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Diamondback Energy Inc
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Good day, ladies and gentlemen, and welcome to the Diamondback Energy Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. And as a reminder, this conference is being recorded.
I would now like to introduce your host for today's conference, Mr. Adam Lawlis, Director of Investor Relations. Sir, you may begin.
Thank you, Olivia. Good morning, and welcome to Diamondback Energy's third quarter 2018 conference call. During our call today we will reference an updated investor presentation, which can be found on our website. Representing Diamondback today are Travis Stice, CEO; Mike Hollis, President and COO; and Tracy Dick, 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 on 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, and thank you for listening to Diamondback's third quarter 2018 conference call. Diamondback was able to execute on multiple, long-term strategic initiative over the last three months, all while maintaining our focus on near-term execution with best-in-class operating efficiencies and margins.
We grew production 9% quarter-over-quarter to a 123,000 BOEs a day while decreasing cash cost over the same time period. Our production is now up 45% year-over-year all from organic growth within cash flow, and our updated 2018 production guidance implies 50% year-over-year growth within cash flow.
In a world where capital discipline is now the primary theme across North American energy and companies are discussing what they plan to do, look no further than what Diamondback has done over the past three years. Our operating philosophy has not changed. Maximized production growth within cash flow, maintain best-in-class operating metrics, low leverage, and execute on acquisitions accretive to our current acreage position and per share metrics. All of which, we continue to do in the third quarter.
During the third quarter, we announced our transformational combination with Energen. As an update, we have received regulatory approval for the merger, and the shareholder meetings are scheduled for November 27 with the deal expected to close shortly thereafter pending shareholder approval. We are currently operating 14 rigs and Energen is currently operating 10 rigs, both split evenly between the Midland and Delaware Basins.
We see this rig count as the baseline for our 2019 operating plan as we integrate the merger and work to instill best practices across the pro forma company's asset base. We will begin delivering on the primarily synergies presented in our merger presentation immediately, and our 2019 capital and production guidance will reflect this pro forma cost structure, which we will look to present in the coming months after the merger closes.
We were also able to close multiple significant acquisitions in the Northern Midland Basin including the previously-announced Ajax acquisition and the recently-announced ExL acquisition. These acquisitions add 25,000 Tier 1 acres to our existing inventory and have three zones with greater than 100% IRRs at current commodity prices.
The blocky complementary nature of these assets gives us significant running room for capital efficient, long-lateral development. Also because there are minimal drilling obligations across the block, we can run multiple rigs drilling large, multi-well pads and efficiently develop the reservoir.
Diamondback will continue to look for assets complementary to our existing asset base that compete for capital right away within our existing portfolio at acquisition prices that allow us to generate full-cycle returns well in excess of our cost to capital. With the size and scale of our pro forma business, we will look to continue to grow production differentially within cash flow, add inventory and acreage without compromising our balance sheet, and grow a return of capital program through our dividend.
With these comments now complete, I'll now turn the call over to Mike to discuss our operational highlights for the quarter.
Thank you, Travis. In the third quarter, Diamondback continue to execute on both our near term and long-term crude marketing strategies. In the near term, we have over 100,000 barrels per day in gross production, lock-in firm transportation agreements with multiple third parties. These deals have been signed over the last six months and have various fixed differentials to Gulf Coast pricing, including deals linked to Brent and MEH.
In general, pricing is expected to be the weakest in the fourth quarter this year and the first quarter of next year with pricing improving throughout the remainder of 2019. When the EPIC Pipeline project completes its early in service construction, Diamondback will benefit from space on that pipeline and overall lower differentials through the back half of 2019.
With respect to our long-term oil marketing strategy, we now have over 200,000 barrels per day of space between the Gray Oak and EPIC Pipeline projects, with 50% of this space take-or-pay. We also have a 10% equity interest, our equity option in both projects held at our subsidiary, Rattler Midstream. This incentivizes Diamondback to efficiently utilize our long-haul space in both projects. We expect that Gray Oak project will move all of our anticipated production from Diamondback's current Delaware Basin position to the Gulf Coast, and that the EPIC project will move most of our anticipated production from our current Midland Basin position.
We are proactively working with our marketers to secure a true wellhead to water solution with reserve, tankage and export capacity needed on the Gulf Coast. These deals remove the Midland market risk from our future while building our midstream business via strong strategic partnerships.
In the third quarter, we also executed a joint development agreement with Carlyle for the development of the San Pedro area of our Pecos County asset and has started drilling with one rig. This strategic partnership will allow us to bring value forward from an area that does not currently compete for capital while also benefiting our midstream and minerals businesses. We look forward to a long successful partnership with Carlyle developing this acreage block over the coming years.
In true Diamondback fashion, we've had an extremely busy and successful third quarter. I'd like to take this time to thank all of the Diamondback staff for leaning in together to make this happen. With everything we've accomplished this quarter, the team has never missed a beat on execution.
Diamondback completed over 414,000 lateral feet this quarter across 43 wells with an average lateral length of over 9,600 feet. We operated 13 rigs and five frac crews throughout the quarter. We begin testing the use of 100% local sand in the Delaware Basin and we'll continue to monitor both our results and offset activity.
In the Midland Basin, we are using local sand for all three of our completion crews and realizing roughly $60 per lateral foot of savings. We have also begun dual fuel operations on one drilling rig and one frac crew in the Delaware Basin, supplementing higher cost diesel with cheap natural gas. If the use of dual fuel continues to make economic sense, we have five drilling rigs and two completion crews with these capabilities currently in our fleet.
Moving to well results, we are excited to announce two successful test of the Second Bone Spring in Pecos County, and look forward to continuing to prove-up this zone as a secondary target to the Wolfcamp A. We also announced that Wolfcamp A result on the eastern third of our Pecos County acreage that early-time is as good as any well we have completed across acreage block.
Regarding our capital budget for the year, we are increasing our overall budget by 6% at the midpoint of our range due to an increase in our infrastructure and midstream budget for the year. This is primarily due to the continued build part of our midstream infrastructure in the Delaware Basin, the added infrastructure from the execution of our joint development agreement with Carlyle, as well as our overall increased rig count exiting the year. Please note all of this investment has been done within cash flow.
Over time, the infrastructure spend as a percentage of total capital in the Delaware Basin will begin to move from current levels to a rate that more closely represent what we achieved in the Midland Basin, roughly 10% of total capital.
With these comments now complete, I'll turn the call over to Tracy.
Thank you, Mike. Diamondback's third quarter 2018 net income was $1.59 per diluted share, and our net income adjusted for non-cash derivatives and other items was $1.67 per diluted share. Our adjusted EBITDA for the quarter was $372 million and our cash operating cost were $8.70 per BOE including LOE of $4.34 per BOE and cash G&A of $0.78 per BOE.
During the quarter, Diamondback spent $321 million on drilling, completion in non-operated properties and $74 million on infrastructure and midstream. Year-to-date, we have spent $934 million on drilling, completion in non-operated properties and $205 million on infrastructure and midstream, while generating free cash flow of $12 million excluding acquisitions.
Diamondback ended the third quarter of 2018 with a net debt to Q3 annualized adjusted EBITDA ratio of 1.2 times. After adjusting for the closing of the Ajax, ExL, and EnergyQuest acquisitions on October 31 and our increased credit facility of $2 billion, we ended the quarter with roughly $1.3 billion of liquidity.
Finally, Diamondback's board of directors has declared a cash dividend for the third quarter of $0.125 per common share, payable on November 26, 2018 to shareholders of record at the close of business on November 19, 2018.
Operator, please open the line for questions.
Thank you. And our first question coming from the line of Neal Dingmann with SunTrust, your line is open.
Good morning, all. Travis, my first question for you or Kaes or the guys. Can you discuss, it seems like a strategy that's really going to pay off longer-term. I want to dig a little bit more into your wellhead-to-water strategy, specifically. Could you talk about – I know there's a lot factors involved as far as the storage and everything with the ship channel, all the way to making sure you have the proper storage on the ship and everything itself. Again, just – I know, maybe a bit premature for that, but I'm just wondering if you could just give the highlight as far as what you all deem the benefits of a strategy like this versus what, sort of, I guess, options some others are taking at this point?
Sure. Well, the strategy that we've outlined a couple of times on our wellhead-to-water strategy is not one that sacrifices anything near term for long-term gains. I think we've really advantaged our investors with the way that we've set this structure up that allows us to ensure we've got firm transportation. We now have equity ownership in two pipelines that's going to fit within our Rattler Midstream, and really think that this strategy long-term is going to be seen as a really creative strategy that drives differential value to our shareholders.
Yeah. I mean, I think, long-term, Neal the upside for us is not one of our barrels on our current position will touch the Midland market for the foreseeable future. And if you think about the systems that we're going to be on and the long-haul systems we're going to be on, we're going to paying ourselves via our equity ownership to move our barrels to the water. So essentially we're getting to Corpus Christi almost for free. And then that's where the experts take over. We're not an exporter, we're not a marketer. And we have some strategic partnerships with exporters to handle those barrels from then on.
In the near term, we used that scale and our commitments to those pipes to secure firm transportation in the near term in what is a pretty tight market in the Permian this year. So now we have over 100,000 barrels a day of gross production protected at fixed discounts to Brent and MEH to get us through the next couple quarters. And then once EPIC comes on in Q2 or Q3 next year, the dips start to ease and we'll start to maximize the benefits of these investments.
Okay. Great color. And then maybe just my second one for Mike. Mike, looking at that slide five, where you – I'm sorry, slide 14 actually, where you talk about the takeaway and sort of more about the landing zones that you're showing in the Southern Delaware. Could talk about – I think you mention in here about the high graded landing zones, but specifically if you could talk about the thickness when you look at the Bone Springs versus the Wolfcamp A, B and C? How important is it to have this sort of high graded landing zone in order to achieve sort of the highest results?
Absolutely, Neal. 3D seismic, we've just got some high-resolution 3D data that's in and we're utilizing that for our targeting. And it's giving us the ability to stay well within that premium target in both the Wolfcamp A and the Bone Springs. Again, thickness is important, but where you are within that thickness and the rock quality is very important. So we continue to refine our model and continue to place these wells where we're able to test it and get that data so we can adjust as we go forward. But from the well results that we have been able to publish and show you guys, the work that we are doing down in Pecos County is really paying off.
Great. Thanks so much, guys.
Thank you. And our next question coming from the line of John Nelson with Goldman Sachs, your line is now open.
Good morning and congratulations on the update. Travis, our math says the market is only giving Diamondback credit for about $600 million of the more than $2 billion of synergies you all detailed alongside the Energen acquisition announcement. So I guess my question is; one, how, if at all, do you view the execution risk of Energen different from kind of the numerous other acquisitions the team's previously executed on? And then; two, can you maybe walk through a timeline for achieving some of the synergies that you outlined?
Yeah. We – I think we had in our prepared remarks, John. We anticipate when we update the market on our 2019 guide that the synergies that we outlined in our acquisition presentation, we're going to be – that's what to expect organizationally, that's the challenge that's been placed in front of us. And look, Every time Diamondback has made up pivot or done a large acquisition, there is always been in front of us a hurdle of execution. And our track record has always been to address that challenge and we overcome it every time while we've had flawless execution.
This is a large acquisition, yes, but we are a larger company now as well too. So I feel really confident about the synergies that we outlined. It's $220 a foot in the Midland Basin wells. Obviously, the acquisition hasn't closed yet. But we're seeing things, I would say that the Energen organization exited really high as this merger goes through. And I couldn't be more excited about how the integration is going, the opportunity in front of the pro forma company to deliver on those primary synergies. And look, we also outlined a couple of billion dollars of second synergies as well too in that acquisition presentation. And I think those are going to become more and more real over time as we get some of these strategic initiatives executed upon. So I'm just really excited about what this pro forma company is going to be able to do in the upcoming quarters.
That's great. And just to push a little bit, I think the timing on beginning to see the Midland Basin D&C and some of the G&A was 1Q in early 2019. Is that still kind of a fair target? Or as you kind of started to work on getting further along in evaluating or integrating with the team, is there any reason to believe that will be a little bit later to be achieved?
No, John. We plan our 2019 guide, cost per lateral foot to be what we're doing today with 14 rigs across a 24-week program. And on the G&A side, we plan our $1 per BOE guidance to be in line with what we've done traditionally, which is less than $1 per barrel.
Perfect. And then just the second question, the infrastructure spend is now kind of more than 20% at D&C capital and Mike you kind of hit on in your prepared remarks that should migrate to 10% over time. But as you think over the next one to two years, how should we think about that trajectory to get down to the long-term target.
Yeah, John, on slide 17, we put out a little comparison of the Midland and the Delaware Basins. We're five years into a horizontal program in Midland Basin, and now the infrastructure dollar as a percentage of total are much smaller amount, down to about 8% in total. The Delaware Basin when we bought that asset, really it was a new country out there in Pecos County and Reeves County and no infrastructure in place. So we've been spending a lot of money out there over the last two years. And you see that the Delaware is about 28% of total capital out there this year, but as our rig count ramps and the amount of batteries we have out there, the electricity is in place, the oil gathering system is in place, that number will decrease over time, and hopefully be less than 10% probably by 2020.
Perfect. I'll let somebody else hop on. Congrats, again.
Thanks, John.
And our next question coming from the line of Derrick Whitfield with Stifel Financial. Your line is now open.
Good morning, all, and congrats on a strong quarter.
Thanks, Derrick.
Reading between the lines, you guys are truly excited about the Spanish Trail north asset, the potential of Middle Spraberry there. What level of activity should we assume for this area broadly as you look out to 2019 and 2020?
Derek, we'd be looking at two to three rigs. We'll – the asset we had there before we were running between one, 1.5s then we added the additional 25,000 acres. It's reasonable to expect about one rigs per – about 10,000 acres. So you have somewhere in the three, four rigs running in the area going forward.
I think the other thing, Derek, that we tried to highlight in the prepared remarks was the fact that the lease obligations here are minimal, so we can actually take a rig and park a rig there and develop multi-well pads. I think we've talked previously about 12-well pad and that's what we intend to do is park a couple rigs there to develop in these eight to 12 well pads one right after another. And again that acreage has three zones that at today's prices has greater than 100% rate of return. So from a capital allocation perspective, those projects are going to compete in the top quartile of maybe not even the top 15%, top 10% of Diamondback's overall portfolio. So look to us to accelerate and lean in on one that as hard as we can.
Great. Great update. And then regarding the second Bone Spring wells that you discussed in your press release, could you comment on the targeted zone within Bone Spring formation and your AFEs on those as wells?
Derrick, yes. The AFEs are – again when we drill these wells, they are shallower, they are a little bit lower pressured than the Wolfcamp A. So we see somewhere in the 800,000 to 1 million difference. And again as we continue to use the local sand in the area, we'll be able to realize a little bit more of that savings. Again as far as the targeting, we do hit several targets in the Bone Spring, so we'll actually wine rack some in what we call an upper to lower. But again as we continue to develop this we have three wells in the area right now. So we don't have a whole lot of development to be able to talk about, but we wanted to delineate some acreage across the acreage bought.
Great. Thanks. Very helpful guys.
Our next question coming from the line of Drew Venker with Morgan Stanley. Your line is now open.
Good morning, everyone. How do you think about setting your capital program and the balance between growth and return of cash, and thinking also about just the free cash flow profile? Should we think about that as increasing over time, and then a corresponding slowing of the pace of regulations?
Yeah, I think we've been pretty clear what our strategy has been. We're going to allocate – we are going to continue to look at capital to high rate of return projects within cash flow and pay dividends. And the rig count right now is 14 from Diamondback and 10 from Energen. So that's going to be the initial allocation of capital. And we'll look – depending on commodity price and free cash flow, we'll look to – if we need to increase that in the back half of 2019.
But, look, I think we are on the cusp really of having created what we feel like is a really special oil and gas company, because not only can we generate peer-leading growth, we can also grow our dividend and we can do bolt-on acquisitions all within cash flow and doing so with less than a turn to leverage. And we think that's pretty special and we think that's the strategy that's going to carry this company forward for multiple years if not decades to come. And we think that's what that journalist have been looking for, that's what the specialist in energy space have been looking for. And I think Diamondback has touched all of those levers as we've matured as a company.
Thanks for that Travis. And in terms of the Howard County lawsuit with Energen, is there anything you can really share there as far as timing and then how you guys would proceed with either acquiring the acreage in full or some other structure to move ahead with development there?
Yeah. We can't talk too much about it, but Energen did put out an 8-K about 10 days ago that the Court of Appeals had ruled in favor of Energen in that lawsuit. I think the counterparty has the opportunity to appeal that sometime over the next 30 days. So we're going to be waiting patiently and hope this deal comes to a resolution in some shape or fashion.
Thanks.
And our next question coming from the line of Mike Kelly with Seaport Global. Your line is now open.
Hey, guys, good morning.
Good morning, Mike.
Specific one for me. Just if I look at your updated production guidance for 2018, could you guys give a sense of how much of that roughly kind of 2,000 barrels a day increase is attributable to these acquisitions you're folding in here in Ajax and ExL. I was little unclear on that? Thanks.
Yeah, Mike, this is Kaes. I'll take this a further step back. If you look at when we came into this year we guided midpoint of 112,000 a day production, the new midpoint of our guidance is 119,000 barrels a day production. And even if you take all the Ajax and ExL production together, let's just say, it's about 12,000 barrels a day today for two months of credit that would be 2,000 barrels a day production out of that 7,000 barrels a day we raised. So more specifically for the year, we're organically raising our production guidance by 5%. Going into the year we're going to grow 40% within cash flow we're now going to grow 50% within cash flow all due to the outperformance of well results. But more specifically to Q4, we raised our guidance last quarter for the Ajax acquisition by about 4% at the midpoint. We raised it again this quarter by 2%. I'd say, 25% of that 2% is attributable to ExL, which is about 500 barrels to 600 barrels a day out of the 2,000 barrel a day increase.
Awesome. That's lot of detail. Appreciate that.
So, I'd say, 30% related acquisitions for the year and 70% of the growth related to organic growth for the year.
Okay, great. Appreciate that color. And then another one to be fairly granular here, on the differentials. You guys were little more than $13 off WTI in Q3 on oil front. I think Mike mentioned that, Q4, Q1 still has a Midland exposure, not going to be that pretty, but things start to change in 2Q with all these fixed term contracts and once you get oil in pipe. Would you care – could you maybe just frame it for us a little bit, how you expect to ultimately see those oil realizations trend maybe at the end of 2Q and the second half of the year, where you could be relative to WTI kind of incorporating everything you laid out to us? Thanks.
Yeah. I think Q4 will look better than Q3 because of the improvement in the Midland market. We had two deals that priced in the second quarter that were at fixed differentials to MEH over that quarter. And so, those deals are in place throughout first quarter next year and then through all of next year. And then, we have some other deals currently pricing that are looking better, because the Midland market has improved. So, overall, I think, Q4 differentials to WTI will look better than our Q3 differential, but tightening through Q2 of next year. And then when the EPIC pipe comes on early, we'll have space on that, and that kind of clears the basin until the other large pipes Cactus and Gray Oak come on.
When that all is said and done, Kaes, I mean do you think that assuming – yeah, incorporating the fees you're going to have to pay to actually to get the crude to the Coast, do you have a sense – can you kind of frame it in terms of what you'd expect to be priced at relative to WTI incorporating transportation?
I think I'll take it a different way in that we'll be at the Gulf Coast price less about $3 or $4 to get to Corpus Christi. And of that $3 or $4, we're going to pay ourselves probably 65% of that with our equity interest in the pipes and our ownership of in-basin gathering with Rattler.
Got it. Perfect. Thanks a lot guys.
Thanks, Mike.
Our next question coming from the line of Asit Sen with Bank of America Merrill Lynch. Your line is now open.
Thanks. Good morning, guys. So, two unrelated question. In the past, Travis, you've talked about grow and prune strategy. It looks like you've added some nice acreage. On pruning, what are the areas that are prime for high grading, and your thoughts or early thoughts on Central Basin Platform near term?
I think, Asit, if you look on any of our presentation, any slide in our presentation, it has those ellipses around the kind of what we're calling our core areas – core development areas. Anything outside those circles or ellipses are what we're considering as assets that are available for pruning. Now, the first thing we're going to do and we were clear with this during the acquisition of the – with the Energen presentation is that our first, is to try to swap and core that up. But to the extent we can't swap and core that up, it becomes divesture candidates. And look, Central Basin Platform, we've essentially called that reserve for sale and we'll start that process as quick as we can after the merger closes.
Great. Thanks. And then on the dual fuel opportunity, which switched to natural gas, looks like we were trying on one rig potential to go up to five rigs, early thoughts on the reliability issues and the potential savings that you expect?
Absolutely. Reliability, the diesel engines, they have no issue running natural gas as part of the fuel stream. We can run upwards to 60% maybe as high as 70% of the fuel stream is natural gas as opposed to diesel. Savings wise on completion crews, again, it depends on the size of the job and whether it's Midland or Delaware, but in general, roughly about $100,000 a well or $10 a foot. On the drilling side, it's of course we use a lot of less diesel on the drilling side. So it's somewhere in the $15,000 to $20,000 a well range there.
Very helpful. Thanks, Mike.
You bet.
Thank you. And our next question coming from the line of Tim Rezvan with Oppenheimer. Your line is now open.
Good morning, folks. I'm trying to get some context on the ExL tack-on you announced last night. You highlighted acreage and production. You also mentioned related assets. Can you talk about what those related assets are? Is it infrastructure or kind of minerals just trying to understand that value in relation to the total price.
Yeah. Nothing major. It's just some infrastructure and batteries that came with the acquisition.
Okay. So those will get folded into I guess into Rattler?
Correct.
Yes.
Okay. And then on the – if we just step back a little bit, Travis, you've been pretty clear about this growth within cash flow approach and you've sort of hinted at dividend growth moving forward, and talked about cash capital discipline. At the same time, there's been over $1 billion in acquisitions announced in the last three months separate from Energen. So how do you think about when or how Diamondback might sort of dial down the resource capture? And I guess do you that this acquisition appetite kind of muddies the picture for investors who are looking for clarity on capital discipline?
Well, I'll try to be clear that the acquisitions we do we would do so without putting the balance sheet at risk. And again, if you go back and look at our history, you've always seen, we have maintained a fortress balance sheet for just these type of opportunities. But look this – what we're calling now the Spanish Trail North, that was just too good of an opportunity not to have transacted on. We felt like we had differential knowledge in the area because of our legacy activity. We felt like we had willing sellers that they weren't marketing the process broadly. And we felt like we could bring our expertise to wells that could immediately compete for capital right way.
Going forward, Jim, I said during the Energen merger presentation that Diamondback in a large sense is going to be on the sidelines on the acquisition front. And that's essentially where we are right now. We understand what our challenge is in front of us, and that challenge is very clearly defined as execution. So, throughout really now both organizations, we understand that the battle lines are drawn for us to execute on those synergies, which is why we spent so much time detailing the synergies and our plans for or the timeframe for when we're going to deliver on those. So, look, I think we've got a lot of things going, very positive direction for Diamondback. And I think we really like our inventory where it sits right now. And, like I said, we're more or less on the sidelines until we get this merger integrated and start delivering materially on the synergies that we talked about.
And I'll add tuck-in acquisitions like the ExL acquisition that make a lot of sense are just going to be part of our core operating philosophy. And capital discipline probably has a couple of definitions in the market. To us, capital discipline is not out-spending our cash flow, do you see any CapEx plus infrastructure plus our dividend, which is small but continuing to grow, equals our operating cash flow. And that's our mantra of capital discipline. And we expect our investors to expect us to do deals that have created full cycle returns and compete for capital right away with our existing inventory.
Yes, these acquisition, Tim, are immediately accretive. And listen, you've covered us for a long time, Tim, and you know that the capital discipline mantra is not something new. As I've pointed out, we are 15 quarters in a row right now of being capital disciplined in terms of spending less than we make. And I think that's a unique commentary in the energy space right now. 15 quarters in a row, so essentially after the oil price collapsed in 4Q 2014, this capital discipline has been fundamental to our capital-allocation strategy. In not one single quarter have we deviated from that strategy. So I think any of our investors that have known Diamondback understand that capital discipline is believed because of not what we say but because of what we have done.
Okay. I appreciate that context. And just sort of to close the loop, I guess if you're running models through 2020 and you have a decent commodity price. You can see pretty healthy free cash flow. So besides the dividend we should look to kind of you all sort of putting that to work on opportunistic resource capture is just kind of how you're thinking about that free cash flow?
That's one of the levers that we can crack on. Look, the returns of capital to our investors is a real strategy that we at the board have discussed. And that return of capital can take many forms. But it's real within Diamondback and its visible when you look at 2020 and beyond.
Okay. Appreciate all the context, folks. Thank you.
Our next question coming from the line of Jason Wangler with Imperial Capital. Your line is now open.
Hey, good morning, everyone. Appreciate the kind of update on the Energen plans and kind of the 2019. As you look at that 24 combined rigs, do you expect to kind of keep 14 on your properties and 10 on Energen to starter? How do you kind of think of the allocation of those rigs going forward?
These drilling schedules the way we like to think they are immediately flexible. In fact, they are really about six months to nine months out in front. So once the merger goes through, we're going to continue operating 14 Diamondback rigs on the Diamondback properties and the 10 on Energen properties. And it probably won't be until late 2Q or the back half of the year before we're able to start modifying the drill schedule substantially.
Okay, that's helpful. And then, obviously, you talked a bunch about the infrastructure spend on your end and as you grab the Energen assets as well. Can you talk about kind of where they are in the stage of that lifecycle? Do you see a significant amount of spend that you would need for them as you look at 2019 and closing that deal? Or do you think it will be kind of comparable to what you look to spend on the Diamondback assets next year and going forward?
Yeah, actually what's been exciting for us is to see how much they had in place. They've been really smart about how they've built their infrastructure especially in the Delaware Basin where they have probably twice or three times the SWD capacity that we have today. So they've have been operating in the Delaware for a long time and they've set up a great infrastructure system. So I'd expect their percentage of total capital to be closer to our Midland Basin percentage of total capital. The thing with us in the Delaware Basin, 100,000 acres with really nothing on it. So we had to put electricity, oil, gas, water, SWD all in over the last 24 months. And it's been benefiting as long-term with realizations and LOE and midstream value creation. But it's just a lot of money we're spending as a percentage of total in the Delaware at the moment.
I appreciate. Thank you.
And our next question coming from the line of Richard Tullis with Capital One Securities. Your line is now open.
Thank you. Good morning. Lot of my questions have been asked already, Travis. But just going back to the D&C cost for next year. I believe it was mentioned that intend to basically use current Diamondback D&C cost for the entire program next year. Are you seeing any meaningful cost pressures anywhere on the D&C side even if they are being offset by other efficiencies?
Richard, this is Mike. The quick answer is yes. With oil price increasing, we obviously see service cost go along with that steel tariffs and all of those that are in place today. So, going forward, absolutely in our budget, we are taking into account some of the inflationary pressures. However, we also take into account the cost savings from local sands and put some of the pressure pumping deals that we have in place today as well as some of the operational efficiencies that we have our eyes set on today as well as what we get to working on those. So the answer is yes. We're going to take current pricing that we have today in our current structure, apply it as well to the Energen properties. But going forward, yes, there will be some inflationary pressures coming.
Thanks, Mike. And then I just lost one. So looks like the industry take away bottlenecks are on track to get relieved in the second half of next year. Looking longer term, are you seeing any potential issues that could slow the strong industry growth projections over the next couple of years whether it's on the water side et cetera?
Richard, we're doing everything we can to be ahead of all these issues. There's always going to be a new issue in the Permian. I think NGLs are getting solved, crude is getting solved. For us, it's the most important. And gas is getting solved by the end of 2019. So we've put a lot of water capacity into our systems in the Delaware Basin, and we're getting ahead of our growth ramps so that any issues that do present themselves we're looking to be ahead of. And I think you have a rule of thumb that we've got to stay two years ahead of major issues. Now, this oil gathering or oil take away issue crept-up on us faster than we expected, but we've now solved it. And I think all of our barrels and growth barrels projected are going to have a nice home on the water for a long time.
All right, Kaes. Thank you. That's all for me.
Thanks, Richard.
Our next question coming from the line of Charles Meade with Johnson Rice. Your line is now open.
Good morning, Travis, to you and your team there. I wanted to explore a little bit the – maybe – your future plans in that new Spanish Trail North area you're creating. You've done a good job of assembling that in seems like pretty quick fashion. But it strike to me as I look in the map, you've got perhaps chance to extend that towards the southeast and connect the dots with that energy position that's kind of there kind of Central or Northwest, Martin County. So can you help us calibrate our expectations on not just may be your appetite to do that, but also the possibility of are there other sellers in that spot?
Well, we think we've been pretty opportunistic in putting this position together. We've now got over 25,000 Tier 1 location that all set up for 10,000 plus laterals. And so, as Kaes highlighted earlier, we'll continue to be opportunistic to do bolt-on deals. And for a plus $20 billion market cap company on a pro forma basis, these tack-on deals can be relatively large from historical perspectives. But we couldn't be more excited about that Spanish Trail North area, and we're very pleased with what our position looks like right now. And we'll be opportunistic to do small tuck-ins and bolt-ons if they are accretive, and they make sense for our development scenario.
And Charles as far as connecting the dots, whether it's with the acreage in between or whether we can you do it with our infrastructure, we'll take advantage of that anytime it make sense. So we'll tie-in things like oil gatherings, SWD capacity, and take care of that so we can increase our ability to move fluids from one place to another. We do that across all of our other acreage, and I think it would be reasonable to expect here that we'll do the same thing.
Right. It's one of those advantages of scale you guys have been talking about. If I could ask you for my second question, going back to your comments in the prepared remarks about those, I believe it was new let go wells in Pecos County on the Eastern third of your acreage. Can you talk about whether those wells have in any way changed your view of the surrounding area either by de risking some inventory, or perhaps alternatively high grading some of that inventory over there?
Charles, it confirmed our initial assessment of the area. And so, no, it really hasn't changed any of our plans. At the end it's very productive in that area. It's to the eastern side. It also makes us excited about what may happen down and what we call our San Pedro area even further into the east and south of there. So again we're – it's exciting to see the productivity across the entire acreage block.
Yeah, I think it's important to remember that we're very early in the Delaware Basin probably 80 wells into a 3,000-well program. So, our geos and reservoir engineers and ops team, they're all learning a ton as we start to ramp up there. We started with two rigs and now we're running seven rigs across the Delaware. So, certainly learning things every well we drill.
That's help color. Thank you.
Our next question coming from the line of Michael Hall with Heikkinen Energy Advisors. Your line is open.
Thanks, good morning. Just kind of curious on the – as you think about 2019 and the activity profile relative to the efficiencies we've seen of late. I think in the third quarter you completed something little over 400,000 lateral feet with the 13 rigs and five crews. Is it fair to just kind of scale up that kind of quarterly footage completed with the new equipment profile for 2019? Or do you think it will kind of take a dip down as you integrate the new assets and then kind of when would it normalize if that's the case?
Michael, we expect – we think about it on a completed lateral feet per crew per day. On the Midland Basin side, our crews right now average about 1,400 lateral feet per day, that includes all move-time throughout the quarter. And on the Delaware side, we're closer to 900 lateral feet per crew per day. So, we're running five crews right now. Post-acquisition or merger completion, we'll probably run 10 crews. And those crews will be about evenly split between Midland and Delaware five and five. So, we expect those operational efficiencies to hit right away.
That's helpful. And then I guess on the wellhead to water strategy, what if any additional details can you provide on the water side of that equation? What exactly have you secured? What sort of contracts have you taken on and kind of where does that end I guess in the value chain as it relates to Diamondback?
Yes, our expertise ends when the pipe ends, and then transfers over to the marketer's expertise. We're still planning to sell the barrel to the marketer at our wellhead in the Permian. And the marketer will then step into our tariffs and move our barrels to the Coast. And via our commitments to these pipes, they know what our minimum volume is going to be on these pipes and that allows them to secure the tankage and the export capacity that they need in this particular case in Corpus Christi.
Okay. No, that's helpful. I think that's all I have for now. I appreciate the time. Congrats, guys.
Thanks, Michael.
Our next question coming from the line of Leo Mariani with NatAlliance Securities. Your line is now open.
Hey, guys. Just a quick question for you here on well performance. Certainly, it seems like your wells got stronger this quarter from what you guys demonstrated. You guys did talk about having some better 3D of late out there in the field. Could you maybe just provide a little bit more color on what you're seeing in terms of some of the improved well performance and some of the reasons behind that?
Yes, this is Paul Molnar. We're obtaining – continuing to obtain 3D in the Southeast Delaware area. And it's really helping us with our geosteering. As you can see, there's a lot less vertical well control down there, and prior operators had difficulty staying in their targeted intervals. And as the 3D is coming in, we're having a lot more success staying in our primary targets.
And Leo from the other side of the operational piece, of course, we're learning, continuing to optimize every day. So, we've changed from the landing points to how we stimulate the wells, how we flow the wells back, whether it's cluster spacing in size, fluid volumes, sand content, distribution of the sand size, the intensity with which we frac with, whether we use diversion, and the answer is we use all of those, and we continue to change that recipe over time and we'll continue to get better as we go. And you've seen that across the industry as a whole. But all of those with being able to put the wells in the right spot in the rock and spaced properly is I think what's given in all of those things together are what you are seeing with the better well performance.
Okay, that's helpful. And I guess, I certainly noticed that just looking at your guidance for oil cut for 2018, I guess you guys reduced it a little bit here with this update and I guess it's kind of been coming down a little bit in the last couple of quarters in terms of your oil cut. Just wanted to get a sense of what was driving that. I don't know if you guys were shifting activity to different areas, but maybe just a little color behind that.
Yes, Leo, it's been interesting to see not only ourselves but also across the Permian with natural gas takeaway getting tighter and economics prevailing. Ethane has been moving out of the residue stream and into the NGL stream. And therefore, increasing our NGLs as a percentage of total. So, six to one molecule is getting more one to one credit as an NGL. So really NGLs have grown – out-grown our oil cut or oil growth, so that led us to lower the oil cut for the year. Really think the kind of midpoint of our new range is where we are for the foreseeable future until something changes on the ethane front.
Okay. So just with respect to what you just said there on ethane, I mean, do you guys have expectations that there'll continue to be a lot of ethane pulled out of the stream for the foreseeable future, next several quarters? I mean, how do you see that playing out as we work into 2019?
Yes, I mean, it's a push forward, the tightness in both NGL market and the natural gas takeaway market. But the ethane pricing right now seems to be – ethane acceptance versus rejection is the norm in the Basin.
Thanks, guys.
Thank you.
Thank you. And at this time, I'm showing no further questions. I would like to turn the call back over to Mr. Travis Stice, our CEO for closing remarks.
Thanks, again to everyone participating in today's call. If you have any questions, please contact us using the contact information provided.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.