Diamondback Energy, Inc.

Good day, and thank you for standing by. Welcome to the Diamondback Energy First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you may need to press star and the number 1 on your telephone keypad. Please be advised that today's conference call is being recorded. If you require assistance during the conference, please press star and then the number 0. I would now like to hand the conference over to your speaker today, Adam Lawless, Vice President of Investor Relations. Please go ahead.

Thank you, Amanda. Good morning, and welcome to Diamondback Energy's first quarter 2022 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 Dice, Chairman and CEO, Kate Fantos, President and CFO, and Danny Wesson, COO. 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 in the company's filings with the SEC. In addition, we will make reference to certain non-GAAP measures. Reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I'll now turn the call over to Travis Spice.

Thank you, Adam, and welcome to Diamondback's first quarter earnings call. In February, Russia launched an unprovoked invasion of the sovereign nation of Ukraine. We at Diamondback strongly condemn Russia's actions and aggression. Our thoughts and prayers are with the millions of men, women, and children affected by this unjust war. And while we desire a quick and peaceful resolution to this conflict, We recognize that this war could go on for quite some time. We will continue to support the innocent victims of Ukraine, just as we did earlier this year when we announced a $10 million commitment to various nonprofit entities providing vital humanitarian support. Russia's actions have plunged the global energy markets into turmoil. as the world and especially our allies in the European Union grapple with the potential loss of a major source of their energy supply and rethink their respective energy policies. This war has magnified the interconnectivity of the global energy equation and the impact post-Cold War globalization has had on all supply chains. It has also reminded the world of the importance of the traditional oil and gas to the global economy as we're witnessing the impact high energy costs can have on the consumer and the economy in real time. As the war in the Ukraine and the resulting governmental sanctions continue, Russia's oil production is expected to be impacted by shut-ins, natural declines, storage limitations, and lower exports, creating a global shortage of oil. Over the next few years, We will need to make up for this lost production, and we believe that the U.S. oil and gas industry is best suited to provide the low-cost, environmentally friendly barrels needed to ensure global energy supply. However, today, we are operating in a constrained environment, with inflationary pressures continuing to increase across all facets of our business. Also, labor and materials shortages are now present across the supply chain. We at Diamondback are fortunate to have secured the necessary equipment, personnel, and materials to run our 2022 capital program. But increasing activity now would result in capital efficiency degradation. It would not meaningfully contribute to fixing the global supply and demand imbalance in the oil market today. Therefore, Diamondback remains committed to maintaining our current oil production levels of approximately 220,000 net barrels of oil per day. While we believe that efficiently growing our production base is achievable over the long term, we do not feel that today is the appropriate time to begin spending dollars that would not equate to additional barrels until multiple quarters from now. We continue to focus on capital efficiency and strive to operate with the highest level of environmental and social responsibility. At Dynabank, we plan to invest approximately $60 million to reduce our direct emissions and lower our carbon intensity, including ending routine flooding by 2025. This figure does not include the hundreds of millions of dollars we've spent to electrify our production fields and to build pipelines to ensure we produce and transport fluid with the lowest emission intensity possible. These investments are not only good for the environment, but also smart economic decisions that we expect to lower our operating costs. By investing in infrastructure in our high activity levels, we now have the ability to run a dedicated electric fleet for the foreseeable future. We've partnered with Halliburton to secure our first electric frac fleet which will run in our Martin County acreage off power generated from the central location and delivered via existing lines, reducing our scope one emissions profile. This partnership will also lower our cost per foot, primarily due to fuel savings, decrease our footprint on location, and increase our operational efficiency as a result of lower maintenance and non-productive time. We expect this fleet to be operational in the fourth quarter. In 2021, we also announced initiatives to reduce our Scope 1 greenhouse gas emissions or GHG intensity by at least 50% and reduce methane intensity by at least 70% from 2019 levels by 2024. In 2021 alone, we reduced our Scope 1 GHG and methane intensities by 15% and 21% respectively from the 2020 levels. Lastly, we launched our net zero now strategy under which, as of January 1st of 2021, every hydrocarbon produced by Diamondback is anticipated to have zero net scope 1 GHG emissions as we offset these emissions with certified carbon credits. Moving to first quarter performance, our production of 223,000 barrels of oil exceeded the high end of our guidance range creating 1.4 billion in operating cash flow. We were able to keep our capital costs in check, spending 437 million in CapEx during the quarter, nearly hitting the low end of our guidance range of 435 to 475, and pushing our free cash flow for the quarter to 974 million. We returned 555 million of cash back to our stockholders, or $3.09 per share, representing 57% of Q1 2022 free cash flow and 50% of adjusted free cash flow, which we calculated by adding back the $135 million in cash we used to terminate certain future hedge positions. This return was made up of stock repurchases, the base dividend, and our first variable dividend. As we've said in the past, our share repurchase program is opportunistic. and we stuck with our plan of evaluating our share repurchases just as we would with any acquisition. A buyback must generate a return well in excess of our weighted average cost of capital, assuming a reasonable mid-cycle oil price. In the first quarter, our price deck was approximately $60 a barrel, and as such, we were able to take advantage of some of the volatility in the market and repurchase 57,000 shares at an average price of $117 a share. Through the end of the first quarter, we've spent about $440 million, or 22% of the $2 billion program our board authorized last September. Additionally, we once again increased our growing base dividend, which we view as our primary, constant, and predictable form of shareholder returns. It's now at $2.80 a share on an annualized basis, up 17% quarter over quarter, and approaching our target of $3 a share. We have now increased our base dividend by a quarterly CAGR of over 11% since it was initiated in 2018. Today, this represents a current yield of just over 2%. Finally, if the free cash flow returned through our base dividend and repurchase program does not equal at least 50% of our free cash flow for that particular quarter, then we've committed to 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, and most importantly, allows at least 50% of free cash flow to be returned. For our strategy, we allocated $422 million to our first variable dividend this quarter, or $2.35 per share, putting our total dividend payout in the first quarter at $3.05 per share, or nearly a 10% total dividend yield. We met our commitment to return at least 50% of free cash flow to our stockholders and use the remaining cash to strengthen our financial and operating position. In the quarter, we fully redeemed $500 million of notes due in 2024 and $1 billion of notes due in 2025. We also took advantage of the flat long end of the curve by pricing $750 million in new 30-year senior notes at 4.25%. This liability management exercise reduced our absolute debt by $750 million, decreased annual interest expense by $20 million, pushed out the average weighted maturity of our debt profile by five years, and kept our average weighted cost of debt flat. With only one tranche of near-term maturities outstanding, we are pleased with the progress we've made to improve our investment grade balance sheet and are nearing our leverage target of approximately one time at $50 oil, which would equate to approximately $3.5 billion in absolute debt at the current level. We also continue to put our cash to work by high grading our existing inventory position through small bolt-on acquisitions. and we're excited about blocking up our reward position with the acquisition we completed in January. This bolt-on added approximately 6,000 net acres in Ward County and gave us an additional 60 long lateral locations with an 85% net revenue interest in a high rate of return area. In fact, we've already began drilling the position, but do not expect to have production until late this year. As we look to our outlook for the rest of 2022, Our simple plan has not changed. Maintain oil production of approximately 220,000 barrels of oil per day by spending between $1.75 and $1.9 billion. At the current strip pricing, this production and capital spend equates to approximately $4.5 billion of free cash flow, which per our returns framework gives us a minimum of $2.25 billion of cash back to our investors. We're off to a good start for the year, mitigating inflationary pressures while justifying our social and environmental license to operate. We believe our capital discipline and returns profile is still best near-term path to equity value creation, while our operational execution provides differentiated returns to our shareholders. With these comments now complete, operator, please open the line for questions.