Good day, and thank you for standing by. Welcome to the Diamondback Energy first quarter 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 may need to press star and the number one on your telephone keypad. Please be advised that today's conference call is being recorded. If you require assistance during the conference, please press star and then the number zero. I would now like to hand the conference over to your speaker today, Adam Lawlis, Vice President of Investor Relations. Please go ahead.
Thank you, Amanda. Good morning, and welcome to Diamondback Energy's first quarter 2022 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 will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.
I'll now turn the call over to Travis Stice.
Thank you, Adam, and welcome to Diamondback's first quarter earnings call. In February, Russia launched an unprovoked invasion of the sovereign nation of Ukraine. We at Diamondback strongly condemn Russia's actions and aggression. Our thoughts and prayers are with the millions of men, women, and children affected by this unjust war. While we desire a quick and peaceful resolution to this conflict, we recognize that this war could go on for quite some time. We will continue to support the innocent victims of Ukraine, just as we did earlier this year when we announced a $10 million commitment to various nonprofit entities providing vital humanitarian support. Russia's actions have plunged the global energy markets into turmoil. As the world, and especially our allies in the European Union, grapple with the potential loss of a major source of their energy supply and rethink their respective energy policies.
This war has magnified the interconnectivity of the global energy equation and the impact post-Cold War globalization has had on all supply chains. It has also reminded the world of the importance of the traditional oil and gas to the global economy as we're witnessing the impact high energy costs can have on the consumer and the economy in real time. As the war in Ukraine and the resulting governmental sanctions continue, Russia's oil production is expected to be impacted by shut-ins, natural declines, storage limitations, and lower exports, creating a global shortage of oil. Over the next few years, we will need to make up for this lost production, and we believe that the U.S. oil and gas industry is best suited to provide the low-cost, environmentally friendly barrels needed to ensure global energy supply.
However, today, we are operating in a constrained environment, with inflationary pressures continuing to increase across all facets of our business. Also, labor and materials shortages are now present across the supply chain. We at Diamondback are fortunate to have secured the necessary equipment, personnel, and materials to run our 2022 capital program, but increase in activity now would result in capital efficiency degradation. It would not meaningfully contribute to fixing the global supply and demand imbalance in the oil market today. Therefore, Diamondback remains committed to maintaining our current oil production levels of approximately 220,000 net barrels of oil per day. While we believe that efficiently growing our production base is achievable over the long- term, we do not feel that today is the appropriate time to begin spending dollars that would not equate to additional barrels until multiple quarters from now.
We continue to focus on capital efficiency and strive to operate with the highest level of environmental and social responsibility. At Diamondback, we plan to invest approximately $60 million to reduce our direct emissions and lower our carbon intensity, including ending routine flaring by 2025. This figure does not include the hundreds of millions of dollars we've spent to electrify our production fields and to build pipelines to ensure we produce and transport fluid with the lowest emission intensity possible. These investments are not only good for the environment, but also smart economic decisions that we expect will lower our operating costs. By investing in infrastructure and our high activity levels, we now have the ability to run a dedicated electric fleet for the foreseeable future.
We've partnered with Halliburton to secure our first electric frack fleet, which will run in our Martin County acreage off power generated from a central location and delivered via existing lines, reducing our Scope 1 emissions profile. This partnership will also lower our cost per foot, primarily due to fuel savings, decrease our footprint on location, and increase our operational efficiency as a result of lower maintenance and non-productive time. We expect this fleet to be operational in the fourth quarter. In 2021, we also announced initiatives to reduce our Scope 1 greenhouse gas emissions or GHG intensity by at least 50% and reduce methane intensity by at least 70% from 2019 levels by 2024. In 2021 alone, we reduced our Scope 1 GHG and methane intensities by 15% and 21% respectively from the 2020 levels.
Lastly, we launched our Net Zero Now strategy under which as of January 1, 2021, every hydrocarbon produced by Diamondback is anticipated to have zero net Scope 1 GHG emissions as we offset these emissions with certified carbon credits. Moving to first quarter performance. Our production of 223,000 barrels of oil exceeded the high end of our guidance range, creating $1.4 billion in operating cash flow. We were able to keep our capital costs in check, spending $437 million in CapEx during the quarter, nearly hitting the low end of our guidance range of $435 million-$475 million and pushing our free cash flow for the quarter to $974 million.
We returned $555 million of cash back to our stockholders, or $3.09 per share, representing 57% of Q1 2022 free cash flow and 50% of adjusted free cash flow, which we calculated by adding back the $135 million in cash we used to terminate certain future hedge positions. This return was made up of stock repurchases, the base dividend and our first variable dividend. We've said in the past, our share repurchase program is opportunistic, and we stuck with our plan of evaluating our share repurchases just as we would with any acquisition. A buyback must generate a return well in excess of our weighted average cost of capital, assuming a reasonable mid-cycle oil price.
In the first quarter, our realized price was approximately $60 a barrel, and as such, we were able to take advantage of some of the volatility in the market and repurchase 57,000 shares at an average price of $117 a share. Through the end of the first quarter, we've spent about $440 million, or 22% of the $2 billion program our board authorized last September. Additionally, we once again increased our growing base dividend, which we view as our primary, constant and predictable form of shareholder returns. It's now at $2.80 a share on an annualized basis, up 17% quarter-over-quarter and approaching our target of $3 a share.
We have now increased our base dividend by a quarterly CAGR of over 11% since it was initiated in 2018. Today, this represents a current yield of just over 2%. Finally, if the free cash flow return through our base dividend and repurchase program does not equal at least 50% of our free cash flow for that particular quarter, then we've committed to 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.
Per our strategy, we allocated $422 million to our first variable dividend this quarter, or $2.35 per share, putting our total dividend payout in the first quarter at $3.05 per share, or nearly a 10% total dividend yield. We met our commitment to return at least 50% of free cash flow to our stockholders and used the remaining cash to strengthen our financial and operating position. In the quarter, we fully redeemed $500 million of notes due in 2024 and $1 billion of notes due in 2025. We also took advantage of the flat long end of the curve by pricing $750 million in new 30-year senior notes at 4.25%.
This liability management exercise reduced our absolute debt by $750 million, decreased annual interest expense by $20 million, pushed out the average weighted maturity of our debt profile by five years and kept our average weighted cost of debt flat. With only one tranche of near-term maturities outstanding, we're pleased with the progress we've made to improve our investment-grade balance sheet and are nearing our leverage target of approximately 1x at $50 oil, which would equate to approximately $3.5 billion in absolute debt at the current level. We also continued to put our cash to work by hydrating our existing inventory position through small bolt-on acquisitions, and we're excited about blocking up our Ward position with the acquisition we completed in January.
This bolt-on added approximately 6,000 net acres in Ward County and gave us an additional 60 long lateral locations with an 85% net revenue interest in a high rate of return area. In fact, we've already began drilling the position, but do not expect to have production until late this year. As we look to our outlook for the rest of 2022, our simple plan has not changed. Maintain oil production of approximately 220,000 barrels of oil per day by spending between $1.75 billion and $1.9 billion. At the current strip pricing, this production and capital spend equates to approximately $4.5 billion of free cash flow, which per our returns framework gives us a minimum of $2.25 billion of cash back to our investors.
We're off to a good start for the year, mitigating inflationary pressures while justifying our social and environmental license to operate. We believe our capital discipline and returns profile is still best near-term path to equity value creation, while our operational execution provides differentiated returns to our shareholders. With these comments now complete, operator, please open the line for questions.
Thank you. As a reminder to ask a question, please press star and one on your telephone keypad. Our first question comes to the line of Neal Dingmann from Truist Securities. Your line is now open.
Morning all. Travis, first question really, the obvious just on shareholder return and ops specifically. Well, I guess maybe tackle it a little bit different. Just wondering what levers would you all think about pulling if oil were to go potentially in a super spike scenario, you know, where if Russian oil would decouple or if oil completely goes the other way and rolls, assuming something happens to Putin? I'm really just trying to get a sense of what, you know, sort of quarterly changes you would or would not make, if this were to happen down the line.
Well, certainly from a quarterly perspective, from an operational perspective, we're pretty set on this year's plan. Now we have the ability, obviously to ratchet things down, but as I tried to lay out in my prepared remarks, ratcheting things up right now is not really the right answer. You know, if you're asking questions specifically about buybacks, Neal, you know, we're gonna stay disciplined in our approach to buying our stock back. You know, when we look at mid-teens returns or mid-cycle pricing, you know, that's really not changing. I think what matters most though, Neal, is that we're returning cash to shareholders, and we're giving our shareholders the flexibility to do with that cash as they see fit. That's kind of how I view the world right now, Neal.
No, I like that flexibility. I think it makes a lot of sense as I think investors do. My second question, just on your capital guidance, specifically looking at the $150 of inflation, the $125 DUC benefit, and then the $60 midstream incremental moves that you've talked about since 2021. Really just wondering, is there potential for each of these to move further this year? Does this sort of 2022 spin set you up for a stable 2023 production?
Yeah, Neal, you know, I don't see any changes. I mean, I think, you know, we're seeing inflationary pressures across the value chain. You know, fortunately, we baked a lot of that into our guidance for the year. You know, fortunately we had a strong Q1, which, you know, if you annualize Q1, you'd be towards the well under the range. So it gives us a little flexibility in the back half of the year. You know, second to that, I think, you know, we're debating internally what does 2023 and beyond look like? We're not ready to give an answer to that today, but it doesn't mean that the plan is zero growth forever.
I think we have the flexibility to ramp up a little bit if we needed to, if that was the decision, you know, come some kind of late summer for 2023 and beyond.
Great to hear. Thanks, Kaes Van't Hof. Great results today, guys.
Thanks, Neal.
Our next question comes from the line of Arun Jayaram from JP Morgan. Your line is now open.
Arun, are you on mute?
Yeah. I'm sorry. I didn't hear my name. Sorry about that. Yeah, good morning, gents. Travis, I wanna get your thoughts. You know, obviously, looking at the near-term performance of the stock, you've clearly lagged your oil beta as well as, you know, our sense of execution, which has been good in the field. I was wondering if you and/or Kaes could talk a little bit about the bear thesis on the stock. As you know, there's a number of properties on the market in the Permian, and the market appears to be concerned about Diamondback executing perhaps a pro-cyclical type of M&A deal in this type of environment as the buyback pace has waned a bit.
I was wondering if you could maybe talk about that and just your broader thoughts on M&A in this kind of $100+ oil environment.
You know, Arun, if I could control the price of stock, it would be a lot higher than it is today, granted, but I can't. What we can control is how we allocate capital, how we execute in the field, how we can generate, you know, more cash per barrel than anyone else. Those are the things that we really can control. You know, it is. You know, we do hear a lot about this narrative that, you know, Diamondback is a serial acquirer. Let me just put it simply. You know, large scale M&A today is, quite frankly, off the table. We've got nothing on our deal sheet that's considered more than a tuck-in, like the one that I just announced in my prepared remark.
This remains a seller's market, and we're not gonna underwrite M&A at today's oil prices, just like we're not gonna underwrite repurchasing stocks at today's oil prices. I hope that's clear in both of those two points that I made, Arun.
Great. That sounds like large-scale M&A is off the table today, if I based on those comments.
Yes. Let me reiterate that.
My follow-up.
Large scale M&A is off the table. I'll reiterate that point.
Okay. Yes, that's clear. The second point I wanted to make is, you know, just looking at, you know, the cash flow statement, you know, for calendar 2022.
On our model, which is a bit below the strip, you know, call it $6.2 billion-$6.4 billion of CFO, you know, a little under $1.9 billion of CapEx. If we go through all of the, you know, the uses of cash, including, you know, nearly $800 million of debt reduction year- to- date, we'd still get, you know, over $1.2 billion of cash build this year. I was wondering if you could talk about some of the priorities for this excess cash. I think you highlighted maybe a debt target for FANG standalone at $3.5 billion. I was wondering if maybe you could talk about, you know, uses of cash if this high commodity price environment continues.
Yeah, Arun, you know, good question. You know, I wouldn't say $3.5 billion is a hard and fast number before we ramp up, you know, shareholder returns. Certainly would like to take advantage of this market by taking out our 2026 notes, and therefore not having any near-term maturities before 2029, which, you know, opens up the door for accelerated cash returns. You know, I think that's gonna happen sooner rather than later. You know, just generally, we do want to keep a cash balance, but we're not gonna sit on a large cash balance. We think, you know, no debt isn't the right answer. You know, we're not gonna sit on it, and therefore, we're gonna return it.
You know, this is an active discussion we have with our board every quarter on cash returns. I think, you know, generally, you know, we're gonna be supportive of more cash returns as the balance sheet is put in fortress shape.
Great. Thanks a lot.
Our next question is from the line of Nitin Kumar with Wells Fargo. Your line is now open.
Hi, good morning, gentlemen, and thanks for taking my questions. I want to start with, you know, Permian takeaway on the gas side has been a topic of discussion over the last three months or so. Just wanna see what you guys are seeing on the ground, and maybe if you can talk a little bit about your flow assurance into 2023 and 2024.
Yeah, you know, Nitin, I think people are on the midstream and the upstream side are coming together to solve this problem. You know, you've seen a couple announcements on expansions of a couple existing pipes in the last couple weeks. You know, we still think there needs to be a large pipe built, a new built pipe, which, you know, hopefully happens here in the next month or two from an announcement perspective. You know, generally, going back to what we said last quarter, you know, we don't have take-in-kind rights for all of our gas, but we do have flow assurance for all of our gas. You know, we are exposed to WAHA.
We've hedged much of our exposure in 2023, and we think that's the tight spot. You know, the gas is gonna move. It's just a matter of price. You know, I think there's a lot of constraints on Permian growth right now, as we've seen anecdotes from others on trying to ramp activity into this constrained environment. Generally, I think the gas thing gets solved. I think both sides are as incentivized as ever to build the pipes and, you know, that should clear the way for Permian growth in the out years.
Great. Thanks for that color. As my follow-up, you know, inflation did not feature as prominently in your release as it did for others, but you did talk about constraints. Kaes, you also mentioned possibly looking for growth. Are there any specific areas, as you look into 2023 that are tighter on the supply chain side? Maybe talk a little bit about how you're contracting for those services right now.
Yeah, I would say right now everything's tight across the board, whether it's sand, you know, casing, new, you know, high-spec rigs, frac crews. You know, everything's very, very tight. You know, we're doing our part by keeping our activity levels flat. We're running the 12 rigs we need, and we're running the three simul-frac crews we need with a fourth spot crew. But, you know, you're hearing anecdotes of, you know, not being able to get casing, not being able to get sands. You know, these are things that, you know, we've done our best to secure, and I think we're in a really good position. It kind of ties to, you know, what Travis was saying is, you know, if you're gonna bet on someone in a inflationary environment, it's Diamondback.
I mean, we control costs as well as anybody in this business, and that's what we're laser focused on in 2022.
Great. Thanks for the color, guys.
Thanks, Nitin.
Our next question is from the line of Scott Hanold from RBC Capital Markets. Your line is open.
Thanks. If I could, you know, kind of flash back to the shareholder returns kind of strategy here, and I think you guys have been, you know, pretty articulate in how you think of it big picture. You know, and Travis, I know you made a point of, you know, mention once here earlier in this call about, you know, does it make sense to buy back, you know, Diamondback stock, you know, at this point in time? You know, how.
When we think about how you return that cash going forward, you know, should we anticipate at, you know, kind of heightened oil price levels, you are gonna stick to, say, that $60 mid-cycle price and the, you know, large quantum of return, you know, likely is gonna be in a variable dividend? Is that how we should think about it until there's a more material pullback in sort of the equities here?
Yeah. I think that's a reasonable approach. Scott, I also think you have to be cognizant of what our industry has done over the last 10 years in respect to,
On share repurchases. You know, we've typically, as an industry, you know, chased oil price and repurchased shares back all the way at the top. We're trying to be mindful of that and disciplined in our approach, and I've tried to be as articulate as I could about the way that we think about share repurchases as any other form of capital allocation with that mid-cycle oil price. You know, mid-cycle oil price is a mid-cycle oil price that doesn't change. Now, what could change is, as we continue to accumulate cash, you know, that's gonna have an influence on our future capital allocation, both in the form of share repurchases and increased variable payouts.
Yeah. We, you know, I wouldn't say we haven't had opportunities. I mean, we've had opportunities even in Q2 to repurchase shares given the volatility in this space. There's enough volatility out there to give us opportunities and, you know, the share repurchase is more defensive than offensive. When things are going really, really well, like they did in the first quarter, you know, we make up the difference with a variable dividend.
Got it. Appreciate that. You know, on the first quarter results, you know, what stood out to me was your oil price realizations were extremely strong. Can you talk about the dynamics specifically in the quarter and if that's, you know, continuing at this point in time? It looked like you all got an average premium to WTI pricing.
Yeah. You know, I would say it was more one-off than anything, but the volatility in Brent and dated Brent in particular versus WTI benefited us. You know, I'd say about 30% of our oil production receives a dated Brent price for barrels going to Europe. That was in our favor there in Q1. You know, I think generally, we've always guided to 95% of WTI as our realization. You know, that might need to move up a little bit, particularly with WTI going up as much as it has. It's gonna be tough to hit 100 consistently.
Appreciate that. Thank you.
Thank you, Scott.
Our next question is from David Deckelbaum from Cowen. Your line is now open.
Thanks, Travis and Kaes. Danny, thanks for squeezing me in.
Of course, David.
Travis, I wanted to just follow up on your comments that you made, around capital efficiency degradation for deploying capital in today's environment. I guess, you know, how do you think about those conditions, you know, resulting in improved capital efficiency over time? I guess it sounds like the variables are that there really just isn't very much availability of equipment, significant delays. You know, I know that you guys are benefiting from having pre-purchased a lot of, some of the raw materials for this year's program. You know, I guess, are we to think about when you talk specifically around capital efficiency, if you stood up a rig today that the free cash payback period on that would be, significantly longer than a year?
Yeah. I think there's two points. Your first one is correct, that capital efficiency does imply that the payout for that investment is much longer, notwithstanding the fact that the production from that the way we develop these assets with multi-well pads is quarters away. The second thing is that in a hyperinflationary environment like we're in in the Permian right now, standing up a rig, using your example, really means that we're in most instances we're gonna be taking that rig away from somebody else. That applies to really all services.
If you're looking to increase the total, you know, barrel production out of the Permian, you'd just really be reallocating, so it's not really helping the global supply-demand equation because that's really how tight the services are out here today.
Yeah. It was more a macro comment that the service market is a zero-sum game right now, and us ex-US stepping on the accelerator would result in someone else not. We wanna maintain that capital efficiency that we have and the trust that we've earned with investors that this is the plan.
You know, we've seen in the past, in these hyperinflationary environments, that supply chains ultimately normalize. It takes time for that normalization to occur, which is measured, you know, in quarters, if not years, for it to normalize. When it does, then you start to have a greater opportunity to grow without degrading your capital efficiency.
I appreciate the responses, Travis. The last one for me is just on the Ward County acquisition. Sounds like you guys are already drilling some of those locations there. I guess when you're making an acquisition right now, I know you said large scale is off the table, but are these smaller deals? Should we think about these locations moving to the front of your program?
Yeah. These, you know, these were some pretty high returning locations, mainly because the acreage had an 84% NRI. You know, an extra 9% NRI was about a third of the deal value. That made, you know, a completely undeveloped unit in the Delaware Basin very competitive with, you know, Midland Basin units. I'd say this deal is the exception versus the norm. You know, it was agreed to about six months ago. You know, if other opportunities like that come about, you know, I think it's a good use of cash, so long as we're not impacting our cash return program.
Thanks, guys. Best of luck going forward.
Thanks, David.
Thanks, David.
Our next question is from Derrick Whitfield from Stifel. Your line is now open.
Good morning, all. Congrats on your quarter and updates.
Thanks, Derrick.
Following up on David's first question, could you broadly outline the macro and investor conditions that would support a decision to pursue growth over 5% per annum?
You know, I think what you're asking us to do is start forecasting 2023, you know, growth rates. I'm not, you know, that we're not really ready to talk about 2023. I think, though, Derrick, if you look at the macro uncertainties that are still out there, let me try to enumerate some of those. You've still got Iranian barrels, whether they're gonna find their way in the market. You've got Venezuela. You've got Libya. You've got continued a little bit of surplus capacity in the OPEC. Plus, those are all volumes that can come onto the equation of the supply-demand equation. You've also got the continued demand impacts of COVID, particularly in the Asian markets right now.
Then lastly, you know, to say bluntly, the administration's comments are certainly causing a lot of uncertainty in the market, both in terms of, you know, regulatory taxation, legislation, and negative rhetoric towards our industry. That creates uncertainty in our owners, our shareholders' minds about what the future of this industry really is. I think, you know, this represents, on that front, a pretty unique time to have a sober assessment of what a energy policy really needs to look like for the United States, one that recognizes all forms of energy while at the same time, you know, having aspirational goals about a more sustainable future.
Thanks, Travis. I certainly appreciate those comments and understand those. As my second question, I wanted to follow up on gas egress and more specifically your view on how you'd like to position Diamondback in the value chain for LNG offtake. With the understanding that you are an oil company at the core, have you evaluated or would you consider direct offtake contracts with European utilities to better position Diamondback for higher realizations?
I think we consider it, Derrick. We just don't have control over enough molecules to do anything meaningful. You know, this goes back to the take-in-kind rates, right? We exchange the custody of the molecule at the wellhead, outside of you know 200 million a day we have on the Whistler Pipeline going down to Katy in South Texas. Really don't have control over a lot of gas. You know, as the company's grown through acquisitions, a lot of times the gas came dedicated already with you know no take-in-kind rates for that operator.
Great update, and thanks again for your time, guys.
Thanks, Derrick.
Thanks, Derrick.
Our next question is from the line of Scott Gruber with Citigroup. Your line is now open.
Yes, good morning. I guess just listening to the conversation here this morning, you guys mentioned the e-frac fleet coming in during Q4 and how that'll help efficiency. There's obviously been various drilling optimization software that have been developed to help trim those drill times. Is there an ability for Diamondback to grow volumes modestly without adding an additional rig or two and more frac time, or is that just not possible?
I think it's certainly possible, Scott, and certainly it's part of our, you know, assessment of where we're headed and also ties into this, you know, mantra of capital efficient growth or capital efficient maintenance. It's amazing what the organization has done in terms of efficiencies. You know, three simul-frac fleets have, you know, doubled our efficiency on the frac side and on the drilling side. Like you mentioned, the clear fluid drilling system, as well as, you know, moving on to electrification has reduced costs and cycle times. So I certainly think it's possible, you know, and we continue to see improvements throughout this year and certainly going into our calculus for what does the next few years look like.
You know, Scott, when you think about the improvements that Kaes Van't Hof just talked about that are operationally and execution focused, those are made irrespective of a commodity price or service cost. What's exciting about those and what I'm so proud of our organization about is those are permanent. Those are permanent savings that go forward. When you start doing the relative gain to Diamondback versus others' performance, that's what creates the spread. This is not just a recent phenomenon. You know, our organization, their stock-in-trade has been these types of incremental improvements year-over-year, regardless of the economic or commodity price backdrop. I think it's fair that we're gonna continue to do that.
It gets harder in times like today, but it doesn't mean that we still can't find differential ways to do more with less. The second point is that as we fully embrace the Northern Midland Basin with the assets that we acquired through Guidon and QEP coming onto the production mix back half of this year and fully into 2023, those wells are so good, you will see a natural uptick in capital efficiency because those wells deliver more per dollar spent.
Got you. Yeah, I guess that was the kind of heart of my question is, you know, is there enough kind of incremental gain on the kind of process efficiency, coupled with, you know, the Martin County program hitting its full stride?
That, you know, is there enough combination there that you could actually achieve, call it 5% growth with-without adding an additional rig line?
Yeah, we'll see. You know, it's still early, so we'll see. I think we're really focused on getting through the rest of this year in a very tight inflationary environment.
Okay. Thank you.
Thanks, Scott.
Our next question is from the line of Jeanine Wai from Tudor, Pickering. Your line is now open.
Good morning, everyone, and thanks for taking my questions. My first one just.
Yes.
Hey. My first one's just a follow-up on some of the cost commentary from earlier, if you wouldn't mind sharing some additional insight that you've got, just given your history in the basin. You know, with your outlook for well costs per foot for the year, in particular, staying consistent with the initial guide, even as, you know, other operators are talking up quarter-to-quarter changes with uncertainty beyond that as you go through the year.
I just wanted to ask about what y'all are doing in the field to mitigate higher costs that you might be experiencing, or you know, just plans for activity in the field to mitigate expected costs in the future, just in terms of flexibility around you know, who you contract with for services while still maintaining and upholding the low-cost operations that Diamondback's known for.
Yeah, good question, Jeff. I mean, you know, we've obviously, you know, baked in some inflation into these costs and, you know, went into the year at a lower well cost than we went into 2021, you know, even in the face of an inflationary environment last year. You know, generally there are service providers pushing price, and sometimes, you know, we decide not to keep working with those particular service providers. I think, you know, our ability to control costs is because we control a lot of the process with our business partners on the service side.
We recognize they need to make margin, but if there is another provider that can provide the same service for less cost, you know, we'll go that route, and we've done that a few times this year. That's, you know, that's helped us control things a little bit.
You know and Jeff, those are true strategic comments that Kaes Van't Hof just made. Look tactically, you know, what we continue to see is our operations organization, you know, getting to TD faster on a quarterly basis, you know, and that's kind of goes back to the comments I made earlier. This is what we do. The getting to TD faster translates to cost savings that become permanent. Also completing more lateral feet per day as an efficiency gain this year is another one of those tactical things that we're doing that's helping us hold the line on an increasing cost backdrop.
Just to emphasize, you know, we always get the question asked, you know, what is it that makes the secret sauce of Diamondback in our low-cost operations that you just pointed out? It's really not one or two things. It's really a consistent laser focus on every single decision that we make that spends dollars. The cumulative effect of that laser-like focus allows Diamondback not just on a quarterly basis, but now almost through a 10-year time period maintain, you know, the lowest cost operations and best execution out here in the Permian.
Perfect. Thanks for that. I appreciate the detail and the reminders. My second one's just on the balance sheet, really just around what you see as what's left on the opportunity for further strengthening from here. You know, I know y'all have talked about and flagged the 2026s in the past and, you know, spoke to debt targets that can also be flexible. You know, it would seem like y'all are within striking distance here of an optimal balance sheet position for the medium to long- term. Just wanted to get your latest thoughts on that, given the progress you've made so far, especially recently, and I apologize if I missed this earlier.
No. Listen, I think we feel fine with everything we have due 2029 or later sitting out there and, you know, if we take care of the 2026s, which should be, you know, in a matter of months, not years, you know, we'll be in a position to have discussions about increasing shareholder returns beyond what we're already doing.
Perfect. Thank you.
Our next question is from Nicholas Pope from Seaport Research Partners. Your line is open.
Good morning, everyone.
Hey, Nick.
First, I wanted to commend you guys on that ESG kind of real-time data that y'all are providing, because I think it's probably one of the best in the sector. You provide the data, so I've got a question about a little bit. You kind of talk about kind of gross gas flared, and I saw in one Q, it kind of crept up from kind of where it was in fourth quarter, where it was in first quarter of last year as kind of a percent of total like gross gas production. I was curious, like, is that what drives that? Is there some seasonality in that? Is it I mean, is it limited capacity to move gas?
I mean, I'm just trying to understand a little bit about kind of the movement in that, in that metric, which is a big part of kind of the CO2 emissions, I think, that y'all report.
Sure, Nick. Two things. The first comment on disclosure, I appreciate you saying that. Our board has mandated us to not only be best in class on actual performance, but also best in class in disclosure. There's a lot of our organization that is focused on delivering these results, and we're proud to report them. I think if those haven't had a chance that are on the call to look at the ESG detail in our investor deck, which is up on our website, I strongly encourage you to do that. The second part of your question, Nick, was gross gas. That's, you know, the reason we reported that, 'cause that's a way that you can back calculate and verify our numbers, but that has to do with the acquired volumes, Kaes Van't Hof, that we.
No, it's all due to plant turnarounds, right? I mean, we put out a slide that explains that, you know, 75%-80% of our flaring is due to downstream issues. You know, we're trying to push and incentivize our business partners on the midstream side to do better in terms of flaring, you know, sometimes through contracts where we pay them more per MCF if they flare less than 1%. You know, really timing wise, Q1, a lot of turnarounds from some of our business partners on the midstream side. There is some seasonality to it, but you know, that's why we push them for more interconnectivity among their peers so that if their plant goes down, they can send it to another plant or to a peer, and we'll still pay them.
You know, part of the whole value chain is, you know, we need our friends on the G&P side to work with us here.
Nick, we view that as a win-win or a lose-lose. We're not trying to position, you know, ourselves as a win versus lose on the G&P side. We know that emissions from the product we produce, you know, need to be eliminated and minimized as quickly as we can. That's the reason that we spend time in conversations like this, talking about our G&P business partners, as well as including some slides in the ESG detailed part of the deck that highlights, you know, what Diamondback was responsible for and what our midstream guys were responsible for, both planned and unplanned outages.
Got it. That's actually very helpful. I appreciate it. Kind of further onto the, you know, kind of the other components of this, you kind of talk about the electrification of, you know, of compression, of parts of the frack fleets. Is that something that is that gonna be showing up as part of the LOE kind of improvements that you're working on? Is that where it shows up, or is it primarily gonna be something that is reflected in these ESG metrics when you think about that move towards the electrification of a lot of assets?
Well, electrification in the field helps LOE. You know, electrifying all of our fields is not only, you know, environmentally friendly, but also cost friendly, you know, getting rid of in-field power generation. On the frack side and the drilling rig side, you know, moving rigs and frack fleets to electrification would help, you know, lower costs on the capital side, but also then lower our combustion percentage of Scope 1 emissions.
Got it. That's all I really needed. I appreciate the time this morning. Thank y'all.
Okay. Thanks, Nick.
Our next question is from Doug Leggate from Bank of America. Your line is open.
Hey, guys. I guess P/E's and Q's are directly correlated with the commentary around your variable dividend. Thanks for getting me on this morning. It's good to talk to you fellows. Travis.
Hey, Doug.
I gotta hit this right up front. Look, how can you say you think your stock is undervalued but you're not prepared to buy it? Variable dividends take cash off the balance sheet. They don't get capitalized in a business which has a finite inventory. How do you expect the market to pay you for a variable dividend? It is, to me, in this business, it doesn't make a lot of sense. I'd just love your perspective.
Yeah. Doug, listen, we've tried to outline exactly our thoughts and rationale behind all of those things. My comments on the stock price was really a function of what I can control and not control, and I can't control the actual market, you know, what the stock is, what the actual stock price is. We try to be very disciplined, and we are very disciplined in the calculus we use to buy anything, whether it's our stock, whether it's acquisitions, or whether it's making, drill well decisions. I've tried to outline, you know, the mid-cycle oil price at $60 a barrel. I think that could change, you know, as we continue to accumulate free cash. Mid-cycle oil price won't change, but our ability to buy more shares back will change.
We made a commitment to distribute at least 50% of our free cash flow, and other than holding it on the balance sheet, which we said we're not gonna do, we're gonna honor that commitment and return at least 50%.
Yeah. No, I understand completely the rationale. It's an intellectual debate perhaps, but equity volatility correlates with balance sheet structure. EOG, Pioneer, some of your other peers are choosing to have net debt zero. Anyway, we'll carry on the debate. I wanna ask about a more specific question about the current commodity environment and how it's impacting your cash flow outlook, specifically cash taxes. This might be for Kaes Van't Hof. We've got a much higher gas price. Obviously, we've got a backwardated curve, obviously. I assume that's accelerating the inflection in when you get to a full cash tax position. If you can just give us an idea what you see happening in that regard, and I'll leave it there. Thanks.
Yeah, good question, Doug. You know, we raised our cash tax percentage this quarter because we weren't you know running $100 oil in our initial guidance in February. You know, there still is some protection this year. You know, we do have about $1.5 billion of NOLs that'll protect us next year. We won't be full cash taxpayer next year in 2023. You know, some of our NOL got pushed out, couldn't use it this year, so we got to use it next year. You know, commodity prices stay where they are, you know, full cash taxpayer by 2024.
Just to be clear, even with the forward curve, Kaes Van't Hof, you're still good through the end of next year?
Yeah. I mean, partially, right? I think our protection will decrease next year, but there will be some protection, and then full cash taxpayer, 2024.
Got it. Thanks so much, fellas.
Thanks, Doug.
Thanks, Doug.
Our next question is from Leo Mariani from KeyBank. Your line is open.
Hey, guys. Just wanted to follow up a little bit on some of the inflation commentary here. Just wanted to kind of clarify, you know, sort of what I heard. It sounds like y'all have all your equipment here for your 2022 program. Just wanted to get a sense if generally the prices for the big ticket items on the service side are locked in for 2022. Perhaps could you see, I'll just call it some inflationary risk in the CapEx, you know, maybe in the second half? Then as we look to, you know, 2023, is that where you think that inflation could be, you know, maybe a larger problem if commodity prices are well bid later this year?
Yeah. I mean, it really depends, right? I mean, it depends what happens in the situation with Russia and Ukraine, you know, as it relates to, you know, pipe costs, right? We thought pipe costs were gonna come down the back half of the year. Doesn't look like that's gonna happen this year. It might happen next year. I mean, I think there's a little push-pull, Leo, with, you know, this business tends to sort out supply chain issues over time. You know, as commodity prices stay stronger for longer, you know, some of the tightness will get sorted out.
I certainly I'm not gonna make a prediction that 2023 inflation is gonna be as much as 2022, but we're certainly seeing inflationary pressures across all the big ticket items right now. And some of that pricing for the big ticket items is incentivizing new builds, which tends to lower prices. I think there's a little bit of push-pull, you know, jury's still out on 2023.
Look, we will be affected by inflation, you know, no two ways about it. The bet that we've always made here internally is that we will be affected the least of anyone else because of our efficient operations. You see it in the first quarter of this year. We were all affected by the same inflation and we were at the, you know, low end of our CapEx guide for the quarter. Recognizing that's gonna be a challenge to continue that performance, I still bet on our organization to deliver.
Okay. No, that's helpful. Certainly, I can see that from where you came out in 1Q on CapEx. It looks like on second quarter CapEx guidance, you seem equally confident that you can kind of keep the costs under control. You know, is this something that could maybe creep up more in the second half this year, or do you kind of have rigs and crews and pipe locked in here in 2022?
We feel really good about the budget. You know, obviously, we're on pace, you know, for the low end. I think that's gonna be tough, but we feel really good about this year's budget.
Okay. Thanks, guys.
As a reminder, to ask a question, please press star and the number one on your telephone keypad. Our next question comes from Paul Cheng from Scotiabank. Your line is open.
Thank you. Good morning, gents. Two questions please.
Good morning, Paul.
Thank you. I think first is for Kaes Van't Hof. In the cash tab, I just want to confirm in the accounting that you guys adopt, you will estimate for the full year what is the cash tax rate, and then you apply the same tax rate in each quarter, roughly, flat on that, and not necessarily based on saying that, later in the year that you may have already used some more on the NOL, so you will have a higher cash tax. Also that if we assume, let's say call it an average $100 WTI price for next year, I assume the cash tax rate will be higher. Any rough guidance that you can give? That's the first question.
Yeah. I'll take the second part first. You know, certainly, the cash tax guidance will be higher next year, if we have these commodity prices. You know, I think it's, you know, basically, you know, pretty close to a full cash tax payer outside of $1.5 billion of protection. Then second, I think your question relates to when the cash exits the system for cash taxes. You know, we'll be making payments, you know, our first payment in June for the first half of the year, and then quarterly thereafter now that we're, you know, heading to cash tax land.
Is the cash tax rate, say, throughout the year will be about the same or that they still have the quite a fluctuation?
No, still fluctuation. You know, our burden in Q2 is expected to be higher than our burden was in Q1. It's just that the cash is gonna leave the system in Q2.
I see. Okay. The second question is then for this year look like from a equipment availability and also lock in the service price you guys already done quite a lot. For next year, any kind of rough percentage you can provide how much of your service for CapEx or equipment that you already locked in with a set price or that is 100% subject to the market condition at this point?
I would say most of it's subject to market conditions. You know, we talked about the E-fleet. We signed a deal with Halliburton. You know, that price is fixed and our sand price is fixed. You know, the rest is gonna fluctuate, and we'll see where the market goes over the next few months.
I see. Okay. Thank you.
Thanks, Paul.
At this time, I'd like to turn the call back over to Travis Stice, CEO, for closing remarks.
Thank you again to everyone participating in today's call. If you've got any questions, please reach out to us using the contact information provided.
This concludes today's conference call. Thank you for participating. You may now disconnect.