Ladies and gentlemen, thank you for standing by, and welcome to the Diamondback Energy Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there'll be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the over to your speaker today, mister Adam Lawless, vice president of investor relations.
Please go ahead, sir.
Thank you, Catherine. Good morning, and welcome to Diamondback Energy's conference call to discuss the two Midland Basin transactions announced this morning. During our call today, we will reference an updated investor presentation, which can be found on Diamondback's website. Representing Diamondback today are Travis Sky, CEO and Kate Vantel, CFO.
During this conference call, the
participants may make certain forward looking statements regarding the company's financial condition, results of operations, plans, objectives, future performance and businesses. We caution you that actual results different materials from those that are indicated in your forward looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC and are also posted on page two of the investor presentation posted to our website this morning. I will now turn the call over to Trash Buff.
Thank you, Adam, and good morning, everyone, and thank you for joining the call. I'm really excited to share with you that Diamondback has announced two strategic, highly accretive acquisitions in the Northern Midland Basin. The acquisition of all the leasehold interests and related assets of Gaidan operating and the acquisition of QEP Resources. These acquisitions check every box when it comes to Diamondback's corporate development strategy. One, they're accretive.
These deals are both together and individually accretive on all relevant 2021 financial metrics, including free cash flow per share, cash flow per share, and leverage even before accounting for synergies. This accretion only increases over time as the pro form a high graded development plan will result in more free cash flow and, therefore, return of capital per share than the already strong stand alone plan. Two, the assets compete for capital. These deals add tier one resource that competes for capital right away in Diamondback's current portfolio. Upon closing, we will reallocate capital from our existing assets to high grade development and accelerate activity on these assets, which is the definition of good capital allocation.
Three, these deals improve our capital efficiency. We will now be able to allocate more of our capital to the high returning Middle Basin where our cost structure and asset base remains differentiated. These deals improve 2021 capital efficiency, lower our near and long term reinvestment ratio, and lower our twenty twenty one breakeven because of the quality of the acreage we are integrating into our portfolio. Four, these deals are leverage accretive. Pro form a for these transactions, Diamondback is expected to maintain its investment grade status, ensuring access to capital.
Over a multiyear time period, Diamondback will be able to retire pro form a debt faster
than the stand alone plan as
a result of these transactions. Fifth, the deals offer tangible, visible synergies. We estimate we can drive at least 60 to 80,000,000 of annual synergies primarily through a combination of g and a and cost of capital synergies with secondary synergies that include improved capital efficiency from high graded development and physical adjacencies that will increase our pro form a lateral lengths. QP has done a great job building out their midstream infrastructure in the Permian, and there will be opportunities to consolidate that infrastructure with both Diamondback's and Rattler's existing systems in the future, for more efficient development of midstream and infrastructure capital. Also, all of QEP's oil production is dedicated to Rattler's joint venture gathering system with Oryx Midstream, of which Rattler owns 60% of the JV.
And lastly, the sixth point, there's minimal integration risk. These assets are simply in our backyard, the Northern Illinois Basin. Integrating these assets will present more opportunities and challenges due to the physical adjacencies to our existing position. The blocking nature of the pro form a position will provide for most capital efficient development as possible. As stated in past public commentary, Diamondback does not need to participate in industry consolidation simply to get better.
We participate in corporate development opportunities that we firmly believe will increase the long term value of our stockholders' investment. These deals help cement Diamondback's leadership position in the Northern Denver Basin, which is why we're excited to discuss these two deals with you today. With that, operator, please open the line for questions.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. And our first question comes from Neil Dingmann with Truist Securities. Your line is open.
Good morning, Travis. Congrats. Travis, we're just wondering how important was having a large equity component for these deals? And you talked about how your estimate, you know, on just you talked about this a little bit on prepared remarks, but just again, if you go over a little bit again on your thoughts on leverage post these these these deals.
Yeah. Listen, Neil, as I highlighted, our ability that well, first off, leverage comes down with with upon closing of these transition transactions. And even more importantly, the rate at which that leverage ratio continues to decrease is accelerated. So it's it's a win. You know, it's a win across the board when it comes to leverage.
Got it. And then how do you think on these deals on just the could you talk a little bit about how you guys have signed maybe for, you know, a little bit on just the Bakken? And then I'm just trying to think on what you guys are looking at on kind of a per you know, I know what we've come up with, but how you all are thinking on kind of a per acre basis and what that ascribes to the you know, does that include, you know, what on the PDPs and then what does that back out for the synergies?
Yes. Let me first address your question on the Bakken. Know, Diamondback is is a is a pure play, and we've got no intention of diversifying away from what we think is the best remaining development opportunity in Northern Basin, which, of course, is right here in the Permian Basin. You know, if you think about the Bakken assets, it's it's very similar to when we announced the Energen acquisition. We had those assets on the Central Basin platform that we that that we that we just simply held for sale.
And that's that's what we that's what we intend to do here, you know, you know, once once the deal closes and we get a chance to, you know, to to do some value propositions. The second thing is is that, you know, you were talking about the the quality of the acreage and how much you know, what what it was costing. And this acreage, Neil, we actually bid on back in 02/2015 and 02/2016. We know the acreage very well. We didn't get it back then.
It went for 50 or $60,000 an acre, back in the day. But, you know, if you do the, if you do the math on these with 20 or $25,000, per flowing barrel, you'll see that these per acreage acquisition costs are among the lowest that Diamondback has ever done. And in fact, you know, these acquisitions probably rivaled when we bought Spanish drills back in 02/2009.
Our
next question comes from Gail Nicholson with Stephens. Your line is open.
Good morning, everybody, and happy holidays. When you guys are looking at the 60 to $80,000,000 per year of synergies, can you just break that out between how you're looking at that via CapEx synergies, expense synergies on the G and A side and maybe potentially LOE as well as interest reduction synergies as an you know, as you guys are investment grade and QEP is not?
Yeah. Gail, you know, I'd say the majority of the the synergies come on the G and A side. And and, you know, I think we are are well staffed with Diamondback and and, you know, have have been patient throughout this year to to add assets, you know, opportunistically and and do so in a way where we don't have to add a lot of people or or expense to that. So that that's probably the majority of the synergies. Obviously, interest cost savings will be will be important.
You know, retaining investment grade status was was vital to us and and to our board, and that ensures, you know, a low a lower cost of capital. You know, I think overall, we still wanna be reducing net debt versus, you know, versus extending maturities, but but we do have a lot of opportunities now to to do both. On top of that, know, LOE, you know, QEP is a great operator. They they have a very low cost structure. They think they think about the business in a similar way to us, and and therefore, I've had a lot of infield infrastructure built.
And and I think, you know, as you can see in the map, the physical adjacencies, it's gonna allow for us to, you know, merge our systems together and and utilize capacity effectively. So I think long term, that drives LOE savings and certainly capital on the midstream and infrastructure side, but but the most tangible synergies are on the g and I and
the interest side. Yeah. And, Gail, I know you've studied Diamondback for a long time, and you know that we operate a lean organization. And we're proud of that. And listen.
Even in the the fact of the global apocalypse we've we've been through through this catastrophic downturn, you know, we've been able to avoid any layoffs, and we've retained the organizational capacity that we had prior to our downturn. And and, look, that that that G and A per barrel at around 50¢ a barrel, what was then and is still now peer leading. And with the combination of these deals, that cost per barrel on GNA, actually goes down. So it's, you know, and that's that's you know, the the the LOE side is, you know, the field organization will will stay in place, but but that goes to LOE, not GNA. So, you know, we've we've we've shown in the past that we've got, expertise in integrating, new entities in on a large scale, most recently with the Energen acquisition.
But but as we think about this, you know, this is is a more of a tuck in off tuck in operationally to our existing organization than really than really an entity integration. So very confident that, you know, the conservatively modeled synergies, and and and certainly, we'll continue to maintain our leadership position.
Great. And then you've mentioned the idea of capital reallocation capital reallocation to these assets once they're put into the portfolio. Can you talk about where that reallocation occurs from? And then also in the presentation, you you mentioned that this is gonna be reducing your 2021 breakeven. Can you talk about where breakeven was in '21 and where breakeven will be close of the acquisition?
Thank you.
Yeah. Gail, you know, we gotta make sure these deals close, and and we come out with full pro form a guidance. But but the way we're thinking about it in general is that, you know, both GP and Guidon have, you know, assets that that compete in the top of our portfolio. You know, I think our our base plan with Guide On was to reduce a rig or rig and a half at Diamondback and and allocate two to Guide On. And then when you add CPP on top of that, you know, you run their kind of two rig cadence.
But I think you can also reallocate some of our existing rigs to, you know, an area like Robertson Ranch, is in, you know, the dead center of Marcon County and and hasn't been getting capital from QEP yet to date. And so, you know, I think just overall pushing more of our capital, higher percentage of our capital through north Northern Midland Basin lowers that reinvestment ratio and and the breakeven. And, you know, I think overall, our our plan is to basically hold pro form a q four twenty twenty production flat. And I think we're gonna be able to do that, you know, with with less dollars per BO added or BO maintained than we were prior.
Great. Thank you. I appreciate the the responses on that. I have more questions, so I'll turn it over to everybody else. Merry Christmas.
Thank you, Gail.
Thank you. Our next question comes from Arun Jayaram with JPMorgan Chase. Your line is open.
Hey. Good morning, gentlemen. Kaes, I I wanted to see if you could talk about, you know, any plans that you have to leverage, you know, Diamondback's, you know, IG credit rating and lower cost of capital. As you know, QEP has about 1,100,000,000.0 of debt due before May 2023. So where's your head in in terms of thinking about those bond maturities in in '22 and '23?
Yeah, Arun. You know, that was an important part of this of this trade. And, you know, I think, you know, overall, you know, we modeled the business where we could pay those off with cash and free cash flow between now and and that time period. I don't think that's gonna be the case. You know, I think we'll probably do some form of, liability management that involves, you know, the the FANG 20 ones and the and and the the, excuse me, the QEP 20 twos and 20 threes and and also the FANG 20 fives that that are callable.
So, you know, I think we kept that bond out there, for an opportunity to refinance, and, you know, we have a lot of options at our disposal here. I think, overall, some some combination of extending maturities, but also paying down gross debt is is our, is our game plan.
Great. Great. Secondly, a trace Chase or Casey, pardon me, or Travis, it seems like high grading here is a is a is a one of the the deal motivations here or or deal rationale. Can you talk about, from a productivity basis, how the Gaidon and and QEP assets in the Northern Midland Basin compete to saying that existing, you know, asset base in the Midland Basin?
Yeah. You know, I think they they compete in the top quartile of our of our existing Northern Midland Basin, acreage position. And I think, you know, as as Travis said, you know, we we've made public comments in the past that we don't need to get bigger just to get bigger. We have to get better. And capital allocation and NAV, while they're not, you know, hot topics today in oil and gas, you know, our ability to drill better wells for the next, five, ten years versus our original plan is very important to our shareholders and very important to long term value creation.
Travis, do want to add anything to that?
Yes. Listen, Arun, the way that we're thinking about it is that the addition of these locations, this inventory that that immediately competes for capital has now extended Diamondback's runway of tier one inventory projects for more than a decade. You know, tier one being, you know, some kind of 30% or so rate of return at the at the current strip. So,
you know, a lot of
the questions we've heard in the past is, hey. Diamondback is a great operator. You know, they've they've got the best cost structure in the business. You know? But, their tier one inventory is is is short.
We never had agreed with that proposition. But certainly, with the addition of these two acquisitions, we've extended that runway significantly.
Thank you. Our next question comes from Derrick Whitfield with Stifel. Your line is open.
Good morning, all. Congrats on the acquisition.
Thank you, Derek.
Perhaps for Travis or Case, could you speak to the synergy opportunities from a Viper or Rattler perspective? I know you guys have focused on the G and A side of the equation, but seemingly there's a lot of opportunities on the midstream side as well.
Yeah, Derek. You know, we we obviously looked looked at that in detail. And and QEP, you know, like I like I said earlier in the call, has really thought about their development in a similar fashion to to Diamondback, and that's, you know, controlling more midstream and and also, you know, keeping those those costs in house. So I do think there's a a good amount of midstream value, on the QEP side, that that, you know, Rattler will have a chance to take a look at. And then, you know, on top of that, like Travis said, all of QP's oil production flows through the Reliance former former Reliance Gathering System, which now is called the Homog JV that Rattler owns 60%, Oryx owns 40.
And, you know, part of the reason why we bought that deal back in the day was understanding the under underlying quality of the acreage that's on that system, and and that's proven out to be a good investment that's now gonna look a little better with more capital being allocated to, you know, pro form a OMOG, you know, acreage. On the Viper side, you know, we we actually don't own a lot of minerals underneath QEP or Gaidon today, but I but I think that opens up a new sandbox for our our Viper team to increase mineral ownership under Diamondback properties. You know, there's some significant ranches mineral owners under under both, and, I think we look forward to having those conversations on the Viper side.
Great. And perhaps for Travis, as you compare and contrast your operations with QP, what's your early assessment on QP's development approach via tank style development?
Yeah. We're gonna Derek, that's a great question. And, and we're gonna be we're gonna be widening that development space, spacing, and that's what we have, that's what we have in our go forward development plan. So the the pure wells with greater productivity per well.
Yeah. We we agree with the tank style. Right? It's just, it's just a matter of spacing. And I think when we looked at both of these deals, you know, we were we were very conservative on spacing, and we were also very conservative on development pace.
You know, gone are the days of acquire, exploit, and accelerate. You know, I think we're we're now talking acquire, exploit, high grade and and distribute cash. And and that means you're not ramping the rig count on your acquisitions, you know, like deals of the past.
Yeah. And and listen, grading we've had several questions now on the high grading of these assets, and that is important. But but the primary reason that we did these deals, as I highlighted in my opening comments, is that we are now improving cash flow, earnings efficiency, you know, on our leverage targets, all of those things with the announcements of these deals. And, it's it's our responsibility to to to work the development plans upon close in a way that drives the most return and and greatest net present value.
Thanks, guys, and congrats again on two very solid deals.
Thank you, Jerry.
Thank you. Our next question comes from David Deckelbaum with Cowen. Your line is open.
Morning, guys. Just curious why the the third deal didn't get across the finish line this morning.
Well well, listen. Yeah. Listen, David. I'll tell you that that, you know, we we can't determine the circumstances or the timing at which we find opportunities, one, two, or three in your in your question. But we just simply have to evaluate them as they unfold.
And, you know, in in my experience of doing this, you know, for over thirty five years now, it it's not uncommon to find extraordinary opportunities in times of tremendous pressure such as we have now. But but you've gotta be ready for them. Right? Organizationally, you have to be ready for them. And, you know, the simple fact is that we believe each of these opportunities adds value, individually to our shareholders.
That they happen at the same time, that's just coincidence. We're we're fortunate enough, even though there's some there's some tired eyes around the conference table in here, to have the organizational capacity to do that heavy lifting in evaluating these opportunities. And also, we've got the bandwidth to integrate them both. So, you know, the the fact is it's two, not three, it's just a function of coincidence.
I appreciate that. So my my first question just is on on well costs. You know, if if we're looking at QEP's stated well cost per lateral foot, you know, in in the 4 hundreds now in Diamondbacks, Midland, obviously, a bit above that. If we're comparing them apples to apples, you know, is that more due to QEP's infrastructure in place? Or, you know, do you feel like there's some headway to be made?
Or or should we see, you know, those costs kind of fit more to the Diamondback completion style?
Yeah, David. You know, like I said a couple, questions ago, you know, QEP is is a very good operator, and we've learned a lot from their development in Martin County. You know, you know, we use now simul frac crews on all of our, Midland Basin development, and they, you know, they were an early adopter of that. You know, I I will say, you know, from a DNC perspective, we're we're very, very close. I think their stated number was $4.30 a foot, last quarter, and and ours is about $4.50.
We include the equipped in ours, so that puts our Midland Basin well cost at $5.30 a foot. I mean, I'd I'd say, overall, you know, both both companies are low cost operators. We tend to do a little bit bigger frac job, which is probably, you know, a little bit of a difference in, in well costs. And and therefore, you know, a little wider spacing with a little higher, bigger frac job is probably gonna result in a little more productivity per well completed.
Appreciate that. And just the last one for me. I know there isn't formal guidance out there yet, but should we still be generally thinking about that sort of 30% reduction in total spend versus 2020 next next year to keep that fourth quarter number flat?
No. That's gonna be tough to do when you're when you're adding, you know, 60,000 barrels a day that that are gonna decline. So we're you know, we have to spend more than, you know, what what the original plan was for Diamondback stand alone. I think, overall, it's going to look more capital efficient than if you stack the three businesses on top of each other. But we're gonna pull that that information together and and update the market as as quickly as we can.
Our next question comes from Asit Sen with Bank of America.
Expectations for 2021 production remains unchanged, which is great, Travis, and congratulations and true to what you have said in the past. My question is what could prompt any change on that guidance in 2021? And how should we think conceptually about production growth into 2022?
Well, certainly,
as if there are no indications today that the market needs more oil. There should be no growth in our sector at all, full stop. You know, we've got a world that's still six to seven six to 7,000,000 barrels a day oversupplied. We've got a a world that's still vitally struggling with what what the economies are gonna look like post COVID. So there's just no no reason or call, for production growth into '20 you know, in 2021.
You know, I think most experts, of which I am not, are are more optimistic about the back half of, of 2021. And and look, you know, the future plan, for for Diamondback, which we're certainly not issuing multiyear guidance, but should the market again call for, you know, a a small growth rate in the future 2022 or beyond, Diamondback's ability to do so now more efficiently has been increased with the addition of these, these high quality assets.
Great, Travis. Thanks. And in your opening commentary, again, similar theme, you mentioned transaction lowers 2021 reinvestment ratio. Could you speak to directionally how much? And when you think broadly about the business looking into 2022, how are you thinking about reinvestment rates?
Yeah. I mean, I you know,
I think, just generally, you know, about about strip, which, you know, today is probably gonna be a little lower, but strip as of Friday, you know, we're talking about a sub 60 ish percent reinvestment ratio in, in '21. Now I don't think we'll be able to retain that forever, you know, but but I do think we have a a business that can generate consistent free cash flow and distribute that free cash flow to to shareholders in in in an investment grade balance sheet for a much longer period of time now. Thanks a lot. Yeah. Just just to add to that, you know, QEP has a few DUCs, or a good amount of DUCs as does Diamondback.
And so I think that's gonna help, you know, 2021 from a capital efficiency perspective. I think, you know, when we get our hands on on development at at both assets and, you know, drill some good wells with with a little wider spacing, you will have less wells completed in 2022 to require the same amount of production or production stability.
Appreciate it, Kes. Thank you.
Thanks, Austin.
Thank you. Our next question comes from Nitin Kumar with Wells Fargo. Your line is open.
Good morning, guys. Thanks for taking my questions. Maybe just kind of following up on that high grading concept, Carlos. In the last quarter, you had reported roughly 3,300 locations in the Midland, breakeven below 35. QEP, as you mentioned earlier, had gone through a slightly tighter spacing and a different development strategy.
As a percentage or or directionally, much more inventory should we be thinking about from this deal?
Yeah. It's probably, you know, somewhere about a a a third of that. That's that's highly economic and competes in the in the top quartile of of our pro form a portfolio.
Okay. And and is that, when you say a third of that's a third of 3,300?
Yeah. That that's correct.
K. What's the do you have a sense of
what the decline rate was for both guiding and QEP in the Permian compared to yours?
QEP is very similar to ours. You know, they they've, they've been around developing for for a while, similar production basis. You know, I think their their corporate decline was a little a little a little, lighter than ours because of the the Bakken. But, you know, Guidon probably has a little higher corporate decline, but the the, you know, the the total production that you're contributing on the Guidon side is less, than QEP side. So I I'd say, you know, Guidon, ton of a ton of economic inventory ahead of it with, you know, early in its production life cycle.
And and QEP obviously has been public, so everyone knows what their production has been for for a long time. But there's a lot of completely undeveloped rock at, at both companies.
And I just need one more in. QEP had some ducks in the Bakken. You've classified those masses as more of a noncore asset. Does that mean that you wouldn't be pursuing those opportunities at all? Or how should we think about those?
Yes, that's correct. I mean those will sit there, but they have some value.
Great. Thank you.
Our next question comes from Harry Mateer with Barclays. I
appreciate the comments earlier about how you're thinking about pro form a cap structure, combo liability management and still with some gross debt reduction. I'm curious, how do
you plan to treat the QEP bonds in the
pro form a structure? Are you guys going to allow for some structural subordination? Or is the preference to have it more be you know, clean pari pursue, you know, potential cross guarantees or some some kind of, like, kind of exchange into FANG notes?
Yeah. There there's gonna be no guarantee. You know, we did the the same strategy with the Energen bond. So they're they're gonna fit. The QP bonds will fit in the merger side and and, you know, will not be guaranteed by the the guarantor group.
Now, you know, most likely, we're gonna be focused on the twenty fifth and '23, so that probably leaves the 20, sitting in that in that group for a longer period of time. But, you know, I think overall, like like we said at the beginning of the the call, you know, we do have a lot of flexibility with, you know, Diamondback 2025 bond that's callable in in the twenty twos and twenty threes as as kind of our chess pieces for liability management.
Got it. Okay. Thank you.
Thank you.
Thank you. Our next question comes from Charles Meade with Johnson Rice. Your line is open.
Good morning, Travis and and Jason and to the the rest of your team there. Travis, I wanna go back to your your earlier comments, and and and I I think it's I think it's good that you I guess, your opening comments where you really focus on on leverage. And and, you know, frankly, as as you can guess, I I have to do more work to put these pieces together and see it all see how it flows. But it looks to me like, you know, on, you know, our numbers you guys were gonna be approaching, you know, two x at one at year end '21 on a on a net debt, you know, net debt to EBITDA basis. It looks to me that with the you know, obviously, the the guide on stuff is coming the cash consideration, that's gonna be below two x, but the but the QEP was coming in looks like something north of of three times.
And so I I wanna just make sure I'm I'm understanding what what you were saying. It looks to me with just, you know, dark cursory cursory look that you guys are going to be be more levered than you otherwise would have been at year end '21. But I I just wanna just go back and but but in both cases, you will be delivering over time. So I just wanted to check and make sure I I understood your pieces there.
Yeah. That's completely incorrect, Charles. We're gonna be, below
on a pro form
a basis where we were stand alone. So I think, you know, immediately q two twenty twenty one, you put these two businesses together or three businesses together, you're, you know, four or 5% below the stand alone plan, and that's run at the same strip. And then you accelerate, that deleveraging faster in the pro form a business than than stand alone. So I think, overall, it's not it's not a huge number, but, you know, we're still anticipating being close to two times at strip with both both businesses integrated.
Okay. Thanks for that, Casey. Just to be clear, you when you say, you know, whatever 5% low, you're talking on a on a on a metric or multiple basis, not not on a absolute basis?
That's correct. I mean, the size of the enterprise value just got significantly higher.
Right. Yeah. That that that makes sense. I just just wanna be clear, and thank you for that. And then the the question I I had going back to to the these assets you picked up in in Southeast Martin.
If to me, that looks like that that new or the additions in that South Southeast Martin is probably gonna be up, you know, some of that top CorPal stuff. Can you give us a sense for for these for the new the new acreage you brought in? What percent developed is that in that Southeast Martin quadrant?
Yeah. You know, that's that's for the on the QEP side in Southeast Martin, that's the Robinson Ranch, and they have not developed that at all. So I think that's gonna be a very exciting development area for us. You know, DatOn has a couple wells offset that to the south, Southwest, but I I would say that block is is, you know, less than 10% developed. So that's gonna be a very important area for us on on you know, from an oil production perspective and a capital efficiency perspective.
Our next question comes from Brian Singer with Goldman Sachs.
Hi, Brian. Brian.
I wanted to follow-up first on the capital allocation. You've maintained your dividend despite the volatility in the markets this year, and you've highlighted the pro form a leverage coming down and maintaining investment grade. Can you talk to, what you'd be looking for leverage wise to allocate more capital to shareholders via dividend or repurchase? Or how is that if at all, the transactions that you're announcing today changes your strategy there?
Well, we're not changing our strategy with these acquisitions. I mean, I've talked about, you know, how these these both of these trades are accretive across all fronts. In fact, our development strategy hasn't changed. It's just gotten better. So we've always talked it's not an either or about debt reduction and the dividend increase.
It's a and, and there's beauty in that as well because we believe that, that with the addition of these assets, you know, we can both continue to lean into the dividend. And as Casey has been talking about, you know, the market group to really lower our our our leverage ratio.
Great. And is there a certain point at which and I I I realized that you say, you know, but not an or, but is there is there a certain point of sub two or sub, you know, 1.7 or sub 1.5, kind of where you want to, where you wanna take this?
I mean, it really just depends on the outlook, Brian. You know, I I I think there's still a lot of uncertainty in the market, particularly in the first half of next year. Our board has traditionally looked at the dividend in the first quarter to address it. This year, we stayed patient and held it flat after doubling it a month a month before the, you know, the the Saudi price war and COVID breakout. But overall, I mean, I I I think we can take a look at it, you know, by by kind of the middle of next year because, you know, overall, the amount of free cash flow dividend increase on the amount of free cash flow that we're talking about does not impact our ability to generate free cash and reduce the enterprise value through a combination of of debt reduction and and then continuing the shareholder return on the dividend side.
Great. Thanks. And then my final question is with regards to the capital reallocation. You we spent a lot of time here talking, understandably, about the attractive assets in the in the Northern Midland Basin and treating the Bakken and the Williston Basin assets as noncore and potentially candidate for asset sales. Can you talk a little bit about the implications for the Delaware Basin?
It seems like there's a capital allocation away potentially away from the Delaware. And just how you think about the the the strategic role of the of the Delaware assets in that portfolio.
Yeah. Certainly, the Delaware is still important to us, and and there are, you know, locations there that compete for capital in in the portfolio. I think overall, you know, we're excited that we can allocate a higher percentage of of, you know, our capital to the Midland Basin. I I would just say that the well results generally, you know, tend to be better on a on a returns basis, but but also our cost structure is is better overall as well. So, you know, there's still a lot of of lower acreage that that competes for capital on our existing portfolio, but I I would just say it's become less important to the overall company than than the Northern Midland Basin, which which is kind of our home and where we got started.
Yeah. But listen, Brian. Look. I completely agree with what with what Casey is saying, But I just wanna give you know, I just wanna make sure you understand how proud that I am of our organization's ability to continue to improve results in the in the Delaware Basin since we, since we acquired that back in 2016 in 02/2016. In terms of rate of change and improvement, you know, the Delaware Basin, has been a remarkable success story for Diamondback.
As Kate pointed out, you know, as commodity prices got got lower, and increased focus on total rate of return, you know, it forced us as good capital allocators to allocate towards higher rate of return. But in no way, shape, form, or fashion do do we need to imply that the Delaware Basin is not as important to us nor the organization that's that's running that Delaware Basin hasn't done a good job because it's quite the opposite.
Great. Thank you so much.
Thanks, Brian.
Thank you. Our next question comes from David Heikkinen with Heikkinen Energy. Your line is open.
Good morning, and thanks for taking my question. Know a lot about your assets and QEP. Can you talk a little bit about the history of Guidon, just what their pace of development has been? You you hit a little bit of their decline rates are a little steeper, but and they have the eight ducks that you had in the press releases. But you talked just a little bit about where where Garten was, what their activity level had been pre maybe first quarter level before everything became a half half a glass half empty kind of world and and then just have one follow-up.
Yeah. Well, today is the day we're gonna start with the glass half full commentary. So, you know, 2020 is almost in the rearview. Ten ten days left. But overall, know, listen.
They they've been around for a while. They they acquired their their assets from Endeavor in in 2016 in a great timely purchase, and and they've, you know, been a pretty active developer of you know, with one or two rigs for the last couple of years. Obviously, things slowed down a little bit, with, you know, this with the glass half empty portion of the year. And, now, you know, I think they've been running one rig pretty consistently for the last, you know, six months or so and and completing, you know, pretty large pads. And and we got some some nice some nice looking pads on the schedule, in the first half of the year, and and we're looking forward to adding kind of another rig to that development plan to to keep things moving, particularly in the the Southeast Martin County portion.
Did they have any hedges by chance?
We're not taking on any hedges. It's an asset deal, but but we will take on all the QEP hedges.
Helpful. And on the half full side, I couldn't agree more, and, hopefully, our note was a little more half empty than I intended on rereading it. So looks accretive to us on deals, have a have a Merry Christmas and a Happy New Year and look forward to actually seeing people again, hopefully, in 2021. So have a great, holiday season
out there.
Yeah. Thanks, David. Appreciate it.
Thank you. Our next question comes from Jeffrey Lambigem with Tudor Pickering Holt. Your line is open.
Good morning. Thanks for taking my question. Y'all talked before about the scale of the legacy Diamondback portfolio being sufficient to compete for these deals. These transactions obviously only build on that. So as you look at the the pro form a position on Acreage and production and also what the opportunity set still is across the Midland and the Delaware today, how are you thinking about treating other opportunities from here?
I apologize if I missed this earlier, but maybe you can just speak to, you know, how these transactions came together and how Diamondback's activity in the market would change, if at
all, as these deals close.
Yeah, Jeff. You know, I I saw your note this morning too, and and I think, you know, our commentary is is firmly that, you know, when we get bigger, we have to get better. And this this acreage makes us better, competes for capital right away. And and I think we belated that point enough. But but overall, you know, going into this year, our BD team has has done an incredible job.
You know, we've had, you know, basically, MAVs built for almost every target that we're interested in, both private and public. And, it's just a matter of timing. And, fortunately, for us, you know, the the the rally of the last couple months has allowed us to to have real conversations and and get a deal done. It's, or two deals done. We didn't want them
to happen at the same
time, but but I think overall, you know, these were our two top targets from a acreage quality perspective going into the year, and and, the year took us a much different path than we all expected. But but we ended up, you know, acquiring the two the two targets that we had highest on our list. Yeah. Jeffrey, just let me
let me emphasize the point that that I made earlier about, you know, we can't control the timing of opportunity nor the circumstances. But what we can control is our ability organizationally to be prepared. You know, while 2020, you know, certainly will be marked by the wailing and gnashing of teeth and wringing of hands, you know, as Keith pointed out, our business development team doubled down and tripled down on their efforts to provide us, you know, a full economic workup on all of the assets that, that we were interested in, even though even though we knew that for much of 2020, we were gonna be unable to, unable to, to execute on those. So, again, you you know, as I mentioned, you know, these trying times can present great opportunities for companies that are prepared, and we're giving you a great example of a company that was prepared this morning.
Great. Thank you very much. Appreciate the detail, and happy holidays. Thanks, Jeff.
Thank you. Our next question comes from Leo Mariani with KeyBanc. Your line is open.
Hey, guys. Just wanted to touch base a bit on sort of the liability management side, which you guys mentioned here. Obviously, you are taking more absolute debt as we roll into 2021 here. And you guys mentioned that you think it's still a bit of an uncertain outlook out there, at least the portions of 'twenty one. Would you plan on kinda hedging, you know, more portions of these volumes maybe in '21 to try to kinda lock in, you know, some of the cash flows on these deals?
Is that something else that you need to be working on here as these deals start to look like they're gonna close?
Yeah. Leo, that's that's a good question. You know, I I think I think hedging needs to become a bigger part of our our strategy, you know, irrespective of our debt levels. You know, I think, you know, investors want returns on capital and and guaranteeing which guaranteed return of capital. And in our business, the only way to protect that is protect your revenue stream.
So, you know, we we are almost 80% hedged in in q one, and then you you roll in these two deals in q two, you know, we're about two thirds hedged, and and that tails off a little bit in the back half of the year. But, you know, basically, we're putting in place a a business that can can lock in returns and also lock in a combination of debt reduction plus, plus the dividend. So, you know, the way we modeled it, you know, kind of 45 flat, which is where the curve has been recently. We're able to handle every note, at par when they come due. Again, I don't think that's what we're planning on doing, but but that did give us and our board a lot of, sense of security that, we have protection.
Okay. That's helpful for sure.
And just kind of looking at the value propositions in terms of kind of purchase price for these two assets, it certainly looked like you guys paid a little bit more in terms of this production value, performing BOE for Diode you know, versus, you know, QEP here. I just wanted to see if there's anything that we should be, you know, kind of reading into that. Did you need to see the the Gideon assets maybe as, you know, a little bit better? And, obviously, with QEP, you have the Bakken, I guess, you know, a lot more debt. Is it maybe more just, you know, difference with more just the capital structure with a lot of additional debt coming from the QP side?
Just wanna get a sense of any kind of, you know, value proposition differences that you, looked at for these two deals.
Yeah. Well, they're they're completely different deals. Right? And on the private side, you know, you look at, your your NAV and and drill out, you know, with a couple of rigs for, you know, all the inventory on on guide on and present present value of those cash flows. And, you know, coincidentally, that's the number that that we were comfortable paying on a multiple basis in the near term.
And and it's quite the opposite on on the QEP side, you know, because you do have a public currency and so relative valuation and and looking at, you know, where they're trading and what their enterprise value, versus what we could pay for it. You know, those are those are two different, scenarios. So I think dollar for flowing is is an output, not an input. And, you know, overall, I think I think our internal NAV with and without synergies for QEP is well above the market price, as of Friday. And, on on the guidance side, you know, I think, you know, the the counterparty sees a lot of value in Diamondback stock and therefore, was happy taking a a good amount of stock in in the trade.
Okay. Thanks for the color.
Thank you. Our next question comes from Janine Wai with Barclays. Your line is open.
Hi. Good morning, everyone. Thanks for taking my questions. Hi, Janine. Hi.
Good morning. Happy holidays. My first question is just a follow-up on on Brian's question on the Delaware. I know you said that the basin will remain important to FANG, but are there parts of that acreage that may qualify as a potential divestiture candidate maybe a little bit down the line?
I've been saying that Delaware is fits in the divestiture candidate box today. I mean, maybe some non op stuff in in the Delaware, you know, in in New Mexico in particular because we're just not a big operator there. But, you know, I think, overall, you know, our job is going to be, you know, looking at our our whole asset base. And and I think, you know, we do have some acreage that that makes sense to sell. You know, Travis mentioned the Bakken, and also, you know, maybe some stuff in the Southern Midland Basin where, you know, you just have kind of PDP value.
But our strategy, you know, throughout this year has been if cash flow's cheap, you know, we can't sell cash flow when it's cheapest. So, I think there will be sale candidates quickly as we get a a a more supportive strip. There's a lot of PDP buyers out there. I I know that. That seems to be a very common private equity strategy this year.
And so I think there's gonna be a a competitive process for some of these assets.
Okay. Great. That's very helpful. Thank you. And my second question is just on integration.
So in terms of just, you know, generally managing integration risk, are there any lessons learned from the Energen deal that maybe you can apply to these two deals? Thank you.
Yeah. You you'd always wanna learn from your prior experiences. But but, Jeanine, I don't wanna overplay the integration issue. These are simply you know, they're they're tuck ins for us. And and, you know, the the field organization is gonna, you know, largely stay in place, integrate inside Dynavax, you know, field organization, which is, as you can see on the map, it's it's it's contiguous.
And and this is just simply, Janine, what it is that we do. We integrate assets, and and this one is is no different than any other of the ones that we've demonstrated in the past that we're capable of doing.
Great. Thank you very much.
Thank you. And I'm showing no further questions. I'd like to turn the call back to Travis Stice, CEO, for any closing remarks.
Thank you. Just as we kinda close this out, I wanna reiterate that that every time the Diamondback completes a trade, it's objectively obvious that the shareholders are better off after the trade than before. If that isn't the case, then we simply don't do the trade. In both of the trades that we talked about this morning, Diamondback shareholders are better off. They're better off because on every relevant financial measure, you see you see significant accretion, and in some cases, you know, dish double digit accretion.
You know, these these are certainly extraordinary times, but also times that create extraordinary opportunities for those, as I've mentioned before, that are prepared, and and we are. And we couldn't be more excited, you know, to bring these opportunities to our shareholders. Happy holidays. Merry Christmas to everyone out there. Stay well, god bless.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.