Diamondback Energy (FANG) Q1 2024 Earnings Call Transcript

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FANG earnings call for the period ending March 31, 2024.

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Diamondback Energy (FANG -2.55%)
Q1 2024 Earnings Call
May 01, 2024, 9:00 a.m. ET

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Diamondback Energy first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

(Operator instructions). Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Adam Lawlis, VP of investor relations. Please go ahead.

Adam Lawlis — Vice President, Investor Relations

Thank you, Jules. Good morning, and welcome to Diamondback Energy’s first quarter 2024 conference call. During our call today, we will reference an updated investor presentation and Letter to Stockholders, which can be found on Diamondback’s website. Representing Diamondback today are Travis Stice, chairman and CEO; Kaes Van’t Hof, president and CFO; and Danny Wesson, COO.

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

The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I’ll now turn the call over to Travis Stice.

Travis Stice — Chairman and Chief Executive Officer

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

Questions & Answers:

Operator

Thank you. At this time, we will conduct a question-and-answer session. (Operator instructions). Our first question comes from the line of Neil Mehta of Goldman Sachs.

Your line is now open.

Neil Mehta — Goldman Sachs — Analyst

Yes. Good morning. Travis, Kaes, and team. A lot of good stuff in the letter.

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

Travis Stice — Chairman and Chief Executive Officer

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

Kaes Van’t Hof — President and Chief Financial Officer

Yes, Neil, long term, we want to be able to contribute to more pipes. We’ve done that in the last couple of years with commitments on Whistler and Matterhorn. We’ve relinquished taking chondrites in other areas to commit to other pipes that were built. As Travis said, we just need to do more.

And I think with our size and scale and balance sheet, we should be taking a leadership position on these new pipes. We’ve talked to a lot of people that are working on them today. And it seems that there are projects in the works that will help debottleneck past the end of this year. But as we control or have the ability to control more gas flows on our side, as contracts roll off, etc., we’re going to keep pushing on more pipes and more markets out of this basin.

Neil Mehta — Goldman Sachs — Analyst

Yes. Thanks, both. And then, the second is capital efficiency. You talked about the 10% improvement that you’re expecting per lateral foot.

So just talk about what you’re seeing in real time in terms of deflation and then also what are the next steps in terms of driving your cost structure lower as we think about efficiency of fleet?

Travis Stice — Chairman and Chief Executive Officer

Well, I think the deflationary pressures we continue to see in the Permian are being driven by the decline in the rig count and the decline in the completion crew count. Those will be tailwinds for us as we look through the rest of this year. But also, without regards to those deflationary impacts, we continue to push the envelope on our D&C operations where we’re getting — I think we averaged almost 13,000 feet for the quarter this year. And we continue to get these wells drilled faster.

And then, our completion crews continue to push the envelope on the number of lateral feet that are completed in a 24-hour period. So we’re working on the numerator and the denominator of capital efficiency and really like the way the rest of the year sets up for us.

Neil Mehta — Goldman Sachs — Analyst

OK. Thanks, Travis.

Travis Stice — Chairman and Chief Executive Officer

Thanks, Neil.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Arun Jayaram of J.P. Morgan Securities LLC.

Your line is now open.

Arun Jayaram — J.P. Morgan — Analyst

Yes. Good morning. Travis, you, and the team had highlighted up to 550 million of annualized synergy capture in the transaction in the Midland Basin, including 150-foot decline in D&C and ECOS in the Midland Basin to that 600 to 650 range. Maybe a follow up to Neil’s question, but were you seeing kind of leading edge kind of cost today in the Midland Basin as you continue to push those lateral links a bit longer?

Kaes Van’t Hof — President and Chief Financial Officer

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

Very clearly, we laid out some strong synergy targets and a very strong capital efficient 2025 plan, and we still feel very, very confident in that plan.

Arun Jayaram — J.P. Morgan — Analyst

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

Kaes Van’t Hof — President and Chief Financial Officer

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

Arun Jayaram — J.P. Morgan — Analyst

Great. Thanks a lot.

Kaes Van’t Hof — President and Chief Financial Officer

Thanks, Arun.

Operator

Our next question comes from the line of David Deckelbaum of TD Cowen. Your line is now open.

David Deckelbaum — TD Cowen — Analyst

Good morning, Travis, Kaes, and team. Thanks for your time today.

Travis Stice — Chairman and Chief Executive Officer

You’re welcome, David. Good morning.

David Deckelbaum — TD Cowen — Analyst

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

Kaes Van’t Hof — President and Chief Financial Officer

Yes. I think what’s changed is just timing, right? I think the projects we see as non-core asset sales or the asset sales to subsidiaries we have, it’s still the same. Endeavor has a really good midstream business that would fit well with our midstream JV. They have a significant mineral business that I think is going to be a game changer for Viper, if those two businesses are combined.

And our strategy to execute on those trades has not changed. It’s just been pushed out to the right. So, on top of that, there’s an $8 billion cash consideration. That continues to be worked down with free cash flow between sign and close.

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

David Deckelbaum — TD Cowen — Analyst

Thanks for the thoughts there. Maybe just to follow-up a little bit more on just the gas pipeline side, just for my own edification, just some clarity, just you highlighted. You didn’t have any issues with egress. You know you have Matterhorn coming online in the third quarter.

Is there, a point as you look forward where you anticipate egress issues or is this more appearing to be just more proactive, to get involved with taking on firm capacity in future pipelines? Do you need to take a more active role beyond that?

Kaes Van’t Hof — President and Chief Financial Officer

Yeah, well, I mean, we’re facing them right now, egress issues, right? Not, not, not on the physical side, but certainly on the price side. So, I think if we can remove the pricing aspect of pricing molecules rob versus pricing them further downstream, and just paying a fixed fee on the pipe that to us is a risk mitigation strategy that makes sense for Diamondback shareholders. So I think we see the gas forecast continuing to increase. If you do look backs on the big public third party services and what they thought gas production was going to be in 2024 they all been wrong.

So, it’s always been more gas sooner. And so, for us, we need to handle that physically where we can, and with our balance sheet and size of scale, we can sign those 10 year deals because we know we’re going to be around to produce for a very, very long time.

David Deckelbaum — TD Cowen — Analyst

Thanks for your thoughts, guys.

Kaes Van’t Hof — President and Chief Financial Officer

Thanks, David

Operator

Please stand by for our next question. Our next question comes from the line of Scott Hanold of RBC Capital Markets. Your line is now open.

Scott Hanold — RBC Capital Markets — Analyst

Yes. Hi, guys. Thanks. I’m just going to stick on the gas team as well because it is very topical, but it sounds like and just correct me if I’m wrong, you guys feel good about your development program on a Diamondback stand-alone basis, as well as with Endeavor with gas capacity, at least for the foreseeable future, and just confirm that’s correct.

And if you could also, maybe opine on, just broader Permian general. Do you expect other operators to see some physical constraints not being able to get their gas out and potential shut-ins related to that?

Kaes Van’t Hof — President and Chief Financial Officer

Yes, Scott, we’re 100% confident in our plan. You know, I think we have a lot of visibility. We have more and more specifically coming our way. Every molecule is moved to date.

You know, I don’t like the speculation blame game in the Permian about who’s going to be able to move or not. I’m focused on Diamondbacks, and we’re going to be in really good shape.

Scott Hanold — RBC Capital Markets — Analyst

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

Kaes Van’t Hof — President and Chief Financial Officer

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

If we see some weakness, we’re going to step in and support the stock. But the longer term, we want to make the nine-figure, 10-figure bets on buybacks at the right time. And that’s the flexibility we want on capital return. You know, I think we still see kind of mid-cycle in the $60 to $70 range.

I think we were firmly at 60 for a long time. We’re probably closer to $70, $20, and $2 or $3 gas. And, you know, in the combined business, you look at what we have with Endeavor, there’s a significant amount of inventory and a lot of NAV accretion, and probably a lower combined cost of capital. So I think we feel like we can, you know, raise that buyback top a little bit, but we’re probably going to be cautious until we close.

Scott Hanold — RBC Capital Markets — Analyst

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

Kaes Van’t Hof — President and Chief Financial Officer

Yeah, we’ve always been a little higher than 10. I think, you know, I think an after-tax PV12 felt like at a mid-cycle price felt like a very conservative price to buy back shares. And that also makes sure we don’t get trapped into a positive feedback loop of buying back shares all the way to the top. So I think an after-tax 12% rate of return in this business is a really good rate of return at a mid-cycle price.

And that keeps you in a good spot, you know, through the cycle.

Scott Hanold — RBC Capital Markets — Analyst

Thanks for that.

Operator

Please stand by for our next question. Our next question comes from the line of Roger Read of Wells Fargo Securities. Your line is now open.

Roger Read — Wells Fargo Securities — Analyst

Thank you. Good morning. I’d like to come back on the, let’s call it efficiencies and lower costs. Obviously, some part of that, as you mentioned, was, you know, service competition, rig-on-rig, crew-on-crew, lowering costs.

But if you looked at the underlying improvements you cite, you know, E-FRACs over a diesel FRAC, kind of where do you think we are in terms of running through continued efficiencies there as we, you know, let’s say, alter the equipment, maybe alter the methods of doing some of the wells, and with the danger of crossing the line here to, you know, post-endeavor, kind of what you see as a, you know, maybe a year or two out in terms of continued efficiency gains?

Danny Wesson — Chief Operating Officer

Yes. Good question. We are continuing to drive costs out of the business through our operational plan and execution. You know, on the completion side, a lot of that’s going to come in the way of getting these e-fleets off of generated power and onto some form of grid power where we can recognize a lower, you know, energy source cost.

You know, we’re continuing to try to drive days out of our execution, and, we’re kind of on the asymptotic slope of that efficiency gain that we’re getting to a point where the fixed cost of the wells are a significantly larger portion of the cost of the well, and then the variable cost. So, we’re getting to a point where the variable costs that we’re going to impact are pennies and nickels and not as much, the dollars anymore and to get those large chunks, we’re going to have to think about doing things differently. As far as the physical plan for the well, what we are going to consume as part of the fixed cost of the wells.

Travis Stice — Chairman and Chief Executive Officer

Roger, I give our give our guys some joke with them, a little bit on the drilling side, because they’re almost to the point where they’re spending more time screwing pipe together and unscrewing pipe together than they are actual rotating hours on the lateral not quite, but they keep certainly pushing the envelope. And really, if you go back to what we said during the acquisition announcement, with their merger announcement, with endeavor, we talked about $150 a foot. $100 of that foot was from just simply going to the simul-frac, and the other $50 a foot was going to clear fluids. And really, that’s what we’re doing today.

So we emphasized at the time that’s not a big stretch. It’s just simply doing what we’re doing today on a new set of assets. And in Dan’s comments, we’re spot on as well.

Roger Read — Wells Fargo Securities — Analyst

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

Kaes Van’t Hof — President and Chief Financial Officer

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

Roger Read — Wells Fargo Securities — Analyst

I appreciate that for sure. OK. Well guys, that’s kind of where I wanted to go with the question. So I’ll turn it back.

Thank you.

Kaes Van’t Hof — President and Chief Financial Officer

Thanks, Roger.

Operator

Thank you. Please standby for the next question. Our next question comes from the line of John Freeman of Raymond James. Your line is now open.

John Freeman — Raymond James — Analyst

Good morning, guys.

Kaes Van’t Hof — President and Chief Financial Officer

Hi, John.

John Freeman — Raymond James — Analyst

Just following up on the these, these efficiency drivers, obviously, in the quarter, the wells that you all completed, the 101 wells, they were, you know, right in line on the lateral length of what you all have guidance was for the full year of around that 11,700 feet. But obviously, the, you know, you all point out the 69 wells that you all drilled in the Midland base, and that were, you know, significantly longer than that, over 13,000 a foot, obviously, first class problem, given the capital efficiency you’re seeing on these longer laterals. But should we still use that that four-year guide of 11,500-foot average for the year, is that that’s still applicable, or should we consider that probably moving up relative the original guide?

Travis Stice — Chairman and Chief Executive Officer

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

John Freeman — Raymond James — Analyst

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

The kind of money on that stuff?

Travis Stice — Chairman and Chief Executive Officer

Yeah, John, we can operate as separate companies until the deal closes, and those things will all come to the benefits of the combined company. But certainly can’t — can’t influence any outcomes until we are closed.

John Freeman — Raymond James — Analyst

Got it. Thanks guys. Solid quarter

Travis Stice — Chairman and Chief Executive Officer

Thanks, John.

Operator

Thank you. Please standby for our next question. Our next question comes on the line of Neal Dingmann of Truist Securities. Your line is now open.

Neal Dingmann — Truist Securities — Analyst

Good morning, guys. Travis, my question for you, OK, is just on the marketing side, you look in, not only from a capital efficiency, but it seems like from a takeaway, you’ll continue to get better and better sort of realize margin. I’m just wondering, now, with the larger size, or, I guess you know when that closes, what type of benefits, or will you continue to see the benefits on the back end that you’ve seen on the company? So it seems like noticeable that a lot of your — that I said, your margins and all just on the on the marketing side continue to improve.

Travis Stice — Chairman and Chief Executive Officer

Yeah, Neal, I mean, I think, I don’t think we’re going to see much more improvement. I think it’s for us. It’s more about, risk aversion, right? And having our barrels and molecules go to different bigger markets downstream. So we have a lot of oil that goes to the Gulf Coast in Corpus and is exported.

We now have a good amount of oil going to Houston feed refineries there. So I think we’ve kind of grown up as a company in terms of marketing, and very clearly, mistakes were made five, six, seven years ago, and the Permian got tight and we’re just not looking to make those mistakes again. So with our size and scale we’re going to be contributing to oil pipes, contributing to new gas pipes. We’ve made some investments in, gathers and processors and many midstream investments throughout the years here that, one made our shareholders money on the investment side, but two protected us on the commercial side.

So I’d expect that trend to continue as we get bigger.

Neal Dingmann — Truist Securities — Analyst

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

Kaes Van’t Hof — President and Chief Financial Officer

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

Neal Dingmann — Truist Securities — Analyst

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

Kaes Van’t Hof — President and Chief Financial Officer

Yeah, I mean, that you could go on for hours about that. I mean, that ties the culture, right. Our biggest — our biggest benefit at Diamondback is that we have a small company, dynamic culture with a large asset base that’s now growing larger. So we’re going to make sure we maintain that that gritty, quick, fast, moving, adaptive culture to a larger asset base.

I’m fully confident that we have the exact team and employee base at both the Diamondback and Endeavor to do that. And I think these big projects there’s a lot of capital being put in the ground before first oil, sometimes upwards of $250 million, $300 million dollars, but as long as you have the ability to move crews and rigs within a quarter, within a year, keep hitting numbers, we’re going to keep doing that at a larger scale.

Travis Stice — Chairman and Chief Executive Officer

And Neal as we’ve built this company over the last 10 years we’ve always maintained a couple of constants. One is the fact we keep a real flat organization and we keep a non siloed organization as well too. And the only way that you can grow an organization and maintain that effectively is to have an unreasonable level of trust. And as we encourage our Endeavor employees to come over we’re going to be demonstrating this high level of trust because it’s going to be, it’s going to be a very important part of our evolving culture as a much larger company.

But those two things will stay the same, flat organization, no silos.

Neal Dingmann — Truist Securities — Analyst

Look forward to the new assets, guys. Thanks so much.

Kaes Van’t Hof — President and Chief Financial Officer

Thanks, Neal.

Travis Stice — Chairman and Chief Executive Officer

Thanks, Neal.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Derek Woodfield of Stifel. Your line is now open.

Derek Woodfield — Stifel Financial Corp. — Analyst

Thanks. Good morning, all. Congrats on another solid print.

Travis Stice — Chairman and Chief Executive Officer

Thank you, Derek.

Derek Woodfield — Stifel Financial Corp. — Analyst

With my first question, I wanted to focus on the second request from the FTC at a high level. Our research indicates that most of the larger transactions have received that. Is that consistent with how you’re thinking about it?

Travis Stice — Chairman and Chief Executive Officer

Yes, that’s consistent.

Derek Woodfield — Stifel Financial Corp. — Analyst

All right. Terrific. And then, shifting over to OPS. So, during the quarter you completed three additional Upper Spraberry wells based on those results and some from last year.

Could you speak to how the interval competes in your portfolio and if it’s likely to get added to your inventory charts on Page 21?

Travis Stice — Chairman and Chief Executive Officer

Yeah, Derek. We followed up this year in Q1 with three additional Upper Spraberry completions kind of following up that success that we had in the North Martin area with that first test. And we really like the initial results from those wells. And I think that from a cost perspective we’re seeing those costs be pretty competitive.

And I think we’ll probably look at adding that development to subsequent developments in the future.

Kaes Van’t Hof — President and Chief Financial Officer

I think, it is off to the top of that, Derek. If you start to add in zones like the Upper Spraberry, Wolfcamp D, we got some really good Wolfcamp D tests in some of those same paths. If you start to add those in and you don’t see degradation on a corporate basis in terms of the QM curves that everyone looks at so closely every year that’s inventory extension in our existing asset base. With the combination of us and Endeavor, adding in zones like the Upper Sprayberry, Wolfcamp D and the full-scale development only extends the duration of what we can do here in the Midland Basin.

Derek Woodfield — Stifel Financial Corp. — Analyst

Agree. Very helpful. Thanks for your time.

Travis Stice — Chairman and Chief Executive Officer

Thanks, Derek.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Paul Cheng of Scotiabank. Your line is now open.

Paul Cheng — Scotiabank — Analyst

Thank you. Good morning, guys.

Travis Stice — Chairman and Chief Executive Officer

Good morning, Paul.

Paul Cheng — Scotiabank — Analyst

Travis, in your presentation, you have an interesting statement on the ESG intent to eventually invest in income-generating projects that are expect to more directly offset remaining Scope 1 emissions. Can you elaborate a little bit more in terms of how big is the kind of investment are you expecting that become a new division or that a new business for you or that is really is going to be pretty small scale and we shouldn’t pay openly too much attention on that. That’s the first question? The second question is, interestingly, that the E&P producer, no one really talking much about AI, but the service provider, like Lumber J, they start to brag about, say, how AI is going to drive their revenue and is going to allow the improvement of EUR and productivities, of the well productivity. So just curious that, is Diamond, you guys have been always do a lot on the technology.

Have you test on the AI application and whether that you see that going to be meaningfully change your EUR or your well productivities?

Travis Stice — Chairman and Chief Executive Officer

Well, the first emphasis on AI has been not the generative AI, but using AI to process data information a lot quicker. And so, we’re really excited about the long-term implications of AI on our industry whether that translates to improvements in EUR or improvements in efficiencies or hopefully both. I think it’s yet to be determined, but it’s one of those things that we’re trying to be fast followers on. This is an arena of our industry that’s moving incredibly fast.

These electric frack fleets that we’re using right now actually are accumulating more information than we can process. So we’re storing some of that information and hoping to use smart algorithms or AI to help us process that information in a more usable and more real-time fashion. Kaes this first question was on income generating tech to offset that.

Kaes Van’t Hof — President and Chief Financial Officer

Yes. We have a subsidiary snake company called Cottonmouth Ventures that’s kind of our new ventures snake, I’ll call it. But it’s not a huge business today. I think one of the more exciting projects we’re working on is with our Verde Clean Fuels Partnership, where we are in the scoping phase of building a gas to gasoline plant in the basin that’s going to be tapped into one of the pipelines that we are a participant in.

That plant will convert 35 million cubic feet a day of gas, natural gas, lean gas, into 3,000 barrels a day of gasoline. So that I think fits our motto of, if we can contribute molecules and expertise to a project, not just capital, but the other things to drive value, we’re going to look at it. I would say that project might FID by the end of this year and be up and running in a couple years. That might be a good little offtake for 35 million a day of gas.

And if it works, we’re going to build more of them.

Travis Stice — Chairman and Chief Executive Officer

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

Paul Cheng — Scotiabank — Analyst

Thank you.

Travis Stice — Chairman and Chief Executive Officer

Thanks, Paul.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Leo Mariani of ROTH MKM. Your line is now open.

Leo Mariani — ROTH MKM — Analyst

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

Kaes Van’t Hof — President and Chief Financial Officer

Yes, Leo, a couple things. I think, we’re having a pretty good end of the year latch here into Q4, and so we pushed some completions into Q1. So Q1 looks a little high relative. I think generally you can think about that 70 to 80 overall completions of a quarter as the base case.

Q2 might be a little toward the high end there, but, because we’re a little bit ahead of plan in terms of efficiencies and timing, we’re probably going to, reduce our frac crew count by one for a period of time over the summer, as well as kind of get down into that 12, 13 rigs, on the drilling side to complete or to drill the same number of wells. So, we look at the plan, almost weekly with the planning team, and I think, generally the efficiencies have led to less overall activity, more capital efficiency, and setting us up well for this potential close here in Q4 with Endeavor.

Leo Mariani — ROTH MKM — Analyst

OK. Now, that’s helpful, color. And then, just shifting over to asset sales, you obviously talked a little about sort of when the Endeavor deal closes, maybe moving some midstream assets into your Deep Blue, JV, and also a drop down to Viper. Outside of some of the Endeavor-related asset sales, is there anything else that you guys are sort of working on? You talked about raising cash for, just from pre-cash flow here over the next handful of months until the deal closes, but just trying to get a sense if you guys are looking at other, asset sales in the interim?

Kaes Van’t Hof — President and Chief Financial Officer

Yes, not many. We sold a piece of our Viper ownership in the first quarter, and that put another $450 million of cash on the balance sheet. I think it goes, I go back to when we structured this deal, we certainly did not want to put so much cash into the deal with Endeavor that we had to be a seller of assets, and that’s exactly what we’ve done. Now, I think we’ve had some price help here the last couple months that, has boosted pre-cash flow and reduced the cash portion of the transaction.

And listen, I think, the price has got to be right for any asset sale, whether it’s the deep blue, Viper, or otherwise, and we’re going to be patient post-close. I think, I do think those assets make sense in other hands, but it’s got to be the right value.

Leo Mariani — ROTH MKM — Analyst

OK. That’s helpful, and then just wanted to ask about your production severance tax here. You’ve been guiding to 7% of revenue. It’s come in below that the last handful of quarters, closer to 5% to 6%.

Just wanted to see what was going on there. Maybe that was anomalous in the last handful of quarters, and is 7% the right number going forward?

Kaes Van’t Hof — President and Chief Financial Officer

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

Leo Mariani — ROTH MKM — Analyst

OK. Thank you.

Kaes Van’t Hof — President and Chief Financial Officer

Thanks, Leo.

Operator

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

Travis Stice — Chairman and Chief Executive Officer

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

Operator

(Operator signoff)

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