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Operator
Good day, and thank you for standing by. Welcome to the Diamondback Energy second quarter 2023 earnings conference call. At this time, all participants are in 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the VP of Investor Relations, Adam Lomas. Please go ahead.
Adam Lomas
Thank you, Jules. Good morning, and welcome to Diamondback Energy's second quarter 2023 conference call. During our call today, we will reference an updated investor presentation and letter to stockholders, which can be found on Diamondback's website. Representing Diamondback today are Travis Seitz, Chairman and CEO, Kate Spanthoff, 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 SEC. In addition, we will make a 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 Suss.
Jules
Good morning, and thank you, Adam. As Adam mentioned, last night we released a shareholder letter in conjunction with our press release, and this is our second quarter in a row we've tried this. I hope you find it useful. We believe that it not only increases the transparency directly to our shareholders, but also improves efficiency and Those of you who have followed our story for a long time know how important improving efficiency is to us. So with that, operator, let's move right into questions, if you'll open the line.
Operator
Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
Neil
Our first question comes from the line of Neil Dingman of Trust Security.
Operator
Your line is now open.
Neil
Morning, Travis, guys. Nice quarter. Travis, my first question, maybe get right to it, is on service costs that we've heard a lot of chatter about. Specifically, could you speak to maybe the current rig and frac rate environment today versus a couple months ago? And maybe more importantly, what are you all assuming the change in cost for the remainder of the year and how this could impact the 24 levels?
Jules
You know, Neil, good morning. That's a good question. You know, when you look at our business partners on the service side, they have always been responsive to declining and increasing rig count. And the Permian Basin rig count continues to decline. And with the discipline we're seeing across the E&P space, with the reluctance to increase spending, we believe that we will continue to see a softening in cost from our friends on the service side. Now, with that, that's only part of the calculus. The other part, which we view more as the variable side, we continue to drive cost out of the equations with increased efficiency. And like we talked about in May, we also see continued input costs coming down, steel, cement, and other items. So it's hard to forecast into the future, but we definitely believe that we're going to see a softening in many of the costs that we've seen from the first half of the year. And we also continue to rely on the organization to do things more efficiently, which they continue to do quarter over quarter.
Neil
So is it too early to call any deflation for next year at this point?
Travis
I think it's premature to call deflation from where we're headed at the end of the year. I think high level, we entered the year in the Midland Basin in the low 700s of foot, drilling complete and equipped costs, and we'll probably exit the year in the low 600s of foot. Again, we're not calling for a cratering of the service market. We're just calling for a rationalization of it where costs only went up and to the right for all service lines and raw materials for seven or eight quarters, and now that's coming back down to earth a little bit. We can kind of enter 2024 or exit 2023 in the
Neil
low 600s per foot in the midland basin that feels like a pretty good uh baseline for 2024. great great point guys and then my second question on capital spin specifically it looked like you slightly increased the midstream and upstream capex guide just you know very very slightly but i'm just wondering are you able to give a little color on maybe how this will be allocated both for the upstream and midstream, and then potential benefits that this slight push should cause, especially noticeable around the midstream, but I'm curious around both, maybe any benefits that we could see from this upturn.
Travis
Yeah, I'll start with the upstream. We drilled a lot of wells in Q2, right? We drilled a record amount of wells, 98 wells in the quarter. That would imply we're drilling almost 400 wells a year versus guidance at 340. A lot of pipe in the ground, a lot of lateral footage drilled, almost a little over 1.1 million lateral feet. So it was a good quarter operations-wise, which is why we're slowing down the drilling pace in the second half of the year and building a few ducts. So that's kind of part of the main bump on the DC&E side. And then on the midstream side, we have a lot of infrastructure in the Middleman Basin that most of it does have extra capacity and If a neighbor needs water or needs to dispose of water and we have that capacity, we will spend a few dollars to connect to that person. So a few unique opportunities came up in Martin County throughout the last three or four months, and we're going to spend some dollars to go get a lot of barrels, and that's high payback, high return, midstream spend.
Neil
Helpful. Thanks, guys.
Travis
Thank you, Neil.
Neil
Thank you. Please stand by for our next question. Our next question comes from the line of Neil Mehta of Goldman Sachs. Your line is now open.
Neil Mehta
Thank you so much, guys. The first question, Travis, is just on the M&A landscape in the Permian. And maybe you could talk about, do you see a role for Diamondback to continue to be a consolidator in the basin and then also provide an update on the asset sales as the program has gone very well for you guys?
Jules
I'll take those in reverse order. If you're talking about the deals that we did earlier in the year, they've been seamlessly integrated with absolutely no issue. I will say that both of those companies we acquired were running more rigs than we're currently running now, which again continues to be the trend as you see acquisitions occur, operators that are acquiring or dropping rigs as they focus on increased profitability. The landscape, Neil, certainly relative to what we've seen in the last couple of quarters, there's just really few opportunities out there. I mean, there was a rush primarily on the private equity side to get deals into the market. And relative to what we see right now, it's very, very, very, very limited. As to FANG's role in M&A, we have created a lot of shareholder value. through M&A, but our discipline has also been noteworthy as well, too. It's not important to win every deal. It's important to win deals that make us not bigger, but better. And so we'll continue to always hold ourselves accountable to that. But I'll go back to my earlier comment that relative to what we've seen in the first half of the year, it's pretty harsh on a go-forward basis.
Neil Mehta
Thanks, Travis. And the follow-up is just, Optimal capital structure, we've talked about this in the calls over the years, but just how do you think about what the optimal cash level, leverage level is for the business, and it'll help us sort of calibrate the return of capital for the company too. Thank you.
Jules
Sure. You know, the leverage, you know, obviously moves around with oil price, but I think having a leverage ratio of less than one is appropriate for the size and scale of a company of diamondback size. I do think also that building a little bit of cash on the balance sheet continues to make sense in order to be opportunistic for share repurchases in a counter-cyclical way. But those are kind of the two inputs that we build our capital structure and return model around. Thanks, Travis.
Neil
Thank you. Please stand by for our next question. Our next question comes from the line of Arun Jayaram from JPMorgan.
Operator
Your line is now open.
CapEx
Good morning, Travis and team. Both of my questions relate to CapEx. My first question is on your updated guide, you're guiding to an $80 million decline in sequential CapEx in 4Q versus 3Q, which you're pegging as the new baseline I was wondering if you could help us understand the drivers of the lower CapEx and 4Q versus 3Q.
Travis
Yeah, I would say 4Q versus 3Q is a combination of lower activity and lower costs going through the system. As you know, we're a cash CapEx payer, so we can see a few months in advance what CapEx is looking like and certainly coming down in the out months. I would say generally, you know, that's probably the low end of a baseline for the next year. You know, certainly think that a low 600 is a quarter kind of run rate feels okay. 600 million is a quarter run rate feels okay for 2024. You know, it is on the August 1st. So, you know, we're going to put that in pencil and see where service costs shake out. But certainly things tend to be moving our way from a well-cost perspective. You know, I gave some kind of Cost per foot language earlier in the Midland Basin, you know, down to the low 600s by the end of the year, you know, still feels very achievable, and that kind of sets our targets for the upcoming year.
CapEx
Great. And kind of stole my thunder there on the second question, but your 2024 outlook is to drive low single digits oil growth. I know the street is now modeling around $650 million per quarter growth. in capex, but it sounds like your comfortable case as we stand here today at something in the low 600s.
Travis
Yeah, I'd say that today. Obviously, still a lot of things to shake out, but I think the quality of the inventory that we have coming up as well as the high mineral interest in the core of the basin, completely undeveloped sections and units, feels like a very capital-efficient plan. You know, we've kind of been highlighting this for the last couple years. You know, the guide on QP transactions provided a lot of undeveloped inventory that we can bring a large-scale execution machine to, and now we're, you know, seeing the benefits of those couple deals.
Jules
You know, really, just as a reminder, we've been guiding for kind of lower CapEx, you know, all year long in the back half, and we're seeing it play out now, and And as we laid out on slide six of our investor deck, you know, sort of a forecast, you know, by quarter of what that looks like.
CapEx
Great. Thanks a lot, gents.
Jules
Thanks, everyone.
Neil
Thank you. Please stand by for our next question. Our next question comes from the line of Derek Whitfield of Stifle.
Operator
Your line is now open.
Derek
Good morning, all, and congrats on a strong quarter. Thanks, Derek. Staying on 2024, now that you've fully integrated Firebird and Larry O, what is the right base level of activity that would support the 2024 outlook from a rig and frack spread perspective?
Travis
Yeah, you know, I'll kind of highlight, you know, what we've done in 2023, and that feels like a good baseline for you know, before a plan, not forever, but how we think about capital allocation. You know, we have a business where we can run four simul-frac crews efficiently, right? And a simul-frac crew on the completion side completes about 80 wells a year. And for us, you know, in this new business model of capital efficiency and profit, you know, value over volumes, you know, we're focused on running the most efficient plan possible, which would be that four SAML frac crew plan. You know, absent of a major change in commodity price, the plan is the plan, and that allows the teams to plan their business and also allows us to execute at the lowest cost from a CapEx perspective. So kind of that 15-ish rigs and four SAML frac crews feels like a really good baseline for us.
Jules
You know, and just to add to that, this profitability model, that we've been demonstrating now for multiple quarters in a row and the industry has pivoted to, I hope we have been able to demonstrate that volume growth is an output of efficient capital allocation that's laser-like focused on profitability. So as here on August 1st, as we're entertaining questions on 2024, the volume growth will be an output of efficient capital allocation that maximizes the value for our capital allocation decisions.
Derek
Understood. Thanks for that, Travis. And as my follow up, I wanted to touch on well productivity, which you've rightfully highlighted on page 15 as a positive. When you look out to 2024, how do you guys think about well productivity relative to 2023? And then how does that project over the next few years? It feels like you guys have a very deep portfolio that has quite a bit of stability over the next several years.
Travis
Yeah, Derek, you know, I think, you know, generally we feel very confident in the forward outlook for productivity. I think that's going to be a unique position in North American shale. You know, we've been, we've timed deals very, very well. And we've made the shift to co-development four or five years ago now, and that's that's resulting in very steady productivity, as you can see, you know, within 1% of 2022 levels already in 23. And, you know, I would just say flat, you know, flat feels like the baseline. And if it's better than that, that's one for the good guys.
Jules
You know, Derek, we continue to lay out on slide 16 in this deck, you know, what our inventory looks like. And, you know, as I look into the future, I couldn't be more confident about the long-term quality of our inventory. And in fact, that confidence in the future business plan is part of the reason that we're confident in being able to increase our base dividend. I mean, that's to me the clearest indication from management to our owners about the future of our business and the quality of our inventory is our ability to continually increase our base dividend. I think our Our quarterly CAGR for dividend increases is around 10% since we initiated it in 2018. So, I hope that helps.
Derek
Great. Well done, guys. Thanks for your time.
Neil
Thank you. Please stand by for our next question.
Operator
Our next question comes from the line of Charles Mead of Johnson Rice. Your line is now open.
Charles Mead
Good morning, Travis Case and Adam and the rest of the fan crew there.
Jules
Good morning, Charles.
Charles Mead
Travis, I wonder if you could drill down a little bit on the improved cycle times that's allowing you to increase your gross well count for the year. Is this something that's I can think of a few possibilities. Is this something where you have a couple of rigs that have just increased their performance, or is this something that's more widespread across your whole rig fleet, perhaps bit selection or something like that, which is letting every rig just get through their laterals quicker? What's the driver there?
Jules
Charles, I wish I could say it was one individual rig. piece of technology that's transferable across our entire rig fleet, but it's much more subtle than that. I'm going to let Danny give you some specific examples, but we get this question a lot and it's always phrased in different ways about why does Diamondback do what they do, but the answer remains unchanged. It's the culture that we have that has an extreme focus on cost control and efficiencies. And the reason that that's important to our culture is because when we make those gains in efficiencies, those gains become permanent in part to our future capital allocation decisions, which makes us more competitive for the same dollar that we're competing with relative to our peers. And again, it's not one or two items. It's thousands of items that are decided upon every one of these rigs. Look, we have a healthy competition among our rigs and completion crews that we incentivize monetarily for efficiency and cost control measures. Danny, do you want to add some specifics on that?
Charles
Yeah. I think we've seen certainly our year-over-year days reduced by some measurable percentage. What it boils down to is the team's measuring every little thing they can on the rig and measuring which way those operational metrics are trending. When one's not trending in the right direction, they attack it with a fervor that is unlike anything I've ever seen. That continues to output year-over-year improvements in execution. You know, this past month we had a couple wells that they've drilled at all-time records for us for 7,500 foot laterals that were, you know, some five-day wells, just over four days to PD. And those results are remarkable. And we don't talk about individual well results a lot, but those are the things that, you know, we continue to do in the, you know, in the day-to-day of the company that continue to drive our execution down.
Jules
You know, Charles, just One added to that, we just completed our quarterly reviews several weeks ago. The teams present to us levels of details of measurement that Danny was talking about, which is almost stunning to me, but we do it almost every quarter. That is, they measure how long it takes to physically screw pipe together for 300 times for every trip that they make. And that measurement of just simply screwing pipe together in five minutes versus the next rig over that was six minutes, you know, you think doesn't matter, but you do that several bit trips, bit runs, you know, per well, it adds up. And that's the level that organization focuses on efficiency. And we have a lot of down back employees listening into this call this morning, and I want them to hear that I'm proud of that work. that they continue to do and deliver those results of four-day, 7,500-foot wells that Danny just alluded to.
Charles Mead
Thank you, Travis. That reminds me of that saying, what gets measured gets done. But second question, and this kind of gets to the capital structure question. I want to ask how you view the decision or the tradeoff between the share buybacks and the note buybacks. I'd like to see those note buybacks, and it looks like you guys did it at some good prices, but sometimes that could perhaps get lost in the – this is not technically a cash return to shareholders, but it is a return to shareholders. So how do you guys approach that look on buyback notes versus shares?
Jules
Let me – talk to you about how we discussed it at the board level. The primary form of shareholder return is in our base dividend. And we put that in place to be not only a sustainable, but a growing base dividend. And as I talked about earlier this quarter, we increased our base dividend another 5%. And so, as you look into the future, that base dividend will remain of paramount importance to us. And we believe that we have that base dividend covered down to $40 a barrel of oil. So I just give you some confidence as to that base dividend. The second piece of the equation is share buybacks. And share buybacks are determined based on our future expectation of future cash flows and turned into a stock price so that we can measure you know, where we want to repurchase shares back. And so you can tell from the last several quarters the fact that we've leaned in all of our discretionary free cash flow after our base dividend to repurchase shares. And in a general sense, and not specific, because everybody wants to know what stock price we're using, which we won't say until the quarter's behind us, but the lower the stock price, you know, the more you get share repurchases, the higher the stock price, you tend to purchase less. So I hope that makes sense. And then anything left over from that calculus, Charles, is going to be distributed in the form of a variable dividend because we made a commitment to our owners that we would return 75% of our free cash flow. So I hope that makes sense.
Charles Mead
Thank you for that elaboration. Appreciate it.
Operator
Thank you.
Neil
Please stand by for our next question. Our next question comes from the line of Subash Chandra from Benchmark Company.
Operator
The line is now open.
spk03
Hi. Good morning, everyone. The first question is how you think of, you know, oil cuts going forward into 24. You know, is that a function of of maybe the zones you're drilling, or just spatially where the acreage is located, or perhaps other factors like gas capture, et cetera?
Travis
Yeah, good question. Listen, we're allocating a lot of capital to the northern Des Moines Basin where it's very oily, particularly early time. I think we kind of guide people to 59%, 60% oil. I think that's probably... a fairly good baseline for the next few years. You know, in a world where we're not growing as much, you know, that oil cut stays flat, it comes down slightly because, you know, the oil declines a little faster than the gas piece. But, you know, generally, you know, we had a couple higher gas cut wells in the Delaware Basin at the beginning of this year that, you know, boosted the gas production as a company. But overall, you know, kind of high 50s, 60% in a good quarter would be a a good range for oil cuts.
spk03
Terrific. Thanks. And the follow-up is, I guess, on asset sales. So they've been largely midstream. How do you think the market now is for upstream assets now that oil's returned back to 80, the bid-ask? And in the cash flow statement, I think there was 140, 150 million in asset purchases. Just curious if that's just an overflow from the first quarter on deals announced already or just immaterial acquisitions.
Travis
Yeah, I'll take that two ways. Generally, on the purchase side, we've been doing a little bit of leasing as well as a little bit of netting up. We try to make our asset teams involved in BD. They're making offers on undeveloped. you know, interests and those non-off pieces that we don't own in our development. So they're doing work there. You know, we've been looking at leasing some of the deeper rights in the Midland Basin across some of our positions. So that's tied to some of those purchases in the cash flow statement. And then, you know, on the divestiture side, we've divested a good amount of what we deem non-core acreage. You know, acreage doesn't compete for capital in the next kind of 10 years of development and have received some good prices there. I'd say we're on the sidelines more on the divestiture side today outside of what would be a very unique offer. Instead, we're more focused on the non-core midstream type divestitures like the OMOG divestiture we announced this earnings. We didn't increase our non-core asset sale target. We certainly have some more assets that make sense to sell. We'll just most likely be you know, tagging along and not controlling the process.
spk03
Thanks so much.
Operator
Thank you. Thank you. Please stand by for our next question. As a reminder, to ask a question, you will need to press star 11 on your telephone. Again, that's star 11 on your telephone.
Neil
Our next question comes from the line of Leo Mariani of Roth MKM.
Operator
Your line is now open.
spk01
Hi, guys. I want to talk a little bit about production here. So second quarter, you know, very nice beat, you know, versus the guidance. I think you guys said that you kind of drilled a record number of wells, you know, in the quarter. You know, looking at third quarter production guide, it does indicate that on a total basis production should be down a little bit. You know, this quarter, can you just help us kind of think through that dynamic a little bit with kind of record drilling last quarter, but production is coming down. Maybe you guys are kind of holding some wells off in terms of turning them in line until later in the year. What's kind of happening there?
Travis
Yeah, Leo, you know, I kind of see, we kind of think about the oil guidance as what drives the decisions here at the company. I kind of see Q3 as flat, maybe up a little bit from Q2, but Q2 is a very good quarter from a completions perspective. The drilling side doesn't really drive the production profile. We were probably building a few ducts in the back half of the year to set us up well for the next year. Completion cadence was also high in the first half of the year. 89 wells in Q2, you know, that'll come down to kind of 80-ish for Q3 and Q4. So, you know, I think, again, the production is the output of smart, capital-efficient decisions. You know, if this was 2017 or 2018, we'd, you know, be stepping on the accelerator and spending more capital, but instead we're focused on generating more free cash flow in the second half of the year and returning that cash to shareholders.
spk01
Okay, that's helpful. And then just on capital here, so kind of looking at kind of where you guys were in the second quarter, I mean, it looks like that's going to be the peak, so we should be expecting CapEx to come down, I guess, both in 3Q and in 4Q. How much of that is kind of related to service costs? You just talked about fewer completions in the second half, but is it really fourth quarter where you start to see maybe more service cost benefit? You talked about going from Low 700s per foot start the year at a kind of low sixes by the end of the year. So are you starting to get some of that benefit here in 4Q? You know, similar number of completions, 80 should be down kind of a fair bit on capital here in 4Q. Just help us think through that a little bit.
Travis
Yeah, I think right now we're seeing the benefits of the raw materials decreases coming through the system, you know, mainly pipe, cement, diesel, and now, you know, kind of after this call through the end of Q3 into Q4, you know, some of the true service side, you know, rolling through the numbers. You know, as we mentioned, we're a cash CapEx payer, so today we're paying for activity in June, so we kind of have a good forward outlook that that CapEx is coming down. I think the cost per foot we're seeing on wells put in the ground today is lower even than Q2, and, you know, that's all going to translate to, a lower average wealth cost at the end of the year.
Neil
Okay, thanks. Thanks, Leo.
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of Paul Chang of Scotiabank. Your line is now open.
Paul Chang
Thank you. Good morning, guys. Two questions, please. One of your large customers is spreading about how much is their EUR recovery rate has improved or is going to improve based on the work that they are doing. Just wondering that, Travis, that in this debate, I mean, are you guys looking into that or that whether that based on today's technology and commodity price, is it economic for you to pursue trying to substantially improve the recoverable rate? That's the first question. Second question.
Travis
Yeah, Paul, let me answer the first one first. I think Diamondback is really a technology company that produces oil, and we spend a lot of time looking at improving EURs. We spend a lot of time looking across the fence line at what competitors and peers are doing. There's not a ton of secrets in the Permian Basin. So if there is a better mousetrap, we're going to find a way to do it. I think our advantage is that we can do it at a lower cost. So generally, we're constantly pursuing improving URs, improving recoveries, improving technologies. So you'd expect us to be on our front foot there. I don't think we're going to spend a ton of dollars testing that, but would instead be a fast follower on anything that looks to be working.
Paul Chang
Based on what you can see today on the technology and the current pricing, is it possible to pursue such activities?
Travis
I don't think it's possible today. I certainly think there's some people spending money to look at it. You know, for us, you know, we really want to allocate capital to the best returning projects that we have today. And that, for us, is, you know, high return, multi-zone development in the Midland Basin.
Paul Chang
Great. The second question is on the electoral length. You guys have been very successful, continue to lengthen yet. I think the third quarter is expecting about 10,800 seats. Based on your existing land position, your portfolio, do you think that there's far more room for you, your average land is going to be able to push substantially higher than here, or that we are pretty close to the max, unless there's some meaningful portfolio changes?
Travis
Yeah, you know, I think it's a risk-reward decision, Paul. There's certainly some areas where we can drill longer, I think, but I think generally The way our land position is laid out and the way our acreage sits today, that 10,000 to 11,000 range feels about right on average. We'd rather drill a 15,000-footer than two 7,500-footers, but I think today we'd rather drill two 10,000-footers versus one 20,000-footer. So I think the drilling guys can do it on the drilling side. There's no doubt about that. It's a risk-reward decision because if something bad happens at 18,000 feet, that's an expensive mistake. So we'd rather continue to get wells down at 10,000 feet in eight, nine days consistently versus risking a 30-, 40-day well when something goes wrong.
Paul Chang
All right, great. Thank you.
Neil
Thanks, Paul. Thank you.
Operator
At this time, I would now like to turn it back to Travis Stice for closing remarks.
Jules
Appreciate everyone listening in this morning. Good set of questions. Hope you have a fantastic day. If you've got any questions, just reach out to us at the number provided.
Operator
Thank you. At this time, that concludes today's conference. You may now disconnect.
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