Diamondback Energy Inc

NASDAQ:FANG

Earnings Call Analysis

Diamondback Energy Q1 2024 Update with Endeavor Merger and Efficiency Gains

Diamondback Energy's Q1 2024 earnings call highlighted significant efficiency improvements and strategic asset management amid preparations for the Endeavor merger expected to close in Q4. Natural gas pricing and pipeline issues are being addressed proactively with commitments to new pipelines. The company reported substantial capital efficiency gains, achieving 10% better performance per lateral foot. Asset sales, including a $450 million Viper ownership sale, bolstered the balance sheet. Despite regulatory delays, the merger is anticipated to deliver $550 million in annual synergies in the Midland Basin, with optimistic guidance on maintaining and improving capital efficiency into 2025.

Macroeconomic Environment and Infrastructure Needs

The leadership at Diamondback Energy emphasized the importance of building new pipelines every 12 to 18 months to manage the increasing natural gas production from the Permian Basin. With natural gas almost being treated as a byproduct, the company is taking significant steps to mitigate pricing issues in Waha. For instance, they have made commitments to new pipelines like Whistler and Matterhorn and are considering relinquishing certain rights to ensure contracted capacity on pipelines【4:0†source】.

Operational Confidence and Market Dynamics

The executives at Diamondback expressed confidence in their development plans, especially concerning gas capacity. Their focus remains on ensuring that every molecule of gas is moved efficiently, and they are not overly concerned with the speculation around potential gas movement constraints in the Permian【4:1†source】. Additionally, the company is poised to step up stock buybacks post-merger with Endeavor, eyeing flexibility in capital return strategies involving substantial buybacks while maintaining a disciplined approach to asset sales【4:2†source】【4:12†source】.

Revenue and Tax Efficiency

A notable aspect of Diamondback's financial strategy involves their guidance on severance tax, which they expect to be around 7% of revenue annually. This figure has been consistent over the years, though it had come in slightly lower recently due to accrual adjustments【4:2†source】.

Synergy and Cost Reduction Initiatives

Diamondback is anticipating up to $550 million in annualized synergy from the merger with Endeavor, mainly through extended lateral drilling lengths and operational efficiencies. They expect these measures to reduce costs to about $600 to $650 per foot in the Midland Basin, bolstered by both unexpected completion efficiencies and some softening in service costs【4:3†source】【4:4†source】.

Capital Efficiency and Future Outlook

The company is concentrating on capital efficiency and expects a 10% improvement per lateral foot due to declining rig counts and completion crew counts in the Permian. This will serve as a tailwind for the rest of the year as they push the boundaries of D&C operations, aiming for better drilling speeds and increased lateral completions per day【4:4†source】【4:9†source】.

Ethical and Efficient Operations

On ESG and technological fronts, Diamondback is considering investments that offset their Scope 1 emissions while also embracing AI to process large volumes of operational data more swiftly. For example, their new ventures arm, Cottonmouth Ventures, is exploring projects like converting natural gas into gasoline【4:13†source】【4:14†source】.

Strategic Marketing and Customer Relations

Diamondback continues to refine its marketing strategy for better realized margins, employing long-term contracts to mitigate market tightness and maximize their returns. They plan to continue this approach as they grow in size, focusing on getting their product to larger, more liquid markets downstream【4:18†source】【4:19†source】.

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Diamondback Energy First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Adam Lawlis, VP of Investor Relations. Please go ahead.

[Adam Lawlis, executive]

Thanks, Jose. Good morning, and welcome to Diamondback Energy's First Quarter 2024 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 Stice, Chairman and CEO; Kaes Van’t Hof, 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 reconciliation of the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I'll now turn the call over to Travis Stice.

[Travis Stice, executive]

Thank you, Adam, and I appreciate everyone joining again this morning. I hope you continue to find the stockholders' letter that we issued last night in an efficient way to communicate. We spend a lot of time putting that letter together, and there's a lot of material in that. So operator, with that as a brief introduction, would you please open the line for questions?

[Operator]

[Operator Instructions] Our first question comes from the line of Neil Mehta of Goldman Sachs.

[Neil Mehta, analyst]

A lot of good stuff in the letter. Two quick follow-ups. First, just on natural gas. You spent a lot of time talking about some of the steps you've taken to mitigate some of the softness that we're seeing in Waha pricing. Can you spend more time on that? And as it relates to that, how do you think about the timing of debottlenecking Permian gas?

[Travis Stice, executive]

Well, from a macro perspective, I think we've been pretty clear that we're going to continue to need pipes being built about every 12 to 18 months out of the Permian to accommodate the associated gas that goes along with just 6 million barrels a day that we produce out here. Natural gas is right now being almost like a waste product, and we've got it. This -- when matter workup zone this fall, we'll see some of that reverse. But Kaes, do you want to give them some description of what we're doing in the rest of the gas?

[Kaes Van't Hof, executive]

Yes, Neil, I mean, this will be long term, we want to be able to contribute to more pipes. We've done that in the last couple of years with commitments on Whistler and Matterhorn. We've relinquished taking kind rights in other areas to commit to other pipes that were built. As Travis said, we just need to do more. And I think with our size and scale and balance sheet, we should be taking a leadership position on these new pipes. We've talked to a lot of people that are working on them today, and it seems that there are projects in the works that will help the bottleneck past the end of this year. But as we control or have the ability to control more gas flows on our side, as contracts roll off, et cetera, we're going to keep pushing on more pipes and more markets out of this basin.

[Neil Mehta, analyst]

Yes. And then the second is capital efficiency. You talked about the 10% improvement that you're expecting per lateral foot. So just talk about what you're seeing real time in terms of deflation. And then also, what are those the next steps in terms of driving your cost structure lower as we think about efficiency of fleet?

[Travis Stice, executive]

Well, I think the deflationary pressures we continue to see in the Permian are being driven by the decline in the rig count and the decline in the completion crew count. Those will be tailwinds for us as we look through the rest of this year. But also without regards to those deflationary impacts, we continue to push the envelope on our D&C operations where we're getting -- I think we averaged almost 13,000 feet for the quarter this year, and we continue to get these wells drilled faster and then our completion crews continue to push the envelope on the number of lateral feet that are completed in a 24-hour period. So we're working on the numerator and the denominator of capital efficiency and really like the way the rest of the year sets up for us.

[Operator]

Our next question comes from the line of Arun Jayaram of JPMorgan Securities LLC.

[Arun Jayaram, analyst]

Travis, you and the team had highlighted up to $550 million of annualized synergy capture in the transaction in the Midland Basin, including a 150-foot decline. And do you see any cost in the Midland Basin to that $600 million to $650 million range? Maybe a follow-up to Neil's question, but where are you seeing kind of leading-edge cost today in the Midland Basin as you continue to push those lateral links a bit longer?

[Kaes Van't Hof, executive]

Yes, this is Kaes. I think the combination of those longer laterals, 12,000-plus with some efficiencies on the completion side that we probably weren't expecting going into the year as well as some softening on the service side makes us feel pretty good that we're in the lower half of that $600 to $650 a foot in the Midland Basin. As you know, 90% of our capital is being allocated to that basin. So with those costs trending in the right direction, I think on a real-time basis, closer to $600 a foot, we feel really, really good about our plan this year as well as carrying that momentum into a Q4 close. The Endeavor deal and into 2025. Very clearly, we laid out some strong synergy targets and a very strong capital-efficient 2025 plan, and we still feel very, very confident in that plan.

[Arun Jayaram, analyst]

Great. Kaes, looking at the quarter, you didn't really -- how many activity in terms of [ TILs ] in the Delaware Basin. Can you give us some thoughts on the Delaware program? I know it's 10% of the program, but what's your thoughts on the Delaware as we think about moving on into the back half of this year and into next year?

[Kaes Van't Hof, executive]

Yes. Listen, there's still a place for the Delaware program. There are still some really good projects coming up in Q2. I think we have a project in that Romeo area, Northern East County that's going to be very good. I think generally, with large pad development, you're going to see pockets of development in the Delaware rather than consistent development because we want to go over there and complete multiple wells, multiple pads in a row and keep that capital efficiency high versus the Midland Basin where 3 or 4 simul-frac crews are going to be running at all times.

[Operator]

Our next question comes from the line of David Deckelbaum of TD Cowen.

[David Deckelbaum, analyst]

Maybe this question is for both of you guys. But considering the positioning a bit early with the debt that you raised earlier this month, now the expectation that the deal will close at the end of the year with Endeavor. You talked about kind of the synergy expectations in the last series of questions. Can you give us an update on how you're thinking about that initial sort of noncore sale asset target and maybe some of the updated timing around those thoughts, considering the market's changed a bit, especially around the cash consideration portion?

[Kaes Van't Hof, executive]

Yes. I think what's changed is just timing, right? I think the projects we see as noncore asset sales or the asset sales to subsidiaries we have is still the same. Endeavor has a really good midstream business that would fit well with our midstream JV. They have a significant mineral business that I think is going to be a game changer for Viper if those 2 businesses are combined. And our strategy to execute on those trades has not changed. It's just been pushed out to the right. So on top of that, there's an $8 billion cash consideration, that continues to be worked down with free cash flow between sign and close.

I think that just means, we have to pony up less cash at close in Q4. And we raised the money a couple of weeks ago because we were preparing to potentially close the deal as early as today. Unfortunately, the deal has been pushed out due to regulatory review, but we had to be ready to fund the deal, and that's where we were. Fortunately, the bond deal was pretty well-timed. We're actually earning very minimal negative carry on the cash that we have sitting at the banks today, and we'll be ready to use it when we close in a couple of quarters.

[David Deckelbaum, analyst]

Maybe just to follow up a little bit more on just the gas pipeline side. Just for my own edification, just some clarity. Just you highlighted you didn't have any issues with egress. You have Matterhorn coming online in the third quarter. Is there a point as you look forward, where you anticipate egress issues? Or is this more appearing to be just more proactive to get involved with taking on firm capacity in future pipelines? Do you need to take a more active role beyond that?

[Kaes Van't Hof, executive]

Yes. Well, I mean, we're facing them right now, egress issues, right, not on the physical side, but it's really on the price side. So I think if we can remove the pricing aspect of pricing modules in Waha versus pricing them further downstream and just paying a fixed fee on the pipe. That to us is a risk mitigation strategy that makes sense for Diamondback shareholders. So I think we see the gas forecast continuing to increase. If you do look back the big public third-party services and what they thought gas production was going to be in 2024, they've all been wrong. So it's always been more gas sooner. And so for us, we need to handle that physically where we can. And with our balance sheet and size and scale, we can sign those 10-year deals because we know we're going to be around to produce for a very, very long time.

[Operator]

Our next question comes from the line of Scott Hanold of RBC Capital Markets.

[Scott Hanold, analyst]

I'm just going to stick on the gas team as well because it is very topical, but it sounds like, and just correct me if I'm wrong, you guys feel good about your development program on a Diamondback stand-alone basis as well as with Endeavor with gas capacity, at least for the foreseeable future and just confirm that's correct? And if you could also maybe opine on just broader Permian in general, do you expect other operators to see some physical constraints not being able to get their gas out and potential shut-ins related to that?

[Kaes Van't Hof, executive]

Yes, Scott, we're 100% confident in our plan. I think we have a lot of visibility. We have more and more physical space coming our way. Every molecule is moved to date. I don't like the speculation blame game in the Permian about who's going to be able to move or not. I'm focused on Diamondback, and we're going to be in really good shape.

[Scott Hanold, analyst]

Okay. Fair enough. And then my next question is on stock buybacks. Obviously, it sounds like it's going to be a little bit more tempered until the deal closes with Endeavor, but can you give us your thought process on buybacks post-merger and how you think about the intrinsic value of the combined company? And what mid-cycle price makes sense to underpin that?

[Kaes Van't Hof, executive]

Yes. I think philosophically, part of the move back to 50% of free cash flow returned every quarter allows us to build more cash, pay down debt faster, but also make the bigger bets on buybacks, right? In a single quarter, if you're having to distribute 75% of your free cash flow, you don't get to really make the big bet on the buyback at the right time. And so this flexibility will allow us to do that. Clearly, we've been a little limited on buybacks since announcing the deal. I would expect that to stay about the same here in the second and third quarters depending upon the market.

If we see some weakness, we're going to step in and support the stock. But longer term, we want to make the 9-figure, 10-figure bets on buybacks at the right time, and that's the flexibility we want on capital return. I think we still see kind of mid-cycle in the $60 to $70 range. I think we were firmly 60 for a long time. We're probably closer to $70, $20 and $2 or $3 gas. And in the combined business, you look at what we have with Endeavor, there's a significant amount of inventory and a lot of NAV accretion. So -- and probably a lower combined cost of capital. So I think we feel like we can raise that buyback up a little bit, but we're probably going to be cautious until we close.

[Scott Hanold, analyst]

Yes. Just to clarify a couple of points. Just broadly speaking, how much accretion do you all feel Endeavor added? And can you give us a sense of like when you think about cost of capital, like what were you kind of thinking before when you did intrinsic value. Was it like a 10% kind of flat? Or do you get a little bit more scientific with that?

[Kaes Van't Hof, executive]

Yes. We've always been a little higher than 10%. I think in after-tax [PV-12] felt like at a mid-cycle price, felt like a very conservative price to buy back shares. And that also makes sure we don't get trapped into a positive feedback loop of buying back shares all the way to the top. So I think an after tax, 12% rate of return in this business is a really good rate of return at a mid-cycle price, and that keeps you in a good spot through the cycle.

[Operator]

Our next question comes from the line of Roger Read of Wells Fargo Securities.

[Roger Read, analyst]

Yes. I'd like to come back on the, let's call it, efficiencies and lower costs. Obviously, some part of that, as you mentioned, was service competition, rig on rig, crew on crew lowering costs. But if you look at the underlying improvements you cite e-fracs over a diesel frac, kind of where do you think we are in terms of running through continued efficiencies there as we, let's say, alter the equipment, maybe alter the methods of doing some of the wells and with the danger of crossing the line here to post Endeavor, kind of what you see as maybe a year or 2 out in terms of continued efficiency gains.

[Daniel Wesson, executive]

Yes. Good question. We are continuing to drive costs out of the business through our operational plan and execution. On the completion side, A lot of that's going to come in the way of getting any fleets off of generated power and on to some form of grid power where we can recognize a lower energy source cost. We're continuing to try to drive days out of our execution, and we're kind of on the asymptotic slope of that efficiency gains that we are getting to a point where the fixed cost of the wells are a significant -- significantly larger portion of the cost of the well than the variable cost. So we're getting to a point where the variable costs that we're going to impact our pennies and nickels and not as much the dollars anymore and to get those large chunks, we're going to have to think about doing things differently as far as the physical plan for the wells and what we are going to consume as part of the fixed cost of the wells.

[Travis Stice, executive]

Roger, I give our guys some joke with them a little bit on the drilling side because they're almost to the point where they're spending more time screwing pipe together and unscreen pipe together than they are actual rotating hours and the lateral, not quite, but they keep certainly pushing the envelope. And really, if you go back to what we said during the acquisition announcement with the merger announcement with Endeavor, we talked about $150 a foot. $100 of that foot was from just simply going to a simul frac and the other $50 a foot was going to clear fluids. And really, that's what we're doing today. So we emphasized at the time. That's not a big stretch. It's just simply doing what we're doing today on a new set of assets. And in Dan's comments, we're spot on as well.

[Roger Read, analyst]

Got you. So we just need somebody to come up with the next better mousetrap out there for the step functions. I appreciate that.

[Kaes Van't Hof, executive]

Listen, Roger, one other comment on that. I mean the guys are so good on the drilling side now. They're measuring how thick the threading is between casing and on the drilling side to say, "Can I screw that pipe together half a second faster versus what I used to do." I mean it is down to the absolute second on-site to reduce those variable costs.

[Operator]

Our next question comes from the line of John Freeman of Raymond James.

[John Freeman, analyst]

Just following up on these efficiency drivers. Obviously, in the quarter, the wells that you all completed, the 101 wells, they were right in line on the lateral length of what your guidance was for the full year around that 11,500 feet. But obviously, you all point out the 69 wells that you all drilled in the Midland Basin that were significantly longer than that over $13,000 a foot, obviously, first-class problem given the capital efficiency you're seeing on these longer laterals. But should we still use that full year guide of 11,500-foot average for the year? Is that still applicable? Or should we consider that probably moving up relative to the original guide?

[Daniel Wesson, executive]

Yes, John. I think in the first quarter, those longer laterals were really just a function of where we were completing the wells that average lateral length of 11,500 is what we expect to see for the rest of the year.

[John Freeman, analyst]

Okay. And then just shifting gears a little bit on the topic of, I'm trying to get a sense of like how much you are able to do sort of in advance of the Endeavor deal closing. And I know that in those initial efficiencies that you all laid out, things like, maybe pricing power supply chain, things like that weren't even necessarily priced into those initial synergies. So I'm trying to get a sense of like how much can you all do in advance in terms of negotiating with some of your service providers in anticipation of sort of a larger combined entity buying in bulk, things like that, like how much of that, if at all, can you do in advance or you just kind of have to sit and kind of wait until the deal closes to kind of get running on that stuff?

[Travis Stice, executive]

Yes, John, we got to operate as separate companies until the deal closes, and those things will come to the benefits of the combined company, but certainly can't influence any outcomes until deals were closed.

[Operator]

Our next question comes from the line of Neal Dingmann of Truist Securities.

[Neal Dingmann, analyst]

Travis, my question for you, okay, is just on the marketing side. You are looking not only from a capital efficiency, but it seems like from a takeaway, you all continue to get better and better sort of realized margin. I'm just wondering, now with the larger size, or I guess when that closes, what type of benefits will you continue to see the benefits on the back end that you've been seeing on the company? Because it seems like noticeable that a lot of your margins and all just on the marketing side continue to improve.

[Kaes Van't Hof, executive]

Yes, Neal, I mean, I think -- I don't think we're going to see much more improvement. I think it's -- for us, it's more about risk aversion, right, and having our barrels and molecules go to different, bigger markets downstream. So we have a lot of oil that goes to the Gulf Coast in Corpus and is exported. We now have a good amount of oil going to Houston feed refineries there. So I think we've kind of grown up as a company in terms of marketing. And very clearly, mistakes for May 5, 6, 7 years ago when the Permian got tight, and we're just not looking to make those mistakes again. So with our size and scale, we're going to be contributing to oil pipes, contributing to new gas pipes.

We've made some investments in gatherers and processors and many midstream investments throughout the years here that 1 made our shareholders' money on the investment side, but to protected us on the commercial side. So I'd expect that trend to continue as we get bigger.

[Neal Dingmann, analyst]

That Kaes, you're saying you'll continue to contract more of those longer-term marketing contracts then?

[Kaes Van't Hof, executive]

Yes. I think our philosophy is to get our barrels to the most liquid bigger market and very clearly, selling within Midland or in the Midland market has not always been the most beneficial to our shareholders. There are pockets of time when the Midland market is very loose, but there are also periods where it gets very, very tight. So the way we see this physical marketing protection is a long-term insurance policy to make sure our barrels move to the right market.

[Neal Dingmann, analyst]

Okay. And then just quickly on project size. You all continue to do a fantastic job not only that you have the larger projects, let's call it, on average, 6, 4-well pads, things on that nature, but you seem to have the flexibility that the larger and oftentimes the majors don't on those projects. Will that continue to be sort of the standard for you all going forward on these larger projects where -- and you'll maintain that flexibility or maybe you could just hit on that briefly.

[Kaes Van't Hof, executive]

Yes. I mean you can go on for hours about that. I mean, that ties the culture, right? And our biggest benefit at Diamondback is that we have a small company dynamic culture with a large asset base that's now growing larger. So we are going to have to make sure we maintain that gritty quick, fast-moving adaptive culture to a larger asset base. I'm fully confident that we have the exec team and employee base to both at Diamondback and Endeavor to do that. And I think these big projects, there's a lot of capital being put in the ground before first oil sometimes upwards of $250 million, $300 million, but as long as you have the ability to move crews and rigs within a quarter, within a year, keep hitting numbers, we're going to keep doing that at a larger scale.

[Travis Stice, executive]

And Neal, as we built this company over the last 10 years, we've always maintained a couple of constants. One is the fact that we keep a real flat organization. And we keep a non-siloed organization as well too. And the only way that you can grow an organization and maintain that effectively is to have an unreasonable level of trust. And as we encourage our -- the Endeavor employees to come over, we're going to be demonstrating this high level of trust because it's going to be a very important part of our evolving culture as a much larger company. But those 2 things will stay the same, flat organization, no silos.

[Neal Dingmann, analyst]

Look forward to the new assets, guys.

[Operator]

Our next question comes from the line of Derrick Whitfield of Stifel.

[Derrick Whitfield, analyst]

Congrats on another solid brand. With my first question, I wanted to focus on the second request from the FTC at a high level. Art Research indicates that most of the larger transactions have received that. Is that consistent with how you're thinking about it?

[Kaes Van't Hof, executive]

Yes, that's consistent.

[Derrick Whitfield, analyst]

All right. Terrific. And then shifting over to ops. So during the quarter, you completed 3 additional Upper Spraberry wells. Based on those results and some from last year, could you speak to how the interval competes in your portfolio and if it's likely to get added to your inventory charts on Page 21?

[Daniel Wesson, executive]

Yes, Derrick. We followed up this year with -- in Q1 with 3 additional Upper Spraberry completions kind of following up that success that we had in the North Martin area with that first test. And we really like the initial results from those wells. And I think that from a cost perspective, we're seeing those costs be pretty competitive. And I think we'll probably look at adding that development to subsequent developments in the future.

[Kaes Van't Hof, executive]

I think to fill this up to the top of that, Derrick. If you start to add in zones like Upper Spraberry, Wolfcamp D, we've got some really good Wolfcamp D tests in some of those same pads. If you start to add those in and you don't see degradation on a corporate basis in terms of the cume curves that everyone looks at so closely every year. That's inventory extension in our existing asset base. And with the combination of us and Endeavor, adding in zones like the Upper Spraberry, Wolfcamp D into full-scale development, only extends the duration of what we can do here in the Midland Basin.

[Operator]

Our next question comes from the line of Paul Cheng of Scotiabank.

[Paul Cheng, analyst]

Travis, is that in your presentation, you have an interesting statement on the ESG, you intend to eventually invest in income-generating projects that are expect to more directly offset remaining Scope 1 emissions. Can you elaborate a little bit more in terms of how big is the kind of investment? Are you expecting that to become a new division or that a new business for you? Or that is -- when it is going to be pretty small scale and result pay over the too much attention on that. That's the first question.

The second question is interestingly that the E&P producer, no one really talking much about AI, but the service provider, now it's number they start to brand about say, how AI is going to drive their revenue and it's going to allow the improvement of EUR and productivities -- of the well productivity. So just curious that is Diamondback, you guys have been always do a lot on the technology. Have you tested on the AI application and whether that you see that going to be meaningfully change your EUR or your well productivities.

[Travis Stice, executive]

Well, the first emphasis on AI has been not degenerative AI, but using AI to process data information a lot quicker. And so, look, we're really excited about the long-term implications of AI on our industry, whether that translates to improvements in AUR or improvements in efficiencies or hopefully both, I think, is yet to be determined. But it's one of those things that we're trying to be fast followers on. This is arena of our industry that's moving incredibly fast. These electric frac fleets that we're using right now actually are accumulating more information than we can process. So we're storing some of that information and hoping to use smart algorithms or AI to help us process that information in a more usable and more real-time fashion. Kaes, this first question was the income-generating tech to offset that.

[Kaes Van't Hof, executive]

Yes. I mean we have a subsidiary snake company called Cottonmouth Ventures, that's kind of our new ventures snake, I'll call it. But it's not a huge business today. I think one of the more exciting projects we're working on is with our Verde Clean Fuels partnership where we are in the scoping phase of building a plant, a gasoline plant in the basin that's going to be tapped into one of the pipelines that we are participant in. That plant will convert 35 million cubic feet a day of gas -- natural gas, lean gas into 3,000 barrels a day of gasoline.

So that, I think, fits our model of, if we can contribute molecules and expertise to a project, not just capital, but the other things, to drive value. We're going to look at it. I would say that project might FID by the end of this year and be up and running in a couple of years, and that might be a good little offtake for 35 million a day of gas. And if it works, we're going to build more of them.

[Travis Stice, executive]

Paul, when you look at the capital program, it's going to spend between $4 billion and $5 billion a year on a pro forma basis. The percent of that, that we're going to allocate to income-generating projects is probably pretty small and that in an individual sense, it will probably have a larger impact, but I wouldn't expect it to move up to the noticeable level on a company that's spending between $4 billion and $5 billion a year.

[Operator]

Our next question comes from the line of Leo Mariani of ROTH MKM.

[Leo Mariani, analyst]

I just wanted to touch base on sort of activity cadence this year. It looks like you guys had kind of 89 first quarter completions, all in the Midland, but that's a pretty healthy percentage, about 32% of your full year budget on completions. Is there some anticipation that maybe some slowdown as the year goes and just seem like a quicker pace than I expected here in the first quarter.

[Kaes Van't Hof, executive]

Yes, Leo, a couple of things. I think we're having a pretty good end of the year last year into Q4, and so we pushed completions into Q1. So Q1 looks a little high relative I think generally you can think about that 70 to 80 overall completion a quarter as the base case. Q2 might be a little towards the high end there. But because we're a little bit ahead of plan in terms of efficiencies and timing we're probably going to reduce our frac crew count by 1 for a period of time over the summer as well as kind of get down into that 12, 13 rigs on the drilling side to complete -- to drill the same number of wells. So we look at the plan almost weekly with the planning team. And I think, generally, the efficiencies have led to less overall activity, more capital efficiency and setting us up well for this potential close here in Q4 with Endeavor.

[Leo Mariani, analyst]

No, that's helpful color. And then just shifting over to asset sales. You obviously talked a little bit about sort of when the Endeavor deal closes, maybe moving some midstream assets into your Deep Blue JV and also a drop-down to Viper. Outside of some of the Endeavor-related asset sales, is there anything else that you guys are sort of working on. You talked about raising cash for, just from free cash flow here over the next handful of months until the deal closes. But just trying to get a sense if you guys are looking at other asset sales in the interim.

[Kaes Van't Hof, executive]

Yes. Not many. We sold a piece of our Viper ownership in the first quarter, and that plugged another $450 million of cash on the balance sheet. And I think I'll go back to when we structured this deal. We certainly do not want to put so much cash into the deal with Endeavor that we had to be a seller of assets, and that's exactly what we've done. Now I think we've had some price help here in the last couple of months that has boosted free cash flow and reduced the cash portion of the transaction. And listen, I think the price has got to be right for any asset sale, whether it's the Deep Blue, Viper or otherwise. And we're going to be patient post-close. I do think those assets make sense in other hands, but it's got to be the right value.

[Leo Mariani, analyst]

Okay. That's helpful. And then just wanted to ask about your production kind of severance tax here. You give the guiding to kind of 7% of revenue. It's kind of come in below that the last handful of quarters, closer to 5% to 6%. Just wanted to see what was kind of going on there. Maybe that was kind of anomalous in the last handful of quarters and 7% the right number going forward?

[Kaes Van't Hof, executive]

Yes. It was just higher than that before then, a couple of quarters before that, and we had to work off the accruals. That number has been 7% for 10 years. We had a consultant that told us it was going to be higher last year, and that consultant is no longer working for us, but it's going to be 7% on an annual basis on average.

[Operator]

This concludes the question-and-answer session. I would now like to hand the call back over to Travis Stice.

[Travis Stice, executive]

Thank you again to everyone participating in today's call. If you've got any questions, please reach out to us using the contact information provided. Thank you, and have a great day.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.