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Diamondback Energy Inc (FANG) Q1 2019 Earnings Call Transcript

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Diamondback Energy Inc (NASDAQ: FANG)
Q1 2019 Earnings Call
May. 8, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Diamondback Energy First Quarter 2019 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 be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

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

Adam Lawlis -- Vice President of Investor Relations

Thank you, Sidney (ph). Good morning, and welcome to Diamondback Energy's first quarter 2019 conference call. Representing Diamondback today are Travis Stice, CEO; Mike Hollis, President and COO; and Kaes Van't Hof, CFO.

During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.

I'll now turn the call over to Travis Stice.

Travis D. Stice -- Chief Executive Officer and Director

Thank you. Adam. Welcome everyone and thank you for listening to Diamondback's first quarter 2019 conference call. After closing the Energen acquisition in the fourth quarter of 2018, we ensure that Diamondback got off to a fast start in 2019 and showcased the strength of our operations organization and the low cost structure on a larger scale. We navigated a $30 drop in fourth quarter oil prices by immediately cutting activity to start 2019, while still growing production 5% from our December 2018 exit rate of 250,000 barrels a day. All while integrating our $9 billion acquisition of Energen in the addition of over 300 employees to the Diamondback family.

I'm going to pause and take a minute to give credit to all of the employees within Diamondback for working together with the new significantly larger group of colleagues in executing on this plan seamlessly. Both the Diamondback and former Energen employees have learned best practices from each other and the results have shown through in the capital and operating costs presented in our first full quarter as a combined company. Our first quarter results and revised expectations for capital cost reflect the execution of the synergies presented in the merger presentation with Energen last August. Diamondback is on pace to achieve our previously disclosed synergy targets earlier than expected and we will look to continue to push efficiency and drive down cash operating costs. Diamondback spent $627 million on CapEx in the first quarter and generated $675 million of EBITDA with $8 per barrel cash operating costs, including $0.55 per barrel G&A. We completed 82 wells in the quarter and are maintaining our expectations to bring on between 290 and 320 wells this year from a $2.7 billion to $3 billion capital budget.

Capital discipline is important to Diamondback and we have no intention to exceed this budget or well count in 2019, regardless of commodity price. From a corporate development perspective, we executed on our "grow and prune" strategy assigning definitive agreements to divest the conventional assets acquired from Energen as well as non-core acreage in Crockett and Reagan counties. These transactions are expected to close by July 1 and as a result, we have lowered our full-year production guidance to account for the production, expected to be lost for these properties in the back half of the year.

We also lowered our full year LOE guidance by $0.25 a barrel to account for the higher operating cost structure of these assets. Secondly, we also contributed the oil gathering and salt water disposal assets acquired in Energen acquisition into our midstream subsidiary (inaudible) midstream with market-based contracts in place. Lastly, we are actively working on dropping down the remaining mineral and royalty assets held at the Diamondback level to Viper and expect to do so at some point in 2019.

Most importantly this quarter, our Board of Directors has authorized upto $2 billion capital return program to be executed in the form of a stock repurchase program through the end of year 2020. This program is a direct reflection of the confidence we have in our business plan and free cash flow outlook given the improvement in commodity prices from our original 2019 budgeting process our capital budget control and the expected improvement in our oil realizations as legacy fixed differential contracts have rolled off and we moved more of oil barrels to the Gulf Coast.

With this announcement we have set a cleared use of proceeds for this free cash flow and expect to generate over $750 million of free cash flow from operations in 2020 at $55 WTI. Over the long term, the consistent growth of our dividend will remain our primary return of capital objective. But this repurchase program represents the next step in our total return strategy and the evolution into a large cap Permian pure-play. At a higher level, our capital allocation philosophy is grounded on achieving peer leading year-over-year growth supporting a growing dividend, reducing debt consistently and continuing to replace and maintain a deep inventory of Tier 1 acreage. Excess free cash flow above this will be returned to stockholders. Diamondback will not spend every dollar of free cash flow on growth or acquisitions, could simply we feel buying back our stock is the best acquisition opportunity we see today, given the outlook and multiple visible catalyst ahead.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Neal Dingmann with SunTrust. Your line is now open.

Neal Dingmann -- SunTrust

Good morning. Travis, go right into that but you had mentioned the biggest news obviously on the release being the material stock buyback announcement. Could you also speak to your expectations for future production growth in the out years, assuming you continue with this impressive buyback? I guess what I'm getting at is, you all still forecast growth to stay around that 26% stated target level you've laid out today or in the -- I guess in the slides given, assuming this material shareholder return initiative would continue?

Travis D. Stice -- Chief Executive Officer and Director

Sure Neal, obviously we're not going to give multi-year guidance order growth where it's going to be. But I think if you look at -- if you look at what our growth where it was last year between 40% and 50% this year to around 26% looked a lot of big numbers eventually catch up -- catch up with you. And we're still going to be growing in the upcoming years. But I think the key word here is growth. I think we're going to continue -- we are going to continue to spend less than we make. and we're going to continue to return capital to shareholders as part of our total return philosophy.

Neal Dingmann -- SunTrust

Okay, and then just one follow-up. Could you talk about maybe just on a good capital budget. I'm trying to what I'm getting this -- what I'm trying to looking at is basically in your capital budget, you've disclosed. I'm wondering if you include acreage, acquisitions, equity investments that on acquisitions a whole bit. I think you were around what 300-ish or something in the first quarter and just want to know is that a good run rate and then you know, really trying to frame that in the context of generating the cash flow and needing that to buyback that stock.

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Hey, Neal, I'll take that one. Yeah, I mean, the capital budget $2.7 billion to $3 billion is drilling in completion midstream and infrastructure. And on top of that we have our equity investments in the Gray Oak and the EPIC pipelines, which are going to be held in our Rattler subsidiary. And we know, you really don't consider onetime proceeds whether that's asset sales or asset purchases in that budget. So really the key message is free cash flow is going to be operating cash flow less the CapEx budget and the dividend that we plan to grow continuously.

Neal Dingmann -- SunTrust

So is a case is that cash flow that you'll use to buyback the stock, you won't do that with debt or something.

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

No, no plans.

Neal Dingmann -- SunTrust

Great, thank you all.

Operator

Thank you. And our following question comes from the line of Brian Singer with Goldman Sachs. Your line is now open.

Brian Singer -- Goldman Sachs -- President and Chief Operating Officer

Thank you. Good morning.

Adam Lawlis -- Vice President of Investor Relations

Good morning, Brian.

Brian Singer -- Goldman Sachs -- President and Chief Operating Officer

Following up on the plan to return cash to investors, can you talk a little bit of the priorities of paying down the revolver versus share repurchase. And then how are you expecting to time the share repurchase portion relative to expected versus actual free cash flow and expected versus actual asset sales and monetization proceeds?

Travis D. Stice -- Chief Executive Officer and Director

Sure, Brian. We've committed to reducing our debt. I think our debt, our leverage ratio is around 1.9. We'll probably get that reduced here pretty quickly. Kaes will answer the back part of that on the --.

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Yeah, the revolver right now is $1.9 billion Brian. We're going to get that down by $700 million or $800 million with onetime proceeds. On the free cash flow piece, it's really what we see in the modeling Q2 through Q4 of this year and then 2020 at nearly any commodity price let alone strip. The majority of that free cash flow is going to go back to shareholders in the form of this buyback.

Brian Singer -- Goldman Sachs -- President and Chief Operating Officer

Great, thank you. And then shifting to the assets in the broader consolidation landscape, you've never been tried to participate in consolidation, you talked about the "grow and prune" strategy. Can you just talk about the landscape that you see out there, both in terms of further pruning asset transactions like what you announced here with the non-core asset sale, bolt-on acquisitions to further add scale and then potential for larger scale M&A?

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

We've been pretty clear that doing the little acquisitions you know, the bolt-ons where we can take advantage of Diamondback's operation paralysis or just part of our D&A , so we're going to continue to do those. As any good capital allocator, I think it's important to, to always look at your portfolio and look at those late-life assets to figure out whether or not they make mostly it's in your hands or someone else's hands and that what we just did the majority of those late-life assets or low value assets by selling $322 million of them.

And then you're on the larger -- on the larger deals, I'm not really going to speculate on the larger deals that are out there. I think very clearly my job is to create value working for the shareholders that own the company. And today, we really feel like that's best accomplished through first-in-class execution or low cost operations and delivering on the outlook that we just presented. My job really, I can't really speculate on what goes on each M&A it's further to discuss what I know and what I can control and what my responsibility is, which is to drive shareholder value.

Brian Singer -- Goldman Sachs -- President and Chief Operating Officer

Great , thank you.

Operator

Thank you. And our following question comes from the line of Derrick Whitfield with Stifel. Your line is now open.

Derrick Whitfield -- Derrick Lee Whitfield -- Analyst

Good morning all and congrats on your strong update and decision to pursue the meaningful share repurchase.

Travis D. Stice -- Chief Executive Officer and Director

Thank you Derrick.

Derrick Whitfield -- Derrick Lee Whitfield -- Analyst

For Travis, this is an open-ended question for you on a related topic to Brian's last question. As you guys know M&A has been a topic of increasing interest among investors based on really your success and a progression you've made from mid-cap to bellwether status, could you share with us your views on the merits of zero-premium mergers among your former mid-cap peers to create advantage to perform the companies in a scale and overhead synergies that come along with that. And I think to some degree we all live in spreadsheets, but I imagine the execution is quite a bit harder than perceived.

Travis D. Stice -- Chief Executive Officer and Director

Yeah, certainly execution is a lot harder than the spreadsheet. I think we learned that in our early days. But again, Derrick, I just want to focus on what I know and that's my job is to represent what Diamondback does and in control these best-in-class operations and in really pristine execution. And really all I know about what's going on in the largest phase is what I read in the press and I don't want to be the industry spokesman talking about what goes on in the M&A world. I'm really focused on what message I can deliver to the shareholders that own Diamondback. And that's what we're trying to accomplish.

Derrick Whitfield -- Derrick Lee Whitfield -- Analyst

Completely fair. And then as my follow up perhaps for Mike. I mentioned this to you guys last night, but your track record in drive an increasingly lower completed well cost has been remarkable. If you were to assume Frankenstein wells in those basins, where would that theoretically place your well costs and per foot lateral?

Michael Hollis

Absolutely, Derrick . So on both basins we always look at that kind of the technical limit well and we always strive to push that. And what we find is that technical limit keeps moving. So we're past some of the technical limits we had a year or two ago, so they keep moving. So I don't have a direct answer for you because we're a learning, growing organization that's going to continue to drive that efficiency and cost control. But with that said, the answer is continually lower than it is today.

Derrick Whitfield -- Derrick Lee Whitfield -- Analyst

It's very helpful. Thanks for your time.

Operator

Thank you. And our following question comes from the line of Gail Nicholson with Stephens. Your line is now open.

Gail Nicholson -- Stephens

Good morning, everybody. Travis , I think, it's great that the concentration as what Diamondback can do you guys do it so well. When you look at the business at a whole, what do you think is that one area that you'd continue to improve on that one, that low-hanging fruit that might still exist, when you look at the next 12 to 18 months from a standpoint of cost structure, lowering expenses, but just overall improving that cash margin and driving incremental shareholder return?

Travis D. Stice -- Chief Executive Officer and Director

Yeah, you know, Gail it's not just one thing and I think that's actually where you can get yourself in trouble if you just normally focus on one thing. It's really the combination of -- it's really the combination of all the things that fit into that low-cost operations and really good execution. And I believe we've got an organization that understands their role in delivering on those. And so our focus is continually on those items that drive efficiency even at sometimes if you had to spend more because it's a emerging technology if it translates to a lower overall cost we'll embrace that as well too. So it's not that we're just trying to squeeze every penny, we of course try to do that. But we also look for the best way to do things that have -- going to have the greatest impact on our overall portfolio. And I'm really impressed with our new organization that essentially doubled in size in November as to how quickly everyone now all the Diamondback employees embrace that concept.

Gail Nicholson -- Stephens

And then looking at the DrillCo well that are (inaudible) this quarter very solid results. Can you just give a little bit more color around that area and kind of what you guys think about that going forward? And then what needs to be done from a standpoint infrastructure build out down there?

Travis D. Stice -- Chief Executive Officer and Director

Yeah, obviously, we're very impressed with the initial wells that we drill down there. Some of the best wells we've actually drilled in Pecos county. And we're going to continue to develop that with our business partner and we've got some midstream down there that our Rattler businesses are actively developing now. And also Viper has been acquiring minerals down in that area as well too. So it's a good example of how Diamondback's different companies are really driving a lot of value for our investors.

Gail Nicholson -- Stephens

Thank you.

Operator

Thank you. And our following question comes from the line of Jeff Grampp with Northland Capital. Your line is now open.

Jeff Grampp -- Northland Capital Markets

Good morning, guys. Travis, in your prepared remarks, you said not only is there a strict focus on maintaining spending within the CapEx budget, but also that you wouldn't go over your completed well count guidance and I guess just wanted to make sure I understand mechanically, if you guys were at a point where dollar rise you'd be within budget but efficiencies were driving the completed well count higher. Should we expect Diamondback to curtail drilling rigs and/or completions in that type of scenario and how does that kind of set up? How do you guys think about setting up to 2020 program?

Travis D. Stice -- Chief Executive Officer and Director

Yeah, and Jeff we're not planning to go over that 320 gross well count for the year. I think it would be very hard for us to hit the lower half of our budget with that higher half of the completed well count that's certainly our target. So we like to think about things at the midpoint and beating the midpoint on the backside of that guidance. So with the $2.7 billion to $3 billion budget we're thinking internally here, we got to beat $2.85.

Jeff Grampp -- Northland Capital Markets

Okay. And on the prudent side of the equation there, obviously you got the nice sale in the books. Is there anything else that you guys feel kind of compelled to turn into cash in the next let's say six to 12 months. I imagine you guys are always open for business if someone made you a good offer on some backdated inventory. But is there any kind of proactive effort internally to that's prudent to any other additional assets.

Travis D. Stice -- Chief Executive Officer and Director

Yeah, again, Jeff, as I said, as good capital allocators we always got to be aware of that. But I'll tell you right now where our G&A's focused is we get a lot of other initiatives we're working on right now that I'm very proud that we are able to get that divestiture done. It represents delivery on one of the synergies that we talked about at the acquisition time. And so like I said, any opportunity, we'll take a look at but right now we're focused on delivering on some of these other corporate objectives, like maintaining our focus on low cost operations.

Jeff Grampp -- Northland Capital Markets

All right. Understood. Thanks for the time guys.

Operator

Thank you. And our next question comes from the line of Ryan Todd with Simmons Energy. Your line is now open.

Ryan Todd -- Simmons Energy

Thanks. Maybe a follow-up on cost and capital. CapEx performance on the quarter was clearly impressive particularly on the D&C side, which probably makes sense given how cost synergies are tracking. But can you talk about the primary drivers of the lower than expected CapEx, whether you see others as sustainable. And although it's early whether what you see is the potential downside risk to the full year budget where I guess, at least the bottom half of the budget?

Travis D. Stice -- Chief Executive Officer and Director

Yeah, Ryan, we made a promise in December that we were going to cut activity and cut activity right away and we deliver on that in the first quarter. We dropped two spreads immediately and dropped three drilling rigs. I think the combined organization we've learned a lot of things from the Energen folks and they've and vice versa. And we've started to push down costs on the service cost side. So a lot of it's going to be permanent but some help from the service side in the first quarter.

Ryan Todd -- Simmons Energy

Great, thanks. And then maybe not meant to be a follow-up on M&A, but really one on scale you're -- there is another operator in the Permian Basin that recently referred the optimal scale as being somewhere between six and 20 rigs in the basin and the benefits decreases you move much beyond that. We got another large operator there seems to be suggesting that they worry about having the longer-term scale necessary to compete in the Permian. You guys there obviously have a good amount of scale there. How do you think about your scale and position long-term in the basin and the type of scale that you -- you think you need or have to compete?

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Yeah, Ryan, I'm not going to comment on any peers commentary that's up to their opinion. For us, speaking about Diamondback Energy, we certainly have seen a benefit of scale between where we were in August prior to the Energen merger and post that deal. We're certainly seeing the benefits on the cost side and a ton of benefits on the operation side of the two companies being put together.

Travis D. Stice -- Chief Executive Officer and Director

You know, look Ryan, we've grown the company from essentially no horizontal rigs to where we are today over 20 horizontal rigs. And regardless of what the right cadence is and I think that's dependent on each -- each company. Our objective is, whether it's one rig or 20 rigs, is to be the low cost operator of that rig. And our unique organizational focus remains on being best-in-class executors and the lowest cost operators whether we're rolling in one rig, 20 rigs or 40 rigs. So I don't know how to calibrate what the right number of rigs are, but I do know that whatever number of rigs Diamondback is running we're going to be best-in-class in the lowest-cost operator.

Ryan Todd -- Simmons Energy

I appreciate that. Thanks, Travis.

Travis D. Stice -- Chief Executive Officer and Director

Now, just to add to that, the other thing is that you know scale also requires you being able to be in control of your infrastructure, which is the reason that we have an infrastructure company set up, so that we can maintain control of that largely you get the bigger and bigger piece of importance to your strategy and your execution development is being able to control the infrastructure and that's why we are -- that's why we've got a nice infrastructure company inside Diamondback.

Ryan Todd -- Simmons Energy

Okay. Thanks.

Operator

Thank you. And our next question comes from the line of David Deckelbaum with Cowen. Your line is now open.

David Deckelbaum -- Cowen

Good morning, Travis, Kaes, everyone. Thanks for taking my questions.

Travis D. Stice -- Chief Executive Officer and Director

Of course.

David Deckelbaum -- Cowen

Just curious on you guys are seem to be ahead of schedule and realizing the savings on the Midland side. I guess, you're expecting to take another $20 per foot out of the well cost heading into 2020. Where do you see that most likely coming from at this point? It looks like the contract side of it on the service side has been realized. So just looking how do we take another $20 out and then when you look at the Delaware Basin well costs certain elements that we've realized on the Midland side haven't yet made their way over to the Delaware particularly, it looks like on -- on service costs and to some extent on cycle times. When do you see that sort of catching up on the Delaware side?

Travis D. Stice -- Chief Executive Officer and Director

David, I'll take the first question first. In the $20 -- the additional $20 in the Midland side was what we captured in January. So that is already in place and we demonstrated that this quarter. On the Delaware side going forward, so again we're not quite as far along in the development on the Delaware side as we are on the Midland side. So again baseball term is kind of third, fourth inning. So we're seeing a lot of changes in how we're drilling the wells, pad development, completion techniques, casing designs, removing casing strings, reducing what we're building on these wells and getting better results. So you're going to see a higher rate of change over the next near term period in the Delaware compared to the Midland side. But the numbers that we presented today is what we saw in first quarter.

David Deckelbaum -- Cowen

Got it. I appreciate that. And then just my second question. If you -- you think about, I think in 2020 you guys put out the PDP decline of about 36% this year and 32% I think going into 2020 if I recall. Is that solely a function of the cadence of wells coming online or is there sort of an assumes benefit from managing the base a bit better in terms of non-productive downtime?

Travis D. Stice -- Chief Executive Officer and Director

It's really just the benefit of having more wells on longer and slowing down the natural growth rate, right. I mean, if you look back to 2016 to today, we went from four operated rigs to 22 that's going to really increase the treadmill over that time period. Now with us at 21 rigs today and not looking to add six or seven rigs a year anymore and that's where your PDP decline rate is going slow so and we see that declining by about 5% from 2019 to 2020.

David Deckelbaum -- Cowen

Thanks guys.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, David.

Operator

Thank you. And our following question comes from Asit Sen with Bank of America. Your line is now open.

Asit Sen -- Bank of America

Thanks, good morning. Appreciate the free cash flow guidance for 2020 at the $55 WTI. Just wondering what CapEx or rig count assumption has been factored in that number? And also any additional synergies beyond the secondary synergies that you've laid out, are you factoring anything in?

Travis D. Stice -- Chief Executive Officer and Director

Hey, Asit, I mean, the biggest things we're factoring in is we're at 21 rigs today. I don't expect us to add more than one or two rigs in 2020. From a capital perspective, it's natural that if oil stays where it is that service costs it'll be recalibrated a bit to the higher side. So there is some conservatism baked into that number.

Most importantly, our oil marketing contracts get significantly better in Q2 this year. But looking into 2020 we'll be exporting a majority of our barrels down to Gulf Coast, so that's going to help us from a realization perspective.

Asit Sen -- Bank of America

Okay. And my next question is actually on slide 14 where it looks like the average completed lateral length has stayed fairly steady over the past several quarters. Is there an opportunity to push that number higher? And just wondering if you have any thoughts on where you see optimal pad size evolving based on your current footprint in both sides of the basin.

Travis D. Stice -- Chief Executive Officer and Director

I'll let Mike handle the optimal pad size. But from a completed lateral length we are going to be around that 9,500 foot level for a while. Our goal from a business development perspective is to make sure we have 10,000 foot laterals at least across our whole portfolio. So we are going to be moving at the margin, but every 100 feet certainly makes a difference from a capital efficiency perspective.

Michael Hollis

Asit on the Midland Basin side we have well pads as large as 12, 16 well pads. Again, it's area specific. There is a lot of factors that go into what makes me optimal and that's where the team does a great job of figuring out what that is in each one of our geographic areas. And if you go to the Delaware Basin, of course, the wells produce a lot more fluid than we have on the Midland Basin side, so typically the pad sizes will be smaller. So there typically were a two to three somewhere it's up to the four well pads right now. Overtime that may grow, but it will grow to the level that we have in the Midland Basin side in the near term .

Asit Sen -- Bank of America

Great, thank you.

Travis D. Stice -- Chief Executive Officer and Director

Thank you.

Operator

Thank you. And our following question comes from Tim Rezvan with Oppenheimer. Your line is open.

Tim Rezvan -- Oppenheimer

Hi, good morning folks. I wanted to switch topics a bit and move to the Carlyle JV. You announced a couple of very strong wells last night. And on the heels of that, I just wonder if you could give a bit of a refresher on kind of what could happen with that JV, how material kind of that could be? And really if it could influence sort of drilling with -- within or kind of around that JV area and Pecos County?

Travis D. Stice -- Chief Executive Officer and Director

Hey, Tim, Yeah, we're certainly pleased with those well results. It's really going to be up to our partner in Carlyle to elect to go to the next tranche of wells and we're expecting that imminently. Over the long-term and I think we're confident enough in the northern half of that that acreage that if we didn't have a partner, we drill it ourselves. We bought a lot of minerals and have a lot of midstream in place and the well results compete with the main block.

Tim Rezvan -- Oppenheimer

Okay. And then on the next tranche. How many wells would that be?

Travis D. Stice -- Chief Executive Officer and Director

It'll be just drilling out the northern half and some southern half wells.

Tim Rezvan -- Oppenheimer

Okay.

Travis D. Stice -- Chief Executive Officer and Director

But from a Diamondback perspective it'd be a very low capital amounts.

Tim Rezvan -- Oppenheimer

Okay, fair enough, fair enough. And then just to hammer the repurchase kind of theme a bit more, I know, Travis you've talked with them. If you see the accretion in perpetuity from the repurchases, what kind of price sensitivity do you see around that. If we assume or else equal, but your shares come back to that 2018 high 135 or higher. Would you still plan to execute this or do you feel like there is sort of a tactical nature to the intensity based on what the share price is doing?

Travis D. Stice -- Chief Executive Officer and Director

Yeah, so look, we are committed to this capital share return program and I think we've allowed ourselves in the flexibility to figure out what the best way to drive that value to our shareholders is going to be, whether it's in the form of cash or share repurchases. And that's something the Board will continue to evaluate. But the key here is that this is -- this is not just a one-time event. This is -- this is the Board signal and that this is -- this is an ongoing return of capital strategy that's underpinned by our free cash flow growth profile and our production growth profile well into the future.

Tim Rezvan -- Oppenheimer

Okay, thank you.

Operator

Thank you. And our following question comes from Drew Venker with Morgan Stanley. Your line is open.

Drew Venker -- Morgan Stanley

Hi, good morning, everyone. I just want a follow-up a little bit on the M&A. You've had excellent success pursuing and delivering on the synergies you promised. With the Energen merger not always it says that with large corporate M&A (inaudible) actually come through and they're quite visible. And from our perspective , it seems like there is still a number of opportunities where you've had but your operational model and cost structure on other assets and extracts a lot of value at the same time with your large buyback announcements, we'd like to think your stock is really under-appreciated. Can you just talk about how you think about the potential opportunities in the space and how you balance that with where you see your stock price right now?

Travis D. Stice -- Chief Executive Officer and Director

Yes. Drew, again it's I just don't -- it is not my role to speculate on basin wide M&A activities. I think the signal that we put forth today is that we believe that repurchasing our shares represents the greatest value in the M&A front. And that's a $2 billion acquisition that we're talking about.

Drew Venker -- Morgan Stanley

Yes, that's certainly a (inaudible) degree if your stock is it's very (inaudible). So in terms of the $2 billion buyback, let me talk about the -- that figure specifically you talked about funding it with so it's free cash flow and proceed some asset sales. Is that $2 billion number you think you have line of sight to is that incorporate a potential upside as proceeds from asset sales and free cash flow of surprises to the upside. Or is there an upside to the $2 billion number, how do you guys think about that?

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Drew, that's the number for now. If we outperform them we'll go back and talk to our Board and adjust accordingly. But we see at strip and with the catalyst we have on the proceed side we certainly see visibility to executing on that number through the end of 2020.

Drew Venker -- Morgan Stanley

Excellent, thanks Kaes.

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Thank you Drew.

Operator

Thank you. And our next question comes from Jeoffrey Lambujon with Tudor, Pickering, Holt. Your line is now open.

Jeoffrey Lambujon -- Tudor, Pickering, Holt

Good morning, thanks for taking my questions. My first one is just a follow-up on the free cash flow in 2020 at $55 WTI commentary. I know that a lot of the moving pieces like service recalibration for example as you just mentioned would flex alongside changes in crude pricing. But are there any sensitivities that you can share with us around that free cash flow figure as you think about variability in WTI?

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Jeff, we've always reacted to WTI to flex up or down at the margin. I think what's changing now is that our plan is pretty set, there is not going to be a wild swing in rig count up. There might be a wild swing in rig count down if we have to adjust because commodity falls out of bed. But overall, we feel like we are creating an execution to machine that's going to complete through a little over 300 wells this year and a little bit of growth on top of that next year.

Jeoffrey Lambujon -- Tudor, Pickering, Holt

Got it. Appreciate that. And then my second one is just on the timing of activity. Is there any additional detail you can speak to on both how Q1 played out and maybe what your thoughts are just on the rest of the year. Just toward giving us a sense where we could expect in terms of production trajectory from here and how timing could play into that?

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Yeah, I certainly think we're going to grow into Q2. We completed 83 wells in Q1 with 19 of those wells coming on in the last two weeks of the year. So we're certainly going to grow into Q2. Q3 will be the first month without the 6500 barrels a day of production that we listed as for sale that's expected to close July 1. So I expect us to grow and Q3 just not as much as Q2 and then another consistent quarter into Q4.

Jeoffrey Lambujon -- Tudor, Pickering, Holt

Appreciate it.

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Thank you, Jeff.

Operator

Thank you. And our next question comes from Charles Meade with Johnson Rice. Your line is now open.

Charles Meade -- Johnson Rice

Good morning to you Travis and your whole team there. I wonder if I could ask you about some -. Thank you. I wonder if I could ask you about some Delaware Basin assets that we don't seem to talk a lot about it at least with you guys. And that's really that North Central loving it into Lea County. My sense is that's some of the most valuable -- valuable acreage on a per acre basis in the Permian. But you don't really seem to have the scale there that you have and like your reward area or in your other places but then the basin. So with what do you see, -- do you, are those assets more likely you think to be on the growth side of your strategy or more likely on the proven side?

Travis D. Stice -- Chief Executive Officer and Director

We certainly have a substantial and not position that we can execute on our capital plan there. It's not as big as our other core development areas. Our business development team is actively working to trade and block up their acreage to increase the operated positions. I think we, with the Energen acquisition we acquired a lot more non-op than we traditionally had had at Diamondback. So we're doing our best to translate that non-op position into a slightly larger operated position. We're certainly not opposed to operating New Mexico, because of the well results in that area. And we're kind of planning to do that if we can build that position a little bit.

Charles Meade -- Johnson Rice

Got it. That's helpful. And say, so if you can transition it operated then it would make more sense. But Travis, I want to go back to --.

Travis D. Stice -- Chief Executive Officer and Director

There is an operated position there today. Our job is to make sure that operated position grows and so it's more attractive for us to develop long-term.

Charles Meade -- Johnson Rice

Got it, got it. And then in terms, I want to go back to a comment you made once in your prepared remarks and you repeated here in the Q&A when you said that buying back your own stock is the best acquisition opportunity you see. And I'll ask it a little bit first and say that because I thought to myself that there is probably some other operators looking and seeing the same thing. But I wanted to ask my question to you is, what are the metrics that you use or that you're willing to share with us that you use to look to span that space between looking at the acquisition opportunity that's a publicly traded equity even if drone versus looking at a discreet asset purchase.

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Well, certainly the cash flow profile of any acquisition target now is among the top things that we evaluate, where we want cash flow per share accretion and but then all the other things still need need to matter, right. I mean, it's got to be accretive on reserves and it's got to be in the top quartile of our portfolio so that we can immediately allocate the capital to bring our operations excellence to the assets. So I think, as we've reached a scale that we're at right now and this continued commitment of living within cash flow that we've demonstrated (inaudible) since 2015 the cash flow component of acquisition targets is really important.

Travis D. Stice -- Chief Executive Officer and Director

I think on top of that Charles, if you think about it from an engineering perspective, we feel that we're trading in the high teens PV with a 9% cost of capital. So buying back our stock is a great use of that capital.

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

And back on the targets I can't count the number of times I've used the word accretive. It's got to be an accretive trade and there is several metrics are laid out, we've got to look for accretion on that. And then we'll never do anything that will put Mike's organization at risk of not being best-in-class executor so --.

Charles Meade -- Johnson Rice

That honestly guys that's helpful insight that it's that focus on the near-term cash flow accretion. So I appreciate those comments.

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Thank you, Charles.

Operator

Thank you. And our next question comes from Richard Tullis with Capital One Securities. Your line is now open.

Richard Tullis -- Capital One Securities

Hey, thanks, good morning, everyone. Just quickly back to CapEx theme maybe for case. Obviously capital spending trend is off to a very favorable start in 1Q. How does it set up the cadence for the rest of the years.? Is there perhaps some bigger infrastructure spend in any one particular quarter?

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Yeah, Richard, I think from the infrastructure perspective, the Rattler budget, which is the midstream budget is going to be fairly consistent through the year on a quarterly basis, we spent about a quarter of that budget in Q1. On the infrastructure side, we expect that piece to pick up a bit in Q2 and Q3, that number was about 19% of the total budget for the year. And then on the D&C side, you know, I think we're going to have a little bit higher working interest and a little bit higher average lateral length in the second quarter. So I think it's logical that the D&C gross CapEx number picks up a bit with their higher working interest.

Richard Tullis -- Capital One Securities

Okay, thank you. And for Travis. At the DUG Permian conference couple of weeks ago, there was a private operator discussing some solid Barnett oil well results they were seeing near your Limelight acreage. What is your outlook for that acreage? I know it's not a big position. But how do you see that acreage playing out and when do you expect to begin appraisal there?

Travis D. Stice -- Chief Executive Officer and Director

It'll probably be a fourth quarter event this year, maybe first quarter next year. But we're still excited about that the block we put together really, really low cost and we're pleased to see offset results that continue to support our thesis as to why that was a good area to explore.

Richard Tullis -- Capital One Securities

All right, very good. That's all I have, thanks a bunch.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, Richard.

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Thanks, Richard.

Operator

Thank you. And our following question comes from the line of Michael Hall with Heikkinen Energy. Your line is now open.

Michael Hall -- Heikkinen Energy

Thanks , good morning. And well done on the execution of this quarter. Just curious you still have a decent amount of inventory I guess, particularly in the Midland Basin and kind of the other category. Just curious if you have any plans for praising any of that or de-risking any of that over the course of 2019?

Travis D. Stice -- Chief Executive Officer and Director

Michael, I think we've always been a fast follower and we're very focused on the highest rate of return zones. We're certainly co-developing more zones and as well as A&B. I think in that other category, we've seen some really good results from some offset operators that might change our plans in the future but not in a meaningful way. I think from a overall capital allocation perspective, the highest rate of return zones are still going to get the vast majority of our capital.

Michael Hall -- Heikkinen Energy

All right. Understood. And then I guess more of a technical question. Just curious on the buyback, it sounded like your intention is to get started with that here in the near term. In light of some of the remaining potential transactions over the course of the year, are there any restrictions in terms of timing on when you can implement that buyback over the course of 2019?

Travis D. Stice -- Chief Executive Officer and Director

Not to my knowledge today. We expect to implement the buyback insert buying back stock in the second quarter here.

Michael Hall -- Heikkinen Energy

All right, sounds good. Thanks guys.

Operator

Thank you. And our next question comes from Jason Wangler with Imperial Capital. Your line is open.

Jason Wangler -- Imperial Capital

Hey, good morning all. Just had one as you kind of move forward with the share repurchase and you think about on the hedging side of it. Obviously the basis differential should just keep getting better based on what you've talked about, but how should we think about on how you think on the hedging side as you kind of shift this new kind of formula for the company.

Travis D. Stice -- Chief Executive Officer and Director

Yeah, I mean, it changes a little bit. Fortunately, for us by 2021, I don't think we're going to be worrying about the basis hedge anymore with all our barrels to Gulf Coast. In 2020 there will still be some barrels priced at the WTI Midland price. But as it relates to hedging, you'll see that we hedged about 25% of our 2020 production in the quarter with pretty -- pretty wide callers. I think protecting the downside is more important to us than be straight swaps. But we're still going to probably try to hedge about 50% of our production on a go-forward basis. And most of that we are the callers and then a little bit of swaps on top.

Jason Wangler -- Imperial Capital

I appreciate the color. I'll turn it back.

Travis D. Stice -- Chief Executive Officer and Director

Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from Leo Mariani with KeyBanc. Your line is open.

Leo Mariani -- KeyBanc

Hey guys, I was hoping to see maybe if you could put a few numbers in terms of the completion cadence. I know you guys said you had 82 wells in the first quarter. Is there any help you can sort of give us on maybe that number that we would expect to see in sort of 2Q, 3Q and 4Q this year?

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Yeah, Leo, we don't give quarterly guidance. I'm going to stick to the plan that we're going to complete 290 to 320 growth wells. And we're probably leaning toward the higher half of that at the lower half of our budget and that's our plan right now.

Leo Mariani -- KeyBanc

Okay.

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

From a cadence perspective, we're running eight spreads you know, it's about the number that we're going to run. So it's going to be a pretty consistent turn in lines throughout the year.

Leo Mariani -- KeyBanc

All right. And I guess just with respect to the initiatives on the buyback, I think you guys talked about $700 million, $800 million of debt reduction this year. Obviously you got the $322 million asset sale, are there some other dropdowns or some other initiatives sort of working here. But just kind of wanted to understand the $2 billion of magnitude. So should we assume that any asset sale proceeds above the debt reduction of $700, $800 this year and then any other free cash flow that in 2019 that pretty much all goes to the buyback. And then as you work into next year should we assume that there is some type of dividend increase that's to occur and really all the rest of free the cash flow goes to the buyback, is that the right way to think about it?

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Yeah, I mean I don't want to commit to a number of how much we're going to buyback quarter over quarter. I think in 2019, we're looking to get started really quickly here. And then in 2020 as we consistently grow and have a consistent amount of free cash flow throughout the year. The buyback program becomes more programmatic and that along with the dividend becomes a part of our multi-year total return philosophy.

Leo Mariani -- KeyBanc

All right, thank you.

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Thank you, Leo.

Operator

Thank you. And I'm not showing any further questions. At this time, I would now like to turn the call back to Travis Stice for closing remarks.

Travis D. Stice -- Chief Executive Officer and Director

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

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day.

Duration: 49 minutes

Call participants:

Adam Lawlis -- Vice President of Investor Relations

Travis D. Stice -- Chief Executive Officer and Director

Kaes Van't Hof -- Chief Financial Officer and Executive Vice President of Business Development

Michael Hollis

Neal Dingmann -- SunTrust

Brian Singer -- Goldman Sachs -- President and Chief Operating Officer

Derrick Whitfield -- Derrick Lee Whitfield -- Analyst

Gail Nicholson -- Stephens

Jeff Grampp -- Northland Capital Markets

Ryan Todd -- Simmons Energy

David Deckelbaum -- Cowen

Asit Sen -- Bank of America

Tim Rezvan -- Oppenheimer

Drew Venker -- Morgan Stanley

Jeoffrey Lambujon -- Tudor, Pickering, Holt

Charles Meade -- Johnson Rice

Richard Tullis -- Capital One Securities

Michael Hall -- Heikkinen Energy

Jason Wangler -- Imperial Capital

Leo Mariani -- KeyBanc

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