Diamondback Energy Inc (FANG) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Diamondback Energy Second Quarter 2019 Earnings Conference call.

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Adam Lawlis, Vice President of Investor Relations.

Sir, you may begin.

Thank you, Josh.

Good morning and welcome to Diamondback Energy Second Quarter 2019 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 Stice, CEO; Mike Hollis, President and COO; and Kaes Van't Hof, CFO.

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 Stice.

Thank you, Adam.

Welcome, everyone, thank you for listening to Diamondback's Second Quarter 2019 Conference Call.

Diamondback continued to execute in the second quarter of 2019.

We produced record EBITDA per share from 7% quarter-over-quarter production growth, while lowering the midpoint of our capital cost guidance and increasing the midpoints of both our full year production guidance and estimated completed well count for the year.

Diamondback has now grown earnings per share at 11% quarterly CAGR and EBITDA per share by 9% quarterly since our IPO in late 2012.

Based on second quarter numbers, Diamondback now generates more annualized EBITDA per share than our IPO price 7 years ago.

Diamondback continues to focus on per share metrics with shareholders now owning more production, cash flow and earnings per share than prior to our acquisition of Energen a year ago, even in the face of a lower commodity price environment.

Diamondback's per lateral foot well costs, which include every dollar spent bringing our operated wells to production and the first 6 months of production-related costs thereafter, are down 7% year-over-year in the Midland Basin and 16% year-over-year in the Delaware Basin.

As a result, we are narrowing the midpoint of our 2019 capital budget and increasing the midpoint of our operated completions, which implies over $110 of improved capital efficiency per completed lateral foot versus our initial budget presented in December.

Our operations organization continues to drive material costs out of the business with expectations for continued tailwinds due to improved efficiencies and service cost deflation.

With respect to the Energen acquisition and subsequent integration, Diamondback has now completed every major strategic objective and exceeded our stated synergies presented 1 year ago when we announced the deal.

In the second quarter, we completed the IPO of our midstream business, Rattler, raising over $720 million net to Diamondback.

We also recently announced the drop-down of over 5,000 net royalty acres to Viper for $700 million of gross proceeds, including $150 million in cash.

Lastly, we recently completed the sale of the conventional Central Basin Platform assets acquired via the Energen acquisition.

As a result of completing these objectives, Diamondback immediately commenced our stock repurchase program by repurchasing $104 million of stock in the second quarter after reducing our consolidated net debt by $400 million quarter-over-quarter.

We intend to use the majority of the remainder of these proceeds, along with increasing free cash flow from operations, to continue our stock repurchase program.

Our balance sheet is strong with both absolute debt levels and leverage metrics low.

And we will continue to return capital to shareholders via our share repurchase program and dividend.

At current valuations, we continue to feel the best use of our free capital at Diamondback is buying back our own stock.

With respect to oil realizations, we believe the worst of our widest basis differential quarters are behind us, and we now expect to realize greater than 95% of WTI pricing for the second half of 2019.

By early next year, we expect to realize oil prices at parity with or greater than WTI as our existing commitments convert to the Gray Oak and EPIC pipelines and receive Brent or coastal pricing.

With our recently announced commitment to the Wink to Webster Pipeline, we will have full exposure to the Houston and Corpus Christi local refining and export markets by 2021, removing in-basin pricing risk from our future business model.

In closing, Diamondback continues to execute on the promises presented at the time of the Energen acquisition, and our business is nearing a significant free cash flow inflection point in the second half of 2019 and into 2020.

We may no longer be maximizing growth within cash flow, but we are not sacrificing growth in 2020 as we expect to grow at industry-leading rates for large-cap E&P and deliver over $750 million of free cash flow at $55 oil due to our best-in-class cost structure, asset quality and operating metrics

With these comments now complete, operator, please open the line for questions.

(Operator Instructions) Our first question comes from Mike Kelly with Seaport Global.

Travis, as I flip through the slide deck here, it's pretty apparent that you guys have really kind of checked the box on a whole bunch of aggressive objectives over the last year.

And I really just kind of wanted to get your thoughts on what's on your mind now, kind of what's your refreshed strategic to-do list kind of look like as we sit here today?

Thanks, Mike.

Yes listen, our strategic objectives, there's not really any new ones.

We're going to maintain our commitment to execution and capital efficiency.

That's as part of our core business practices as just about anything.

We're continued at the Board level to grow the dividend.

And we've committed to this free cash flow return to shareholders in the form of share repurchases.

So while we clicked off some pretty significant objectives, those were kind of onetime events in the first 7 months of this year.

We're committed long-term to this shareholder return program, and we're pretty confident we'll be able to deliver on it.

And maybe the follow-up on that you just mentioned, too, that $750 million of free cash flow in 2022 with industry-leading growth still in the works.

What would get you to just maybe dial down that growth a little bit and to up the ante on free cash flow, just kind of curious just to hear maybe your philosophical thoughts on net growth versus free cash flow balance.

It's not an exact science the way that we look at the future.

If commodity prices roll over further, we're certainly going to look at our forward model and make adjustments accordingly, probably in the form of dropping 1 or 2 rigs.

But our future is really bright, Mike.

With the way that we continue to execute, with our overall cash costs mid-8s right now, we're profitable significantly on every barrel that we produce for a long ways from this current oil price.

So we're pretty confident.

We've got a lot of still exciting things to deliver in the future.

And I think the future of Diamondback is really bright.

And our next question comes from Neal Dingmann with SunTrust.

Travis, going through the release about your low capital costs continue to be notable so I guess my question's around those.

How do these factor in when allocating capital between thinking about production growth versus buyback or other shareholder initiatives?

Neal, it's not really an either/or.

I think it's an and.

I think we can -- we're one of the few companies that can do both.

We can still grow and we can repurchase shares and further returns to our shareholders.

So we don't pivot on that.

We actually look at a way to combine both growth and returns to our shareholders.

Okay.

Great.

And then my follow-up just is around Slide 10 on your -- looking at the spacing.

It appears to me, I was looking at this versus some prior presentations even going back 2 years.

It appears to me like your assumptions haven't changed for quite some time.

And I'm just wondering could there be potentially, looking at this, some downspacing opportunities?

Or are you sort of content with this?

I'm just wondering, obviously there's a lot of scrutiny these days on that.

So maybe anything you could say around your assumption in how this has or hasn't been or maybe will change.

Yes, Neal.

I went back and did the same thing.

I wanted to see how long this slide deck had been in our -- or this slide had been in our slide deck and I think it goes back like 4 years.

And I think I've said a thousand times it's easier strategically to add locations than it is to take away locations.

And we've always been conservative in our spacing assumptions.

And we don't really have any plans right now, especially as commodity price continues to decline, to look at any reasons to increase well spacing.

This is one of those things where we've been pretty steadfast in our strategic development objectives on spacing.

It's been underpinned by our annual reserve reports.

And we pay attention to a lot of the spacing results that go on in the Permian Basin.

And we try to learn from those as well, too, without exposing our shareholders to downspacing risks.

So I'm very comfortable with our spacing assumptions.

And our next question comes from Derrick Whitfield with Stifel.

Congrats on your strong update.

Thank you, Derrick.

Perhaps for Travis, your capital efficiency and now disclosure standards as of last night's release are peer-leading.

What in your view makes your organization so successful at cost control?

Derrick, we get that question coming from a lot of different angles over different quarters.

And I'll tell you, it's not just one thing.

It's really a combination of a thousand things.

I mean we just finished an operational review getting ready for this quarter several weeks ago.

And the drilling organization showed me an analysis of the connection time, how fast you screw pipe together where they cut not quite a minute, I think 0.7 of a minute per connection for every well that we drilled with 20 rigs in the second quarter.

And that, for instance, I think -- you'll say well that's not -- so what?

Well, that's $1.00 a foot per well, 5 times 20 rigs.

And it's that level of scrutiny across our cost spend that I think truly differentiates our operations organization.

I mean we say around here, you've got to inspect what you expect.

That's one of our operating mantras.

And really, the -- our business is not that complicated.

It's converting rock into cash flow.

And you've got to measure every facet of that conversion process to ensure you're most efficient.

And I think we've got a great machine.

I mean if we didn't have the machine that we have, we couldn't have delivered on the results, the cost results after doing $10 billion worth of acquisitions at the end of last year.

I mean it's hard for me to believe that today, our D,C&E full well costs are lower on a combined basis with Energen than they were on a Diamondback stand-alone basis a year ago.

And that to me represents seamless integration of an acquisition.

And we did so while accomplishing all of these corporate objectives that are laid out in my prepared remarks.

And most importantly, we did it while adding over 300 people to our organization.

So I think it's a remarkable feat for our organization to have accomplished what we did in this earnings release and in this quarter.

Our economics are better than they've ever been.

We are more profitable.

We've got more operational capability.

I mean just across the board, we're firing on all cylinders.

I mean it's unfortunate in this market backdrop, but we're going to be okay because our cost structure and because our execution prowess, our capital efficiency, we're going to continue prosecuting our development plan, and we got a great organization do that.

I agree, Travis, quite an impressive feat.

As my follow-up, perhaps for you or Mike, as you think about and compare your D&C cost between the Midland and Delaware basins, where do you see the greatest room for improvement in your Delaware cost?

Yes, Derrick, and you nailed it.

The Delaware is where we're, kind of the baseball reference, we're probably in inning 3 to 4. Midland, we're probably in inning 5, getting into inning 6. So Midland, it's -- we're picking up dimes and quarters.

Delaware as you saw, we had a 16% reduction in our dollar per foot.

So that's where we're seeing the biggest change in optimizations rate.

But going forward, the organization's not going to -- and the great thing is everything that we're learning and doing and changing in Midland is applicable in Delaware and vice versa.

So those 2 teams are fully integrated as well.

So again across the board, we'll continue to see efficiencies get worked into the system.

And as Travis said, there's also some tailwinds with commodity, where the commodity price sits, where activity sits, we're seeing some softening on the service side as well.

So all of those things together, I think you're going to have some good things coming in the next couple of quarters.

And our next question comes from Gail Nicholson with Stephens.

I really had a housekeeping question.

Can you talk about the next steps for you guys to achieve investment-grade status and the potential timing of that?

Gail, we're having active dialogue with the rating agencies.

I think with us doing over 280,000 barrels a day, this business qualifies as an investment-grade company.

Our debt certainly trades like it's investment-grade company.

We just need an upgrade from either S&P and Moody's who upgraded us both after the acquisition.

We've executed on everything we have said we're going to do post acquisition.

And I think this business is on its way to becoming an investment-grade company, whether or not the ratings get there or not.

We also added the following -- Gail, we also added the borrowing provisions to our credit facility in the early spring.

And that results in our credit facility becoming unsecured once one other agency upgrades us, including our Fitch rating today.

And our next question comes from Drew Venker with Morgan Stanley.

Travis, in the past you talked about using some of your free cash flow to replenish inventory.

I think you've really talked down corporate M&A.

A lot obviously has changed in the market over the last few months.

But I was just interested to hear if the asset market is open, if maybe bid/ask -- I don't know if bid/ask is too wide here, but if you can pick up acreage at attractive prices.

Well, I think you've always heard us say that we'll do accretive deals, but there's a reason in my prepared remarks I said that I think the best M&A opportunity for us right now is repurchasing Diamondback shares and so that's really the corporate focus.

But we do have an obligation to look for deals, but they've got to be massively accretive.

And like I said, just to reiterate, our focus is on repurchasing our own shares right now.

And our next question comes from Tim Rezvan with Oppenheimer.

I had a question on unit expenses in 2Q.

We saw gathering and transportation LOE both kind of reverse course after some pretty big declines.

Can you talk about anything like one-off that happened maybe in 2Q or sort of how we should think about a more normalized trend going forward on those cash OpEx items?

Tim, yes.

So in the second quarter, we had the full effect of the Central Basin Platform.

That acreage was closed on July 1. So our LOE should trend down here in Q3 and Q4.

We've kind of been hinting towards the upper half of our $425 million to $475 million guidance for the rest of the year on LOE.

Gathering, processing and transportation, that moves around a little bit quarter to quarter.

I still think the midpoint's a good number there.

Okay.

Okay.

I appreciate that.

And then if I could ask a question related to Slide 15 on sort of your CapEx to cash flow reconciliation.

Just want to make sure I understand this correctly.

It appears that your updated guidance implies or is kind of on track with your first half '19 cost level of $890 per foot.

And I'm just wondering is it fair to say that your updated guide is not reflecting any incremental efficiencies in the back half of the year?

Yes, Tim.

I mean we don't make promises on service costs.

And I think efficiency-wise, the business is running as efficiently as possible.

Certainly, there are some tailwinds on the service sector, but we certainly felt that this quarter was not the quarter to go too aggressive on the guidance change.

And we have expectations to continue to drive capital costs out of the business and meet or exceed these numbers here.

And our next question comes from Ryan Todd with Simmons Energy.

Maybe a follow-up on a couple earlier things.

The $750 million in free cash flow in 2020 that you've talked about, what CapEx, rough CapEx budget does that assume?

And does it imply a modest acceleration from second half '19 levels?

Or kind of a continuation of current activity?

Ryan, if anything, it would be a very, very moderate increase versus current activity levels.

We're running 8 frac spreads today.

We ran 8 frac spreads all year, and we're going to exit the year running 8 frac spreads.

We don't anticipate having any frac holidays at the end of the year.

We're going to exit 2019 running 8 spreads and probably enter 2020 running those 8 spreads.

So I think for us now, the questions are at the margin, right?

We're completing 300 to 320 wells this year.

I don't expect a material change from that number to the upside or the downside pending a major commodity price change.

Great.

That's helpful.

And then you reduced debt a little bit in the quarter, and obviously you're in a strong financial position.

But at a high level, what do you think is the right level of debt for your company?

Is it a conservative leverage metric at a sub-$50 barrel oil price?

Should we expect further debt reduction going forward?

Or do you feel like you're in a pretty good place?

Yes, Ryan.

I feel really good about how much debt we've reduced over the last couple of quarters.

Really on an absolute basis, but also on a leverage metric basis, I feel like we're in really good shape.

Right now, with the amount of cash proceeds that we have and the free cash flow profile of the business, buying back our stock at these depressed levels is probably a better use of capital for us while still maintaining a fortress balance sheet.

And our next question comes from Asit Sen with Bank of America.

So on Slide 12, you mentioned additional potential savings from infrastructure efficiency attributable to Rattler Midstream.

Can you elaborate on that specifically?

Yes, Asit.

So these numbers that you see, the $735 in the Midland Basin and the $1,131 in the Delaware Basin are gross numbers.

The benefit that we have of Rattler is that we do capitalize the first 6 months of water production in both basins.

That's part of our equip, the EPs of our D,C&E.

At Rattler's margins, we're saving probably an extra $30 a foot on the Midland side and close to $75 or $80 a foot on the Delaware side.

And Mike, in the operational update, it was mentioned that you completed a pair of Jo Mill wells this quarter.

Can you provide more detail from the zone across your footprint and how you intend to layer in these completions going forward?

Sure.

Northern Midland Basin is kind of the area that we are focusing on right now.

So you'll typically stagger Middle Spraberry with Jo Mill, the 2 that we did this quarter.

We're drilling more this quarter as we're going forward.

So as we do our kind of key development across the entire Northern Midland Basin, we're adding Middle Spraberry and Jo Mill into those cubes.

And so as far as that going forward, that's what we're planning to do.

The wells are performing and competing for capital with all of our other zones as we have today and look forward to doing more of that going forward.

And our next question comes from Jeff Grampp with Northland Capital Markets.

Was curious that it seems like -- it seemed like this quarter, there was a little bit larger discrepancy in some path in terms of drill versus complete so was just kind of wondering if that was kind of the expected plan for the quarter, if that's just kind of a timing issue.

Or how we should kind of think about drill versus complete in the back half of the year?

Yes, Jeff.

You'll see that we drilled 170 wells year-to-date and completed 151.

We're planning on completing somewhere around the midpoint of our guide of 300 to 320 wells.

So our rig count has gotten a little bit ahead of our completion count or completion cadence.

So we probably -- you'll probably see us drop a couple of rigs into the back half of the year, but there'll be no change to the completion cadence with us running 8 spreads consistently for the rest of the year.

All right, Kaes.

And for my follow-up, Travis, you mentioned buybacks being the most interesting use of free cash flow right now.

So just kind of wondered as we look into 2020, you guys are starting to build a track record of building the dividend and having some growth there.

So just kind of wondering should we still assume that growing that annual dividend is still going to take precedence over accelerating buybacks.

Or how you guys kind of look to balance the 2 while understanding that both of those are goals for you guys?

Yes.

Again, it's not an either/or and I think you've heard us say consistently that the Board feels that dividend is the primary form of shareholder return.

And our next question comes from David Deckelbaum with Cowen.

Just wanted to ask a couple of questions on as you go into 2020, you basically hit all of the goals that you wanted to in '19 and this was a pretty busy year for you guys on the corporate side just with the Rattler IPO, the VNOM drop-down.

As we go into '20, should we be thinking that this is going to start being, for lack of a better word, a more boring execution model?

Or should we still be looking for things like DrillCos and other things that you've endeavored in the past to kind of pull some value forward?

And I guess how do you square those with some of your ambitions of being this free cash growth engine?

Yes, David.

If 2020 is going to be a boring year for Diamondback, that'll be the first boring year in our company's history.

So if the past is a prediction of the future, I expect a lot of exciting things to happen for Diamondback right now.

I don't know what those are yet, but I know as we continue to demonstrate the free cash flow machine that we've built and our execution in capital efficiency, better than anybody that's out here in the Permian, I think there's going to be opportunities.

I don't know what those are going to be yet, but we know as long as we execute and this organization continues to deliver, we're going to have opportunities.

And it's up for -- and it's up to us and the -- management and the Board to assess those opportunities and determine which one creates the most value for the shareholders who own the company.

So don't know what those are going to be, but I suspect there'll be something.

Got it.

I guess just like on the completion side and you highlighted costs perhaps coming down on the service side in the back half.

Are you looking at other applications like some of the e-fracs and things that we see maybe more headline-oriented these days, but are you looking at those with any sincerity at this point going into next year?

David, absolutely.

So the answer is going to be yes to every new technology or application that we can vet and make sure that we're going to save money on the dollar per foot and not hurt any efficiency on the production of the wells.

So e-frac, we have an e-frac crew coming in the latter half of this year.

We utilize dual-fuel capability on several of our frac fleets and drilling rigs.

Again, we're always looking at what's out there.

We're watching what everyone else is doing as well.

So we'll be typically a very, very fast follower a lot of times.

We won't be on the exact bleeding edge because again, we don't want to put our shareholders at risk for that.

But the end of the day, yes.

That dollar per foot and the efficiency and capital efficiency is what we're looking for.

So the great thing is as we're slowing down as in industry, a lot of these things are coming available that have been working for other folks and now they're coming available and we're able to pick them up.

So we're getting some of these crews that are coming in hot.

We're doing the same thing with rigs.

We've got a completely different rig fleet today than we had a year ago.

And I think you're seeing some of the capital efficiency metrics change because of what we're doing now.

And our next question comes from Richard Tullis with Capital One Securities.

Travis or Mike, it seems like the rigs have been split fairly evenly between the Midland and Delaware Basins the past couple of quarters.

Do you see that split holding fairly evenly into 2020?

Or how do you look at the allocation of capital as we get a little bit closer to next year?

Yes.

We take a look at that almost on every well decision.

But I think just for planning purposes, I think just assuming you're going to have an equal split with rigs on either side of the basin is a good planning assumption.

Okay.

And then just lastly, I know it's not a big part of your story.

But the Limelight area, looks like you're planning a rig there -- excuse me, a well there for the third quarter.

With success, how active could that area become in 2020 for Diamondback?

Yes.

Look, if that area's successful, it'll probably -- that means it competes for capital, then the footprint we have there is good for 1 to 2 rigs probably, and we'll just -- it'd be good for Rattler as well too.

So we'll just -- we'll wait until we get some data there and then make some capital allocation decision.

But it could be a nice place to park a rig for multiple years.

And our next question comes from Jason Wangler with Imperial Capital.

Just had one and Mike, you kind of hit it a minute ago on services side.

As far as the pricing of services, I mean how much more do you think there is to really get, given they've been pretty beat up obviously?

And also, I guess you've already kind of switched out a lot of rigs.

But do you see much more in the upgrading, whether it's how to place your crews or rigs left as you move forward?

Jason, again these guys on the service side have been squeezed pretty hard.

Again, hitching their wagon up to someone that's going to be very consistent in a fluid commodity price environment, provides them with both an operational and a financial hedge.

So we're getting some benefit there as well as from the size and scale.

So us being able to stay steady is really helping those guys out as well.

Don't see a whole lot of softening just because again, we want our partners to be there at the end of the day, and we need them.

They're a very big part of the success we've had.

So we're working with those folks.

And they work with us on the high end of commodity price, and we'll work with them on the low end of commodity price.

But no, it is softening a little bit just because the activity level's dropping so much.

And our next question comes from Michael Hall with Heikkinen Energy Advisors.

Yes, I guess just a quick one of mine; a lot have been addressed.

As you think about the size and scale of the repurchase program, should we think about the free cash flow as the cap on that?

Or given some of the asset sales and the liquidity you have, should we anticipate seeing potentially even higher amounts of repurchases relative to the free cash flow you're talking about?

Well, Michael, yes.

I think through 2019, the rest of 2019, we're going to use a mix of the free cash flow profile and proceeds from the asset sales to continue the buyback program.

As we move into 2020, I'd say free cash flow becomes more of the governor at that point.

We've completed all these onetime proceeds.

The stock's still, in our opinion, very cheap and we're going to continue to use our capital to buy back shares in this market.

Okay, makes sense.

And then I guess just coming back a little bit on the whole growth versus free cash flow question.

How do you big-picture approach the optimization as you think about 2020 and beyond, the optimization of growth versus free cash flow in the capital allocation decision?

I'm just curious kind of more about your process as opposed to the outcome.

Yes.

I think it's a process that's done at the margin for us now, right?

I mean we're a company that maximized growth within cash flow for the last 4 years.

So growing within cash flow is not a new concept to us.

The big change is that we can grow and deliver free cash flow, and we have no intention of slowing that growth to maximize free cash flow or vice versa.

It's going to be a symbiotic relationship for a long time.

We're going to keep growing.

Maybe it's add a rig or keep the same rig count as this year, do more with the same capital and growth is the output next year with free cash flow also being the output.

Our next question comes from Scott Hanold with RBC Capital Markets.

Just a couple of quick ones.

One, I first want to commend you all from obviously stepping up and buying back stock.

And hopefully we'll see more by you all and the rest of the industry, especially with where some of the equities are trading.

But maybe just this one's for Kaes.

As you all think the buybacks here over the next quarter or 2, is there -- in your conversations with the rating agencies, is there any sort of pushback from them to get into investment grade with the amount of buybacks you're doing?

No.

I haven't seen a lot of pushback.

I think a lot of the onetime proceeds that we've received already, about $1 billion worth of onetime proceeds are all seen as very credit-positive.

So we've checked those boxes and we've also checked the production box and checked the capital efficiency box.

So I haven't had a lot of pushback on that front.

And for us right now, investment grade is a corporate objective.

But for us, buying back stock at depressed values is a more significant corporate objective.

All right.

Appreciate that.

And a quick second one is on your ownership of VNOM, obviously you guys strategically took more equity in that ownership with the recent drop.

Can you give us a big-picture view of your thoughts behind that investment here going forward?

And where do you all want to shake out with that ownership over time?

Yes, I mean I'm excited that Diamondback now owns, pro forma for the drop, back up to over 60% of VNOM.

I think it's a great relationship between the 2, the relationship between Diamondback and Viper certainly differentiates Viper's multiple.

It allows both companies to do smart deals like the deal that we announced last week.

Diamondback has not sold one share of Viper over the past 4 years.

In fact, we've increased our ownership -- via share count.

So we're happy with that ownership.

We get a significant dividend at the Diamondback level from Viper on an annual basis.

And that relationship is -- it will continue to be very strong.

And our next question comes from Leo Mariani with KeyBanc.

Just a question on the marketing side here.

So I think you guys said that you'll be at kind of 95% or a little bit better on oil price realizations in the second half of this year versus WTI.

Just trying to get a sense, is it maybe a little bit lower in the third quarter?

Or kind of the big boost comes in the fourth quarter?

Can you give us any differentiation between 3Q and 4Q on that?

Yes, Leo.

I think there will be some -- I think third quarter is close to that 95% range and Q4 pops up a little bit.

I'll use this as a point that we've now secured takeaway for all of our major production across the company when we had 0 takeaway a year ago.

Certainly got through the worst of our wide differential quarters.

And on a go-forward basis, we're going to be selling all of our crude either at across the dock in Corpus where we have reserved dock space or to a refinery in Houston.

So we're pretty excited about where our marketing position is heading on the oil side.

Okay.

That's great.

I guess could you comment at all on any initiatives on the gas or NGL side?

Obviously, it was a rough quarter in the second quarter for gas price realizations.

Are you guys working on anything maybe to kind of get that gas out of basin to other markets going forward?

Yes, we have very few, take-in-kind rights across our position.

I think we do have some take-in-kind rights in the Delaware that we're going to exercise and get some different pricing exposure.

But our Midland Basin and Northern Delaware gas production, we're going to look to hedge and protect ourselves that way.

I think for us with gas being such a small percentage of our production in revenue, we're more focused on hedging that price at a decent realized price and not having to deal with the negative realizations we've had to deal with this quarter.

Okay, that makes sense.

And I guess just on well cost side, obviously you guys did a tremendous job of reductions here post the Energen deal.

I know it's kind of hard, of course, to sort of project forward, but you certainly discussed at length your relentless focus on efficiencies here.

I mean, would you guys potentially foresee, in the absence of any changes in service costs, I mean, could we be sitting here a year from today and be talking about another 5% to 10% reduction in well costs?

Well, Leo, Mike's guys are obviously the best in the business.

And that's why we hammered this cost discussion so hard in this deck.

I see a lot of notes out about 6 month cumes and IPs across the basin.

No one's talking about what these wells cost to get out of the ground.

I mean the cost structure that we have differentiates us into someone that can grow and return free cash versus someone who outspends cash flow.

That's how important those differences are.

So I expect Mike and his team to continue to drive costs out of the business.

We certainly have some service cost tailwinds hitting us right now, and those should continue into 2020.

And our next question comes from Brian Singer with Goldman Sachs.

Can you talk to how you see the rates of return in the Midland Basin versus the Delaware Basin?

Realize you kind of have an even split in terms of activity, but just how you see those rates of return comparing?

And then post the cost reductions, you've highlighted how the Energen locations in the Delaware compare relative to legacy Diamondback locations.

I'll tell you, the locations in the Vermejo area, that's the best rock in our portfolio.

And we got -- that was the crown jewel in the Energen acquisition, and those wells are just simply spectacular.

And so the rates of return there obviously are the best of anything in our portfolio.

I still think, Brian, that when you look at either side of the basin, it costs you more in the Delaware Basin, but you get it out faster and you got higher EUR per foot.

Midland Basin, you don't quite get as much hydrocarbon recovery, but it's a lot cheaper.

So as we look at it, there's parts -- we still sort of think about it in an equal allocation in terms of rates of return.

And that's -- you can see that in how we spend our capital dollars there with rigs about equally on either side of the basin.

So it's not a precise number, but we still think of them as roughly equivalent.

And then my follow-up is with regards to just how you're thinking about the range of options in 2020, but particularly share repurchase and the extent of that relative -- and investing in that relative to investing for growth and how up cycles or down cycles in commodity prices would play a role.

Yes, Brian.

I mean I think it's somewhere around what our budget was this year, either plus a rig or minus a rig absent a very negative commodity tape between now and the end of the year.

So we're very focused on hitting that 7 -- at least hitting that $750 million of free cash at $55 WTI next year.

If WTI is lower than that, we'll have to look at where service costs are and where our well costs are and see what free cash flow comes out of the model.

But like I said earlier, there's not a huge delta between our current thinking and where we're -- our current pace and where we're going to be in 2020, which allows this business to grow significantly, but also buy back a lot of stock.

And if the stock remains depressed, we will continue to buy back stock with free cash flow and our onetime proceeds that we've executed on this last quarter.

And I'm not showing any further questions at this time.

I would now like to turn the call back over to Travis Stice, CEO, for any further remarks.

Thanks again, everyone, for participating in today's call.

If you've got any questions, please contact us using the contact information provided.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program, and you may all disconnect.

Everyone, have a wonderful day.