Good day, ladies and gentlemen, welcome to the Diamondback Energy second quarter 2019 earnings conference call. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Adam Lawlis, Vice President, Investor Relations. Sir, you may begin.
Thank you, Josh. Good morning, and welcome to Diamondback Energy's second quarter 2019 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, CEO, Mike Hollis, President and COO, and Kaes Van't Hof, 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. Welcome, everyone, and thank you for listening to Diamondback's second quarter 2019 conference call. Diamondback continued to execute in the second quarter of 2019. We produced record EBITDA per share from 7% quarter-over-quarter production growth, while lowering the midpoint of our capital cost guidance and increasing the midpoints of both our full-year production guidance and estimated completed well count for the year. Diamondback has now grown earnings per share at 11% quarterly CAGR and EBITDA per share by 9% quarterly since our IPO in late 2012. Based on second quarter numbers, Diamondback now generates more annualized EBITDA per share than our IPO price seven years ago. Diamondback continues to focus on per share metrics, with shareholders now owning more production, cash flow, and earnings per share than prior to our acquisition of Energen a year ago, even in the face of a lower commodity price environment.
Diamondback Energy's per lateral foot well costs, which include every dollar spent bringing our operated wells to production and the first six months of production-related costs thereafter, are down 7% year-over-year in the Midland Basin and 16% year-over-year in the Delaware Basin. As a result, we are narrowing the midpoint of our 2019 capital budget and increasing the midpoint of our operated completions, which implies over $110 of improved capital efficiency per completed lateral foot versus our initial budget presented in December. Our operations organization continues to drive material costs out of the business, with expectations for continued tailwinds due to improved efficiencies and service cost deflation. With respect to the Energen acquisition and subsequent integration, Diamondback Energy has now completed every major strategic objective and exceeded our stated synergies presented one year ago when we announced the deal.
In the second quarter, we completed the IPO of our midstream business, Rattler, raising over $720 million net to Diamondback. We also recently announced the drop-down of over 5,000 net royalty acres to Viper for $700 million of gross proceeds, including $150 million in cash. Lastly, we recently completed the sale of the conventional Central Basin Platform assets acquired via the Energen acquisition. As a result of completing these objectives, Diamondback immediately commenced our stock repurchase program by repurchasing $104 million of stock in the second quarter after reducing our consolidated net debt by $400 million quarter-over-quarter. We intend to use the majority of the remainder of these proceeds, along with increasing free cash flow from operations, to continue our stock repurchase program.
Our balance sheet is strong, with both absolute debt levels and leverage metrics low, and we will continue to return capital to shareholders via our share repurchase program and dividend. At current valuations, we continue to feel the best use of our free capital at Diamondback is buying back our own stock. With respect to oil realizations, we believe the worst of our widest basis differential quarters are behind us, and we now expect to realize greater than 95% of WTI pricing for the second half of 2019. By early next year, we expect to realize oil prices at parity with or greater than WTI as our existing commitments convert to the Gray Oak and EPIC pipelines and receive Brent or coastal pricing.
With our recently announced commitment to the Wink to Webster Pipeline, we will have full exposure to the Houston and Corpus Christi local refining and export markets by 2021, removing in-basin pricing risk from our future business model. In closing, Diamondback continues to execute on the promises presented at the time of the Energen acquisition, and our business is nearing a significant free cash flow inflection point in the second half of 2019 and into 2020. We may no longer be maximizing growth within cash flow, but we are not sacrificing growth in 2020, as we expect to grow at industry-leading rates for large cap E&P and deliver over $750 million of free cash flow at $55 oil due to our best-in-class cost structure, asset quality, and operating metrics. With these comments now complete, operator, please open the line for questions.
Thank you, ladies and gentlemen. If you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Michael Kelly with Seaport Global. You may proceed with your question.
Thanks. Good morning, guys. Travis, as I flip through the slide deck here, it's pretty apparent that you guys have really checked the box on a whole bunch of aggressive objectives over the last year. I really just wanted to get the thoughts of what's on your mind now, what's your refreshed strategic to-do list kind of look like as we sit here today? Thanks.
Thanks, Mike. Yeah. Our strategic objectives, there's not really any new ones. We're going to maintain our commitment to execution and capital efficiency. That's as part of our core business practices, as just about anything. We're continued at the board level to grow the dividend, and we've committed to this free cash flow return to shareholders in the form of share repurchases. While we clicked off some pretty significant objectives, those were kind of one-time events in the first seven months of this year. We're committed long-term to this shareholder return program, and we're pretty confident we'll be able to deliver on it.
Okay. Thanks. Maybe the follow-up on that, you just mentioned too, that $750 million of free cash flow in 2020 with industry-leading growth still in the works. What would get you to maybe dial down that growth a little bit and to up the ante on free cash flow? Just kind of curious just to hear maybe your philosophical thoughts on that growth versus free cash flow balance. Thank you.
It's not an exact science, the way that we look at the future. If commodity prices roll over further, we're certainly going to look at our forward model and make adjustments accordingly, probably in the form of dropping one or two rigs. Our future is really bright, Mike, with the way that we continue to execute with our overall cash costs, in the mid eights right now. We're profitable significantly on every barrel that we produce for a long way from this current oil price. We're pretty confident. We've got a lot of still exciting things to deliver in the future. I think the future of Diamondback is really bright.
Appreciate it. Thanks, guys.
Thank you. Our next question comes from Neal Dingmann with SunTrust. You may proceed with your question.
Morning, all. Travis, going through the release about your low capital costs continue to be notable. I guess my questions around those. How do these factor in when allocating capital between thinking about production growth versus buyback or other shareholder initiatives?
Neal, it's not really an either/or. I think it's an and. I think we're one of the few companies that can do both. We can still grow, and we can repurchase shares and further returns to our shareholders. We don't pivot on that. We actually look at a way to combine both growth and returns to our shareholders.
Okay, great. Then my follow-up just is around slide 10 on your looking at the spacing. It appears to me, I was looking at this versus some prior presentations, even going back to years, and it appears to me like your assumptions haven't changed for quite some time. I'm just wondering, could there be potentially looking at this some down-spacing opportunities, or are you sort of content with this? I'm just wonder-- obviously, there's a lot of scrutiny these days on that, so maybe anything you could say around your assumptions and how this has or hasn't and maybe will change.
Yeah, Neal, I went back and did the same thing. I wanted to see how long this slide had been in our slide deck, and I think it goes back, like, four years. I think I've said 1,000 times, it's easier strategically to add locations than it is to take away locations. We've always been conservative in our spacing assumptions, and we don't really have any plans right now, especially as commodity price continues to decline, to look at any reasons to increase well spacing. This is one of those things where we've been pretty steadfast in our strategic development objectives on spacing. It's been underpinned by our annual reserve reports, and we pay attention to a lot of the spacing results that go on in the Permian Basin, and we try to learn from those as well too, without exposing our shareholders to down-spacing risks.
I'm very comfortable with our spacing assumptions.
Very good. Keep up the good work, guys.
Thank you, Neal.
Thank you. Our next question comes from Derrick Whitfield with Stifel. You may proceed with your question.
Good morning, all, and congrats on your strong update.
Thank you, Derrick.
Perhaps for Travis, your capital efficiency and now disclosure standards as of last night's release are peer leading. What in your view makes your organization so successful at cost control?
You know, Derrick, we get that question coming from a lot of different angles over different quarters. I'll tell you, it's not just one thing. It's really a combination of a thousand things. We just finished an operations review getting ready for this quarter several weeks ago, and the drilling organization showed me an analysis of the connection time, how fast you screw pipe together, where they cut not quite a minute, I think 0.7 of a minute, per connection for every well that we drilled with 20 rigs in the second quarter. That translates. You say, "Well, that's not So what?" That's $1 a foot per well, if I times 20 rigs. It's that level of scrutiny across our cost to spend that I think truly differentiates our operations organization.
We say around here, "You got to inspect what you expect." That's one of our operating mantras. Really, our business is not that complicated. It's converting rock into cash flow, and you've got to measure every facet of that conversion process to ensure you're most efficient. I think we've got a great machine. If we didn't have the machine that we have, we couldn't have delivered on the results, the cost results, after doing $10 billion worth of acquisitions at the end of last year. It's hard for me to believe that today our DC&E full well costs are lower on a combined basis with Energen than they were on the Diamondback standalone basis a year ago. That to me represents seamless integration of an acquisition. We did so while accomplishing all of these corporate objectives that I laid out in my prepared remarks.
Most importantly, we did it while adding over 300 people to our organization. I think it's a remarkable feat for our organization to have accomplished what we did in this earnings release and in this quarter. Our economics are better than they've ever been. We're more profitable. We've got more operational capability. Just across the board, we're firing on all cylinders. It's unfortunate in this market backdrop, but we're going to be okay. Because our cost structure and because our execution prowess, our capital efficiency, we're going to continue prosecuting our development plan, and we've got a great organization to do that.
I agree, Travis, quite an impressive feat. As my follow-up, perhaps for you or Mike, as you think about and compare your D&C costs between the Midland and Delaware basins, where do you see the greatest room for improvement in your Delaware cost?
Derrick, you nailed it. The Delaware is where we're, kind of the baseball reference, we're probably in inning three to four. Midland, we're probably inning five, getting into inning six. Midland, we're picking up dimes and quarters. Delaware, as you saw, we had a 16% reduction in our $ per foot. That's where we're seeing the biggest change in optimization rate. Going forward, the great thing is, everything that we're learning and doing and changing in Midland is applicable in Delaware and vice versa. Those two teams are fully integrated as well. Again, across the board, we'll continue to see efficiencies get worked into the system. As Travis said, there's also some tailwinds with where the commodity price sits, where activity sits. We're seeing some softening on the service side as well.
All of those things together, I think you're going to have some good things coming in the next couple of quarters.
Very helpful, guys. Thanks for your time.
Thank you, Derrick.
Thank you. Our next question comes from Gail Nicholson with Stephens. You may proceed with your question.
Good morning, everybody. I really just had a housekeeping question. Can you talk about the next steps for you guys to achieve investment-grade status and the potential timing of that?
Hey, Gail. We're having active dialogue with the rating agencies. I think, with us doing over 280,000 barrels a day, this business qualifies as an investment-grade company. Our debt certainly trades like it's an investment-grade company. We just need an upgrade from either S&P and Moody's, who upgraded us both after the acquisition. We've executed on everything we had said we were going to do post-acquisition, and I think this business is on its way to becoming an investment-grade company, whether or not the ratings get there or not.
Great. Thank you.
Gail, we also added the fall-away provisions to our credit facility in the early spring, and that results in our credit facility becoming unsecured once one other agency upgrades us, including our Fitch rating today.
Great. Thank you.
Thank you.
Thank you. Our next question comes from Drew Venker with Morgan Stanley. You may proceed with your question.
Hi, everyone. Travis, in the past, you talked about using some of your free cash flow to replenish inventory. I think you've really talked down corporate M&A a lot. Obviously, it's changed in the market over the last few months. I was just interested to hear if the asset market is open or if maybe bid-ask, I don't know if bid-ask is too wide here, but if you can pick up?
acreage at attractive prices?
Well, I think you've always heard us say that, we'll do accretive deals, but there's a reason in my prepared remarks, I said that I think the best M&A opportunity for us right now is repurchasing Diamondback shares. That's really the corporate focus. We do have an obligation to look for deals, but they've got to be massively accretive and, like I said, just to reiterate, our focus is on repurchasing our own shares right now.
Understood. Thanks, Travis.
Thank you. Our next question comes from Tim Rezvan with Oppenheimer. You may proceed with your question.
Good morning, folks. I had a question on unit expenses in 2Q. We saw gathering and transportation and LOE both kind of reverse course after some pretty big declines. Can you talk about anything like one-off that happened maybe in 2Q or sort of how we should think about a more normalized trend going forward on those cash OPEX items?
Hey, Tim. Yeah, in the second quarter, we had the full effect of the Central Basin Platform. That acreage was closed on July 1, our LOE should trend down here in Q3 and Q4. We've kind of been hinting towards the upper half of our $425-$475 guidance for the rest of the year on LOE. Gathering, processing, transportation, that moves around a little bit quarter-over-quarter. I still think the midpoint's a good number there.
Okay. I appreciate that. Then, if I could ask a question related to slide 15 on sort of your CapEx to cash flow reconciliation. Just want to make sure I understand this correctly. It appears that your updated guidance implies or is kind of on track with your first half 2019 cost level of $890 per foot. I'm just wondering, is it fair to say that your updated guide is not reflecting any incremental efficiencies in the back half of the year?
Yeah, Tim, we don't make promises on service costs. I think efficiency-wise, the business is running as efficiently as possible. Certainly, there's some tailwinds on the service sector. We certainly felt that this quarter was not the quarter to go too aggressive on the guidance change. We have expectations to continue to drive capital costs out of the business and meet or exceed these numbers here.
Okay. That's fair enough. I'll leave it there. Thank you.
Thank you. Our next question comes from Ryan Todd with Simmons Energy. You may proceed with your question.
Good, thanks. Maybe a follow-up on a couple earlier things. The $750 million in free cash flow in 2020 that you've talked about, what rough CapEx budget does that assume? Does it imply a modest acceleration from second half 2019 levels or kind of a continuation of current activity?
Hey, Ryan, if anything, it would be a very moderate increase versus current activity levels. We're running eight frac spreads today. We've run eight frac spreads all year, and we're going to exit the year running eight frac spreads. We don't anticipate having any frac holidays at the end of the year. We're going to exit 2019 running eight spreads and probably enter 2020 running those eight spreads. I think for us now, the questions are at the margin, right? We're completing 300-320 wells this year. I don't expect a material change from that number to the upside or the downside, pending a major commodity price change.
Great. Thanks. That's helpful. You reduced debt a little bit in the quarter, and obviously, you're in a strong financial position. At a high level, what do you think is the right level of debt for your company? Is it a conservative leverage metric at a sub-$50 a barrel oil price? Should we expect further debt reduction going forward, or do you feel like you're in a pretty good place?
Yeah, Ryan, I feel really good about how much debt we've reduced over the last couple of quarters. On an absolute basis, but also on a leverage metric basis, I feel like we're in really good shape. Right now, with the amount of cash proceeds that we have and the free cash flow profile of the business, buying back our stock at these depressed levels is probably a better use of capital for us while still maintaining a fortress balance sheet.
Great. Thanks. I appreciate it.
Thank you. Our next question comes from Asit Sen with Bank of America. You may proceed with your question.
Thanks. Good morning, guys. On slide 12, you mentioned additional potential savings from infrastructure efficiency attributable to Rattler Midstream. Can you elaborate on that specifically?
Yeah, Asit. These numbers that you see, the 735 in the Midland Basin and the 1131 in the Delaware Basin are gross numbers. The benefit that we have of Rattler is that we do capitalize the first 6 months of water production in both basins. That's part of our equipment, the E piece of our DC&E. At Rattler's margins, we're saving probably an extra $30 a foot on the Midland side and close to $75 or $80 a foot on the Delaware side.
Great. Thanks for the color. Mike, in the operational update, it was mentioned that you completed a pair of Jo Mill wells this quarter. Can you provide more details on the zone across your footprint and how you intend to layer in these completions going forward?
Sure. Northern Midland Basin is kind of the area that we're focusing on right now. We'll typically stagger Middle Spraberry with Jo Mill. The two that we did this quarter, we're drilling more this quarter as we're going forward. As we do our kind of cube development across the entire Northern Midland Basin, we're adding Middle Spraberry and Jo Mill into those cubes. As far as that going forward, that's what we're planning to do. The wells are performing and competing for capital with all of our other zones as we have today. Look forward to doing that more going forward.
Great. Appreciate the color, guys. Thanks.
Yes. Thank you.
Thank you. Our next question comes from Jeff Grampp with Northland Capital Markets. You may proceed with your question.
Good morning, guys.
Good morning, Jeff.
It seemed like this quarter there was a little bit larger discrepancy than some past in terms of drill versus completes. Was just kind of wondering if that was the expected plan for the quarter, if that's just kind of a timing issue, or how we should think about drill versus completes in the back half of the year?
Yeah, Jeff, you'll see that we drilled 170 wells year-to-date and completed 151. We're planning on completing somewhere around the midpoint of our guide of 300-320 wells. Our rig count has gotten a little bit ahead of our completion count, our completion cadence. You'll probably see us drop a couple rigs into the back half of the year, but there'll be no change to the completion cadence with us running eight spreads consistently for the rest of the year.
All right. Thanks for that, Kaes. For my follow-up, Travis, you mentioned buybacks being the most interesting use of free cash flow right now. Just kind of wondering as we look into 2020, you guys starting to build a track record of building the dividend and having some growth there. Just kind of wondering, should we still assume that growing that annual dividend is still going to take precedence over accelerating buybacks? Or how you guys look to balance the two while understanding that both of those are goals for you guys?
Yeah. Again, it's not an either/or, and I think you've heard us say consistently that the board feels that the dividend is the primary form of shareholder return.
All right. Thanks, Travis. Appreciate the time, guys.
You bet. Thanks, Jeff.
Thank you. Our next question comes from David Deckelbaum with Cowen. You may proceed with your question.
Thanks, guys. I'm not going to correct the last name, but just wanted to ask a couple questions on, as you go into 2020, you basically hit all of the goals that you wanted to in 2019, and this was a pretty busy year for you guys on the corporate side, just with the Rattler IPO, the Viper drop down. As we go into 2020, should we be thinking that this is going to start being, for lack of a better word, a more boring execution model? Should we still be looking for things like DrillCos and other things that you've endeavored in the past to kind of pull some value forward? I guess, how do you square those with some of your ambitions of being this free cash growth engine?
Yeah, David, if 2020's going to be a boring year for Diamondback, that'll be the first boring year in our company's history. If the past is a prediction of the future, I expect a lot of exciting things to happen for Diamondback right now. Don't know what those are yet, but I know as we continue to demonstrate the free cash flow machine that we've built and our execution and capital efficiency, better than anybody who's out here in the Permian. I think there's going to be opportunities. I don't know what those are going to be yet, but we know as long as we execute and this organization continues to deliver, we're going to have opportunities. It's up to us and the management and board to assess those opportunities and determine which one creates the most values for the shareholders who own the company.
Don't know what those are going to be, but I suspect there'll be something.
Got it. I guess just on the completion side, you highlighted costs perhaps coming down on the service side in the back half. Are you looking at other applications like some of the e-fracs and things that we see, maybe more headline oriented these days, but are you looking at those with any sincerity at this point going into next year?
David, absolutely. The answer's going to be yes to every new technology or application that we can vet and make sure that we're going to save money on the dollar per foot and not hurt any efficiency on the production of the well. e-frac, we have an e-frac crew coming in the latter half of this year. We utilize dual fuel capability on several of our frac fleets and drilling rigs. Again, we're always looking at what's out there. We're watching what everyone else is doing as well. We'll be typically a very fast follower. A lot of times we won't be on the exact leading edge because, again, we don't want to put our shareholders at risk for that. At the end of the day, yes, that dollar per foot and the efficiency and capital efficiency is what we're looking for.
The great thing is, as we're slowing down as an industry, a lot of these things are coming available that have been working for other folks, and now they're coming available and we're able to pick them up. We're getting some of these crews that are coming in hot. We're doing the same thing with rigs. We've got a completely different rig fleet today than we had a year ago, and I think you're seeing some of the capital efficiency metrics change because of what we're doing now.
Good. Appreciate the time, guys.
Thank you.
Thank you. Our next question comes from Richard Tullis with Capital One Securities. You may proceed with your question.
Hey, thanks. Good morning, everyone. Travis or Mike, it seems like the rigs have been split fairly evenly between the Midland and Delaware basins the past couple of quarters. Do you see that split holding fairly evenly into 2020, or how do you look at the allocation of capital as we get a little bit closer to next year?
Yeah. We take a look at that almost on every well decision. I think just for planning purposes, I think just assuming you're going to have an equal split with rigs on either side of the basin is a good planning assumption.
Okay. Lastly, I know it's not a big part of your story, but the Limelight area looks like you're planning a well there for the third quarter. With success, how active could that area become in 2020 for Diamondback?
Look, if that area's successful, that means it competes for capital, and the footprint we have there is good for 1 to 2 rigs probably. It'd be good for Rattler as well too. We'll wait until we get some data there, and then make some capital allocation decisions. It could be a nice place to park a rig for multiple years.
All right. Well, that's all for me. Thank you, Travis.
You bet. Thanks, Richard.
Thank you. Our next question comes from Jason Wangler with Imperial Capital. You may proceed with your question.
Good morning, guys. Just had one. Mike, you kind of hit it a minute ago on the services side. As far as the pricing of services, how much more do you think there is to really get, given they've been pretty beat up, obviously. Also, I guess you've already kind of switched out a lot of the rigs, but do you see much more in the upgrading, whether it's on completion crews or rigs left as you move forward?
Jason, again, these guys on the service side have been squeezed pretty hard. Hitching their wagon up to someone that's going to be very consistent in a fluid commodity price environment provides them with both an operational and a financial hedge. We're getting some benefit there, as well as from the size and scale. Us being able to stay steady is really helping those guys out as well. Don't see a whole lot of softening, just because, again, we want our partners to be there at the end of the day. We need them. They're a very big part of the success we've had. We're working with those folks, and they work with us on the high end of commodity pricing, and we work with them on the low-end commodity price.
No, it is softening a little bit just because the activity level's dropping so much.
Okay. I appreciate it. Thank you.
Thank you, Jason.
Thank you. Our next question comes from Michael Hall with Heikkinen Energy Advisors. You may proceed with your question.
Thanks. Yeah, I guess just a quick one on my end. A lot have been addressed. As you think about the size and scale of the repurchase program, should we think about the free cash flow as the cap on that? Given some of the asset sales and the liquidity you have, should we anticipate seeing potentially even higher amounts of repurchases relative to the free cash flow you're talking about?
Well, Michael, yeah. I think through the rest of 2019, we're going to use a mix of the free cash flow profile and proceeds from the asset sales to continue the buyback program. As you move into 2020, I'd say free cash flow becomes more of the governor at that point. We've completed all these one-time proceeds. The stock's still, in our opinion, very cheap, and we're going to continue to use our capital to buy back shares in this market.
Okay. Makes sense. Then I guess just coming back a little bit on the whole growth versus free cash flow question, how do you big picture approach the optimization as you think about 2020 and beyond? The optimization of growth versus free cash flow in the capital allocation decision. I'm just curious more about your process as opposed to the outcome.
I think it's a process that's done at the margin for us now, right? We're a company that maximized growth within cash flow for the last four years. Growing within cash flow is not a new concept to us. The big change is that we can grow and deliver free cash flow. We have no intention of slowing that growth to maximize free cash flow or vice versa. It's going to be a symbiotic relationship for a long time. We're going to keep growing. Maybe it's add a rig or keep the same rig count as this year, do more with the same capital, and growth is the output next year, with free cash flow also being the output.
All right. Makes sense. Sure seems differentiated. Appreciate it, guys.
Thank you, Michael.
Thank you. Our next question comes from Scott Hanold with RBC Capital Markets. You may proceed with your question.
Thanks. Just a couple quick ones. I first want to commend you all for obviously stepping up and buying back stock, Hopefully we'll see more by you all and the rest of the industry, especially with where some of these equities are trading. Maybe this one's for Kaes. As you all think about the buybacks here over the next quarter or two, in your conversations with the rating agencies, is there any sort of pushback from them to get into investment grade with the amount of buybacks you're doing?
No. I haven't seen a lot of pushback. I think a lot of the one-time proceeds that we've received already, about $1 billion worth of one-time proceeds, are all seen as very credit positive. We've checked those boxes, and we've also checked the production box and checked the capital efficiency box. I haven't heard a lot of pushback on that front. For us right now, you know.
Investment grade is a corporate objective, but for us, buying back stock at depressed values is a more significant corporate objective.
All right. Appreciate that. A quick second one is on your ownership of Viper. Obviously, you guys strategically took more equity in that ownership with the recent drop. Can you give us a big picture view of your thoughts behind that investment here going forward, and where you all want to shake out with that ownership over time?
Yeah, I'm excited that Diamondback now owns pro forma for the drop back up to over 60% of Viper. I think it's a great relationship between the two. The relationship between Diamondback and Viper certainly differentiates Viper's multiple and allows both companies to do smart deals like the deal that we announced last week. Diamondback has not sold one share of Viper over the past four years. We've increased our ownership via share count. We're happy with that ownership. We get a significant dividend at the Diamondback level from Viper on an annual basis, and that relationship will continue to be very strong.
Understood. Thanks.
Thank you. Our next question comes from Leo Mariani with KeyBanc. You may proceed with your question.
Hey, guys. Just a question on the marketing side here. I think you guys said that you'll be at kind of 95% or a little bit better on oil price realizations in the second half of this year versus WTI. Just trying to get a sense, is it maybe a little bit lower in the third quarter and kind of the big boost comes in the fourth quarter? Can you give us any differentiation between three Q and four Q on that?
Yeah, Leo, I think third quarter is close to that 95% range and Q4 pops up a little bit. I'll use this as a point that we've now secured takeaway for all of our major production across the company when we had zero takeaway a year ago. Certainly got through the worst of our wide differential quarters. On a go-forward basis, we're going to be selling all of our crude either across the dock in Corpus where we have reserved dock space or out to a refinery in Houston. We're pretty excited about where our marketing position is heading on the oil side.
Okay. That's great. I guess could you comment at all on any initiatives on the gas or NGL side? Obviously, it was a rough quarter in second quarter for gas price realizations. Are you guys working on anything maybe to kind of get that gas out of basin to other markets going forward?
Yeah, we have very few take-in-kind rights across our position. I think we do have some take-in-kind rights in the Delaware that we're going to exercise and get some different pricing exposure. Our Midland Basin and Northern Delaware gas production, we're going to look to hedge and protect ourselves that way. I think for us, with gas being such a small % of our production and revenue, we're more focused on hedging that price at a decent realized price and not having to deal with the negative realizations we had to deal with this quarter.
Okay. That makes sense. I guess just on the well cost side, obviously you guys did a tremendous job of reductions here post the Energen deal. I know it's kind of hard, of course, to sort of project forward, but you certainly discussed at length your relentless focus on efficiencies here. Would you guys potentially foresee, the absence of any changes in service costs? Could we be sitting here a year from today and be talking about another 5%-10% reduction in well costs?
Well, Leo, Mike's guys are obviously the best in the business. That's why we hammered this cost discussion so hard in this deck. I see a lot of notes out about six-month CUMs and IPs across the basin. No one's talking about what these wells cost to get out of the ground. The cost structure that we have differentiates us into someone that can grow and return free cash versus someone who outspends cash flow. That's how important those differences are. I expect Mike and his team to continue to drive costs out of the business. We certainly have some service cost tailwinds hitting us right now. Those should continue into 2020.
Thank you.
Thank you, Leo.
Thank you. Our next question comes from Brian Singer with Goldman Sachs. You may proceed with your question.
Thank you. Good morning.
Good morning, Brian.
Can you talk to how you see the rates of return in the Midland Basin versus the Delaware Basin, realize you kind of have an even split in terms of activity, but just how you see those rates of return comparing, and then post the cost reductions you've highlighted, how the Energen locations in the Delaware compare relative to legacy Diamondback locations?
I'll tell you, the locations in the Vermejo area, that's the best rock in our portfolio. That was the crown jewel in the Energen acquisition, and those wells are just simply spectacular. The rates of return there obviously are the best of anything in our portfolio. I still think, Brian, that when you look on either side of the basin, it costs you more in the Delaware Basin, but you get it out faster and you got higher EUR per foot. Midland Basin, you don't quite get as much hydrocarbon recovery, but it's a lot cheaper. As we look at it, we still sort of think about it in an equal allocation in terms of rates of return, and you can see that in how we spend our capital dollars there with rigs about equally on either side of the basin.
It's not a precise number, but we still think of them as roughly equivalent.
Great. Thank you. My follow-up is with regards to just how you're thinking about the range of options in 2020, particularly share repurchase and the extent of that and investing in that relative to investing for growth and how up cycles or down cycles in commodity prices would play a role.
Brian, I think it's somewhere around what our budget was this year, either plus a rig or minus a rig, absent a very negative commodity tape between now and the end of the year. We're very focused on at least hitting that $750 million of free cash at $55 WTI next year. If WTI is lower than that, we'll have to look at where service costs are and where our well costs are and see what free cash flow comes out of the model. Like I said earlier, there's not a huge delta between our current thinking and our current pace and where we're going to be in 2020, which allows this business to grow significantly, but also buy back a lot of stock.
If the stock remains depressed, we will continue to buy back stock with free cash flow and our one-time proceeds that we've executed on this last quarter.
Great. Thank you.
Thank you, Brian.
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Travis Stice, CEO, for any further remarks.
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