Good day, and thank you for standing by. Welcome to the Diamondback Energy Fourth Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require assistance during the conference, please press star zero. I would now like to hand the conference over to your speaker today, Adam Lawless , Vice President, Investor Relations.
Thank you, Amy. Good morning, and welcome to Diamondback Energy's fourth quarter 2021 conference call. During our call today, we will reference an updated investor presentation which can be found on Diamondback's website. Representing Diamondback today are Travis Stice, Chairman and CEO, Kaes Van't Hof, President and CFO, and Danny Wesson, COO. During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we'll make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.
I'll now turn the call over to Travis Stice.
Thank you, Adam, and welcome to Diamondback's fourth quarter earnings call. 2021 was a great year for Diamondback and our industry, with higher product prices allowing the vast majority of our industry to, one, repair and improve balance sheets quickly. Two, accelerate returns to shareholders. Three, make significant progress on environmental objectives. At Diamondback, we reduced our absolute debt by $1.3 billion, increased our base dividend every quarter, initiated a return of capital framework, and announced ambitious environmental goals designed to help us earn our environmental license to operate. In the fourth quarter alone, buoyed by commodity price strength, Diamondback generated $772 million of free cash flow, with production and capital both positively exceeding expectations.
We returned 67% of this free cash flow to stockholders, which was above our commitment to return at least 50% of our free cash flow to shareholders quarterly. This return was made up of $106 million allocated to our growing base dividend, now at $2.40 a share on an annualized basis, which represents a current yield of approximately 2%, and $409 million in share repurchases as we bought back nearly 3.9 million shares at an average price of just under $106 per share. We are at the beginning of an incredible period of value creation for the industry, and I'm confident that the capital discipline demonstrated by us and our peers in 2021 will continue, putting returns, and therefore shareholders, first.
We believe this is the best near-term path to equity value creation as our shift from a consumer of capital to a net distributor of capital cements itself as our long-term business model. Two months into 2022, economies are rapidly reopening around the world, stoking demand, which we believe to be close to, if not above, pre-pandemic levels. On the supply side, we are witnessing some underperformance from OPEC+ to meet this increasing demand, calling into question spare capacity with global inventory numbers now approaching 2010 to 2014 levels. We cited both global oil inventories and OPEC+ spare capacity as impediments to any discussion around U.S. public company oil growth, and those issues appear to have subsided for now.
However, the global balance remains tenuous at best, with up to a million barrels per day of additional Iranian barrels potentially coming online sometime this year and U.S. growth expectations continuing to climb higher, led by private companies and, more importantly or more recently, majors. Both of these supply factors could be bearish signals for oil. Therefore, Diamondback's team and board believe that we have no reason to put growth before returns. Our shareholders, the owners of our company, agree. As a result, we will continue to be disciplined, keeping our oil production flat this year. As such, our plan for this year is simple. Maintain oil production of approximately 220,000 bbl per day by spending between $1.75 billion and $1.9 billion.
At current strip pricing, this production and capital spend equates to nearly $4 billion of free cash flow, which for our returns framework gives a minimum of $2 billion of cash back to our investors. At the same time, we are committed to permanent returns to our investors, which is why we continue to lean into our base dividend, increasing it again by 20% this quarter. Our growing base dividend is our primary means of returning capital, and we've increased it by a quarterly CAGR of over 10% since it was initiated in 2018. Today, we have line of sight to get our dividend to $3 a share by the end of this year if market conditions remain favorable, which would mean 25% of our 2022 distributable free cash flow would be allocated through this constant, predictable form of shareholder return.
History has taught us that oil is a volatile commodity and that the macro environment will not always be this favorable. We continue to work towards protecting our base dividend down to $35 WTI, with the view that this dividend is really just a form of debt, and it, plus our maintenance capital budget, have to be protected to the extreme downside. By continuing to focus on a fortress balance sheet and layering on strategic derivative positions to our hedge book, we are confident in our ability to perform in any environment. While the base dividend is the primary tool of returning capital, we will also utilize share repurchases and potentially variable dividends to reach at least 50% of distributed free cash flow on a quarterly basis.
We continue to repurchase shares opportunistically, taking advantage of volatility while generating returns on these repurchases well in excess of our cost of capital at mid-cycle commodity prices, which today is assumed to be around $60 WTI. Through the end of the fourth quarter, we've spent $430 million or 22% of the $2 billion program our board authorized last September. If the free cash flow returned through our base dividend and repurchase program does not equal at least 50% of free cash flow for that particular quarter, then we will make our investors whole by distributing the rest of that free cash flow via a variable dividend. This strategy gives us the ability to be flexible and opportunistic when distributing capital above and beyond our base dividend, and most importantly, allows at least 50% of free cash flow to be returned.
However, it is important that the board also retains discretion on what to do with the other 50% of the free cash flow generated. As was the case in the fourth quarter, we have the ability to distribute above and beyond our 50% threshold. If we feel comfortable with our balance sheet and associated cash balance and do not have a use for excess cash, we will return that cash aggressively to shareholders. Some quarters, we will distribute 50% of free cash flow, but in others, we will have the ability to return more, just like we did in the fourth quarter. Going forward, we fully expect to differentiate ourselves not only by our returns framework, but more importantly, through our consistent execution in the field. Last year, our clear fluid design lowered our average drilling days in the Midland Basin by approximately 35%.
That's an astounding achievement for our drilling department. On the frack side, our simulfrac operations continue to reduce our time on pad as we are now averaging 3,200 ft per day with our four-well simulfrac design. As we've laid out in our investor deck, these operational efficiencies have helped us mitigate the substantial cost pressures we've seen related to consumables and labor. As we noted last quarter, these gains will be permanent, giving us more variable cost control than our peers due to these industry-leading drilling and completion times. Now, when you bake in these cost increases and offset them with our efficiency gain, this equates to about 10% of additional capital spend year-over-year, which is baked into our guidance. We will try to offset this inflation by doing what we do best, innovating, implementing new technology, and drilling more efficient and better wells.
As mentioned, we were able to offset a vast majority of pricing increases we faced last year through this type of innovation, and we're confident we can maintain our best-in-class capital efficiency and cost structure this year. At the same time, we're fortunate to have multiple pieces of our capital cost structure locked in with contracts and dedications, like our water and sand supply. As the rig count in the Permian climbs, we will continue to work to control other components of our cost structure, particularly services, labor, and consumable products, while continuing to be the leader in cash margin and capital efficiency. Finally, I'd like to close by detailing the strides we've made in our environmental, social, and governance practices.
To begin, we met four of our five environmental goals in 2021, which had a 20% weighting in management short-term compensation this year and included specific targets related to flaring, water recycling, GHG emission intensity, produced liquid spills, and total recordable incidents. Unfortunately, we did not meet our expectation of flaring less than 1% of gross gas produced. While we met this goal on legacy Diamondback acreage, which was how the goal was set, we missed our target when incorporating our acquired QEP assets, which included a QEP Bakken asset we divested in October. We will continue to improve our takeaway on the acquired Permian acreage and partner with our midstream companies to not only structure contracts that incentivize takeaway in price-agnostic environments, but also apply performance-based incentives and penalties related to flaring.
All of our progress in 2021 positions us well to hit our long-term goals of reducing our GHG and methane intensity by 50% and 70% respectively by 2024, and recycling over 65% of our water and eliminating all routine flaring by 2025. These environmental goals hit close to home, as we hold the unique title of being the only publicly traded E&P headquartered in Midland, in the heart of the Permian Basin. As such, we feel an enormous social responsibility to better the community in which we live, work, and play. We recently committed $2.5 million to a complete redesign of Midland's largest public park, as well as $500,000 for Midland's Meals on Wheels program.
Arguably more important, however, our employees continue to give their time to sponsor and host camps, reading and instructional programs, and public work projects. I'm incredibly proud of our team's efforts. 2021 was a great year for the company. We generated record free cash flow and distributed over 30% of it to shareholders, strengthened our balance sheet by substantially reducing our absolute debt load, and continued to produce one of the cleanest and most cost-effective barrels in the industry. Looking ahead, we're confident in continued consistent operational execution and the ability to generate peer-leading returns. With these comments now complete, operator, please open the line for questions.
Thank you, sir. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question is from Arun Jayaram from J.P. Morgan.
Good morning, Travis and team. I wanna just get some broader thoughts on, you know, your plan, Travis, to allocate free cash flow in 2022. You obviously have buybacks, variable dividends, and debt, while, you know, I'm assuming you wanna keep some powder dry for A&D opportunities. With the stock trading above the valuation of the stock, assuming a mid-cycle deck, you know, we think you're probably gonna pivot a little bit more to variable dividends, but wanted to get your thoughts on that and how, you know, the $4 billion, if the strip holds, could be allocated this year.
Sure. You know, Arun, it's good visiting with you again. Listen, I'll tell you to the penny how much on share repurchases we buy in May, if any. But what hasn't changed, Arun, is our commitment. Whatever portion of our free cash flow that we don't spend on repurchases, we're gonna return that free cash flow to our shareholders. Look, when it comes to share repurchasing, we view that as just like any other investment decision. Drill a well, M&A activity, we do so, like you mentioned, at a mid-cycle oil price, which for us is around $60 a barrel. It has to generate a positive return.
When you go back and look at what oil price has averaged since the fall of 2014, it's averaged $53 a barrel. If you can guarantee me that the price of oil is gonna be $90 or above, then I'll tell you that our shares are undervalued. We're gonna be disciplined, we're gonna be opportunistic when it comes to our share repurchase programs, just like any other form of capital allocation. What we don't repurchase in shares, we're gonna return back to our shareholders in the variable dividends every quarter.
Yeah, I think on top of that, Arun, you know, we certainly want a fortress balance sheet. You know, I think there's, you know, some stuff for us to do with our 2024s and 2025 notes this year. You know, pay down debt when things are good. You know, I think that could open the door for higher returns. I think the key is, you know, 50% of free cash flow is going back to the shareholders, and if we don't have anything to do with the other 50%, it's coming back as well. You know, we proved that in the fourth quarter.
Great. I had one follow-up on the Permian in general. Just thinking about the industry, one of the potential headwinds for future growth will be gas takeaway. Current receipts are just around 14 Bcf a day. We estimate there's about 17 Bcf a day of takeaway capacity. I wanted to get your thoughts, Travis. Your net production is approaching half a Bcf. How do you think Diamondback is positioned to manage this tightness that could occur in late 2023 or early 2024?
Yeah. I mean, I think, Arun, you know, unlike the past, I think we have the size and scale now to contribute to pipelines and make sure it happens. You know, I—we're certainly doing our part not growing. I wish other people would grow less in the Permian too, but that's a different topic. Generally, you know, we committed to the Whistler Pipeline, just announced that this with this earnings. That was with our WTG commitment on gas gathering and processing committed to the BANGL Pipeline, which is NGL takeaway. You know, and really just trying to put our balance sheet to work to make sure, you know, pipeline capacity is strong coming out of the basin. I think we'll see some announcements here pretty soon. We saw a couple things last week on new pipes.
I think generally the industry is aligned that, you know, we can't go back to the way we were when it comes to flaring and, you know, particularly with gas prices up, you know, we should all be incentivized to make sure gas flows out of the Permian. It's gonna be tight if growth continues through 2023, but I'm pretty optimistic on 2024.
Okay. Are you looking to add capacity on those one of the two pipes?
Yeah, you know, we would. You have to have take-in-kind rights to be able to do that. We're putting a lot of pressure on our midstream partners to either relinquish our take-in-kind rights to us so that we can contribute to the pipeline like we did on the Whistler Pipeline, you know, putting our balance sheet to work or, you know, incentivizing them to contribute themselves. It's a little bit of a game of chicken with our G&Ps, but, you know, I think the message is, you know, we both need to figure this out as a group, and we would be willing to put our balance sheet to work to make it happen.
Great. Thanks a lot.
Thank you, Arun.
Thanks, Arun.
Your next question is from Neil Mehta of Goldman Sachs.
Good morning, team, and congratulations to everyone on the new promotions over at Diamondback. The first question is the hedging strategy. Travis, you talked about a long-term $60 WTI view. Curves obviously trading well through that. Does it make sense to opportunistically layer in hedging and thereby lock in more of the capital returns? Or do you think given the strength of balance sheet you can run the business more open?
You know, I'd as our balance sheet strengthens, I think your comment about running the business a little bit more open makes sense. Having said that, though, we have to make sure that we protect the extreme use case, you know, the extreme downside. Look, the impossible happened in 2020. While we don't ever think that's gonna happen again, we wanna make sure that we've got insurance to provide accordingly. I think, you know, we try to do deferred premium puts, you know, as our preferred hedging strategy, which kind of sets that protection in place for us while accomplishing giving our shareholders all the upside on price as well.
Yeah. I mean, I think we hope for the best but prepare for the worst. Preparing for the worst is buying puts, you know, at $50. The balance sheet doesn't blow out. Dividends well protected. Still have free cash flow above that and, you know, try to leave as much upside for the best as possible.
Yep, that makes sense. The follow-up is Travis, you know, you famously said, I think it was last August, that your view was it was a seller's market, and stock has obviously done very well since then, and your equity value has strengthened. What's your thought on the M&A environment in the Permian? Do you view Diamondback as a logical consolidator, and how do you think about the timeline of it, especially with oil above mid-cycle prices?
Yeah, you know, Neil, that's a good question, and it's really hard for me to see how, you know, kind of the excessive G&A that still exists in the Permian, you know, how all of that gets consolidated. I wish I could articulate clearly, you know, what the catalyst is gonna be that allows consolidation to occur because it's needed in our industry. You know, that being said, there's a lot of companies that had 1 ft in the, in the, you know, whistling through the graveyard with 1 ft in the grave. Now a couple of years later, oil's at $90 a barrel and, you know, they're expecting to sell out and get value on future cash flows at $90 a barrel.
As I mentioned, it's the same strategy on our share buybacks, you know, right? If the mid-cycle oil price is $60 a barrel, then it's gonna be hard to close the spread between bid and ask on the much-needed, you know, M&A activity that has to occur here in the Permian. While I'd like to think Diamondback could create unreasonable value for our shareholders like we did with the QEP and Guidon acquisition, it's hard with these frothy expectations on oil price that we're seeing today.
No, that's very clear. Thank you, Travis, Kaes.
Thanks, Neil.
Thanks, Neil.
Your next question is from Neal Dingmann of Truist Securities.
Morning, guys. Thanks for the time. My question maybe for you, Kaes, is my first a little different angle on shareholder return. What I'd say there is, you know, I'm glad to see y'all have really not gotten caught in this group think and suggesting you have to pay out all your free cash flow. You know, the questions I'm getting from investors is, how do y'all think you best show investors that you'll continue to be the best allocators of capital that you have? You know, choice Kaes, you mentioned really anything is out there on, you know, a lot of possibilities. Would one of those allocation choices at some point include higher production?
Yeah, Neal, good question. You know, I think the Street has lost sight of value creation for E&Ps. You know, I get that there's a lot of cash going back to shareholders, but, you know, at the end of the day, if you can generate more free cash flow with the same expectations out of the business, you're creating more value over a long period of time. You know, execution is gonna matter, metrics matter, controlling cost matters, PF&D matters, and, you know, for us, all of those inputs create more free cash flow, and that means more free cash flow is going to shareholders. Whether it's 50% of free cash flow in one quarter or 67% in another, you know, we kind of think about this as a partnership.
It's just that the partnership has a commitment to return 50% of free cash flow. If we have something to do with the other 50% that creates unreasonable value, you know, we'll keep it, but we're not gonna sit on cash, and we're gonna distribute a ton of cash to partners. It's just the only commitment is at least 50% of that cash is coming back.
Great to hear. Travis, my second question probably for you is, I like those slides 10 and 11 on margins and costs. I'm just wondering specifically, can you give maybe a little more color on the primary driver of that median cash margin? I mean, is it that sort of newish 10-day drilling well design that's driving that? Or maybe just talk what you would primarily point to?
Yeah, certainly we've got, you know, the benefit of the improvements that we made in 2021. You know, as I mentioned, 35% improvement in drill times, and we're gonna get a full year impact of that this year, which is helping us offset the inflationary effects. You know, a couple of data points, Neal, you know, that we just I just found out about yesterday as we're getting updated in our weekly meeting, you know. We drilled a well in the Delaware Basin, you know, it's a 15,000 ft lateral. We drilled it to TD in nine days, which is a record for us and, you know, for that area, just an outstanding occurrence.
Even on the Midland Basin side where we've been drilling the most, we drilled another 3-mile lateral, a 15,000 ft lateral in 7.5 days. What's amazing about that, and that's the TD. What's amazing about that is, we only spent 3.5 days in the lateral. Now we used a rotary steerable, and sometimes rotary steerable technology is a little harder to replicate, but that's what's possible. We've got an organization, Neil, that continues to lean into this variable expense side. What I can't emphasize enough is that that's ground that's taken and never given back. When you become more efficient at something, you know, that's always on your side of the table, and it's for the good guys.
I know that's a little bit off topic there, but it's really important to hear that our organization is locked and loaded and this machine is humming very efficiently. You couldn't want a machine humming more efficiently than we are right now in an inflationary environment.
No, I always wanted to hear those op updates. Thanks, Travis. Thanks, guys.
Thanks, Neal.
Your next question is from Derrick Whitfield of Stifel.
Hey, good morning, all. Congrats on your quarter and update.
Thank you, Derrick.
Thanks, Derrick.
With my first question, I wanted to focus on the flaring you experienced in Q4 with the full understanding of its importance to you based on your ESG mandate and incentive compensation. Could you speak to the higher than expected flaring you experienced and what steps you guys can take to mitigate that in the future, even with your partners?
Yeah. If you look on slide 18, Derrick, we laid it out, you know, with quite a bit of detail. Just as an aside, you've heard me say this before, our board expects management to not only lead the industry in environmental measures, but also lead the industry in disclosure. I think 18's a pretty good slide. Let me just point to something specifically. If you look in the top right of that slide, it talks about flaring by source. If you take third-party planned maintenance and third-party unplanned maintenance, that's 80% of our flaring volumes in 2021. Particularly on the unplanned side, which is, you know, something that we've just got to do a better job with our business partners on.
You know, now I said in my prepared remarks, we've actually changed contracts where we can that both incentivizes and penalizes flaring performance. We're looking to expand that concept across all of our gatherers, but we're also intentionally asking our midstream gatherers, you know, to help us as an industry on this effort. That's part of the reason that, you know, we're calling attention to this and, you know, to their performance on slide 18. Now, particular to the miss, I tried to lay that out. We set the goal for our flaring before we bought QEP and Guidon. We didn't adjust our goal just because we acquired assets that had much worse flaring statistics than we did. We tried to absorb it.
We did absorb it, but it cost us on our annual performance. That's. We felt like that was the right way to treat it. Once a goal is set, we honor it.
Yeah. One thing to add, you know, we also deferred 500,000 bbl of oil last year. I mean, we're trying to do our part here, Derrick. You know, we deferred 850,000 BOE, 500,000 bbl of oil because of flaring. You know, we're just kind of asking that both sides, midstream and upstream, get together to solve this industry issue.
That shouldn't be lost, Derrick. That's a very key point. Think about that. We deferred over 500,000 bbl last year just to avoid flaring. That's a behavior that represents a substantial pivot for Diamondback and a substantial pivot if our peers follow suit for our industry. What I believe you're seeing, Derrick, is you're seeing environmental stewardship, more companies are viewing it as an operating philosophy as opposed to an expense, which it was historically or hit the volumes. I think that's an important narrative for our industry to get out there and push. As an operating philosophy, environmental stewardship, particularly around eliminating flaring and eliminating methane emissions, is simply the way to operate a business on a full cycle basis. I hope that makes sense.
It does, and your commitment to it is quite clear. As my follow-up, I wanted to dig in a bit more on the macro side and ask if you could share your expectations for growth in the Permian in 2022, and ask if the growth rates outlined by the majors in the Permian, if that's a concern for you.
Well, look, I've pointed out that on a global sense, the supply-demand is pretty tenuous. Even with the announced growth from the majors, I'm not sure that the total barrels that they're producing are growing into the global equation. That's kind of a plus. Now, right here, as I look out my window, I know that the Permian's running about 300 rigs right now. We're probably on the way to 350 or 400 rigs by the end of this year. A large portion of that of those rigs have been operated by Permian, but I think some of the growth you're seeing on a go-forward basis will be from the majors.
We've already talked about gas pipeline takeaway issues and a little bit on the NGLs, which I think Diamondback has been on the front foot getting in, you know, getting some strategic alliances there. Oil takeaway is in great shape, but it is going to create inflationary pressures. That's what your charge to us and all of our industry's charge is how to manage CapEx in an inflationary environment and not put your shareholder return program at risk. That's kinda how I think about the total Permian playbook.
Great. You guys have done a great job with that. Thanks again for your time.
Thank you.
Thank you.
Your next question is from Doug Leggate of Bank of America.
Thank you. Good morning, everybody. Guys, post the deals, I guess the cleanup of last year, it looks like you've gone through a little bit of an inventory high grading on your latest disclosure. I just wonder if you could kind of walk us through what that looked like. It looks to us that you're sitting on about a better than 15-year inventory, if you define just the core of that, slightly longer lateral inventory you laid out today. Can you just walk us through what that process was and if I'm thinking about it the right way?
Yeah. I mean, generally, Doug, you know, post deals, we do a lot of trades to try to block up, extend inventory, you know, extend laterals sometimes at the expense of, you know, lower working interest inventory that, you know, that may not be operated or have shorter laterals. So that's, you know, the blocking and tackling piece that we're very focused on. You know, and second, on inventory, you know, we've gone a little wider in both the Midland and the Delaware Basins. You know, I think our updated inventory numbers reflect that, you know, kind of moving towards six to seven wells per zone, per section in the Midland Basin versus, you know, kind of eight being the tightest, 660 ft spacing.
In the Delaware, moving to kind of four to five wells a section in the, you know, in the primary zones versus 6. I think what we found is we're not sacrificing a ton of EUR from that unit by going a little wider, but we are generating much better returns and, you know, much better capital efficiency. I think the offset from a present value perspective, you know, outweighs the loss of a couple locations.
Is it the right way to think about this or if you guys maintain your existing growth outlook, we're looking at better than 15 years of growing. I mean, obviously, I know it's a little bit too precise, but I'm trying to just think about the longevity of the portfolio strategy with the inventory you have today.
Yeah, that's fair. You know, I will add that, you know, it's a small number, but we are completing five less wells at the midpoint in 2022 than we were in 2021. You know, as the base decline shallows out and we get active on Sale and Robertson Ranch, where we have a significant percentage of minerals helping us out, you know, that capital efficiency is gonna look a little better here over the coming years.
Okay. Thank you for that. My follow-up, I hate to do it, but it's the variable dividend buyback balance sheet question. Like when you pay out a variable, the cash is gone at the top of the cycle, let's say, and M&A opportunities fall by the wayside, let's assume, then you get a correction in oil prices and the cash has been paid out as a variable. I'm just kinda curious, your commentary, you mentioned variable has differentiated you, but you haven't gone down that path. What should we take from those comments as to how you're prioritizing sitting cash on the balance sheet, continuing to buy back stock if you see intrinsic value, or indeed, you know, giving out a variable dividend that you don't really get a chance to get back?
Yeah. It's really pretty straightforward, Doug. It's leaning to the base dividend, which we've shown every quarter, since we initiated the dividend back in 2018. We're gonna get that up to $3 a share, you know, if the market conditions don't change. The second is share repurchases. Again, there's a calculus that's involved in an investment decision for share repurchases. To the extent we can consume 50% of our free cash flow at a good return on share repurchases, then that's what we'll do. If we see a dislocation between, you know, commodity price, share repurchases, you know, we'll pivot quickly and within the quarter to pay out the remaining up to 50%, or at least 50% of the free cash flow in the form of a variable dividend.
You know, it in some quarters, it's at least gonna be 50%, and in some quarters it could be as much as, you know, like we did this last quarter, 67% or more. We're just trying to maintain. At the end of the day, Doug, we're trying to maintain the greatest flexibility
To generate the best shareholder return.
Travis, I apologize. What do you do with the other 50%? You did 67% in the fourth quarter.
Well, right now, you know, we'd like to continue to work on having a fortress balance sheet and having cash on that fortress balance sheet for the inevitable down cycle. I think we're focused on kind of, you know, our mid-decade maturities. If we can, you know, extend some of them but also pay down most of them, you know, that clears the way for a lot more cash to be put on the balance sheet. And then, you know, step up the overall shareholder return from there. You know, I just don't think we're there yet, Doug.
All right. Thanks, fellas.
Thanks, Doug.
Your next question is from David Deckelbaum with Cowen.
Morning, guys. Thanks for the time this morning.
Good day.
Thanks, David.
Just wanted to revisit that last point on the balance sheet. You talked about the mid-decade maturities. Can you remind us, is there an absolute sort of debt target that you have if you're factoring in a $60 mid-cycle price?
Yeah. I mean, I kind of think about absolute getting down to, you know, $3.5 billion-ish at Diamondback and $1 billion-ish at the sub, so $4.5 billion total. I think that, you know, keeps you very well protected even at a mid-cycle price, you know, turn or so. More importantly, you know, average maturity, you know, getting extended is gonna be important 'cause that, you know, clears the way for more shareholder returns between now and 2029 when our next, you know, big note would be due.
Appreciate that. Then just my second question. The slide where you were referencing cost inflation looked like it rolled up to about 15% overall. Now, the reference point was the third quarter of 2020, where I think we were paying people to stick oil in swimming pools. 15%, you know, seems relatively benign since then. I'm curious what your outlook is on what you can do and what you're factoring in in terms of cost inflation into the 2023, 2024 timeline. You know, do you think that there's still room to offset that with efficiencies, and are you changing how you're contracting for services right now?
Well, you always want your organization to continue to look for the efficiencies on the variable side. It's hard to forecast what those are, but it's not hard to try to incentivize the culture that looks for those efficiency gains. What they're gonna look like in 2023 and 2024, can't tell you, but I know we're gonna continue to look for it. I know if past performance is a good indication, you know, we'll continue to lead the pack on these type of efficiencies.
You know, contracting long-term for more of the consumables on the fixed side of the equations, those have typically been very difficult for our industry because the time that the operator wants to lock in is the time that the service provider doesn't. We're always at opposite ends of the spectrum. You know, like right now, the consumable guys on the service side would love to lock in these all-time high prices. Operators are reluctant to do so. You know, Diamondback has the size and the scale to have very meaningful conversation with our business partners on the service side, and we have those quarterly or every six months.
You know, that's the way that we've chosen to manage that relationship. Most of our service providers, you know, we've had now for over five years, and we've got a really good business relationship with them. Look, their margins have to expand, we understand that, but our commitment to be best in class, you know, and the highest margin remains unchanged as well too. It's not a straightforward calculus, David, that I can lay out for you, but I can tell you that organizationally, we continue to lean into it, and I'm very confident, certainly for 2022, you know, that we'll be able to do so.
Well, one comment on slide 10, David. Slide 10 tells you exactly what we're saying, right? The rig line and the stimulation line. Rig rates are up, frac rates are up, but the efficiencies that have been gained, as seen in the top half of the page, means that those pieces of the well costs have not risen like fixed costs like fuel or cement or casing.
Absolutely. Thanks for pointing that out. Congrats on all the promotions. Thanks for the answers.
Thanks, David.
Thanks, David.
Your next question is from Jeoffrey Lambujon of Tudor, Pickering, Holt & Co.
Good morning, and thanks for taking my question. Just one for me on ESG. Obviously, a lot of progress made on the initiatives that you set out in September with your sustainability report, just looking at the, that section on the slide deck that you highlighted. I was wondering if you could just talk a bit about what you're focused on this year. I know you hit on flaring already. Thinking further out, it'd be interesting to hear about what sort of projects you could see yourselves investing in that continue to make progress on offsetting emissions.
You know, we've been pretty clear that, you know, we're committing, you know, I don't know, $20 million or so per year for the next several years, you know, to eliminate flaring and to significantly reduce methane emissions. Tactically, that's translated on the methane side to overhauling and reconfiguring a lot of our old, mostly acquired tank batteries that have gas pneumatic. I think we've got a slide in there that actually points that out. Gas pneumatic, you can see what that is on slides 19 and 20. But that's been the first focus area is the gas pneumatic. Danny, we're probably halfway through getting those batteries changed, a third to halfway through.
Yeah. We've kinda laid out the framework to get through them all and three to four years, a couple years ago. We're about halfway through with the battery upgrades and, you know, still working on, you know, leak detection and repair initiatives and, then, you know, flaring is our main drivers of methane emissions.
Then Jeff, on methane emissions, there's just an amazing amount of innovative tech, technology that's coming out from the service side. We haven't picked a winner yet. I don't know that there's been a clear winner, but our approach has been to field test all of them. We've probably got five or six leading-edge technology methane sensors in the field in order to monitor these things, monitor methane emissions real time. We're investing alongside, you know, these technology companies on methane emissions. As Danny mentioned, flaring is, you know, something we're really leaning hard into.
I can't emphasize enough that we can do everything we can on our side, but if we don't get our midstream partners on the G&P side to participate, it's gonna be very difficult for our industry to meet, you know, our goal of reducing, eliminating, routine flaring as defined by the World Bank. There is a reason we're being pointed in our presentation today about asking to work collaboratively with our G&P partners on the flaring side.
Great. Thank you.
Thanks, Jeff.
Your next question is from Nitin Kumar of Wells Fargo.
Hi. Good morning, guys. Thanks for taking my questions. You know, a lot of ground has been covered on the cash return side, but I wanna check on the base dividend. You mentioned earlier that it could be about 25% of free cash flow in other return portion of free cash flow in 2022. How are you thinking about it beyond the $3 per share? Is that a good limit, or could we see more increases, and what would drive that?
Well, you know, it really depends what the market conditions look like at that point. I mean, we can't continue to grow 10% per quarter forever, right? At $3 a share, that's over $500 million a year of financial debt, is what, how I look at it. I'm not saying that's a limit, but I'm saying that that's certainly what our near-term focus is to get to that $3 a share.
I guess what I was asking was, is there a percentage of cash flow that you're targeting or something like that at a mid-cycle price? Like, how do you come up with that level?
Yeah. We look at it more on the breakeven side. You know, so pre-dividend breakeven right now, $30 a barrel. You know, I think that number stays fairly consistent here over the coming years as, you know, capital efficiency stays strong, base declines are reduced. And then above that, you know, our large shareholders universally have said they want a base dividend that's protected below $40 oil. Right now, the base dividend is protected at $35. You know, that'll go up over time, but you also might have less shares over time and less debt, so that frees up some more cash to go to the dividend.
Overall, you know, Nitin, you know, cash returns have been widely discussed over the last couple quarters, and the only thing we have universally heard from large long-onlys is more base dividends sooner. That's, you know, why Travis is making the commitment to get to three by year-end, you know, with board support, you know, should conditions remain.
Got it. Travis, really quick question here, but I think you mentioned 400 rigs in the Permian in a year or so. We've talked here a little bit about Permian takeaway on the gas and NGL side, but what are the other challenges that the basin could face if we do see that kind of growth, and how are you positioned to be ahead of that?
I think if you're asking what are some of those constraints gonna be if you get to 400 and what Diamondback is doing to prepare for that. Again, it's a part of it goes back to the longstanding relationship we have with our service partners. But secondarily, you know, anything that requires boots or tires in the Permian Basin is going to continue to be tight. That means as an industry, we're gonna have to attract you know more workers into the Permian Basin like we did in 2018, 2019. You're gonna see that translate to an increase in labor costs. But again, those cost increases are gonna paint you know pretty much all of us with the same brush.
We'll focus, like I tried to highlight earlier, we'll focus on the variable side, things we can actually do something about. You know, 400, what did we peak at, Danny, out here in the Permian?
Peaked at, like, $4.90.
Yeah.
We exited, you know, pre-pandemic around 400 rigs.
Even though I think those rigs are a little bit more efficient today than they were then, we're approaching, you know, or will approach by the end of this year, sort of where we were at the end of 2019.
Okay. Thanks for the answers, guys.
Thanks, Nitin.
Thanks, Nitin.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Your next question is from Leo Mariani of KeyBanc Capital Markets.
Hey, guys. Just wanted to ask a question on the potential for FANG to return to a little bit of production growth at some point. You clearly mentioned that here in 2022 with the looming threat of Iranian barrels, it was certainly one of the key issues that was keeping you guys away from growing. Also, you know, based on your comments, maybe we're not quite back to pre-pandemic demand, but very close. As we look into next year, if we are, you know, above pre-pandemic demand levels and the Iranian situation has resolved itself, you know, one way or the other, could that be the time where maybe we see some modest growth from FANG? How do you think about what the right level of growth is eventually?
Yeah, I don't know what the right level of growth will be or when it's gonna occur. I can tell you definitively right now what's being valued by our investors is a shareholder return program. You know, no one wants to see that shareholder return program put at risk with volume growth, not for Diamondback specifically, for our industry in total. You know, look, the world will be calling for oil growth at some point in the future, and our industry is gonna have to figure out the right way to respond while not putting the shareholder return program at risk.
We've spent the last decade consuming capital, and now we've got a little bit of sunshine around us where we can return that capital to our investors that have been waiting patiently and sometimes impatiently for this return. It's a good question to ask, Leo, but I can't give you the time at which Diamondback or the industry is gonna respond to growth. I'll tell you, when we do, it's gonna be in conjunction with, you know, creating unreasonable value for our shareholders.
If we do.
If we do.
Okay, understood. I just wanted to ask quickly on the 2022 guidance here, maybe just starting with the CapEx. You know, it's a fairly good range, $1.75 billion to $1.9 billion. You did describe having a percentage of some of the services locked in for the year here. So just definitely wanted to get your thoughts on kind of what the $150 million variability could be here in 2022, 'cause it sounds like you're not gonna change the program, and there really won't be production growth.
Then just additionally, looking at the production side of the guidance, if my math is right, it looks like you guys either were kind of at the very high end of the oil every quarter in 2021 or actually beat it. As you're kind of looking at that guide in 2022, should we be thinking that, you know, you always have a slight bit of conservatism to allow for, you know, things that could go wrong in the field? Just wanted to get a little bit more color on the production and CapEx guide in 2022.
Yeah, I think we always bake a little conservatism for the good guys into our plan. You know, drilling and completing 280 wells at your AFE number for a year is not an easy task. You know, it might look easy for me in my Excel model, but actually doing it in the field is pretty darn impressive. You know, we certainly wanna give some room for, you know, guys to do what they do in the field, but also, you know, service costs are going up. I mean, Travis mentioned a very high rig count number in the Permian. If that number comes to fruition, you know, there's gonna be pressure on all the variable costs and the fixed costs in this basin.
You know, fortunately, we have the 12 rigs we need, and we have the three simul-frac crews we need. This is not a year where we need to go find eight rigs and three crews. We might have to pay them a little more to keep working for us, but, you know, that's the risk to the high end in the back half of the year.
Okay. That's definitely helpful. Thanks, guys.
Thanks, Leo.
Your next question is from Charles Meade of Johnson Rice.
Good morning, Travis and Kaes and the rest of the team there.
Good morning, Charles.
Travis, this goes back to some, you know, some of your earlier comments about the, you know, really what seems like a linchpin for your strategy, this idea of a mid-cycle oil price. Why is $60 the right price?
Yeah. We ask that question every day, but one of the things that's, when I ask that question, one of the responses I got was, "What do you think the average price was for the last seven years?" That's $53 a barrel.
Right.
You know, it's real easy to get euphoric about $90+ oil. In fact, I think I'm seeing some of that euphoria in our industry right now, certainly in the commentary that's out there. We know geopolitically there's you know, dollars that are in today's oil price that, you know, God willing, will be resolved, you know, without armed conflict. We know that there's you know, Iranian barrels that are probably coming on. I said by the end of the year, but it may be by the end of this month. We've got this fervor in the Permian Basin that's continuing to lift U.S. production forecasts. While OPEC hasn't you know, performed up to their 400,000 barrels per day per month production increases, I think they're getting closer to it.
I don't know what their surplus is, but it's not zero yet. All of those things to me, you know, you add them together, you know, actually seem to be a little bit more bearish for crude than it does to be optimistic. The other thing, you know, is if we're wrong and oil price is higher, we're gonna generate a lot of free cash flow, and our investors are gonna get a lot of that return to them. If I'm right, well, then we've protected our investments, and we've made the right decisions.
$60, I don't know that it's a hard and fast number, but it's kind of the aperture at which we start all of our decisions on investments, whether it's M&A or drilling wells or share buybacks.
That's helpful, Travis. It seems as good as any other number to me. I just wanted to hear more of your thinking. Quick follow-up. I noticed that you guys said you drilled or I think maybe drilled and completed a Barnett well in the quarter. Was that on the Limelight acreage. I'm guessing that was on that. Is there any kind of rate of change there that was worth highlighting?
Yeah. You know, we drilled a couple wells there. I think we have a couple planned this year. You know, it's still early in the testing phase, but you know, at $90 oil, it certainly competes, you know. Even at $60 oil, including the you know, low entry cost, it competes on a full cycle basis. You know, not yet does it compete with you know, our core Midland and Delaware Basin position.
I think one added to that is that right now we're drilling single wells, and there's a huge cost inefficiency when you're drilling single wells trying to delineate a play. You know, once you move into full cycle development, and you can drill at least, you know, four wells, simul-frac operations, and combine that with efficient drilling operations, you can drive a lot of cost out of the equation, which raises the economics on a play like Limelight and actually makes it start to compete for capital with the other items in our portfolio.
Got it. Thanks for the detail, guys.
Thank you, Charles.
I will now turn it back over to Travis Stice, CEO, for closing remarks.
Thank you again, to everyone listening today. If you've got any questions, just reach out to us using the contact information provided.
Thank you for participating in today's teleconference. At this time, you may all disconnect.