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spk10: Ladies and gentlemen, thank you for standing by and welcome to the Diamondback Energy First Quarter 2021 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker, Adam Lawless, Vice President of Investor Relations. Please go ahead.
spk03: Thank you, Phyllis. Good morning, and welcome to Diamondback Energy's first quarter 2021 conference call. During our call today, we will reference an updated investor presentation, which can be found on Diamondback's website. Representing Diamondback today are Travis Dye, CEO, and Case Vantile, CFO. During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual rules 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. Well, now I'll turn the call over to Travis Stice.
spk13: Thank you, Adam, and welcome to Diamondback's first quarter earnings call. Diamondback had a successful first quarter, continuing to build off the momentum generated in the back half of 2020. Operationally, we are hitting on all cylinders. We were able to effectively navigate a once-in-a-generation winter storm while keeping well costs and cash operating costs near all-time lows. We closed both the Guidon and QEP acquisitions in the first quarter and are very pleased with how the integration efforts are progressing. We are achieving our synergy targets ahead of schedule and in excess of the 60 to 80 million of annual cost savings we highlighted when the deals were announced. Yesterday, we also announced three non-core asset divestitures for gross expected proceeds of 832 million. By selling these non-core acreage positions in such a timely and opportunistic manner, we were able to take advantage of a strong A&D market and generate attractive cash returns for Diamondback shareholders. We anticipate using the combined proceeds from these non-core asset sales to accelerate debt reduction. As we discussed last quarter, even though oil demand has shown signs of recovery from the depths of the global pandemic, Oil supply is still purposely being withheld from the market, primarily through the actions of OPEC+. As a result, we continue to believe we do not need production growth and will hold our pro forma fourth quarter 2020 oil production flat through 2021. Due to the complexity resulting from the timing of the QEP and guidon acquisitions, as well as the announced divestitures, we have instituted quarterly production and capital guidance for the first time. For the second quarter, we anticipate spending 350 to 400 million in capital in producing 232 to 236,000 barrels of oil a day. This production range accounts for a full quarter of contribution from QEP's Williston asset in approximately two months of production from the announced non-core Permian asset sales. Looking at the full year of 2021, our free cash flow profile continues to improve. In the first quarter, we generated approximately $330 million of free cash flow, marking the third consecutive quarter of significant free cash generation. At current strip pricing and accounting for the Williston divestiture, we expect to generate approximately $1.4 billion in pre-dividend free cash flow this year, at a reinvestment ratio of below 55 percent. In March, we executed a successful tender offer and refinancing of all of QEP bonds and one of Diamondback's existing bonds. This refinancing equates to $40 million of annual interest expense savings and extended our average debt maturity by three years. Today, we have three debt maturities that are callable before the end of this year. $191 million due later this year, $650 million due in 2023, and $432 million due in 2025. We expect to use cash on hand from internally generated cash flow as well as proceeds from our asset sales to retire these three tranches of bonds, reducing our absolute debt load and further strengthening our balance sheet. Now, turning to ESG, We recognize the importance of operating with the highest level of environmental responsibility and continue to make progress on our ESG initiatives. We flared 0.75% of our gross gas production in the first quarter, a decrease of over 85% from 2019. Flaring is the biggest driver of our CO2 emissions, and while we are happy with our progress on our legacy acreage, we still have significant work to do on our recently acquired positions as we move to reduce our Scope 1 GHG intensity by at least 50 percent from 2019 levels by 2024. We've also committed to reducing our methane intensity by 70 percent over the same timeframe. In the first quarter, we continued spending capital to retrofit our older tank batteries with air pneumatic devices as gas pneumatics account for 50% of our methane emissions. We also signed a contract to conduct quarterly flyovers of all of our tank batteries to more frequently check for equipment leaks, improving our maintenance practices. Our net zero now initiative is also underway, which means every hydrocarbon molecule produced by DynaVac is anticipated to have zero net Scope 1 carbon emissions from January 1, 2021 forward. While we recognize we still have a carbon footprint, we have already purchased carbon credits to offset remaining emissions and ultimately plan to be a fast follower in investing in income-generating projects here in the United States that will more directly offset these remaining Scope 1 emissions. To finish, the first quarter was busy and productive. We generated substantial free cash flow, kept our capital and operating costs down, extended debt maturities, added Tier 1 inventory, and divested non-core assets. All the while, our strategy remains the same. Operate in a prudent and sustainable manner, spend maintenance capital to hold production flat, and use future free cash flow to return cash to shareholders and reduce debt. With these comments complete, operator, please open the line for questions.
spk10: At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Neil Dingman with Truist Securities.
spk02: quite you and the team have been emphatic about what I would call macro speaking, that the world really does not need any more oil growth anytime soon. So my question is really pertaining to this. Do you all believe your operational program is as optimal at this lesser pace than if you had, you know, a more multi-rigged, you know, larger frack plan in several of your areas and wouldn't business have much impact on your cash costs?
spk13: Sure, I think if you look, Neil, just at our cash cost that we printed this quarter, you would say that there's not been any leakage or any cost pressure that has translated into execution slippage associated with the lower activity rate. I mean, Neil, if you look at rolling into 2020 before the global pandemic hit, we were running 23 drilling rigs and, I don't know, eight or nine frack spreads. That was a pretty quick pace, and I've actually been really pleased with As that pace was reduced in some cases dramatically last year, even as we've entered into this year, we really seem to be at a pretty efficient frontier in both rig activity and frac spreads with 11 rigs and three to four frac spreads. So I think if you just keep watching our numbers that we print, I think that'll be a good indicator of whether or not we're being efficient and certainly for the first quarter and the fourth quarter also. the numbers really look strong.
spk02: No, I agree. I agree. Okay. And then now that Guy Don, if you appear in the books, I'm just wondering, could you or Kay's comment, anything you all see that's different or surprise you from the assets, maybe specifically, do you all still believe there's as many, you know, quality locations and, you know, how do you sort of rank that inventory versus existing?
spk13: Yeah, certainly that narrative hasn't changed at all. In fact, it's probably gotten a little bit better. I'll tell you, I was very complimentary of the QEP team at acquisition announcement time and again during our February call and our April update. Operational, they were doing some really, really efficient things. Just looking at the drilling report this morning, QEP has always used water-based mud. Diamondback now, we've adopted it and we're on our first or second well. with water-based drilling fluids that, quite honestly, QEP is helping us with. And so far, really, really impressed with the improved efficiency using water-based mud. So that's been a nice add to what I thought was already a really efficient Diamondback Legacy operations team. This looks to be a little bit of a stair step in the right direction.
spk02: Good, good. Look forward to all the activity. Thanks, Travis.
spk13: You bet. Thank you, Neal.
spk10: Your next question comes from the line of Arun Jayaram with JP Morgan.
spk15: Good morning. Travis, I guess the shoe is on the other foot this time with Diamondback on the other side of marketing assets. I wanted to get your thoughts. Obviously, you guys have the data room for the Bakken sale. You sold some non-core Permian assets as well. What is your sense of the A&D market today? We've seen a couple of very large Permian trades, DoublePoint and VTOL. And I guess I wanted to get your sense of do you see more of these private to public trades occurring this year and what criteria that Diamondback will use to evaluate A and D activity?
spk13: Certainly. We were really pleased with the interest in the Bakken divestiture process. Now, granted, we're the beneficiaries of commodity price run-up and some previously announced deals in the Bakken that I think put some wind at our backs. So I think that piece of the A&D still seems to be pretty frothy, particularly on the PDP-focused type of divestiture. There's a lot of interest in that. But specific to what Diamondback is looking for on a go-forward basis, we still remain very resolute in our strategy that it's got to meet internal objectives like free cash flow and it's got to be return accretive on a per share basis. And when you look at the combination, we've got to accelerate return of free cash flow. The larger trades, particular ones that you referenced, the quality of assets that fit for capital in Diamondback's top quartile you know, are probably fewer than greater. And the prices that were recently announced on some of those trades, you know, might have quelled some of the activity for a little while anyway. But, you know, I think as long as we can demonstrate, you know, that we're being creative on a per share basis and that we're accelerating return of free cash flow, We're going to continue to look in the Permian Basin, but the opportunity set is pretty narrow right now.
spk05: Most importantly, there has to be inventory that competes for capital right away. While this industry has moved towards financial metrics, that can't be the only numbers that we look at when we think about what makes sense in terms of an acquisition. And sticking inventory in the bottom quartile or bottom half of our existing inventory just doesn't make sense to us from a returns perspective.
spk15: Makes sense. Case, I'd love to get your thoughts on the updated inventory disclosure. Quite a few changes here. It looks like in terms of focusing on the Midland Basin, you increased your inventory inventory count by just over 150 net locations. I know that the lateral links increased a little bit, and perhaps the Delaware declines just reflect some of the A&D activity. But give us the thoughts on the updated inventory, kind of snapshots, kind of the key takeaways. And I do sense that you perhaps are using a little bit wider spacing for some of the acquired assets from QEP and Guidance.
spk05: Yeah, that's right. You know, we hadn't posted a full inventory update since the beginning of 2020. You know, so this was the first update post the two deals. You know, I'd say generally, you know, we spent a lot of time looking at our development as well as offset development, particularly in the Midland Basin. And, you know, I think our focus is, you know, the bed zones can still handle kind of 660-foot spacing, which is as tight as we've kind of ever gotten. But we kind of realized that maybe the secondary zone should be spaced a bit wider. And so that's reflected in that inventory numbers we put out. So, you know, secondary zones that are getting co-developed with the primary zone, which we still think is the right thing to do, are getting spaced, you know, at five to seven walls a section rather than, you know, kind of seven to eight, which is the best zones.
spk15: Okay, great. Thanks a lot.
spk10: Your next question comes from the line of Neil Mehta with Goldman Sachs.
spk09: Good morning, team. Taking a look at the slides here, you show at a $60 WTI pricing reference to this driver in your script of north of $1.4 billion of free cash flow before the dividend this year. But this year, you are burdened by hedges. I was curious if you could provide some perspective around what open EBITDA would look like in that type of environment. And then also your perspective on use of proceeds of all this free cash flow and the asset sales, your framework around returning some of this excess capital to shareholders.
spk05: Yeah, that's a good question, Neil. And, you know, we're probably sitting on, you know, about $450 or $500 million of hedge losses for the rest of the year at STRIP today. for the balance sheet. So that's the drag on free cash this year. I think it's fortunate that we are losing money on hedges compared to where we were a year ago, but unfortunate that we do have to write the checks. But overall, I think if you add that number back to the free cash number, you can get a pretty clean look at what the future might hold on an unhedged basis.
spk04: That's great.
spk09: And that ties into the follow-up around capital returns. Talk about how quickly you can get to the leverage levels that you're targeting. And then there are a lot of different options at that point, right? You can think about a buyback. You can think about a variable dividend. Recognizing it's too early to commit to that until you hit your debt target. Just walk us through your framework about the different options that are at your disposal.
spk13: Yeah, sure, Neil. I think it's good for our industry that we continue to talk about you know, investors recouping a return for the money that they've asked us to deploy. I think that's good for our industry. And you're right about reaching certain debt targets, and these announcements that we laid out yesterday simply accelerate the timeframe at which we can hit those debt targets. You know, I think the callable debt reduction of $1.2 billion or more, you know, by the end of this year, you know, is going to put us in a favorable position to start talking about what the next step is. I also think that our industry, you know, has seen a lot of interest in laying out a formula for, you know, how capital allocation is going to go or capital allocation and returns to shareholders is going to go. And I wish that our industry was as simple that you could put a formula in place and And formulas work as long as the world doesn't change, but in our business and a commodity-based business, we know that our world does change. So I'm always a little leery of trying to promise delivery on a formula when we know the world's going to change. But the options are very clear. The strategy around a variable dividend is part of the future discussions at the board level, as is share buybacks, and most importantly, like we've always committed to, continue to lean into our base dividend. So we're very pleased that we're able to accelerate our debt reduction targets with kind of a very positive divestiture number. And we're going to continue to deliver through our performance and try to avoid making promises multiple quarters in front of us.
spk10: Thank you. Your next question comes from the line of Doug Legate with Bank of America.
spk16: Thanks. Good morning, everyone. Travis, after the QEP deal, you suggested that your breakeven to sustain your production would potentially move lower. I just wondered if you could give an update in light of your comments around synergies last night as to where you see that settling out.
spk13: Well, Certainly the synergies that were in excess of what we promised, you know, stem from the refinancing of the long QEP's debt. I think we talked $40 million. We didn't even describe that as a synergy at acquisition announcement time. You know, the specifics around, you know, lower in the breakeven cost has to do with our capital allocation of moving rigs into this newly acquired acreage, both Guidon and QEP. And while I can't formulaically give you dollars and cents how much our breakeven cost has come down, we do know that doing higher cash flow generating projects at higher rate of return is going to translate to a lower breakeven cost.
spk16: Okay. It seems to us you've won by about a buck or two, but we'll take that offline. My follow-up is also related to, I guess, some of the comments at the time of the QEP deal related to infrastructure. and maybe the opportunity to drop or look at dropping down some assets to Rattler, and maybe some royalty opportunities for Viper. I'm just wondering if you've got any update you can share as to how you're thinking about that.
spk05: Yeah, Doug, you know, there's not a lot on the Viper side to drop down at the Diamondback today. You know, QEP and Guidon, you know, they, in different ways, QEP, you know, is on a lot of large landowners in the Permian that have been around for a long time and not looking to sell their minerals and And Guidon had a sister company like a Viper that was buying minerals. So on the Viper side, you know, we're certainly sourcing minerals at the Viper level under QEP and Guidon acreage, but there won't be a drop down. And then on the Rattler side, you know, QEP, we've been pretty vocal that QEP did a really good job on infrastructure. I think we've learned a lot on the recycling side from them, you know, going to boost our Midland Basin recycling program significantly. And eventually those assets should probably be long in Rattler, but I think it's going to take a few more quarters for us to get all that work done and then eventually drop it down.
spk16: Okay, great stuff. Thanks, guys. Thanks, Doug.
spk10: Your next question comes from the line of Gail Nicholson with Stevens.
spk01: Good morning. Every quarter efficiency gains are achieved. Where do you think you are in that learning curve? And are you trying any new technologies that could prove to be beneficial for future improvements?
spk05: Yeah, Gail, I mean, you know, I think Travis kind of said it earlier in the call, but bringing the QEP team in the fold, just like when we brought Energen in the fold, you know, we don't need to be, you know, the best. We just want to learn from the people that we add to the team. And, you know, we learned a lot from Energen, and then we recently just learned a lot from QEP. So, you know, as Travis was mentioning, water-based mud on the drilling side, some drill-out techniques on larger pads that are saving us some time. On the cementing side, I think we've learned that we can batch drill and batch cement, which saves us time, and it all reduces time on location and increases the efficiencies, which is why Danny's team on the drilling side is getting ahead of the 2021 program early in the year, which I think is positive.
spk13: You know, Gail, back at the Energen announcement time, I think I used the phrase that we checked our egos at the door when we brought the Energen team on board, and this is just really, as Case highlighted, this is another example of checking your egos at the door, and let's just try to figure out what's the best way to do this for our shareholders, and really proud of the operations organization. Once again, they've done so, and we've not really had the QEP team inside the fold for very long, but yet they're already making a very positive influence.
spk01: And then circling back to the inventory, with the improvement in oil prices, do the secondary zones see a potential uptick in capital allocation in 22 forward, or should we still be assuming that the primary zones are the target for the foreseeable future?
spk05: I think just generally we're very focused on co-development between zones, particularly in the Midland Basin. and the secondary zones get spaced a little wider. I think, Gil, we did a lot of work at various oil prices on inventory and spacing and EUR per foot, and we kind of found that the benefit to IRR outweighs any benefit to NPV from going tighter. So no one got mad at you for drilling wells that were too good. And so I think we're going to stick with that strategy, particularly with how much undeveloped acreage we got with the QEP and guide-on deals.
spk01: Great. Thank you.
spk05: Thank you, Gail.
spk10: Your next question comes from the line of David Deckelman with Cohen.
spk07: Morning, guys. Thanks for taking the questions.
spk13: Sure, Dave.
spk07: Just curious, you know, the deal with QEP only closed, I guess, about seven weeks ago now. As we think about your development plans on those assets, when would be like a decision point where we might see a shift of activity either more towards county line or some other areas that you're learning from that might have surprised you with what you're seeing today versus pre-deal so we could start thinking about how 22 looks?
spk05: Yeah, David, you know, I think you start to see that in terms of the wells that we're going to be drilling now, but you won't see it in terms of production until kind of Q4 21, early 22. You know, I think we're trying to get as many rigs as we can in the, you know, Robertson Ranch slash Sale Ranch area in south central Martin County. You know, some big pads and efficient development going to be headed that direction. Rigs are there right now. I think, you know, when it comes to kind of county line and the northern part of Martin County, we've done a lot of technical review with the QEP team and our team, and they've done some things in the shallower zones that we like, some targets that we like in the county line area. So I think you'll see, you know, more of the Wolf Camp A, Middle Sprayberry, Deans,
spk07: ls you know work in the in the county line area and then more of the the deeper wolf camp and lower spray beret in the in the robertson ranch area i appreciate that um if i could just ask one on just the capital program this year um you know just curious like relative to uh your guidance on footage costs of 520 to 580 in the midland and 720 to 800 and and the dell Where you guys are today, because as I look at the rest of the year, it seems to certainly be implying like a back halfway to program. Does that stair step up each quarter now going into the end of the year? Because I guess we're thinking about sort of like the sustaining quarterly run rate that we should expect to going into next year.
spk05: Yeah, that's a good question as well. You know, I think I'll take the well costs first. You know, we put a live look at well costs in the deck. Midland Basin was around 530 a foot, and Delaware was actually below the low end of the guide, which I think was just a really good quarter operationally. You know, a little lower sample size as well. But as you think, you know, we did put out Q1 CapEx at 300 and Q2 implying 375 at the midpoint, so that would imply we're going to spend a billion dollars in the back half of the year, and And I would say there's certainly some conservatism on our side. We've been very vocal that we will cut CapEx to keep production flat rather than grow production and spend more dollars. But the ancillary stuff, environmental, infrastructure, midstream, non-op, is going to pick up a bit in the middle of the second half of the year. And that on top of the couple quarters of true pro forma QEP and guide on and Diamondback activity will result in capital coming up slightly, you know, throughout the year. But, yeah, we're off to a pretty good start in the first half.
spk07: Appreciate the color on that. Thanks, guys.
spk10: Your next question comes from the line of Derek Whitfield with Staple.
spk12: Good morning, all. Congrats on your transactions. Thanks, Derek. perhaps for Travis or Case, following up on the earlier A&D question, but taking it a slightly different direction, in your view, did that larger transaction tilt the environment to a seller's market? And if so, would it make sense to pursue smaller divestitures to further improve your balance sheet?
spk05: You know, that's a good question. You know, certainly, you know, the market has improved dramatically, and that's why we kicked off the Upton County process and the non-op New Mexico process that we thought in the back of our minds were sale candidates for years, but the last 12 months have not been conducive to selling cash flow. I think the trend, Derek, is that a lot of private capital has moved towards buying PDP-heavy assets and distributing that cash flow to their LPs or to their shareholders, and when everyone's doing that, you have a lot of competitive tension in the process. And so that allowed us to get pretty competitive bids on all three assets, and we're pretty happy. But I think for us, anything else that's a sale candidate in the premium has real undeveloped value, and that's not something we're looking to sell right now, because I think the market for that is less competitive than a PDP-heavy market.
spk12: That makes sense. And Travis, for my follow-up, I'd like to pick up on a comment from our discussion yesterday. As you guys progress your plans to invest in income-generating projects that will more directly offset scope on emissions, could you speak to the nature of your industry discussions since Q4 and how that plan might take shape longer term at Diamondback?
spk13: Yes. Specifically for Diamondback, we talked about CCUS technology and the emerging you know, emerging trends with that. I think a good analogy for our Diamondback shareholders would be to see how Rattler participated alongside, you know, subject matter experts on long haul pipe. You know, we don't expect to become subject matter experts in income generating projects, you know, CCUS type projects, but we do anticipate, you know, aligning ourselves with those that are those experts and try to do those technologies. That is, those emerging technologies are not months or quarters, they're quarters away and they're things that, there's new technology emerging and we're trying to stay abreast of it and when I talk to my industry peers, it's a very similar, it's a very similar, you know, tact that they're taking as well too is to try to be extremely fast followers and figure out what emerging technology you need to lean into the soonest. But I think it's an industry trend for sure.
spk12: Great. Great update, guys, and thanks again for your time. Thank you, Derek.
spk10: Your next question comes from the line of David Heikkinen with Heikkinen Energy Advisors.
spk11: Good morning. Any thoughts on a drop-down of your QEP midstream assets their formerly QEP assets into Rattler and timing of that?
spk05: Yeah, David, you know, it's certainly on the schedule. You know, the other activities, getting Bakken sold and getting the refinancing done, you know, took priority. But the team is doing their work. I think, you know, I think as you think about the drop-down, you know, we're going to have a very large block across, you know, half of Martin County, and so we want to get the engineering right. and also build out recycling infrastructure across that block to be able to store produced water and reuse it in the Midland Basin. So I think it's a couple quarters away, but certainly it's on the docket.
spk11: Okay. Thanks.
spk10: Your next question comes from the line of Leo Marinani with KeyBank.
spk08: Hey, guys. I wanted to follow up a little bit on your comments around synergies. You guys talked about that you're... you know, ahead of expectations of the 60 to 80 million. Chloe, you pointed out the debt refinance, but perhaps maybe you could talk a little bit more to kind of the G&A and the operational, you know, synergies. Are we going to start to see those numbers show up as soon as second quarter earnings when you report? Do these come more in the second half, you know, of the year? And can you maybe provide a little bit of color just on the operational synergies and specifically where those will come from.
spk05: Yeah, Leo, you know, I think we, you know, predicated the deal primarily on GNA and interest. You know, QEP was a low-cost operator just like Diamondback, so unlike Energen, you know, we didn't come out and say, hey, we're going to drill, you know, 2,000 wells, $200 a foot cheaper. But, you know, the GNA stuff will start to show in Q3 and Q4. and obviously the interest has happened today. I think there's probably some upside on the operational front when, you know, if and when a drop-down happens at Rattler and being able to connect all of our midstream systems without spending extra capital to add that capacity, you know, could be an upside surprise.
spk13: And also, Leo, just operational, we talked already on this call about, you know, the water-based mud, you know, using big rigs for drill-outs, You know, some of the other, you know, same-ending practices that Diamondback's now adopting from QEP learnings, those all translate directly to lower dollars per foot. And that's, you know, those are direct synergies as well. Okay, that's helpful information.
spk08: And I guess just on the LOE side, you guys certainly spoke to just, you know, great cost control in the first quarter. Certainly couldn't help but to notice that your first quarter LOE was below your full year guidance, despite the fact that we had a, you know, call it a 100-year storm in the first quarter. So certainly it looks like you guys are doing a good job executing in the field. Do you guys feel like you're maybe – you know, set up to come in a little bit below that LOE guidance for the year, or are you going to see an uptick once the QEP and guided assets kind of take, you know, full effect here in the second quarter?
spk04: Hey, Leo, Danny. You know, the LOE in the first quarter, we certainly, you know, saw some surprising benefits throughout the year, their first quarter from You know, some electrical contracts and other things throughout the storm. We do expect that we'll see a little bit of increase from that number from the guidon and QEP assets. Mostly the guidon assets have a little bit higher lifting cost than what we traditionally see in a diamondback. But we like the low end of that guide right now, and as we learn kind of, you know, more about the assets and where their lifting cost is going to settle as we get them integrated, We'll update the market.
spk10: All right. Thanks, guys.
spk05: Thank you, Leo.
spk10: Your next question comes from the line of Richard Tellis with Capital One Securities.
spk17: Hey, good morning. Just one question for me, kind of following up on the earlier ESG discussion. And you mentioned, Travis, in your opening comments about being the fast follower in the investment side. So you're generating strong free cash flow, and it certainly looks like that could continue given where commodity prices are. You know, how large of a part of the FANG story could investment in renewables or CCUS-type projects or entities develop into, say, over the next two, three years?
spk13: Yeah, that's a fair question, Richard, but I just don't know what that number is going to look like yet. There's too much that's still emerging in the form of new technology developments, And I know it's important, but in terms of what percentage of our capital is going to be allocated towards that, I'm not comfortable communicating that yet because, quite honestly, we don't know what that answer is.
spk05: Yeah, I think what's most important, Richard, is if our scope on emissions go down, you have less incentive or need to invest on the other side to offset it, right? $15 million a year is going into the tank battery side. I think we put out some new numbers that we're going to replace 200 generators in the field this year and move that to line power. We're then moving towards a scope two emissions number and how we're going to get that down through sourcing electricity through renewable sources. So while Travis says we're going to be a fast follower on the investment side, we're certainly going to be a leader in terms of spending dollars in the field to, you know, clean up and reduce our intensity on what we can control.
spk17: That's helpful. Thanks a bunch. That's all from me.
spk05: Thanks, Richard.
spk10: Your next question comes from the line of Charles Meade with Johnson Rice.
spk06: Good morning, everyone there. A quick one for me, and then maybe a more open-ended one. You guys, you've sold or agreed to sell close to a billion dollars worth of assets, but your CapEx guidance is unchanged. Does that mean that you essentially had to minimize CapEx on those assets that you're divesting, or is there some reallocation going on?
spk05: No, it just means they were non-core trials. You know, the key to an asset sale is does that asset compete for capital with the rest of your assets? And these three assets did not. You know, I'd say some of the New Mexico acreage was really good acreage, but, you know, we're not a non-off producer. So, you know, we sold stuff that sits lower in the inventory ranking and, you know, we're going to reinvest it at this time to pay down debt and generate free cash to return to shareholders.
spk06: Got it. Thank you for that case. And then, Travis, if I could go back to comments in your prepared remarks. You mentioned before how oil inventories, global oil inventories, and also U.S. inventories are looking better, but we're still looking at some supply artificially being withheld from the market by OPEC+. I want to understand a little bit more of your thinking, because in my view, In my way of looking at things, if you wait until OPEC Plus has zero barrels offline, at that point, you're probably in a spike scenario. And I don't think you maybe need to wait that long. And so maybe it's not a binary thing that you have to wait until OPEC's spare supply is zero. But can you tell me about how it looks from your point of view and what – you know, what any threshold or series of thresholds would be?
spk13: Yes, certainly. I wished most of the decisions that I had to answer were binary, you know, yes or no type of questions. And this is not one of those. You know, just from a macro perspective, you know that OPEC Plus is effectively controlling the market right now, and it's having an outcome of reduced inventories. And you know, against a backdrop of still a fledgling oil demand recovery, which quite honestly might be negatively impacted by the unfortunate outbreak in India. It's just still, in our opinion, it's still too early to be talking about growth. There's no clear signal. Now, do we need to get to zero, you know, zero with OPEC Plus being withheld? I don't know that that's the right answer either. We've still got to assimilate, you know, a million or a million and a half barrels a day of Iran production likely coming back on. So it's an evolving question, but as it pertains to Diamondback, there's no clear signal for us to grow volumes, and it's unlikely that you'd see any of those signals this year.
spk06: Thank you for that elaboration, Travis.
spk13: Thanks, Charles.
spk10: Again, To ask a question, please press star, then the number 1 on your telephone keypad. Your next question comes from the line of Paul Chang with Scotiabank.
spk14: Hi, good morning. I'm just curious that you talk about the near-term debt reduction for this year, 1.2 billion. Longer term, what will be the right capital structure or the debt level for Diamondback?
spk13: Yeah, I think that's certainly an evolving question as well, or evolving answer as well, but certainly we wanted to get our absolute debt reduced to where we were before the QEP and the guidon acquisitions, which were almost there. I think in terms of leverage target, of course, leverage is a function of EBITDA, a function of oil price, but leverage targets, the board mandate has had us below two times since the IPO, and we'll be there now sooner rather than later. I think the longer-term run rate for leverage is probably one or below, and it's going to take multiple quarters for us to get there, but certainly encouraged with the way our forward outlook plan looks and our debt retirement strategy.
spk14: Just curious, because I think there's one school of thought in a highly volatile sector like oil and gas, the best hedge is actually not the paper market hedging program, but using a fortress-like balance sheet. So on that basis, will Diamondback be interested or consider to drive the net debt down to a really low level so that you can get away from the hedging program totally and also position yourself to be much stronger and have far more flexibility and opportunity when you get to the next downturn?
spk05: Yeah, Paul, I mean, I don't know if that's an either-or answer, right? I think it's an and answer. And, you know, like Travis was saying, you know, I think something like a turn of permanent leverage at, you know, high 40s WTI is a pretty good hedge, you know, natural hedge for the next downturn. But I think you also need, you know, some sort of put protection or, you know, big insurance policy that if things go really south like they did in 2020 – you know, you're still protected. So I think it's a combination. I think hedges will still be a part of our story, particularly, you know, with a growing dividend and investors demanding capital be returned to them. You have to protect that cash flow the only way you can. In the paper market, you might, you know, do a wire collar or buy puts that are, you know, pretty cheap. But I think, again, it's kind of an and discussion.
spk14: Mm-hmm. And with your structure in Ragnar, with more than 7% dividend yield there, so statistically, does it really have the benefit for you to keep it as an independent entity and drop down assets there? I mean, does it really gain anything from a capital efficiency standpoint?
spk05: Well, we sold everything we had in that business for 29% of the business. So I think for Diamondback shareholders, the IPO of Rattler was certainly a win. I think we have to look at the subsidiaries consistently in the lens of what's the best thing for Diamondback shareholders and what's the best thing for the shareholders of the subsidiaries. Fortunately, we've created these vehicles without major conflicts of interest and Traditionally, they've traded at higher multiples than the parent, so they've been, I'd say, successful investments. But yeah, we've got to think about what value those add. I think in an acquisitive environment, they've added value. And I guess if we're acquiring less, we'll have to reassess that. But right now, they're still strategic, and we have a lot of value for Diamondback shareholders sitting in the stock of those two companies. Okay.
spk14: Final question for me. Can you discuss the process when you sell the Bakken asset? Maybe we are wrong, but when we're looking at the future script, that for the next 12 months, the Bakken asset that you sell should be able to generate a EBITDA of about 250 to 300. So it looks like you sell for two and a half to three times turn. That seems a bit low, so just trying to understand the process.
spk05: You know, I think the process was very competitive. You know, this was an asset that wasn't going to be getting capital from us. So, you know, I think, Paul, we were very vocal that the Bakken was going to be held for sale. I'm personally very pleased with the price we received. It seems like in the fall everyone was saying, oh, you can't sell anything for better than PDP PV15. And, you know, like I said earlier in the call, I think this industry can't move towards only looking at financial metrics. NPV and NAV still matter. They probably play a lower role than they did in the past, but financial metrics alone isn't going to be the reason why we sell an asset we deem non-core when we, you know, when we did an acquisition a couple months ago. All right. Thank you.
spk10: At this time, there are no further questions. I would now like to turn the call back over to Travis Stice, CEO, for closing remarks.
spk13: Thank you again, everyone, for participating in today's call. If you have any questions, please contact us using the information provided.
spk10: Thank you. That does conclude today's conference. We thank you for participating, and you may now disconnect.
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