Diamondback Energy, Inc.

Good day and thank you for standing by and welcome to Diamondback Energy Second Quarter 2022 Earnings Conference Call. At this time, all participants are on the listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Lawless, Vice President. Please go ahead.

Thank you, Justin. Good morning, and welcome to Diamondback Energy's second quarter 22 conference call. During our call, we will reference an updated investor presentation, which can be found on Diamondback's website. Representing Diamondback today are Travis Stice, Chairman and CEO, Case Vantoff, President and CFO, and Danny Wesson, COO. During this conference call, participants may make certain forward-looking statements related 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. The 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 Dice.

Thank you, Adam, and welcome to Diamondback's second quarter earnings call. I'd like to start by highlighting our second quarter performance. We once again delivered operationally, producing over 221,000 barrels of oil per day near the high end of our quarterly guidance range. Our discretionary cash flow, or operating cash flow before working capital changes, totaled $1.8 billion, up 27% quarter over quarter, setting a new high for the company. This increase was primarily due to a favorable macro backdrop as well as improvement to our realized pricing as hedges put on last year continued to roll off. Our free cash flow for the quarter was $1.3 billion, up 35% quarter over quarter. We will return 63% of this free cash flow to our shareholders. well in excess of our commitment to return at least 50% of free cash flow. This return is made up of our growing and sustainable base dividend, opportunistic share repurchases, and a robust variable dividend. Our annual base dividend is now $3 per share, or 75 cents per quarter, representing a 7.1% increase from the company's previous annual base dividend of $2.80 per share, or 70 cents per quarter. As previously announced, the Board elected to keep our total dividend per share flat quarter over quarter at $3.05, which is comprised of a 75% base dividend and a $2.30 variable dividend. This puts our total annualized 2Q dividend yield at nearly 10%. Additionally, we took advantage of market volatility and repurchased nearly 2.4 million shares during the quarter at an average price of a little over $127 a share for a total cost of approximately $303 million. We believe our opportunistic, disciplined approach to our repurchase program brings the most value forward for our shareholders and continues to give us the flexibility to use either our variable dividend buybacks or as has been the case so far in 2022, a combination of both to hit or exceed our returns target. As we move into the second half of the year, it's hard to ignore the amount of free cash flow we expect to generate, around $2.5 billion of current strict pricing. In June, we announced an increase in our capital returns commitment target, moving it up from 50% to at least 75% of free cash flow beginning in the third quarter. At 75%, that's over $1.8 billion returned to shareholders or well north of the $10 per share in just two quarters, for a total annualized return yield of approximately 17%. This robust free cash flow profile led the board to double the size of our buyback program from $2 billion to $4 billion, giving us ample running room to be opportunistic in the equity markets. Since the program was initiated in the third quarter of last year, we've repurchased over 8.3 million shares at an average price of $113 a share for a total cost of approximately 940 million. This includes 1.8 million of shares we've already repurchased in the third quarter for a total of 200 million at an average price of $113.70 a share. Our confidence to increase our returns payout is rooted in the strength of our balance sheet. During the second quarter, We opportunistically repurchased $337 million in Diamondback Senior Notes at an average cost of 95.4% of PAR for a total of $322 million. We focused on our debt coming due over the next 10 years, significantly lowering our maturity towers while taking advantage of the volatile debt market. We also recently redeemed $45 million in Legacy Intergen and QEP notes due 2022 at PAR. As a result, Our balance sheet is stronger today than ever before. Our annualized net debt to EBITDA is under 0.7 turns and we continue to improve our leverage profile with net debt decreasing by $267 million or 5% quarter over quarter. These debt reduction efforts have helped decrease our interest expense by 25% year over year, offsetting higher production taxes and lifting costs and helping push our unhedged realized cash margin this quarter to more than 83% of company record. Moving to the operations side of the business, the environment in the Permian continues to be challenged. However, we continue to focus on how we can mitigate the inflationary pressures we're seeing across nearly all facets of the business by lowering the variable pieces of our cost structure. These efforts have allowed us to keep the high end of our capital guidance range flat at 1.9 billion, and we do not anticipate any future changes. Yet, we still haven't been able to offset all of the fixed pricing increases we've seen, which is why we've moved up our third quarter capital range to 470 to 510 million, up from our capital spend of 468 million this quarter. This takes into account the roughly 10% cost increase we expect on the frac side, which is made up of increases in the cost of horsepower, wireline services, and fuel. On the drilling side of the business, we're seeing a similar level of pricing increases, particularly from day rates, casing, and cement. In the back half of this year, we plan to operate approximately 12 drilling rigs and three frack crews. As we mentioned last quarter, we've partnered with Halliburton to secure our first E-Fleet frack core, which will run in our Martin County acreage off power generated from a central location and delivered via existing lines, not only reducing our scope one emissions profile, but also lowering our completion costs as a result of fuel savings and improved operational efficiency. We expect this fleet to be operational early in the fourth quarter, and it will simply be swapped in for one of our existing Halliburton crews. Earlier this month, we continued to lean into this technology and secured our second E-Fleet core. This crew will be operational in the first quarter of 2023 and is expected to further reduce costs and decrease our environmental footprint. It will also replace one of our existing crews. On the drilling side, we currently have one drilling rig running off line power in the Delaware Basin with two more electric rigs expected in 2023. Just as we're seeing on the completion side, the electrification of our drilling fleet has multiple benefits. Additionally, We're utilizing sputter and intermediate rigs to take advantage of lower pricing as compared to the rest of our drilling fleet and are exploring downsizing surface casing size, intermediate hole size to improve our drilling efficiencies, pushing Diamondback even further down the cost curve. Lastly, we continue to work to earn our social and environmental license to operate. Part of this is our commitment to provide quarterly disclosures that detail our progress towards our environmental goals. We are proud of how we have performed so far this year when looking at multiple metrics, including recycling nearly 40% of our produced water and keeping our total recordable incident level at multi-year lows. However, flaring continues to be an issue. We're diligently working with our gathering partners to build in redundancy, accelerate plant turnarounds, and meet the takeaway needs of our current development plan. We remain committed ending routine flaring by 2025 and are confident in our ability to achieve that goal. We've also spent hundreds of millions of dollars to lower our emissions profile by building pipelines and electrifying our production fields. These projects have lowered our costs to date, but due to the increase in the cost of power across the state of Texas, we have had to move our lease operating expense guidance range up by 50 cents a barrel at $4.50 to $5 a barrel. Even with this move, we continue to be the low-cost Permian operator and build on a long track record of cost control. The second quarter was a record quarter for the company. We delivered on our production guidance, kept costs in line, and distributed over 63% of our free cash flow to our shareholders. We are well positioned to build off this momentum and are excited to begin returning at least 75% of our free cash flow to our shareholders this quarter. We expect this industry-leading cash returns program and our best-in-class operational machine to continue to deliver differentiated results for our shareholders. With these comments now complete, operator, please open the line for questions.