Good day, and thank you for standing by, and welcome to Diamondback Energy Q2 2022 Earnings Conference Call. At this time, all participants are on a listen only mode. After the speakers presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Lawlis, Vice President. Please go ahead.
Thank you, Joseph. Good morning and welcome to Diamondback Energy Q2 2022 conference call. During our call today, we'll 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 Daniel Wesson, COO. During this conference call, the participants may make certain forward-looking statements related to the company's financial condition, results of operations, plans, objectives, future performance and business.
We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. 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 Q2 Earnings Call. I'd like to start by highlighting our Q2 performance. We once again delivered operationally, producing over 221,000 barrels of oil per day, near the high end of our quarterly guidance range. Our discretionary cash flow or operating cash flow before working capital changes totaled $1.8 billion, up 27% quarter-over-quarter, setting a new high for the company. This increase was primarily due to a favorable macro backdrop, as well as improvement to our realized pricing as hedges put on last year continued to roll off. Our free cash flow for the quarter was $1.3 billion, up 35% quarter-over-quarter.
We will return 63% of this free cash flow to our shareholders, well in excess of our commitment to return at least 50% of free cash flow. This return is made up of our growing and sustainable base dividend, opportunistic share repurchases, and a robust variable dividend. Our annual base dividend is now $3 per share or $0.75 per quarter, representing a 7.1% increase from the company's previous annual base dividend of $2.80 per share or $0.70 per quarter. As previously announced, the board elected to keep our total dividend per share flat quarter-over-quarter at $3.05, which is comprised of a $0.75 base dividend and a $2.30 variable dividend. This puts our total annualized Q2 dividend yield at nearly 10%.
Additionally, we took advantage of market volatility and repurchased nearly 2.4 million shares during the quarter at an average price of a little over $127 a share for a total cost of approximately $303 million. We believe our opportunistic, disciplined approach to our repurchase program brings the most value forward for our shareholders and continues to give us the flexibility to use either our variable dividend, buybacks, or, as has been the case so far in 2022, a combination of both to hit or exceed our returns target. As we move into the H2 of the year, it's hard to ignore the amount of free cash flow we expect to generate, around $2.5 billion at current strip pricing.
In June, we announced an increase in our capital returns commitment target, moving it up from 50% to at least 75% of free cash flow beginning in the third quarter. At 75%, that's over $1.8 billion returned to shareholders or well north of the $10 per share in just two quarters for a total annualized return yield of approximately 17%. This robust free cash flow profile led the board to double the size of our buyback program from $2 billion to $4 billion, giving us ample running room to be opportunistic in the equity markets. Since the program was initiated in the third quarter of last year, we've repurchased over 8.3 million shares at an average price of $113 a share for a total cost of approximately $940 million.
This includes 1.8 million of shares we've already repurchased in the Q3 for a total of $200 million at an average price of $113.70 a share. Our confidence to increase our returns payout is rooted in the strength of our balance sheet. During the Q2 , we opportunistically repurchased $337 million in Diamondback senior notes at an average cost of 95.4% of par for a total of $322 million. We focused on our debt coming due over the next 10 years, significantly lowering our maturity towers while taking advantage of a volatile debt market. We also recently redeemed $45 million in Legacy Energen and QEP notes due 2022 at par. As a result, our balance sheet is stronger today than ever before.
Our annualized net debt- to- EBITDA is under 0.7x , and we continue to improve our leverage profile, with net debt decreasing by $267 million or 5% quarter-over-quarter. These debt reduction efforts have helped decrease our interest expense by 25% year-over-year, offsetting higher production taxes and lifting costs and helping push our unhedged realized cash margin this quarter to more than 83%, a company record. Moving to the operations side of the business, the environment in the Permian continues to be challenged. However, we continue to focus on how we can mitigate the inflationary pressures we are seeing across nearly all facets of the business by lowering the variable pieces of our cost structure.
These efforts have allowed us to keep the high end of our capital guidance range flat at $1.9 billion, and we do not anticipate any future changes. Yet, we still haven't been able to offset all of the fixed pricing increases we've seen, which is why we've moved up our Q3 capital range to $470 million-$510 million, up from our capital spend of $468 million this quarter. This reflect an expected ~ 10% cost increase we expect on the frack side, which is made up of increases in the cost of horsepower, wireline services, and fuel. On the drilling side of the business, we're seeing a similar level of pricing increases, particularly from day rates, casing, and cement.
In the back half of this year, we plan to operate ~ 12 drilling rigs and three frac crews. As we mentioned last quarter, we've partnered with Halliburton to secure our first E-fleet frac crew, which will run in our Martin County acreage off power generated from a central location and delivered via existing lines, not only reducing our scope one emissions profile, but also lowering our completion costs as a result of fuel savings and improved operational efficiency. We expect this fleet to be operational early in the Q4 , and it will simply be swapped in for one of our existing Halliburton crews. Earlier this month, we continued to lean into this technology and secured our second E-fleet crew. This crew will be operational in the Q1 2023 and is expected to further reduce costs and decrease our environmental footprint.
It will also replace one of our existing crews. On the drilling side, we currently have one drilling rig running off line power in the Delaware Basin, with two more electric rigs expected in 2023. Just as we're seeing on the completion side, the electrification of our drilling fleet has multiple benefits. Additionally, we're utilizing spudder and intermediate rigs to take advantage of lower pricing as compared to the rest of our drilling fleet and are exploring downsizing surface casing size, intermediate hole size to improve our drilling efficiencies, pushing Diamondback even further down the cost curve. Lastly, we continue to work to earn our social and environmental license to operate. Part of this is our commitment to provide quarterly disclosures that detail our progress towards our environmental goals.
We are proud of how we have performed so far this year when looking at multiple metrics, including recycling ~ 40% of our produced water and keeping our total recordable incident level at multi-year lows. However, flaring continues to be an issue. We're diligently working with our gathering partners to build in redundancy, accelerate plant turnarounds, and meet the takeaway needs of our current development plan. We remain committed to ending routine flaring by 2025 and are confident in our ability to achieve that goal. We've also spent hundreds of millions of dollars to lower our emissions profile by building pipelines and electrifying our production fields.
These projects have lowered our costs to date, but due to the increase in the cost of power across the state of Texas, we have had to move our lease operating expense guidance range up by $.50 per barrel to $4.50-$5 per barrel. Even with this move, we continue to be the low-cost Permian operator and build on a long track record of cost control. The Q2 was a record quarter for the company. We delivered on our production guidance, kept costs in line, and distributed over 63% of our free cash flow to our shareholders. We are well positioned to build off this momentum and are excited to begin returning at least 75% of our free cash flow to our shareholders this quarter.
We expect this industry-leading cash returns program and our best-in-class operational machine to continue to deliver differentiated results for our shareholders. With these comments now complete, operator, please open the line for questions.
Thank you. As a reminder, to ask a question, you'll need to press star one one on your telephone. Please stand by while we compile the Q&A roster, and we ask that you limit yourself to one question, one follow-up. Again, limit yourself to one question, one follow-up. One moment for questions. Our first question comes from Neal Dingmann from Truist. Your line is now open.
Morning, guys. My first question is similar on shareholder returns. Specifically, I think on your conference call a year ago, looked and tried to think you stated that as you looked at back then at supply and demand fundamentals, you said, I think suggested that oil supply was still, you know, purposely being withheld to the market, driving your call to not grow production. I'm wondering, when you look at today, do you still believe that's the overall case of worldwide fundamentals or specifically, supply and does that still drive? Is that still your primary decision, your primary driver of your decision for the no growth, or is this more based on investor request?
Well, certainly as we look into 2023, I think it's a little premature to do much forecasting into 2023, but I can tell you know, kind of our base case is, you know, looking at something at the same activity level, you know, probably generating something in the low single digits in terms of growth rate. Again, it's more of an output.
I think what you specifically asked about the call last year, I think I highlighted really three things and then subsequently added a fourth, and that was demand at pre-COVID-19 levels, wanted to see five-year inventory levels, returning to the five-year average. We still had a question about OPEC capacity, and the one I added subsequent to our call was, you know, the administration continuing to impose uncertainty into our capital allocation process across the industry. Certainly three of the four of those have been answered today, Neil. There's still a lot of administration led uncertainty, both in policy actions and in rhetoric. The other ones certainly appear to be answered.
I think as the industry starts to pivot towards more focus on 2023, I think you'll still be governed primarily by the shareholders who own the companies, you know, but I do think you'll start to see, you know, a little bit of growth in the industry as we look into next year.
Great response. My second question really I would say is on the notable capital spend discipline that you guys continue to have. You know, as many others we've already heard about continue to increase their cost, you know, despite them previously saying that they were locked in. I'm just wondering, going forward, would you all consider any type of, I don't know, like a more vertical integration or any other new strategy, will the focus remain more or less on the same as working with vendors and just the efficient execution?
Well, Neal, I think we've been pretty successful with the existing model. We'll always look at seeing what ways we can ensure lower execution costs. You know, we were a little bit flummoxed in the first quarter, you know, with all the commentary about locked in prices and then subsequently followed with CapEx raises. That's just not the way that we've typically tried to communicate what our execution focus is. I do wanna. I know I have a lot of employees listening in the call this morning. Look, I wanna give, you know, a shout-out to our organization, you know, for our ability to continue to manage costs in an inflationary environment.
Again, about a year ago, Neal, we were talking about how you separate winners and losers, you know. In an inflationary environment, it's always those that can control costs. While we've taken our licks on the fixed cost side of the AFE ledger, you know, we've done a really remarkable job on the variable cost. I look for our organization to continue to lean into that in 2023.
Very good. Thank you so much.
Thanks, Neal.
Thank you. One moment for our next question. Our next question comes from Neil Mehta from Goldman Sachs. Your line is now open.
Yeah. Good morning, Travis team. First question is around capital returns, and you did increase the share repurchase authorization to $4 billion from $2 billion previously. It looks like you've been leaning a little bit more into the repurchase with the pullback in the stocks. If you could just talk about your framework around variable dividend versus repurchases and how you're thinking about being countercyclical with how you deploy your share repurchases.
Well, we certainly think that there's a lot of value in our existing stock price, and we think that oil and public equity stocks is really undervalued right now. The two data points that you mentioned I think are good indicators of future behaviors. The first being, you know, we've spent about $500 million in the last, you know, two to three months repurchasing shares. The board just, you know, essentially doubled our authorization up to $4 billion. The base dividend still remains, you know, sacred, you know, sustainable and growing, followed by, you know, in this environment, you know, share repurchases.
As we committed to a month ago, you know, we'll make up the difference and keep our shareholders whole , by returning at least 75% of free cash flow.
Yeah. Thanks, Travis. Would love your perspective on the M&A outlook. We know that you've been active over the last couple of years. Is it fair to assume that, given that you're re-prioritizing share repurchases at this point, you think that's a better investment than third party M&A? Thank you.
Yeah, certainly, Neil. That's the behavior we're demonstrating. As I just iterated, just to emphasize, oil in the public markets is really cheaper in the private markets. I think there continues to be a wide gap between those two points. I think you're also seeing, you know, stalled or failed processes as well, which again indicates a spread between bid and ask. Right now, the greatest return for our shareholders is leaning into our repurchase program.
Thank you, sir.
Thank you. One moment for our next question. Our next question comes from Arun Jayaram from J.P. Morgan Securities. Your line is now open.
Yeah. Good morning, Travis and team. Maybe just a follow-up to Neal's question is, how do you think about you know, your process to engage in portfolio renewal, in this kind of backdrop and, perhaps a little bit more color? Looks like you had about $85 million of property acquisitions in the cash flow statement. I was wondering, if you could provide us a little bit of detail on that. I think on a year to date basis, that takes you just under $400 million of property acquisitions.
Arun, you know, the big deal was obviously in Q1, $230 million deal. You know, we do capitalize a little G&A and interest, which flows through that number. It's not all property acquisitions. You know, the couple things that we do on the property side is just the typical blocking and tackling, netting up. You know, we give our land teams the directive that we'd rather drill 100% working interest wells across the board. You know, they're always working to net up and block and tackle. Nothing of significance purchased in Q2.
Look, Arun, you know, having boots on the ground here in Midland, I think there, you know, all of our shareholders expect me and us to be in the deal flow at all times. But that just means we look at things coming across the desk that I go back to and say, "Look at what our behaviors are," and the separation between, you know, public and private, you know, expectations on value. That's, I think, the best way to think about what our forward plans are.
Okay. Just my follow-up is, you know, you guys had really strong oil price realizations in the quarter. I was just wondering if you could just remind us about your mix between getting waterborne crude pricing versus, you know, call it a Midland type of benchmark?
Yeah. We have all of our oil on pipes going to the Gulf Coast, about a third of it going to Houston, getting MEH pricing, two-thirds going to Corpus, getting Brent pricing. We've been the beneficiary of these, you know, this wide Brent WTI spread. We have a little bit of exposure to the Midland market, but we also have the ability to kind of flex that to the Gulf Coast with the space that we have. This sell-off in WTI versus Brent has resulted in really good oil realizations. You know, no guarantees that it's gonna continue forever, but that kind of fits the insurance policy that we've put in place to invest in these pipelines and get our barrels to the most liquid markets.
Great. Thanks, Kaes.
Thanks, Arun.
Thank you. One moment for our next question. Our next question comes from Scott Hanold from RBC Capital Markets. Your line is now open.
Hey, thanks. Could you all give us some, you know, view on what you all are seeing on leading edge inflation? If you can give us a sense of, what kind of, savings you guys, expect from the E-fracs versus a regular fracker. I mean, how meaningful is that?
Yeah, Scott, good question. You know, I would say generally, you know, we took up CapEx on the low end and took up, you know, our average well cost estimate for the year. I would say probably today we're probably up, you know, 15% today from beginning of the year. We'll probably exit a little higher than that, so, you know, probably 15% year-over-year well cost increases. But, you know, what, you know, the ops team is doing is not taking, you know, every phone call and just increasing prices. We're trying to do some things to be more efficient. You know, you mentioned the E-fleet. Travis just mentioned in his opening remarks that, you know, we're gonna have a second E-fleet coming in early next year.
You know, that saves money, not just on the horsepower piece, but on the fuel piece. You know, these will be connected to line power, and, you know, the back end of a gas plant with, you know, burning dry gas in the Permian. While gas prices have gone up, they certainly haven't gone up as much as diesel. You know, I would say we probably save $50-ish a foot with that $50 a foot with that E-fleet. You know, a couple other things we are doing on top of that, you know, we are adding some preset rigs to replace some big rigs as those preset rigs, you know, cost a lot less with these big pads and long cycle investments. You know, we have that ability to do so.
Our team is also getting really smart on casing design, cement design. You know, wherever we can pick up pennies, that's just our stock and trade.
A lot of pennies there, you're picking up. You know, good to hear that. Follow up, and I'm gonna kind of belabor the point on shareholder returns. I know you all, you know, have, you know, done pretty well with executing your flexible plan. But the bottom line is right now it appears that your stock is trading at a discount. I mean, it looks pretty evident. Like, how do you all think about like, what the best way to bridge that gap is? Like, you know, what can you do to kind of, you know, force the issue to get your valuation more in line with peers or where you think it should be?
You know, Scott, when I talk to our board and communicate, you know, what I think the success indicators are, there's really five. Three of them were foundational that led us to success in the first 10 years, and I think the two that I've added are gonna be, you know, foundational for the next 10 years. The three that we built the company on are execution, low-cost operations, and transparency. We've been very successful at differentiating ourselves with those. The two that have recently been added are capital return and decarbonization. On the capital return, you know, we're now, you know, our yield, you know, is peer leading. You know, we're competitive on all forms of shareholder return measures. The last one is decarbonization, and not only in our disclosure but also in our performance.
Look, those are the five things that we excel at. You can ask us questions about any one of those five, and we can articulate chapter and verse why those are successful, why we're successful with those. While you pointed out a dislocation in stock, we believe fundamentally that we continue to do the right thing for our shareholders to generate the greatest value. We believe we're running this company not just for a quarter, but for the next 10 years and longer.
Appreciate the color. Thank you.
Thank you. One moment for our next question.
Our next question comes from David Deckelbaum from Cowen. Your line is now open.
Thanks, Travis, Kaes, and team. Appreciate the color today. Maybe if I could ask one on just CapEx. In 2022, I think you all forecasted about 12% of your total budget going towards non-D&C. Is that a good contribution as we think about 2023 and 2024?
Good question, David. You know, I think, you know, generally if you look at our past history, we kinda whenever a deal happens the next year, you know, infrastructure and midstream is, you know, 10%-15% getting down to kinda 7%-8% of total capital in the out years. I certainly expect us to be closer to 7%-8% of total capital in 2024 with a step down next year in 2023. I think the only wrinkle is, you know, we and our peers are all spending a lot of money on environmental cleanup. That's probably, you know, $30 million-$40 million a year that wasn't in the budget in 2017 or 2018. It's necessary dollars.
You know, generally, I'd expect our midstream and infrastructure budgets to come down next year and into 2024, probably a step change down to 7% or 8% in a couple years.
Thanks for that, Kaes. Maybe just as a follow-up. Obviously, the 3Q CapEx, 4Q CapEx is gonna follow with activity, with 3Q being higher than 4Q. As we think about next year, though, and I think the expectation is that you guys would still be in that, you know, sort of 270- 290 wells, you know, ~12 rigs, a few frac crews. Is that ~$460 million or so implied guide for 4Q? Is that 460 to, you know, $500 million range, like a reasonable run rate to think about 2023, or are there explicit reasons why you would want us to be guided away from that?
Yeah. I mean, I think it's just too early to talk 2023 inflation. You know, I'm certainly kind of in the camp that we're not willing to continue to concede margin expansion on the service side, you know, perpetually. You know, we're gonna see where things shake out over the next six months. You know, like we said earlier in the call, there are some things we are doing to increase efficiencies and lower costs. I would just say generally, you know, I think you're right on activity going into 2023. I'm not gonna comment yet on service prices and where things head, you know, particularly with some of the stuff that's out of our control, like steel continuing to go up in price.
I appreciate it, guys. The only inflation I'm baking in is CapEx per share, so thanks for the color.
Good new metric.
Yeah.
Thank you. One moment for our next question. Our next question comes from Derrick Whitfield from Stifel. Your line is now open.
Good morning, all, and congrats on your quarter and update. With my first question, I wanted to focus on your operational efficiency. Would it be safe to assume the improvement you experienced in your drilling and completion efficiency metrics over the last couple of years has at least plateaued as a result of service tightness and the dilution of experienced crews?
Yeah, Derek, I think that's a fair statement. You know, certainly the business has gotten a lot harder to operate and execute this year. You know, it's on us, though, to make sure we have the right supervision in the field to make sure, you know, green hands are trained up quickly. You know, it's not. It's something that we are seeing. We do spend a lot of money, you know, near the wellhead to make sure our supervision oversees, you know, what's going on in the field. There's a couple other things that kind of, you know, go the other way, right? These spud rigs that we're putting in place, they drill a little slower, but they cost half as much as the big rigs.
I think generally, you know, we kinda hit the efficient frontier on days to TD, you know, this year. Now we're doing some things that might slow things down, but spend less money per well.
That makes complete sense. As my follow-up, I wanted to touch on the Inflation Reduction Act, which could be voted on this week. Focusing on the minimum tax and methane fee components, could you speak to the implications for Diamondback and the industry in general? It seems at a minimum from our perspective that the worst case that gets Diamondback would be minimized with the 15% minimum tax stipulation.
Derrick, the methane fee tax is one thing that we've looked at. You know, because of the dollars we've spent over the last three years really reducing, you know, our methane emissions, that doesn't appear, as we understand it, to be a needle mover for Diamondback.
Yeah. Then on the tax side, you know, we're pretty low on NOL protection. If the strip holds, you know, we have about $1 billion of protection next year. We would be above the 15% minimum that's being proposed. You know, I think generally moving towards a full taxpaying entity at Diamondback, you know, would mitigate the impact to us. You know, certainly, if we were in a different commodity price environment, it might be a different story. In this environment, you know, we're headed towards full cash taxes in 2024.
Great update. Thanks for your time.
Thanks, Derek.
Thank you. One moment for our next question.
Our next question comes from Jeanine Wai from Barclays. Your line is now open.
Hi, good morning, everyone. Thanks for taking our questions.
Good morning, Jeanine.
Our first question. Good morning, Travis. Thanks for the time today. Our first question is maybe hitting on the balance sheet a little bit. FANG had about $21 million of standalone cash at the end of the quarter, and that reflects really getting after paying off those notes early and at a very nice discount, which is great. What's the sequencing of further debt reduction that you mentioned, and do you have an updated view on your target cash balance? We're essentially trying to back in to how much potential upside there could be to exceeding the 75% minimum return.
Yeah, Jeanine, good question. You know, with the Rattler deal expected to close at the end of August, we'll have to pay off that revolver at close. It's about $200 million revolver that we'll expect to pay down with cash. We also wanna take out the Rattler notes, $500 million notes next. You know, there are some reporting requirements with those notes if they continue to stay out there. I think those two items are certainly the priorities, and we probably expect to be in a position to have those taken out by, you know, the next time we're on the phone here. Then I think, you know, after that it goes back to being selective with, you know, the other outstanding notes.
We do not repurches the two 30-year tranches, but we did take down some of our 2029 and 2031 opportunistically with a discount. Generally, the Rattler notes and Rattler revolvers coming out next, and then we'll be, you know, more prudent with the rest.
Okay, great. Maybe a quick one on operations. I think in the past you mentioned running three simul-frac crews and then potentially utilizing a spot crew. In your prepared remarks, I think I heard you mention just running three frac crews. Just wondering if I'm remembering those two things correctly, and have you been able to maybe drop that spot crew due to efficiencies? Thank you.
The three simul-frac crews are gonna run consistently throughout the whole year. Those three have been going this year. They'll be the baseline for next year. We did have a spot crew running for part of Q2. I don't have a spot crew again till probably the end of this year. We try to string together enough pads to make that spot crew cost competitive. I don't know if anyone have anything on the spot crew.
No, I think the you know the three simul-frac crews will do about 80%-90% of our planned well activity. Then you know the remaining 10%-20% we have to handle with an additional crew. We usually try to block it up and get it you know get a dedicated you know line of work for a crew for a period of time. You know let it go and bring it back for the next group of wells.
Okay, thank you.
Thanks, Jeanine.
Thank you. One moment for our next question. Our next question comes from Nicholas Pope from Seaport Research. Your line is now open.
Morning, everyone.
Morning.
Morning, Nick.
I had a quick question on kind of the updated CapEx guidance. Most of the increase was all on the drilling side without much kind of change in kind of expected activity, but no real change in any other components, the midstream environmental infrastructure components. I was kind of curious what kind of inflation you're seeing on there? Are you expecting kind of the same amount of activity on those non-drilling, non-completion components, or is that just a little bit more fixed with project-type work?
Yeah, it's definitely a little more fixed with project-type work. There is some inflation in those, you know, in those budgets, but that was already, you know, somewhat baked in. You know, on the midstream side in particular, you know, the big bulk item is buying a lot of pipe and we, you know, pre-bought a lot of that, so we knew where that was gonna sit on the cost side. You know, on the infrastructure and our environmental side, it's not necessarily, you know, a change in plan. As you mentioned, it's just, you know, a few inflationary items around the edges. But it's nothing to the extent of what we're seeing on the drilling and completion side when it comes to inflation.
Got it. Appreciate that. As you kinda look at kind of progressing towards completion of the midstream, the Rattler kind of acquisition, is there an anticipation of any real change in operations? Or I guess how much kind of third party is even a part of Rattler at this point in terms of-
Yeah.
-operation?
That's a great question. That's a great question, too. You know, nothing's gonna change operationally. You know, we still like the midstream business. We still like what it does for our consolidated margins. You know, we just felt that it didn't need to be a separate public entity. We're able to, you know, buy that back in and still run a midstream business that we own 100%. You know, I will say the team has done a good job seeking out third party opportunities. I wouldn't say it's our core business, but, you know, we'll have some real cash flow coming in from third parties, you know, given the amount of assets we have on the ground on the midstream side.
I appreciate the color. I'll let you guys go. Thanks a lot.
Thank you. One moment for our next question. Our next question comes from Doug Leggate from Bank of America. Your line is now open.
Oh, thanks. Good morning, everybody. Travis, I hate to go back to the capital return question, but you will issue a bunch of shares. You know, I'm just wondering how we should think about split between the variable and the, you know, the stepped up buyback program as you go forward.
Yeah, Doug, you were a little mixed there on. I couldn't hear you too well, but I think I got the gist of it. You know, I think generally we are gonna be very aggressive on the buyback here in Q3, given where the stock is and we're, you know, we continue to generate free cash well above mid-cycle prices. We already spent $200 million quarter to date. You know, generally, if you kind of take street numbers and keep our base dividend flat in Q3, you know, we could probably spend another $650 million on buybacks this quarter.
You know, if the stock stays where it is and oil stays where it is, you know, we're gonna be very, very aggressive on that buyback, which is why, you know, the board signified the confidence in increasing that authorization to $4 billion.
Okay. Sorry to press on this point, Travis, and I apologize for my line, but is there a more formulaic way we can think about, I mean, are we still looking at a substantial variable in the second half of this year?
Not at these prices, you know, Doug. If the stock price stays where it is today, all that cash is gonna go towards reducing the share count.
Great. That's what I was looking for. My follow-up is just a quick one on going back to the AMT very quickly. Can you clarify, as your understanding is today, do IDCs and, I guess NOL is not such a big deal for you guys, but an IDC specifically, do they still qualify as an offset to the AMT in your view? Any color you can offer in your interpretation of that?
I think our interpretation is they still do. Unfortunately, IDCs have become such a small part of the cash flow stream that they're not, you know, impacting things much. That's our understanding today. You never know with politicians. Anything can happen.
Great. Well, I appreciate the clarity on the cash CapEx guidance. Thanks so much.
Yeah. Thanks, Doug.
Thank you. One moment for our next question. Our next question comes from David Deckelbaum from Cowen. Your line is now open.
Thanks for letting me back in the room, guys. I wanted to ask, just to follow up on some of the thoughts around return on capital. Travis, you know, you talked about conversations with the board, how to make Diamondback competitive relative to its peers. You've seen the evolution of, you know, what you guys had promised last year, 50% of 2022's free cash return to shareholders, the rest, you know, retiring debt. You increased that to 75%. You just increased the buyback. I guess, when you talk to the board now about the return on capital programs, are there explicit targets that you're thinking about when you're putting an outline around the buyback? You know, how did you come to this amount?
Are you trying to intentionally show that Diamondback can retire, you know, 10% of its market cap plus every year? Is that? Are those explicit goals now, or are these more coincidental based on where the free cash is today?
Yeah, those are. We don't have specific goals, you know, that are articulated in the way that you just asked that question. We simply look at the value that we believe the inherent value of the stock versus where it's trading at. You know, we want to demonstratively move into repurchases, you know, when we think there's a big dislocation like we see in today's market. You know, as we go forward in time, you know, maybe that changes. As it sits today, as Kaes just outlined with the previous caller, you know, we believe that there's still a lot of value in, you know, a lot of value in the stock.
Perfect. Thank you, guys. That's all I had.
Thank you. One moment for our next question. Our next question comes from Vincent Lovaglio from Mizuho Group. Your line is now open.
Yeah, thanks for getting me on, guys. Given the scale of free cash flow generation, I'm wondering how you guys are thinking about potential investment in future offtake, particularly on the gas side and, you know, kind of connecting that gas molecule to the Gulf Coast and ultimately, hopefully international markets.
Yeah. Vin, good question. You know, I think just generally, you know, while we are a pretty significant gas producer now at this point, you know, we don't have a lot of control over the molecule. You know, Diamondback's grown through acquisition over the years, and with those acquisitions come dedications, and most of those dedications, you know, don't come with take-in-kind rights. You know, we're certainly doing as much as we possibly can to incentivize, you know, pipeline development, getting molecules to the Gulf Coast. You know, we did commit to the Whistler Pipeline. We'll have about a third of our gas on that. But generally, you have to have control of that molecule to incentivize development. You know, we don't have much more beyond that today.
Got it. I just wanted to go back to the E-fleets. They seem like kind of a no-brainer at this point in time. I'm just wondering if there were, you know, any changes in planning or any hurdles that you guys kind of have to get through before, you know, broader E-fleet adoption, or is it really just kind of securing that line power?
Well, you know, it's really about the quality of the fleet and what you're signing up for. You know, I think what Halliburton has put together is truly a unique product. You know, we're gonna have some form of battery storage attached to that E-fleet so that you're very efficient with the use of natural gas and electricity when that fleet is working. You do need, you know, a pretty big acreage block. You need large pads like we have ahead of us, and you need a long-term commitment with a business partner like Halliburton. I think that we checked all those boxes. We feel very good about the E-fleet that's coming on in September. You know, so good that we signed up for a second one.
Two-thirds of our simul-frac fleets will be E-fleets with Halliburton. You know, like you said, it's pretty obvious when the economic and environmental advantages sync up, you know, that's a no-brainer for us, and we're looking forward to getting our first one in the field here in a month.
Thanks, guys. Appreciate the time.
Thank you, Vince.
Thank you. One moment for our next question. Our next question comes from Leo Mariani from MKM Partners. Your line is now open.
Hey, guys. Just wanted to clarify a couple things that I heard on the call here. In terms of the buyback, I just wanna make sure I heard the numbers right. Did you guys say that you could do an additional $650 million in Q3 alone on top of the $200 million you already announced? Just wanna make sure I heard that number right.
Yeah. You know, I'm taking Leo, street numbers and multiplying it by 75%, taking out the $200 million we've spent quarter to date and taking out the $0.75 per share base dividend and, that's your max on buybacks for the quarter. That's something we look at every day. I mean, we have our team rerun the model on a weekly basis to figure out how much cash we're gonna have in the quarter to buy back shares when there's this much of a dislocation between oil in the public market and oil in the ground.
Okay. That's helpful. Just on the debt pay down, obviously you talked about paying off some of the Rattler debt here. Can you maybe just give us a little more color on the decision to kind of pay off some of the FANG debt, which wasn't kind of due until the end of the decade, I guess, some of the, you know, 2029- 2030 or whatnot in the Q2 ? It looked like you kind of elected to do that versus kind of pay the higher variable dividend because obviously cash flows were up for the quarter. Just any more color kind of around the thinking there?
Yeah. You know, it's a pretty unique opportunity where an E&P has a ton of cash flow and bonds trading below par. We saw that opportunity. Our board saw it with us and decided that, you know, buying back some debt well below par , was a good use of capital and also accelerates that de-leveraging process to give us, you know, more confidence in the increase to 75% of free cash flow going back to shareholders beginning in Q3.
Okay. Just to clarify on the shareholder returns, you guys do not count debt pay down as a shareholder return, right?
That's correct.
Okay, thanks.
Thank you, Leo.
Thank you. If you would like to ask a question, that is star one one. Again, if you would like to ask a question, that is star one one. One moment for our next question. Our next question comes from Paul Cheng from Scotiabank. Your line is now open.
Thank you. Hi, good morning, gentlemen. Two questions, please. Can you just remind us what is your hedging policy, if that's an official guidance in terms of what percentage that you want to hedge? Secondly, with the rising recession fear, how that impact your thought process in the 2023 budget, in terms of the capital return, balance sheet management and all that? Thank you.
Yeah, good questions, Paul. I'll take the hedging policy and I'll let Travis talk more macro about 2023. You know, just generally, we do buy puts for a rainy day. So we've gone to, you know, as the balance sheet has strengthened, we've bought more and more puts around $50-$55 Brent. You know, in that situation, if we do go below $55 Brent, you know, we're probably making capital decisions to slow down, but the balance sheet doesn't blow out. We can still pay our dividends and still generate free cash, you know, in that situation.
You know, really protecting for a rainy day, trying to spend, you know, around $1.50-$2 per barrel to buy those puts, and we wanna be about ~60% hedged going into a particular quarter. If you look at our hedge book, about ~60% hedged for Q3, going down to about 0%, by mid- 2023, and we'll just continue to keep rolling that forward, for rainy day insurance.
You know, Paul, energy has typically been a pretty good hedge, you know, a better offset historically. You know, as you look into 2023 regardless of how you define a recession, you know, it looks like there will be recessionary impacts, you know, across our economy. You know, what's a little bit different this time is that, you know, the world today, still appears to be chronically short physical barrels with not a lot of spare capacity to fill that gap.
While we don't necessarily plan on anything other than, in the future than our mid-cycle price deck, you know, it looks to me like the macros, you know, the macro looks pretty positive for energy prices over the next couple of years, even in spite of what I know will be a recessionary impact. Look, if you do see some recessionary impacts, it'll probably soften some of the inflationary pressures we're seeing today.
Yeah. I think one more point, you know, that's the benefit of this new business model where we're not changing our plans for every $10- $30 movements in oil prices. You know, there needs to be a ~$50 move in oil price lower before we discuss any change to our , execution plan. I think this level-loaded plan, level-loaded activity levels has allowed us to, fight off the inflation bug a little better than most. Again, as Travis mentioned, there's no oil out there.
Just curious, will you gentlemen want to keep more cash balance if there's an increasing recession fear?
Yeah, I kind of throw out cash. You know, we certainly want a cash balance. The cash balance moves a lot right now when you're generating $1 billion of revenue a month. The cash balance fluctuates wildly throughout each month. I think generally having a strong balance sheet and having some cash and , access to capital through a cycle is something us and the board discuss on a monthly basis. I think that also ties to where your maturity profile sits, right?
If we not only have less debt but, you know, a longer duration maturity profile, that gives us confidence in our access to capital and our ability to generate cash, given that, our cash flow break even is down in the mid-$30 per barrel.
Perfect. Thank you.
Thanks, Paul.
Thank you. I am showing no further questions. I would now like to turn the call back over to Travis Stice, CEO, for closing remarks.
Thank you again for everyone for participating in today's call. If you've got any questions, please reach out to us using the contact information provided. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.