Diamondback Energy Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Diamondback Energy First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Adam Lawlis, VP of Investor Relations. Please go ahead.

[Adam Lawlis, Vice President, Investor Relations at Diamondback Energy]

Thank you, Joel. Good morning, and welcome to Diamondback Energy's first quarter 2024 conference call. During our call today, we will reference an updated investor presentation and letter to stockholders, which can be found on Diamondback's website. Representing Diamondback today are Travis Stice, Chairman and CEO; Kaes Van't Hof, President and CFO; and Danny Wesson, COO.

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.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thank you, Adam, and I appreciate everyone joining again this morning. I hope you continue to find the stockholders letter that we issued last night. An efficient way to communicate. We spend a lot of time putting that letter together, and there's a lot of material in that.

So, operator, with that as a brief introduction, would you please open the line for questions?

Questions and Answers

[Operator]

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions]. Please standby while we compile the Q&A roster. Our first question comes from the line of Neil Mehta of Goldman Sachs. Your line is now open.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Yeah. Good morning, Travis, Kaes and team. A lot of good stuff in the letter. Two quick follow-ups. First, just on natural gas. You spend a lot of time talking about some of the steps you've taken to mitigate some of the softness that we're seeing in Waha pricing. Can you spend more time on that? And as it relates to that, how do you think about the timing of debottlenecking Permian gas?

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Well, from a macro perspective, I think we've been pretty clear that we're going to continue to need pipes being built about every 12 to 18 months out of the Permian to accommodate the associated gas that goes along with the 6 million barrels a day that we produce out here. Natural gas is right now being almost treated like a waste product, and we've got it -- this -- when Matterhorn comes on this fall, we'll see some of that reverse. But Kaes, do you want to give him some description of what we're doing with the rest of the gas?

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Yes, Neil. I mean, listen, we -- long term, we want to be able to contribute to more pipes. We've done that in the last couple of years with commitments on Whistler and Matterhorn. We've relinquished taking chondrites in other areas to commit to other pipes that were built. As Travis said, we just need to do more. And I think with our size and scale and balance sheet, we should be taking a leadership position on, on these new pipes.

We've talked to a lot of people that are working on them today, and it seems that there are projects in the works that, that will help the bottleneck past the end of this year. But as we control or have the ability to control more gas flows on our side as contracts roll off, etc., We're going to keep pushing on more pipes and more markets out of this basin.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Yeah. Thanks, both. And then, the second is capital efficiency. You talked about the 10% improvement that you're expecting per lateral foot. So just talk about what you're seeing real time in terms of deflation. And then also, what are the next steps in terms of driving your cost structure lower as we think about efficiency of fleet?

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Well, I think the deflationary pressures we continue to see in the Permian are being driven by the decline in the rig count and the decline in the completion crew count. Those will be tailwinds for us as we look through the rest of this year. But also, with that regards to those deflationary impacts, we continue to push the envelope on our D&C operations where we're getting -- I think we averaged almost 13,000 feet for the quarter this year and we continue to get these wells drilled faster. And then our completion crews continue to push the envelope on the number of lateral feet that are completed in a 24-hour period. So we're working on the numerator and the denominator of capital efficiency and really like the way the rest of the year sets up for us.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Okay. Thanks, Travis.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thanks, Neil.

[Operator]

Thank you. Please standby for our next question. Our next question comes from the line of Arun Jayaram of JPMorgan Securities, LLC. Your line is now open.

[Arun Jayaram, Analyst at JPMorgan Securities]

Yeah. Good morning. Travis, you and the team had highlighted up to 550 million of annualized synergy capture in the transaction in the Midland Basin, including a 150-foot decline in D&C and e-cost in the Midland Basin to that $600 to $650 range. Maybe a follow-up to Neil's question, but where are you seeing kind of leading-edge kind of cost today in the Midland Basin as you continue to push those lateral links a bit longer?

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Yeah. Arun, in this case, I think the combination of those longer laterals, 12,000 plus with some efficiencies on the completion side that we probably weren't expecting going into the year as well as some softening on the service side makes us feel pretty good that we're in the lower half of that $600 to $650 a foot in the Midland Basin. As you know, 90% of our capital is being allocated to that basin. So, with those costs trending in the right direction, I think on a real-time basis, closer to $600 a foot, we feel really, really good about our plan this year, as well as carrying that momentum into Q4 close to the Endeavor deal and into 2025. Very clearly, we laid out some strong synergy targets and a very strong capital efficient 2025 plan, and we still feel very, very confident in that plan.

[Arun Jayaram, Analyst at JPMorgan Securities]

Great. Kaes, looking at the quarter, you didn't really have any activity in terms of TILs in the Delaware Basin. Can you give us some thoughts on the Delaware program? I know it's 10% of the program, but what's your thoughts on the Delaware as we think about moving on into the back half of this year and into next year? Yeah, listen, there's still a place for the Delaware program. There's still some really good projects coming up in Q2. I think we have a project in that Romeo area, Northern Reese county. That's going to be very good. I think, generally with large pad development, you're going to see pockets of development in the Delaware rather than consistent development because we want to go over there and complete multiple wells, multiple pads in a row and keep that capital efficiency high versus the Midland Basin, where three or four simul frac crews are going to be running at all times. Great. Thanks a lot.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thanks, Arun.

[Operator]

Our next question comes on the line of David Deckelbaum of TD Cowen. Your line is now open.

[David Deckelbaum, Analyst at TD Cowen]

Morning, Travis, Kaes, and team. Thanks for your time today.

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

You're welcome, David. Good morning.

[David Deckelbaum, Analyst at TD Cowen]

Kaes, maybe this question is for both of you guys, but considering the positioning a bit early with the debt that you raised earlier this month, now the expectation that the deal will close at the end of the year with Endeavor, you talked about kind of the synergy expectations in the last series of questions. Can you give us an update on how you're thinking about that initial sort of noncore sale asset target and maybe some of the updated timing around those thoughts, considering the markets changed a bit, especially around the cash consideration portion?

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Yeah. I mean I think what's changed is just timing, right? I think the projects we see as noncore asset sales or the asset sales to subsidiaries we have is still the same. Endeavor has a really good midstream business that would fit well with our midstream JV. They have a significant mineral business that I think is going to be a game changer for Viper if those two businesses are combined, and our strategy to execute on those trades has not changed. It's just been pushed out to the right.

So -- on top of that, it was an $8 billion cash consideration. That continues to be worked down with free cash flow between sign and close. I think that just means we have to pony up less cash at close in Q4. And we raised the money a couple weeks ago because we were preparing to potentially close the deal as early as today.

Unfortunately, the deal has been pushed out due to regulatory review. But we had to be ready to fund the deal. And that's where we were. Fortunately, the bond deal was pretty well timed. We're actually earning very minimal, negative carry on the cash that we have sitting at the banks today, and we'll be ready to use it when we close in a couple of quarters.

[David Deckelbaum, Analyst at TD Cowen]

Thanks for the thoughts there. Maybe just to follow up a little bit more on just the gas pipeline side just for my own edification, just some clarity, just -- you highlighted you didn't have any issues with egress. You have Matterhorn coming online in the third quarter. Is there a point, as you look forward, where you anticipate egress issues? Or is this more -- appearing to be just more proactive to get involved with taking on firm capacity in future pipelines? Do you need to take a more active role beyond that?

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Yeah, well, I mean, we're facing them right now, egress issues, right? Not on the physical side, but certainly on the price side. So I think if we can remove the pricing aspect of pricing molecules at Waha versus pricing them further downstream and just paying a fixed fee on the pipe, that to us is a risk mitigation strategy that makes sense for Diamondback's shareholders. So, I think we see the gas forecast continuing to increase.

If you do look backs on the big publics, the big public third-party services and what they thought gas production was going to be in 2024, they're all been wrong. So, it's always been more gas sooner. And so, for us, we need to handle that physically where we can. And with our balance sheet and size and scale, we can sign those 10-year deals because we know we're going to be around to produce for a very, very long time.

[David Deckelbaum, Analyst at TD Cowen]

Thanks for the response, guys.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thanks, David.

[Operator]

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

[Scott Hanold, Analyst at RBC Capital Markets]

Yeah. Hey, guys. Thanks. I'm just going to stick on the gas theme as well, because it is very topical. But it sounds like, and just correct me if I'm wrong, you guys feel good about your development program on a Diamondback standalone basis as well as with Endeavor with gas capacity at least for the foreseeable future and just confirm that's correct. And if you could also maybe opine on just broader Permian in general. Do you expect other operators to see some physical constraints not being able to get their gas out in potential shut-ins related to that?

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Yeah. Scott, we're 100% confident in our plan. I think we have a lot of visibility. We have more and more physical space coming our way. Every molecules move to date. I don't like the speculation blame game in the Permian about who's going to be able to move or not. I'm focused on Diamondback, and we're going to be in really good shape.

[Scott Hanold, Analyst at RBC Capital Markets]

Okay, fair enough. And then my next question is on stock buybacks. Obviously, it sounds like it's going to be a little bit more tempered until the deal closes with Endeavor. But can you give us your thought process on buybacks post merger? And how you think about the intrinsic value of the combined company? And what mid-cycle price makes sense to underpin that?

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Yeah, I think philosophically part of the move back to 50% of free cash flow returned every quarter allows us to build more cash paid on debt faster, but also make the bigger bets on buybacks, right? In a single quarter if you're having to distribute 75% of your free cash flow, you don't get to really make the big bet on the buyback at the right time. And so, this flexibility will allow us to do that.

Clearly, we've been a little limited on buybacks since announcing the deal. I would expect that to stay about the same here in the second and third quarters depending upon the market. If we see some weakness, we're going to step in and support the stock. But longer-term, we want to make the nine-figure, 10-figure bets on buybacks at the right time, and that's the flexibility we want on capital return.

I think we still see kind of mid-cycle in the $60 to $70 range. I think we were firmly $60 for a long time. We're probably closer to $70 [Indecipherable] gas. And on the combined business, if you look at what we have with Endeavor, there's a significant amount of inventory and a lot of NAV accretion, so -- and probably a lower combined cost of capital. So, I think we feel like we can raise that buyback cost a little bit, but we're probably going to be cautious until we close.

[Scott Hanold, Analyst at RBC Capital Markets]

Yeah. Just to clarify a couple of points. Just broadly speaking, how much accretion do you all feel Endeavor added? And can you give us a sense of like when you think about cost of capital, like what is the -- what were you kind of thinking before when you did intrinsic value? Was it like a 10% kind of flat? Or do you get a little bit more scientific with that?

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Yeah, we've always been a little higher than 10. I think an after-tax PV 12%, it felt like a -- at a mid-cycle price, felt like a very conservative price to buyback shares, and that also makes sure we don't get trapped into a positive feedback loop of buying back shares all the way to the top. So I think an after-tax 12% rate return in this business is a really good rate of return at a mid-cycle price, and that keeps you in a good spot through the cycle.

[Scott Hanold, Analyst at RBC Capital Markets]

Thanks for that.

[Operator]

Please standby for our next question. Our next question comes from the line of Roger Read of Wells Fargo Securities. Your line is now open.

[Roger Read, Analyst at Wells Fargo Securities]

Yeah. Thank you. Good morning. I'd like to come back on the, let's call it, efficiencies and lower costs. Obviously, some part of that, as you mentioned, was service competition rig on rig, crew on crew lowering cost. But if you look at the underlying improvements you cite e-fracs over a diesel frac, kind of where do you think we are in terms of running through continued efficiencies there as we, let's say, alter the equipment, maybe alter the methods of doing some of the wells? And with the danger of crossing the line here to post Endeavor, kind of what do you see as maybe a year or two out in terms of continued efficiency gains?

[Danny Wesson, Executive Vice President and Chief Operating Officer at Diamondback Energy]

Yes. Good question. We are continuing to drive cost out of the business through our operational plan and execution. On the completion side, a lot of that's going to come in the way of getting these e-fleets off of generated power and on to some form of grid power where we can recognize a lower energy source cost.

We're continuing to try to drive days out of our execution and we're kind of on the asymptotic slope of that efficiency gain that we are getting to a point where the fixed cost of the wells are a significant -- significantly larger portion of the cost of the well than the variable cost. So, we're getting to a point where the variable cost that we're going to impact our pennies and nickels and not as much the dollars anymore. And to get those large chunks, we're going to have to think about doing things differently as far as the physical plan for the wells and what we are going to consume as part of the fixed cost of the wells.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

You know, Roger, I give our guys some joke with them a little bit on the drilling side, because they're almost to the point where they're spending more time screwing pipe together and unscrewing pipe together than they are actually rotating hours in the lateral. Not quite, but they keep certainly pushing the envelope.

And really, if you go back to what we said during the acquisition announcement, with the merger announcement with Endeavor, we talked about $150 a foot, $100 of that foot was from just simply going to the simul frac and the other $50 a foot was going to clear fluids, and really that's what we're doing today. So, we emphasize at that time that's not a big stretch. It's just simply doing what we're doing today on a new set of assets. And in Danny's comments, we're spot on as well.

[Roger Read, Analyst at Wells Fargo Securities]

Got you. So, we just need somebody to come up with a the next better mousetrap out there for the step functions. I appreciate that.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Yeah. I mean, listen, Roger, one other comment on that. I mean, the guys are so good on the drilling side, now they're measuring how thick the threading is between casing and on the drilling side to say, can I screw that pipe together half a second faster versus what I used to do? I mean, it is down to the absolute second on site to reduce those variable costs.

[Roger Read, Analyst at Wells Fargo Securities]

Appreciate that for sure. Okay. Well, guys, that's kind of where I wanted to go with the questions, so I'll turn it back. Thank you.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thanks, Roger.

[Operator]

Thank you. Please standby for our next question. Our next question comes from the line of John Freeman of Raymond James. Your line is now open.

[John Freeman, Analyst at Raymond James]

Good morning, guys.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Hey, John.

[John Freeman, Analyst at Raymond James]

Just following up on these efficiency drivers. Obviously, in the quarter, the wells that you all completed, the 101 wells, they were right in line on the lateral length of what you all's guidance was for the full year of around that 11,500 feet. But obviously, you all pointed out the 69 wells that you all drilled in the Midland Basin that were significantly longer than that, over 13,000 a foot and obviously first class problem, given the capital efficiency you're seeing on these longer laterals. But should we still use that, that four-year guide of 11,500 foot average for the year? Is that still applicable? Or should we consider that probably moving up relative to the original guide?

[Danny Wesson, Executive Vice President and Chief Operating Officer at Diamondback Energy]

Yeah, John, I think in that -- in the first quarter, those longer laterals were really just a function of where we were completing the wells. That average lateral length of 11,500 is what we expect to see for the rest of the year.

[John Freeman, Analyst at Raymond James]

Okay. And then just shifting gears a little bit on the topic of trying to get a sense of how much you all are able to do sort of in advance of the Endeavor deal closing? And I know that in the old initial efficiencies that you all laid out, things like maybe pricing power supply chain, things like that weren't even necessarily priced into those initial synergies. So I'm trying to get a sense of how much can you all do in advance in terms of negotiating with some of your service providers in anticipation of sort of the larger combined entity, buying in bulk, and things like that? Like how much of that, if at all, can you do in advance? Or do you just kind of have to sit and kind of wait till the deal closes to kind of get running on that stuff?

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Yeah, John, we got to operate separate companies until the deal closes, and those things will all come to the benefits of the combined company. But certainly can't influence any outcomes until we're closed.

[John Freeman, Analyst at Raymond James]

Got it. Thanks, guys. Solid quarter.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thanks, John.

[Operator]

Thank you. Please standby for our next question. Our next question comes from the line of Neal Dingmann of Truist Securities. Your line is now open.

[Neal Dingmann, Analyst at Truist Securities]

Morning, guys. Travis, my question for you and Kaes is just on the marketing side. I look not only from a capital efficiency, but it seems like from a takeaway, you all continue to get better and better sort of realized margin. I'm just wondering now with the larger size, I guess, when that closes, what type of benefits or where you continue to see the benefits on the back end that you've been seeing on the company? Because it seems like noticeable that a lot of your -- as I said, your margins and all just on the marketing side continue to improve.

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Yeah. I don't think we're going to see much more improvement. I think for us, it's more about risk aversion, right? And having our barrels and molecules go to different bigger markets downstream. So, we have a lot of oil that goes to the Gulf Coast in corpus and is exported. We now have a good amount of oil going to Houston feed refineries there. So, I think we've kind of grown up as a company in terms of marketing, and very clearly, mistakes were made five, six, seven years ago when the Permian got tight. And we're just not looking to make those mistakes again. So, with our size and scale, we're going to be contributing to oil pipes, contributing to new gas pipes. We've made some investments in gatherers and processors. And many midstream investments throughout the years here that, one, made our shareholders money on the investment side, but two, protected us on the commercial side. So, I would expect that trend to continue as we get bigger.

[Neal Dingmann, Analyst at Truist Securities]

But Kaes, you're saying you'll continue to contract more of those longer-term marketing contracts then?

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Yeah. I think our philosophy is to get our barrels to the most liquid bigger market, and very clearly, selling within Midland or in the Midland market has not always been the most beneficial to our shareholders. There are pockets of time when the Midland market is very loose, but there are also periods where it gets very, very tight. So, the way we see this physical marketing protection is a long-term insurance policy to make sure barrels move to the right market.

[Neal Dingmann, Analyst at Truist Securities]

Okay. And then just quickly on project size. You all continue to do a fantastic job. Not only that you have larger projects, let's call it, on average, six, four well pads, things on that nature. But you seem to have the flexibility that the larger that loss of time, the majors don't on those projects. Will that continue to be sort of the standard for you all going forward on these larger projects where you'll maintain that flexibility? Or maybe you could just hit on that briefly.

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Yeah, I mean that you can go on for hours about that. I mean, that ties to culture, right? And our biggest benefit at Diamondback is that we have a small company, dynamic culture, with a large asset base that's now growing larger. So, we are going to have to make sure we maintain that gritty, quick, fast-moving, adaptive culture to a larger asset base. I'm fully confident that we have the executive team and employee base at both the Diamondback and Endeavor to do that.

And I think these big projects, there's a lot of capital being put in the ground before. First oil, sometimes upwards of $250 million, $300 million. But as long as you have the ability to move crews and rigs within a quarter, within a year, you keep hitting numbers. We're going to keep doing that at a larger scale.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

And you know, Neal, as we built this company over the last 10 years, we've always maintained a couple of constants. One is the fact we keep a real flat organization. And we keep a non-siloed organization as well too. And the only way that you can grow an organization and maintain that effectively is to have an unreasonable level of trust.

And as we encourage our Endeavor employees to come over, we're going to be demonstrating this high level of trust because it's going to be a very important part of our evolving culture as a much larger company. But those two things will stay the same. Flat organization. No silos.

[Neal Dingmann, Analyst at Truist Securities]

Look forward to the new assets, guys. Thanks so much.

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Thanks, Neal.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thanks, Neal.

[Operator]

Thank you. Please standby for our next question. Our next question comes from the line of Derrick Whitfield of Stifel. Your line is now open.

[Derrick Whitfield, Analyst at Stifel Nicolaus]

Thanks. Good morning, all. Congrats on another solid print.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thank you, Derrick.

[Derrick Whitfield, Analyst at Stifel Nicolaus]

With my first question, I wanted to focus on the second request from the FDC at a high level. Our research indicates that most of the larger transactions have received that. Is that consistent with how you're thinking about it?

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Yeah, that's consistent.

[Derrick Whitfield, Analyst at Stifel Nicolaus]

All right. Terrific. And then shifting over to ops. So during the quarter, you completed three additional Upper Sprayberry wells. Based on those results and some from last year, could you speak to how the interval competes in your portfolio and if it's likely to get added to your inventory charts on Page 21?

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Yeah, Derrick. We followed up this year with -- in Q1 with three additional Upper Sprayberry completions kind of following up that success that we had in the North Martin area with that first test. And we really liked the initial results from those wells. And I think that from a cost perspective, we're seeing those costs be pretty competitive and I think we'll probably look at adding that development to subsequent developments in the future.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

And I think philosophy on top of that, Derrick, if you start to add in zones like the Upper Sprayberry, Wolfcamp D, we've got some really good Wolfcamp D tests in some of those same pads. If you start to add those in and you don't see degradation on a corporate basis in terms of the Q curves that everyone looks at so closely every year, that's inventory extension in our existing asset base.

And with the combination of us and Endeavor adding in zones like the Upper Sprayberry, Wolfcamp B and the full scale development, it only extends the duration of what we can do here in the Midland Basin.

[Derrick Whitfield, Analyst at Stifel Nicolaus]

Agree. Very helpful. Thanks for your time.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thanks, Derrick.

[Operator]

Thank you. Please standby for our next question. Our next question comes from the line of Paul Cheng of Scotiabank. Your line is now open.

[Paul Cheng, Analyst at Scotiabank]

Thank you. Good morning, guys.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Good morning, Paul.

[Paul Cheng, Analyst at Scotiabank]

Travis, that in your presentation, you have an interesting statement, say, in -- on the ESG. You intend to eventually invest in income generating projects that are expect to more directly offset remaining Scope 1 emissions. Can you elaborate a new bit more in terms of how big is the kind of investment? Are you expecting that become a new division or that a new business for you or that is going to be pretty small scale and we shouldn't pay overly too much attention on that? That's the first question.

The second question is interestingly, that the E&P producer, no one really talking much about AI but the service provider, nice number, they start to brag about, say, how AI is going to drive their revenue and it's going to allow the improvement of AUR and productivity -- of the well productivity. So just curious that, as Diamondback, you guys has been always do a lot on the technology. Have you tested on the AI application and whether that you see that going to be meaningfully change your AUR or your well productivity?

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

The first emphasis on AI has been not the generative AI, but using AI to process data information a lot quicker. And so, look, we're really excited about the long-term implications of AI on our industry and whether that translates to improvements in AUR or improvements in efficiencies, or hopefully both, I think it's yet to be determined, but it's one of those things that we're trying to be fast followers on. This is an arena of our industry that's moving incredibly fast. These electric frac fleets that we're using right now actually are accumulating more information than we can process. So we're storing some of that information and hoping to use smart algorithms or AI to help us process that information in a more usable and more real-time fashion. Kaes, the first question was income generating tech to offset that scale...

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Yeah, I mean we have a subsidiary snake company called Cottonmouth Ventures, that's kind of our new venture; snake, I'll call it. But it's not a huge business today. I think one of the more exciting projects we're working on is with our Verde Clean Fuels partnership, where we are in the scoping phase of building a plant, a gasoline plant in the basin that's going to be tapped into one of the pipelines that we are a participant in. That plant will convert 35 million cubic feet a day of gas -- natural gas, lean gas into 3,000 barrels a day of gasoline.

So that, I think, fits our motto of, if we can contribute molecules and expertise to a project, not just capital, but the other things to drive value, we're going to look at it. I would say that project might FID by the end of this year and be up and running in a couple of years, and that might be a good little offtake for 35 million a day of gas. And if it works, we're going to build more of them.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Paul, when you look at a capital program, it's going to spend between $4 billion and $5 billion a year on a pro forma basis. The percent of that that we're going to allocate to income generating projects is probably pretty small, and that, in an individual sense, it'll probably have a larger impact, but I wouldn't expect it to move up to the noticeable level at a company that's spending between $4 billion and $5 billion a year.

[Paul Cheng, Analyst at Scotiabank]

Thank you.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thanks, Paul.

[Operator]

Thank you. Please standby for our next question. Our next question comes from the line of Leo Mariani of ROTH MKM. Your line is now open.

[Leo Mariani, Analyst at Roth Mkm]

Hey. Just wanted to touchbase on sort of activity cadence this year. It looks like you guys had kind of 89 first quarter completions, all in the Midland, but that's a pretty healthy percentage, about 32% of your full-year budget on completions. Is there some anticipation that maybe some slowdown as the year goes? And just seemed like a quicker pace than I expected here in the first quarter.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Yeah, Leo, a couple of things. I think we're having a pretty good end of the year last year into Q4. And so we pushed some completions into Q1. So Q1 looks a little high relative. I think generally you can think about that 70 to 80 overall completions of a quarter as the base case. Q2 might be a little towards the high end there, but because we're a little bit ahead of plan in terms of efficiencies and timing, we're probably going to reduce our frac crew count by one for a period of time over the summer as well as kind of get down into that 12, 13 rigs on the drilling side to complete -- to drill the same number of wells.

So, we look at the plan almost weekly with the planning team, and I think generally the efficiencies have led to less overall activity, more capital efficiency and setting us up well for this potential close here in Q4 with Endeavor.

[Leo Mariani, Analyst at Roth Mkm]

Okay, now that's helpful color. And then just shifting over to asset sales, you obviously talked a little about sort of when the Endeavor deal closes, maybe moving some midstream assets into your Deep Blue JV and also a drop down to Viper outside of some of the Endeavor-related asset sales. Is there anything else that you guys are sort of working on? You talked about raising cash for -- just from free cash flow here over the next handful of months until the deal closes. But starting to get a sense if you guys are looking at other asset sales in the interim.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Yeah, not many. We sold a piece of our Viper ownership in the first quarter, and that put another $450 million of cash on the balance sheet. And I think I go back to, when we structured this deal, we certainly did not want to put so much cash into the deal with Endeavor that we had to be a seller of assets and that's exactly what we've done now.

I think we've had some price help here in the last couple of months that has boosted free cash flow and reduced the cash portion of the transaction. And listen, I think the price has got to be right for any asset sale, whether it's the Deep Blue, Viper or otherwise. And we're going to be patient post close. I think -- I do think those assets make sense in other hands, but it's got to be the right value.

[Leo Mariani, Analyst at Roth Mkm]

Okay, that's helpful. And then just wanted to ask about your production kind of severance tax here. You gave me guiding to kind of 7% of revenue. It's kind of come in below that, the last handful of quarters, closer to 5% to 6%. Just wanted to see what was kind of going on there. Maybe that was kind of anomalous in the last handful of quarters, and is 7% the right number going forward?

[Kaes Van't Hof, President and Chief Financial Officer at Diamondback Energy]

Yes, it was just higher than that before that, a couple of quarters before that. And we had to work off the accruals. That number has been 7% for 10 years. We had a consultant that told us it was going to be higher last year, and that consultant's no longer working for us, but it's going to be 7% on an annual basis on average.

[Leo Mariani, Analyst at Roth Mkm]

Okay. Thank you.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thanks, Leo.

[Operator]

Thank you. This concludes the question-and-answer session. I would now like to hand the call back over to Travis Stice.

[Travis Stice, Chairman and Chief Executive Officer at Diamondback Energy]

Thank you, again, to everyone participating in today's call. If you've got any questions, please reach out to us using the contact information provided. Thank you, and have a great day.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Adam Lawlis, Vice President, Investor Relations
• Travis Stice, Chairman and Chief Executive Officer
• Kaes Van't Hof, President and Chief Financial Officer
• Danny Wesson, Executive Vice President and Chief Operating Officer

Analysts

• Neil Mehta, The Goldman Sachs Group, Inc.
• Arun Jayaram, JPMorgan Securities
• David Deckelbaum, TD Cowen
• Scott Hanold, RBC Capital Markets
• Roger Read, Wells Fargo Securities
• John Freeman, Raymond James
• Neal Dingmann, Truist Securities
• Derrick Whitfield, Stifel Nicolaus
• Paul Cheng, Scotiabank
• Leo Mariani, Roth Mkm