Q2 2022 Diamondback Energy Inc Earnings Call
Okay.
Good day, and thank you for standing by and welcome to Diamondback Energy second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one.
On your telephone please be advised that today's conference is being recorded I would now.
Now I'd like to hand, the conference over to your speaker today Adam.
Vice President. Please go ahead.
Thank you Joseph.
And welcome to Diamondback Energy's second quarter 'twenty two conference call.
During our call and we'll reference an updated investor presentation, which can be found on buying back stock.
Representing Diamondback today are Travis Stice, chairman and CEO .
Our president and CFO .
And Danny.
During this conference call 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.
We will make reference to certain non-GAAP measures the reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.
I'll turn the call over to Travis Stice.
Thank you Adam and welcome to Diamondback, <unk> second quarter earnings call.
I'd like to start by highlighting our second quarter performance.
Once again delivered operationally producing over 221000 barrels of oil per day near the high end of our quarterly guidance range.
Discretionary cash flow or operating cash flow before working capital changes.
The $1 8 billion up 27% quarter over quarter setting a new high for the company.
This increase was primarily due to a favorable backdrop.
Macro backdrop as well as improvement to our realized pricing as hedges.
Qunar last year continue to roll off.
Our free cash flow for the quarter was $1 3 billion up 35% quarter over quarter.
We returned 63% of this free cash flow to our shareholders well in excess of our commitment to return at least 50% of free cash flow.
This return is made up of a growing and sustainable base dividend opportunistic share repurchases into.
And the robust variable dividend.
Our annual based dividend is now $3 per share were <unk> 75 cents per quarter, representing a seven 1% increase from the company's previous annual base dividend of $2 80 per share 70 cents per quarter.
As previously announced the board elected to keep our total dividend per share flat quarter over quarter at $3 five.
Which is comprised of the 75% base dividend and a $2 30.
This puts our total annualized <unk> dividend yield of nearly 10%.
Additionally, we took advantage of market volatility and repurchased nearly $2 4 million shares during the quarter at an average price of a little over $127 a share for a total cost of approximately $303 million.
We believe our opportunistic disciplined approach to our repurchase program breaks.
Brings the most value for our shareholders and continues to give us the flexibility to use either our variable dividend buybacks or.
It has been the case so far in 2022, a combination of both to hit or exceed our return targets.
As we move into the second half of the year, it's hard to ignore the amount of free cash flow, we expect to generate around $2 $5 billion of current strip pricing.
In June we announced an increase in our capital returns commitment target moving it up from 50% to at least 75% of free cash flow beginning in the third quarter at.
At 75% that's over $1 8 billion returned to shareholders or well north of a $10 per share in just two quarters for a total annualized return yield of approximately 17%.
This robust free cash flow profile led the board to double the size of our buyback program from 2 billion to $4 billion, giving us ample running room to be opportunistic in the equity markets.
Since the program was initiated in the third quarter of last year.
We repurchased over $8 3 million shares at an average price of $113 a share for a total cost of approximately $940 million.
This includes $1 $8 million of shares we've already repurchased in the third quarter for a total of $200 million at an average price of $113.70 a share.
Our confidence to increase our returns payout is rooted in the strength of our balance sheet.
During the second quarter, we opportunistically repurchased $337 million of Diamondback senior notes at an average cost of 95, 4% of par.
Our total of $322 million.
We focused on our debt coming due over the next 10 years significantly lowering our maturity towers, while taking advantage of the volatile debt markets.
We also recently redeemed $45 million in legacy Energen, and QEP notes due 2022 at par.
As a result, our balance sheet is stronger today than ever before.
Our annualized net debt to EBITDA is under 0.7 turns.
And we continue to improve our leverage profile with net debt decreasing by $267 million or 5% quarter over quarter.
This debt reduction efforts have helped to decrease our interest expense by 25% year over year.
<unk> higher production taxes, and lifting costs and helping push our unhedged realized cash margin this quarter to more than 83%.
Company record.
Moving to the operations side of the business the environment in the Permian continues to be challenged.
However, we continue to focus on how we can mitigate the inflationary pressures, we're seeing across nearly all facets of the business by lowering the variable pieces of our cost structure.
These efforts have allowed us to keep the high end of our capital guidance range flat.
At $1 9 billion and we do not anticipate any future changes.
Yet.
We still haven't been able to offset all of the fixed price increases we've seen which is why we've moved up our third quarter capital range to $470 million to $510 million.
For more capital spend of $468 million. This quarter. This takes into account that roughly 10% cost increase we expect on the Frac side, which is made up of increases in the cost of horsepower wireline services and fuel on.
On the drilling side of the business, we're seeing a similar level of pricing increases, particularly from day rates casing and cement.
In the back half of this year, we plan to operate approximately 12 drilling rigs and three frac crews.
As we mentioned last quarter, we've partnered with Halliburton to secure our first easily frac core which will run in our Martin County acreage off power generated from a central location and delivered via existing lines not only reducing our scope one emissions profile, but also lowering our completion costs as a result of <unk>.
Fuel savings and improved operational efficiency.
We expect this fleet to be operational early in the fourth quarter and it will simply be swapped in for one of our existing Halliburton crews.
Earlier this month, we continue to lean into this technology and secured our second easily court.
This crew will be operational in the first quarter of 2023 and is expected to further reduce costs and decrease our environmental footprint. It will also replace one of our existing crews.
On the drilling side, we currently have one drilling rig running off line power in the Delaware Basin with two more electric rigs expected in 2023.
Just as we're seeing on the completion side.
The electrification of our drilling has multiple benefits.
Additionally, we're utilizing sputter and intermediate rigs to take advantage of lower pricing as compared to the rest of our drilling fleet and are exploring downsize and surface casing size intermediate hole size to improve our drilling efficiencies pushing diamondback, even further down the cost curve.
Lastly, we continue to work to earn our social and environmental license to operate.
Part of this is our commitment to provide quarterly disclosures that detail our progress towards our environmental goals.
We're proud of how we have performed so far this year, we're looking at multiple metrics, including recycling nearly 40% of our produced water.
And keeping our total recordable incident level at multi year lows.
However, flaring continues to be an issue.
We are diligently working with our gathering partners to build in redundancy accelerate plant turnarounds and meet the takeaway needs of our current development plan.
We remain committed to ending routine flaring by 2025 and are confident in our ability to achieve that goal.
We've also spent hundreds of millions of dollars to lower our emissions profile by building pipelines and electrifying our production fields.
These projects have lowered our cost to date, but due to the increase in the cost of power across the state of Texas.
We have had to move our lease operating expense guidance range by 50.
$4 50 to $5 a barrel.
Even with this move we continue to be the low cost Permian.
And build on our long track record of cost control.
The second quarter was a record quarter for the company, we delivered on our production guidance.
Costs in line and distributed over 63% of our free cash flow to our shareholders.
We are well positioned to build off this momentum and are excited to begin returning at least 75% of our free cash flow to our shareholders. This quarter.
We expect these industry, leading cash returns program and our best in class operational machine to continue to deliver differentiated results for our shareholders.
With these comments now complete operator, please open the line for questions.
And thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster and we ask that you limit yourself to one question one follow up again limit yourself to one question one follow up and one moment for questions.
And our first question comes from Neal Dingmann from Jewish Your line is now open.
Good morning, guys. My first question is somewhat on shareholder returns specifically like on your conference call a year ago looked and try but I think you stated that as you look back that supply and supply and demand fundamentals. You said I think suggests that oil supply was still purposely being withheld from the market driving your call to not.
<unk> production. So I'm wondering when you look at today do you still believe that's the overall case of worldwide fundamentals or specifically.
Supply and does that still drive is that still your primary decision that your primary driver of your decision for the no growth or is this more based on industrial request.
Well certainly as we look into 2023, I think it's a little premature to do much forecast them into 2023, but I can I can tell you is kind of our base cases looking at something at the same activity level.
Probably generating something in the low single digits in terms of growth the growth rate, but again, it's more of an output, but I think what you specifically ask about the call last year I think I highlighted really three things and then subsequently added a fourth and that was demanded pre COVID-19 levels I wanted to see five year inventory levels somewhere return.
To the five year average.
We still had a question about capacity and what I've added subsequent to our call was the administration continue to.
Uncertainty into our capital allocation process across the industry and so certainly three or four of those have been answered today, Neil Theres still a lot of administration.
And certainly both in policy actions and rhetoric, but the other ones certainly appear to be answered. So I think as the industry starts to pivot towards more focus on 2023, I think youll still be governed primarily by the shareholders who own the companies.
But I do think youll start to see a little bit of growth in the industry as we look into next year.
Great. Great response, then my second question really I would say is on the notable capital spend discipline that you guys continue to have.
Many others, we have already heard about continued to increase their cost.
Despite them previously, saying that they were locked in so I'm just wondering going forward would you all consider any type of I don't know like a more vertical integration or any other new strategy with a focus remained more or less on the same is working with vendors and just the efficient execution.
Well Neal I think we've been pretty successful with existing model will always look at we'll always look at seeing what ways. We can we can we can ensure.
Lower execution costs, we were a little bit <unk> in the first quarter with all the commentary about locked in prices and then subsequently followed with Capex raises in.
And that's just not the way that we've typically tried to communicate what our.
What our execution focus is but I do want to I don't know if I have a lot of employees listening in the call. This morning, and look I want to give a shout out to our organization for our ability to continue to manage cost in an inflationary environment again about a year ago deal. We were talking about how you separate winners and losers and an inflation.
Dairy environment, it's always those that can control costs and while we've taken our links on the on the fixed cost side of the.
Ledger, we've done a really remarkable job on the variable cost looked through our organization to continue to lean into that in 2023.
Very good thank you so much.
Thanks Neil.
Thank you and one moment for our next question.
And our next question comes from Neil Mehta from Goldman Sachs. Your line is now open.
Good morning, Travis team.
First question is around capital returns and you did increase the share repurchase repurchase authorization to $4 billion from 2 billion previously it looks like you've been leaning a little bit more into the repurchase with the pullback in the stock. So can you just talk about your framework around variable dividends versus repurchases.
And how are you thinking about being countercyclical with how you deploy.
Share repurchases.
Well, we certainly think that there is a lot of value in our existing stock price and we think that that oil in public equity stocks is really undervalued right now and so the two data points that you mentioned I think are good indicators of future behaviors the firsthand.
We spent about $500 million in the last two to three months repurchasing shares and <unk>.
And the board just essentially doubled our authorization up to $4 billion. So.
The base dividend still remains.
Sacred.
Sustainable and growing.
Followed by this environment.
Share repurchases and as we committed to a month ago.
Make up the difference and keep our shareholders whole.
Bob returning at least 75%.
Our free cash flow.
Thanks, Travis and then would love your perspective on the M&A outlook.
We know that you've been active over the last couple of years.
But is it fair to assume that given that you are re prioritizing share repurchases. At this point do you think that's a better investment than 10 third party M&A. Thank you.
Yes, certainly that's the behavior, we are demonstrating and is that just iterate it.
Just to emphasize all in the public markets is really cheaper in the private markets and I think there continues to be a.
A wide gap between between those two.
It was two points.
And I think Youre also seeing stalled or failed processes as well, which again indicates the spread between bid and ask so right now the greatest return for our shareholders is leaning into our repurchase program.
Sir.
Thank you.
One moment for our next question.
And our next question comes from a rooms, Ron from J P. Morgan Securities. Your line is now open.
Yes, good morning, Travis and team maybe just a follow up to Neil's question is how do you think about your process to engage and portfolio of renewal.
And this kind of backdrop, and perhaps a little bit more color. It looks like you had about $85 million of property acquisitions and the cash flow statement, but I was wondering.
If you could provide us a little bit of detail on that and I think on a year to date basis that takes at just under $400 million.
Property acquisitions.
Yes.
The big deal with Iot in Q1 $230 million deal.
Do capitalize a little G&A and interest which flows through that number so if not all property acquisitions, but then a couple of things that we do do on the property side. It's just the typical blocking and tackling netting up we give our land teams the directive that we'd rather drill 100% working interest wells across the board and so theyre always.
Working to sum that up.
<unk> block and tackle but nothing nothing of significance purchased in Q2, okay.
Okay, and look around being having boots on the ground here in Midland I think.
All of our shareholders expect.
Does to be in the deal flow at all times.
But that just means we look at things come across the desk, but I'll go back to say look what our behaviors are in the separation between.
Public and private expectations on value.
I think thats, the best way to think about what our plans are.
Okay, and just as my follow up is.
You guys had really really strong oil price realizations in the quarter I was wondering if you could just remind us about your mix between getting waterborne crude.
Pricing versus.
Call It a midland type of benchmark.
Yes so.
We have all of our oil on pipe is going to the Gulf coast.
A third of it go into Houston, getting EMEA pricing two thirds going to do.
Going to corpus getting Brent pricing and so we've been the beneficiary of these this water Brent Ti spread we have a little bit of exposure to the Midland market. We also have the ability to kind of flex that to the Gulf coast with the space that we have and so.
The sell off in.
WCS versus Brent.
As noted in really good oil realizations no guarantee that it's going to continue forever, but that kind of fit the insurance policy that we've put in place to invest in these pipelines in and get our barrels to the most liquid markets.
Great. Thanks, guys.
Thanks, everyone.
And one moment our next question.
And our next question comes from Scott <unk> from RBC capital markets. Your line is now open.
Hey, thanks.
Could you all give us some.
You on what you all are seeing on leading edge inflation and if you can give us a sense of.
What kind of.
Savings you guys.
Spec from the E fracs versus a regular frac or I mean, how meaningful is that.
Yes, Scott Good question I would say generally we took up capex on the low end and took up.
Our average well cost estimate for the year I would say probably today, we're probably up 15% today from the beginning of the year and we'll probably exit a little higher than that so probably 15% year over year, well cost increases, but you know what.
The ops team is doing is not taking.
Every phone call and just increasing prices, we are trying to do some things to be more efficient you mentioned the fleet. Charles just mentioned in his opening remarks that we're going to have a second easily coming in early.
Next year that saves money not just on the horsepower piece, but on the fuel piece. These will be connected to <unk> power.
And the back end of a gas plant with.
You know for any dry gas in the Permian, So while gas prices have gone up they certainly havent gone up as much as diesel.
I would say, we probably say 50 50 ish of foot with that $50 a foot with that easily a couple.
A couple of other things we are doing on top of that we are.
Adding some preset rigs.
Placed some big rigs as those preset rates cost a lot less with these big pads in long cycle.
<unk>, we have that ability to do so the team is also getting really smart on casing design cement design wherever we can pick up pennies, just a stock and trade.
On opinions, there you're picking up.
Good to hear that.
The follow up and I'm going to kind of belabor the point on shareholder returns and I know you all.
We have done pretty well with executing your flexible plan, but the bottom line is right now it appears that your stock is trading at a discount to peers I mean, it looks pretty evident and like how do you all think about like what the best way to bridge that gap is and Mike.
What can you do to kind of force the issue to get your valuation more in line with peers or where you think it should be.
Scott.
When I talk to our board.
Communicate what I think the success indicators are.
There's really five three.
Three of them were foundational that led us to success in the first 10 years and I think the two that I've added are going to be foundational for the next 10 years, but the three that we built the company.
On our execution low cost operations and transparency and we've been very successful at differentiating ourselves with those the two that have recently been added.
Sure.
Capital return.
And de Carbonization and on the capital return.
We're now our yields.
As peer leading.
We're competitive on all.
Forms of shareholder return measures.
And the last one is <unk> organization and not only our disclosure, but also in our performance.
Look those are the five things that we excel at and you can ask us questions about any one of those five we can articulate chapter and verse, while those are successful while we're successful dose.
And.
You pointed out a dislocation in stock we believe fundamentally that we continue to do the right thing for our shareholders to zero integrated value and.
And we believe we're running this company not just for a quarter, but.
But for the next 10 years and longer.
Appreciate the color. Thank you.
And thank you and one moment our next question.
And our next question comes from David <unk> from Cowen. Your line is now open.
Thanks, Travis cases team I appreciate the color today.
Okay.
Maybe if I could ask one on just capex.
In 2022, I think you all forecast with about 12% of your total budget going towards non D&C.
Is that a good contribution as we think about 'twenty three and 'twenty four.
Good question David.
It generally is.
If you look at our past history, we kind of whenever a deal happens in the next year infrastructure and midstream is 10% to 15% getting down to that kind of 7% to 8% of total capital in the out years.
I, certainly expect us to be closer to 7% to 8% of total capital in 2024 with a step down.
<unk> year in 2023, I think the only the only wrinkle is we are all us and our peers are all spending a lot of money on environmental cleanup and so thats probably.
30% to 40 extra $1 million a year that wasn't in the budget in 2017 to 2018, it's necessary dollars, but generally I would expect our midstream infrastructure budgets to come down next year and into 'twenty, four probably probably a step change down to seven or 8% a couple of years.
Thanks for that case, and then maybe just as a follow up.
Obviously, the <unk> Capex <unk> Capex is going to be is going to follow with activity with <unk> being higher than <unk>.
We think about next year, though I think the expectation is that you guys would still be in that.
We're at 270 290 wells.
12 rigs.
<unk> crews.
Is that $460 million or so implied guide for <unk>.
Is that $4 60 that for $500 million range like a reasonable run rate to think about 23 or are there explicit reasons why you would want us to.
We guided away from that.
Yes, I think it's just too early to talk top 23 inflation.
Certainly.
In the camp that we're not willing to continue to can see margin expansion on the service side.
So we're going to see where things shake out over the next six months like we said.
Earlier in the call. There are some things we are doing to increase efficiencies and lower costs.
Just say generally yes, I think youre right on activity going into 2023.
I can't I can't I'm, not going to comment yet on service prices and where things had particularly with some of the stuff that's out of our control like steel.
You need to go up in price.
I appreciate it guys. The only inflation on Bacon, then there's capex per share. So thanks for the color.
Good new metric.
Thank you.
And one moment for our next question.
And our next question comes from David with deal from Stifel. Your line is now open.
Good morning, all and congrats on your quarter and update.
With my.
First question I wanted to focus on your operational efficiency would it be safe to assume the improvement you experienced in your drilling and completion efficiency metrics over the last couple of years has at least plateau and as a result of service tightness and the dilution of experienced crews.
Yes, Derrick I think Thats, a fair statement certainly certainly the business has gotten a lot harder to operate and execute.
This year.
So to make sure we have the right supervision in the field to make sure Green hands are trained up quickly.
It's something that we are seeing we do spend a lot of money near the wellhead to make sure our supervision overseas, what's going on in the field.
But then there's a couple of other things that kind of.
So the other way right. So the spud rigs that we're putting in place they drill a little slower, but they cost half as much as the big rigs. So I think generally we kind of hit the efficient frontier on base in TD.
This year, but now we're doing some things that might slow things down, but but spend less money per well.
That makes complete sense and as my follow up I wanted to touch on the inflation reduction Act.
Which could be voted on this week.
Focusing on the minimum tax and methane components could you speak to the implications for diamondback and the industry in general it seems at a minimum from our perspective that the one case that gets diamondback will be minimized with a 15% minimum tax stipulation.
Derek.
Methane fee tax is one thing that we've looked at and because of the dollars that we've spent over the last three years really reducing our methane emissions that doesn't appear as we understand it to be to be.
Needle mover for Diamondback, yes.
And then on the on the tax side.
We're pretty low on on.
NOL protection. So if the strip if the strip holds we have about $1 billion of protection next year will be above 15%.
Minimum that's being proposed so.
I think.
Generally moving towards a full tax paying entity at diamondback.
Mitigates the impact to us certainly.
If we were in a different commodity price environment it might be a different story, but in this environment, we're headed towards full cash taxes in 2024.
Great update thanks for your time.
Thanks Stuart.
Thank you.
One moment for our next question.
And our next question comes from Jeanine Wai from Barclays. Your line is now open.
Hi, good morning, everyone. Thanks for taking our questions.
Morning, Jason Good morning, Kevin Thanks for the time today.
Our first question is maybe hitting on the balance sheet, a little bit Zhang had about $21 million of Standalone cash at the end of the quarter and that reflects really getting after paying off those notes early and at a very.
Nice discount that's great Alex.
Sequencing of further debt reduction that you mentioned and then do you have an updated view on your target cash balance were essentially kind of backend to how much potential upside there could be exceeding the 75% minimum return.
Yes, Janine good good question.
The rattler deal expected to close at the end of August we'll have to pay off that debt revolver at close thats about $200 million.
Revolver that we'll expect to pay with down with cash.
Also want to take out the rattler notes $500 million notes next.
There are.
Some reporting requirements with those notes if they continue to stay out there.
Those those two items are certainly the priorities and we'd probably expect to be in a position to have those taken taken out by the next time, we're on the phone here.
And then I think after that it goes back to being being selective with the other outstanding notes. You'll note that we did not we didn't touch the 30 year to $2 30 year tranches that we have out there, but we did.
Take down some of our 29% to 30 ones opportunistically with a discount, but generally the rather notes and rattler revolvers coming out next.
And then we'll be more prudent with the rest.
Okay, Great and then maybe a quick one on operations I think in the past.
You mentioned running three thermal frac crews and then potentially utilizing a spot crew and then in your prepared remarks, I think I heard you mentioned Jess running three frac crews. So just wondering if I'm remembering those two things correctly and have you been able to maybe drop that spot crew due to efficiencies. Thank you.
Yes, so the <unk> frac crews are going to run consistently.
Throughout the whole year and those those three if you can go on this year and there'll be the baseline for next year. We did have a spot crew running for part of Q2, I don't think we need a spot for again they'll probably the end of this year, we tried to string together.
And a path to make that spot crew.
Cost competitive.
And.
Dan you want to add anything on the spot <unk> no I think the three pharma frac crews will do about 80% to 90% of our plan.
While activity and then the remaining 10% to 20% we have to we have to handle with an additional career, we usually try to block it up.
Get a dedicated.
A lot of work for our crude for a period of time and then let it go and bring it back for the next group of Wells.
Okay. Thank you.
Thanks Gene.
Thank you.
And one moment our next question.
And our next question comes from Nicholas Pope from Seaport Research. Your line is now open.
Good morning, everyone.
Good morning, Nick.
Had a quick question on.
It's kind of the updated capex guidance.
The increase was all on the on.
On the drilling side without much kind of change in kind of expected activity, but no real change in the other components the midstream environmental infra.
Infrastructure components. So just kind of curious are you what kind of inflation youre seeing on there are you expecting kind of the same amount of activity on those non drilling non completion components or is that just a little bit more fixed with project type work.
Yes, it's definitely a little more fixed with project type work. There is some inflation in those in those budgets, but that was already somewhat baked in.
The midstream side in particular, the big bulk items is buying a lot of pipe.
Pre bought a lot of that so when you were that was going to sit on the cost side.
Infrastructure and our environmental side, it's not necessarily changing.
Change in plan as you mentioned, it's just a few inflationary items around around the edges, but it's nothing it's nothing.
Nothing to the extent of what we're seeing on the drilling and completion side when it comes to comes to inflation.
Got it I appreciate that and and as you kind of look at kind of.
Progressing towards completion of the midstream the rattler kind.
Kind of acquisition is there any anticipation of any real change in operations or I guess how much.
Kind of third party.
Is even a part of rattler at this point in terms of operation. That's a great question. That's a great question too.
Nothing's going to change operationally, we still we still like the midstream business, we still like what it does for our consolidated margins. We just felt that it didn't need to be a separate public entity and so we're able to.
By that back in and still run our midstream business that we own 100%.
Say the team has done a good job seeing seeking out third party opportunities I wouldn't say it was.
It's our core business, but we will have we will have some real cash flow coming out coming in from third parties given the amount of assets we have in the ground on the midstream side.
And I appreciate it.
The color.
I'll, let you guys, yes, thanks a lot.
Thank you and one moment our next question.
And our next question comes from Doug Leggate from Bank of America. Your line is now open.
Hi, Thanks, good morning, everybody.
Thomas.
Goodbye.
Turning the question, but.
Laura just hopefully youll.
<unk> will issue a bunch of shares so I'm just wondering how we should think about the split.
Between the variable.
Stepped up by bipolar.
As you go forward.
Yes, Doug if you were a little mix there.
I Couldnt hear you too well, but I think I got the gist of it.
I think generally we are going to be very aggressive on the buyback here in Q3, given given where the stock is and where we continue to generate free cash flow above mid cycle pricing. So we've already spent $200 million.
Quarter to date generally as you kind of take street numbers and keep our base dividend flat in Q3, we could probably spend another $650 million.
On buybacks this quarter, so if the stock stays where it is and and oil stays where it is we're going to be very very aggressive on that buyback, which is why the <unk>.
Board signified the confidence in increasing that authorization to $4 billion.
Okay. So sorry to press on this point province, and I apologize for my line, but.
Is there a more formulaic way, we can think about.
Are we still looking at a substantial variable in the second half of this year.
Now.
These prices, Doug if the stock price stays where it is today.
All of that cash is going to go towards reducing the share count.
Great. That's what I was looking for my follow ups, just a quick one on the on going back to the Emt very quickly can.
Can you clarify is your understanding is today do itc's on.
I guess Nols not such a big deal for you guys, but in Idc's, specifically that they still qualify as an offset to the emt in your view.
Any any color you can offer your your interpretation of that.
I think our interpretation is they still do.
Unfortunately, IDC has become such a small part of the cash flow stream that are not in.
Packing things much so that's our understanding today, but you never know what politicians anything anything can happen.
Great well I appreciate the clarity on the cash tax guidance. Thanks, so much.
Yes, Thanks, Doug.
Thank you.
One moment for our next question.
Okay.
And our next question comes from David <unk> from Cowen. Your line is now open.
Thanks for letting me back in the room guys.
Wanted to ask just a follow up on some of the thoughts around return on capital and Travis you talked about conversations with the board.
How to make the diamondback competitive relative to its peers you've seen the evolution of what you guys had promised last year, 50% of.
2020, two's free cash return to shareholders the rest or retiring debt you increased that to 75, you just increased the buyback I guess when you talk to the board now about the return on capital programs are there explicit targets that you're thinking about when you're putting on the outline around the buyback.
How did you come to this this amounts are you trying to intentionally show that diamondback can retire 10% of its market cap plus every year is that are those explicit goals now or are these more coincidental based on where the free cash is today.
Yes, those are those we don't have specific goals.
Articulated in a way that you just asked that question.
We simply look at the at the value that we believe the inherent value of the stock versus where it's trading at and.
We wanted a demonstratively move into repurchases when we think Theres a big location like we see in today's market and as we go forward in time.
Maybe that changes, but as it sits today is case just outlined with the previous caller.
We believe that there's still a lot of value and a lot of value in the stock.
Alright. Thank you guys. That's all I had.
Yes.
Thank you.
One moment for our next question.
And our next question comes from Ben Levine from Mizuho Group. Your line is now open.
Yeah. Thanks for getting me on guidance given the scale of free cash flow generation and I'm wondering how you guys are thinking about.
Potential investment in future offtake, particularly on the gas side.
Kind of connecting that gas molecule to the Gulf coast and ultimately hope.
Hopefully international markets.
Yes.
Good question.
I think just generally.
We are a pretty significant gas producer now at this point, we don't have a lot of control over the molecule <unk> flow through acquisition over the years and what those acquisitions come dedications and most of those dedications don't come we're taking kind right. So.
We're certainly doing as much as we possibly can to incentivize.
Pipeline development getting getting molecules to the Gulf Coast, we did commit to the Whistler pipeline will have about a third of our gas on that.
But generally you have to have control of that molecule.
Lentivirus.
Development, and we don't have much more beyond that today.
Got it.
And then I just wanted to go back to the equally.
They seem like kind of a no brainer at this point in time Im just wondering.
If there were any changes in planning or any hurdles that you guys kind of have to get through before broader easily adoption or is it really just kind of securing that that line power.
Well, it's really it's really about the quality of the fleet and what you are signing up for I think what would however, halliburton has put together is truly a unique product.
We're going to have some form of battery storage attached to that easily. So that you are very efficient with the use of natural gas and electricity when that fleet is working so you do need a pretty big acreage block, we need large pads like we have ahead of us and we need a long term commitment with.
Our business partner like Halliburton, So I think that we checked all those boxes, we feel very good about the fleet thats coming on in September . So good that we signed up for a second one or two thirds of our R.
Our simulcast fleets will be equates with with Halliburton and.
Like you said, it's pretty obvious when the economic and environmental advantages sync up.
That's a no brainer for us and we're looking forward to getting our first one of the field here in a moment.
Thanks, guys I appreciate the time.
Thank you Ben Thank you.
One moment for our next question.
And our next question comes from Leo Mariani.
From MK M Partners. Your line is now open.
Hey, guys just wanted to clarify a couple of things that I heard on the call here. So in terms of the buyback I just wanted to make sure I heard the numbers right.
Did you guys say that you could do an additional $650 million in three key <unk> alone on top of the $200 million already announced just want to make sure I heard that number right.
Yeah, I'm thinking I'm taken street numbers and multiply it by 75% taking out the $200 million.
Quarter to date and taking out the 75, a share base dividend and that's through Maxim on buybacks for the quarter and that's something we look at every day I mean, we have our team rerun, we run the model on a weekly basis to figure out how much cash we didn't have in the quarter too.
To buyback buyback shares when there's this much of a dislocation between.
Well in the public markets and oil in the ground.
Okay. That's helpful. And then just on the debt pay down obviously, you talked about paying off some of the rattler debt here.
Can you, maybe just give us a little more color on the decision to kind of pay off some of the <unk> debt, which wasn't kind of due to the end of the decade I guess some of the 29 <unk> in the second quarter looked like you can kind of elected to do that versus kind of pay the higher variable dividend. Because obviously cash flows were up for the quarter. So any more color kind of around our thinking there.
Yes, it does.
Pretty unique opportunity, where an E&P has a ton of cash flow and bonds trading below par and we saw that opportunity our board.
With us and decided that buying back some debt while below par.
It was a good use of capital and also accelerates that deleveraging process to give us more confidence in the increased 75% of free cash flow going back to shareholder shareholders beginning in Q3.
Okay, and just to clarify on the shareholder returns you guys do not count debt Paydown as a shareholder return right.
That's correct.
Okay. Thanks.
Thank you.
Thank you.
And if you would like to ask a question that is star one one again, if you would like to ask a question that is star one one and one moment for our next question.
And our next question comes from Paul Cheng from Scotiabank. Your line is now open.
Alright, Thank you hi, good morning.
Two questions. Please can you just remind us what your hedging policy.
That's an official guidance in terms of.
What percentage that you wanted to hedge.
Secondly, with the rising recession in yet.
That impact your cost that in 2023 Bucks a.
In terms of their capital return bonuses management and all of that thank you.
Yes. Good question, Paul I'll take I'll take the hedging policy and I'll, let Travis more macro about 2023, and just generally we do buy puts for a rainy day. So we've gone to the balance sheet is strengthened we bought more and more pushed around $50 to $55 Brent.
And that situation. If we do go below $55, Brent, we're probably making capital capital decisions to slowdown, but the balance sheet doesn't blow out we can still pay our dividend and still generate free cash in that situation. So.
Really protecting for a rainy day trying to spend.
Around $1 50 to $2 a barrel to buy those first and we want to be about 60% hedged going into a particular quarter. So if you look at our hedge book about 60% hedged for Q3 going down to about zero percent by Q2 Q3 of 2023, and we will just continue to keep rolling that forward.
For rainy day insurance.
And Paul Energy has typically been a pretty good hedge.
Rich.
A bit offset.
Historically and as you look into 2023, regardless of how you define a recession it looks like there will be recessionary impacts.
Across our economy.
Whats a little bit different this time is that the world today still appears to be chronically short physical barrels with not a lot of spare capacity to fill that gap and so while we don't necessarily plan on anything other than in the future than our mid cycle price.
Eric.
It looks to me like the macros.
Macro looks pretty positive for energy prices over the next couple of years.
Even in spite of what I know will be recessionary impact and look if you do see some recessionary impacts it will probably soften some of the some of the inflationary pressures. We're seeing today, yes, I think one more point that's the benefit of this new business model, where we're not changing our plans for every $10 $130 move in oil prices.
To be a $50 move in oil prices lower before we discuss any change to our execution plan and I think this level loaded planned level loaded activity levels has allowed us to.
Fight off the inflation bug, a little better than most and and again.
As Travis mentioned Theres no oil out there.
Just curious you gentlemen want to keep more cash on those yet.
Testing increasing recession fee.
Yes, I kind of throw cash, we certainly want to cash balance the cash balance moves a lot right now.
When you're generating $1 billion of revenue a month.
Our cash balance fluctuates wildly throughout each month.
I think generally having a strong balance sheet, having some cash and having access to capital through a cycle is something also in the board discuss on a monthly basis and.
I think that also ties to where your maturity profile sits right. So if we not only have less debt but.
Longer duration maturity profile.
That gives us confidence in our access to capital and our ability to generate cash given that our cash flow breakeven is down in the mid $30 a barrel.
Perfect. Thank you.
Thanks, Paul.
And thank you.
And I am showing no further questions I would now like to turn the call back over to Travis Stice CEO for closing remarks.
Thank you again for everyone.
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