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Diamondback Energy Inc (FANG) Q2 2019 Earnings Call Transcript

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Diamondback Energy Inc (NASDAQ: FANG)
Q2 2019 Earnings Call
Aug 7, 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 Second Quarter 2019 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference, Adam Lawlis, Vice President, Investor Relations. Sir, you may begin.

Adam T. Lawlis -- Vice President of Investor Relations

Thank you, Josh. Good morning and welcome to Diamondback Energy's Second Quarter 2019 Conference Call. During our call today, we are referencing an updated investor presentation which can be found on Diamondback's website. Representing Diamondback today, are Travis Stice CEO, Mike Hollis, President and COO and Kaes Van't Hof, CFO. During this conference call, the participants may make certain forward-looking statements relating to the Company's financial condition, results of operations, plans, objectives, future performance and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. The 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 Second Quarter 2019 Conference Call. Diamondback continue to execute in the second quarter of 2019. We produced record EBITDA per share from 7% quarter-over-quarter production growth while lowering the midpoint of our capital cost guidance and increasing the midpoints of both our full-year production guidance and estimated completed well count for the year. Diamondback has now grown earnings per share at 11% quarterly CAGAR and EBITDA per share by 9% quarterly since our IPO in late 2012. Based on second quarter numbers, Diamondback now generates more annualized EBITDA per share than our IPO price seven years ago.

Diamondback continues to focus on per share metrics with shareholders now owning more production, cash flow in earnings per share then prior to our acquisition of Energen a year ago even in the face of a lower commodity price environment. Diamondback's per lateral foot well costs, which include every dollar spent bringing our operated wells to production and the first six months of production related costs thereafter are down 7% year-over-year in the Midland Basin and 16% year-over-year in the Delaware Basin. As a result, we are narrowing the midpoint of our 2019 capital budge, and increasing the midpoint of our operated completions which implies over $110 of improved capital efficiency per completed lateral foot versus our initial budget presented in December. Our operations organization continues to drive material costs out of the business with expectations for continued tailwinds due to an improved deficiencies and service cost deflation. With respect to the Energen acquisition and subsequent integration, Diamondback has now completed every major strategic objective and exceeded our stated synergies presented one year ago when we announced the deal. In the second quarter, we completed the IPO of our midstream business Rattler raising over $720 million net to Diamondback. We have also recently announced the dropdown of over 5,000 net royalty acres to Viper for $700 million of gross proceeds including $150 million in cash. Lastly, we have recently completed the sale of the conventional Central Basin Platform assets acquired via the Energen acquisition.

As a result of completing these objectives, Diamondback immediately commenced our stock repurchase program by repurchasing 104 million of stock in the second quarter after reducing our consolidated net debt by $400 million quarter-over-quarter. We intend to use the majority of the remainder of these proceeds along with increasing free cash flow from operations to continue our stock repurchase program. Our balance sheet is strong with both absolute debt levels and leverage metrics low and we will continue to return capital shareholders via our share repurchase program and the dividend. At current valuations, we continue to feel the best use of our free capital at Diamondback is buying back our own stock.

With respect oil realizations, we believe the worst of our widest basis differential quarters are behind us. And we now expect to realize greater than 95% of WTI pricing for the second half of 2019. By early next year, we expect to realize oil prices at parity with or greater than WTI as our existing commitments convert to the Gray Oak and EPIC pipelines and receive Brent oil coastal pricing. With our recently announced commitment to the week to Webster pipeline, we will have full exposure to the Houston and Corpus Christi local refining and export markets by 2021 removing in-basin pricing risk from our future business model.

In closing Diamondback continues to execute on the promises presented at the time of the Energen acquisition in our business is nearing a significant free cash flow inflection point in the second half of 2019 and into 2020. We may no longer be maximizing growth within cash flow but we are not sacrificing growth in 2020 as we expect to grow at industry-leading rates for large cap E&P and deliver over $750 million of free cash flow at $55 oil due to our best-in-class cost structure, asset quality and operating metrics.

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

Questions and Answers:

Operator

Thank you, ladies and gentlemen. [Operator Instructions] Our first question comes from Mike Kelly with Seaport Global. You may proceed with your question.

Mike Kelly -- Seaport Global -- Analyst

Thanks. Good morning guys. Travis, as I flipped through the slide deck here, it's pretty apparent that you guys have really kind of check the box and a whole bunch of aggressive objectives over the last year and it really just kind of wanted to get the thoughts on what's on your mind now, kind of what's your refreshed strategic to-do list is going to look like as we sit here today? Thanks.

Travis D. Stice -- Chief Executive Officer and Director

Thanks, Mike. Yes. Listen, our strategic objectives, there's not really any new ones. We're going to maintain our commitment to execution and capital efficiency that's as part of our core business practices as just about anything. We're continued at the board level to grow the dividend and we've committed to this free cash flow returned to shareholders in the form of share repurchases. So what we clipped off some pretty significant objectives, those who were kind of one-time events and for seven months of this year, we are committed long-term to this to the shareholder return program and we're pretty confident we'll be able to deliver on it.

Mike Kelly -- Seaport Global -- Analyst

Okay, thanks. And maybe the follow-up on that, you just mentioned to that $750 million of free cash flow in 2020 with industry leading growth still in the works, what would get you to maybe dial down that growth a little bit into up the any on free cash flow? Just kind of curious just to hear maybe your philosophical thoughts on that growth versus free cash flow balance. Thank you.

Travis D. Stice -- Chief Executive Officer and Director

It's not an exact science, the way that we look at the future, if commodity prices rollover can be further, we're certainly going to look at our forward model and make adjustments accordingly, probably in the form of drop in one or two rigs but our future is really bright Mike with the way that we continue to execute with our overall cash cost in the mid-eights right now. We're profitable significantly , now every barrel that we produce for a long way from this current oil price. So we're pretty confident we got a lot of still exciting things to deliver in the future and and I think the future of Diamondback is really bright.

Mike Kelly -- Seaport Global -- Analyst

I appreciate. Thanks guys.

Operator

Thank you. And our next question comes from Neal Dingmann with SunTrust. You may proceed with your question.

Neal Dingmann -- SunTrust -- Analyst

Good morning all. Travis, apparently going through the release about your low capital costs continue to be notable as I guess my question is around those, how do these factor in when allocating capital between thinking about production growth versus buyback for other shareholder initiatives?

Travis D. Stice -- Chief Executive Officer and Director

Neal, it's not really an either or I think it's in the end, I think we are one of the few companies that can do both, we can still grow and we can repurchase shares and further returns to our shareholders. So we don't pivot on that. We actually look at a way to combine both growth and returns for our shareholders.

Neal Dingmann -- SunTrust -- Analyst

Okay, great. And then my follow up just is on slide 10 on you're looking at the spacing appears to me and I was looking at this versus some prior presentations even going back two years, it appears to me like your assumptions haven't changed for quite some time and I'm just wondering, could there be potentially looking at this some downspacing opportunities or are you sort of content with this? I am just wondering obviously there's a lot of scrutiny these days on that, so maybe anything you could say around your assumptions and how this has or hasn't then maybe will change.

Travis D. Stice -- Chief Executive Officer and Director

Yes. Neal I want to go back and did the same thing I want to see how long this slide deck had been or slide deck and I think it goes back like four years and I think I've said it thousand times it's easier strategically to add locations than it is take away locations and we've always been conservative in our spacing assumptions and we don't really have any plans right now, especially as commodity price continues to decline to look at any reasons to increase for oil spacing. And this is one of those things where we've been pretty steadfast in our strategic development objectives on spacing, it's been underpinned by our annual reserve reports and we pay attention to larger spacing results that going in the Permian Basin and we try to learn from -- we try to learn from those as well too without exposing our shareholders to downspacing risks. So I'm very comfortable with our spacing assumptions.

Neal Dingmann -- SunTrust -- Analyst

Very good. Keep up the good work, guys.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, Neal.

Operator

Thank you. And our next question comes from Derrick Whitfield with Stifel. You may proceed with your question.

Derrick Whitfield -- Stifel -- Analyst

Good morning all and congrats on your strong update.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, Derrick.

Derrick Whitfield -- Stifel -- Analyst

Perhaps for Travis, your capital efficiency and now disclose your standard as of last night's release are peer-leading. What in your view makes your organization so successful at cost control.

Travis D. Stice -- Chief Executive Officer and Director

We get that question coming from a lot of different angles over different quarters and I'll tell you, it's not just one thing, it's really a combination of a thousand things. I mean we just finished an operational review, getting ready for this quarter, several weeks ago. And the drill organization showed me an analysis of the connection time, I mean, how fast you screw pipe together where they cut not quite a minute, I think 0.7 of minute per connection for every well that we drilled with 20 rigs in the second quarter. And that trends but you say well that's not so what will -- that's the dollar foot per well 5 times 20 rigs. And it's that level of scrutiny across our cost spend there and I think truly differentiates our operations organization. I mean we say around here you got inspect what you expect. That's one of our operating monitors and it really -- our business is not that complicated it's converting rock into cash flow and you've got to measure every facet of that conversion process to ensure you most your most efficient. And I think we've got a great machine and I mean if we didn't have the machine that we have -- we couldn't have delivered on the results, the cost results after doing $10 billion worth of acquisitions at the end of last year, I mean it's a hard for me to to believe that today our DC&E full well costs are lower on a combined basis with the Energen than they were on the Diamondback stand-alone basis a year ago.

And that to me represents seamless integration of an acquisition and we did so accomplishing all of these corporate objectives that are laid out in my prepared remarks and most importantly, we did it while adding over 300 people to our organization. So I think it's a remarkable feat for our organization to have accomplished what we did in this earnings release and in this quarter. Our economics are better than they've ever been. We're more profitable. We've got more operational capability. I mean just across the board, we're firing on all cylinders and it's unfortunate in this market backdrop but we're going to be OK because our cost structure and because our execution prowess or capital efficiency, we're going to continue to prosecuting our development plan and we got a great organization to do there.

Derrick Whitfield -- Stifel -- Analyst

Hi. Great. Travis quite an impressive feat, as my follow up perhaps for you or Mike, as you think about and compare your D&C costs between the Midland and Delaware Basins, where do you see the greatest room for improvement in your Delaware cost?

Michael L. Hollis -- President, Chief Operating Officer and Director

Derrick, you nailed it. The Delaware is where we're kind of the baseball reference we're probably in inning, three to four Midland, we're probably inning five, getting into inning six. So, Midland, we're picking up dimes and quarters, Delaware as you saw we had a 16% reduction in our dollar per foot. So that's what we're seeing the biggest change and optimization rate but going forward, the organization is not going to-- and the the great thing is everything that we're learning in doing changing in Midland is applicable in Delaware and vice versa. So those two teams are fully integrated as well.

So again across the board, you will continue to see efficiencies get work into the system that is Travis said there is also some tailwinds with commodity for our -- where the commodity price sit, where our activity sits we're seeing some softening on the service side as well. So all of those things together I think you're going to have some good things coming in the next couple of quarters.

Derrick Whitfield -- Stifel -- Analyst

Very helpful, guys, thanks for your time.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, Derrick.

Operator

Thank you. And our next question comes from Gail Nicholson with Stephens. You may proceed with your question.

Gail Nicholson -- Stephens -- Analyst

Good morning. But I really have housekeeping question, can you talk about the next steps for you guys to achieve investment grade status and the potential timing of that?

Michael L. Hollis -- President, Chief Operating Officer and Director

Hi, Gail. We're having active dialog with the rating agencies. I think with us doing over 280,000 barrels a day, this business qualifies as an investment grade company. Our debt certainly trades like its investment grade company. We just need an upgrade from either S&P and Moody's, who upgrade us both. After the acquisition, we've executed on everything we've said we're going to do post-acquisition. And I think this businesses is on its way to becoming an investment grade company whether or not the ratings get there or not.

Travis D. Stice -- Chief Executive Officer and Director

Gail, we also added fall away provisions to our credit facility in the early spring. And that results in our credit facility becoming unsecured once one other agency upgrades us including our FISH rating today.

Gail Nicholson -- Stephens -- Analyst

Great, thank you.

Michael L. Hollis -- President, Chief Operating Officer and Director

Thank you.

Operator

Thank you. And our next question comes from Drew Venker with Morgan Stanley. You may proceed with your question.

Drew Venker -- Morgan Stanley -- Analyst

Hi everyone, Travis. In the past, you talked about using some of your free cash flow to replenish inventory. I think you've really talked down corporate M&A a lot, obviously it seen in the market over the last few months but I was just interested to hear if the asset market is open if maybe bid ask and I've been asked is too wide here, but if you can pickup acreage at attractive prices?

Travis D. Stice -- Chief Executive Officer and Director

Well, I think you've always to say that we'll do accretive deals but there is a reason in my prepared remarks, I said that I think the best M&A opportunity for us right now is repurchasing Diamondback shares. And so that's really the corporate focus but we do have an obligation to look for deals but they've got to be massively accretive and like I said just to reiterate our focus is on a repurchasing our own shares now

Drew Venker -- Morgan Stanley -- Analyst

I see. Thanks, Travis.

Operator

Thank you. And our next question comes from Tim Rezvan with Oppenheimer. You may proceed with your question.

Tim Rezvan -- Oppenheimer -- Analyst

Good morning, folks. I had a question on unit expenses in 2Q. We saw gathering and transportation LOE both kind of reverse course after some pretty big declines. Can you talk about anything like one-off that happen maybe in 2Q or sort of how we should thinking about more normalized trend going forward on those cash OpEx Items?

Michael L. Hollis -- President, Chief Operating Officer and Director

Hi, Tim. Yes. So in the second quarter, we have the full effect of the Central Basin Platform that acreage was closed on July 1st. So how we should trend down here in Q3 and Q4, we've kind of been hinting toward the upper half of our 425 to 475 guidance for the rest of the year on LOE, gathering processing, transportation that moves around a little bit quarter-to-quarter. I still think the midpoint of a good number there.

Tim Rezvan -- Oppenheimer -- Analyst

Okay. I appreciate that. And then I am if I could ask a question related to Slide 15 and sort of your capex to cash flow reconciliation. I want to make sure I understand this correctly, it appears that your updated guidance implies just kind of on track with your first half '19 cost level of 890 per foot and I'm just wondering, is it fair to say that your updated guide is not reflecting any incremental efficiencies in the back half of the year?

Michael L. Hollis -- President, Chief Operating Officer and Director

Yes, Tim I mean we don't make promises on service costs. And I think the efficiency wise, the business is running as efficiently as possible. Certainly there is some tailwinds on the service sector but we certainly felt that this quarter was not the quarter to go too aggressive on the guidance change and we have expectations to continue to drive capital costs out of the business and meet or exceed these numbers there.

Tim Rezvan -- Oppenheimer -- Analyst

Okay. that's fair enough. I leave it there. Thank you.

Operator

Thank you. And our next question comes from Ryan Todd with Simmons Energy. You may proceed with your question.

Ryan Todd -- Simmons Energy -- Analyst

Good , thanks. Maybe a follow-up on a couple of earlier things. The $750 million in free cash flow in 2020 that you've talked about, what capex rough capex budget does that assume and does it imply a modest acceleration from second half '19 levels or kind of a continuation of current activity?

Michael L. Hollis -- President, Chief Operating Officer and Director

Ryan, if anything, it will be avery, very moderate increase versus current activity levels. We are running, eight frac spreads today, we run eight frac spread all year and we're going to --actually be running eight frac spreads, we don't anticipate having any frac holidays at the end of the year, we're going to exit 2019 running eight frac and probably enter 2020, running those eight spreads. So I think for us now, the questions are, at the margin, right. We're completing 300 to 320 wells this year. I don't expect a material change from that number to the upside or the downside pending a major commodity price change.

Ryan Todd -- Simmons Energy -- Analyst

Great, thanks, that's helpful. And then you reduce debt a little bit in the quarter and obviously you're in a strong financial position but at a high level, what do you think is the right level of debt for your company? Is it conservative leverage metric at a sub $50 a barrel oil price? Should we expect further debt reduction going forward or do you feel like you're in a pretty good place?

Michael L. Hollis -- President, Chief Operating Officer and Director

Ryan, I feel really good about how much debt we have reduced over the last couple of quarters. Not really on an absolute basis but also on a leverage metric basis, I feel like we are in really good shape. Right now with the amount of cash proceeds that we have and the free cash flow profile of the business buying back our stock at these depressed levels is probably a better use of capital for us while still maintaining a fortress balance sheet.

Ryan Todd -- Simmons Energy -- Analyst

Great, thanks. I appreciate it.

Operator

Thank you. And our next question comes from Asit Sen with Bank of America. You may proceed with your question.

Asit Sen -- Bank of America -- Analyst

Thanks, good morning guys. So on Slide 12, you mentioned additional potential savings from infrastructure efficiency attributable to Rattler Midstream, can you elaborate on that specifically?

Travis D. Stice -- Chief Executive Officer and Director

Yeah. So these numbers that you see the 7.35 in the Midland Basin and the 11.31 in the Delaware Basin are gross numbers. The benefit that we have of Rattlers that we do capitalize the first six months of water production in both basins, that's part of our equip the EPs of our DC&E, Rattlers margins we're saving probably an extra $30 a foot on the Midland side and close to $75 or $80 a foot on the Delaware side.

Asit Sen -- Bank of America -- Analyst

Great, thanks for the color and Mike in the the operational update, it was mentioned that you completed a pair of Jo Mill wells this quarter, can you provide more details on the zone across your footprint and how are you intend to layer in these completions going forward?

Michael L. Hollis -- President, Chief Operating Officer and Director

Sure. Northern and Midland Basin is kind of the area that we're focusing on right now. So we'll typically staggered Middle Sprayberry with Jo Mill. The two that we did this quarter, we're drilling more of this quarter, as we're going forward. So as we do our kind of cube development across the the entire northern Midland Basin. We're adding Middle Spraberry and Jo mill into those cubes. And so, as far as that going forward that's what we're planning to do the wells are performing and competing for capital with all of our other zones as we have today and look forward to doing that more going forward.

Asit Sen -- Bank of America -- Analyst

Great. I appreciate the color, guys, thanks.

Michael L. Hollis -- President, Chief Operating Officer and Director

Yes, thanks.

Operator

Thank you. And our next question comes from Jeff Grampp with Northland Capital Markets. You may proceed with your question.

Jeff Grampp -- Analyst

Good morning , guys. I was curious, it seems like this quarter there was a little bit larger discrepancy in some past in terms of drill versus complete. So I was just kind of wondering if that was kind of the expected plan for the quarter. If that's just kind of a timing issue or how we should kind of think about drill versus complete in the back half of the year?

Travis D. Stice -- Chief Executive Officer and Director

Yes. Jeff you'll see that that we drilled 170 wells year-to-date and completed 151. We're planning on completing somewhere around the midpoint of our guide of 300 to 320 wells. So, our rig a rig count has got a little bit ahead of our completion count or completion cadence. So you will probably see us drop a couple of rigs in the back half of the year but there will be no change to the completion cadence with us running eight spreads consistently for the rest of the year.

Jeff Grampp -- Analyst

All right, thanks for that case. And for my follow-up, Travis you mentioned buyback being most interesting use of free cash flow right now. So I was just kind of wondering as we look into 2020, you guys starting to build a track record of building the dividend and having some growth there. So it's kind of wondering, should we still assume that growing that annual dividend is still going to take precedence over accelerating buybacks or how you guys kind of look to balance the too well understanding that both of those are goal for you guys?

Travis D. Stice -- Chief Executive Officer and Director

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

Jeff Grampp -- Analyst

All right, thanks, Travis thanks. I appreciate for the time guys.

Travis D. Stice -- Chief Executive Officer and Director

You bet. Thanks, Jeff.

Operator

Thank you. And our next question comes from David Deckelbaum with Cowen. You may proceed with your question.

David Deckelbaum -- Cowen -- Analyst

Thanks guys. That's not my correct last name but just wanted to ask couple of questions on as you go into 2020, you basically hit all of the goals that you want to in '19 and this is a pretty busy year for you guys on the corporate side, just with the Rattler IPO, the them drop down as we go into '20 should we be thinking this is going to start being, for lack of a better word a more boring execution model or should we still be looking for things like drill cos and other things that you've endeavored in the past to kind of pull some value forward and I guess how do you square those with some of your ambitions of being this free cash growth engine?

Travis D. Stice -- Chief Executive Officer and Director

David, if 2020 is going to be a boring year for Diamondback that will be the first boring year in our company's history. So if the fast as a prediction of the future, I expect a lot of exciting things to happen for Diamondback right now. I don't know what those are yet but I know as we continue to to demonstrate the free cash flow machine that we built in our execution and capital efficiency that out there in the Permian. I think there's going to be opportunities. I don't know what those are going to be yet but we know as long as we execute and this organization continues to deliver, we're going to have opportunities and it's up to us the management and board to assess those opportunities and determine which will creates the most value for the shareholders who own the company. So I don't know what those are going to be but I suspect there'll be something.

David Deckelbaum -- Cowen -- Analyst

I guess like, just on the completion side and you highlighted costs perhaps coming down on the service side in the back half, are you looking at other applications like some of the e-fracs and things that we see maybe more headline oriented these days. But now, are you looking at those with any sincerity at this point going into next year?

Travis D. Stice -- Chief Executive Officer and Director

David. Absolutely. So the answer is going to be yes. Every new technology or application that we can get and make sure that we're going to save money on the dollar per foot and not heard any efficiency on the production of the well. So e-frac, we have an e-frac crew coming in the latter half of this year. We have utilized dual fuel capability on several of our frac fleets and drilling rigs. Again, we're always looking at what's out there, we're watching what everyone else is doing as well. So we'll be typically a very, very fast follower a lot of times we will be on the drag leading edge because again we don't want to put our shareholders at risk for that, but at the end of the day, yes let dollar per foot in the efficiency and capital efficiency is what we're looking for . So, the great thing is, as we're slowing down as an industry, a lot of these things are coming available that have been working for other folks and now they're coming available, we'll take them up. So we're getting some of these crews that are coming in hot, we're doing the same thing with rigs. We've got a completely different rig fleet today than we had a year ago . And I think you're seeing some of the capital efficiency metrics change because of what we're doing now.

David Deckelbaum -- Cowen -- Analyst

I appreciate the time guys.

Travis D. Stice -- Chief Executive Officer and Director

Thank you.

Operator

Thank you. And our next question comes from Richard Tullis with Capital One Securities. You may proceed with your question.

Richard Tullis -- Capital One Securities -- Analyst

Hey, thanks, good morning everyone . Travis or Mike, it seems like the rigs have been split fairly evenly between the Midland and Delaware Basins the past couple of quarters. Do you see that split holding fairly evenly into 2020? Or how do you look at the allocation of capital as we get a little bit closer to next year?

Travis D. Stice -- Chief Executive Officer and Director

Yes. We take a look at almost on every well decision but I think just for planning purposes, I think just assume and you're going to have an equal split with rigs on either side of the basin as a good planning assumption.

Richard Tullis -- Capital One Securities -- Analyst

Okay. And just lastly, I know it's not a big part of your story but the limelight area it looks like your plan and a rig there. I mean, excuse me, a well there for the third quarter with success how active could that area become in 2020 for Diamondback?

Travis D. Stice -- Chief Executive Officer and Director

Yes, look at better area successful little probably that means it competes for capital and the footprint, we have there is good for, we wanted to rigs probably and we'll just be good for Rattler will do. So we'll just, -- we'll wait until we get some data there and then and it make some capital allocation decision, but it could be a nice place to park rig for multiple years.

Richard Tullis -- Capital One Securities -- Analyst

All right. Well, that's all from me. Thank you. Travis.

Travis D. Stice -- Chief Executive Officer and Director

You bet. Thanks, Richard.

Operator

Thank you. And our next question comes from Jason Wangler with Imperial Capital. You may proceed with your question.

Jason Wangler -- Imperial Capital -- Analyst

Good morning, guys. Just had one and Mike, you kind of hit it imminently on the services side, I mean as far as the pricing of services, I mean how much more do you think there is to really get given been pretty beat-up obviously. And also I guess you've already kind of switched a lot of the rigs. But do you see much more in the upgrading whether it's on completion crews or rigs left as you move forward?

Michael L. Hollis -- President, Chief Operating Officer and Director

Jason, again these guys on the service side have been squeezed pretty hard. Again it's in their lagging up to someone that's going to be very consistent in a fluid commodity price environment provides them with those an operational and a financial hedge. So we're getting some benefits there as well as from the size and scale. So us being able to stay steady is really helping those guys out as well. We don't see a whole lot of softening just because again we want our partners to be there at the end of the day we need them. There are very big part of the success we had. So we're working with those folks and they work with us on the high end of commodity pricing. We work with them on the low-end commodity price, but no actually it is softening a little bit just because the activity levels dropping so much.

Jason Wangler -- Imperial Capital -- Analyst

Okay. I appreciate it. Thank you.

Michael L. Hollis -- President, Chief Operating Officer and Director

Thank you, Jason.

Operator

Thank you. Our next question comes from Michael Hall with Heikkinen Energy Advisors. You may proceed with your question.

Michael Hall -- Heikkinen Energy Advisors -- Analyst

Thanks. And I guess just a quick one and my lot have been addressed. As you think about the size and scale of the repurchase program, should we think about the free cash flow as the cap on that? Or given some of the asset sales and liquidity have anticipating potentially even higher amounts of repurchases relative to the free cash flow, you're you talking about?

Michael L. Hollis -- President, Chief Operating Officer and Director

Well, Michael. I mean I think through 2019, the rest of 2019 we are going to use the mix of the free cash flow profile and proceeds from the asset sales to continue the buyback program. As we move into 2020, I'd say free cash flow becomes more of the governor at that point. We've completed all of these onetime proceeds, the stocks still in our opinion very cheap and we're going to continue to use our capital to buyback shares in this market.

Michael Hall -- Heikkinen Energy Advisors -- Analyst

Okay, makes sense. And then I guess just coming back a little bit on the whole growth versus free cash flow question, how do you big picture approach the optimization as you think about 2020 and beyond but have the optimization of growth versus free cash flow in the capital allocation decision. I'm just curious kind of more about your process as opposed to the outcome?

Michael L. Hollis -- President, Chief Operating Officer and Director

Yes, I think it's a process which is done at the margin for us now. I mean we are a company that maximize growth within cash flow for the last four years. So growing within cash flow is not a new concept to us and the big changes that we can grow and deliver free cash flow and we have no intention of slowing down that growth to maximize free cash flow or vice versa. It's going to be a a symbiotic relationship for a long time. We're going to keep growing, maybe it's at a rig or keep the same retailers this year do more with the same capital and growth is the output next year with free cash flow also being the output.

Michael Hall -- Heikkinen Energy Advisors -- Analyst

All right, makes sense. You're seems differentiated. I appreciate it guys.

Michael L. Hollis -- President, Chief Operating Officer and Director

Thank you, Michael.

Operator

Thank you. Our next question comes from Scott Hanold with RBC Capital Markets. You may proceed with your question.

Scott Hanold -- RBC Capital Markets

Yes. Thanks. Just a couple of quick ones. I first want to commend you all from obviously stepping up and buying back stock and hopefully we'll see more by you all on the rest of the industry especially with where some of these equities are trading but maybe this one for Kaes, is you all think about the buybacks here over the next quarter or two, is there-- in your conversations with the rating agencies, is there any sort of push back from them to get to investment grade with the amount of buybacks you're doing?

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

No, I haven't seen a lot of push back. I think a lot of the, a lot of the onetime proceeds that we've received already about $1 billion worth of onetime proceeds are all seeing is very credit positive. So we've checked those boxes and we've also check the production box and check the capital efficiency box. So I haven't heard a lot of push back on that front and for us right now investment grade is a corporate objectives but for us buying back stock at depressed values is a more significant corporate objective.

Scott Hanold -- RBC Capital Markets

All right. I appreciate that. In a quick second one is on your ownership of VNOM, obviously you guys strategically took more equity in that ownership with the recent drop. Can you give us a big-picture view of your thoughts behind that investment here going forward and where you all want to shake out with that ownership over time?

Travis D. Stice -- Chief Executive Officer and Director

Yes, I'm excited that Diamondback now owns pro forma for the drop back up to over 60% of them. I think it's, I think it's a great relationship between the two, the relationship between Diamondback and Viper, certainly differentiates Viper's multiple. It allows both companies to do smart deals like the deal that we announced last week. Diamondback has not sold one share of Viper over the past four years and in fact we've increased our ownership. So we share count. So we're happy with that ownership. We get a significant dividend at the Diamondback level from Viper on an annual basis and that relationship will continue to be very strong.

Scott Hanold -- RBC Capital Markets

Understood, thanks.

Operator

Thank you. Our next question comes from Leo Mariani with KeyBanc. You may proceed with your question.

Leo Mariani -- KeyBanc -- Analyst

Hi guys, just a question on the marketing side here. So I think you guys said that you'll be it kind of 95% or a little bit better on oil price realizations in the second half of this year versus WTI, just try to get a sense, is it maybe a little bit lower in the third quarter and kind of the big boost comes in the fourth quarter? Can you give us any differentiation between 3Q and 4Q on that?

Travis D. Stice -- Chief Executive Officer and Director

Yes, I think there'll be some, I think third quarter is close to that 95% range and Q4 pops up a little bit. I'll use this as a point that we've now secured takeaway for all of our major production across the company when we had zero take away a year ago. Certainly got through the worst of our wide differential quarters and on a go-forward basis, we're going to be selling all of our crude either at a across the docking corpus where we have reserved base space or to a refinery in Houston. So we're pretty excited about where our marketing position is heading on the oil side.

Leo Mariani -- KeyBanc -- Analyst

Okay, that's great. And I guess could you comment at all on any initiatives on the gas or NGL side , obviously it was a rough quarter in second quarter for gas price realizations, you guys working on anything, maybe to kind of get that gas out of Basin to other markets going forward?

Travis D. Stice -- Chief Executive Officer and Director

Yes, we have very few taking time rates across our position. I think we do have some taking time regimen at Delaware that we're going to exercise and get some different pricing exposure but our Midland Basin in northern Delaware gas production, we're going to look to hedge and protect ourselves that way. I think for us with gas being such a small percentage of our production and revenue, we're more focused on hedging that price at decent realized price and not having to deal with the negative realizations we had to deal with this quarter.

Leo Mariani -- KeyBanc -- Analyst

Okay that makes sense. And I guess just on the well cost side, obviously you guys did a tremendous job of reductions here post the Energen deal. I know it's kind of hard to of course to sort of project forward but you certainly discussed at length the relentless focus on efficiencies here, I mean would you guys potentially foresee the absence of any changes in service costs. I mean, could we be sitting here a year from today and be talking about another 5% to 10% reduction in well costs?

Travis D. Stice -- Chief Executive Officer and Director

Leo, Mike's guys were obviously the best in the business and that's why we hammered this cost discussion so hard in this deck. I see a lot of notes out about six months tunes and IPs across the basin. No one talking about what these wells cost to get out of the ground. I mean the cost structure that we have differentiates us into someone that can grow and return free cash versus someone who outspend cash flow that's how important those differences are. So I expect Mike and his team to continue to to drive cost out of the business. We certainly have some service cost tailwinds hitting us right now and that those should continue into 2020.

Leo Mariani -- KeyBanc -- Analyst

Thank you.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, Leo.

Operator

Thank you. And our next question comes from Brian Singer with Goldman Sachs. You may proceed with your question.

Brian Singer -- Goldman Sachs -- Analyst

Thank you. Good morning.

Travis D. Stice -- Chief Executive Officer and Director

Good morning, Brian.

Brian Singer -- Goldman Sachs -- Analyst

Can you talk to how you see the rates of return in the Midland Basin versus the Delaware Basin realize you kind of have an even split in terms of activity? But just how you see those rates of return comparing and then post the cost reductions, you've highlighted how the Energen locations in the Delaware compare relative to legacy done back locations?

Travis D. Stice -- Chief Executive Officer and Director

I'll tell you the locations in the Vermejo area. That's the best rock in our portfolio and we got, that was ground in the Energen acquisition and those wells are just simply spectacular. And so the rates of return there obviously are the best meeting our portfolio. I still think buying that when you look at either side of the basin and cost more in the Delaware Basin but get it out faster than your preferred little Basin quite get as much hydrocarbon recovery but you to lot cheaper . So as we look at it, it's, parts still sort to think about it in an equal allocation in terms of rate of return and that's, you can see that how we spend our capital dollars there with rigs about equally will need to the basin. So it's not a precise number but we still think of them as roughly equivalent.

Brian Singer -- Goldman Sachs -- Analyst

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

Travis D. Stice -- Chief Executive Officer and Director

Yeah, Brian, I mean I think it's somewhere around what our budget was this year either plus or rig or minus rig absent a very negative commodity type between now and the end of the year. So we're very focused on hitting that at least hitting that $750 million of free cash at 55 WTI next year. If WTI is lower than that, we'll have to look at where our service costs are and where well costs are and see what free cash flow comes out of the model, but like I said earlier, there is not a huge delta between our current thinking and where we're in our current pace and where we're going to be in 2020 which allows this business to grow significantly, but also buy back a lot of stock and if the stock remains depressed, we will continue to buy back stock with free cash flow in and onetime proceeds that we've executed on this last quarter.

Brian Singer -- Goldman Sachs -- Analyst

Great, thank you.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, Brian.

Operator

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

Travis D. Stice -- Chief Executive Officer and Director

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

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Adam T. Lawlis -- Vice President of Investor Relations

Travis D. Stice -- Chief Executive Officer and Director

Michael L. Hollis -- President, Chief Operating Officer and Director

Jeff Grampp -- Analyst

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

Mike Kelly -- Seaport Global -- Analyst

Neal Dingmann -- SunTrust -- Analyst

Derrick Whitfield -- Stifel -- Analyst

Gail Nicholson -- Stephens -- Analyst

Drew Venker -- Morgan Stanley -- Analyst

Tim Rezvan -- Oppenheimer -- Analyst

Ryan Todd -- Simmons Energy -- Analyst

Asit Sen -- Bank of America -- Analyst

David Deckelbaum -- Cowen -- Analyst

Richard Tullis -- Capital One Securities -- Analyst

Jason Wangler -- Imperial Capital -- Analyst

Michael Hall -- Heikkinen Energy Advisors -- Analyst

Scott Hanold -- RBC Capital Markets

Leo Mariani -- KeyBanc -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

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