Good day, ladies and gentlemen, and welcome to Diamondback Energy's 4th Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference call, Mr.
Adam Wallace, Vice President, Investor Relations. Sir, you may begin.
Thank you, Kevin. Good morning, and welcome to Diamondback Energy's Q4 2019 conference call. During our call today, we will reference an updated investor presentation, which can be found on Diamondback's website. Representing Diamondback today are Travis Stice, CEO and Case Van Toff, CFO. During this conference call, the participants may make certain forward looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance and businesses.
We caution you that actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we will make reference to certain non GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I'll now turn the call over to Travis Stice.
Thank you, Adam, and welcome to Diamondback's 4th quarter earnings call. Before I start with my remarks, I want to pause and recognize an individual who passed away last week, Clayton Williams, who was truly a larger than life West Texan and a man that paved the way for so many in our industry who came after him. He was a wildcatter, a patriarch, a philanthropist and a Texas Aggie. Later today, we will lay him to rest and celebrate a life well lived, but I couldn't start without reflecting on what Clady has meant to so many people. Ms.
Williams and family, our thoughts and prayers are with you today. Godspeed, Clayton Williams. You will be missed. Turning to the Q4, Diamondback ended 2019 in a position of strength, achieving 5% oil production growth quarter over quarter along with our highest oil realizations of the year. This, combined with our industry leading cost structure, resulted in 18% quarter over quarter EBITDA growth and 31% quarter over quarter adjusted EPS growth.
We repurchased 2,400,000 shares in the quarter for approximately $199,000,000 utilizing free cash flow and a $43,000,000 gain from an interest rate swap that was unwound as part of our 1st investment grade bond offering in November to repurchase shares at a depressed valuation. Further, Diamondback did not slow operations in the second half of twenty nineteen and maintained continuous operations with 8 completion crews running consistently through the end of the year, setting us up for continued growth and operational momentum in 2020. Taking a step back to review the full year, 2019 was a busy year for Diamondback. We successfully integrated our merger with Energen, doubling the size of our company, while achieving greater cost synergies in a shorter period of time than originally promised at time of deal announcement. We grew pro form a oil production 26% year over year from a $2,900,000,000 capital budget, increased our dividend by 50% and repurchased 6,400,000 shares or about 10% of the shares issued to complete the Energen merger.
On the corporate development front, we sold non core assets, dropped down mineral interest to Viper and took our midstream business public. In November, we executed on the final piece of our synergy scorecard and refinanced $3,000,000,000 of the company's long term debt following our upgrade to investment grade at an attractive interest rate. While I'm proud of what we accomplished in 2019, we don't spend any time looking backward at our tracks in the sand, but rather looking ahead and concentrating on the future. 2020 has already brought its own industry challenges, and we are focused on navigating these challenges by staying disciplined, improving our industry leading cost structure, growing production, increasing environmental transparency and returning more cash to stockholders. Our dividend remains our primary method of returning capital to stockholders and as evidenced through our announcement today, we are strongly committed to continuing to grow this dividend, which sits at a 2% yield at today's stock price.
We will continue to be opportunistic with our share repurchase program and outright debt reduction to maintain balance sheet strength, but our dividend is considered 1st dollar out when it comes to capital allocation at Diamondback. Looking to the year ahead of us, Diamondback expects to grow oil production in the first quarter of 2020 on the back of our strong 4th quarter production en route to our 10% to 15% year over year expected oil production growth in 2020. We expect to execute this plan within the same capital budget framework as 2019, while completing 7% more lateral footage with the same amount of capital. Our oil realizations are expected to improve to nearly 100% of WTI in the Q1 of 2020, which will be a nice tailwind for per share metrics. Full service start up of the EPIC and Gray Oak pipelines in the second quarter will increase our exposure to the export and Gulf Coast markets as well as increase cash flow through our 10% ownership of each pipeline at Rattler.
We will also continue to work to drive down cash operating costs through the year with LOE expected to decline relative to 2019 numbers. We believe this capital and operating plan reflects the optimal capital efficiency for achieving a peer leading combination of growth and free cash flow in 2020. Should commodity prices decline further from current levels, we will be prepared to act responsibly and cut capital further just like we've done multiple times in the past. If commodity prices rally, we plan to use excess free cash flow to accelerate our capital return program and reduce debt. With these comments now complete, operator, please open the line for questions.
Our first question comes from Derrick Whitfield with Stifel.
Hey, good morning all and congrats on your decision to reinforce your return of capital message with a substantial dividend hike.
Thank you, Derek.
Perhaps for you, Travis, as we critically evaluate your inventory additions and the well performance trends by interval, it's clear to us that the Middle Spraberry and the Delaware Second Bone Spring intervals are becoming more valuable intervals within your inventory set. Focusing on the Bone Spring Shell and Pecos, to what degree have you guys delineated the trend across your footprint? And are there specific or any specific reasons this interval can't account for a larger percentage of your Delaware allocation in future years?
Yes, Derek, certainly we're very encouraged in what we're seeing in the Second Bone Springs across our Delaware position and look for continued results like we posted that we're going to continue to allocate more and more capital to the Bone Springs. But we're very encouraged about that inventory development and also our existing inventory as we continue to drive down costs and improve returns on all of our Delaware position.
Sure. And as my follow-up, I'll stay on the Bone Spring shell. I imagine your operations team could drive meaningful cost improvements in a fulfilled development scenario. Could you speak to your current completed well costs in comparison to the Wolfcamp A and also comment on potential savings you could see in a full field development scenario?
Yes, Derek. I think from a drilling perspective, it's about $40 to $50 a foot cheaper. So assuming the same completion design as the Wolfcamp A in Pecos, that would be about $500,000 cheaper on a 10,000 foot lateral. And I will say one of the benefits is there's been so much infrastructure dollars spent in Pecos that you don't have to load up the Bone Spring pads with the same level of infrastructure spend as we did for the Wolfcamp A over the last few years. So really excited about the results we're seeing there.
It's certainly becoming a competitive zone to the Wolfcamp A, and we'll start to take more of the capital dollars in that field.
Our
Our next question comes from Neal Dingmann with SunTrust.
Good morning, all. Travis, my first question is on your investor metrics. Among the Permian players, we have you all generated among the highest combination of oil growth, free cash flow yield and dividend yield at about over 15% already. Could you speak to your confidence on the sustainability to maintain this or potentially grow these metrics in today's or even a lower oil environment?
Sure, Neal. I made a comment in my prepared remarks that our Board is committed to continuing to grow our dividend. The free cash flow yield and volume growth, we feel confident that those numbers are multi year in duration. And obviously, we've got an inventory that can support that. So we're really pretty excited about sustainable oil production growth as well as increasing free cash flow, total free cash flow yield and dividend growth as well.
Very good. I'd be remiss if I didn't ask second question on M and A. Could you all just comment, Travis, for you or Kaye's, your view on the need for M and A, especially in such a continued volatile energy tape?
Yes. Look, Neal, our shareholders expect us to to know everything that's going on out here in the Permian. And with boots on the ground out here, we certainly do. But they also expect us and they know that from our past performance that anything that we consider needs to be accretive, which means on several metrics, free cash flow, cash flow per share, EPS, inventory quality and operational efficiency. So any deal that we're interested in has got to be extremely compelling from a price perspective given our current stock price and the abundance of cheap opportunities out there in the marketplace.
As I just was talking to Derek, we're very confident with our inventory and that inventory is going to drive growth for many years in the future. But we also have a responsibility to our shareholders to continue to stay in the game and looking at opportunities that are really attractive.
Very good. Thanks for the details.
Our next question comes from Scott Hanold of RBC Capital Markets.
Thanks. And maybe just a good time to follow-up on that last question. In general, as you look at your lateral lengths and as you go to these longer lateral lengths, I mean, you look at your average lateral length of your inventory, How do you see that progressing? I mean, is there a lot of opportunities yet to block up? I know you talked about a Northern Delaware transaction.
But as you look at your footprint, what should we expect that lateral length to look like, say, in the next year or 2 on average?
Yes. Scott, our asset teams have their own little business development opportunities where they know that drilling longer laterals improve economics and increase our returns to shareholders through increased free cash flow generation. And that's part of our day in and day out business. We would like to always drill longer laterals. I think somewhere in that 10,000 foot length is probably where our inventory is typified by today.
But certainly, we'll look to always to push that.
Okay. Fair enough. And as you step back and talked about the proposition you give for investors in that mid teens growth, a strong free cash flow yield and a good dividend yield. How do you see that growth rate, that production growth rate going forward? And you got that low to mid teens number kind of set right now this year.
But as you look into, say, 2021, 2022, do you would you like to maintain that rate? Does that maximize your free cash flow? Or do you think over time it could fall to sort of that 10% to 12%?
Well, certainly the law of big numbers catches up with you. And if you're going to maintain flat CapEx on a year in or year out basis, that's going to have an impact on your overall production growth. So we believe that having that double digit growth rate combined with the yield that we have provides our investors a clear differential investment thesis and we've got the inventory that we think we can support that for multiple years to come. But as we continue to try to grow production on a larger and larger production base, you're going to have to see the CapEx numbers minus capital efficiencies continue to increase.
Yes. Yes. And I guess the bottom line, I should have been more succinct in saying as you look forward to that free cash flow, how does it get allocated between dividend buybacks and investing in the business to continue to grow? Like where does how does that allocation change over time?
Yes. I mean, that's an important point, Scott. Really, free cash flow should be defined as cash flow available above your sustaining CapEx. And for us, right now, the sustaining CapEx to keep production flat, exit to exit is about $1,600,000,000 Now above that, in the mid-50s oil price environment, we have a couple of $1,000,000,000 of cash flow to allocate. And today, in 2020, we're allocating 2 thirds of that to growth and a third of that to shareholder returns.
So I think, for us, we shouldn't capitulate on growth. I think Diamondback is still a growth story and now it's a growth with free cash flow story.
That's perfect. Thanks.
Our next question comes from Scott Gruber with Citigroup.
Yes, good morning.
Good morning, Scott.
Just a quick question on the Midland Basin development by zone. You guys have been pretty forthright here with the 2020 mix. Is the mix largely optimized at this point? As we think about '21 and beyond, is there much additional shifting between zones and change in that percentage of co development beyond 2020?
Yes, Scott. So I think the big mix, the shift to co development happened in 2019 with a little carry on into 2020. The whole point of the co development strategy is to get the economic zones that are available today all at the same time. So I think as you think about development strategy going forward, the Middle Spraberry and the Wolfcamp B will have a bigger piece of the total pie versus past years. I'm hopeful that it stays about consistent to 2020.
But as we move across various areas where in some areas, the Middle Spraberry is better, in some areas, Wolfcamp B is better. But overall, this development pace is going to be standard across the company, and we are co developing everywhere in the Midland Basin.
Got it. And then just turning back to the dividend, great to see the doubling today. As we think about the go forward, you mentioned continuing to grow the dividend. How do you think about where you want to place the dividend? Obviously, the stock price will dictate the yield.
The near term, is there a number that you're targeting over the next, call it, year or 2 to continue to grow that dividend? And then longer term, how do you think about a proper payout ratio for the business, just given the inherent volatility in the commodity price?
Yes, Scott. So we've heard a lot of feedback from investors over the last 18 months, particularly around the dividend and growth in exchange for that capital return. I think the only consistent message we've heard from our large shareholders is that they want the dividend larger sooner. So for us, we took a big jump this year as we're fully shifting to growth plus free cash flow in 2020. And that was an important step for us.
Now I think in the future, the dividend is still going to be the primary return of capital and going to need to grow. We don't want to grow it to the point where our implied yield or the payments we need to make on that dividend are a restraint on our business plan. But today, it's unfortunate that we got to a 2% yield via the stock price, but we were always focused on getting that dividend to a meaningful level, which is near a couple of bucks a share.
Our next question comes from Gail Nicholson with Stephens.
Good morning. LOE, can you talk about the progression for LOE throughout the year? And then what specific projects you guys are working on that will drive improvement?
Hi, Gail. Yes. So we took a nice step down in the 4th quarter. We guided to 440 to 480 for the year. I would say the first half of the year is probably going to be on the higher end versus the back half of the year.
We start to see some benefit from large projects, particularly on the electrification side of our fields. Right now, we are renting a lot of power generation in field. And while that's with these turbines is better than small diesel generators, it's not as efficient as being hooked up to the grid. So as we progress through the year, we should see a nice trend down in LOE based on getting electrification in Howard County, Pecos County and Northwest Martin County.
Great. Thank you. And then on the infrastructure spend in 2020, what percent of that is onetime projects versus normal course of business? And how should we think about that trending in 2021 forward?
Yes. I would say that that's a onethree one time projects. With the integration of Energen, we have learned that some areas are better for gas lift in our field. So there are some gas lift projects that are one time in nature. And then the electrification, as I mentioned, will be some one time projects.
I think credit to our facilities team, we're going to complete 3 40 wells this year and about half of those need $0 from an infrastructure perspective. So I think that's a pretty impressive feat by the infrastructure team.
Great. Thank you.
Our next question comes from Brian Singer with Goldman Sachs.
Thank you. Good morning. I wanted to follow-up on one of the earlier questions with your versus growing versus growing CapEx in future years relative to seeing your growth rate decelerate to the low end or below the 10% to 15% range?
Hey, Brian. It's important what service costs are going to do, right? I mean if service costs stay flat, our midstream and infrastructure budgets will continue to decrease and therefore we're able to get more net wells within the same budget framework. So I think we'll address 2021 2022 as we get closer and see what service costs and oil price does. But we're not going to give up
on sustainable growth, but also that growth in the free cash flow on a gross basis year over year. Look, the organizational emphasis has always been to grow and to, as we mentioned earlier, also grow the dividend. And one of the ways that our guys differentiate themselves is in the way that we become more and more capital efficient as we go forward in time and while we know that that becomes somewhat asymptotic as you go forward in time, that's still part of our core competencies is to pick pennies and nickels up where we used to pick up the dimes and quarters. And so organizationally, Brian, we're going to continue to drive efficiencies well into the future. Great.
Thanks. And then can you add any color on how you see the production trajectory and CapEx trajectory through the year and the setup that that would provide going into 2021?
Yes, Brian. I think the way we have it set up is to be operate fairly consistently throughout the year. As exhibited by 20 19, we did not slow down in the second half of the year and we have no intention to this year. We're running 21 big rigs today, 2 saltwater disposal rigs and 8.5 frac crews essentially. And that pace should be pretty consistent.
I think we do plan to grow off of what was a very good number in Q4. And then as you think about the rest of the year, we should have fairly consistent growth from Q2 through Q4. So really like the setup here and also the setup for 2021 as we don't plan on slowing down in the back half of the year.
Yes. Brian, just like I was talking about the organizational culture of efficiency, it didn't make sense to us to go to the operations organization in the back half of last year and say, okay, guys, start laying equipment down and then we're going to ask you to pick it back up in the Q1 and immediately assume the same level of operational momentum and capital efficiency. So that was the reason we decided to continue with the efficiency and that's what's led to what we feel like is a good growth in the Q1 as well. We're not having to catch up or make up ground that we lost from laying down activity in the Q4.
Great. Thank you.
Our next question comes from Jeanine Wai with Barclays.
Hi, good morning everyone.
Hey Jeanine, how are you?
Good morning. Great. Thank you. My first question is on buybacks versus debt reduction, just following up on some of the prior questions. With the 2% dividend yield now at the current share price, how do you think about buying back stock versus specifically reducing debt?
We know that your debt is trading at a higher yield. This could increase strategic flexibility in the future. You've got some nice ID tailwinds going on for you as
well? Yes, I'll let Kate answer that in detail. But I'll just say, in general, the higher the oil price, probably the less you buy back stock in our business. And likewise, the converse of that's also true. The lower the oil price, the more you're going to buy back.
Yes, I would agree with that. Today, where we are, we still have free cash to buy back stock. We're not concerned with our leverage ratio or overall leverage. Certainly, it's important for an oil and gas company to decrease leverage over time. But unlike other companies, we also have a significant amount of equity in 2 subsidiaries that is monetizable not at a moment's notice, but can be monetized.
So I think for us on the balance sheet side, we're going to keep taking care of converting our old high yield notes into IG notes throughout the year and continuing to drive down the overall interest expense at the company.
Okay, great. That's very helpful. And my second question is on inventory. How do you think about the cost of adding Tier 1 inventory? For example, how did the cost compare from moving current Tier 1 current inventory into Tier 1 via exploration, appraisal, whatever else you might think of versus inorganic additions either via M and A and acreage trades tend to be pretty high IRRs as well?
Yes. Acreage trades are certainly the highest rate of return possible and we got about 40 of them done last year with the 2 combined businesses of Energen and Diamondback. So that was a lot of low hanging fruit for us to improve. Now I'll let Travis comment on the other piece, but all I would say is that any inventory additions today in the Permian are significantly cheaper than they have been in any time in our short history. Yes.
And like I mentioned earlier, we have a set of metrics that we have to be accretive on. And we'll continue to we've always done accretive deals and we'll always look at these accretive metrics. You mentioned like 3 different ways and one of them was exploration and while that's been a very small part of Diamondback's history, We did release results on our 25,000 acre play that we entered in about 3 years ago at a really, really low cost on the Xanadu well. And while for a $20,000,000,000 company, one well test is not particularly that significant, but it sure was a good test for the first well that we drilled, the Xanadu well. I think it's IP30 or something over 100 barrels a foot.
And now we're turning it over to the execution guys as we move into the appraisal stage and drive costs down. And as we drive costs down, that's going to push up the returns for that and probably attract a 1 to 2 rig program in our future capital allocation decisions. So it's really all three of those things. Acreage trades are certainly a day in and day out opportunity, looking accretive acquisitions, extremely low valuation that we see today. And then sprinkled in a little bit of exploration success.
So I think we're executing on all three of those strategies.
Okay, great. Very helpful. Thank you for the detailed response.
Thank you, Jeanine.
Our next question comes from Jeff Grampp with Northland Capital.
Good morning, guys. Good morning, Jeff.
I was
just curious, we've talked a bit on kind of how you guys are thinking about growing the business going forward. And I guess related to that, I was wondering, if I'm looking at Slide 10, I think, you guys referenced both the PDP oil decline and BOE decline rates. How should we think about those changing, given that you guys will still be growing the base? Do those really moderate at all, given that you are still growing? Or just kind of wondering high level like if we were to roll that forward 12 months, how do you guys think that maybe changes, if at all?
Yes, Jeff, it won't moderate much. We are we will have a big tailwind from 2019 to 2020 on the decline. 20 nineteen's decline was north of 40% on the oil side. This year, high 30s on the oil side, given that we're no longer maximizing growth within cash flow and accelerating or adding 5 or 6 rigs this year. So that should help.
I can't guarantee that it will keep going down from here, but certainly don't expect it to ramp up significantly given the steady state development we're heading towards.
Got it. Thanks, guys. And for my follow-up, Travis, maybe for you, you guys in the prepared remarks obviously had a substantial checklist of accomplishments that you guys did in 2019. I was wondering what's on the 2020 checklist in terms of kind of more kind of strategic objectives or goals for the business in 2020 that maybe in 12 months you come back on the 4Q 2020 call and tell us about?
Well, certainly as we sit here today, the level of major corporate development objectives that we had in 2019 won't be repeated in 2020. That was an incredibly busy year for us. What we're really focused on this year is growing the business, increasing shareholder returns and really refining our differential story of growth and yield. And we think we've got the framework exactly suited to be able to do that.
Got it. All right. That's it for me. Thanks, guys.
Thank you, Jeff.
Our next question comes from Asit Sen with Bank of America.
Thanks. Good morning. I have one for Kees and a follow-up for Travis. Kees, appreciate the update on sustaining CapEx. But historically, you have talked about generating a $675,000,000 of free cash flow at $55 oil.
Could you talk about the sensitivity to this free cash flow to changes in oil price? And how would you think about adapting the activity program to lower oil prices, say, in a $45 scenario?
Yes. I'll take the second part first. If we saw $45 oil for a couple of months, we would do the right decision, make the right decision and cut back on capital spending. I will say this addition of free cash flow to the story now allows us to not whipsaw around our activity levels based on a weekly or daily or a monthly move in commodity price. So this gives us an operations organization an ability to continue to operate steadily and drive efficiencies through the year.
On the free cash flow side, certainly above $55,000,000 we start to get a lot of the benefit of our three way collars or unhedged production. So I think at the midpoint of our guidance on oil, dollars 1 in oil price above $55 gives you $65,000,000 or $70,000,000 of free cash.
And I'll just add to that from a general perspective or maybe a higher level perspective. Diamondback has always demonstrated that when returns to our investors go up, we lean into that. Now we've moderated that comment a little bit now because we're so focused on free cash flow generation. But what goes along with that is when returns go down to our shareholders, we slow activity down. And I think you go back in early 2015, again in 2016 and even again in late 2018, we've got a track record of doing just that.
When the commodity tells us we're not getting paid for it, we moderate our activity accordingly.
Thanks. Travis, a follow-up for you. You guys have been a leader in making changes to compensation structure and appreciate ESG component as part of management scorecard. But could you provide some early examples of some of the metrics that you're going to track? What's motivating this move And perhaps speak to the issue of flaring and how TRRC is positioned in Texas and your conversations with them?
Sure. The one thing just I want to point out is that the transparency that we try to communicate with our investors, we believe is best in class. And we spend a lot of time talking to our large shareholders. And some of the things that we instituted in this release were as a result of direct communications with those shareholders, things like holding ourselves accountable for ES and G measures. We've got maybe up to 10% to 15 percent now of every individual's compensation is going to be tied to ES and G metrics, things like water recycle, spill control, total recordable incident rate, flaring.
Those are not subject to discretion. Those are quantitative measures that we will incentivize better performance on. That's one thing that we've proven at Diamondback is what gets rewarded gets done, and we intend to do that in our scorecard. We've also adjusted, and again we've laid it out in a very transparent way, but and we'll do so more when we release our proxy here in a month or so. We've adjusted now our total shareholder return to where we have modifiers for anything below 0% or negative TSR.
We've now got a modifier that takes down our long term incentive. Now the converse of that's also true, anything above a 15% total shareholder return gets an adder. But again, that's in response to conversations that we've had with our shareholders. So we really have 2 objectives. We have the first, which I think is the most important is that we want to be best in class on all of our ES and G measures, full stop.
And secondly, we want to be best in class on the disclosure associated with those things. And we believe that what we released last night is the very important first step in achieving both of those objectives.
And on flaring, Travis?
Yes. So flaring in the Permian Basin is an issue that we as an industry have to address. There is flaring that's voluntary flaring that should be eliminated as quickly as we can. I mean companies have to put their balance sheets to work and make sure the gathering system is in place prior to bringing on wells. Certainly, at Diamondback, we follow that to the strictest letter.
There's also collaboration that we have to make with our gatherers. Even if we're tied into systems, our gatherers have to make sure that they've got contracts in place that allow that gas to be custody transferred at the wellhead and that gas moved to market. And so it's really it's not all on the upstream guys. It's really a holistic issue that needs to be addressed by everyone to try to eliminate certainly routine flaring out here in the Permian as quickly as we can.
Appreciate the color, Travis. Thank you.
And I'll just add to that, I'll say that the scorecard that we've added in the ES and G has flaring in there. And I can tell you from we talk about it on our executive meeting. We have pretty rigorous reports that we review every week and we talk about creative ways that Diamondback or Rattler could bring their balance sheet to bear to cause flaring to be eliminated quicker than if we just relied on somebody else. So we're trying to be creative and willing to put our balance sheet to work if need be to eliminate the flaring.
Our next question comes from David Deckelbaum with Cowen.
Good morning, guys. Thanks for the time. I just wanted to ask a couple of follow ups on just the Pecos activity. I think the first half of the year, you guys are running about 6 rigs there right now. Is the plan does that slow in the back half of the year and then going into 2021?
Or should we think about that as kind of a steady state program?
Yes, David. I mean it's more about completion cadence, right? So in the first half of the year, we do have more completions in Pecos than the back half. I think overall, 2019, we completed almost 100 wells in that field. And I think the goal here is to get that down to 60 or 70 on a go forward basis.
So we are allocating capital in the second half of the year to better return areas, 1 rig going to ReWard and 1 rig going to the Northern Midland Basin, particularly as the held by production issues that we had in Pecos have subsided and we can have a more steady state plan there with 5 rigs or so running full time.
And David, I'll tell you the execution teams, particularly in Pecos County have done a remarkable job of maintaining results or improving results, some of which we talked about in the second Bone Springs, but they've really driven a lot of costs out of the equation. And now the returns continue to improve with the same or better EURs per foot, but much lower cost per foot. So it's again a good example of what Diamondback excels at as you work on the numerator and the denominator at the same time and we're driving rate of return positively for our shareholders.
For sure. It's encouraging to hear that. It also sounds that as you get into the back half of 2020 and going into 2021, absent everything else, some of those HPP obligations obviously subside going into 'twenty one?
Correct.
Okay. And then I just wanted to just ask one more just framing this conversation around M and A. You've highlighted a lot of priorities around sustainable free cash dividends growth. When you screen now for M and A, do you start with a priority of free cash accretion? You did talk about obviously things have to be accretive.
You also talked about acreage being at heavily discounted valuations right now. Do you still see room for what would otherwise be NAV accretive M and A? Or does everything now have to become free cash accretive?
Well, certainly that has vaulted to the top of the category list of the things we look at, but we really focus on several key metrics. If you're asking probably what we screen on the first, certainly free cash flow per share is way up there. Also cash flow per share, earnings per share and then the more traditional measures of inventory quality and what Diamondback can do with that property in the form of operational efficiency and then of course NAV as well too. We still fundamentally believe that NAV is an important valuation metric for our business. But those are what we believe are the right ways to focus on anything you're looking at.
And right now with the stock where it is, we're focused on buying back the stock because it's trading at the deeper discount to NAV than anything we're seeing in the market. Yes, I agree with that.
Understood. And thanks for confirming. We don't have to delete our NAV model just yet, but thanks guys.
Yes, agreed.
Yes, hold on to that.
Our next question comes from Michael Hall with Heikkinen Energy Advisors.
Thanks. Good morning. Just to answer my question as it relates to how the stock price looks relative to M and A opportunities. So thanks for that. And I guess the second one I had just to follow-up a little bit on the evolution of co development, you addressed it in the Midland Basin.
But I'm also curious in the Delaware, just kind of look on the slides, the proportion of the Wolfcamp A that's driving the 2020 program on Slide 14, I guess. How does that evolve over time? Should we expect that to kind of grind lower as a percentage of the total in 2021 and beyond or any color on that?
Yes. Michael, I think that's fair, right? I think there's a secondary zone in each of our three fields that we think competes for capital today. In Pecos, it's the 2nd Bone Spring, so that's going to get more attention. In Leeward, it's the 3rd Bone Spring.
We're doing a lot more co development between the A and the 3rd Bone Spring in that acreage position in 2020 and beyond. And then up in the Vermejo area, 3rd Bone Spring is good, but also the Wolfcamp B deserves some attention from a rate of return perspective. So each of those fields has a different development strategy. But unlike the Midland Basin, where in the Midland Basin, the zones that are being co developed from a rate of return perspective are in a narrow band. The Wolfcamp A versus the other zones in the Delaware Basin had always said drill the Wolfcamp A and go to the other zones later.
But with the second bone, particularly in Pecos getting better, that's getting more attention. Great.
That's helpful color. I appreciate it. Thanks, guys.
Thanks Michael. Our next question comes from Charles Meade with Johnson Rice.
Good morning, Travis, to you and your whole team there. I want to go back to the there's a little bit of tension in some of your or at least I see some tension in your prepared comments. You talked about how we've had a lot of volatility in late 2019 and even in early 2020 with the commodity price. That's on one hand. But on the other hand, I get your message that the dividend, you're committed to the dividend is you're committed to it and those are the first dollars out the door.
But I'm wondering if in broad terms you can give us any insight into your thinking or the Board's thinking. Is there a limit, maybe a soft limit on the percentage of your cash flow from ops want to exceed in terms of the dividend payout if commodity prices fell lower? And conversely go ahead, I'm sorry.
No, finish, I'm sorry.
Well, no, I'd say conversely, is there some minimum level that you're targeting if oil prices hit higher?
Yes, you can go back
and look at some of my previous prepared remarks where we've talked about the Board wanting to seek a dividend yield that approaches the S and P 500. And to get prescriptive much beyond that, we don't think is the right way to communicate that message. Case outlines right now that how we look at what to do with free cash flow above our maintenance CapEx. But I think at the end of the day, Charles, just simply said, when we look at capital allocation, we look at ways to drive not only current shareholder value, but also long term shareholder value. And certainly the dividend and the growth of that dividend is very important in that conversation.
What we have seen is some companies that get dividend let the dividend get so high, it actually can become an impediment to doing what oil and gas companies are supposed to do, which is convert resource into cash flow. So we're ever mindful of that, but it's a discussion that we have at the Board level on an annual basis. And I can just tell you that we are laser focused on current shareholder value creation and long term shareholder value creation.
That's helpful color. Thanks for that, Travis. And then going back to your Limelight your Limelight well. And I appreciate your earlier comments that you guys are much bigger company now, certainly than when you got into this play 3 years ago, but that it's still encouraging to get that kind of first well results. What would you need to see in the combination between well cost from here and productivity from this year as well?
What would you need to see from this play to make it really compete in the top tier of your overall portfolio for capital?
So we're pretty pleased with the oil profile that came out of it or that we're seeing so far in that first well and the decline profile looks actually pretty good. Of course, we're ever mindful that it's a single well in a section. But I think it's 2 things. 1, you've always got to push greater recoveries and we have to push a lower development cost, which is something that's right in the wheelhouse of the Diamondback operations teams, both driving EUR and reducing well costs. So I think there's Charles more to come on this story.
We'll probably drill 1 or 2 more appraisal wells this year and then we'll talk about it more in 2021 if we're successful in accomplishing those objectives and it starts attracting more capital in the allocation process.
Thank you for that, Travis.
Our next question comes from Richard Tullis with Capital One Securities.
Thanks. Good morning. Travis, real quick on Limelight, just continue with that theme. You drilled the Meramec with the Sanity well. The upcoming appraisals, do you anticipate going after any other targets there in Limelight area?
Yes. I'm going to let Dave answer that question, Dave.
Yes. For the next two wells that we have upcoming for the appraisal project, as we move to the south within the Limelight trend, we're actually going to be targeting the upper portion of the Woodford. And then we're going to be drilling a well close by to Xanadu, further driving development efficiencies in the Meramec itself.
Okay. Thank you. And lastly for me, looking at the Northern Delaware Basin acreage swap referenced in the release, how did that transaction or group of transactions come together? And how much net acreage remains in New Mexico?
Yes, Richard, we've worked on probably almost 40 trades throughout the year. This was certainly the largest. For us, entering New Mexico as an operator to operate 6 or 7 sections just didn't make sense, given that we could bolt on to other blocks of acreage that we operate in Texas. So that certainly that trade is one of many that worked out really well. Today, we have about 2,500 acres left in New Mexico, primarily non op with 1 operated well.
All right, Kees. Thanks so much. Appreciate it.
Thank you.
Our next question comes from Leo Marini with KeyBanc.
Afternoon, guys. Just wanted to follow-up on one of your earlier comments here just as a point of clarity. If I heard it correctly, did you guys kind of say that production growth on a quarterly basis in 'twenty would be maybe a little slower in the Q1 and then pick up in Q2 of 2020 and then kind of be steady for the rest of the year? Just wanted to make
sure I understood that cadence.
Yes, that's fair, Leo. We plan to grow off of what was a very, very good number in Q4. It exceeded our internal expectations, but we do expect to grow off that number in Q1 and then have steady growth throughout the year.
Okay. That's helpful. And I guess just with respect to well cost, wanted to see if you could kind of give us anything a little bit sort of leading edge here in terms of maybe what you've seen in the last couple of months here just to kind of kick off the year in 2020 maybe versus 4th quarter averages, where you guys able to continue to drive efficiencies or maybe benefit from some lower service cost deals that you might have negotiated in 4Q to kind of start the year here in 2020? Any comments around that?
Yes. So service cost reductions are not things that we count on as we forecast our capital budget. Those are not permanent. We know when commodity price turns back around, those go away. What we really are focused on is what type of cost improvements can we make that are more permanent in nature And that's again what I think the Diamondback operations organization just absolutely excels.
And we were talking just this week about a 15,000 foot lateral that we got drilled in 11 or 12 days. And so we can continue to see faster and faster well results from our operations organization. And we expect that to continue to happen throughout this year.
Okay. Thank you.
Thanks, Leo. And I'm not showing any further questions at this time. I'd like to turn the call back over to Travis Stice for closing remarks.
Thanks again to everyone participating in today's call. If you've got any questions, please contact us using the contact information provided.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.