's it's really it's really not one or two things. It's really a consistent laser focus on every single decision that we make and the cumulative effect of that.
Laser like focus allows diamondback, just not on a quarterly basis, but now almost for a 10 year time period maintain the lowest cost operations and best execution out in the Permian.
Perfect. Thanks for that I appreciate the detail on the reminders.
My second one is just on the balance sheet really just around what you see is what's left on the opportunity for further strengthening from here I know you all talked about flat to 2026 as in the past.
I spoke to debt targets that can also be flexible, but it would seem like you're within striking distance here of an optimal balance sheet position for the medium to long term. So just wanted to get your latest thoughts on that given the progress you've made so far, especially recently and I apologize if I missed this earlier.
No listen I think we feel fine with everything we have due 2029 later sitting out there and you know we take care of the 2026 years, which should be you know in a matter of months not years.
We will be in a position to have discussions about increasing shareholder returns.
What we already do it.
Perfect. Thank you.
Our next question is from Nicholas Pope from Seaport Research. Your line is open.
Good morning, everyone.
Hey, Nick.
First I wanted to commend you guys on the on that ESG kind of real time data that you all are providing because I think it's probably one of the best in the sector, but.
But to provide the data so I've got a question about a little bit.
You kind of talk about.
Kind of gross gas flared and I saw in <unk>, it kind of creeped up from kind of where it wasn't fourth quarter, where it was in first quarter of last year, it's kind of a percent of total gross gas production. I was just curious like is that what drives that is there some seasonality in that is it.
I mean does it limited capacity to move gas I mean, I'm, just trying to understand a little bit about kind of the movement in that in that metric, which is a big part of kind of that Cotwo emissions I think Youll report.
Sure Nick two things the first comment on disclosure I appreciate you, saying that our board is.
Has mandated us to not only be best in class on actual performance, but also a best in class and disclosure and there's a lot of our organization that is focused on delivering these results and we're proud to report them and I think if those havent had a chance to draw the call to look at the ESG detail in our investor deck, which is up on our website I strongly encourage.
Bridge you to do that.
Second part of your question, Nick was gross gas and that's.
That's the reason we reported death, because thats, what you can back calculate to hand, verifier numbers, but they have to do with the acquired volumes space.
It's all due to plant turnaround so that I mean, you put out a slide that explains that.
75%, 80% of our flaring due to downstream issues and you know we were trying to push and incentivize our business partners on the midstream side to do better in terms of flaring.
Sometimes through contracts, where we pay them more per Mcf, if they take a little less than 1%, but really timing wise Q1 lot of turnarounds from some of our business partners on the midstream side, there is some seasonality to it but.
That's why we push them for more connectivity among their peers. So that if their plant goes down we can send it to another plant or two appear and we'll still pay them. So you know part of the whole the whole value chain as you know, we need or we need our friends on the G&P side to work with us here.
We view that as a as a win win or lose lose so we're not trying to position.
Shelves as a wound versus lose on with J P is we know that.
Emissions from the product we produce.
Need to be eliminated or minimized.
As we can and that's the reason that we spent time in conversations like this talking about our G&P business partners as well as including some slides in the in the U S and G detailed part of the deck.
Highlights.
Diamondback was responsible for and what our midstream guys, who are responsible for both planned and unplanned outages.
Got it that's actually very helpful. I appreciate it.
And kind of further on to the kind of the other components of this.
You kind of talk about the electrification of.
Compression of parts of the Frac fleets.
That something that.
Is that so is that are you going to be showing up as part of the L. O E.
Kind of improvements that you're that you're working on is that where it shows up or is it primarily going to be something that is reflected in these ESG metrics. When you think about that move towards the electrification of a lot of asset well electric electrification in the field helps hello.
Electrifying all of our fields is not only environmentally friendly, but also tops friendly getting rid of infield power generation, but on the on the.
On the Frac side, and the drilling rig side, you know moving rigs and Frac fleets to electrification would help lower costs on the capital side, but also the lower our combustion percentage of scope one emissions.
Got it that's that's all I really needed I appreciate the time. This morning. Thank you.
Thanks, Nick.
Our next question is from Doug Leggate from Bank of America. Your line is open.
Hey, guys.
I guess places in Qs.
Directly correlated with the commentary around your variable dividend. Thanks.
Thanks for.
For getting me on this morning's good to talk to you.
Charles If I go ahead I'm sorry.
Got it hit this right upfront.
How can you say you think your stock is undervalued, but you're not prepared to buy it.
Variable dividends take cash off the balance sheet it doesn't get capitalized in a business, which has a finite inventory.
How do you expect the market to use sort of variable dividend just to me in this business. It doesn't make a lot of sense I'd just love your perspective.
Listen we've tried to outline exactly our thoughts on the rationale behind all of those things my comments on the stock price was really a function of what I can control and not control and I can't control. The actual market you know what the stock is what's the actual stock prices. We've tried to be very disciplined and we are very disciplined and the calculus, we used to buy anything.
Whether it's our stock, whether it's acquisitions or whether it's making drill well decisions and I've tried to outline the mid cycle oil price at $60, a barrel I think that could change.
To accumulate free cash mid cycle oil price won't change, but our ability to buy more shares back will change, but we made a commitment to distribute at least 50% of our free cash flow and other than ordering on the balance sheet, which we said we're not going to do we're going to honor that commitment and return at least 50%.
Yeah, no I understand completely the rationale.
It's an intellectual debate, perhaps but.
Equity volatility correlates with balance sheet structure. So yohji pioneer some of your other peers are choosing to health net debt zero. So.
We will carry on the debate I wanted to ask about.
A more specific question to the current commodity environment and how it's impacting your cash flow outlook, specifically cash taxes. So this might be for case, we've got a much higher gas price. Obviously, we've got a backward dated curve, obviously I assume that's accelerating the inflection and when you.
<unk> cash cost positions can you just give us an idea what.
What you see harping on that regard and I'll leave it there. Thanks, yes.
Yeah. Good question Doug.
Right, our cash tax percentage this quarter, because we weren't running $100 oil.
Our initial guidance.
In February .
There still are some protection this year.
We do have about 1 billion of Nols that will protect us next year.
So we won't be full cash tax payer next year in 2023.
So somewhere in the world that pushed out couldn't use it. This year. So you got to use it next year and then you know if commodity prices stay where they are.
A full cash taxpayer by 2024.
So just to be clear the even with the forward curve case youre still get through the end of next year.
Yeah, I mean, partially right I think our protection will decrease next year, but there will be some some protection and then forecast taxpayer for 2024.
Got it thanks, so much guys.
Thanks Dexter.
Yes.
Our next question is from Leo Mariani from Keybanc. Your line is open.
Hey, guys just wanted to follow up a little bit on some of the inflation commentary here I.
I just wanted to kind of clarify sort of what I heard it sounds like Youll have all your equipment here for your 2022 program, but just wanted to get a sense. It is generally the prices for the big ticket items on the service side are locked in for 2022 or perhaps could you see I'll just call. It some inflationary risk in the Capex.
Maybe in the second half and then as we look to 2023 is that we think that inflation could be maybe a larger problem is if commodity prices are well bid later this year.
Yeah, I mean, it really it really depends right I mean, it depends what happens in the situation.
With Russia and Ukraine.
As it relates to.
Pipe cost right, we thought podcast, we're gonna come down in the back half of the year. It doesn't look like that's going to happen. This year. It might happen next year, I mean, I think theres, a little push full with this business tends to sort out supply chain issues over time.
As commodity prices stay stronger for longer.
Some of the tightness will get sorted out.
Certainly I'm not going to make a prediction that 2023 inflation is going to be as much as 2022, but we certainly we're certainly seeing inflationary pressures across all the big ticket items right now and some of that pricing for the big ticket items as incentivizing, new builds which tends to lower prices. So I think theres a little bit of a push.
Paul.
Jury's still out on 2023.
Look we will be affected by inflation.
Two ways about it but the best that we've always made here internally is that we will be affected the leash of anyone else because of our efficient operations and and you see it in the first quarter of this year, we were all affected by this.
Inflation in.
And we're at the low end of our Capex guide for the quarter, recognizing that's going to be a challenge to continue that performance are still better than the origins of our organization to deliver.
Okay. That's helpful and certainly I can see that from where you came out and one key one capex and it looks like on second quarter Capex guidance, you've seen equally confident that you can kind of keep the costs under control. So is this something that could maybe creep up more in the second half this year or do you kind of have rigs and crew.
<unk> and pipe locked in here in 'twenty two.
We feel really good about the budget obviously, we're on pace for the low end I think that's going to be tough but.
We feel really good about the this year's budget.
Okay. Thanks, guys.
And as a reminder to ask a question. Please press star and the number one on your telephone keypad.
Our next question comes from Paul Cheng from Scotiabank. Your line is open.
Alright. Thank you good morning gents.
Okay.
Thank you.
I think firstly, it's Paul pace.
In the cash Todd just wanted to confirm in the counting that you guys set top.
You will estimate for the full year cash.
Cash tax rate and then you apply the same tax rate.
In each quarter, roughly flat on that and not necessarily based on saying that maintaining the yet that you may have already use some more on the way up so high.
Yes.
And also that if we assume let's say call. It an app based on Daytona <unk> next year.
I assume that cash tax rate would be higher.
What guidance that you can gave that's the first question.
Yeah I'll take the second part first certainly the cash tax guidance would be higher next year. If we have these commodity prices.
I think it's you know basically.
Pretty pretty close to a full cash taxpayer outside of the $1 billion.
Protection.
And then second I think I think your question related to what is the cash exit the system for cash taxes, and we'll be making a pay.
Payments, our first payment in June for the first half of the year and then quarterly thereafter, now that we're heading to cash tax cash tax land.
And yes.
So the cash tax way.
Say hello to yet would be about the same.
Or that they still have.
Quiet penetration.
No fluctuation so our burden in Q2 is expected to be higher than our burden was in Q1, just with the cash you're going to leave the system in Q2.
I see okay.
And the second question is that.
For this year look like.
Some of your equipment availability and also in the surface applies you guys already done quite a lot.
For next year, any kind of rough percentage kind of Hawaii, how much of your surface for capex on the equipment that you already locked in with a fair price for that yes.
It's been subject to the market conditions at this point.
I would say most of it's subject to market conditions, we did we talked about.
Equally we signed a deal with Halliburton, you know that price is fixed and our sand price is fixed so the rest is going to fluctuate and we'll see where the market goes over the next over the next few months.
Okay. Thank you.
Thanks, Paul.
At this time I would like to turn the call back over to Travis Stice CEO for closing remarks.
Thank you again to everyone participating in today's call if you've got any questions. Please reach out to us using the contact information provided.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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