Diamondback Energy, Inc.

Good day and thank you for standing by. Welcome to the Diamondback Energy Second Quarter 2021 Earnings Conference Call. At this time, all participants 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 0. I would now like to hand the conference over to your speaker today, Adam Lawless, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Chelsea. Good morning, and welcome to Diamondback Energy's second 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, Kate Stantoff, CFO, and Danny Wesson, EVP of Operations. During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found on 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 on our earnings release issued yesterday afternoon. And I'll turn the call over to Travis Dice.

Thank you, Adam, and welcome to Diamondback's second quarter earnings call. Diamondback had an outstanding second quarter, extending its track record of operational excellence. I am proud of everything our team has been able to accomplish this year by pushing the boundaries of our current thought processes and embracing new technologies and playbooks, many of which have come from the personnel we've added through our acquisitions. Nowhere is that more evident than on the drilling and completion sides of the business, where we continue to lower costs and improve cycle times. We've decreased our drill times from spud to total depth by over 30% and are averaging just over 10 days to drill a two-mile well in the Midland Basin. On the completion side, we're now running three simul-frac crews, which lower our downtime and improve our pad efficiencies. We are currently completing approximately 2,800 lateral feet per day in the middle basin, an improvement of nearly 70% as compared to our early zipper frack designs. All of these operational advances translate to our ability to do more with less. While we are seeing some inflation on diesel, steel, and other materials, our ability to continually improve operationally and become more efficient has more than offset these cost increases and our leading edge DC&E costs continue to be at the low end of our guidance range. As a result, we're decreasing the number of rigs and crews we need to execute this year's capital plan and are reducing our full year capital guidance by $100 million or down 6% from prior expectations. On the production side, our wells have outperformed expectations this year. As a result, we are slightly increasing our Permian oil production guidance, which should not be taken as a conscious decision to grow. As we look at supply and demand fundamentals, oil supply is still purposefully being withheld from the market, and we continue to believe there's not a call on U.S. shale production growth. We will continue, therefore, to target flat oil production for the foreseeable future and plan to do that by completing less wells than originally planned this year. These operational highlights, coupled with a supportive macro backdrop, led to record free cash flow generation for Diamondback. During the second quarter, we generated $578 million in free cash flow or $3.18 per diluted share. To put this into perspective, We entered 2021 anticipating roughly this amount of free cash flow for the full year. We've already put this cash to work by calling and paying down over 600 million of callable debt so far this year, with over 600 million more expected later this year when our 2023 notes become callable. In total, this debt reduction will reduce cash interest expense by almost $40 million annually. We continue to emphasize that reducing debt and increasing shareholder returns are not mutually exclusive. And we proved this point again by increasing our quarterly dividend by 12.5% from 40 cents a share to 45 cents a share or $1.80 annualized. This puts our year-to-date dividend growth at 20% above 2020 levels. At Diamondback, We prefer to talk about our current performance rather than future promises. However, our performance has allowed us to accelerate our debt pay down and increase our base dividend. And we now feel it's appropriate to put up some goalposts as it relates to additional return of capital in 2022, given the current free cash flow outlook at strip pricing. Our plan is to distribute 50% of our free cash flow to our shareholders in 2022. This form of additional capital return will be decided by the board at the appropriate time, but we intend to be flexible based on which opportunities we believe present the best return to our stockholders, the owners of our company. Remember, our strategy is unchanged since 2018 when we initiated our base dividend. This additional clarity is simply an evolution of our guidance and also reflective of the maturation of our business. A lot can happen between now and the end of the year, but we feel we are well positioned to take advantage of the current commodity price environment and deliver differential free cash flow in 2022. Our capital efficiency improvement allows us to maintain an elevated base level of Permian oil production through 2022 by spending approximately $1.7 to $1.8 billion of total capital. The continued improvement in our realized pricing and our low cash cost structure combined to form a best-in-class cash margin, which we plan to protect as we layer on hedges that are focused on protecting extreme downside, allowing our shareholders to participate in commodity price upside. Turning to ESG, we continue to make progress on our ESG initiatives. Flaring continues to be one of the biggest drivers of our CO2 emissions, and while we've made significant progress since 2019, we still have work to do. Our target in 2021 is to flare less than 1% of gross gas produced, and in the first half of the year, we were above that number. Now, this is primarily due to the integration of the QEP assets, and we expect this metric to improve as we build out additional infrastructure in the Midland Basin and close the Williston divestiture later this quarter. We have also begun two pilot projects utilizing tankless and limited tank facility designs. While the first tankless facility is expected to be installed in the fourth quarter, we've already had two successful limited tank design pilots. On average, this design reduced our CO2 emissions from our storage tanks by more than 90%. Because of this success, We've elected to extend this pilot to another five facilities in the back half of this year and expand to an additional 15 facilities in 2022. Lastly, we are continuing to build out our electrical substations, which will help minimize emissions from combustion equipment, primarily generators and gas engine driven compressors. We are working to remove or replace over 200 of these units by 2023. The combination of these efforts position us well to meet our commitment of reducing our scope one GHG intensity by at least 50% and reduce our methane intensity by at least 70% as compared to 2019 figures by 2024. The second quarter exceeded our expectations and exemplified why Diamondback is a leader in the industry. Our people continue to innovate making us more environmentally responsible and efficient, uniquely positioning us for the future. Our record free cash flow generation allowed us to accelerate our debt pay down and increase our dividend, all the while positioning us for robust shareholder returns next year. We are delivering on our exploit and return strategy, continuing to focus on maintaining permanent oil volumes, reducing debt, and returning cash to shareholders. With these comments now complete, operator, please open the line for questions.