Q3 2022 Diamondback Energy Inc Earnings Call
The conference will begin shortly.
Raise your hand during Q&A, you can dial star one one.
[music].
Yeah.
Hello, and thank you for standing by welcome to the Diamondback Energy third quarter 2022 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 this session you will need to press star one one on your telephone.
It is now my pleasure to introduce vice President of Investor Relations Adam Lawlis.
Thank you Andrew Good morning, and welcome to Diamondback Energy third quarter 2022 conference call. During our call today, we will reference an updated investor presentation, which can be found in Diamondbacks website.
Presenting diamondback today are Travis Stice, Chairman and CEO , Keith <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.
As of operations plans objectives future performance and businesses.
Caution you that actual results could differ materially from those that are indicating these forward looking statements due to a variety of factors information concerning these factors can be found in the company's filings with SEC.
Additionally, we'll make reference.
Reference to certain non-GAAP measures the reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon, I'll now turn the call over to Travis Stice.
Thank you Adam and before we start with my prepared remarks this morning.
I encourage each of you to please take advantage of one of our greatest driven which is we have as Americans our freedom through elect representatives. Please take the time out of your busy schedules today to go float if you've not already done so.
Welcome to Diamondback <unk> third quarter earnings call.
At Diamondback, we pride ourselves on our execution.
Our commitment to being the lowest cost operator in the Permian Basin has and will continue to position us for success through the cycle.
The third quarter was no exception.
In the quarter, we produced over 224000 barrels of oil per day.
And generated approximately $1 7 billion in operating cash flow.
Our capex was once again within our guidance range, leading to free cash flow of nearly $1 2 billion.
As we previously announced we increased our return of capital commitment and stated that beginning this quarter.
We would return at least 75% of free cash flow back to our shareholders up from at least 50% previously.
At 75% total capital returned was nearly $875 million.
With dividends totaling $403 million or $2 26 per share.
The remaining $472 million towards our opportunistic share repurchase program.
We bought back nearly 4 million shares at an average price of approximately $120 this year to.
To date, we've spent approximately $1 2 billion of our $4 billion buyback authorization.
Repurchasing nearly 6% of our shares outstanding.
September of last year, when we initiated a program.
In October we announced the pending acquisition of the assets of Firebird Energy company with a large contiguous position in the Midland Basin.
We feel far burden is the right balance of cash flow and inventory and the acquisition is immediately accretive on all relevant to per share financial metrics, while providing a long runway of high quality drilling opportunities.
With over 350 locations, we expect to have well over a decade of running room at our projected one rig development pace.
In conjunction with the acquisition, we announced that we would sell that at least $500 million of non core assets by the year end 2023 with.
With net proceeds primarily used to pay down debt since June .
We closed on $155 million sale of.
Both non core assets in the Delaware Basin, Jumpstarting, our program and ensuring continuous improvement to our investment grade balance sheet.
We will continue to pursue strategic divestitures, including the sale of certain assets within our rattler portfolio generating unrealized value for our shareholders.
In closing we know our business.
We know we have some of the best inventory in the United States with our low cost operator operational machine in place.
We have the unique ability to generate significant repeatable returns through the drill bit for decades to come.
In 2019, we began co developing our primary targets. Since then we've learned how to optimize our development patterns and spacing and as a result are seeing material improvement in well productivity over the past 36 months.
In fact, our well performance this year.
He is back at 2019 levels. When we were primarily targeting one off wells and our best films, which while having great performance and economics has the potential to strength significant components of our inventory.
Leading to material parent child concerns down the line.
Fortunately, we are well positioned for the future we expect to close in the harbor transaction at the end of November and slow the development pace on that estimate from.
From three rigs to one.
We are working with our service providers to ensure that we have the most efficient and cost effective personnel and equipment in place for next year, including the two easily Sam will for about crews we've secured from Halliburton. The first of which is already in the field and performing well.
All of this will provide operational momentum as we move into 2023, we expect to deliver the same operational results you've come to expect from Diamondback.
While we won't be giving detailed 2023 guidance today, we believe that we will be able to generate low single digit pro forma oil production growth next year by maintaining our current standalone activity levels.
The one additional firebird re.
It's not easy to operate in this environment, but our size scale and quality of the inventory uniquely position us to deliver differentiated results and create meaningful value for our shareholders.
Before I open up for questions I want to address all the diamondback employees that are on the phone.
Diamondback, we just celebrated our 10 years as a public company going from a $500 million market cap to almost $30 billion today.
The people around me in this morning, and sometimes may individuals.
Get too much credit for the success.
It's you the men and women of Diamondback that deserve the credit.
It's your pursuit of excellence.
Your desire to be the very best version of yourself.
Your dedication to integrity.
That is responsible for our success.
It remains my privilege representing.
Thank you for all that you do operator, please open the line for questions.
Certainly.
As a reminder to ask a question you will need to press star one one on your telephone once again to ask a question. Please press star one one.
And our first question comes from the line of Neal Dingmann with truest.
Thanks, Hey, good morning, Travis team Travis My first question is on.
On your developmental strategy, specifically could you all discuss if you have or will continue to develop you mentioned that could slide seven.
<unk> gone to the co development you all went there really I think before a lot of other stead and I'm. Just wondering I'm wondering are you going to do that is that pretty much on all the assets, including when you takeover Firebird and I'm just wondering in the second part of that are there parts of this process that you believe.
You still have an advantage over our peers just seems to me when I'm looking at sort of margins that Perm you all still our leidy and so I'm just wondering if there's some things youre dealing with when looking at that slide seven that you still think are leading the pack.
Yes, Neil Good question. This is case I think generally we obviously had a tough earnings call at the end of 2019. When we made this shift to co development I think we learned very very quickly from that as well as moving more of our capital to the Midland Basin and I think just generally the teams has done a really good job on that.
Only spacing within each zone, but the <unk> spacing given that these zones talk to each other and the result is better overall results here over the last couple of years. So nothing is going to change there I think we're going to keep co developing and in fact in some ways will end up doing some larger pads and we even have.
Prior given the amount of Virgin rock, we have and that sale and Robertson ranch area that is kicking off in <unk>.
In a real way right now.
Generally on the other on your other question.
Well costs are certainly the biggest advantage we have as a company at Diamondback and that's a cultural thing from top to bottom, we're very focused on cost very focused on.
Keeping costs down in this inflationary environment I think that gives us an advantage, particularly.
Looking at stuff like Firebird Firebird looking to co develop a lot of zones up into north at a low cost structure.
Central position, there's opportunities for upside if we bring the wolfcamp, a and the lower sprayberry development and that I think the Testament.
We can drill them cheap the returns make sense to compete for capital.
So really it sounds encouraging.
And my second question really I guess I'd call. It the top of Azure and Thats on shareholder return and capital allocation.
Travis for you or case, I mean, do you see any scenario, where you all would back off that 75% payout and maybe turn to more growth or something else.
And then on the capital allocation obviously.
You all had nice stock move how do you feel about the buybacks versus the des.
Look we've seen with volatility in the market that every quarter, we've had the opportunity to buy shares back and when that opportunity presents itself.
We will do so aggressively I think the key to any of those questions is the ability to generate free cash flow.
That's certainly what our focus is and then maintaining the flexibility on how the return of that free cash flow.
It gets prosecuted I will say that in conversations with the with our long only shareholders lot of those guys prefer.
In order to get the cash back.
But again, we believe that we will have opportunities.
To repurchase shares going to yes, and there is no change to the 75% of free cash flow you know wallets, certainly a restrictive amount of cash to be giving back to the equity holders, we feel that our balance sheets in a position to be able to do that and we're still.
Reduce debt through noncore asset sales or free cash flow generation and our debt structure is significantly better than it has probably ever been in our company history. So.
Generally we feel that it's time for our equity holders to get their cash back. After this company Hasnt matured from a high growth company to a high returning company.
Yeah, Okay, great and your total shareholder return certainly speaks for itself. Thanks, guys.
Thank you.
Thank you.
And our next question comes from the line of Neil Mehta with Goldman Sachs.
Yes, good morning team and congrats on 10 years that went by very fast.
While that in here maybe my first question is on 2023 cap.
Capital spending.
Any early thoughts here as we bridge from <unk>.
<unk> levels two to next year.
Talk about all the moving parts ranging from inflation activity.
Yes. Good question, Neil I think while we're not ready to throw on the.
All of that well costs are going to keep going up next year, we do have some things coming our way from a efficiency perspective, but I'll kind of laid out two ways based on the $1 9 billion that diamondback is going to spend on capital this year pre firebird.
I would I would assume we're probably up 10% to 15% on that number.
We've done that if we had to make that decision today on on well costs I think another way to think about it is.
Basically in Diamondback today is pretty firebird at a $500 million run rate of capital I would say somewhere below 10% increase off of that makes sense and then in both scenarios, adding the $250 million of Capex for Firebird.
That deal on current well cost so those current well costs are running through that.
Capital free cash flow numbers that we've put in for that deal. So that's how we're thinking about it I think I think certainly there are some things that could go our way.
Casing has been a massive headwind for us and for the industry.
One basin casing of now $110 a foot.
That is a huge number up on a fixed cost that we can't really control here.
Okay.
We'll look for a little more clarity, but that's helpful. Starting point and then perhaps a question for you is just on your outlook for U S shale growth I think a number of industry participants have been surprised by.
How flat the U S production profile has looked here over the last several months and so curious on your thoughts on.
Shell maturity.
Is the lack of growth that we're seeing relative to expectations of function of service bottlenecks or is it a function of also asset maturity.
Lots of unpacking that question, Neil but I think it's really all of the above I think there is asset maturation I think certainly supply chain.
Chain constraints or are also limiting growth I think for public companies to continued discipline that we've all been demonstrating on shareholder returns versus commitments.
Commitment to growth I think all of those factors.
Way into more of a muted production growth.
<unk> ratio going forward.
That's it out here in the Permian and I think we're still continuing to hit.
Production Records every month somewhere close to 3% to five 5 million barrels a day.
But thats going to be challenged to continue to grow that into the future do we have the assets out here, yes, we do but some of those other <unk>.
Capital constraints that I mentioned are going to be.
Pediments too.
To efficient growth soon.
Soon we will probably see and higher commodity prices some people try to grow but you're allocating capital with a very trailing into.
Efficiency. So those also create headwinds as well for shareholders.
Okay.
Thanks Travis.
Yeah.
Thank you.
And our next question comes from the line of a room Ziram with J P. Morgan.
Good morning, gentlemen.
A case there Travis I was wondering if you could talk.
A little bit about the evolution of your co development strategy, which has shifted in 2019.
You highlighted how you're well productivity now has returned to 2017 levels.
I'm wondering.
To see if maybe you could also maybe compare and contrast.
How diamond backs development looks like relative to many of your peers. Because you highlighted how you believe youre completing the most number of sevens per pad.
In the Midland Basin.
Yes, I'll kind of focus more on what Diamondback doing certainly do a lot of competitor analysis and learn a lot from our competitors on what to do and what not to do in the basin and so generally we have a data analytics team that looks at inter lateral in Arizona spacing and how many how many wells are completing per pad in <unk>.
Zone, and how close the nearest wallboard is in our math tells us that we're finding are striking a good balance here between IRR, an NPV, we may not have the highest.
Oil EUR per foot, but certainly spacing wells, a little tighter as well as well as co developing more economic zones together.
Theyre trying to continue.
Had our way.
Some ways these higher commodity prices.
Bring more zones into the equation and maybe even one or two wells per zone, but generally spacing.
Fairly consistent here for for the last couple of years, so credit to the team for looking at what we've done what's gone well, what's gone poorly and adjusting accordingly, and I think we're set up now for <unk>.
Few years of very solid development, particularly in the Midland Basin side.
Great Great and then maybe just my quick follow up.
Uh huh.
As you guys have now started to develop some of the assets you bought from guide on and QEP and kind of Central Martin County can you give us a sense of how the early wells have been trending and what type of.
Mix should we expect in Martin County.
On a go forward basis over the next couple of years.
Yes, I mean, certainly when we go back to that deal. We basically said we did these two deals to get better not bigger and I think that's proving out in the performance of the wells and the performance.
Since then.
We're just getting started in the main block.
So, it's probably a 24 well pads coming on here in early 2023, and we will continue to develop that sale in Robertson.
Block very aggressively with probably a three rig run rate until it's drilled up in three or four years and that that should drive the lion's share of operational performance.
Done by that though we have seen very good well results up in the northwest portion of Martin County, this year due to some adjustments on spacing and landing targets.
I'm proud to say certainly some of the shallower zones Middle Sprayberry has looked very very good up there relative to prior expectations.
Great. Thanks, a lot.
Thank you.
And our next question comes from the line of Derrick Whitfield with Stifel.
Good morning, all.
Hey, good morning Derek.
Hum.
Travis with the understanding that you guys have limited exposure to longhorn in 2023, and the recent weakness was really driven by maintenance could you speak to your macro views on gas egress over the next few years and how you plan to mitigate the exposure over time.
Certainly, it's going to be tight and I'll, let Kate give some specifics on that but I think <unk> was going to be tied to really the certainly most of next year, probably well into 2020 forward willing to exit some of the major Firestone. So we do think we do.
We do opportunistic hedging, particularly against the on the Walmart side and we've committed to some of these pipes that are making sure we get gas not only that doesn't go to warm up it goes directly to the Gulf Coast, Yes, I mean, basically next year in two thirds of our guests are exposed to wawa and Thats all been hedged today actually hedged at a while back.
And the other third.
Gulf Coast exposure on the Whistler pipeline and then as you think about 2024 as you know, we think theres going to be pockets of weakness in 2024, certainly easing in the back half of the year when the big the big pipe matter when it comes on but it's going to be it's going to be tight from now until then because some of these expansions yet at 500 million a day expand.
But I think theyre going to be full right away.
Terrific.
My follow up I wanted to focus on your operational efficiency given.
Given the improvements you've experienced in D&C efficiency metrics really over the last couple of years, most would expect efficiency to apply to due to the law of diminishing returns in the dilution of experienced crews.
As you guys look forward in time, what are the levers, you're hoping to pull to improve or at least maintain your operational efficiency.
Yeah. Good question I think the biggest thing that's going to help us next year from a cost perspective.
Halliburton easily.
One has just started and one is picking up.
I think generally on the horsepower side, we get charged a little bit less they make more margin on that on that.
Particular piece of business on top of that we're not spending money on diesel.
Fueling that fleet with cheap Wahaha gas for the next couple of years and that could be anywhere from 10% to 15 Bucks a foot savings depending on.
Where the price of all hires and we just opened our first net mobile mine are many mine.
Let me write offset some of our Martin County position, So I think generally what.
We're not drilling wells to TD faster than we were last year.
We're still best in class in that in that area. Now is the time to work on the other pieces of the cost equation as as inflation heats up here. Yes. There is a lot of conversation is always when you see activity levels increased in the Permian basin about the impact.
Inexperienced or <unk>.
Green hands, we call them.
But I don't I don't.
I don't follow that line of thinking because it's our job as supervisors of those activities to make sure that even.
Least experienced individuals has the right supervision to performance job not only safely efficiently. So the illness actually transfer is not to the service companies within experience and the <unk>.
Transfers to our operations organizations more field supervisors to make sure they can provide the oversight.
Executing our plans effectively and efficiently and safely.
Great update thanks for your time.
Thank you Derek.
Thank you.
Our next question comes from the line of David <unk> with Cowen.
Yes.
Thanks, everyone for taking my questions today.
Youre welcome.
Morning.
Good morning.
Wanted to follow up just on the $500 million noncore asset divestiture program $155 million achieved already on some PDP.
Travis you highlighted in your prepared remarks, some of the rattler assets kind of feel like Diamondback isn't getting credit for it but should we think about that is representing the bulk of the remaining noncore targets.
Could you give us a little bit more detail about the scope of that asset.
Yes, I mean really David it's all value, but generally internally, we see that an E&P business trades at a $4.
Five times in our.
Our pipeline gathering system trades at eight to 10 times so far.
Last call for us with us not getting any credit for it in our evaluation to look at some of the JV that we invested in alongside contributing volumes to those those businesses over the last five years.
I think there are any kind of a harvest mode, where it might make sense to sell particularly given our buying of rattler and renewed focus on.
The upstream business, which is what we're so good at so.
I won't commit to certain certain projects, but there is certainly some of our JV, where we're sitting on a big wins in.
Do you expect us to try to monetize those appropriately over time.
I appreciate the color on that and good luck with those.
Maybe just a second one for me I know, we've talked a lot about well productivity, but obviously its on that slide seven you guys highlight continued well productivity improvements in the Midland Basin.
I guess as we think about going into 2023, I think you guys have highlighted that you will continue to allocate more activity towards some of the Virgin rock areas like Robertson ranch policies.
Seems like the overall Midland productivity is benefiting from high grading and Martin and Midland.
With Firebird, I guess youre, putting one rig on there.
I guess when you look out you know how long does this mix b. How long is this mixed maintains with this sort of intense high grading and within Martin and Midland, where we might expect that productivity per well or on a per foot basis to be sustained at these levels or perhaps improving.
Yes.
I think it's going to be around for a while certainly longer than in the market can see today.
I think it's important right we have two well sized deals in 2020 that that we're benefiting from today.
I think generally our job is to allocate capital to the best returning zones and projects first so we won't be able to keep this up forever, but I think.
As the shale cost curve goes up which is likely to happen over the next decade, our job is to maintain a cost structure and an inventory that keeps us at the low end of that cluster and that's what we built this business on and I think we have both the inventory and definitely the cost structure to be able to to keep ourselves.
At the low end of that cost cost curve longer.
I appreciate that.
Thank you guys.
Thanks, Dave.
Thank you.
Our next question comes from the line of Jeffrey Lambeau, John with Tpa.
Good morning, guys and thanks for taking my questions.
Thank you Jason just a.
A couple from me on the fiber at acreage in particular, a little bit on productivity, but also a bit on inventory I saw on the deck that you highlighted some more results on that acreage I just wanted to get your thoughts on if there are any potential implications there from an inventory standpoint, if you could maybe speak to how the locations you spoken to it at this point that asset are distributed across physician and search.
What sort of upside you might contemplate in terms of inventory based on some of these results.
Yes, Jeff Great question.
When we announced the deal you got on the phone a lot a lot of people who haven't been on a big call like this we basically said the northern prospect.
As you can see on slide eight in our deck competes for capital right away and that's the game plan is to allocate that that rig to that northern prospect for the first few years of the deal.
I think generally you know recent well results in the central prospect.
Bringing in the Wolfcamp a upside into co development, we underwrote fixed across in the lower sprayberry across that block and Thats, what we paid for but recent well results of co developing <unk> look pretty promising today, we have some time to kind of set out before.
Full field development, but that's kind of the unwritten.
Underwritten upsides of the trip.
Yeah.
Perfect. Thanks, guys.
Thank you Jeff.
Yeah.
And our next question comes from the line of Jeanine Wai with Barclays.
Hi, Good morning, Kevin Good morning, guys. Thanks for taking our questions.
Good morning Jeanine.
Our first question, maybe just going back to the 2020 to guide the updated guidance for wells drill it's now a little bit lower at 260 for the year versus two 780 to 90, but before I think.
Can you talk about what's driving that number lower now and how that really impacts operation momentum into next year.
Yes, Jeanine I won't say that interrupt operational momentum into next year, because it's our job to.
To not have those be issues, we are running a couple of extra.
Intermediate rates today to get ahead of these large pads, where the big rig follow so.
I think the message is nothing to see here from operational momentum, that's what you'd expect us to do and that's what we do best.
Just I would just say, we probably completed a couple of more wells in the Delaware and we originally expected this year and.
We ran probably one less rig and we thought for the year. So.
On the other side of the equation, we're completing probably 15 less wells than we went into the year expecting to complete so capital efficiency, certainly looking good and momentum feels it feels very good going into 2023.
Okay, Great that's definitely a standout these days Nancy wonderful thank you for that clarity.
Second question is just a quick housekeeping one.
In your prepared remarks on 23, you talked about low single digit growth on a year over year adjusted basis, and what baseline oil number should we be using or assuming it's like 220, a day for legacy Fang but.
We're not quite sure what to assume for Firebird since we only have commentary for <unk>.
And that's only for like a month.
Housekeeping question on that thank you.
Yeah. Good question I think we did release 19000 barrels of oil a day net for fiber in 2023 and that is not changing.
Base business Bank, we went into 2022, saying, we're going to 220000 barrels of oil a day flat, we've put outperformed out a little bit this year, but basically you can take that $2 20.
Complete the same number of wells is as we expected at the pre fire with diamondback level and that should spit out a couple of percentage points with low single digit growth and then add that Firebird 19 on top of that and nothing has changed here from our perspective I think that's what you expect us to do.
Transparent and hit these numbers.
Hey, Thanks, gentlemen.
Thank you Janine.
Thank you.
And our next question comes from the line of Tim <unk> with Keybanc capital markets.
Hi, good morning folks.
Some of my questions have been addressed so I think I'll just ask one Travis you opened the door a bit talking about election day today and.
And I'm just curious if you could talk about it.
Either diamondback or any of the year our industry trade groups have had any discussions.
With the bite administration in D C about.
These proceeds oil shortages in the U S. Any context, you can provide would be helpful.
Yes, certainly not specific specifically inside diamondback, but yes aggressively so with the trade organizations that diamondback is part of <unk>.
At the federal level API <unk>.
We have a lot of sweat equity invested in both of those trade organizations that we lean in alongside all of our industry peers to chip to provide some so clear.
Strategies into the White house and into the current administration so.
And that will continue regardless of how the results of the elections turned out today.
Our that's our advocacy arm and we think it is important to our shareholders to be to be a dynamic part that advocacy.
Okay, and then I guess the follow up is do you believe that.
Anybody D C is listening to the sort of the domestic.
Group of producers.
Yeah. It certainly seems like the rhetoric has turned decidedly against the industry again.
In the lead up to these elections.
We can only open pray for that our citizens continue to elect.
Morally.
Excellent.
Representatives, so that we can send people to Washington D. C that do the will of the people and.
Diamondback is going to continue to do our part.
Like I said through advocacy, both locally and at the state and federal level, you know as we navigate this very difficult rhetoric, that's being addressed.
Pointed at our industry.
Okay. Thank you I appreciate the comments.
Thanks, Tim.
Thank you.
Yeah.
Okay. The next Doug Leggate with Bank of America.
Good morning, This is John Abbott for Doug Leggate.
And thank you for taking our questions.
Our first question is yes.
It's on capital allocation.
Approximately 80% of your Capex is to the Midland This.
This year, 20% to the Dell.
And you sort of look over a multiyear horizon at what point would you anticipate that the Delaware will become a better for a larger percentage of your overall capex.
Honestly quite frankly, if you look at all our inventory and we can kind of keep that 80 20 steady for for a long time. So I don't think there's any plans to change it in some ways with the Firebird acquisition. Some more wells completed there will probably be closer to 80 580 515 Midland.
Hello Aaron.
I think.
The curves that we posted on slide seven prove out that our Midland Basin is certainly top notch and that's where we're going to be focused.
Appreciate it and then our second question is on sustainable free cash flow. So.
The wells you're drilling this year are over 10000 foot laterals.
Looking at your slides I think it's about two thirds of your inventories about 10000 foot laterals. The other one third is less than that so over a multiyear horizon. How do you think about your ability to sustain free cash flow.
I think generally we have a significant amount of long lateral development ahead of us at some point naturally.
If we can't get trades done.
Lockup acreage, we're going to have to reduce our lateral lengths, but I think on the other hand.
You have a a lower decline production, allowing you to maintain capital efficiency for a longer period of time. So we look at it.
Every quarter total inventory, it's all development and.
As far as as we can see things look things look very good for Diamondback capital efficiency for the next few years.
Appreciate it guys. Thanks for taking our questions.
Thanks, John .
Thank you and our next question comes from the line of Charles Meade with Johnson Rice.
Good morning, Travis case in the rest of the done back group.
Good morning Charles.
So I'd like to ask a question back to the fiber asset you guys laid out this view along with the north South axis, but could you give us.
Some of the.
Some of the I guess, how how the prospectively changes west to east to West and if my understanding is yes.
Youre starting to approach or get up onto the central basin platform on particularly on the on the western side of that central prospect and I think it even a bunch of your mind byproduct back. There. So are there are there any promising puzzles youre working on on that side or is that something we should be thinking about for in the near future.
Or is that or is that up.
That's way down the line.
Yeah. Good question I don't think its.
Anything in the near term there certainly are some results further west but early signs look promising we didn't underwrite kind of the two mile buffer on the on the west side for LLS prospect prospectively, but certainly did.
There is certainly some untapped upside with some Barnett and Woodford results nearby including our limelight prospect. So that play is getting a lot of attention, but at the end of the day, our investors expect us on the right what we're going to develop and right now that's all that's all on.
Unvalued upside, which.
Technology and cost workout.
B certainly perspective into the next decade, when we get to drilling it and you will see our development strategy.
Charles as we've moved to the Central block as case, you laid out is kind of our phase II drilling, but we'll start east and work West and I think the two wells that are labeled E and F. On slide eight are good examples of what that early development scenario look like and where we didn't complete those wells there.
<unk> really promising and we're excited about it but.
Phase one will be up to the north which is very akin to our Spanish Trail development and then we'll start on the east side of the central prospect and work our way to the West before you get it up as you pointed out before you get to the Central Basin platform.
That's good detail case, when I was listening to your answer it made me think.
Have a word I don't think I've ever heard before I was expecting you to say something like that.
Western size on underwritten or something like that.
Okay.
Right.
Britain.
And then maybe just one more following up on this on this this firebird deal.
And Travis case, I think this is kind of.
Whether we should think about this as a as a as a new mode or a pattern for you guys is as I look at the different pieces of your of your of your business, where you are youre not going to need to 75% cash return of free cash returned to shareholders that leaves a smaller piece of the 25%.
25% piece available to fund the cash portion.
Of any future A&D and then we look at the Firebird deal you guys. It was it looks like a good deal.
But equities was a big component of it so is that something we should be thinking about for you guys is that as you are retaining less cash or equity is going to be.
A meaningful chunk of future A&D or is that the wrong.
Is that the wrong interpretation.
I think generally there's not there's not a ton of A&D lots to do in the basin right. It certainly.
<unk>.
Not random.
30000 acre blocks in the middle of Martin County, and Midland County that are available. So A&D is certainly evolving.
Over the next couple of years and in the Permian as consolidation continues and I think generally with the $75 25 commitment to equity versus non equity on cash returns that makes looking at deals even more.
Plus deals under the microscope right. So in this deal we're very focused on not.
Not levering up the balance sheet in a meaningful way because we've worked so hard to get the balance sheet, where it is and the sellers.
At an asset that was early in its development and believes in the upside and wanted to take Diamondback staff to execute on that on that upside.
We're not giving up 10% of the company to these guys. They have a 3% position and hopefully their long term happy shareholders, but I think we've used equity to grow this business for the last 10 years and it's proven out to be.
Great way to fund deals.
Thanks for that detail I appreciate it.
Thanks Charles.
Thank you.
Next question comes from the line of Leo Mariani with MKS partners.
Yeah.
Hey, guys wanted to jump back into kind of Capex certainly noticed that.
Capex has kind of been trending up a little bit in the last few quarters and into the fourth quarter guidance I assume that's mainly inflation I think your activity levels have been.
The pace of inflation right now I know you talked about tubular continue.
Continuing to sort of go up are you starting to sense that any other items or maybe starting to ease a little bit whether or not rising as quickly and have you locked in any major portions of your 'twenty three budget at this point and if so can you provide some details on that.
Yeah. Good question I would say.
This is kind of why we're not looking to give 'twenty three guidance officially today, because I think some things will come to us.
Versus this year, where everything just went up.
We do have a couple of frac fleets locked in the two fleets that we talked about all of our sand is locked in.
With a large contract.
With a local provider the rigs we continue to roll our rigs on a rolling <unk>.
Six month basis, and while we're running <unk>.
15 rigs today I bet, you 12 of them are different rigs that are running. This time next this time last year because of simply because of cost and efficiency. So.
There's a lot going on behind the scenes to keep pushing well costs down or stop them from going up and that's what you would expect us to do.
Okay. That's helpful and I just wanted to ask a clarification question I know, it's too early for exact specifics on 2023, but if I heard you guys right I mean.
The base level thinking is sort of flattish year over year activity and then basically we'll just add in fire burn essentially study the operating plan for this year of pre Firebird.
Relatively intact for next year.
That's right I think firebird, we're going to drop.
Rigs dropping down from three rigs to one rig.
Generally a little more free cash on that on that business you know in hips.
19000, net barrels a day of production, we forecasted for that.
Business I think we'll complete around 30 wells. There. So you can basically take diamondback base business from this year plus the 30 wells for fiber.
Plus the production that we laid out today to get.
An early look at 2023.
Okay. Thanks, guys.
Thanks Leo.
Thank you and I'm showing no further questions so with that I'll hand, the call back over to CEO Travis Stice for any closing remarks.
Thank you again for everyone to participate in today's call. If you've got any questions. Please contact us using the information provided.
Yeah.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
[music].
[music].
[music].