Diamondback Energy Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2022

There are 15 speakers on the call.

Operator

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 speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Lawlis, Vice President, please go ahead.

Speaker 1

Thank you, Justin. Good morning, and welcome to Diamondback Energy's 2nd quarter 2022 Conference Call.

Speaker 2

During our call today,

Speaker 1

we will reference an updated investor presentation, which can be found on Diamondback's website. Representing Diamondback today are Travis Stice, Chairman and CEO Case Van Toff, President and CFO and Danny Wesson, COO. 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 business. 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.

Speaker 1

In addition, we will make reference to certain non GAAP measures. 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.

Speaker 2

Thank you, Adam, and welcome to Diamondback's 2nd quarter earnings call. I'd like to start by highlighting our 2nd quarter performance. We once again delivered operationally producing over 221,000 barrels of oil per day near the high end of our quarterly guidance range. Our discretionary cash flow or operating cash flow before working capital changes totaled 1,800,000,000 up 27% quarter over quarter, setting a new high for the company. This increase was primarily due to a favorable Macro backdrop as well as improvement to our realized pricing as hedges put on last year continue to roll off.

Speaker 2

Our free cash flow for the quarter was $1,300,000,000 up 35% quarter over quarter. We will return 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 our growing and sustainable base dividend, opportunistic share repurchases and a robust variable dividend. Our annual base dividend is now $3 per share or $0.75 per quarter, representing a 7.1% increase from the company's previous annual base dividend of $2.80 per share or $0.70 per quarter. As previously announced, The Board elected to keep our total dividend per share flat quarter over quarter at $3.05 which is comprised of the 75% base dividend and a 2 point This puts our total annualized 2Q dividend yield at nearly 10%.

Speaker 2

Additionally, we took advantage of market volatility and repurchased nearly 2,400,000 shares during the quarter We believe our opportunistic disciplined approach to our repurchase program brings the most value forward for our shareholders and continues to give us the flexibility to use either our variable dividend, buybacks or as has been the case so far in 2022, a combination of both to hit or exceed our returns target. 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 $2,500,000,000 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 Q3. At 75 percent, that's over $1,800,000,000 returned to shareholders or well north of the $10 per share in just two quarters for 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 $2,000,000,000 to $4,000,000,000 giving us ample running room to be opportunistic in the equity markets.

Speaker 2

Since the program was initiated in the Q3 of last year, We've repurchased over 8,300,000 shares at an average price of $113 a share for a total cost of approximately 940,000,000 This includes 1,800,000 of shares we've already repurchased in the 3rd quarter for a total of 200,000,000 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 Q2, we opportunistically repurchased $337,000,000 in Diamondback Senior Notes at an average cost with 95.4 percent of par for a total of $322,000,000 We focused on our debt coming due over the next 10 years, significantly lowering our maturity towers while taking advantage of the volatile debt market. We also recently redeemed $45,000,000 in legacy Energen and QEP notes due 2022 at par. As a result, Our balance sheet is stronger today than ever before.

Speaker 2

Our annualized net debt to EBITDA is under 0.7 turns And we continue to improve our leverage profile with net debt decreasing by $267,000,000 or 5% quarter over quarter. These debt reduction efforts have helped decrease our interest expense by 25% year over year, offsetting higher production taxes and lifting costs and helping push our unhedged realized cash margin this quarter to more than 83%, a 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 $1,900,000,000 We do not anticipate any future changes.

Speaker 2

Yet, We still haven't been able to offset all of the fixed pricing increases we've seen, which is why we've moved up our Q3 capital range to $470,000,000 to 510,000,000 up from our capital spend of $468,000,000 this quarter. This takes into account the 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 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 As we mentioned last quarter, we've partnered with Halliburton to secure our first eFleet 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 1 emissions profile, but also lowering our completion costs as a result of fuel savings and improved operational efficiency. We expect this fleet to be operational early in the Q4 and it will simply be swapped in for one of our existing Halliburton crews.

Speaker 2

Earlier this month, we continue to lean into this technology and secured our 2nd eFleet This crew will be operational in the Q1 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 1 drilling rig running offline power in the Delaware Basin with 2 more electric rigs expected in 2023. Just as we're seeing on the completion side, the electrification of our drilling fleet has multiple benefits. Additionally, we're utilizing spudder and intermediate rigs to take advantage of lower pricing as compared to the rest of our drilling fleet and are exploring downsizing surface casing size intermediate hole size to improve our drilling efficiencies pushing Diamondback even further down the cost curve.

Speaker 2

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 are proud of how we have performed so far this year when looking at multiple including recycling nearly 40% of our produced water and keeping our total recordable instant level at multiyear 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.

Speaker 2

We remain committed to ending routine planning by 2025 and are confident in our ability to achieve that goal. We've also spent 100 of 1,000,000 of dollars to lower our emissions profile by building pipelines and electrifying our production fields. These projects have lowered our costs to date, 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 up by $0.50 a barrel at $4.50 to $5 a barrel. Even with this move, we continue to be the low cost Permian operator and build on a long track record of cost control. The 2nd quarter was a record quarter for the company.

Speaker 2

We delivered on our production guidance, kept 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 this 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.

Operator

Please standby while we compile the Q and A roster and we ask that you limit yourself to 1 question, 1 follow-up. Again, limit yourself to 1 question, 1 follow-up And our first question comes from Neal Dingmann from Truist. Your line is now open.

Speaker 3

Good morning, guys. My first question is somewhat on shareholder returns, specifically, So I think on your conference call a year ago looked and probably I think you stated that as you looked at back then at supply and demand fundamentals, You said, I think, suggests that oil supply was still purposely being withheld to the market, driving your call to not grow 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 your primary driver of your decision for the no growth or is this more based on investor to request?

Speaker 2

Well, certainly as we look into 2023, I think it's a little premature to do much forecasting into 2023, but I can I can tell you kind of our base case is looking at something at the same activity level, probably generating something in the low single digits in

Speaker 4

terms of growth rate? But again, It's more

Speaker 2

of an output. But I think what you specifically asked about the call last year, I think I highlighted really three things and then subsequently added a 4th and that was Demand at pre COVID levels, wanted to see 5 year inventory levels, somewhere returning to the 5 year average. We still had a question about OPEC capacity and the one I added subsequent to our call was the administration continuing to to invite uncertainty into our capital allocation process across the industry. And so certainly 3 of the 4 of those have been answered today, Neil. There's Still a lot of administration led uncertainty both in policy actions and rhetoric, but the other ones certainly appear to be answered.

Speaker 2

So I think as the industry starts to pivot Towards more focus on 2023, I think you'll still be governed primarily by the shareholders who own the companies, But I do think you'll start to see a little bit of growth in the industry as we look into next year.

Speaker 3

Great response. Then my second question, really I would say is on the notable capital spend discipline that you guys continue to have, As many others we've already heard about continue 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 where the focus remain more or less on the same as working with vendors and just the efficient execution?

Speaker 4

Well, Neil, I think we've

Speaker 2

been pretty Successful with the existing model. We'll always look at seeing what ways we can ensure Lower execution costs, we were a little bit flummoxed in the Q1 with all the commentary about locked in prices and then subsequently followed with CapEx raises And that's just not the way that we typically try to communicate what our execution focus is. But I do want to I know 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, Neal, we were talking about how you separate winners and losers.

Speaker 2

In an inflationary environment, it's always those that can control costs. And while we've taken our licks on the fixed Cost side of an AFP ledger, we've done a

Speaker 4

really remarkable job on the

Speaker 2

variable cost and I look for our organization to continue to lean into that In 2023.

Speaker 3

Very good. Thank you so much.

Speaker 2

Thanks, Neil.

Operator

And our next question comes from Neil Mehta from Goldman Sachs. Your line is now open.

Speaker 5

Yes. Good morning, Travis, team. First question is around capital returns and you did increase the share repurchase authorization to $4,000,000,000 from $2,000,000,000 previously. It looks like you've been leaning a little bit more into the repurchase with the pullback in the stock. So if you could just talk about your framework around variable dividend versus repurchases And how are you thinking about being countercyclical with how you deploy your share repurchases?

Speaker 2

Well, we certainly think that there's a lot of value in our existing stock price and we think that oil and 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 first being, we spent about $500,000,000 in the last 2 to 3 months Repurchasing shares and the Board just essentially doubled our authorization up to $4,000,000,000 The base dividend still remains sacred, sustainable and growing, followed by in this environment, Share repurchases and then as we committed to a month ago, we'll make up the difference and keep our shareholders whole You know, by returning at least 75% of free cash flow.

Speaker 5

Yes. Thanks, Travis. And then I'd love your perspective on the M and 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're prioritizing share repurchases at this point, you think that's a better investment than 3rd party M and Thank you.

Speaker 2

Yes, certainly, Neil. That's the behavior we're demonstrating. And as I just iterated, just to emphasize, oil in the public markets It's really cheaper in the private markets and I think there continues to be a wide gap between Those two points. And I think you're also seeing stalled or failed processes as well, which again indicates a spread between bid and mask. So Right now, the greatest return for our shareholders is leaning into our repurchase program.

Speaker 6

Thank you, sir.

Operator

And our next question comes from Arun Jarm from JPMorgan Securities. Your line is now open.

Speaker 7

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 in portfolio renewal in this kind of backdrop and perhaps a little bit more color, Looks like you had about $85,000,000 of property acquisitions in the cash flow statement. 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 you just under $400,000,000 of property acquisitions.

Speaker 4

Yes. Arun, the big deal was obviously in Q1 $230,000,000 deal, we do capitalize on our G and A and interest, which flows through that number. So it's not all property acquisitions, but A couple of things that we do on the property side is 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 they're always working to send that up And Block and Tackle, but nothing of significance purchased in Q2.

Speaker 4

Okay.

Speaker 2

And look Arun, being having boots on the ground here in Midland, I think all of our shareholders expect me and us to be in the deal flow at all times. But that just means we look at things coming across the desk that I go back to Look at what our behaviors are and the separation between public and private expectations on value. And that's I think that's the best way to think about what our forward plans are.

Speaker 7

Okay. And just my follow-up is, you guys had really, really strong oil Price realizations in the quarter, I just wondered if you could just remind us about your mix between getting waterborne crude pricing versus call it a Midland type of benchmark?

Speaker 4

Yes. So we have all of our oil and pipes going to the Gulf Coast, Well, a third of it going to Houston getting MEH pricing, 2 thirds going to Corpus getting Brent pricing. And so we've been the beneficiary of these this wider Brent WTI spread. We have a little bit of exposure to the Midland market, but we The ability to kind of flex that to the Gulf Coast with the space that we have. And so this sell off in WTI versus Brent has resulted in really good oil realizations.

Speaker 4

No guarantees that it's going to continue forever, but That kind of fits the insurance policy that we put in place to invest in these pipelines and get our barrels to the most liquid markets.

Speaker 7

Great. Thanks, Casey.

Speaker 4

Thanks, Rene.

Operator

Thank you. And one moment for our next question. And our next question comes from Scott Hanold from RBC Capital Markets. Your line is now open.

Speaker 8

Hey, thanks. Could you all give us some view 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 expect from the e fracs versus a regular I mean, how meaningful is that?

Speaker 4

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, we'll probably exit a little higher than that. So probably 15% year over year Well, cost increases, but what the ops team is doing is not taking every phone call and just Increasing prices, we're trying to do some things to be more efficient. You mentioned the eFleet.

Speaker 4

Travis just mentioned in his opening remarks that We're going to have a second eFleet coming in early next year. That saves money not just on the horsepower piece, but on the fuel piece. These will be connected The wind power and the back end of a gas plant with burning dry gas in the Permian. So Well, gas prices have gone up. They certainly haven't gone up as much as diesel.

Speaker 4

I would say we probably saved $50 ish a foot with that $50 a foot with that eFleet. A couple of other things we are doing on top of that. We are Adding some preset rigs to replace some big rigs as those preset rigs cost a lot less with these big pads and long cycle Investments, we have that ability to do so. Teams also getting really smart on casing design, cement design, Where we can pick up pennies, that's just our stock and trade.

Speaker 8

A lot of pennies there you're picking up, good to hear that. And As a follow-up and I'm going to kind of belabor the point on shareholder returns and I know you all 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 appears, 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 like 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?

Speaker 2

Scott, when I talk to our Board and communicate what I think the success indicators are. There's really 5. 3 of them were foundational that led us to success in the 1st 10 years and I think the 2 that I've added are going to be foundational for the next 10 years. The 3 that we built the company on are execution, low cost operations and transparency, and we've been very successful Differentiating ourselves with those, the 2 that have recently been added are capital return and decarbonization. And on the capital return, we're now our yield It's peer leading.

Speaker 2

We're competitive on all Forms of shareholder return measures. And the last one is decarbonization and not only in our Disclosure, but also in our performance. And look, those are the five things that we excel at. And you can ask us Questions about any one of those 5, we can articulate chapter and verse, why those are successful, why we're successful with those. And while you pointed out a dislocation in stock, we believe fundamentally that we continue to do the right thing for our shareholders to generate the greatest value.

Speaker 2

And we believe we're running this company not just for a quarter, but for the next 10 years and longer.

Operator

And our next question comes from David Deckelbaum from Cowen. Your line is now open.

Speaker 9

Thanks, Travis, Case and team. I appreciate the color today. Maybe if I could ask one on just CapEx. In 2022, I think you all forecasted about 12% of your total budget going towards non D and Is that a good contribution as we think about 2023 2024?

Speaker 4

Good question, David. I think generally, if you look at our past history, we kind of Whenever a deal happens the next year, infrastructure midstream is 10% to 15%, getting down to 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 next year in 2023, I think the only wrinkle is we are all us And our peers are all spending a lot of money on environmental cleanup. And so that's probably $30,000,000 to $40,000,000 extra $1,000,000 a year that wasn't in the budget 2017 to 2018, it's necessary dollars, but generally, I'd expect our midstream and infrastructure budgets to come down Next year and into 2024, probably a step change down to 7% or 8% in a couple of years.

Speaker 9

Thanks for that, Kaes. And then maybe just as a follow-up, obviously the 3Q CapEx, 4Q CapEx is going to be is going to follow with activity with 3Q being higher than 4Q. As we think about next year though, I think the expectation is that you guys would still be in that sort of 270, 290 wells, 12 rigs, Q frac crews, is that $460,000,000 or so implied guide for 4Q, is that $460,000,000 to 500,000,000 Range like a reasonable run rate to think about 2023 or are there explicit reasons why you would want us to be guided away from that?

Speaker 4

Yes. I mean, I think it's just too early to talk 23 inflation. I'm certainly kind of in the camp that we're not willing to continue to concede Margin expansion on the service side, perpetually. So we're going to see where things shake out over the next 6 months. Like we said Earlier in the call, there are some things we are doing to increase efficiencies and lower costs.

Speaker 4

I would just say generally,

Speaker 10

Yes, I think you're

Speaker 4

right on activity going into 2023. I can't I'm not going to comment yet on service prices and where things head, particularly with some of the stuff that's out of our control like steel continuing to go up in price.

Speaker 9

I appreciate it guys. The only inflation I'm baking in is CapEx per share. So thanks for the color.

Speaker 4

Good new metric.

Operator

And our next question comes from David Whitfield from Stifel. Your line is now open.

Speaker 11

Good morning all and congrats on your quarter end 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 plateaued as a result of service tightness and the dilution of experience gurus?

Speaker 4

Yes, Derek. I think that's a fair statement. Certainly, the business has gotten a lot harder To operate and execute this year, it's on us though to make sure we have the right supervision in the field to make sure green hands are trained up quickly. It's not 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.

Speaker 4

But then there's a couple of other things that kind of go the other way, right? So these spud rigs that we're 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 days of TD this year, but now we're doing some things that might slow things down, but spend less money per well.

Speaker 11

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 fee components, could you speak to the implications for Diamondback and the industry in general? It seems that a minimum from our perspective that the one fair case that gets Diamondback would be minimized with the 15% minimum tax stipulation.

Speaker 2

Derek, the methane fee tax is one thing that we've looked at. And because of The dollars we've spent over the last 3 years really reducing our methane emissions that doesn't appear as we understand it To be a needle mover for Diamondback.

Speaker 4

Yes. And then on the tax side, we're pretty low on NOL protection. So If the strip holds, we have about $1,000,000,000 of protection next year, we would be above the 15% minimum that's being proposed. I think generally moving towards a full taxpaying 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.

Speaker 11

Great update and thanks for your time.

Speaker 2

Thank you, Stuart.

Operator

Thank you. And our next question comes from Jeanine Wai from Barclays. Your line is now open.

Speaker 12

Hi, good morning everyone. Thanks for taking our questions. Good morning, Travitz. Thanks for the time today. Our first question is maybe hitting on the balance sheet a little bit.

Speaker 12

Tsang had about $21,000,000 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, which is great. What's the sequencing of further debt reduction that you mentioned? And Do you have an updated view on your target cash balance? We're essentially trying to back in to how much potential upside there could be to exceeding the 75% minimum return?

Speaker 4

Yes, Jeanine, good question. With the Rattler deal expected to close at the end of August, we'll have to pay off that revolver at close. It's about 200,000,000 revolver that we'll expect to pay with down the cash. We also want to take out the Rattler notes, dollars 500,000,000 notes next. There are some reporting requirements with those notes if they continue to stay out there.

Speaker 4

So I think those two items are Certainly, the priorities and we probably expect to be in a position to have those taken out by the next time we're on the phone here. And then I think after that, it goes back to being selective with the other outstanding notes. You'll note that we did not We didn't touch the 30 year the 2 30 year tranches that we have out there, but we did take down some of our 29s and 31s opportunistically with a discount. But generally, the Rattler notes and Rattler revolvers coming out next And then we'll be more prudent with the rest.

Speaker 12

Okay, great. And then maybe a quick one on operations. I think in the past you mentioned running 3 semi frac crews and then potentially utilizing a spot crew. And then In your prepared remarks, I think I heard you mentioned just running 3 frac crews. So just wondering if I'm remembering those two things correctly.

Speaker 12

And Have you been able to maybe drop that spot crew due to efficiencies? Thank you.

Speaker 4

Yes. So the 3 Saddle Frac crews are going to run consistently throughout the

Speaker 2

whole year. And those 3

Speaker 4

have been going this year and they'll be the baseline for next year. We did have a spot crew running As part of Q2, I don't know if we can get spot through again until probably the end of this year. We try to string together Enough pads to make that spot crew cost competitive. And I don't know if anyone had anything And I don't know if anyone had anything on the spot

Speaker 5

No, I think the 3 Final Freight crews will do about 80% to 90% of our planned well activity and then the remaining 10% to 20%, we have to handle with an additional crew. We usually try to block it up and Get a dedicated line of

Speaker 2

work for a crew for a period of time

Speaker 5

and then let it go and bring it back for the next group of wells.

Speaker 12

Okay. Thank you.

Speaker 2

Thanks, Jeanine.

Operator

Thank you. And our next question comes from Nicholas Pope from Seaport Research. Your line is now open.

Speaker 13

Good morning, everyone.

Speaker 1

Good morning. Good morning, Nick.

Speaker 13

I had a quick question on Kind of the updated CapEx guidance, most the increase was all 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 Infrastructure Components. So I was kind of curious, are you what kind of inflation you're 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?

Speaker 4

Yes, it's definitely a little more fixed with project type work. There is some inflation in those budgets, but that was already somewhat baked On the midstream side in particular, the big bulk items is buying a lot of pipe and we pre bought a lot of that. So we knew Where that was going to sit on the cost side. On the infrastructure and our environmental side, it's not necessarily a change in plan. As you mentioned, it's just a few inflationary items around the edges, but it's nothing to the extent of what we're Seeing on the drilling and completion side when it comes to inflation.

Speaker 13

Got it. I appreciate that. And as you kind of look at kind of Progressing towards completion of the midstream, the Rattler kind of acquisition. Is there an 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

Speaker 4

of operations?

Operator

Yes,

Speaker 4

that's a great question. That's a great question too. Nothing is going to change operationally. We We still like the midstream business. We still like what it does for our consolidated margins.

Speaker 4

We just felt that it didn't need to be a separate public entity. And so we're able to buy that back in and still run a midstream business that we own 100%. I will say the team has done a good job Seeking out 3rd party opportunities, I wouldn't say it's our core business, but we'll have some real cash flow coming in from 3rd parties Given the amount of assets we have in the ground on the midstream side.

Speaker 5

I appreciate The color. I'll let you guys go. Thanks a lot.

Operator

Thank you. And one moment for our next question. And our next question comes from Doug Leggate from Bank of America. Your line is now open.

Speaker 10

Thanks. Good morning, everybody. I promise I hate to go back to the capital return question, but Blair, you've just closely you've issued a bunch of shares. I'm just wondering how we should think about split between the variable on the stepped up buyback program as you go forward.

Speaker 4

Yes, Doug, you were a little mixed there on I couldn't 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 where the stock is and where we continue to generate free cash well above mid cycle prices. So We already spent $200,000,000 quarter to date. Generally, if you kind of take Street numbers and keep our dividend flat in Q3. We could probably spend another $650,000,000 on buybacks this quarter.

Speaker 4

So if the stock stays where it is And oil stays where it is. We're going to be very, very aggressive on that buyback, which is why the Board signifies the confidence In increasing that authorization to $4,000,000,000

Speaker 10

Okay. So sorry to press on this point, Travis, and I apologize for my line. But Is there a more formulaic way we can think about I mean, are we still looking at a substantial variable in the second half of this year?

Speaker 4

None of these prices, Doug, if the stock price stays where it is today, all that cash is going to go towards reducing the share count.

Speaker 10

Great. That's what I was looking for. My follow-up is just a quick one on going back to the AMT very quickly. Can you clarify, as your understanding is today, do IDCs and I guess NOLs, not such a big deal for you guys, IDC specifically, do they still qualify as an offset for the AMT in your view? Any color you can offer in Your interpretation of that?

Speaker 4

I think our interpretation is they still do. Unfortunately, IDCs have become such a small part of the Cash flow stream that they're not impacting things much. So that's our understanding today, but you never know with politicians, anything can happen.

Speaker 10

Great. Well, I appreciate the clarity on the cash tax guidance. Thanks so much.

Speaker 2

Yes. Thanks, Doug.

Operator

Thank you. And one moment for our next question. And our next question comes from David Deckelbaum from Cowen. Your line is now open.

Speaker 9

Thanks for letting me back in the room guys. I wanted to ask just to follow-up on some of the thoughts around return on capital. Travis, you talked about conversations with the Board, how to make Diamondback competitive relative to its peers. You've seen the evolution of what you guys had promised last year, 50% of 2022 is free cash return to shareholders, the rest retiring debt. You increased that to $75,000,000 You just increased the buyback.

Speaker 9

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 an outline around the buyback? And how does you come to This amount, 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?

Speaker 2

Yes. Those are those we don't have Specific goals that are articulated in the way that you just asked that question. We simply look at the value We believe the inherent value of the stock versus where it's trading at and we want to demonstratively move into repurchases when we think there's 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, as Kees just outlined with the previous caller, we believe that there's still a lot of value in the stock.

Speaker 9

Thank you, guys. That's all I have.

Operator

Thank you. One moment for our next question. And our next question comes from Ben Lavigio from Mizuho Group. Your line is now open.

Speaker 14

Yes. Thanks for getting me on guys. Given the scale of free cash flow generation, I'm wondering how you guys are thinking about Potential investment in future offtake, particularly on the gas side and kind of connecting that gas molecule to The Gulf Coast and ultimately, hopefully, international markets?

Speaker 4

Yes, Vinh, good question. I think just generally, while we are a pretty significant gas producer now at this point, we don't have A lot of control over the molecule. Diamondback's grown through acquisition over the years and with those acquisitions come Dedications and most of those dedications don't come with taking time rights. So we're certainly doing as much as we possibly can to incentivize Pipeline development, getting molecules to the Gulf Coast, we did commit to the Whistler pipeline. We'll have about a third of our gas on that, but generally have to have control of that molecule to incentivize Development and we don't have much more beyond that today.

Speaker 10

Got it. And then I just wanted to go back

Speaker 14

to the eFleets. They seem like kind of a no brainer at this point in time. I'm just wondering If there were any changes in planning or any hurdles that you guys kind of have to get through before broader eFleet adoption Or is it really just kind of securing that line power?

Speaker 4

Well, it's really about the quality of the fleet and what you're signing up I think what Halliburton has put together is truly a unique product. We're going to have some form of battery Storage attached to that eFleet so that you're very efficient with the use of natural gas and electricity when that fleet is working. So You do need a pretty big acreage block, you need large pads like we have ahead of us and you need a long term commitment with a business partner like Halliburton. So I think that we checked all those boxes. We feel very good about the eFleet that's coming on in September, So good that we signed up for a second one.

Speaker 4

So 2 thirds of our simulfrac fleets will be e fleets 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 in the field here in the month. Thanks guys. Appreciate the time. Thank you, Ben.

Operator

Thank you. And one moment for our next question. And our next question comes from Leo Mariani from MKM Partners. Your line is now open.

Speaker 14

I just wanted to clarify

Speaker 4

a couple of things that

Speaker 14

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 $650,000,000 in 3Q alone on top of the $200,000,000 you already announced? Just want to make sure I heard that number right.

Speaker 4

Yes. I'm taking Leo, I'm taking street numbers and multiplying by 75%, taking out the $200,000,000 we spent Quarter to date and taking out the $0.75 a share based dividend and that's your max on buybacks for the quarter and that's something we look at Every day, I mean, we have our team rerun the model on a weekly basis to figure out how much cash we're going to have in the quarter To buy back shares when there's this much of a dislocation between oil in the public market and oil in the ground.

Speaker 14

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 FANG debt, which wasn't kind of due to the end of the decade, I guess some of the 29s, 30s or whatnot In the Q2, it looks like you kind of elected to do that versus kind of pay the higher variable dividend because obviously cash flows were up for the quarter. Any more color kind of around the thinking there?

Speaker 4

Yes. It's a pretty unique opportunity where an E and P has a ton of cash flow and bonds trading below par. And we saw that opportunity, our Board saw it with us and decided that buying back some debt Well below par, was a good use of capital and also accelerates that deleveraging process to give us More confidence in the increase to 75% of free cash flow going back to shareholders beginning in Q3. Okay. And just to clarify

Speaker 14

on the shareholder returns, you guys do not count debt pay down as a shareholder return, right?

Speaker 2

That's correct.

Speaker 14

Okay. Thanks.

Speaker 4

Thank you,

Operator

And our next question comes from Paul Cheng from Scotiabank. Your line is now

Speaker 6

Thank you. Hi, good morning, Charles. Two questions, please. Can you just remind us what is your hedging policy, If that's an official guidance in terms of what percentage that you want to hedge? Secondly, that with The rising recession fee, how that impact your 4th quarter set in the 2023 budget in terms of the capital return, balance sheet management and all that?

Speaker 6

Thank you.

Speaker 4

Yes. Good questions, Paul. I'll take the hedging policy and I'll let Travis talk No macro about 2023. Just generally, we do buy puts for a rainy day. So we've gone to As the balance sheet is strengthened, we've bought more and more puts around $50 to $55 Brent.

Speaker 4

In that situation, if we do go below $55 Brent, We're probably making capital decisions to slow down, but the balance sheet doesn't blow out. We can still pay our dividend and still generate free cash I mean that situation, so really protecting for a rainy day, trying to spend around $1.50 to $2 a barrel So, buy those puts 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 0% by Q2, Q3 of 2023. And we'll just continue to keep rolling that forward for Rainy Day Insurance.

Speaker 2

And Paul, Energy has typically been a pretty good hedge A hedge of 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. But what's 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 So then in the future than our mid cycle price deck, it looks to me like the macros the macro looks pretty positive for energy prices over the next couple of years, Even in spite of what I know will be a recessionary impact. And look, if you do see some recessionary impacts, it will probably Soften some of the inflationary pressures we're seeing today.

Speaker 4

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, $20,000,000 $30 move in oil price. There needs to be a $50 move in oil price lower before we discuss Any change to our execution plan. And I think this level loaded plan, level loaded activity levels has allowed us So fight off the inflation bug a little better than most. And again, there's as Travis mentioned, there's no oil out there.

Speaker 6

Just curious that will you gentlemen want to keep more cash balance if that's the increasing recession fee?

Speaker 4

Yes, I kind of throw cash. We certainly want a cash balance. The cash balance moves a lot right now When you're generating $1,000,000,000 of revenue a month, the 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 us and the Board discussed on a monthly basis. And I think that also ties to where your maturity profile sits, right?

Speaker 4

So if we not only have Less debt, but a longer duration maturity profile that gives us confidence in our excess capital and our ability to generate cash Given that our cash flow breakeven is down in the mid-30s a barrel.

Speaker 6

Perfect. Thank you.

Speaker 4

Thanks, Paul.

Operator

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.

Speaker 2

Thank you again for everyone for participating in today's call. If you've got any questions, please reach out to us using the contact information provided. Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Diamondback Energy Q2 2022
00:00 / 00:00