Diamondback Energy Q3 2021 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
November 2, 2021
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Operator

Good day and thank you for standing by. Welcome to the Diamondback Energy Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Adam Lawlis, Vice President of Investor Relations. Please go ahead.

Adam T. Lawlis
Vice President of Investor Relations at Diamondback Energy

Thank you, Ken. Good morning and welcome to Diamondback Energy's Third Quarter 2021 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; Kaes Van't Hof, CFO; and Danny Wesson, EVP of Operations. During this conference call, the participants may make certain forward-looking statements relating to the company's financial conditions, 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 reconciliation 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.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Thank you, Adam, and welcome to Diamondback's third quarter earnings call. The third quarter was an exceptional quarter for Diamondback. We were able to generate a record amount of free cash flow as we continued to demonstrate why we are an operational leader in the Permian Basin. Although we are seeing pricing pressure in many areas of our business, particularly with consumables and labor, we have been able to offset these inflationary items through efficiency gains, both in design and execution. On the drilling side, we've decreased the number of days it takes to drill from spud to total depth by nearly 30% this year alone. And we're now drilling 2-mile laterals in roughly 10 days in the Midland Basin. On the completion side of the business, we've seen a step change in efficiency as we've transitioned the majority of our completion crews to simul-frac operations and are now completing wells in the Midland Basin nearly 70% faster than when we were utilizing the traditional zipper frac design. These gains drove a significant beat on capital expenditures this quarter and are the primary driver of our second consecutive decrease in capex for the year. The efficiencies gained this year will be permanent, and while inflation may impact services prices next year, Diamondback will be more insulated than our peers given our control over the variable costs of well design, days to total depth on the drilling side and lateral feet completed per day on the completion side of the business. As a result of these efficiency gains as well as timing associated with some of our ancillary capital spend, we have lowered our 2021 capital guidance for a second time and now expect to spend approximately $1.5 billion this year, a decrease of 10% when compared to our initial capex guidance range we published in April. This includes approximately $435 million to $475 million of estimated capital spend in the fourth quarter. Moving to 2022, we are committed to holding our Permian oil production flat next year. We expect to be able to maintain this level of production by spending similar capital on an annualized basis to our fourth quarter guidance.

This soft guidance accounts for both the efficiencies we've gained this year as well as the potential for service cost inflation in 2022 should activity levels increase in the Permian Basin and oil prices stay strong. The reason we are committed to keeping oil volumes flat in 2022 is that we believe our capital discipline, coupled with our plan to return 50% of anticipated free cash flow to shareholders, is the best near-term path to equity value creation. Diamondback is moving from a consumer of capital to a net distributor of capital, which will benefit long-term return on capital employed and value creation. In order to initiate a moderate growth plan, we would need to see material changes to global oil and gas fundamentals, along with shareholder support for such growth, and we do not see either of those things today. Until such time, we will continue to run our business for free cash flow generation, focusing internally and ensuring we maintain our best-in-class cost structure in the face of inflationary pressure. This will position us for success regardless of where we are in the cycle. At current commodity prices, this plan translates to significant free cash flow generation next year. In our investor deck, we have a slide that shows illustrative 2022 free cash flow at various commodity prices. At today's strip, 2022 free cash flow is well north of $3 billion. We plan to distribute 50% of this free cash flow using a combination of our sustainable and growing base dividend, share repurchases and variable dividends. We will use repurchases and variable dividends interchangeably depending on which presents the best return to our stockholders at that time. As a reminder, we plan to opportunistically repurchase shares of our common stock when we expect the return on that repurchase to be well in excess of our cost of capital at mid-cycle commodity prices, which was clearly the case in mid-September when our Board approved a $2 billion share repurchase program.

After that announcement, we repurchased over 268,000 shares at an average share price of $82 for a total cost of $22 million in the third quarter. If we do not repurchase enough shares in the quarter to equal at least 50% of free cash flow for that particular quarter, then we will make our investors whole by distributing the rest of that free cash flow via a variable dividend. This strategy gives us the ability to be flexible and opportunistic when distributing capital above and beyond our base dividend, but importantly, at least 50% of free cash flow will be returned. We do not set our budget, drill wells or underwrite acquisitions based on a strip oil pricing when current strip pricing is significantly above the last five-year average. Therefore, we will underwrite repurchasing shares, which we see as an acquisition under the same assumptions. Our base dividend continues to be our primary method of returning capital to our shareholders. We have grown our base dividend at a quarterly compounded growth rate of roughly 10% since initiation in 2019. This quarter, we raised our dividend by 11% to $0.50 a share or $2 a share on an annualized basis. Due to our low cost of supply, our dividend is currently protected down to $35 a barrel. As we have said before, increases to our base dividend would occur simultaneously with absolute debt reduction, and this year was a great example of that. Year-to-date, we have used our $1.65 billion of internally generated free cash flow as well as proceeds from divestitures to reduce our gross debt by $1.3 billion and increase our dividend three times. Our balance sheet continues to strengthen, and we expect to end 2021 at just over a turn of leverage. Yesterday, we fully redeemed our $650 million of senior notes due in 2023. As a result, we no longer have any callable debt, and our next material maturity is late 2024. Because of this, we're now in a position to accelerate our returns program to the fourth quarter of 2021. This is a direct result of the combination of everything I've mentioned today: one, strong operational performance; two, a supportive macro backdrop; and three, increasing financial stream.

Yet none of this will be possible without safe and efficient field operations. We continue to build on our safety track record and did not have a recordable employee safety incident this quarter. We've also decreased our flared volumes on our legacy properties and continue to work with third parties to build out additional infrastructure to reduce flared volumes on our recently acquired assets. In addition, we expect to continue our reduced -- continue to reduce our flared volumes as we move into 2022 in conjunction with the completion of our Bakken divestiture. Yet we're striving to be better, and we recently announced our commitment to end routine flaring by 2025, further reducing our emissions and moving us towards our commitment of reducing Scope one GHG intensity by at least 50% and our methane intensity by at least 70% by 2024. The third quarter was a record quarter for Diamondback. We are proud to produce one of the cleanest and most cost-effective barrels in the industry and are thankful to operate in a pro-energy environment in the state of Texas. Our products fuel our local communities, our state, our country and the world. We continue to innovate, justifying our environmental license to operate in the communities where we and our families live, work and play. We will continue to operate reliably and safely and are uniquely positioned to take advantage of the current macro environment by exercising capital discipline, keeping oil volumes flat and generating significant returns to our shareholders. With these comments complete, operator, please open the line for questions.

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Operator

[Operator Instructions] Our first question comes from the line of Arun Jayaram from JPMorgan. Your line is now open.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Can you hear me now.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Yes. Got you there Arun.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Sorry about that. Travis or Kaes, I wanted to get your preliminary thoughts on the 2022 outlook. In the deck, you highlighted an operating cash flow outlook of $4.8 billion at $70 and, I think, $5.3-plus billion at $80. You mentioned $3 billion to $3.5 billion of free cash flow under that range of oil price. This year, you're doing 270 gross drills. So I guess my question is what type of activity do you expect in 2022 that underpins that $1.8 billion budget. And I guess would be interested to know what kind of cash tax rate you're assuming in that free cash flow guidance.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Yes. Thanks, Arun. Good questions. From an activity perspective, not a lot is going to change. It's still going to be 75% or 80% of our wells turned in line in the Midland Basin, still at this kind of 65 to 75 wells a quarter run rate. A big difference in '22 versus 2021 is that, remember, we're running a lot of rigs into the downturn in 2020 and decided to keep those rigs running to build DUCs. We drew down about 50 of those DUCs in 2021 and now are at a steady-state DUC level. So got a 50 DUC headwind in 2022 versus 2021 and a little more infrastructure and midstream spend on the sale of Robertson ranches that we acquired from QEP and Guidon as we get into full field development there. Cash taxes, if the world stays where it is today, oil price-wise, we will have some cash taxes in 2022 kind of in the low nine figures, $100-ish million to $200 million depending where we are, which is a good problem to have. Hopefully, the commodity prices stay where they are.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Great. And just my follow-up, I wanted to see, Kaes, maybe for you, if you could provide a little bit more detail around the drilling efficiency gains that you're seeing. I think you highlighted on slide 11, 10 days now for 2-mile lateral in the Midland Basin. And then on the -- and also maybe describe what you're doing on the completion side and perhaps just the mix of simul-frac in 2022.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. So I'll start with simul-frac. We picked up our first simul-frac crews in the second half of 2020 and have been running those ever since. They've been extremely efficient, probably saves us about $25 or $30 a foot. But more importantly, in areas where you have offset production, you can get in, complete those wells and get out and therefore, limit your water out effect in large fields, which has been successful for us. So essentially, probably 90% of our wells next year will be done with the simul-frac crew. We've been running three simul-frac crews this year plus a fourth spot crew here and there, and I anticipate that kind of pace to be similar in 2022. And then on the drilling side, it's been pretty incredible putting the QEP drilling organization together with the Diamondback drilling organization and finding best practices. And this is the first -- and we kind of talked about this last quarter and the quarter before that, but now we've fully converted all of our Midland Basin rigs to the clear fluid drilling system that we're utilizing. And you can see an average of 10 days spud to TD has been a pretty large step change. And as Travis said in his comments, we all use the same fixed costs in our wells, but days to TD and amount of lateral feet completed per day are variable costs that we think we certainly differentiate ourselves with. So that's been the driver of capex reductions this year in an inflationary environment, which we're seeing, given oil prices and activity levels. That inflation is mitigated by controlling the variable costs, which our operations organization has been able to do.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

And Arun, just to add to that point, when you look ahead in the future, it's always hard to see a step change in performance like we have seen this year, particularly on the drilling side. But just like I've said before, that Diamondback has been an operational leader, and I expect us to maintain that position even going into the next several years.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Great. Thanks a lot.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Thank you, Arun.

Operator

Our next question comes from the line of Neil Mehta from Goldman Sachs. Your line is now open.

Neil Singhvi Mehta
Analyst at The Goldman Sachs Group

Good morning team. Travis, you made a comment on the last call that you thought this was more of a seller's market than a buyer's market. Can you provide an update on your latest thoughts around M&A and if you still feel that's the appropriate strategy and that prioritizing buying back your stock or returning capital makes sense relative to M&A?

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Yes. The best way I can think about M&A right now is in share repurchases. I think -- and I made some comments there about trying -- we don't underwrite M&A or share repurchases at these high commodity prices. And look, right now, it's not something that I'm spending any of my time on M&A. I spend most of my time on, it seems, like regulatory and policy-related efforts and not the M&A. But yes, I've said the comment in the past, it's probably still true today that it still feels, at least on these smaller deals, like a seller's market, but that's typically what you see when commodity prices run like they've done this year.

Neil Singhvi Mehta
Analyst at The Goldman Sachs Group

And then just to continue to flesh out the cost point. There's a lot of talk about service cost inflation as we move into '22 and potentially some tightness in the pressure pumping market. Can you talk about how you're managing some of those inflation risks and confidence interval around being able to execute on the capital budget that you start to pencil out here?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. I mean, listen, the benefit we have, we talked about the efficiency gains, but this year has kind of been the year of raw materials going up on well costs, steel, diesel, sand, but it's logical that the service piece, given labor tightness, starts to get a little traction. Now it's really going to be dependent upon where the rig count goes. We only added eight rigs in the Permian in October. If we add 100 rigs, then it's going to be a lot tighter next year from here. But if we kind of find a steady state, then it's going to be tougher to -- for the service guys to push price. But either way, with these simul-frac crews running, we have three crews running, we have no intention of dropping any of those. That kind of consistency for our business partners allows them to boost their margin profile and know that they have consistent work with Diamondback.

Neil Singhvi Mehta
Analyst at The Goldman Sachs Group

Thank you.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Thank you, Neil.

Operator

Our next question comes from the line of Doug Leggate from Bank of America. Your line is now open.

Douglas George Blyth Leggate
Analyst at Bank of America

Thanks. Good morning everyone. Thanks for taking my question. Guys, I wonder if I could ask, I guess, it's kind of a housekeeping question on cost guidance. It looks to us that based on the guidance you've given for the fourth quarter, the Bakken or the Williston looks like it had, on a number of levels, higher cash cost, DD&A and so on. Would that be the right interpretation? In which case, could you give us some idea of how you expect maybe just qualitatively the run rate to look in 2022? Are we looking at a step down because the Williston is now no longer part of the portfolio?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. Good question, Doug. I mean primarily, LOE probably comes down a couple of times from where it's been the last couple of quarters with the Bakken contributing. So I think generally moving towards the low 4s and $4 a BOE on the LOE side. We did keep the Bakken for a little longer than we like but -- and that kind of impacted the transition employees on the G&A side. So G&A probably comes down $0.05 or so, and then gathering, transportation, certainly higher costs in the Bakken. So you probably see a step change down or step down in G&T, P&T closer to that kind of $1.25 to $1.50 range on a go-forward basis. So it is an asset that we -- when we bought it, when we bought QEP, we put it up for sale right away. Unfortunately, the regulatory environment took a little longer to get it closed. But generally, I think we're happy with the deal, always happy with the deal and our cost structure comes down a little bit in Q4 and into 2022.

Douglas George Blyth Leggate
Analyst at Bank of America

Okay. So I guess what I'm really getting at, it looks like a bit of an inflation offset on the operating cost side rather than on the capital side. I just wanted to make sure I was interpreting that correctly. So it sounds like I'm on the right track there.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes.

Douglas George Blyth Leggate
Analyst at Bank of America

Okay. Guys, I hate to beat up on the cash distribution policy as my second question, but I just want to get a little bit of clarification here. So let's assume that the current strip, you're running at probably a $4 billion free cash number next year. So half of that goes back to shareholders and half of that goes to the balance sheet. So that's pretty much what you're seeing currently, right?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes, at least half of that goes back to shareholders.

Douglas George Blyth Leggate
Analyst at Bank of America

Okay. So when you -- when we think about the sort of rate -- the run rate, if you like, for buybacks, the number could be pretty punchy. And I just wanted to get a handle as to how you guys are thinking about that because on our numbers, you could be buying back a substantial amount of your stock. And I'm trying to think, do we run that $2 billion buyback over what period? That's really what I'm trying to get at because it sounds like it will get reloaded at some point.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. I mean I think the key, Doug, is that the buyback is going to be opportunistic, not programmatic. And as Travis said in his prepared remarks, you think about the buyback in terms of what is our NAV at mid-cycle oil prices, now we can have a long debate about where mid-cycle oil prices are going. But one quarter in, we're not willing to underwrite mid-cycle oil prices higher than we've seen in the last five years. So I think the key is that the buybacks out there as a weapon for us at our disposal. But overall, 50% of the cash flow is -- free cash flow is getting returned. And if we don't get through the buybacks in a quarter, there are lots of ups and downs in this industry. If we don't get through the buyback in one particular quarter, we're going to make our shareholders whole with a variable dividend the quarter following.

Douglas George Blyth Leggate
Analyst at Bank of America

Yes. Well, just as a footnote, $70 oil. It seems to us you got a long way to go before the stock is fairly valued. So I just want to understand how aggressive we should be on the buyback assumption.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. And that's a good problem to have. That's a good problem to have. And considering where we were this summer when we had low 70s oil and the stock was 30%, 40% below where it is, I think we're in a great position right now. And I think there are opportunities on the buyback side, and we look forward to not being blacked out in a day or two and getting back after it.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Yes. Doug, just to add to that, it's hard to think back just 12 months ago, oil price was half of what it is today. And so we know that we're in a volatile industry. And we think being cautious and also providing our shareholders the maximum flexibility is still the prudent way to run the business. And I hope the answers to the capital allocation question you just asked demonstrate that we're trying to be prudent in generating maximum shareholder returns.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

All right. Thanks Travis.

Operator

Our next question comes from the line of Derrick Whitfield from Stifel. Your line is now open.

Derrick Lee Whitfield
Analyst at Stifel Nicolaus

All right. Good morning all, congrats on your quarter end update.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Thank you, Derrick.

Derrick Lee Whitfield
Analyst at Stifel Nicolaus

Perhaps for you, Travis or Kaes, early 2022 indications from industry like yourself seem to suggest the sector is broadly remaining capital discipline. In light of this discipline and the recovery in demand, the environment to us continues to look very constructive for the commodity in the sector as valuations certainly remain attractive relative to the market. What are the one to two potential developments for the sector that give you concern and could change the outlook to a less favorable one?

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Well, there's one thing that I think we have to watch very carefully, and that's the discipline that the public companies demonstrate in their earnings call now and again in February because it's really -- if a company comes out there and starts growing, even though I've been very demonstrative that the world doesn't need that growth right now. But if a company comes out and starts growing and gets recognized in the stock market for that growth, then that's going to change the calculus for our Board and how we allocate capital towards growth. Again, I think if you look at the macro conditions, post pandemic, we need 100 million barrels a day of demand reestablished. We're probably getting close there. More importantly, we need to see the surplus capacity, whatever that number is in the OPEC+ countries being absorbed in the world's energy equation. And then thirdly, you need to see kind of the 5-year average of global inventories return. And it's unlikely you'll see all three of those triangulate precisely, but I think you need to look at the price of oil when those indicators are all pointed at each other. And if the price of oil is $70 or $80 a barrel, then those things are pointed to each other, that probably means we're in good shape in terms of supply and demand. If on the other hand, oil price is significantly higher when those indicators are pointing at each other, then that's probably your first sign that the world is calling for more oil. But even having said that, our Board is dedicated to making sure we're allocating capital that's going to generate the greatest return to our stockholders. And as I've said in my prepared remarks, we've rapidly transitioned from a company that consumes capital for growth to now one that is distributing capital. And we're looking at holding production flat, and we're looking at growing per share measures while continuing to strengthen our balance sheet, and we think that's a prudent way to run our business.

Derrick Lee Whitfield
Analyst at Stifel Nicolaus

Great. And as my follow-up, perhaps digging into your operational efficiencies and really following up on Arun's earlier question on simul-frac ops, do you have a sense, I'm sure you do. But what percent of your wells today are seeing 2-well versus 4-well simul-frac. And are there practical limitations that would limit 4-well implementation program line?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

No. I mean almost, I'd say, 100% of our Midland Basin pads are four wells or more. And the benefit of simul-frac, you got to have an even number of wells, given that you're running two -- basically two crews at the same time. So it's been less apparent in the Delaware. Actually Delaware, we're probably 50% 2-well -- or 4-well plus and 80% 2-well plus and the Midland, that's almost 100% 4-well plus.

Derrick Lee Whitfield
Analyst at Stifel Nicolaus

Great update, and thanks again for your time.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Thank you, Derrick.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Thanks, Derrick.

Operator

Our next question comes from the line of David Deckelbaum from Cowen & Company. Your line is now open.

David Adam Deckelbaum
Analyst at Cowen and Company

Morning, Travis and Kaes. Thanks for the time this morning.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Good morning, David.

David Adam Deckelbaum
Analyst at Cowen and Company

Just wanted to be a little bit more explicit around the well cost inflation. I just wanted to confirm, you all reached record points in the third quarter at $500 a foot in the Midland and $700 in the Delaware. Are you all modeling that now as sort of the trough period for costs? Is that already baked in at a higher level in the fourth quarter guide?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. I mean, look, we had a really good quarter in the third quarter, efficiency-wise. No major issues on drilling. Completion went off without a hedge, not a lot of weather. So we certainly don't model for the best-case scenario. But this is probably the base that we're going to build off of in terms of inflation going into '22. We went into 2021 guiding to kind of 7% to 10% well cost inflation, been able to kind of go the other way. But like Travis said earlier in the call, we don't model in efficiency enhancements throughout the year in our budget. But certainly, the organization on the offside is motivated to continue to push the limits, but this feels like a pretty solid quarter in terms of costs that will be tough to replicate in this kind of inflationary environment.

David Adam Deckelbaum
Analyst at Cowen and Company

I appreciate that. And just for my follow-up, Travis, perhaps for you, or -- and Kaes can chime in as well. But the -- you referenced looking at per share metrics with the buyback. Before, you talked about looking at using a buyback on your expected return exceeds your cost of capital. Are you also looking at what your effective production growth per share looks like when you're considering buying back shares versus perhaps growing in the event that you see some of those early indicators coming back with the world calling for more oil?

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Yes. That's a good point. Part of the buyback work that we did when we announced it was we looked at how much capital does it take to grow the business 5% a year for the next five years or grow the business 10% a year for the next five years versus shrink the business by 5% or 10% a year in terms of share count over the next five years. And the law of large numbers catches up to you on the growth side, but on the buyback side of the shrink side, it starts to get easier to grow per share metrics year two and 3. And obviously, it's stock price dependent, but that was a lot of the work that we did. Do our shareholders own more reserves per share, production per share, a longer inventory life per share with the buyback versus trying to just plow it all into the ground and oversupply a market that's already pretty fragile.

David Adam Deckelbaum
Analyst at Cowen and Company

Yeah, got it. Thank you, guys.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Thank you, David.

Operator

Our next question comes from the line of Scott Hanold from RBC Capital Markets. Your line is now open.

Scott Michael Hanold
Analyst at RBC Capital

Thanks. Good morning. If I could return back to the shareholder return plan. And I think you all said you're going to at least give 50% back to investors. And could you just sort of give some color around that? Does that mean if they're not debt takeout opportunities, you'd potentially look at, say, increasing the buyback or dividend above sort of that 50% threshold? And also on -- if you can give some color on the fixed dividend. Where could that go where you all get to a point where it just doesn't feel comfortable because of the sustainability at more of a mid-cycle price?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. Scott, conversations with large shareholders have basically said, we want to make sure this dividend is well protected below $40. We -- our dividend breakeven for '22 is kind of in the $35 oil range, and we're buying puts at $50 oil. So I think we're still very well protected. I think the dividend is going to continue to grow. The Board talks about it every quarter. We've hit this 10% CAGR since introduction in 2018. That's probably a lofty goal to continue for multiple years but certainly something we're talking about, continuing the dividend growth on a steady basis aggressively. And I think as long as that breakeven stays in the mid-to-high 30s, we feel pretty good about it.

Scott Michael Hanold
Analyst at RBC Capital

Okay. And could you comment on sort of the view on taking out debt and if you would focus a little bit more on variable dividends or buybacks, if there's not debt to take out?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. That's right. Sorry about that. We still want to take down gross debt. We have a maturity in 2024. We also want to keep a larger cash balance than we've run in the past just for inflation. But yes, we're kind of saying, hey, listen, at least 50% of the free cash flow has got to go back to the shareholders. And if we don't have anything else to do with it, then I think it's logical that more will go back. So I'd like to have cash to take up the '24 and be in a position to not have any material maturities until 2029. But like we've done over the last five or six quarters, that's not going to be mutually exclusive from our shareholders getting more money back.

Scott Michael Hanold
Analyst at RBC Capital

Okay. And then as you look into 2022, how do you think, and I know you all are talking about flat oil production into next year. If you were to just outperform operationally, would you guys, I guess, reduce your well completions, say, in the back half of the year to kind of maintain flat production? Or should we assume that you'll have that 65-, 70-well program next year and if there is operational performance, maybe you do a little bit better than maintenance/flat production?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Well, I think generally, right, we got to outperform guidance on oil production, which we've done this year. But what we said all year is that if we are doing better than we thought, we're going to cut capital. And that's what we've done in 2021. And I think that's essentially the goal for 2022 even in the face of some inflationary pressures.

Scott Michael Hanold
Analyst at RBC Capital

Got it. Appreciate it.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Thank you, Scott.

Operator

Our next question comes from the line of Paul Cheng from Scotiabank. Your line is now open.

Paul Cheng
Analyst at Scotiabank Global Banking

Thank you. Good morning. Travis, I want to go back into the cash return. I think it made a lot of sense with the volatility in the market that you put 50% of the excess cash flow into the bond sheet. But is there a number at some point, your net debt will be at a point that you may be able to raise the cash return from 50% to 75% or higher? Is that some number that in mind that you guys are thinking? Or that's not really, it's just that you will go with and saying that, okay, if I don't have any additional use because I no longer have any debt to wipe away, then I would just -- increasing that percentage.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. Paul, that's a great question. I think what we're focused on is committing to the at least 50% right now. I think as this industry evolves and you see companies make these types of commitments, you don't want to walk them back, right? So the -- there will be quarters where we distribute more cash than 50%, but also I don't want that to become a baseline for the next couple of decades. I think we're focused on 50% right now. And some quarters will do better, and some quarters will hit at that 50%. But the 50% is the guarantee.

Paul Cheng
Analyst at Scotiabank Global Banking

Okay. And the second question is related to your midstream operation, Rattler. With the dividend yield over 8%, much higher than the FANG, yourself, one will argue that your cost of capital is actually very high over there. So it doesn't seems like that's really a good reason to have that as an independent trade. We have seen a lot of consolidation in the midstream business. One of your peers there, Midstream Asset, just recently announced to merge with a project company and actually going to reduce their ownership so that they can deconsolidate. So just curious that, I mean, how are you looking at that business and whether that you may want to do some alternative initiatives relate to the structure on that?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. Good question. We've seen a couple of routes, right? We've seen some parent companies buy in their subsidiaries and some sell it down. I think for us, it's more strategic to us to keep it -- to keep that cost structure. And we can address it more on the Rattler call. But I think if you look under the hood, we've been really trying to highlight the Rattler story. We signed a new JV earlier this year or this month that's going to be highly successful for us with a lot of Diamondback exposure. We got the water assets drop-down about to close in another month. So certainly, the strategy at the subsidiary hasn't changed, and the importance of it to us hasn't changed. So I certainly don't think we'd go down the sell route. But we look at cost of capital, we look at multiples. And we've got -- if the stock is not working, we got to think about what to do. But right now, it seems like it's -- Rattler's had a good year. It doesn't have the commodity exposure that Diamondback and by Viper has. So it's probably underperformed a little bit, but it's still generating a lot of free cash to its unitholders, of which Diamondback's the largest.

Paul Cheng
Analyst at Scotiabank Global Banking

Yes. I mean the only thing I would say is that Diamondback has a great story and is probably one of the most attractive E&P names out there. And I think it will help that to even further simplify the corporate structure so that when the investors are looking at you, they don't have to look at so many different corporate structures. Just my almost [Indecipherable].

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. We've heard that before, Paul, and we recognize it. Fortunately, the mother ship has gotten very large and so there's less leakage to the subsidiaries, but both have been important to us over the last half decade.

Paul Cheng
Analyst at Scotiabank Global Banking

Thank you.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Thanks, Paul.

Operator

Our next question comes from the line of Leo Mariani from KeyBanc. Your line is now open.

Leo Paul Mariani
Analyst at KeyBanc Capital

Hi, guys. Just wanted to touch base a little bit on third quarter projection. Looks like it kind of outperformed here and just wanted to get a little bit of color behind that in terms of being a little bit ahead of the guidance. So was this pretty much just better well performance? You did mention kind of a pretty clean operational quarter with no weather issues.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. We had a good quarter. I think we're very focused on hitting our numbers, and the benefit of slowing down and not trying to grow as fast as possible is that the operations organization has gotten better. You can see it on the well cost side. It's also happening on the production side. So a good quarter all around. I think we feel really confident in the forward outlook and continuing to hit our numbers here.

Leo Paul Mariani
Analyst at KeyBanc Capital

Okay. And then just in terms of '22 capex, I understand it's a loose guide that you folks targeted here. If I take the kind of fourth quarter capex range and annualize it, kind of gives me $1.74 billion to $1.9 billion. So pretty wide there at the end of the day. Just wanted to get a sense what you guys think perhaps the outcome can be on the inflation side there. And I know it's still a moving target here and we won't 100% know how this plays out, but any just early indications of what the inflation can be? And is that kind of what would target the top end of the $1.9 billion? Just trying to get a sense of what's baked in there.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. I mean I think I'd say that 2022 is not going to be won on November 2, 2021. So not -- we're one of the few companies talking about 2022. We'll see what happens over the next couple of weeks. But probably have about 10% inflation built into there with a little bit more infrastructure and midstream spend that we didn't need to go through this year. But generally, I think we can narrow that guidance as we get into 2022 and have more evidence. I think the comment earlier, if the retail goes up 100 rigs from here, it's a different story than if the rig count keeps creeping up five to 10 rigs a month.

Leo Paul Mariani
Analyst at KeyBanc Capital

Okay. Thanks, guys.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Thank you.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Thanks, Leo.

Operator

Our next question comes from the line of Charles Meade from Johnson Rice. Your line is now open.

Charles Arthur Meade
Analyst at Johnson Rice and Company

Travis, I want to thank you for your prepared comments. You really addressed a lot of the natural questions on why you've adopted the stance you have for '22. But just one question for me, and it's around the buyback. When we look at the -- you guys announced it on the 15th. And if you look at -- we look at the average price you bought back in the -- and the chart of your share price, it looks like you guys got after it for a few days and then wrapped it up probably in about a week. And I'm curious, is the right inference to make is that low 80s is where you guys, where the scale tips to buybacks as far as the preferred way to return -- I guess, increase returns to shareholders? Or alternatively, is it that -- Kaes, you mentioned a blackout earlier. And obviously that makes sense. Is that a function of your legal team putting you on blackout a few days before the end of the quarter?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. I mean it's just purely, we get blacked out, right? We get blacked out 10 days before the quarter ends, and we're blacked out until a couple of days after earnings. So we'll reassess where we are in a couple of days and be back after it.

Charles Arthur Meade
Analyst at Johnson Rice and Company

Perfect. That's helpful. Thanks guys.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Thanks Charles.

Operator

Our next question comes from the line of Harry Mateer from Barclays. Your line is now open.

Harry Mead Mateer
Analyst at Barclays Bank

Hi. Good morning guys. So I want to dig in maybe a little bit more on the debt piece of it. You guys talked around it, but as you noted, nothing callable at this point, given what you've taken out so far this year, next maturity in 2024. I guess first question is, how do you navigate that? Because -- are you thinking about tenders, make-wholes, that gets expensive, but then at the same time, sitting with a bunch of cash in the balance sheet waiting for the maturity at the end of '24 might not be viewed as attractive either. So how are you thinking about approaching that in the next couple of years?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Yes. I mean I think we're just going to keep following the prices of the bonds and try to get below the make-whole if we can. If not, the make-whole is not too restrictive on something like our '24 as you get into late '22, but certainly not looking to take out anything past 2029.

Harry Mead Mateer
Analyst at Barclays Bank

Got it. Okay. And then on the cash balance, what -- you mentioned you want to run with more of a buffer than you had in the past. What is that number for you?

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

I like $500 million as a minimum, we've kind of said that over the last couple of quarters. And I think that's a good starting point for us.

Harry Mead Mateer
Analyst at Barclays Bank

Okay, great. Thanks very much.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Thank you.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

Thanks Harry.

Operator

Our next question comes from the line of Paul Sankey from Sankey Research. Your line is now open.

Paul Benedict Sankey
Analyst at Sankey Research

Guys, there's a report in The Wall Street Journal this morning that the EPA is going to massively increase methane emission limits. Can you just talk a little bit about what that means for you and for the industry? And then I had a question from a major investor who asked me, have I heard from Diamondback that multiyear flat volumes are now embraced by you and not just for 2022? Is that what I'm hearing?

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Yes. The methane rules, I think we still have to see how the final document gets written. Diamondback continues, as I've stated in my prepared remarks, to focus on methane intensity. We're going to reduce that by 70% from 2019 levels by 2024. So it depends on where the threshold is, but I've been very pleased with the progress we've made already on reducing methane intensity. And in fact, we've got $20-plus million allocated next year to continue those efforts to reduce methane intensity. And if we do things right, hopefully we'll be below the threshold by which that methane intensity applies.

Kaes Van't Hof
Chief Financial Officer and Executive Vice President of Business Development at Diamondback Energy

And then Paul, on multiyear plans, we've always issued multiyear plans at Diamondback. We didn't buy into a multiyear growth plan in 2016, and we're not going to commit to multiple years at flat today. Now certainly, 2022 and 2021 will both be relatively flat production. We think it's worked and capital discipline has worked for this industry. I think this industry has tried a market share war with OPEC before and it didn't work out. So why don't we let OPEC bring back their spare capacity and us stay flat? And we'll see what the future holds in 2023 and beyond. But right now, we're committed to 2022 flat. Capital discipline is real over at Diamondback. And as Travis mentioned, we're going to become a net returner of capital rather than consumer of capital.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

And look, OPEC is going to do what OPEC is going to do. I've said we've transitioned and that Diamondback transitioned very rapidly from consuming capital, returning capital and focused on the increase or the growth that we're seeing in per share metrics. And I've outlined kind of the macro elements by which the world will be calling on more growth. And I think every quarter that we go through, Diamondback, its Board is demonstrating our commitment to maximizing shareholder returns, and we're doing that right now by generating all this free cash flow, this wave of free cash flow that's coming to us and our commitment to return at least 50% of that back to the shareholders.

Paul Benedict Sankey
Analyst at Sankey Research

Understood guys. Thanks.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Thanks, Paul.

Operator

I'm showing no further questions at this time. I would now like to turn the conference back to CEO, Travis Stice. You may proceed.

Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy

Thank you again to everyone for participating in today's call. If you've got any questions, please contact us using the information provided.

Operator

[Operator Closing Remarks]

Corporate Executives
  • Adam T. Lawlis
    Vice President of Investor Relations
  • Travis D. Stice
    Chief Executive Officer and Director
  • Kaes Van't Hof
    Chief Financial Officer and Executive Vice President of Business Development
Analysts

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