Diamondback Energy Q3 2021 Earnings Report

Diamondback Energy EPS Results

• Actual EPS: $2.94
• Consensus EPS: $2.81
• Beat/Miss: Beat by +$0.13
• One Year Ago EPS: $0.62

Diamondback Energy Revenue Results

• Actual Revenue: $1.91 billion
• Expected Revenue: $1.48 billion
• Beat/Miss: Beat by +$432.18 million
• YoY Revenue Growth: +165.30%

Diamondback Energy Announcement Details

• Quarter: Q3 2021
• Date: 10/31/2021
• Time: After Market Closes
• Conference Call Date: Monday, November 1, 2021
• Conference Call Time: 8:00PM ET

Diamondback Energy (NASDAQ:FANG) (NASDAQ: FANG) is an independent oil and natural gas company focused on the development, exploration and production of unconventional resources in the Permian Basin. Headquartered in Midland, Texas, the company concentrates its operations in the core Midland and Delaware sub‑basins of West Texas and southeastern New Mexico, where it pursues contiguous acreage positions to support repeatable drilling programs.

Diamondback’s activities span the upstream value chain, including leasehold acquisition, well planning, drilling, completion and production optimization. The company produces crude oil, natural gas liquids (NGLs) and natural gas from horizontal wells developed using multi‑stage hydraulic fracturing. In addition to drilling and completion operations, Diamondback manages gathering and marketing arrangements to move and sell hydrocarbons, and it employs subsurface, completion and operational technologies aimed at improving recovery and reducing per‑well costs.

As a publicly traded E&P operator, Diamondback balances capital allocation across drilling activity, infrastructure and returns to shareholders while responding to changing commodity price environments. Its concentrated Permian footprint and integrated approach to operations and midstream logistics support scalability and operational efficiency, enabling the company to pursue disciplined development of its unconventional assets.

Diamondback Energy Q3 2021 Earnings Call Transcript

Key Takeaways

• Diamondback reported record free cash flow in Q3, driven by operational leadership in the Permian Basin.
• They achieved a ~30% decrease in drilling days to 10 days for 2-mile laterals and a 70% speedup in completions via simul frac operations.
• 2021 CapEx guidance was lowered by 10% to $1.5 billion—marking the second reduction this year—thanks to sustained efficiency gains.
• For 2022, Diamondback plans to keep Permian oil production flat with similar capital deployment and return at least 50% of free cash flow to shareholders via dividends and buybacks.
• The company strengthened its balance sheet by reducing gross debt by $1.3 billion year‐to‐date, redeeming $650 million of 2023 notes, and targeting ~1x leverage by year-end.

Presentation

[Travis Stice, CEO at Diamondback Energy]

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.

[Travis Stice, CEO at Diamondback Energy]

On the drilling side, we've decreased the number of days it takes to drill, 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.

[Travis Stice, CEO at Diamondback Energy]

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.

[Travis Stice, CEO at Diamondback Energy]

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-$475 million of estimated capital spend in the fourth quarter.

[Travis Stice, CEO at Diamondback Energy]

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.

[Travis Stice, CEO at Diamondback Energy]

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.

[Travis Stice, CEO at Diamondback Energy]

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 pressures. This will position us for success regardless of where we are in the cycle.

[Travis Stice, CEO at Diamondback Energy]

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.

[Travis Stice, CEO at Diamondback Energy]

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.

[Travis Stice, CEO at Diamondback Energy]

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 a 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.

[Travis Stice, CEO at Diamondback Energy]

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 5-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.

[Travis Stice, CEO at Diamondback Energy]

We have grown our base dividend at a quarterly compounded growth rate of roughly 10% since initiation in 2018. This quarter, we raised our dividend by 11% to $0.50 a share for $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.

[Travis Stice, CEO at Diamondback Energy]

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.

[Travis Stice, CEO at Diamondback Energy]

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. 1, strong operational performance, 2, a supportive macro backdrop, and 3, increasing financial strength. Yet none of this would be possible without safe and efficient field operations.

[Travis Stice, CEO at Diamondback Energy]

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 to reduce our flared volumes as we move into 2022 in conjunction with the completion of our Bakken divestiture.

[Travis Stice, CEO at Diamondback Energy]

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 1 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.

[Travis Stice, CEO at Diamondback Energy]

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.

[Operator]

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Arun Jayaram from JPMorgan. Your line is now open.

[Arun Jayaram, Research Analyst at JPMorgan]

Preliminary-

[Travis Stice, CEO at Diamondback Energy]

Can't hear you.

[Arun Jayaram, Research Analyst at JPMorgan]

Can you hear me now?

[Travis Stice, CEO at Diamondback Energy]

Yeah. Yep, got you now, Arun.

[Arun Jayaram, Research Analyst at JPMorgan]

Okay. Sorry about that. Travis and 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+ billion at $80. You mentioned $3 billion-$3.5 billion of free cash flow under that range of oil price. This year, you're doing 270 gross wells. So I guess my question is, what type of activity do you expect in 2022 that underpins that $1.8 billion budget?

[Arun Jayaram, Research Analyst at JPMorgan]

And I guess I would be interested to know what kind of cash tax rate you're assuming in that free cash flow guide.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah. Thanks, Arun. Good questions. You know, from an activity perspective, not a lot's gonna change. You know, still gonna be 75% or 80% of our wells turned in line in the Midland Basin, you know, still at this kind of 65-75 wells a quarter run rate. You know, big difference in 2022 versus 2021 is that, you know, remember we were 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, you know, now are at a steady state DUC level.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

You know, got a 50 DUC headwind in 2022 versus 2021, and a little more infrastructure and midstream spend on the sale of Robertson Ranch that we acquired from QEP and Guidon Energy as we get into full field development there.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

You know, cash taxes, if the world stays where it is today oil price-wise, you know, we will have some cash taxes in 2022, you know, kind of in the low nine figures, you know, $100 million-ish to $200 million, depending where we are, which is a good problem to have. Hopefully the commodity prices stay where they are.

[Arun Jayaram, Research Analyst at JPMorgan]

Great. Thanks for that. 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 a 2-mile lateral in the Midland Basin. 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, CEO and Director at Diamondback Energy]

Yeah. I'll start with simul-frac. You know, we picked up our first simul-frac crews in the second half of 2020 and, you know, have been running those ever since. You know, they've been extremely efficient, probably saves us about $25 or $30 a foot. 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. You know, essentially, probably 90% of our wells next year will be done with a simul-frac crew.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

We've been running 3 simul-frac crews this year, plus a fourth spot crew here and there. I anticipate that kind of pace to be similar in 2022. Then on the drilling side, you know, it's been pretty incredible putting the QEP drilling organization together with the Diamondback drilling organization and finding best practices. You know, 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.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

You can see, you know, an average of 10 days spud to TD has been a pretty large step change. As Travis said in his comments, you know, we all use the same fixed costs in our wells, but you know, days to TD and amount of lateral feet completed per day are variable costs that you know, we think we certainly differentiate ourselves with. That's been the driver of CapEx reductions this year.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

In an inflationary environment, which we're seeing, you know, given oil prices and activity levels, you know, that inflation is mitigated by controlling the variable costs, which our operations organization has been able to do.

[Travis Stice, CEO at Diamondback Energy]

You know, 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. Just like I've said before that, you know, Diamondback has been an operational leader, and I expect us to maintain that position even going into the next several years.

[Arun Jayaram, Research Analyst at JPMorgan]

Great. Thanks a lot.

[Travis Stice, CEO 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 Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Good morning, team.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Good morning.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

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 then prioritize and buying back your stock or returning capital makes sense relative to M&A?

[Travis Stice, CEO at Diamondback Energy]

Yeah. You know, the best way I can think about M&A right now is in share repurchases. I think, you know, to make some comments there about. We don't underwrite, you know, M&A or share repurchases at these high commodity prices. Look, you know, right now, it's not something that I'm spending any of my time on M&A. I spend most of my time on, seems like, regulatory and policy related efforts and not the M&A.

[Travis Stice, CEO at Diamondback Energy]

Yeah, I've said the comment in the past, and it's probably still true today, that it still feels, at least on these smaller deals, like a seller's market. That's typically what you see when commodity prices run like they've done this year.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Thanks, Travis. Just to continue to flesh out the cost point, you know, there's a lot of talk about service cost inflation as we move into 2022 and potentially some tightness in the pressure pumping market. Can you talk about how you're managing some of those inflation risks and, you know, confidence interval around being able to execute on the capital budget that you started to pencil out here?

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah. I mean, listen, you know, the benefit we have, you know, we talked about the efficiency gains, but you know, this year's kind of been the year of raw materials going up on well costs, you know, steel, diesel, sand. You know, it's logical that the service piece, given labor tightness starts to get a little traction. Now, you know, it's really gonna be dependent upon where the rig count goes. You know, we only added eight rigs in the Permian in October.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

If we add 100 rigs, then it's gonna be a lot tighter next year from here. If we kind of find a steady state, then it's gonna be tougher for the service guys to push price. You know, either way, you know, with these simul-frac crews running, we have three crews running. We have no intention of dropping any of those. You know, 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 Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Thanks, team.

[Kaes Van't Hof, CEO 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.

[Doug Leggate, Analyst at Bank of America]

Thanks. Good morning, everyone. Thanks for taking my questions. 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 costs, DD&A and so on.

[Doug Leggate, Analyst at Bank of America]

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 in the longer part of the portfolio?

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah, good question, Doug. I mean, primarily LOE, you know, probably comes down a couple dimes from where it's been the last couple quarters with the Bakken contributing. So I think, you know, generally moving towards the low $4s and $4 per BOE and on the LOE side. You know, we did keep the Bakken for a little longer than we liked, but. That kinda impacted the transition employees on the G&A side. G&A probably comes down a nickel or so. Then, you know, gathering transportation, certainly higher costs in the Bakken.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

You probably see a step change down or a step down in GP&T, you know, closer to that kind of $1.25-$1.50 range, on a go-forward basis. You know, it was an asset that, 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 you know, generally, I think we're happy with the deal. ACE is happy with the deal, and our cost structure comes down a little bit in Q4 into 2022.

[Doug Leggate, Analyst at Bank of America]

I guess what I'm really getting at is, you know, 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. It sounds like I'm on the right track there.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah.

[Doug 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 wanna get a little bit of clarification here. Let's assume that the current strip, you're running at probably a $4 billion free cash number next year. Half of that goes back to shareholders, and half of that goes to the balance sheet. That's pretty much what you're saying currently, right?

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah. At least half of that goes back to shareholders.

[Doug Leggate, Analyst at Bank of America]

Okay. When we think about the sort of rate, the run rate, if you like, for buybacks, the number could be pretty punchy. 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, you know, a substantial amount of your stock. 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'll get reloaded at some point.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah. I mean, I think the key, Doug, is that the buyback is gonna be opportunistic, not programmatic. You know, as Travis said in his prepared remarks, we think about the buyback, you know, 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. You know, one quarter in, we're not willing to underwrite, you know, mid-cycle oil prices higher than we've seen in the last, you know, five years. I think the key is that the buyback's out there as a weapon for us at our disposal.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Overall, 50% of our free cash flow is getting returned. If we don't get through the buyback in a quarter, you know, there are lots of ups and downs in this industry. If we don't get through the buyback in one particular quarter, we're gonna make our shareholders whole with a variable dividend, you know, the quarter following.

[Doug Leggate, Analyst at Bank of America]

Yeah. Well, just as a footnote, at $70 oil, it seems to us you've got a long way to go before the stock is fairly valued. I just wanna understand how aggressive we should be on the buyback assumption.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah.

[Doug Leggate, Analyst at Bank of America]

I appreciate the comments.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

That's a good problem to have, you know. That's a good problem to have. Considering where we were this summer when we had, you know, low-$70s oil and the stock was 30%-40% below where it is, I think we're in a great position right now. You know, 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.

[Doug Leggate, Analyst at Bank of America]

Appreciate the answers, guys. Thank you.

[Travis Stice, CEO at Diamondback Energy]

Yeah. You know, 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. We know that we're in a volatile industry. We think being cautious and also providing our shareholders the maximum flexibility is still the prudent way to run the business. 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.

[Doug Leggate, Analyst at Bank of America]

All right. Thanks, fellas.

[Operator]

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

[Derrick Whitfield, Managing Director and Senior Analyst at Stifel]

Good morning, all. Congrats on your quarter and update.

[Travis Stice, CEO at Diamondback Energy]

Thank you, Derrick.

[Derrick Whitfield, Managing Director and Senior Analyst at Stifel]

Perhaps for you, Travis or Kaes, early 2022 indications from industry like yourself seem to suggest the sector is broadly remaining capital disciplined. In light of this discipline and the recovery in demand, the environment to us continues to look very constructive for the commodity and the sector's valuations certainly remain attractive relative to the market. What are the 1-2 potential developments for this sector that give you concern and could change the outlook to a less favorable one?

[Travis Stice, CEO at Diamondback Energy]

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, you know, it's really, you know, 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. If a company comes out and starts growing and gets recognized in the stock market for that growth, then that's gonna change the calculus for our board and how we allocate capital towards growth.

[Travis Stice, CEO at Diamondback Energy]

Again, I think if you look at the macro conditions, you know, post-pandemic, we need 100 million barrels a day of demand reestablished. We're probably getting close there. More importantly, we need to see, you know, the surplus capacity, whatever that number is in the OPEC+ countries being absorbed in the world's energy equation. Then thirdly, you need to see, you know, kind of the five-year average of global inventories return.

[Travis Stice, CEO at Diamondback Energy]

You know, it's unlikely you'll see all three of those triangulate, you know, precisely, but I think you need to look at the price of oil when those indicators are all pointed at each other. If the price of oil is, you know, $70 or $80 a barrel, when those things are pointed at each other, that probably means we're in good shape in terms of supply and demand.

[Travis Stice, CEO at Diamondback Energy]

If on the other hand, you know, 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. Even having said that, you know, our board is dedicated to making sure we're allocating capital that's gonna generate the greatest return to our stockholders. As I've said in my prepared remarks, we've rapidly transitioned from a company that you know, consumes capital for growth to now one that is distributing capital.

[Travis Stice, CEO at Diamondback Energy]

You know, we're looking at holding production flat, and we're looking at growing per share measures, you know, while continuing to strengthen our balance sheet. We think that's a prudent way to run our business.

[Derrick Whitfield, Managing Director and Senior Analyst at Stifel]

Great. As my follow-up, perhaps digging into your operational efficiencies and really following up on Arun Jayaram's earlier question on simul-frac ops. Do you have a sense, I'm sure you do, but what % of your wells today are seeing two-well versus four-well simul-frac? And are there practical limitations that would limit four-well implementation program-wide?

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

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

[Derrick Whitfield, Managing Director and Senior Analyst at Stifel]

Great update, and thanks again for your time.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Thank you, Derrick.

[Travis Stice, CEO at Diamondback Energy]

Thanks, Derrick.

[Operator]

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

[David Deckelbaum, Managing Director, Sustainability and Energy Transition at Cowen and Company]

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

[Travis Stice, CEO at Diamondback Energy]

Good morning, David.

[David Deckelbaum, Managing Director, Sustainability and Energy Transition at Cowen and Company]

Just wanted to be a little bit more explicit around the well cost inflation. I just wanted to confirm, you know, 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, CEO and Director at Diamondback Energy]

Yeah. I mean, look, we had a really good quarter in the third quarter, efficiency-wise. You know, no major issues on drilling. You know, completion went off without a hitch, not a lot of weather. You know, we certainly don't model for the best case scenario, but this is probably the base that, you know, we're gonna build off of in terms of inflation going into 2022. You know, we went into 2021, got into kind of 7%-10% well cost inflation, been able to kinda go the other way.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

But like Travis said earlier in the call, we don't model in efficiency enhancements throughout the year in our budget. You know, certainly the organization on the ops side is motivated to continue to push the limits. This feels like a pretty solid quarter in terms of costs that will be tough to replicate in this kind of inflationary environment.

[David Deckelbaum, Managing Director, Sustainability and Energy Transition at Cowen and Company]

I appreciate that. Just for my follow-up, Travis, perhaps for you or and Kaes chime in as well. You know, you referenced looking at per share metrics with the buyback. You know, before you talked about looking at using a buyback when your expected return exceeds your cost of capital.

[David Deckelbaum, Managing Director, Sustainability and Energy Transition at Cowen and Company]

Are you also looking at, you know, what your effective production growth per share looks like when you're considering, you know, 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?

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah, that's a good point. You know, 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. You know, the law of large numbers catches up to you on the growth side, but on the buyback side or the shrink side, it starts to get easier to grow per share metrics, you know, year two and three.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

You know, obviously it's stock price dependent, but that was a lot of the work that we did. You know, do our shareholders own more reserves per share, production per share, a longer inventory life per share, with the buyback versus, you know, versus trying to just plow it all into the ground and oversupply a market that's already pretty fragile?

[David Deckelbaum, Managing Director, Sustainability and Energy Transition at Cowen and Company]

Yeah. Got it. Thank you, guys.

[Travis Stice, CEO at Diamondback Energy]

Thank you, David.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Thanks, David.

[Operator]

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

[Scott Hanold, Managing Director of Energy Research at RBC Capital Markets]

Thanks. Good morning. You know, if I could return back to the shareholder return plan, and I think you all said, you know, you're gonna at least give 50% back to investors. Could you just sort of give some color around that? Does that mean, if they're not, you know, debt takeout opportunities, you you'd potentially look at, say, increasing the buyback or dividend above, you know, sort of that 50% threshold?

[Scott Hanold, Managing Director of Energy Research at RBC Capital Markets]

Also on, you know, if you can give some color on the fixed dividend, you know, 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, CEO and Director at Diamondback Energy]

Yeah. Scott, you know, conversations with large shareholders have basically said, you know, we wanna make sure this dividend's well protected below $40. Our dividend break even for 2022 is kind of in the $35 oil range, and we're, you know, buying puts at $50 oil. I think we're still very well protected. You know, I think the dividend's gonna continue to grow. The board talks about it every quarter. We've hit this 10% CAGR since introduction in 2018.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

You know, 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. You know, I think as long as that breakeven stays in the mid- to high $30s, we feel pretty good about it.

[Scott Hanold, Managing Director of Energy Research at RBC Capital Markets]

Okay. Could you comment on, you know, 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, CEO and Director at Diamondback Energy]

Yeah, that's right. Sorry about that. You know, we still wanna take down gross debt. You know, we have a maturity in 2024. We also wanna keep a larger cash balance than we've run in the past just for insulation. Yeah, you know, 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."

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

You know, I'd like to have cash to take out the 2024s and be in a position to not have any material maturities until 2029. Like we've done over the last five or six quarters, you know, that's not gonna be mutually exclusive from our shareholders getting more money back.

[Scott Hanold, Managing Director of Energy Research at RBC Capital Markets]

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

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Well, you know, I think generally, right, we got to outperform guidance on oil production, which we've done this year. What we've said all year is that if we are doing better than we thought, we're gonna cut capital. 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 Hanold, Managing Director of Energy Research at RBC Capital Markets]

Got it. Appreciate it.

[Kaes Van't Hof, CEO and Director 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, Managing Director at Scotiabank]

Thank you. Good morning. Start with that, I want to go back into the cash return. I think it make a lot of sense with the volatility in the market that you put 50% of the excess cash flow into the buyback. 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 there some number that you have in mind that you guys are thinking?

[Paul Cheng, Managing Director at Scotiabank]

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 deal right away, then I would just increasing that percentage.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah. Paul, that's a great question. You know, I think what we're focused on is committing to at least 50% right now. You know, I think as this industry evolves and you see companies make these types of commitments, you don't wanna walk them back, right? 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 decades. You know, 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, Managing Director at Scotiabank]

Okay. The second question relates to your midstream operation, Rattler. With the dividend yield over 8%, much higher than Fang itself, one will argue that your cost of capital is actually very high over there, and doesn't seem 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 that their midstream MLP just recently announced to merge with a private company and actually going to reduce their ownership so that they can deconsolidate.

[Paul Cheng, Managing Director at Scotiabank]

Just curious then, I mean, how are you looking at that business and whether that you may want to do some alternative initiative related to structure on that.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah, good question. You know, we've seen a couple routes, right? We've seen some parent companies buy in their subsidiaries and some sell it down. You know, I think for us, it's more strategic to us to keep it, to keep that cost structure. You know, we can address it more on the Rattler call. You know, I think if you look under the hood, you know, we've been really trying to highlight the Rattler story. You know, we signed a new JV earlier this year or this month that's gonna be highly successful for us with a lot of Diamondback exposure.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

We got the water assets drop down, about to close in another month. You know, 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 you know, we look at cost of capital, we look at multiples, and you know, we gotta, if the stock's not working, we gotta think about what to do. But right now it seems like it's Rattler's had a good year.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

It doesn't have the commodity exposure that Diamondback and Viper have, 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 you know, the largest.

[Paul Cheng, Managing Director at Scotiabank]

Yeah. 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. I think it will help that to even further simplify the corporate structure so that when the investor looking at you, they don't have to look at so many different corporate structures. Just my own feeling. Thank you.

[Travis Stice, CEO at Diamondback Energy]

Yeah. We've heard that before, Paul, and we recognize it. You know, fortunately, the mothership has gotten very large, and so there's less leakage to the subsidiaries. But both have been, you know, important to us over the last half decade.

[Paul Cheng, Managing Director at Scotiabank]

Thank you.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Thanks, Paul.

[Operator]

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

[Leo Mariani, Managing Director and Senior Research Analyst at KeyBanc Capital Markets]

Hey, guys. Just wanted to touch base a little bit on third quarter projection. Looks like it kind of, you know, outperformed here, and just wanted to get, you know, a little bit of color behind that, in terms of being a little bit ahead of the guidance. 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, CEO and Director at Diamondback Energy]

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

[Leo Mariani, Managing Director and Senior Research Analyst at KeyBanc Capital Markets]

Okay. Just in terms of, you know, 2022 CapEx, I understand it's a loose guide that you folks, you know, targeted here. If I take the, you know, kind of fourth quarter CapEx range and annualize it, kind of gives me $1.74 billion-$1.9 billion. You know, pretty wide there at the end of the day. Just wanted to get a sense, you know, what you guys think perhaps, you know, the outcome could be on the inflation side there.

[Leo Mariani, Managing Director and Senior Research Analyst at KeyBanc Capital Markets]

I know it's still a moving target here, and we don't 100% know how this plays out, but any just early indications of what the inflation could be, and is that kind of what would target the top end at the $1.9 billion?

[Leo Mariani, Managing Director and Senior Research Analyst at KeyBanc Capital Markets]

Just trying to get a sense of what's baked in there.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah. I mean, you know, I think I'd say this, you know, 2022 is not gonna be won on November 2nd of 2021. We're one of the few companies talking about 2022. We'll see what happens over the next couple weeks. Probably, you know, 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. Generally, you know, I think we can narrow that guidance as we get into 2022 and have more evidence.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

You know, I think the comment earlier, if the rig count goes up 100 rigs from here, it's a different story than if the rig count keeps creeping up 5-10 rigs a month.

[Leo Mariani, Managing Director and Senior Research Analyst at KeyBanc Capital Markets]

Okay. Thanks, guys.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Thank you.

[Travis Stice, CEO 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 Meade, Equity Research Analyst at Johnson Rice]

Good morning, Travis and Kaes.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Hey, Charles.

[Charles Meade, Equity Research Analyst at Johnson Rice]

Travis, I wanna 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 2022. Just one question from me, and it's around the buyback. When we look at, you know, you guys announced it on the 15th, and you know, we look at the average price you bought back in and the chart of your share price, it looks like you know, you guys got after it for a few days and then wrapped it up probably in about a week.

[Charles Meade, Equity Research Analyst at Johnson Rice]

I'm curious, is the right inference to make is that low 80s is where you guys, you know, where the scale tips to buybacks as far as the preferred way to return, I guess, increased returns to shareholders? Or alternatively, is it that, you know, Kaes you mentioned a blackout earlier, and obviously that makes sense. Is that a function of, you know, your legal team putting you in blackout a few days before the end of the quarter?

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah, 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 days after earnings. So, you know, we'll reassess where we are in a couple days and be back after it.

[Charles Meade, Equity Research Analyst at Johnson Rice]

Got it. That's helpful. Thanks, guys.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Thanks, Charles.

[Operator]

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

[Harry Mateer, Head of Americas FICC Research at Barclays]

Hi. Good morning, guys. So I wanna dig in, maybe a little bit more on the debt piece of it. You guys talked around it, but yeah, as you noted, you know, nothing callable at this point, given what you've taken out so far this year, next maturity in 2024. I guess first question is, you know, how do you navigate that? Because, you know, are you thinking about tenders, make whole?

[Harry Mateer, Head of Americas FICC Research at Barclays]

That gets expensive, but then at the same time, sitting with, you know, a bunch of cash in the balance sheet waiting for the maturity, you know, at the end of 2024 might not be viewed as attractive either. How are you thinking about approaching that in the next couple years?

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Yeah. I mean, I think we're just gonna keep following, you know, the prices of the bonds and try to get, you know, below the make whole if we can. If not, you know, the make whole's not too restrictive on something like our 2024s as you get into, you know, late 2022, but certainly not looking to take out, you know, anything past 2029.

[Harry Mateer, Head of Americas FICC Research at Barclays]

Got it. Okay. On the cash balance, you mentioned wanting to run with more of a buffer than you had in the past. What is that number for you?

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

I like 500 as a minimum. We've kind of said that over the last couple quarters. You know, I think that's a good starting point for us.

[Harry Mateer, Head of Americas FICC Research at Barclays]

Okay, great. Thanks very much.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

Thank you.

[Travis Stice, CEO 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 Sankey, Oil and Gas Equity Analyst at Sankey Research]

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

[Travis Stice, CEO at Diamondback Energy]

Yeah. The methane rules, I think we still have to see how the final document gets written. You know, Diamondback continues, as I've stated in my prepared remarks, to focus on, you know, methane intensity. You know, we're gonna reduce that by 70% from 2019 levels by 2024. Depends on where the threshold is, but I've been very pleased with the progress we've made already on reducing methane intensity. In fact, we've got, you know, $20+ million allocated next year to continue those efforts to reduce methane intensity.

[Travis Stice, CEO at Diamondback Energy]

You know, if we do things right, you know, hopefully we'll be below the threshold by which that methane intensity applies.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

You know, Paul, on multi-year plans, we've always eschewed multi-year plans at Diamondback. We didn't buy into a multi-year growth plan in 2016, and, you know, we're not gonna 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.

[Kaes Van't Hof, CEO and Director at Diamondback Energy]

You know, 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. You know, we'll see what the future holds in 2023 and beyond. Right now, we're committed to 2022 flat. Capital discipline is real over at Diamondback, and as Travis mentioned, we're gonna become a net returner of capital rather than consumer of capital.

[Travis Stice, CEO at Diamondback Energy]

Look, OPEC's gonna do what OPEC's gonna do. You know, I've said we've transitioned and that Diamondback transitioned very rapidly from consuming capital, returning capital. I focused on, you know, the increase or the growth that we're seeing in per share metrics. You know, I've outlined kind of the macro elements by which, you know, the world will be calling on more growth. You know, I think every quarter that we go through, Diamondback, its board is demonstrating our commitment to maximizing shareholder returns.

[Travis Stice, CEO at Diamondback Energy]

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 Sankey, Oil and Gas Equity Analyst at Sankey Research]

Understood, guys. Thanks.

[Travis Stice, CEO 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 Stice, CEO 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]

This concludes today's conference call. You may now disconnect.

Participants

Executives

• Kaes Van't Hof, CEO and Director
• Travis Stice, CEO

Analysts

• Arun Jayaram, Research Analyst at JPMorgan
• Charles Meade, Equity Research Analyst at Johnson Rice
• David Deckelbaum, Managing Director, Sustainability and Energy Transition at Cowen and Company
• Derrick Whitfield, Managing Director and Senior Analyst at Stifel
• Doug Leggate, Analyst at Bank of America
• Harry Mateer, Head of Americas FICC Research at Barclays
• Leo Mariani, Managing Director and Senior Research Analyst at KeyBanc Capital Markets
• Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs
• Paul Cheng, Managing Director at Scotiabank
• Paul Sankey, Oil and Gas Equity Analyst at Sankey Research
• Scott Hanold, Managing Director of Energy Research at RBC Capital Markets