Travis D. Stice
Chief Executive Officer and Director at Diamondback Energy
Thank you, Adam, and welcome to Diamondback's third quarter earnings call. The third quarter was an exceptional quarter for Diamondback. We were able to generate a record amount of free cash flow as we continued to demonstrate why we are an operational leader in the Permian Basin. Although we are seeing pricing pressure in many areas of our business, particularly with consumables and labor, we have been able to offset these inflationary items through efficiency gains, both in design and execution. On the drilling side, we've decreased the number of days it takes to drill from spud to total depth by nearly 30% this year alone. And we're now drilling 2-mile laterals in roughly 10 days in the Midland Basin. On the completion side of the business, we've seen a step change in efficiency as we've transitioned the majority of our completion crews to simul-frac operations and are now completing wells in the Midland Basin nearly 70% faster than when we were utilizing the traditional zipper frac design. These gains drove a significant beat on capital expenditures this quarter and are the primary driver of our second consecutive decrease in capex for the year. The efficiencies gained this year will be permanent, and while inflation may impact services prices next year, Diamondback will be more insulated than our peers given our control over the variable costs of well design, days to total depth on the drilling side and lateral feet completed per day on the completion side of the business. As a result of these efficiency gains as well as timing associated with some of our ancillary capital spend, we have lowered our 2021 capital guidance for a second time and now expect to spend approximately $1.5 billion this year, a decrease of 10% when compared to our initial capex guidance range we published in April. This includes approximately $435 million to $475 million of estimated capital spend in the fourth quarter. Moving to 2022, we are committed to holding our Permian oil production flat next year. We expect to be able to maintain this level of production by spending similar capital on an annualized basis to our fourth quarter guidance.
This soft guidance accounts for both the efficiencies we've gained this year as well as the potential for service cost inflation in 2022 should activity levels increase in the Permian Basin and oil prices stay strong. The reason we are committed to keeping oil volumes flat in 2022 is that we believe our capital discipline, coupled with our plan to return 50% of anticipated free cash flow to shareholders, is the best near-term path to equity value creation. Diamondback is moving from a consumer of capital to a net distributor of capital, which will benefit long-term return on capital employed and value creation. In order to initiate a moderate growth plan, we would need to see material changes to global oil and gas fundamentals, along with shareholder support for such growth, and we do not see either of those things today. Until such time, we will continue to run our business for free cash flow generation, focusing internally and ensuring we maintain our best-in-class cost structure in the face of inflationary pressure. This will position us for success regardless of where we are in the cycle. At current commodity prices, this plan translates to significant free cash flow generation next year. In our investor deck, we have a slide that shows illustrative 2022 free cash flow at various commodity prices. At today's strip, 2022 free cash flow is well north of $3 billion. We plan to distribute 50% of this free cash flow using a combination of our sustainable and growing base dividend, share repurchases and variable dividends. We will use repurchases and variable dividends interchangeably depending on which presents the best return to our stockholders at that time. As a reminder, we plan to opportunistically repurchase shares of our common stock when we expect the return on that repurchase to be well in excess of our cost of capital at mid-cycle commodity prices, which was clearly the case in mid-September when our Board approved a $2 billion share repurchase program.
After that announcement, we repurchased over 268,000 shares at an average share price of $82 for a total cost of $22 million in the third quarter. If we do not repurchase enough shares in the quarter to equal at least 50% of free cash flow for that particular quarter, then we will make our investors whole by distributing the rest of that free cash flow via a variable dividend. This strategy gives us the ability to be flexible and opportunistic when distributing capital above and beyond our base dividend, but importantly, at least 50% of free cash flow will be returned. We do not set our budget, drill wells or underwrite acquisitions based on a strip oil pricing when current strip pricing is significantly above the last five-year average. Therefore, we will underwrite repurchasing shares, which we see as an acquisition under the same assumptions. Our base dividend continues to be our primary method of returning capital to our shareholders. We have grown our base dividend at a quarterly compounded growth rate of roughly 10% since initiation in 2019. This quarter, we raised our dividend by 11% to $0.50 a share or $2 a share on an annualized basis. Due to our low cost of supply, our dividend is currently protected down to $35 a barrel. As we have said before, increases to our base dividend would occur simultaneously with absolute debt reduction, and this year was a great example of that. Year-to-date, we have used our $1.65 billion of internally generated free cash flow as well as proceeds from divestitures to reduce our gross debt by $1.3 billion and increase our dividend three times. Our balance sheet continues to strengthen, and we expect to end 2021 at just over a turn of leverage. Yesterday, we fully redeemed our $650 million of senior notes due in 2023. As a result, we no longer have any callable debt, and our next material maturity is late 2024. Because of this, we're now in a position to accelerate our returns program to the fourth quarter of 2021. This is a direct result of the combination of everything I've mentioned today: one, strong operational performance; two, a supportive macro backdrop; and three, increasing financial stream.
Yet none of this will be possible without safe and efficient field operations. We continue to build on our safety track record and did not have a recordable employee safety incident this quarter. We've also decreased our flared volumes on our legacy properties and continue to work with third parties to build out additional infrastructure to reduce flared volumes on our recently acquired assets. In addition, we expect to continue our reduced -- continue to reduce our flared volumes as we move into 2022 in conjunction with the completion of our Bakken divestiture. Yet we're striving to be better, and we recently announced our commitment to end routine flaring by 2025, further reducing our emissions and moving us towards our commitment of reducing Scope one GHG intensity by at least 50% and our methane intensity by at least 70% by 2024. The third quarter was a record quarter for Diamondback. We are proud to produce one of the cleanest and most cost-effective barrels in the industry and are thankful to operate in a pro-energy environment in the state of Texas. Our products fuel our local communities, our state, our country and the world. We continue to innovate, justifying our environmental license to operate in the communities where we and our families live, work and play. We will continue to operate reliably and safely and are uniquely positioned to take advantage of the current macro environment by exercising capital discipline, keeping oil volumes flat and generating significant returns to our shareholders. With these comments complete, operator, please open the line for questions.