Q2 2019 Earnings Call
Thank you Josh.
Good morning, and welcome to Diamondback, Energys second quarter accumulating conference call.
During our call today reference an updated investor presentation.
Which can be found on Diamondbacks website.
Representing diamondback today.
Travis Stice CEO my call was president and CEO .
Okay that helps the effect.
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 Companys filings with FCC. In addition, we will make reference certain non-GAAP measures. The reconciliations would be appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.
I'll now turn the call to Texas.
Thank you Adam welcome everyone and thank you for listening to Dom above second quarter 2019 conference call.
Diamondback continues to execute in the second quarter of 2019.
We produced record EBITDA per share from 7% quarter over quarter production growth.
While lowering the midpoint of our capital cost guidance and increasing the midpoint.
Both our full year production guidance and estimated completed well count for the year.
Diamondback has now grown earnings per share.
At 11% quarterly CAGR and EBIT dollar per share, but 9% quarterly since our IPO in late 2012.
Based on second quarter numbers Diamondback now generates more annualized EBITDA per share better IP IPO price.
Seven years ago.
Diamondback continues to focus on per share metrics with shareholders now owning more production cash flow and earnings per share than prior to our acquisition of energy and a year ago.
Even in the face of a lower commodity price environment.
Diamondback per lateral foot well calls which include every dollar spent bringing our operated wells to production and the first six months of production related costs thereafter.
Or down 7% year over year in the Midland Basin.
It's 16% year over year in the Delaware Basin.
As a result, we're narrowing the midpoint of our 2019 capital budget and increasing the midpoint of your operated completions, which implies over $110 of improved capital efficiency per completed lateral foot.
Versus our initial budget presented in December .
Our operations organization continues to drive material cost out of the business with expectations for continued tailwinds due to improved deficiencies.
And service cost deflation.
With respect to the Inogen acquisition and subsequent integration Diamondback has now completed every major strategic objective it exceeded our stated synergies presented one year ago.
We announced the deal.
In the second quarter, we completed the IPO of our midstream business right were.
Raising over 720 million net did on the back.
We also recently announced the drop down of over 5000 net royalty acres to Viper.
For 700 million of gross proceeds, including 150 million in cash.
Lastly, we recently completed the sale of the conventional central basin platform assets acquired via the energy acquisition.
As a result of completing these objectives.
DAMI back immediately commenced or stock repurchase program by repurchasing 104 million of stock in the second quarter.
After reducing our consolidated net debt by $400 million quarter over quarter.
We intend to use the majority of the remainder of these proceeds along with increasing free cash flow from operations to continue our stock repurchase program.
Our balance sheet is strong with both absolute debt levels and leverage metrics low.
And we will continue to return capital to shareholders via our share repurchase program and give it to you.
At current valuations.
We continue to feel the best use of our free capital it down but is buying back our own stock.
With respect to oil realizations, we believe the worst of or why this basis differential quarters are behind us and we now expect to realize greater than 95% of W.P.I. pricing for the second half of 2019.
By early next year, we expect to realize oil prices at parity with or greater than W.T. as our existing commitments convert to the gray OIC in epic pipelines and receive Brent or coastal pricing.
With our recently announced commitment.
Through the week to what's your pipeline.
We will have full exposure to the Houston and Corpus Christi local refining in export markets about 2021.
Removing in basin pricing risk from our future business model.
In closing.
Diamondback continues to execute on the promises presented at the time and energy in acquisition.
Our business is nearing a significant free cash flow inflection point in the second half of 2019 and into 2020.
May no longer be maximizing growth within cash flow.
But we are not sacrificing growth in 2020, as we expect to grow at industry, leading rates for large cap BNP and deliver over 750 million of free cash flow at $55 oil due to our best in class cost structure asset quality and operating metrics.
With these comments now complete operator, please open the line for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press the Star then the number one kenyans touchtone telephone.
If your question has been answered or you wish remove yourself from the queue. Please press the pound key to prevent any background noise U.S. Yoo. Please place your line on mute. Once your question has been stated.
Our first question comes from Mike Kelly with Seaport Global.
Proceed with your question.
Thanks, Good morning, guys.
Yeah, Travis as I flipped through the slide deck here, it's pretty apparent that you guys have really kind of check the box and a whole bunch of aggressive.
Objectives over the last year and it really just kind of wanted to get.
The thoughts of whats on your right now kind of what's your refreshed strategic to do looks list I'm kind of look like as we are as we sit here today. Thanks.
Yeah. Thanks, Mike yet you know listen our strategic objectives. There, there's not really any new ones. You know, we're going to maintain our commitment to execution and capital efficiency. That's as part of our core business practices as well as just about anything were continued at the board level to to grow the dividend and we've committed to this free cash flow returned to shareholders in the form of share repurchases. So.
What we clicked off you know some pretty significant objectives. You know those were kind of one time events in the first seven months of this year.
We're committed long term to this to the shareholder <unk> the shareholder return program and I'm pretty confident we'll be able to deliver on it.
Okay, Thanks, and maybe the follow up on that you just mentioned to that.
Yes, $750 million free cash flow in 2020 with industry, leading growth I'm still in the works what would get you to maybe dial down that growth a little bit and two upped the ante on free cash or just kind of curious just to hear maybe or philosophical thoughts on on that growth first free cash flow balance. Thank you.
You know, it's it's not an exact science you know the way that we look at a look at the future you know if commodity prices rollover can your further you know, we're certainly going to we're certainly going to look at our forward model and make adjustments accordingly, probably in the form of.
No drop in one or two rigs, but you know our futures futures is really bright Mike wood with the way that we continue to execute well with our.
Overall cash cost you on the mid eights right now you know were profitable.
Significantly no every barrel that we produce for for a long ways from this current oil price. So you know, we're pretty confident well get a lot a lot of you know still exciting things you know.
To deliver in the future and and I think the future dialing back is really bright.
Appreciate it thanks guys.
Thank you and our next question comes from Neal Dingmann with Suntrust. You May proceed with your question.
Good morning, all.
Hi, This is <unk> <unk> going through the release about your low capital cost continued to be notable on that so I guess my question is around knows how do these factored in when allocating capital between thinking about production grows versus buybacks rather shareholder initiatives.
You know Neal that's not really an either or I think it's an and I think we can we're one of the few companies that can do both we can still grow and we can now.
You know we can repurchase shares in further returns to our shareholders. So you know we don't we don't hit it on the on that we actually look at a way to to to combine to combine both growth and returns for shareholders.
Okay, Great and then my follow up just it's Ron Slide 10 under <unk>.
Looking at the spacing appears to me and I was looking at this versus in prior presentations, even going back two years.
Pairs to me like your assumptions haven't changed for quite some time and I'm just wondering could there be potentially looking at this some downspacing opportunities or are you sort of content with this I'm. Just went obviously, there's a lot of scrutiny. These days on that so maybe anything you can say around your assumptions and how this has or hasn't then maybe will change.
Yeah, Neal Oh went back and did the same thing I wanted to see how long the slide deck had been in our this slide had been or slide deck and I think it I think it goes back like four years and I think I've said a thousand times, it's easier you know strategically to add locations entities take away locations and we've always been you know a conservative in our spacing assumptions and you know we don't really have any plans right now, especially as commodity price continues to decline to look at any reasons to to increase Wilkinson.
This is one of those things where we've been.
Pretty steadfast in our strategic development objectives on the spacing.
It's been underpinned by our annual Reserve report and.
You know we pay attention to you know to love the spacing results that go on in the Permian Basin, and we try to learn from and we try to learn from Bose as well too without exposing our shareholders to.
The downspacing risk, so I'm very comfortable with the with our spacing assumptions.
Very good keep up the good work guys.
Thank you.
Thank you and our next question comes from Derrick Whitfield with Stifel. You May proceed with your question.
Hi, good morning to all and congrats on your strong update.
Thank you Derek.
Perhaps for Travis your capital efficiency and now disclosure standards as of last nights release, our peer leading.
What in your view makes your organization so successful cost control.
You know there we get that question coming from a lot of different angles over different you know over over different quarters and ill tell you its not just one thing.
You know, it's it's really a combination of of a thousand things I mean, we just finished an operational review getting ready for this quarter.
Several weeks ago, and and the drilling organization showed me an analysis of the connection time, you know how fast you screw pipe together, where they could.
Not quite a minute I think 0.7 of a minute you know per connection for every well that we drilled 20 rigs in the second quarter.
And.
That that France, you know you say well that's not you know so so what well that's a dollar a foot per per well, if I times 20 rigs and.
It's that level of scrutiny across our cost spend that they truly differentiates our operations organization I mean, we say around here you got to inspect what you expect that's one of our operating monitors and and really to do their business is not that complicated it's converting rock into cash flow and you've got a major every.
Every facet of that conversion process Im sure. Your most of your most efficient and I think we've got a great machine I mean, if we didnt. If we didn't have the machine that we have we couldn't have delivered on the results. The cost results you know after doing $10 billion worth of acquisitions at the end of last year I mean, it's it's hard for me to <unk>.
Do you believe that.
Today, our D C and E.
Well costs are lower on a combined basis with energy and then they were on the dialing back standalone basis, a year ago.
And you know that that to me.
That to me represents seamless integration of an acquisition and we did so well accomplishing all of these corporate objectives that I laid out in my prepared remarks.
And most importantly, we did well adding.
You know over 300 people to our organization. So it's I think it's a remarkable feat.
You know for our organization to have accomplished what we did in this earnings call in this earnings release and in this quarter, nor our economics or are better than they've ever been you know were more profitable. We've got more operational capability I mean, just across the board you know we're firing on all cylinders and it's unfortunate in this.
In this market backdrop.
But we're going to be okay, no because our cost structure and because her execution prowess our capital efficiency.
You know, we're going to continue prosecuting our development plan and we got a great organization to do that.
I agree Travis quite an impressive feat as my follow up perhaps for you or Mike as you think about and compare.
Your DNC costs between the Midland and Delaware basins.
Where do you see the greatest room for improvement and your Delaware costs.
Yes.
There.
Any email did to the Delaware is where were you know kind of the baseball reference we're probably in.
In in three to four Midland were probably eating five getting in the beginning shake so Midland. It's a we're picking a dimes and quarters, Delaware as you saw we had a 16% reduction in our dollar per foot. So that's where we're seeing the biggest change and optimization.
Right.
But going forward the organizations not gonna in the Great thing is everything that we're learning and doing and changing in Midland is applicable in Delaware and vice versa. So.
Those two teams are fully integrated as well.
So again it across the board will continue to see efficiencies good work into the system as Travis said, there's also some tailwinds with.
Commodity prices are where the commodity prices for activity since we're seeing some softening on the on the service side as well so all of those things together I think you guys. Some good things come in next couple of quarters.
Very helpful guys. Thanks for your time.
Thank you Derek.
Thank you and our next question comes from Gail Nicholson with Stephens. You May proceed with your question.
Oh, good morning, everybody I had a housekeeping question can you talk about the next steps are you guys achieve investment grade data and the potential timing of that.
Hey, Gail you know we were having active dialog with with the rating agencies. You know I think you know with us doing over 280000 barrels a day.
And this business qualifies as an investment grade company, our debt certainly trades like its investment grade company.
We just need a an upgrade from either S&P and Moody's upgraded us both.
After the acquisition we've executed on everything we said we were going to be post acquisition and I think this businesses is on its way to becoming an investment grade company, you know whether or not the the ratings get there or not.
Walter I didn't see a follow <unk> you know we also added the following provisions to our credit facility.
In the early spring and that that results in our credit facility, becoming unsecured wants one another or agency upgrades us, including our fish rating today.
Hi, Thank you.
Thank you.
Thank you and our next question comes from June Venker with Morgan Stanley . You May proceed with your question.
Hi, everyone. Travis you in the past you talked about using some of your free cash flow to replenish inventory.
I think if you really talked down corporate M&A a lot obviously a change in the market over the last few months, but let's just interested to hear if that asset market is opening up many bid ask enough, but that's just too wide here, but if you can pick up acreage at attractive prices.
Well I think you've always heard to say that you know, we'll do accretive deals, but but there's a reason in my prepared remarks, I said that I think the best M&A opportunity for US right now has repurchased in diamondback shares and so that's really the corporate focus, but we do have an obligation to.
So to to look for you know look for deals, but they've got to be massively accretive and.
Like I said just to reiterate our our focus is on a repurchasing our own shares right now.
Gotcha. Thanks Travis.
Thank you and our next question comes from Tim Rezvan with Oppenheimer. You May proceed with your question.
Good morning folks that had a question on a unit expenses into Q.
We saw gathering and transportation Halloween both.
Kind of reverse course after some pretty big declines can you talk about anything one off that happened maybe into Q or sort of how we should thinking about a more normalized trend going forward on this cash opex items.
Hey, Tim Yeah. So in the second quarter, we had the full effect of the Central Basin platform.
That that acreage was closed on July onest, so or how long we should trend down here in Q3, and Q4, we've kind of been been hinting towards the upper half of our 425 to 475 guidance for the rest of the year on Halloween gathering processing transportation that moves around a little bit quarter to quarter I still think you know the midpoint to a good number there.
Okay. Okay, I appreciate that and then.
If I could I ask a question related to slide 15 on Tony your Capex to cash flow a reconciliation.
I want to make sure I understand this correctly.
It appears that your your updated guidance implies.
It's kind of on track with your first half 19.
Cost level of 890 per foot.
And I'm just wondering is it fair to say that your updated guidance not reflecting any incremental efficiencies in the back half of the year.
Yes, Tim I mean are we don't make promises on on service cost and I think efficiency wise, but business is running as efficiently as possible certainly there's some some tailwinds on the on the service sector, but you know we certainly felt in this quarter. It was not the quarter to go you know too too aggressive on the guidance change and you know we have expectations to continue to drive capital costs out of the business and and you don't meet or exceed all these these numbers here.
Okay, Okay fair enough I'll leave it there thank you.
Thank you and our next question comes from Ryan Todd with Simmons Energy You May proceed with your question.
Good Thanks, maybe a follow up on a couple of other things the $750 million in free cash flow in 2020 of you've talked about.
What capex rough Capex budget does that assume and does it imply.
A modest acceleration from second half 19 levels are kind of a continuation of of current activity.
Hey, Ryan if anything it would be a very very moderate increase versus you know current activity levels. We're running we're running eight frac spreads today, we run a frac spreads all year and we're going to exit the year running eight frac spreads you know, we don't anticipate having any you know any frac holidays at the end of the year.
Well, we're going to exit 2019, running eight flags and probably hundred 2020 are running those eight spreads. So I think for US now the questions are a at the margin right. You know, we're completing 300 to 320 wells. This year you know I don't expect a material change from that number to the upside on the downside no pending a major commodity price change.
Great. Thanks.
That's helpful.
And then you reduce that a little bit in the quarter and obviously, you're in a strong financial position.
But at a high level and what do you think is the right level of that for your company is that.
Conservative leverage metric at a sub $50 a barrel oil price.
Should we expect further debt reduction going forward or do you feel like you're in a pretty good place.
Yeah, right now I feel really good about how much debt we've reduced over the last couple of quarters. You know I really you know on an absolute basis, but also on a normal leverage metric basis I feel like we're in really good shape, you know right now with the amount of cash proceeds that we have and the free cash flow profile of the business.
Buying back our stock at these depressed levels is probably a better use of capital for us a while still maintaining a fortress balance sheet.
Great. Thanks appreciate it.
Thank you and our next question comes from a seats and with Bank of America. You May proceed with your question.
Thanks, Good morning, guys. So on slide 12, you mentioned additional potential savings from infrastructure efficiency, a true attributable to do rattler midstream.
Can you elaborate on that specifically.
Yeah. So these these numbers that you see 735 in the Midland Basin and the 11 31 in the Delaware Basin are gross numbers the benefit that we have of rattler. Its got me do capitalize the first six months of water production in both basins Ah that's part of our equip the piece of or do you see any rattlers margins were saving probably an extra $30 a foot.
On the Midland side, and close to 75 or $80 a foot on the Delaware side.
Great. Thanks for the color and Mike on B and the operational update it was mentioned that you completed a pair of Jo mill Wells. This quarter can you provide more details on the zone across your footprint and how you intend to layer in these completions going forward.
Sure.
Northern Midland Basin is kind of the air either were focusing on right now so we'll typically staggered middle Spraberry would Jo mill. The two that we did this quarter, we're drilling more this quarter as we're going forward says we do or.
Our kind of cute development across the.
The entire northern Midland Basin, we're adding middle Spraberry Jo mill into those kids and.
So as far as that going forward, that's what we're planning to do the wells are performing and competing for capital with all of our other zones as we have today.
And look forward to doing that more going forward.
Great appreciate the color guys. Thanks.
Yes. Thanks.
Thank you and our next question comes from Jeff Grampp with Northland Capital markets. You May proceed with your question.
Good morning, guys.
What's curious just like.
It seemed like this quarter there was a little bit larger discrepancy then some path in terms of drill versus complete. So it was just kind of wondering if that was kind of the expected plan for the quarter. If that's just kind of a timing issue or how we should kind of think about drill versus completes in the back half of the year.
Yeah definitely you know you'll see that we drilled 170 wells year to date and completed 151, we're planning on completing somewhere around the midpoint of our guidance 300 to 320 wells. So rig <unk> rig count has gotten a little bit ahead of our completion count our completion cadence. So we probably you probably see us drop a couple of rigs into the back half of the year, but there will be no change to the completion cadence with us running eight spreads consistently for the rest of the year.
All right. Thanks for that case and for my follow up then Travis you mentioned buybacks being most interesting use of free cash flow right now I'm just kind of wondering as we look into 2020, you know you guys starting to build the track record of building the dividend and having some growth. There. So it's kind of wonder and should we still assume that you know growing that annual dividend is still gonna take precedence over accelerating buybacks or how you guys kind of.
Yeah look to balance the two wall you know understanding that both of those are all three guys.
Yeah, again, it's not an either or and I think you've heard us say consistently from that to the board. The board feels that a that the dividend as the primary form of a shareholder return.
All right. Thanks, Travis for the time guys.
You bet Thanks, Jeff.
Thank you and our next question comes from David Deckelbaum with Cowen.
You May proceed with your question.
Thanks, guys I'm not going to correct last names, but.
Just wanted to ask a couple of questions on.
Yeah as you go into 2020, you basically hit all of the goals that you wanted to and 19 and this was a pretty busy year for you guys.
On the corporate side, just with the Rattler IPO the venom drop down.
As we go into 28 should we be thinking that this is.
To start being you know for lack of a better word I'm more boring.
Execution model or should we still be looking for things like drill coas and other yeah.
Things that you've been done in the past to kind of pull some value forward and I guess, how do you square those with.
Some of your ambitions of being missed this free cash growth engine.
Yeah, you know David or if 2020 is going to be a boring year for dialing back that will be the first born here in our company's history. So.
Uh huh.
So it's a fast as the predictions of future I expect a lot of exciting things to happen for for dialing back right now I don't know what those are yet, but I know.
As we continue to to demonstrate the free cash flow machine that we built in into our execution in capital efficiency, you know better than anybody is out here in the Permian you know I think there's going to be opportunities I don't know what those are going to be yet, but we know as long as we execute in this world in this organization continues to deliver.
You know, we're going to have opportunities and it's up it's up to us and you know management board.
The two to Cisos assess those opportunities and then determine which one creates the most values for the shareholders who own the company. So.
I don't know what those are going to be but I suspect there will be something.
I guess like just on on the completion side and you highlighted costs, perhaps coming down on the service side in the back half.
Are you looking at other applications like some of the fraction and things that we see maybe more headline oriented these days, but.
Yeah Yeah.
Are you looking at those with any sincerity at this point going into next year.
David Absolutely. So you know the answer is going to be yes to every new technology or application that weekend bad and.
Make sure that we're going to save money on a dollar per foot and not hurt any efficiency on the production of the wells. So eat frac, we have any frac crude coming in the.
Latter half of this year.
We utilize dual fuel capability on several of our frac fleets in drilling rigs.
Again, we're always looking at what's out there were watching what everyone else is doing as well. So we'll be typically a very very fast follower and lot of times, we will be on the dragon leading edge because again, we don't want to put our shareholders at risk for that.
But at the end of the day, yes that dollar for freight and the efficiency and capital efficiency is what we're looking for so the great thing is as we're slowing down as an industry. A lot of these things are coming available that have been working for other folks and now they're coming available. They come up so we're getting some of these crews that are coming in hot.
We're doing the same thing with rigs we've got to completely beat the different rig fleet today than we had a year ago and I think you're seeing some of the capital efficiency metrics change because of what we're doing now.
I appreciate the time guys.
Thank you.
Thank you and our next question comes from Richard Tullis with capital One Securities. You May proceed with your question.
Hey, Thanks, good morning, everyone.
Travis or Mike It seems like the rigs have been split fairly evenly between the Midland and Delaware basins at the past couple of quarters do you do you see that split a holding no.
Fairly evenly into 2020 or how do you how do you look at.
The allocation of capital is we get a little bit closer to next year.
Yeah, you know we take a look at that almost in every every well decision, but I think just for planning purposes. I mean, just assuming you're going to have an equal split with rigs on either side of the basin is a good planning assumption, Okay, and just lastly, I know, it's not a big part of your story, but the limelight area looks like you're planning a rig day excuse me as well there for the third quarter.
With success, how active could that area become in 2020 for Diamond bag.
Yeah look if that area successful little probably you know that means it competes for capital in the footprint. We have there is good for one or two one to two rigs probably and we'll we'll just a its been good for Rattlers will too so.
We'll just we'll wait until we get some some data there and then and then make some capital allocation decision, but that could be a nice it could be nice place to park a rig for multiple years.
All right well that's all for me Thank you Travis.
You bet. Thanks Richard.
Thank you and our next question comes from Jason Wangler.
Imperial capital you May proceed with your question.
Hi, Good morning, guys, just had one and Mike you kind of hit the emanating on the services side I mean as far as the pricing of services I mean, how much more do you think there is to really get given no they've been pretty beat up obviously and also I guess, you've already kind of switch that allow the rigs, but do you see much more on the upgrading whether it's.
Crews or rigs left as you move forward.
Jason You know again these guys on the service side hadn't been squeezed pretty hard you know again it seemed they are lagging up to someone that's going to be very consistent in.
Fluid commodity price environment provides them with both an operational and a financial hedge so we're getting some benefit there as well as from the size and scale, so us being able to stay steady steady is really helping those guys out as well.
I don't see a whole lot of softening just because again, we want our partners to be there at the end of the day, we need them.
They're very big part of the success. We've had so we're working with those folks and you know they they work with us on the high end of commodity price, we will work with them on the low end commodity price, but but no actually it is softening a little bit just because the activity levels dropping so much.
Okay I appreciate it thank you.
Thank you Jason.
Thank you. Our next question comes from Michael Hall, with Heikkinen Energy Advisors. You May proceed with your question.
Thanks.
Yes, just a quick one of my own a lot of lot of UN addressed that as you think about the size and scale to reach repurchase program should we think about the free cash flow as the the cap on that or given some of the asset sales and the liquidity you have Ashley.
Anticipating <unk> potentially even higher hamatsa.
Hey purchases.
The free cash flow you are you talking about.
Well, Michael Yeah, I mean, I think through 2019 threats of 2019, we're going to use a mix of the free cash flow profile and proceeds from the asset sales to continue the buyback program as you move in to 2020, Yeah, I'd say free cash flow becomes more of the governor at that point, we completed all these all these one time proceeds stocks no still you know in our opinion very cheap and we're going to continue to use our capital to to buy back shares and in this market.
Okay makes sense and then I guess, just coming back a little bit on the no cross first free cash flow question, how do you Big picture approach the optimization.
As you think about 2020 and beyond but do you have the optimization of growth versus free cash flow.
And then the capital allocation decision I'm, just curious kind of more about here your process as opposed to the outcome.
I think.
Oh, no we have no intention of slowing that growth to maximize free cash flow or vice versa. This it's going to be a symbiotic relationship for a long time, you know we're going to keep growing you know maybe it's at a rig or or keep the same rig count was this year or do more with the same capital and growth as the output next year with free cash flow also being the output.
All right makes sense sure seems differentiated appreciate it guys.
Michael.
Thank you. Our next question comes from Scott Hanold with RBC capital markets. You May proceed with your question.
You know things just a couple of quick ones. One you know as you know I first want to commend you all from obviously stepping up and buying back stock and hopefully we'll see more by.
You all in the rest of the industry, especially with the you know where somebody's equities are trading but you know maybe this one's for kids is you. All think about you know the buybacks here over the next quarter or two is there you know in your conversations with the rating agencies is there any sort of push back from them getting to investment grade with the amount of buybacks you're doing.
No I haven't seen a lot of pushback I think a lot of the a lot of the onetime proceeds that we received already you know about a billion dollars worth of onetime proceeds are all seen as very credit positive. So we've we've check those boxes and and it also check the production box and check the capital efficiency box. So Oh, <unk> I haven't heard a lot of pushback on that front and.
For US right now you know.
In investment grade is a is a corporate objective, but for us buying back stock at depressed values as a more significant corporate objective.
All right appreciate that in in a quick second one is on your ownership of Bynum. Obviously, you guys strategically took you know more equity in in a that ownership with the recent drop can you give us a big picture view of your thoughts behind that investment here going forward and were you all want to shake out with that ownership over time.
Yeah I'm excited that that's done back now loans, you know a pro forma for the drop backup to over 60% of that I think it's a I think it's a great relationship between the two that the relationship between Ambac and Viper or certainly differentiates vipers multiple it allows both companies to do smart deals like the deal that we announced last week Diamondback has not sold one share of Viper over the past over the past four years and in fact Weve increased our ownership so via via share count. So you know, we're happy with that with that or would that ownership, we get a significant dividend at the dawn back level from Viper on an annual basis and that relationship is it will continue to be very strong.
Understood. Thanks.
Thank you. Our next question comes from Leo Mariani with Keybanc you May proceed with your question.
Hi, guys. Just a question on the marketing side here, obviously, I think you guys said that you'll be it kind of 95% are a little bit better on oil price realizations on the second half of this year versus Debbie T. I, just trying to get a sense is it maybe a little bit lower in the third quarter and kind of the big boost comes in the fourth quarter can you give us any differentiation between Threeq and Fourq you on that.
Yes, I think there'll be some you know I think third quarter is close to that 95% range and and Q4, we don't Pops up a little bit you know I'll use this as a point that we've now you know secure take away for all of our major production across the company. When we had zero take away a year ago. A you know certainly got through the worst of our wide differential quarters and Ah you know on a go forward basis, we're going to be selling all of our crude either at a across the dock in corpus, where we have reserved dock space or out to a refinery in Houston, So we're pretty excited about where our.
Marketing position is heading on on the oil side.
Okay, that's great and I guess could you comment at all on any initiatives on the gas or NGL sign obviously, it was a rough quarter and second quarter for gas price realizations and he is working anything maybe to kind of get that gas out of basin or to other markets going forward.
Yeah, we have we have very few taking congrats across our position I think you know we do have some taking time regimen, Delaware that we're going to exercise one gets from different pricing exposure, but you know our Midland basin in northern Delaware gas production.
You know, we're going to look to hedge and protect ourselves that way you know I think for us with gas being such a small percentage of our production and revenue.
We are more focused on on hedging that that price at a at a decent realized price and not having to deal with the negative realizations have had to deal with this quarter.
Okay that makes sense and I guess just on the well cost side, obviously, you guys did a.
Tremendous job of reductions here post the energen deal I know, it's kind of hard to of course to sort of project forward, but you certainly discussed at length. Your relentless focus on efficiencies here I mean.
You know would you guys potentially foreseen in the absence of any changes in service costs I mean.
Could we be sitting here a year from today and be talking about another 5% to 10% reduction in well costs.
Well you know my skies were obviously the best in the business and that's why we we hammered this cost discussion so hard in the stack you know I see a lot of a lot of notes out about six month, Qms and IP use across the basin no one's talking about what these wells cost to get out of the ground I mean, the cost structure that we have differentiates us into someone that can grow and return free cash versus someone who outspend cash flow you know that's that's how important those differences are so you know.
I expect Mike and his team to continue to to drive costs out of the business. We certainly have some service cost tailwinds are hitting us right now and those should continue into 2020.
Thank you.
Thank you Leo Thank you and our next question comes from Brian singer with Goldman Sachs. You May proceed with your question.
Thank you good morning.
One bright can you talk to how you see the rates of return in the Midland Basin versus the Delaware Basin realize you kind of have an even split in terms of activity, but just how you see those rates of return comparing and then post the cost reductions you've highlighted how the energen locations in the Delaware compare relative to.
Legacy a legacy done back locations.
I'll tell you the a locations in the Vermeer auto area and that's the best rock in our portfolio and we got that's the that was the crown jewel in the Inogen acquisition and those wells are just simply spectacular.
And so the rates of return there obviously are the best in anything in our portfolio I still think Brian that.
You when you read the sounds of basically calling for more.
In the Delaware Basin figured it out faster and you go higher Youre for food liberalism, you know you don't get as much hydrocarbon recovery, but you wont cheaper so as we look at it. It's there's parts, we sort of think about it in an equal allocation.
In terms of rates of return and that's you can see that <unk>, how we spend our capital dollars are with rigs about regroup on either side of the basin. So it's not a precise number but we still think of them <unk>.
Great. Thank you and then my follow up is with regards to just how you're thinking about the range of options.
In in 2020 , particularly a share repurchase and the extent of that relative and investing in that relative to investing investing for growth and how up cycles are down cycles in commodity prices would play I would play a role.
Yeah, Brian I mean, I I think you know I think it's somewhere around what what our budget was this where you know either either plus or minus a rig you know absent absent a a very negative a commodity paid between now and into the year. So we're very focused on hitting that said at least hitting that $750 million of free cash at 55 W.G.I. next year. If W.P.I. is lower than that you know, we'll have to well have to look at where service costs are and where our well costs are and see what what free cash flow comes out of the model, but you know like I said earlier that there's not a huge delta between our current thinking and where were you at our current pace and where we're going to be in 2020, which allows his business to grow significantly, but also a buyback a lot of stock and if the stock remains a depressed we will continue to buy back stock or with with free cash flow in and out one time proceeds that we've executed on this last quarter.
Great. Thank you.
Thank you Brian .
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Travis Stice CEO for any further remarks.
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Thank you ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program and you may all disconnect everyone have a wonderful day.