Diamondback Energy, Inc.

Good day and thank you for standing by. Welcome to the Diamondback Energy Third 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 zero. I would now like to hand the conference over to your speaker today, Adam Wallace, Vice President of Investor Relations. Please go ahead.

Thank you, Kim. Good morning, and welcome to Diamondback Energy's third quarter 2021 conference call. During our call today, we will reference an updated investor presentation, which can be found on Diamondback's website. Representing Dynaback today are Travis Dye, CEO, Kate Spantoff, 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 conditions, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I'll now turn the caller to Travis Stice.

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 continue 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 two-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 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're 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 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, 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 50 cents 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. 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 strength. Yet none of this would 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 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 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. 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.

As a reminder, to ask a question, you will need to press star 1 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 Aaron Jayaram from JP Morgan. Your line is now open.

Can you hear me now? Yeah, got you now, Aaron. Sorry about that. Travis Case, 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 billion and I think $5.3 billion plus at $80 billion. You mentioned $3 to $3.5 billion of free cash flow under that range of oil price. This year, you're doing 270 gross tills. So I guess my question is, what type of activity do you expect in 2022 that underpins that $1.8 billion budget? And I guess we'd be interested to know what kind of cash tax rate you're assuming in that free cash flow guide.

Yeah, thanks, Ruan. Good questions. You know, from an activity perspective, not a lot's going to change. You know, it's still going to be 75% or 80% of our turned in line in the Midland Basin, you know, still at this kind of 65 to 75 wells a quarter run rate. A big difference in 22 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 ducts. We drew down about 50 of those ducts in 2021 and, you know, now, you know, are at a steady state duct level. So, you know, got a 50 duct headwind in 2022 versus 2021, and a little more infrastructure and midstream spend on the sale in Robertson Ranches that we acquired from QEP and Guidon as we get into full field development there. 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-ish to $200 million, depending where we are, which is a good problem to have. Hopefully the commodity prices stay where they are.

Great. Thanks for that. Just my follow-up, I wanted to see a case 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 two monolateral in the Midland Basin, and then and also maybe describe what you're doing on the completion side and perhaps just the mix of simulfrac and 22.

Yeah, so I'll start with simulfrac. You know, we picked up our first simulfrac 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, but 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. So, you know, essentially probably 90% of our wells next year will be done with a simulfrac crew. We've been running three simulfrac crews this year, plus a fourth spot crew here and there, and I anticipate that kind of pace to be similar in 2022. And 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. And, you know, this is the first. And 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. And you can see, you know, an average of 10 days spud to TD has been a pretty large step change. And 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 feed completed per day are variable costs that, you know, we think we certainly differentiate ourselves with. So that's been the driver of CapEx reductions this year. And 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.

And, 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. But 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.

Great. Thanks a lot.

Thank you, Arun.

Our next question comes from the line of Neil Meada from Goldman Sachs. Your line is now open.

Good morning, team. Travis, you made the 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 in buying back your stock or returning capital makes sense relative to M&A?

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, you know, we don't underwrite M&A or share repurchases at these high commodity prices. And 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 what seems like regulatory and policy-related efforts and not the M&A. But, 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. But that's typically what you see when commodity prices run like they've done this year.

Thanks, Travis. And then 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 22 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 start to pencil out here?

Yeah, I mean, listen, you know, the benefit we have, you know, we talked about the efficiency gains, but, you know, this year has kind of been the year of raw materials going up on well costs, you know, steel, diesel, sand. But, you know, it's logical that the service piece, given labor tightness, starts to get a little traction. Now, you know, it's really going to be dependent upon where the rig count goes. You know, we only added eight rigs in the Permian in October. If we add 100 rigs, then it's going to be a lot tighter next year from here. But if we kind of find a steady state, then it's going to be tougher for the service guys to push price. But, 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 to boost their margin profile and know that they have consistent work with Diamondback.

Thank you.

Thank you, Neil.

Our next question comes from the line of Doug Legate from Bank of America. Your line is now open.

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 Willesden looks like it had, on a number of levels, higher cash cost, DD&A, and so on. 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 Willesden is now in the longer part of the portfolio?

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 fours and $4 a BOE and on the LOE side, you know, we did keep the Bakken for a little longer than we liked, and that kind of impacted the transition employees on the G&A side. So G&A probably comes down a nickel or so. And then, you know, gathering transportation, certainly higher costs in the Bakken, so you probably see a step change down or a step down in GP&T, you know, closer to that kind of 125 to 150 range on a go-forward basis. So, you know, it was an asset that when we bought it, 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 Generally, I think we're happy with the deal and our cost structure comes down a little bit in Q4 into 2022.

Okay. I guess what I'm really getting at is 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.

Yeah.

Okay. Guys, I hate to beat up on the cash distribution policy as my second question, but I just want to get a little bit of clarification here. So let's assume that the current strip, you're running at probably a $4 billion free cash number next year. So 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?

Yeah, at least half of that goes back to shareholders.

Okay. So when we think about the... the run rate, if you like, for buybacks, the number could be pretty punchy. And 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 a substantial amount of your stock. And 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 will get reloaded at some point.

Yeah, I mean, I think the key, Doug, is that the buyback is going to be opportunistic, not programmatic. And 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, but, 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, in the last five years. So I think the, you know, I think the key is that, you know, the buyback's out there as a weapon for us at our disposal and but overall 50% of our cash flows, free cash flows, get in returns. And if we don't get through the buyback in a quarter, you know, there are a lot of ups and downs in this industry. If we don't get through the buyback in one particular quarter, we're going to make our shareholders whole with a variable dividend, you know, the quarter following.

This is a footnote. It's $70 oil. It seems to us you've got a long way to go before the stock is fairly valued. I just want to understand how aggressive we should be on the buyback assumption.

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

Appreciate the answers, guys. Thank you.

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. And so we know that we're in a volatile industry. And we think being cautious and also providing our shareholders the maximum flexibility is is still the prudent way to run the business. And I hope the answers to the capital allocation question you just asked demonstrate that they were trying to be prudent in generating maximum shareholder returns.

All right. Thanks, fellas.

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

Good morning, all. Congrats on your quarter-end update.

Thank you, Derek.

Perhaps for you, Travis, or Case, 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 markets. What are the one to two potential developments for the sector that give you concern and could change the outlook to a less favorable one?

Well, there's one thing 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. But if a company comes out and starts growing and gets recognized in the stock market for that growth, then that's going to change the calculus for our board and how we allocate capital towards growth. Again, I think if you look at the macro conditions, you know, post-pandemic, we need 100 million barrels a day up to man reestablished. We're probably getting close there. More importantly, we need to see the surplus capacity, whatever that number is in the OPEC plus countries being absorbed in the world's energy equation. And then thirdly, you need to see kind of the five-year average of global inventories return. And it's unlikely you'll see all three of those triangulate precisely, but I think you need to look at the price of oil when those indicators are all pointing at each other. And if the price of oil is you know, $70 or $80 a barrel, when those things are pointing at each other, that probably means we're in good shape in terms of supply and demand. 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. But even having said that, you know, our board is dedicated to making sure we're allocating capital that's going to generate the the greatest return to our stockholders. As I've said in my prepared remarks, we've rapidly transitioned from a company that consumes capital for growth to now one that is distributing capital. We're looking at holding production flat and we're looking at growing per share measures while continuing to strengthen our balance sheet. We think that's a prudent way to run our business.

Great, and as my follow-up, perhaps digging into your operational efficiencies and really following up on Arun's earlier question on Simulfrac Ops, do you have a sense, I'm sure you do, but what percent of your wells today are seeing two-well versus four-well Simulfrac, and are there practical limitations that would limit four-well implementation program-wide?

No, I mean, you know, almost, I'd say 100% of our midland basin pads are four wells or more. And the benefit of simultaneous rack, you've got to have an even number of wells, given that you're running basically two crews at the same time. So it's been less apparent in the Delaware. I'd say Delaware, we're probably, you know, 50% four-well-plus and 80% two-well-plus. In the Midland, it's almost 100% four-well-plus.

Great update, and thanks again for your time.

Thank you, Derek. Thanks, Derek.

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

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

Good morning, David.

I 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 quarter. 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?

Yeah, I mean, 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, so yeah. know we certainly don't model for for the best case scenario but but it this is probably the base that um you know we're going to build off of in terms of inflation going into 22. you know we went into 2021 guiding to kind of seven to seven to ten percent low cost inflation been able to kind of go the other way um but but like travis said earlier in the call we don't we don't model in efficiency enhancements throughout the year in our budget. But, you know, certainly the organization on the off side is motivated to continue to push the limits. But this feels like a pretty solid quarter in terms of costs that will be tough to replicate in this kind of inflationary environment.

I appreciate that. And just for my follow-up, Travis, perhaps for you, or Kay's chiming in as well, but you referenced looking at per share metrics with the buyback. Before you talked about looking at using a buyback when your expected return exceeds your cost of capital. Are you also looking at what your effective production growth per share looks like when you're considering buying back shares versus perhaps growing shares? in the event that you see some of those early indicators coming back with the world calling for more oil?

Yeah, that's a good point. 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 and And 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 year two and three. And obviously, it's stock price dependent, but that was a lot of the work that we did. Do our shareholders own more reserves per share, production per share, a longer inventory life per share? with the buyback versus trying to just plow it all into the ground and oversupply a market that's already pretty fragile.

Got it. Thank you, guys. Thank you, David.

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

Thanks. Good morning. If I could return back to the shareholder return plan, and I think you all said you're going to at least give 50% back to investors. Could you just sort of give some color around that? Does that mean if they're not debt takeout opportunities, you'd potentially look at, say, increasing the buyback or dividend above sort of that 50% threshold? And also, if you can give some color on the fixed dividend You know, where could that go where, you know, you all get to a point where it just doesn't feel comfortable because of the sustainability at more of a mid-cycle price?

Yes, Scott, you know, conversations with large shareholders have basically said, you know, we want to make sure this dividend is well-protected below 40. You know, our dividend break-even for 22 is kind of in the $35 oil range range. We're buying puts at $50 oil, so I think we're still very well protected. I think the dividend is going to continue to grow. The board talks about it every quarter. We've hit this 10% CAGR since introduction in 2018. 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. I think as long as that break-even stays in the mid to high 30s, we feel pretty good about it.

Okay, and could you comment 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?

Yeah, that's right. Sorry about that. We still want to take down Gross debt, you know, we have a maturity in 2024. We also want to keep a larger cash balance than we've run in the past just for inflation. But, 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. So, you know, I'd like to – have cash to take out the 24s and be in a position to not have any material maturities until 2029. But like we've done over the last five or six quarters, that's not going to be mutually exclusive from our shareholders getting more money back.

Okay. And then as you look into 2022, how do you think – and I know you all are talking about flat oil production into 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 slash flat production?

Well, you know, I think generally, right, we've got to outperform guidance on oil production, which we've done this year. But what we've said all year is that if we are doing better than we thought, we're going to cut capital. And 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.

Got it. Appreciate it. Thank you, Scott.

Our next question comes from the line of Paul Cheng from Scotiabank. Your line is now open.

Thank you. Good morning. I want to go back into the cash return. I think it makes a lot of sense with the volatility in the market that you put 50% of the excess cash into the bond shift. But 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 that some number that you might, that you guys are thinking? 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 that I no longer have any debt deal right away, then I would just increasing that percentage.

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

Okay. And the second question is related to your midstream operation, Raptor. With the dividend yield over 8%, much higher than the bank itself, one would argue that your cost of capital is actually very high over there. And it 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 there, Mr. Marcia, just recently said, announced to merge with a private company and actually going to reduce their ownership so that they can deconsolidate. So just curious, how are you looking at that business and whether that you may want to do some alternative initiative related to the structure on that?

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

you know, if the stock's not working, we've got to think about what to do. But right now, it seems like Rattler's had a good year. 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 unit holders, of which Diamondback's, you know, the largest.

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

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.

Thank you.

Thanks, Paul.

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

Hey, guys. Just wanted to touch base a little bit on third quarter production. Looks like it kind of outperformed here and just wanted to get 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.

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

And then just in terms of 22 CapEx, I understand it's a loose guide that you folks targeted here. If I take the you know, kind of fourth quarter CapEx range and annualize it. Kind of gives me 1.74 billion to 1.9. So, 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 can be on the inflation side there. And I know it's still moving target here and we went on 100% know how this plays out. But any just early indications of what the inflation can be and is that kind of what would target the top end at the 1.9, just trying to get a sense of what he was baked in there.

Yeah, I mean, I, you know, I think, I think I'd say that, you know, 2022 is not going to be long on, on November 2nd of 2021. So, you know, not, we're one of the few companies talking about 2022. We'll see what happens over the next couple of weeks, but, you know, probably, you know, have, 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. But generally, I think we can narrow that guidance as we get into 2022 and have more evidence. 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 to 10 rigs a month.

Okay. Thanks, guys. Thank you. Thanks, Leo.

Our next question comes from the line of Charles Mead from Johnson Rice. Your line is now open.

Good morning, Travis and Case. Hey, Charles. Travis, I want to 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 22. But just one question for me, and it's around the buyback. When we look at the – you guys announced it on the 15th, and if we look at the average price you bought back and the chart of your share price, it looks like you guys got after it for a few days and then wrapped it up probably in about a week. And I'm curious, is the right inference to make is that 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, Casey mentioned a blackout earlier, and that makes sense. Is that a function of, you know, your legal team putting you in a blackout a few days before the end of the quarter?

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.

That's helpful. Thanks, guys.

Thanks, Charles.

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

Hi. Good morning, guys. I want to dig in maybe a little bit more on the debt piece of it. You guys talked around it, but as you noted, nothing callable at this point, given what you've taken out so far this year, next maturity in 2024. I guess the first question is, you know, how do you navigate that? Because, you know, are you thinking about tenders, make holes, 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 24 might not be viewed as attractive either. So how are you thinking about approaching that in the next couple of years?

Yeah, I mean, I think we're just going to keep following, you know, the prices of the bonds and try to get, you know, below the make hole if we can. If not, You know, the MACL is not too restrictive on something like our 24s as you get into, you know, late 22, but certainly not looking to take out, you know, anything past 2029.

Got it. Okay. And then 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?

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

Okay, great. Thanks very much.

Thank you. Thanks, Jerry.

Our next question comes from the line of Paul Sankey from Sankey Research. Your line is now open.

Guys, there's a report in the Wall Street Journal this morning that the EPA is going to massively increase methane emission limits. Can you just talk a little bit about what that means for you and for the industry? And 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.

Yeah, the methane rules, I think we still have to see how the final document gets written. Diamondback continues, as I've stated in my prepared remarks, to focus on methane intensity. We're going to reduce that by 70% from 2019 levels by 2024. It depends on where the threshold is, but I've been very pleased with the progress we've made already on reducing methane intensity. you know, $20-plus million allocated next year to continue those efforts to reduce methane intensity. And, you know, if we do things right, you know, hopefully we'll be below the threshold by which that methane intensity applies.

And then, you know, Paul, on multiyear plans, we've always eschewed multiyear plans at Diamondback. We didn't buy into a multiyear growth plan in 2016. And, you know, we're not going to commit to multiple years at flat today. You know, certainly 2022 and 2021 will both be relatively flat production. We think it's worked and capital discipline has worked for this industry. You know, I think this industry has tried a market share award 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? And, you know, we'll see what the future holds in 2023 and beyond. But right now we're committed to 2022 flat. Capital discipline is real over at Diamondback. And as Travis mentioned, we're going to become a net returner of capital rather than consumer of capital.

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

Understood, guys. Thanks.

Thanks, Paul.

I'm showing no further questions at this time. I would now like to turn the conference back to CEO Travis Theis. You may proceed.

Thank you again to everyone for participating in today's call. If you've got any questions, please contact us using the information provided.

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