Diamondback Energy Inc

NASDAQ:FANG

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and thank you for standing by, and welcome to the Diamondback Energy's Second Quarter 2022 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 your speaker today, Adam Lawlis, Vice President. Please go ahead.

[Adam Lawlis, VP, IR]

Thank you, Jonathan. Good morning, and welcome to Diamondback Energy's Second Quarter '22 Conference Call. During our call, we will reference an updated investor presentation, which can be found on Diamondback's website. Representing Diamondback today are Travis Stice, Chairman and CEO; Kaes Van't Hof, President and CFO; and Danny Wesson, COO.

During this conference call, the participants may make certain forward-looking statements related to the company's financial condition, results of operations, plans, objectives, future performance and businesses. We caution you that actual results could differ materially from those that are indicated in 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.

[Travis Stice, CEO & Chairman]

Thank you, Adam, and welcome to Diamondback's second quarter earnings call. I'd like to start by highlighting our second quarter performance. We once again delivered operationally, producing over 221,000 barrels of oil per day, near the high end of our quarterly guidance range. Our discretionary cash flow or operating cash flow before working capital changes totaled $1.8 billion, up 27% quarter-over-quarter, setting a new high for the company. This increase was primarily due to a favorable backdrop -- macro backdrop as well as improvement to our realized pricing as hedges put on last year continue to roll off.

Our free cash flow for the quarter was $1.3 billion, up 35% quarter-over-quarter. We will return 63% of this free cash flow to our shareholders, well in excess of our commitment to return at least 50% of free cash flow. This return is made up of our growing and sustainable base dividend, opportunistic share repurchases and a robust variable dividend.

Our annual base dividend is now $3 per share or $0.75 per quarter, representing a 7.1% increase from the company's previous annual base dividend of $2.80 per share or $0.70 per quarter. As previously announced, the Board elected to keep our total dividend per share flat quarter-over-quarter at $3.05, which is comprised of the 75% base dividend and a $2.30 variable dividend. This puts our total annualized 2Q dividend yield of nearly 10%.

Additionally, we took advantage of market volatility and repurchased nearly 2.4 million shares during the quarter at an average price of a little over $127 a share for a total cost of approximately $303 million. We believe our opportunistic, disciplined approach to our repurchase program brings the most value forward for our shareholders and continues to give us the flexibility to use either our variable dividend, buybacks, or as has been the case so far in 2022, a combination of both to hit or exceed our returns target.

As we move into the second half of the year, it's hard to ignore the amount of free cash flow we expect to generate, around $2.5 billion of current strip pricing. In June, we announced an increase in our capital returns commitment target, moving it up from 50% to at least 75% of free cash flow beginning in the third quarter. At 75%, that's over $1.8 billion return to shareholders or well north of $10 per share in just 2 quarters, for a total annualized return yield of approximately 17%.

This robust free cash flow profile led the Board to double the size of our buyback program from $2 billion to $4 billion, giving us ample running room to be opportunistic in the equity markets. Since the program was initiated in the third quarter of last year, we've repurchased over 8.3 million shares at an average price of $113 a share for a total cost of approximately $940 million. This includes 1.8 million of shares we've already repurchased in the third quarter for a total of $200 million at an average price of $113.70 a share.

Our confidence to increase our return through payout is rooted in the strength of our balance sheet. During the second quarter, we opportunistically repurchased $337 million in Diamondback senior notes at an average cost of 95.4% of par for a total of $322 million. We focused on our debt coming due over the next 10 years, significantly lowering our maturity towers, while taking advantage of the volatile debt market.

We also recently redeemed $45 million in legacy Energen and QEP notes due 2022 at par. As a result, our balance sheet is stronger today than ever before. Our annualized net debt-to-EBITDA is under 0.7x, and we continue to improve our leverage profile with net debt decreasing by $267 million or 5% quarter-over-quarter. These debt reduction efforts have helped decrease our interest expense by 25% year-over-year, offsetting higher production taxes and lifting costs and helping push our unhedged realized cash margin this quarter to more than 83%, a company record.

Moving to the operations side of the business. The environment in the Permian continues to be challenged. However, we continue to focus on how we can mitigate the inflationary pressures we're seeing across nearly all facets of the business by lowering the variable pieces of our cost structure. These efforts have allowed us to keep the high end of our capital guidance range flat at $1.9 billion. We do not anticipate any future changes. Yet we still haven't been able to offset all of the fixed pricing increases we've seen, which is why we've moved up our third quarter capital range to $470 million to $510 million, up from our capital spend of $468 million this quarter. This takes into account the roughly 10% cost increase we expect on the frac side, which is made up of increases in the cost of horsepower, wireline services and fuel.

On the drilling side of the business, we're seeing a similar level of pricing increases, particularly from day rates, casing and cement. In the back half of this year, we plan to operate approximately 12 drilling rigs and 3 frac crews. As we mentioned last quarter, we've partnered with Halliburton to secure our first e-fleet frac crew, which will run in our Martin County acreage off power generated from a central location and delivered via existing lines, not only reducing our Scope 1 emissions profile, but also lowering our completion costs as a result of fuel savings and improved operational efficiency.

We expect this fleet to be operational early in the fourth quarter and it will simply be swapped in for 1 of our existing Halliburton crews. Earlier this month, we continue to lean into this technology and secured our second e-fleet crew. This crew will be operational in the first quarter of 2023 and is expected to further reduce costs and decrease our environmental footprint. It will also replace 1 of our existing crews.

On the drilling side, we currently have 1 drilling rig running offline power in the Delaware Basin with 2 more electric rigs expected in 2023. Just as we're seeing on the completion side, the electrification of our drilling fleet has multiple benefits. Additionally, we're utilizing sputter and intermediate rigs to take advantage of lower pricing as compared to the rest of our drilling fleet, and are exploring downsize and surface casing size, intermediate hole size to improve our drilling efficiencies, pushing Diamondback even further down the cost curve.

Lastly, we continue to work to earn our social and environmental license to operate. Part of this is our commitment to provide quarterly disclosures that detail our progress towards our environmental goals. We are proud of how we have performed so far this year when looking at multiple metrics, including recycling nearly 40% of our produced water and keeping our total recordable incident level at multiyear lows. However, flaring continues to be an issue. We are diligently working with our gathering partners to build in redundancy, accelerate plant turnarounds and meet the takeaway needs of our current development plan. We remain committed to ending routine flaring by 2025 and are confident in our ability to achieve that goal.

We've also spent hundreds of millions of dollars to lower our emissions profile by building pipelines and electrifying our production fields. These projects have lowered our costs to date, but due to the increase in the cost of power across the state of Texas, we have had to move our lease operating expense guidance range up by $0.50 a barrel at $4.50 to $5 a barrel. Even with this move, we continue to be the low-cost Permian operator and build on a long track record of cost control.

The second quarter was a record quarter for the company. We delivered on our production guidance, kept costs in line and distributed over 63% of our free cash flow to our shareholders. We are well positioned to build off this momentum and are excited to begin returning at least 75% of our free cash flow to our shareholders this quarter. We expect this industry-leading cash returns program and our best-in-class operational machine to continue to deliver differentiated results for our shareholders.

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

[Operator]

[Operator Instructions]. And our first question comes from Neal Dingmann from Truist.

[Neal Dingmann, Truist Securities]

My first question is somewhat on shareholder returns. Specifically, I think on your conference call a year ago looked and, Travis, I think you stated that as you looked at back then at supply and demand fundamentals. You said, I think, suggest that oil supply was still purposely been withheld in the market, driving your call to not grow production. So I'm wondering when you look at today, do you still believe that's the overall case of worldwide fundamentals or specifically supply? And does that still drive -- is that still your primary decision -- your primary driver of your decision for the no growth? Or is this more based on investor request?

[Travis Stice, CEO & Chairman]

Well, certainly, as we look into 2023, I think it's a little premature to do much forecasting into 2023. But I can tell you kind of our base case is looking at something at the same activity level, probably generating something in the low single digits in terms of the growth rate. But again, it's more of an output.

But I think what you specifically asked about the call last year, I think I highlighted really 3 things and then subsequently added a fourth, and that was demand at pre-COVID levels. We wanted to see 5-year inventory levels somewhere returning to the 5-year average. We still had a question about OPEC capacity. And the one I added subsequent to our call was the administration continuing to embark uncertainty into our capital allocation process across the industry.

And so certainly 3 of the 4 of those have been answered today, Neal. There's still a lot of administration led uncertainty, both in policy actions and rhetoric. But the other ones certainly appear to be answered. So I think as the industry starts to contribute towards more focus on 2023, I think you'll still be governed primarily by the shareholders who own the companies. But I do think you'll start to see a little bit of growth in the industry as we look into next year.

[Neal Dingmann, Truist Securities]

Great. Great response. Then my second question really, I would say is on the notable capital spend discipline that you guys continue to have. As many others we've already heard about, continue to increase their cost despite them previously saying that they were locked in. So I'm just wondering, going forward, would you all consider any type of, I don't know, like a more vertical integration or any other new strategy, will the focus remain more or less on the same as working with vendors and just the efficient execution?

[Travis Stice, CEO & Chairman]

Well, Neal, I think we've been pretty successful with the existing model. We'll always look at seeing what ways we can ensure lower execution cost. We were a little bit plummet in the first quarter with all the commentary about locked in prices and then subsequently followed with CapEx raises. And that's just not the way that we typically try to communicate what our execution focus is.

But I do want to -- I don't know I have a lot of employees listening in the call this morning. And look, I want to give a shout out to our organization for our ability to continue to manage costs in an inflationary environment. Again, about a year ago, Neal, we were talking about how you separate winners and losers in an inflationary environment. It's always those that can control costs. And while we've taken our look on the fixed cost side of an AP ledger, we've done a really remarkable job on the variable cost, and I look for our organization to continue to lean into that in 2023.

[Operator]

Our next question comes from Neil Mehta from Goldman Sachs.

[Neil Mehta, Goldman Sachs Group]

First question is around capital returns. And you did increase the share repurchase authorization to $4 billion from $2 billion previously. It looks like you've been leaning a little bit more into the repurchase with the pullback in the stock. So if you just talk about your framework around variable dividend versus repurchases? And how you're thinking about being countercyclical with how you deploy your share repurchases?

[Travis Stice, CEO & Chairman]

Well, we certainly think that there's a lot of value in our existing stock price. And we think that, that oil and public equity stocks is really undervalued right now. And so the 2 data points that you mentioned, I think, are good indicators of future behaviors. The first being, we spent about $500 million in the last 2 to 3 months repurchasing shares. And the Board just essentially doubled our authorization up to $4 billion. So the base dividend still remains sacred, sustainable and growing followed by this environment share repurchases. And then as we committed to a month ago, we'll make up the difference and keep our shareholders hold by returning at least 75% of free cash flow.

[Neil Mehta, Goldman Sachs Group]

Yes. And then would love your perspective on the M&A outlook. We know that you've been active over the last couple of years. But is it fair to assume that given that you're prioritizing share repurchases at this point, do you think that's a better investment than third-party M&A?

[Travis Stice, CEO & Chairman]

Yes, certainly, Neil, that's the behavior we're demonstrating in. As I just iterated, just to emphasize all in the public markets is really cheaper in the private markets, and I think there continues to be a wide gap between those 2 points. And I think you're also seeing stalled or failed processes as well, which again indicates a spread between bid and ask. So right now, the greatest return for our shareholders is leaning into our repurchase program.

[Operator]

And our next question comes from Arun Jayaram from JPMorgan Securities.

[Arun Jayaram, JPMorgan Chase & Co.]

Maybe just a follow-up to Neil's question, is how do you think about your process to engage in portfolio renewal in this kind of backdrop and perhaps a little bit more color, it looks like you had about $85 million of property acquisitions in the cash flow statement. I was wondering if you could provide us a little bit of detail on that? And I think on a year-to-date basis, that takes you just under $400 million of property acquisitions.

[Travis Stice, CEO & Chairman]

Yes. Arun, the big deal is obviously in Q1, $230 million deal. We do capitalize a little G&A and interest which flows through that number, so it's not all property acquisitions. But a couple of things that we do on the property side, it's just the typical blocking and tackling, netting up. We give our land teams the directive that we'd rather drill 100% working interest wells across the board. And so they're always working to net up and block and tackle, but nothing of significance purchased in Q2.

[Kaes Van’t Hof, President & CFO]

And look around being having boots on the ground here in Midland, I think all of our shareholders expect me and us to be in the deal flow at all times. But that just means we look at things coming across the desk, but I go back to say, look at what our behaviors are and the separation between public and private expectations on value. And that's -- I think that's the best way to think about what our forward plans are.

[Arun Jayaram, JPMorgan Chase & Co.]

Okay. And just my follow-up is, you guys had really, really strong oil price realizations in the quarter. I was wondering if you could just remind us about your mix between getting waterborne crude pricing versus, call it, a Midland type of benchmark?

[Travis Stice, CEO & Chairman]

Yes. So we have all of our oil on pipes going to the Gulf Coast. A 1/3 of it going to Houston, getting MEH pricing, 2/3 going to Corpus getting Brent pricing. And so we've been the beneficiary of these water Brent WTI spread. We have a little bit of exposure to the Midland market, we also have the ability to kind of flex that to the Gulf Coast with the space that we have. And so the sell-off in WTI versus Brent has resulted in really good oil realizations. No guarantees that it's going to continue forever. But that kind of fits the insurance policy that we put in place to invest in these pipelines and get our barrels to the most liquid markets.

[Operator]

And our next question comes from Scott Hanold from RBC Capital Markets.

[Scott Hanold, RBC Capital Markets]

Could you all give us some view on what you all are seeing on leading edge inflation? And if you can give us a sense of what kind of savings you guys expect from the e-fracs versus a regular frac crew? I mean, how meaningful is that?

[Kaes Van’t Hof, President & CFO]

Yes, Scott, good question. I would say, generally, we took up CapEx on the low end and took up our average well cost estimate for the year. I would say probably today, we're probably up 15% today from the beginning of the year. We'll probably exit a little higher than that. So probably 15% year-over-year well cost increases, but what the ops team is doing is not taking every phone call and just increasing prices. We're trying to do some things to be more efficient. You mentioned the e-fleet, Travis just mentioned in his opening remarks that we're going to have a second e-fleet coming in early next year. That saves money, not just on the horsepower piece, but on the fuel piece. These will be connected to line power and the back end of a gas plant with burning dry gas in the Permian.

So while gas prices have gone up, they certainly haven't gone up as much as diesel. I would say we'd probably save 50-ish a foot with that -- $50 a foot with that e-fleet. A couple of other things we are doing on top of that, we are adding some preset rigs to replace some big rigs as those preset rigs cost a lot less with these big pads and long cycle investments. We have that ability to do so. Our team is also getting really smart on casing design, cement design, wherever we can pick up pennies that's just our stock in trade.

[Scott Hanold, RBC Capital Markets]

A lot of pennies there you're picking up. Good to hear that. And as a follow-up, and I'm going to kind of belabor the point on shareholder returns. And I know you all have done pretty well with executing your flexible plan. But the bottom line is right now, it appears that your stock is trading at a discount to peers. I mean it looks pretty evident. And like how do you all think about like what the best way to bridge that gap is? And like what can you do to kind of force the issue to get your valuation more in line with peers or where you think it should be?

[Travis Stice, CEO & Chairman]

Scott, when I talk to our Board and communicate what I think the success indicators are, there's really five. Three of them were foundational that led us to success in the first 10 years. And I think the two that I've added are going to be foundational for the next 10 years. But the three that we built the company on our execution, low-cost operations and transparency. And we've been very successful at differentiating ourselves with those. The two that have recently been added are capital return and decarbonization. And on the capital return, we're now -- our yield is peer-leading. We're competitive on all forms of shareholder return measures. And the last one is decarbonization, and not only in our disclosure, but also in our performance.

And look, those are the five things that we'd sell at. And you can ask us questions about any one of those five, we can articulate chapter verse why those are successful -- why we're successful with those. And while you pointed out a dislocation in stock, we believe fundamentally that we continue to do the right thing for our shareholders to generate the greatest value. And it -- and we believe we're running this company not just for a quarter but for the next 10 years and longer.

[Operator]

And our next question comes from David Deckelbaum from Cowen.

[David Deckelbaum, Cowen and Company]

Appreciate the color today. Maybe if I could ask one on just CapEx. In 2022, I think you all forecasted about 12% of your total budget going towards non-D&C. Is that a good contribution as we think about '23 and '24?

[Kaes Van’t Hof, President & CFO]

Good question, David. I think generally, if you look at our past history, we kind of whenever a deal happens the next year, infrastructure and midstream is 10% to 15%, getting down to kind of 7% to 8% of total capital in that years. I certainly expect us to be closer to 7% to 8% of total capital in 2024 with a step-down next year in 2023. I think the only wrinkle is we are all us and our peers are all spending a lot of money on environmental cleanup. And so that's probably $30 million to $40 extra million a year that wasn't in the budget in 2017 or 2018. It's necessary dollars, but generally, I'd expect our midstream infrastructure budgets to come down next year and into '24, probably a step change down to 7% or 8% in a couple of years.

[David Deckelbaum, Cowen and Company]

And then maybe just as a follow-up. Obviously, the 3Q CapEx, 4Q CapEx is going to be -- is going to follow with activity with 3Q being higher than 4Q. As we think about next year, though, I think the expectation is that you guys would still be in that sort of 270, 290 wells, 12 rigs, a few frac crews. Is that $460 million or so implied guide for 4Q? Is that $460 million to $500 million range, like a reasonable run rate to think about '23? Or are there explicit reasons why you would want us to be guided away from that?

[Kaes Van’t Hof, President & CFO]

Yes. I mean I think it's just too early to talk '23 inflation. I'm certainly kind of in the camp that we're not willing to continue to concede margin expansion on the service side perpetually. So we're going to see where things shake out over the next 6 months. Like we said earlier in the call, there are some things we are doing to increase efficiencies and lower costs. I would just say, generally, I think you're right on activity going into 2023. I can't -- I'm not going to comment yet on some respects and where things head particularly with some of the stuff that's out of our control like steel continuing to go up in price.

[David Deckelbaum, Cowen and Company]

The only inflation I'm making then there's CapEx per share.

[Operator]

And our next question comes from David Whitfield from Stifel.

[Derrick Whitfield, Stifel, Nicolaus & Company]

Congrats on your quarter end update. With my first question, I wanted to focus on your operational efficiency. Would it be safe to assume the improvement you experienced in your drilling and completion efficiency metrics over the last couple of years has at least plateaued as a result of service tightness and the dilution of experienced crews?

[Kaes Van’t Hof, President & CFO]

Yes, Derrick, I think that's a fair statement. Certainly, the business has gotten a lot harder to operate and execute this year. It's on us though to make sure we have the right supervision in the field to make sure green hands are trained up quickly. It's something that we are seeing. We do spend a lot of money near the wellhead to make sure our supervision oversees what's going on in the field.

But then there's a couple of other things that kind of go the other way, right? So the spud rigs that we're putting in place, they drill a little slower, but they cost half as much as the big rigs. So I think generally, we kind of hit the efficient frontier on days of TD this year, but now we're doing some things that might slow things down, but spend less money per well.

[Derrick Whitfield, Stifel, Nicolaus & Company]

That makes complete sense. And as my follow-up, I wanted to touch on the Inflation Reduction Act, which could be voted on this week focusing on the minimum tax and methane fee components. Could you speak to the implications for Diamondback and the industry in general? It seems at a minimum from our perspective that the one rare case that gets Diamondback would be minimized with the 15% minimum tax stipulation.

[Travis Stice, CEO & Chairman]

Derrick, the methane fee tax is one thing that we've looked at. And because of the dollars we've spent over the last 3 years really reducing our methane emissions that doesn't appear as we understand it to be a needle mover for Diamondback.

[Kaes Van’t Hof, President & CFO]

Yes. And then on the tax side, we're pretty low on NOL protection. So if the strip holds, we have about $1 billion of protection next year, we would be above the 15% minimum that's being proposed. So I think generally moving towards a full taxpaying entity at Diamondback which mitigates the impact to us. Certainly, if we're in a different commodity price environment, it might be a different story. But in this environment, we're headed towards full cash taxes in 2024.

[Operator]

And our next question comes from Jeanine Wai from Barclays.

[Jeanine Wai, Barclays Bank]

Our first question is maybe hitting on the balance sheet a little bit. So you had about $21 million of stand-alone cash at the end of the quarter, and that reflects really getting after paying off those notes early and at a very nice discount. That's great. What's the sequencing of further debt reduction that you mentioned? And do you have an updated view on your target cash balance? We're essentially kind of back in to how much potential upside there could be to exceeding the 75% minimum return?

[Kaes Van’t Hof, President & CFO]

Yes, Jeanine, good question. With the rate review we expected to close at the end of August, we'll have to pay off that revolver at close. It's about a $200 million revolver that we'll expect to pay with -- down with cash. We also want to take out the Rattler notes, $500 million notes next. There are some reporting requirements with those notes if they continue to stay out there. So I think those 2 items are certainly the priorities, and we probably expect to be in a position to have those taken out by the next time on the phone here. And then I think after that, it goes back to being selective with the other outstanding notes. You'll note that we didn't touch the 2 30-year tranches that we have out there, but we did take down some of our 29 and 31 opportunistically with a discount. But generally, the Rattler notes and Rattler revolvers coming out next and then we'll be more prudent with the rest.

[Jeanine Wai, Barclays Bank]

Okay. Great. And then maybe a quick one on operations. I think in the past, you mentioned running 3 simul-frac crews and then potentially utilizing a spot crew. And then in your prepared remarks, I think I heard you mention just running 3 frac crews. So just wondering if I'm remembering those 2 things correctly? And have you been able to maybe drop that spot crew due to efficiencies?

[Kaes Van’t Hof, President & CFO]

Yes. So the 3 simul-frac crews are going to run consistently throughout the whole year. And those 3 have been going this year and they'll be the baseline for next year. We did have a spot crew running for part of Q2 -- spot crew again until probably the end of this year. We try to string together enough pads to make that spot crew cost competitive. And I don't know, Danny, you want to add anything on the spot crew?

[Daniel Wesson, Executive VP & COO]

No. I think the 3 simul-frac crews will do about 80% to 90% of our planned well activity and then the remaining 10% to 20%, we have to handle with an additional crew. We usually try to block it up and get a dedicated line of work for a crew for a period of time and then let it go and bring it back for the next group of wells.

[Operator]

And our next question comes from Nicholas Pope from Seaport Research.

[Nicholas Pope, Seaport Research Partners]

I had a quick question on kind of the updated CapEx guidance. Most -- the increase was all on the drilling side without much kind of change in kind of expected activity. But no real change in the other components, the midstream environmental infrastructure components. So I was kind of curious, are you -- what kind of inflation you're seeing on there? Are you expecting kind of the same amount of activity on those nondrilling, noncompletion components? Or is that just a little bit more fixed with project-type work?

[Kaes Van’t Hof, President & CFO]

Yes. It's definitely a little more fixed with project-type work. There is some inflation in those budgets, but that was already somewhat baked in. On the midstream side, in particular, the big bulk items is buying a lot of pipe, and we pre-bought a lot of that. So we knew where that was going to sit on the cost side. On the infrastructure and our environmental side, it's not necessarily a change in plan. As you mentioned, it's just a few inflationary items around the edges, but it's nothing to the extent of what we're seeing on the drilling and completion side when it comes to inflation.

[Nicholas Pope, Seaport Research Partners]

Got it. I appreciate that. And as you kind of look at kind of progressing towards completion of the midstream, the Rattler kind of acquisition. Is there any anticipation of any real change in operations? Or I guess, how much kind of third-party is even a part of Rattler at this point in terms of operation?

[Kaes Van’t Hof, President & CFO]

Yes. That's a great question, too. Nothing is going to change operationally. And we still like the midstream business. We still like what it does for our consolidated margins. We just felt that it didn't need to be a separate public entity, and so we're able to buy that back in and still run a midstream business that we own 100%. I will say the team has done a good job seeking out third-party opportunities. I wouldn't say it's our core business, but we'll have some real cash flow coming in from third parties given the amount of assets we have on the ground on the midstream side.

[Operator]

And our next question comes from Doug Leggate from Bank of America.

[Doug Leggate, Bank of America Merrill Lynch]

I hate to go back to the capital return question, but just mostly you will issue a bunch of shares. I was just wondering how we should think about split between the variable and the stepped-up buyback program as you go forward?

[Kaes Van’t Hof, President & CFO]

Yes, Doug, you were a little mixed on that. I couldn't hear you pretty well, but I think I got the gist of it. I think generally, we are going to be very aggressive on the buyback here in Q3 given where the stock is, and where we continue to generate free cash above mid-cycle prices. So already expensed $200 million quarter-to-date. Generally, if you kind of take street numbers and keep our base dividend flat in Q3, we could probably spend another $650 million on buybacks this quarter. So if the stock stays where it is and well stays where it is, we're going to be very, very aggressive on that buyback, which is why the Board signified the confidence in increasing that authorization to $4 billion.

[Doug Leggate, Bank of America Merrill Lynch]

Okay. So sorry to press on this point, Travis, and I apologize for my line, but is there a more formulaic way we can think about -- I mean, are we still looking at a substantial variable in the second half of this year?

[Kaes Van’t Hof, President & CFO]

None of these prices, Doug, if the stock price stays where it is today, all that cash is going to go towards reducing the share count.

[Doug Leggate, Bank of America Merrill Lynch]

Great. That's what I was looking for. My follow-up is just a quick one on going back to the A&D very quickly. Can you clarify, as your understanding is today, do IDCs and I guess, NOL is not such a big deal for you guys, but in IDC specifically, do they still qualify as an offset to the A&D in your view? Any color you can offer in your interpretation of that?

[Kaes Van’t Hof, President & CFO]

I think our interpretation is they still do. Unfortunately, IDCs have become such a small part of the cash flow stream that they're not impacting things much. So that's our understanding today. But you never know if politicians, anything can happen.

[Operator]

And our next question comes from David Deckelbaum from Cowen.

[David Deckelbaum, Cowen and Company]

I wanted to ask just a follow-up on some of the thoughts around return on capital. Travis, you talked about conversations with the Board how to make Diamondback competitive relative to its peers. You've seen the evolution of what you guys had promised last year, 50% of 2022's free cash return to shareholders, the rest retiring debt. You've increased it to 75%, you just increased the buyback. I guess when you talk to the Board now about the return on capital programs, are there explicit targets that you're thinking about when you're putting on the outline around the buyback? And how did you come to this amount? Are you trying to intentionally show that Diamondback can retire 10% of its market cap plus every year? Is that -- are those explicit goals now? Or are these more coincidental based on the free cash is today?

[Travis Stice, CEO & Chairman]

Yes. Those are -- those -- we don't have specific goals that are articulated in the way that you just asked that question. We simply look at the value that we believe the inherent value of the stock versus where it's trading at. And we want to demonstratively move into repurchases when we think there's a big location like we see in today's market. And as we go forward in time, maybe that changes. But as it sits today, as Kaes just outlined with the previous caller, we believe that there's still a lot of value in the stock.

[Operator]

And our next question comes from Vin Lovaglio from Mizuho Group.

[Vincent Lovaglio, Mizuho Securities]

Given the scale of free cash flow generation, I'm wondering how you guys are thinking about potential investment in future offtake, particularly on the gas side and kind of connecting that gas molecule to Gulf Coast, and ultimately, hopefully, international markets?

[Kaes Van’t Hof, President & CFO]

Yes, Vin, good question. I think just generally, while we are a pretty significant gas producer now at this point, we don't have a lot of control over the molecule. Diamondback has grown through acquisition over the years and with those acquisitions come dedications, and most of those dedications don't come on taking kind rights. So we're certainly doing as much as we possibly can to incentivize pipeline development, getting molecules to the Gulf Coast. We did commit to the Woodford pipeline. We'll have about 1/3 of our gas on that. But generally, you have to have control of that molecule to incentivize development, and we don't have much more beyond that today.

[Vincent Lovaglio, Mizuho Securities]

Got it. And then I just want to go back to the e-fleets. They seem like kind of a no-brainer at this point in time. I'm just wondering, if there were any changes in planning or any hurdles that you guys kind of have to get through before broader e-fleet adoption? Or is it really just kind of securing that line power?

[Kaes Van’t Hof, President & CFO]

Well, it's really about the quality of the fleet and what you're signing up for. I think what Halliburton has put together is truly an unique product. We're going to have some form of battery storage attached to that e-fleet so that you're very efficient with the use of natural gas and electricity when that fleet is working. So you do need a pretty big acreage blocks, you need large pads like we have ahead of us, and you need a long-term commitment with a business partner like Halliburton. So I think that -- we checked all those boxes. We feel very good about the e-fleet that's coming on in September, so good that we signed up for a second one. So 2/3 of our simul-frac fleets will be e-fleets with Halliburton. And like you said, it's pretty obvious when the economic and environmental advantages sync up, that's a no-brainer for us. And we're looking forward to getting our first one in the field here in a month.

[Operator]

And our next question comes from Leo Mariani from MKM Partners.

[Leo Mariani, MKM Partners]

I just wanted to clarify a couple of things that I heard on the call here. So in terms of the buyback, I just want to make sure I heard the numbers right. Did you guys say that you could do an additional $650 million in 3Q alone on top of the $200 million you already announced? I just want to make sure I heard that number right.

[Kaes Van’t Hof, President & CFO]

Yes. Leo taking street numbers and multiply it by 75%, taking out the $200 million we spent quarter-to-date and taking out the $0.75 a share base dividend, and that's your math on buybacks for the quarter. And that's something we look at every day. I mean we have our team rerun the model on a weekly basis to figure out how much cash we're going to have in the quarter to buy back shares when there's this much of a dislocation between oil in the public market then oil in the ground.

[Leo Mariani, MKM Partners]

Okay. That's helpful. And then just on the debt paydown. Obviously, you talked about paying off some of the Rattler debt here. Can you maybe just give us a little more color on the decision to kind of pay off some of the paying debt, which wasn't kind of due to the end of the decade, I guess some of the 29, 30s or whatnot in the second quarter. Look like you kind of elected to do that versus kind of pay the higher variable dividend because obviously, cash flows were up for the quarter. Just any more color kind of around the thinking there?

[Kaes Van’t Hof, President & CFO]

Yes. It's a pretty unique opportunity where E&P has a ton of cash flow and bonds trading below par. And we saw that opportunity. Our Board saw with us and decided that buying back some debt well below par was a good use of capital and also exercise accelerates that deleveraging process to give us more confidence in the increased 75% of free cash flow going back to shareholders beginning in Q3.

[Leo Mariani, MKM Partners]

Okay. And just to clarify on the shareholder returns, you guys do not count debt pay down as a shareholder return, right?

[Kaes Van’t Hof, President & CFO]

That's correct.

[Operator]

[Operator Instructions]. And our next question comes from Paul Cheng from Scotiabank.

[Paul Cheng, Scotiabank]

Two questions, please. Can you just remind us what is your hedging policy, if that's an official guidance in terms of what percentage that you want to hedge? Secondly, that with the rising recession period, how that impact your thought process in the 2023 budget in terms of the capital return, balance sheet management and all that?

[Kaes Van’t Hof, President & CFO]

Yes. Good questions, Paul. I'll take the hedging policy, and I'll let Travis talk more macro about 2023. Just generally, we do buy puts for rainy days. So we've gone to the balance sheet is strengthened, we bought more and more puts around $50 to $55 Brent. In that situation, if we do go below $55 Brent, we're probably making capital decisions to slow down, but the balance sheet doesn't blow out. We can still pay our dividend and still generate free cash in that situation. So really protecting for a rainy day, trying to spend around $1.50 to $2 a barrel to buy those puts, and we want to be about 60% hedged going into a particular quarter. So if you look at our hedge book, about 60% hedged for Q3, going down to about 0% by Q2, Q3 of 2023. And we'll just continue to keep rolling that forward for rainy day insurance.

[Travis Stice, CEO & Chairman]

And Paul, the energy has typically been a pretty good hedge a bit offset historically. And as you look into 2023, regardless of how you define a recession, it looks like there will be recessionary impacts across our economy. But what's a little bit different this time is that the world today still appears to be chronically short physical barrels with not a lot of spare capacity to fill that gap. And so while we don't necessarily plan on anything other than in the future than our mid-cycle prospect, it looks to me like the macros -- the macro looks pretty positive for energy prices over the next couple of years, even in spite of what I know will be a recessionary impact. And look, if you do see some recessionary impacts, it will probably soften some of the inflationary pressures we're seeing today.

[Kaes Van’t Hof, President & CFO]

Yes. I'd make one more point. That's the benefit of this new business model where we're not changing our plans for every $10, $20, $30 move in oil prices. There needs to be a $50 move in oil price lower before we discuss any change to our execution plan. And I think this level-loaded plan, level-loaded activity levels has allowed us to fight off the inflation bug a little better than most. And again, as Travis mentioned, there's no oil out there.

[Paul Cheng, Scotiabank]

Just curious that when you gentlemen kind of want to keep more cash balance if that's the increasing recession fee?

[Kaes Van’t Hof, President & CFO]

Yes. Right now there is still cash. We certainly want to cash balance. The cash balance moves a lot right now and when you're generating $1 billion of revenue a month, if the cash balance fluctuates wildly throughout each month. I think generally, having a strong balance sheet, having some cash and having access to capital through a cycle is something us and the Board discuss on a monthly basis. And I think that also ties to where your maturity profile sits, right? So if we not only have less debt, but a longer duration maturity profile, that gives us confidence in our access to capital and our ability to generate cash, given that our cash flow breakeven is down in the mid-30s a barrel.

[Operator]

And I am showing no further questions. I would now like to turn the call back over to Travis Stice, CEO, for closing remarks.

[Travis Stice, CEO & Chairman]

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

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.