Diamondback Energy, Inc.

Hello, and thank you for standing by. Welcome to the Diamondback Energy third quarter 2022 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 this session, you will need to press star 11 on your telephone. It is now my pleasure to introduce Vice President of Investor Relations, Adam Lawless.

Thank you, Andrew. Good morning and welcome to Diamondback Energy third 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, Kay Stantoff, 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. 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 Sice.

Thank you, Adam. And before we start with my prepared remarks this morning, I want to encourage each of you to please take advantage of one of our greatest privileges we have as Americans, our freedom to elect our representatives. Please take the time out of your busy schedules today to go vote if you've not already done so. Welcome to Diamondback's third quarter earnings call. At Diamondback, we pride ourselves on our execution. Our commitment to being the lowest cost operator in the Permian Basin has and will continue to position us for success through the cycle. The third quarter was no exception. In the quarter, we produced over 224,000 barrels of wool per day and generated approximately 1.7 billion in operating cash flow. Our CapEx was once again within our guidance range, leading to free cash flow of nearly 1.2 billion. As we previously announced, we increased our return of capital commitment and stated that beginning this quarter, we would return at least 75% of free cash flow back to our shareholders, up from at least 50% previously. At 75%, total capital returned was nearly 875 million, with dividends totaling 403 million, or $2.26 per share. The remaining 472 million went towards our opportunistic share repurchase program, where we bought back nearly 4 million shares at an average price of approximately $120 a share. To date, we've spent approximately $1.2 billion of our $4 billion buyback authorization, repurchasing nearly 6% of our shares outstanding since September of last year when we initiated our program. In October, we announced the pending acquisition of the assets of Firebird Energy, a company with a large, contiguous position in the Midland Basin. We feel Firebird has the right balance of cash flow and inventory, and the acquisition is immediately accretive on all relevant per share financial metrics while providing a long runway of high quality drilling opportunities. With over 350 locations, we expect to have well over a decade of running room at our projected one rig development pace. In conjunction with the acquisition, we announced that we would sell at least 500 million of non-core assets by the year-end 2023, with net proceeds primarily used to pay down debt. Since then, we closed on a $155 million sale of non-core assets in the Delaware Basin, jump-starting our program and ensuring continuous improvement to our investment-grade balance sheet. We will continue to pursue strategic divestitures including the sale of certain assets within our Rattler portfolio, generating unrealized value for our shareholders. In closing, we know our business. We know we have some of the best inventory in the United States with our low-cost operational machine in place. We have the unique ability to generate significant repeatable returns through the drill bit for decades to come. In 2019, we began co-developing our primary targets, Since then, we've learned how to optimize our development patterns and spacing, and as a result, are seeing material improvement in well productivity over the past 36 months. In fact, our well performance this year is back at 2019 levels, when we were primarily targeting one-off wells in our bed zones, which, while having great performance in economics, had the potential to strand significant components of our inventories. leading to material parent-child concerns down the line. Fortunately, we're well positioned for the future. We expect to close on the Firebird transaction at the end of November and slow the development pace on that asset from three rigs to one. We're working with our service providers to ensure that we have the most efficient and cost-effective personnel and equipment in place for next year, including the two E-Fleet Simulfrac crews we've secured from Halliburton. the first of which is already in the field and performing well. All of this will provide operational momentum as we move into 2023. We expect to deliver the same operational results you've come to expect from Diamondback. While we won't be giving detailed 2023 guidance today, we believe that we will be able to generate low single-digit co-former oil production growth next year by maintaining our current standalone activity levels plus the one additional Firebird rig. It's not easy to operate in this environment, but our size, scale, and quality of inventory uniquely position us to deliver differentiated results and create meaningful value for our shareholders. Before I open up for questions, I want to address all the Diamondback employees that are on the phone. At Diamondback, we've just celebrated our 10 years as a public company. growing from a $500 million market cap to almost $30 billion today. The people around me this morning, and sometimes me individual, get too much credit for this success. It's you, the men and women of Diamondback, that deserve the credit. It's your pursuit of excellence, your desire to be the very best version of yourself, your dedication to integrity that is responsible for our success. It remains my privilege to represent you. Thank you for all that you do. Operator, please open the line for questions.

Certainly. As a reminder, to ask a question, you will need to press star 11 on your telephone. Once again, to ask a question, please press star 11. And our first question comes from the line of Neil Dingman with Truist.

Thanks. Good morning, Travis and team. Travis, my first question is, on your developmental strategy specifically, could you all discuss if you have or will continue to develop, you know, you mentioned, I think it's slide seven, you've gone to the co-development, you all went there really, I think, before a lot of others did, and I'm just wondering, are you going to do that, is that pretty much on all the assets, including when you take over Firebird, And I'm just wondering in the second part of that, are there parts of this process that you believe you still have an advantage over peers? It just seems to me when I'm looking at sort of margins in the perm, you all still are leading. So I'm just wondering if there's some things you're doing when looking at that slide seven that you still think are leading sort of the pack.

Yeah, Neil, good question. This is Case. I think generally we obviously had a tough earnings call at the end of 2019 when we made this shift to co-development. I think we learned very, very quickly from that as well as, you know, moving more of our capital to the Midland Basin. And I think just generally the teams have done a really good job on not only spacing within each zone, but the intrazonal spacing, you know, given that these zones talk to each other. And, you know, the result is, you know, better overall, all results here over the last couple of years. So, you know, nothing's going to change there. I think we're going to keep co-developing. And in fact, in some ways, we'll end up doing some larger paths than we even have prior, given the amount of virgin rock we have in that Salem-Robertson Ranch area that is kicking off in a real way right now. I think generally, on your other question, well costs are certainly the biggest advantage we have as a company at Diamondback, and that's a cultural thing from top to bottom. We're very focused on cost, very focused on you know, keeping costs down in this inflationary environment. I think that gives us an advantage, particularly, you know, when looking at stuff like Firebird, right? Firebird, we're going to co-develop a lot of zones up in the north at a low-cost structure. And that central position, you know, there's opportunities for upside if we bring the Wolf Camp Bay into the lower Sprayberry development. And that, I think, you know, the testament that if we can drill them cheap, the returns make sense to compete for capitals.

Yeah, it really sounds encouraging. Then turn to my second question, or I guess I'd call it the topic du jour, and that's on shareholder return and capital allocation. Try this for you, RKs. Do you see any scenario where you all would back off that 75% payout and maybe turn to more growth or something else? And then on the capital allocation, obviously, you all had a nice stock move. How do you feel about the buybacks versus the divs?

Look, we've seen with volatility in the market that every quarter, we've had the opportunity to buy shares back. And when that opportunity presents itself, we'll do so aggressively. I think the key to any of those questions is the ability to generate free cash flow. And that's certainly what our focus is, and then maintaining the flexibility on how the return of that free cash flow gets prosecuted. I will say that in conversations with our long-only shareholders, a lot of those guys prefer to get the cash back. But again, we believe that we'll have opportunities to repurchase shares back.

Yeah, and then no change to the 75% of free cash flow. While it's certainly a restrictive amount of cash to be giving back to the equity holders, we feel that our balance sheet's in a position to be able to do that. And we're still going to reduce debt through non-core asset sales or free cash flow generation. And our debt structure is significantly better than it has probably ever been in our company history. Generally, we feel that it's time for our equity holders to get their cash back after this company has matured from a high-growth company to a high-returning company.

Yeah, I would agree. Your total shareholder return certainly speaks for itself. Thanks, guys.

Thank you.

Thank you. And our next question comes from the line of Neil Meadow with Goldman Sachs.

Yeah, good morning, team, and congrats on 10 years that went by. very fast. Well done here. My first question is on 2023 capital spending and just any early thoughts here as we bridge from your 22 levels to next year and talk about all the moving parts ranging from inflation to activity.

Yeah, good question, Neil. I think while we're not ready to throw in the towel that well costs are going to keep going up next year, we do have some things coming our way from a efficiency perspective, but I'll kind of lay it out two ways. Based on the $1.9 billion that Diamondback was going to spend on capital this year pre-Firebird, I would assume we're probably up 10% to 15% from that number, gun to head if we had to make that decision today on well costs. I think another way to think about it is basically in Diamondback today's pre-Firebird at a $500 million run rate of capital, I would say you know, somewhere below 10% increased off of that makes sense. And then in both scenarios, you know, adding the $250 million of CapEx for Firebird, you know, we ran that deal on current well costs. So, you know, those current well costs are running through the capital pre-cash flow numbers that we put in for that deal. So that's how we're thinking about it. You know, I think certainly there are some things that could go our way. You know, casing has been a massive headwind for us and for the industry. you know, in Midland Basin casing is now $110 a foot. You know, that is a huge number on a fixed cost that we can't really control here.

Okay. And then we'll look for a little more clarity, but that's a helpful starting point. And then, Travis, a question for you is just on your outlook for U.S. shale growth. I think a number of industry participants have been surprised by how flat the U.S. production profile has looked here over the last several months. And so you're curious on your thoughts on shale maturity and is the lack of growth that we're seeing relative to expectations a function of service bottlenecks or is it a function of also asset maturity?

You know, a lot to unpack in that question, Neil, but I think it's really all of the above. I think there is asset maturation. I think certainly supply chain chain constraints are also limiting growth. I think for public companies, the continued discipline that we've all been demonstrating on shareholder returns versus commitment to growth, I think all of those factors weigh into more of a muted production growth from US shale going forward. That said, out here in the Permian, I think we're still continuing to hit production records every month, somewhere close to 5.3 to 5.5 million barrels a day. But that's going to be challenged to continue to grow that into the future. Do we have the assets out here? Yes, we do. But some of those other topical constraints that I mentioned are going to be impediments to efficient growth. Soon we'll probably see at higher commodity prices, some people try to grow, but they're allocating capital at the very trailing end of efficiency. So those also create headwinds as well for shareholders.

Thanks, Travis.

Thank you. And our next question comes from the line of Arun Jayaram with J.P. Morgan.

Good morning, gentlemen. Case or Travis, I was wondering if you could talk a little bit about the evolution of your co-development strategy, which has shifted in 2019 You highlighted how your well productivity now has returned to 2017 levels. I wanted to see if maybe you could also maybe compare and contrast how Diamondback's development looks like relative to many of your peers, because you highlighted how you believe you're completing the most number of zones per pad in the Midland Basin.

Yeah, I'll kind of focus more on what Diamondback is doing. We certainly do a lot of competitor analysis and learn a lot from our competitors on what to do and what not to do in the basin. Generally, we have a data analytics team that looks at interlateral and interzonal spacing and how many wells you're completing per pad and per zone and how close the nearest wellbore is. Our math tells us that we're striking a good balance here between IRR and NPV. You know, we may not have the highest, you know, oil EUR per foot, but certainly spacing wells a little tighter as well as co-developing more economic zones together. And, you know, I expect that trend to continue to head our way. You know, in some ways, these higher commodity prices, you know, bring more zones into the equation and maybe even one or two wells per zone. But generally, you know, spacing has stayed fairly consistent here for for the last couple years. So, you know, credit to the team for looking at what we've done, what's gone well, what's gone poorly, and adjusting accordingly. And I think we're set up now for, you know, a few years of very solid development, particularly in the Midland Basin side.

Great, great. And then maybe just my quick follow-up. As you guys have now started to develop some of the assets you bought from guidon and qep and kind of central martin county can you give us a sense of how the early wells have been trending and what type of um you know mix should we expect in martin county um on a go-forward basis over the next couple years

yeah i mean certainly you know when we go back to that deal you know we basically said you know we did these two deals to get better not bigger and i think you know that's proving out in the performance of the wells and the performance you know since then um you know we're just getting started in the in the main block uh you know there's a probably a 24 wealth ad coming on here in in early 2023 and you know we'll continue to develop that sale and robertson block very aggressively with probably a three-rig run rate until it's drilled up in three or four years. And that should drive the lion's share of operational performance. Not to be outdone by that, though, we have seen very good well results up in the northwest portion of Martin County this year due to some adjustments on spacing and landing targets. And I'm proud to say certainly some of the shallower zones, Middle Sprayberry, has looked very, very good up there relative to prior expectations.

Great. Thanks a lot. Thank you. And our next question comes from the line of Derek Whitfield with Stiefel.

Good morning, all. Hey, good morning, Derek. Travis, with the understanding that you guys have limited exposure to WAHA in 2023 and the recent weakness, I was really driven by maintenance. Could you speak to your macro views on gas ingress over the next few years and how you plan to mitigate your exposure over time?

Yeah, certainly it's going to be tight. I'll let the case give some specifics on that, but I didn't think a gas takeaway is going to be tight. Really the, certainly most of next year, probably well into 2024 as well until we get some of the major pipes on. So we do think, you know, we, we do, um, you know, we do, uh, opportunistic hedging, uh, particularly against the, uh, on the Waha side. And we've committed to some of these pipes that are making sure we get gas not only that doesn't go to Oaxaca, but goes directly to the Gulf Coast.

Yeah, and basically next year, two-thirds of our gas is exposed to Oaxaca, and that's all been hedged today, actually hedged a while back. And the other third gets Gulf Coast exposure on the Whistler pipeline. And then as you think about 2024, we think there's going to be pockets of weakness in 2024, certainly easing in the back half of the year when the big the big pipe matterhorn comes on but it's going to be it's going to be tight from now until then you know because some of these expansions yeah they're 500 million a day expansions but i think they're going to be full right away terrific and as my follow-up i wanted to focus on your operational efficiency uh given the improvements you've experienced in dnc efficiency metrics really over the last couple of years

most would expect efficiency to apply to due to the laws of diminishing returns and the dilution of experienced crews as you guys look forward in time what are the levers you're hoping to pull to improve or at least maintain your operational efficiency yeah a good question i think the biggest thing that's going to help us next year from a cost perspective are these the two haliburton e-fleets that uh one has just started and one is picking up you know i think generally

On the horsepower side, we get charged a little bit less. You know, they make more margin on that particular piece of business. On top of that, you know, we're not spending money on diesel, right? So we're fueling that fleet with cheap Waha gas for the next couple of years. And that could be anywhere from 10 to 15 bucks a foot of savings, depending on where the price of Waha is. And, you know, we just opened our first mobile mine or mini mine you know, that's going to be right offset some of our Martin County positions. So I think generally, you know, while we're not drilling wells to TD faster than we were last year, you know, we're still best in class in that area. Now it's time to work on the other pieces of the cost equation as inflation heats up here.

Yeah, and Derek, there's a lot of conversations always when you see activity levels increase in the Permian Basin about the impacts of inexperienced or green hands we call them. But I don't follow that line of thinking because it's our job as supervisors of those activities to make sure that even the least experienced individual has the right supervision to perform his job not only safely but efficiently. So the onus actually transfers not to the service companies with inexperienced hands. It transfers to our operations organizations and our field supervisors to make sure they can provide the oversight to prosecute our plans effectively, efficiently, and safely.

Great update. Thanks for your time.

Thank you, Jared.

Thank you. And our next question comes from the line of David Deckelbaum with Cowan.

Thanks, everyone, for taking my questions today. You're welcome. Good morning. Good morning. One of the follow-up just on the $500 million non-core asset divestiture program, $155 million achieved already on some PDP. Travis, you highlighted in your prepared remarks some of the Rattler assets. I kind of feel like Diamondback isn't getting credit for it. Should we think about that as representing the bulk of the remaining non-core targets? And could you give us a little bit more detail about the scope of that asset?

Yeah, I mean, really, Dave, it's all value, right? But generally, internally, we see that, you know, an E&P business trades at four or five times and a pipeline or a gathering system trades at eight to ten times. So, you know, it's logical for us, with us not getting any credit for it in our valuation, to look at some of the JVs that we, you know, invested in alongside, you know, contributing volumes to those businesses over the last five years. And now I think they're in kind of a harvest mode where it might make sense to, to sell, particularly given our buy-in of Rattler and our new focus on the upstream business, which is what we're so good at. So I won't commit to certain projects, but there are certainly some of our JVs who are sitting on big wins, and you can expect us to try to monetize those appropriately over time.

I appreciate the color on that, and good luck with those. Maybe just the second one for me. I know we talked a lot about well productivity, but you know, obviously it's on that slide seven. You guys highlight continued well productivity improvements in the Midland Basin. I guess as we think about going into 2023, I think you guys have highlighted you'll continue to allocate more activity towards some of the Virgin Rock areas like Robertson Ranch. It also seems like the overall Midland productivity is benefiting from high grading into Martin and Midland. With Firebird, I guess you're putting one rig on there. I guess when you look out, you know, how long does this mix be, you know, how long is this mix maintained with this sort of intense high grading within Martin and Midland where we might expect that productivity per well or on a per foot basis to be sustained at these levels or perhaps improving?

Yeah, I mean, you know, I think it's going to be around for a while, you know, certainly longer than, than the market can see today, which I think is important. We have two well-timed deals in 2020 that we're benefiting from today. I think generally our job is to allocate capital to the best returning zones and projects first, so we won't be able to keep this up forever. But I think as the shale cost curve goes up, which is likely to happen over the next decade, Our job is to maintain a cost structure and an inventory that keeps us at the low end of that cost curve. And that's what we built this business on. And I think we have both the inventory and definitely the cost structure to be able to keep ourselves at the low end of that cost curve longer.

I appreciate that.

Thank you, guys. Thanks, David. Thank you. And our next question comes from the line of Jeffrey Lamblejohn with TPH.

Good morning, guys, and thanks for taking my questions. Thank you, Jeffrey. Just a couple from me on the Firebird acreage in particular, a little bit on productivity, but also a bit on inventory. I saw on the deck that you highlighted some low results on that acreage. I just wanted to get your thoughts on if there are any potential implications there from an inventory standpoint, if you could maybe speak to how the locations you've spoken to to this point for that asset are distributed across the position, and secondly, what sort of upside you might contemplate in terms of inventory based on some of these results.

Yeah, Jeff, great question. You know, when we announced the deal, we got on the phone with a lot of people, but we haven't been on a big call like this. You know, we basically said the northern prospect, which you can see on slide eight in our deck, you know, competes for capital right away, and that's the game play is to allocate that rig to that northern prospect for the first few years of the deal. I think generally, you know, recent well results in the central prospect would bring in the Wolf Camp A upside into co-development. We underwrote six across in the lower spray area across that block, and that's what we paid for, but recent well results of co-developing the LS and the A look pretty promising today. We have some time to kind of test that out before full field development, but that's kind of the underwritten upside of the trade.

Perfect. Thanks, guys.

Thank you, Jeff.

Thank you. And our next question comes from the line of Janine Y. with Barclays.

Hi. Good morning, Travis. Good morning, Kay. Thanks for taking our questions.

Good morning, Janine.

Our first question, maybe just going back to the 2022 guide, the updated guidance for wells drilled, it's now a little bit lower at 260 for the year versus 270 to 290 before, I think. Can you talk about what's driving that number lower now and how that really impacts operational momentum into next year?

Yeah, you know, Janine, I won't say it interrupts operational momentum into next year because it's our job to not have those be issues. You know, we are running a couple extra intermediate rigs today to get ahead of these large pads where the big rig follows. So I think the message is nothing to see here from operational momentum. That's what you expect us to do, and that's what we do best. I would just say we probably completed a couple more walls in the Delaware than we originally expected this year, and we ran probably one less rig than we thought for the year. So On the other side of the equation, we're completing probably 15 less wells than we went into the year expecting to complete. So capital efficiency certainly looking good, and momentum feels very good going into 2023.

Okay, great. Definitely a standout these days in E&P. Wonderful. Thank you for that clarity. Maybe our second question is just a quick housekeeping one. In your prepared remarks on 23, you talked about low single-digit growth on a year-over-year adjusted basis. And what baseline oil number should we be using? We're assuming it's like 220 a day for Legacy Fang, but we're not quite sure what to assume for Firebird since we only have commentary for 4Q, and that's only for like a month. So just a housekeeping question on that. Thank you.

Yeah, good question. You know, I think, you know, we did release 19,000 barrels of oil a day net for Firebird in 2023, and that is not changing. The base business, Fang, you know, we went into 2022 saying we're going to keep 220,000 barrels of oil a day flat. You know, we've kind of outperformed that a little bit this year, but basically you can take that 220, complete the same number of wells as we expected at the pre-Firebird Diamondback level, and that should spit out a couple percentage points of low single-digit growth, and then add that Firebird 19 on top of that, and nothing's changed here from our perspective. I think that's what you expect us to do, be transparent and hit these numbers.

Okay. Thanks, gentlemen.

Thank you, Janine.

Thank you. And our next question comes from the line of Tim Resvan with KeyBank Capital Markets.

Hi. Good morning, folks. Some of my questions have been addressed, so I think I'll just ask one. Travis, you opened the door a bit talking about Election Day today. And I'm just curious if you could talk about if either Diamondback or any of your industry trade groups has had any discussions with the Biden administration in D.C. about these perceived oil shortages in the U.S. and any context you can provide would be helpful.

Yes, certainly not specifically inside Diamondback, but yes, aggressively so with the trade organizations that Diamondback is a part of. At the federal level, API, AXPC, we have a lot of sweat equity invested in both of those trade organizations that we lean in alongside all of our industry peers to provide some clear strategies into the White House and into the current administration. And that will continue regardless of how the results of the elections turn out today. That's our advocacy arm, and we think it's important for our shareholders to be a dynamic part of that advocacy.

Okay, and then I guess the follow-up is, do you believe that anybody in D.C. is listening to sort of the domestic group of producers? Yes.

Yeah, it certainly seems like the rhetoric has turned decidedly against the industry again in the lead up to these elections. We can only hope and pray for that our citizens continue to elect morally and ethically excellent representatives so that we can send people to Washington, D.C. that do the will of the people. You know, Diamondback's going to continue to do our part, like I said, through advocacy, both locally and at the state and federal level, you know, as we navigate this very difficult rhetoric that's being addressed or pointed at our industry.

Thank you. I appreciate the comments.

Thanks, Tim. Thank you. Next, Doug Leggett with Bank of America.

Good morning. This is John Abbott for Doug Leggett, and thank you for taking our questions. Our first question is on capital allocation. Approximately 80% of your CapEx is to the Midland this year, 20% to the Dell, and you sort of look over a multi-year horizon. At what point would you anticipate that the Delaware would become a better or larger percentage of your overall CapEx?

You know, honestly, quite frankly, we look at all our inventory, and we can kind of keep that 80-20 steady for a long time. So I don't think there's any plans to change it. You know, in some ways, with the firebird acquisition, some more wells completed there will probably be closer to 85-15, you know, Midland, Delaware. And, you know, I think, you know, the curves that we posted on slide 7 prove out that, you know, our Midland Basin is certainly – top-notch and that's where we're going to be focused.

Appreciate it. And then our second question is on sustainable free cash flow. So, you know, the wells you're drilling this year are over 10,000 foot laterals. You know, looking at your slides, I think it's about two-thirds of your inventory is about 10,000 foot laterals. The other one-third is less than that. So over a multi-year horizon, how do you think about your ability to sustain free cash flow?

I think generally we have a significant amount of long lateral development ahead of us. At some point, naturally, if we can't get trades done or block up acreage, we're going to have to reduce our lateral length. But I think on the other hand, you have a lower decline production allowing you to maintain capital efficiency for a longer period of time. We look at it every quarter, total inventory, total development, and as far as we can see, things look very good for Diamondback's capital efficiency for the next few years.

Appreciate it, guys. Thanks for taking our questions. Thanks, John.

Thank you. And our next question comes from the line of Charles Mead with Johnson Rice.

Good morning, Travis Case and the rest of the Diamondback crew.

Good morning, Charles.

Travis, I'd like to ask a question back to the fiber asset. You guys laid out this view along the north-south axis, but can you give us some of the, I guess, how the prospectivity changes east to west? And my understanding is this. you're starting to approach or get up onto the central basin platform, particularly on the western side of that central prospect, and I think it even abuts your limelight prospect there. Are there any promising puzzles you're working on on that side, or is that something we should be thinking about in the near future, or is that a project that's way down the line?

Yeah, good question. I don't think it's anything in the near term. There certainly are some results further west that early time look promising, but you know, we didn't underwrite kind of a two-mile buffer on the west side for LS prospectivity, but certainly did, you know, there's certainly some untapped upside with some Barnett and Woodford results nearby, including our limelight prospect. So that play is getting a lot of attention, but, you know, at the end of the day, our investors expect us to underwrite what we're going to develop, and right now that's all on, you know, unvalued upside, which you know, technology and costs work out. It'll be certainly prospective, you know, into the next decade when we get to drilling it.

And you'll see our development strategy, Charles, as we move to that central block, as Case laid out, as kind of our phase two drilling. But we'll start east and work west. And I think the two wells that are labeled E and F on slide eight are good examples of what that early development scenario look like. Now, while we didn't complete them as well, the results are really promising and we're excited about them. But phase one will be up to the north, which is very akin to our Spanish Trail development, and then we'll start on the east side of the Central Prospect and work our way to the west before you get up, as you pointed out, before you get to the Central Basin Platform.

That's good detail. Case, when I was listening to your answer, it made me think of a word I don't think I've ever heard before. I was expecting you to say something like that Western-sized un-underwritten or something like that. But anyway, un-underwritten. And then maybe just one more following up on this Firebird deal and Travis in case. I think this is kind of – whether we should think about this as a new mode or a pattern for you guys. As I look at the different pieces of your business where you're not committing to 75% cash return, a free cash return to shareholders, that leaves a smaller piece, the 25% piece available to fund the cash portion of any future A&D. And then we look at this Fireberg deal, you guys, it looks like a good deal. But, you know, equity was a big component of it. So is that something we should be thinking about for you guys, is that as you're retaining less cash, that equity is going to be a meaningful chunk of future A&D, or is that the wrong interpretation?

Well, I think generally there's not a ton of A&D left to do in the basin, right? It's certainly, you know, there's not random, you know, 20,000, 30,000-acre blocks in the middle of Martin County or Midland County that that are available. So A&D is certainly evolving over the next couple years in the Permian as consolidation continues. I think generally with the 75-25 commitment to equity versus non-equity on cash returns, that makes looking at deals even more, puts deals under the microscope. So in this deal, we're very focused on not levering up the balance sheet in a meaningful way because we've worked so hard to get the balance sheet where it is. And the sellers had an asset that was early in its development and believed in the upside and wanted to take Diamondback stock to execute on that upside. We're not giving up 10% of the company to these guys. They have a 3% position and hopefully they're long-term happy shareholders. But I think we've used equity to grow this business for the last 10 years and and it's proven out to be the right way to fund deals.

Thanks for that detail, Case. Appreciate it.

Thanks, Charles.

Thank you. And our next question comes from the line of Leo Mariani with MKM Partners.

Hey, guys. I wanted to jump back into kind of CapEx. Certainly, I've noticed that CapEx has kind of been trending up a little bit in the last few quarters and into the fourth quarter guidance. I assume that's mainly inflation. I think your activity levels have been pretty flattish. Can you just provide any more color around the pace of inflation right now? I know you talked about tubulars continuing to sort of go up. Are you starting to sense that any other items are maybe starting to ease a little bit where they're not rising as quickly? And have you locked in any major portions of your 23 budget at this point? And if so, can you provide some details on that?

Yeah, Leo, good question. You know, I would say, you know, this is kind of why we're not looking to give 23 guidance officially today because I think some things will come to us, you know, versus this year where everything just went up. You know, we do have a couple of frac fleets locked in, the two E fleets that we talked about. You know, all of our sand is locked in. with a large contract with a local provider. You know, the rigs, we continue to, you know, roll our rigs on a rolling six-month basis. And, you know, while we're running 15 rigs today, I bet you 12 of them are different rigs than we were running this time last year because of cost and efficiency. So, you know, there's a lot going on behind the scenes to keep pushing well costs down or stop them from going up. And, you know, that's what you'd expect us to do.

Okay, that's helpful. And I just wanted to ask a clarification question. I know it's too early for exact specifics on 2023, but if I heard you guys right, I mean, the base level thinking is sort of flattish year over year activity, and then basically you would just add in Firebird essentially. So the operating plan for this year pre-Firebird, you know, is relatively intact for next year.

That's right. You know, I think, you know, Firebird, we're going to drop, you know, a couple rigs. drop them down from three rigs to one rig, generate a little more free cash on that business, you know, and hit 19,000 net barrels a day of production we forecasted for that business. I think we'll complete around 30 wells there. So you can basically take down and back base business from this year plus the 30 wells from Firebird plus the production that we laid out today to get a, you know, an early look at 2023.

Okay. Thanks, guys. Thanks, Leo.

Thank you. And I'm showing no further questions. So with that, I'll hand the call back over to CEO Travis Stice for any closing remarks.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.