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Pioneer Natural Resources Co (PXD) Q2 2021 Earnings Call Transcript

By Motley Fool Transcribers – Aug 3, 2021 at 8:01PM

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PXD earnings call for the period ending June 30, 2021.

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Pioneer Natural Resources Co (PXD 0.14%)
Q2 2021 Earnings Call
Aug 3, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Pioneer Natural Resources Second Quarter Conference Call. Joining us today will be Scott Sheffield, Chief Executive Officer; Rich Dealy, President and Chief Operating Officer; Joey Hall, Executive Vice President of Operations; and Neal Shah, Senior Vice President and Chief Financial Officer. Pioneer has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the Internet at www.pxd.com. Again, the Internet site to access the slides related to today's call is www.pxd.com. At the website, select Investors, then select Earnings and Webcast. This call is being recorded. A replay of the call will be archived on the Internet site through August 30, 2021. The company's comments today will include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospects of Pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Pioneer's news release on page two of the slide presentation and in Pioneer's public filings made with the Securities and Exchange Commission.

At this time, for opening remarks, I would like to turn the call over to Pioneer's Senior Vice President and Chief Financial Officer, Neal Shah. Please go ahead, sir.

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Neal H. Shah -- Senior Vice President and Chief Financial Officer

Thank you, Kian. Good morning, everyone, and thank you for joining us for Pioneer's second quarter earnings call. Today, we will be discussing Pioneer's strong second quarter results and our enhanced return of capital strategy. We will also present our continued strong execution, underpinning our low reinvestment rate and best-in-class breakeven oil price. This is all accomplished while maintaining our focus on safe operations and environmental stewardship in the field. After that, we will open up the call for your questions.

With that, I'll turn it over to Scott.

Scott D. Sheffield -- Chief Executive Officer

Thank you, Neal. Good morning. Obviously, we're very excited after talking about it for 18 months to announce that we are both accelerating our first variable dividend payment into the third quarter this year as well as increasing the payment to reflect 75% of second quarter free cash flow. After payment of the base dividend as our balance sheet continues to strengthen due to higher strip pricing as a result of improved oil demand and a successful vaccine. In addition, we had two highly accretive transactions that also led us to making this decision and accelerating. When combined with the base dividend, total dividend payments in the third quarter will be greater than $2 per share, or a total of approximately $490 million return to shareholders during the third quarter alone. The initiation of our variable dividend payments marks a significant milestone in our investment framework as shareholders will begin receiving material cash return through eight dividend checks per year. Pioneer's strong execution continued during the second quarter, with production near the top end of guidance, delivering over $600 million of free cash flow, driving estimated 2021 free cash flow up to about $3.2 billion. Lastly, Pioneer is the largest producer in the Permian, with the largest inventory of Tier one locations, over 15,000, and the lowest breakeven price in the Lower 48.

Both recent acquisitions were highly accretive and added significant Tier one inventory. We were not looking at any more Midland Basin large acquisitions. We bought the best two available. Apollo, who was the largest shareholder from DoublePoint, our largest shareholder from DoublePoint has sold out from 13 million shares to about two million shares and now less than 1% of the outstanding of the company. Going to slide four. Pioneer's execution remains strong as total production and oil production were in the upper half of our guidance ranges as we successfully integrated DoublePoint's operations into our program. Horizontal lease operating expense dropped by nearly $0.25 per BOE when compared to the first quarter. In total, Pioneer generated approximately $1 billion in free cash flow in the first half of '21. We go on to slide five. Our strong balance sheet underpinned by improved oil price outlook supports both the acceleration and increase of our inaugural variable dividend. The first variable dividend will be paid during the third quarter, and accelerated from 22%, will be based on second quarter free cash flow. Additionally, we are increasing the third quarter variable dividend payment to 75%, post base dividend free cash flow from the previous 50%. The increase up to 75% in our variable dividend program is approximately 18 months sooner than previously planned. These changes result in over $1 billion of incremental cash to be returned to shareholders in 2021, with total dividends to exceed $6 per share.

On slide six, we remain committed to our core investment thesis, predicated on low leverage, strong corporate returns to average over the next five years in the mid-teens, low investment rate, around 50% over the next five years and generating significant free cash flow. This durable combination creates significant value for our shareholders delivering a mid-teens total return through our stable and growing base dividend, compelling variable dividend program and high-return oil growth up to 5%. Obviously, when you look at 2022, the turn on return is much higher because the oil strip over the next five years is about $10 in backwardation. When including the base dividend, approximately 80% of the company's free cash flow is expected to be returned to shareholders through eight separate dividend checks per year, inclusive of both the base and the variable dividend. We will continue to maintain our pristine balance sheet as we allocate the remaining portion of free cash flow to the balance sheet. Going to slide seven. As you can see on slide seven, the product of Pioneer's high-quality assets and top-tier capital efficiency drive significant free cash flow generation amounting to greater than $23 billion through 2026. Again, I want to remind you that the strip is in backwardation. It drops about $10 in backwardation over the next five years. Let's get into free cash flow, which is based on current strip pricing, represents greater than 50% of our enterprise value and more than 65% of our market cap.

Considering the greater than $23 billion of cumulative free cash flow, this program generates over $18 billion of total dividends through 2026, with the remaining free cash flow allocated toward strengthening our balance sheet, driving net debt to EBITDA to less than 0.5. Going to slide eight, positioning a leading dividend yield across all sectors, the combination of Pioneer's expected free cash flow and return on capital framework creates a compelling investment opportunity with a total dividend yield that will exceed all S&P 500 sectors as well as companies and the average yield of the major oil companies and all other energy companies in the S&P 500. Annualized expected dividends paid in the second half of 2021 leads to a dividend yield of approximately 8%, which increases '22 to '26 time period to an average greater than 9% due significant free cash flow. Again, when you look at you just focus on '22, the dividend yield is about 12%. Again, a reminder, the strip with these numbers is about $10 in backwardation. This highly competitive yield is underpinned by the greater than $18 billion of cumulative cash returned to shareholders outlined on the previous slide and speaks to the power and underlying quality of Pioneer's assets.

Let me turn it over to Rich for the outlook.

Richard P. Dealy -- President and Chief Operating Officer

Great. Thanks, Scott, and good morning. Before I start to the slide, I just wanted to give a special thanks to our entire Pioneer team, including all the great people that came over from the Parsley and DoublePoint transactions, for the excellent job they've done in integrating both transactions this year. While we have a few small items left on DoublePoint, the teams have worked extremely hard and have done a tremendous job and seamlessly integrating these operations in a very short period of time. So thank you to all those that are listening. Turning to and looking at slide nine. You can see on the slide here, there's no change to our full year oil production guidance range of $351,000 to $366,000 barrels of oil per day and total production of 605,000 to 631,000 BOEs per day. Similarly, on capital, it's unchanged at $2.95 billion to $3.25 billion, but we are seeing some inflationary pressure, although most of it is being offset by our efficiency improvements by the great work power of drilling and completions and facilities teams. Looking at cash flow. You can see with the increase in commodity prices, our forecasted Operating cash flow has increased to $6.45 billion, and free cash flows increased to $3.2 billion that Scott talked about. Both of those are up $500 million from what we forecasted in our May call related to Q1 earnings.

Turning to slide 10. Our plan remains unchanged and is set to average between 22 and 24 drilling rigs for the full year. We are currently running 24 rigs and eight frac fleets in the Midland Basin. In terms of our Delaware plans, we are moving multiple rigs into the Delaware Basin this quarter, and the team is looking forward to bringing the same efficiency gains that we've achieved in the Midland Basin to the Delaware with the goal of further improving well returns, especially given the higher oil cut and lower royalty burden in our Delaware acreage. Just for reference, the Delaware production was 70% oil during Q2. As you can see here, with over one million acres in the Permian Basin, we have a significant inventory. So we will continue to evaluate opportunities to monetize portions of our longer-dated inventory. As we've done in the past, these monetization opportunities will include small noncore acreage packages as well as evaluating other DrillCo opportunities. Turning to slide 11 and talk about synergies. You can see here from the slide that we have realized $275 million synergy target related to G&A in interest and on both the Parsley and DoublePoint transactions. On the operational synergies, we've made great progress with over 50% of the target synergies being identified and being incorporated into future plans.

For instance, we have leveraged our supplier relationships, we're seeing savings on pressure pumping, wirelines, cement, casing, among other items. Joey will talk more about it. We've successfully tested our simul frac and have incorporated a second simul frac fleet into our program, which benefits mainly Pioneer, partially in DoublePoint acreage, given our -- leveraging our significant water system that we have across the Midland Basin. The teams are also continuing to optimize future development plans to take advantage of existing facilities and infrastructure, including tank batteries, water disposal, reuse facilities, just to name a few. Obviously, this reduces the need for future new builds. And lastly, just as examples which is significant, the team has identified over 1,000 locations that we can drill additional 15,000-foot laterals across our contiguous acreage position that are being incorporated into our future development plans, providing significant improvement in capital efficiency going forward.

Why don't I stop there, and I'll turn it to Neal.

Neal H. Shah -- Senior Vice President and Chief Financial Officer

Thank you, Rich. On slide 12, you'll see Pioneer's high-quality asset base, which yields a peer-leading oil percent that drives our high-margin barrels, positioning Pioneer as the only E&P among our peers to realize a corporate breakeven below $30 a barrel WTI. This peer-leading oil mix, combined with our unparalleled breakeven oil price in the high 20s, not only underpins our operational and financial strength, it enables Pioneer's low reinvestment rate and drive significant and durable free cash flow and return of capital to shareholders well into the future.

With that, I'll turn it over to Joey to discuss our strong operations.

J. D. Hall -- Executive Vice President, Operations

Thanks, Neal, and good morning to everybody. I'm going to be starting on slide 13, where our drilling and completions teams have continued their continuous improvement journey. As you can see, since 2017, these two teams have seen more than 75% improvement in their completed feet per day and more than 65% improvement in their drill feet per day. This journey is even more impressive when considering our increased activity levels, including the integration of Parsley and DoublePoint. As Rich mentioned, we've also seen the continued success of our simul frac operations. Consequently, we're in the process of starting up our second simul frac fleet. Our capital projects and production operations teams are working diligently to upgrade partially in DoublePoint facilities to our operational and environmental standards. And our teams are progressing our ESG initiatives by trialing new low-carbon technologies to power our operations. As in the past, we're only noting the improvements in drilling and completions, but I want to emphasize that we continue to see tremendous performance in our production operations, construction and water management teams. And as always, none of this will be possible without the great effort from our development planning team, our robust supply chain and other groups that support our operations.

We continue to remain focused on keeping our employees and contractor partners safe, delivering peer-leading performance and reducing our environmental footprint. Congrats to the entire Pioneer team for our safe and efficient execution in Q2. I'm now going to move to slide 14. Here, you can see the results of Pioneer's long-standing commitment to meeting high environmental standards by our top-tier flaring intensity and best-in-class CO2 intensity compared to U.S. peers and majors. This was only made possible through years of thoughtful planning and investments to minimize our emissions at our facilities, coupled with our comprehensive leak detection and repair program, which includes routine aerial surveys. Despite our leadership position, Pioneer's goal of reducing greenhouse gas emissions intensity by 25% and methane emissions intensity by 40% through 2030, demonstrates our commitment to further increasing our environmental standards. And now moving to slide 15 and continuing the storyline from the previous slide. Pioneer also produces extremely low emission intensity oil on a global scale. This, combined with our low breakeven results and exceptionally resilient production that we expect, will have a place in the global marketplace for a very long time.

And with that, I'll turn it back over to Scott to wrap things up.

Scott D. Sheffield -- Chief Executive Officer

Thank you, Joey. On slide 16, Pioneer continues to hold all pillars of ESG of great importance. I think one of the most important points with the recent Rystad report, the Permian Basin has declined over the last 18 months as we've been talking about it from about $1 billion a day to less than 200 million a day in regard to flaring. So people are focused on reducing flaring to less than 1% for most oil companies. We continue -- the biggest flares continue to be the private companies in the Permian, and we need to continue to ask you in regard to if you find your private equity, we got to put pressure on the private companies in the Permian Basin. We continue to promote a diverse workforce, which reflects the community in which we live and work. As you can see, when you look at our top 15 individuals that run the company, we're at 47%. Lastly, we would like to welcome Lori Billingsley to our Board of Directors. Lori is an officer of D&I with Coca-Cola. We're very excited to have her experience and her leadership play a pivotal role in navigating the changing global energy landscape. Our 2021 sustainability report is scheduled for release in the third quarter, which will include Pioneer's progress on the environmental targets outlined in the left portion of the slide. And finally, on slide 17. Pioneer is committed to driving all of these values for our shareholders.

Now we'll open it up for Q&A.

Questions and Answers:

Operator

[Operator Instructions] We'll now take the first question from Neil Mehta from Goldman Sachs.

Neil Mehta -- Goldman -- Analyst

Yes. Thank you very much. I appreciate the time, and congratulations to you guys in introducing this variable, or accelerating the introduction of the variable contracts that you've been talking about. I guess the first question is just can you give us a sense of how you're going to plan on updating the market around the variable dividend? Is this something that we should expect on a quarterly basis, on a go-forward? And then also just talk about, as you look forward, the right payout ratio, do you see the potential for this variable dividend payout to continue to move higher over time?

Scott D. Sheffield -- Chief Executive Officer

Yes, Neil, thanks for the opening comments. The -- as you know, at the bottom of our slides, everything, including the base is subject to Board approval. But our long-term intention is to pay up to 75% of free cash flow every quarter for the next several years. That's how we're running our business. With the number of locations that we have, we have over 15,000 locations. We're drilling roughly about probably around 500 a year. So we have probably the largest inventory of anybody out there. So we can go on and produce 5% growth and deliver strong yields for the next several years. So it should be the go-to energy stock if you're focused on dividends. We're focused on dividends, primarily, it was because of the feedback when we talked to all of our shareholders back over the last 18 months, that was the focus feedback that we got. They really don't want buybacks. If they want to take the dividends and buy back our stock, they can do that. They want the ability to invest the dividends in any stock they want to was the feedback that we got. So that's why we're focused and we have the greatest payout up to 75%. So the variability, obviously, will be commodity price. One of the feedbacks we will ask for, we do not plan to do any hedging in regard to the variable dividend. If we do any hedging, it will be, at the very, very low end, it will be to protect the capital budget and balance sheet. If shareholders want us to protect the variable dividend, they'll have to give us that feedback in regard to hedging. I'll stop there.

Neil Mehta -- Goldman -- Analyst

And it sounds like we'll get an update on the quarterly -- on the variable dividend on a quarterly basis going forward.

Scott D. Sheffield -- Chief Executive Officer

Yes.

Neil Mehta -- Goldman -- Analyst

And then the follow-up is just around M&A. So two questions around this. One is, can you provide a little bit more color, in addition to what you provided in the slides here, about capturing the synergies associated with the DoublePoint transaction? And just in general, do you view this as a buyer -- buyers' or a seller's market as it relates to A&D at this point? In other words, are you at the point as Pioneer given the inventory that you're really going to work on your existing asset base as opposed to pursuing incremental transactions for you?

Richard P. Dealy -- President and Chief Operating Officer

Yes, Neil, it's Rich. Our focus is really on executing our program related to the Parsley and DoublePoint transactions, along with the base Pioneer. On the synergies, I think, as I mentioned, we've captured the G&A and interest. We're focused on the operational side and have identified over 50% of those that we're focused on incorporating into our plan, including simul frac that Joey talked about, the longer laterals, integration of our facilities capital that -- and using that integration capital that we spent to prior spending to upgrade the facilities related to Parsley and DoublePoint to our high operational standards. And you'll see that when you see our sustainability report come out, some of the dollars, we've got high standards that we want to adhere to, and you're going to see that in our sustainability report. And so those dollars are being spent to accomplish those activities.

Scott D. Sheffield -- Chief Executive Officer

And on your second question, Neil, the -- as I said, we had -- two became available, Parsley and DoublePoint. They were the best opportunities. They had great Tier one inventory. We bought them, and there was nothing available at the current time. And I don't anticipate anything becoming available. So there's no need for us to look at other opportunities at this point in time.

Neil Mehta -- Goldman -- Analyst

Terrific. Thanks guys.

Operator

We will now take the next question from John Freeman from Raymond James.

John Freeman -- Raymond James -- Analyst

Good morning guys.

Scott D. Sheffield -- Chief Executive Officer

Hi John.

Richard P. Dealy -- President and Chief Operating Officer

Hi John.

John Freeman -- Raymond James -- Analyst

It's great to see we have the variable dividend paid well ahead of schedule. And obviously, the mechanics of that variable dividend payout, you lave laid out really well. I'm trying to get a sense though on -- when I look at the base dividend, sort of how the mechanics, the way the thought process works on the base dividend side of things. I know Scott, in the past, you've talked about that long-term plan assumes kind of roughly like a 2% to 3% per year kind of average increase in the base dividend. So if the variable dividend, as I've said in the past, the main sort of toggle there is the commodity price, is the base dividend, is it mainly just sort of linked to the balance sheet as leverage goes lower, that gives you the ability to raise that? Just any additional color on the base dividend.

Scott D. Sheffield -- Chief Executive Officer

Yes, on the base, we're still building in, just as you said, that 2% to 3% increase in the base that's still subject to Board approval, but that's our intention, is on an annual basis, over the next five years, to increase the base. So as we increase the base, keeping the strip the same, it reduces the variable a little bit.

John Freeman -- Raymond James -- Analyst

Got it. And then just my other question, is there any update yet on the Delaware. We've got the one rig there, and we're starting to drill those initial wells. That area looks to try to compete for some capital. Just any updates on what you're seeing in the Delaware on the early results.

Richard P. Dealy -- President and Chief Operating Officer

Yes, John, we're just getting started. We're -- just this quarter, we're putting our first rigs over there. And so we'll have more data into this year or into next year on performance. But we fully expect to bring the operational benefits that we've seen in the Midland Basin to the Delaware Basin. We're excited to get started over there, but it's just early at this point. So I don't really have any results yet to share until probably early 2022.

John Freeman -- Raymond James -- Analyst

Got it. Thanks, guys. Congratulations.

Richard P. Dealy -- President and Chief Operating Officer

Thanks

Operator

We can now take the next question from Derrick Whitfield from Stifel.

Derrick Whitfield -- Stifel -- Analyst

Good morning, all and congrats on your quarter and variable dividend update. With my first question, I wanted to focus on ops, perhaps for Joey. Are there any practical limitations that can limit your deployment of simul frac ops programwide?

J. D. Hall -- Executive Vice President, Operations

Yes. One of the questions I get quite often because of the great success we've seen on simul frac is why not convert all of our fleets to simul frac. And there's a couple of things that limit that. One is logistics, particularly around water because we basically doubled the water requirements in one area. If all of our frac fleets were working under simul frac operations, we'd have to spend a significant amount of capital to upgrade our water systems and, of course, logistics around the sand as well. But the other maybe more trivial matter is also the number of wells on the pad. If you have an odd number of wells on the pad, it can have a slight impact on the efficiency. But primarily, we want to make sure that we're efficiently deploying capital and we're getting the bang for the buck. So water logistics is probably the single most impactful thing that we look at to deploying simul frac.

Derrick Whitfield -- Stifel -- Analyst

Understood. And staying on ops with my follow-up question, referencing slide 10 in your prepared comments on lateral lengths. I wanted to ask you a 2022 activity question. As you guys internally prepare for 2022 from a permitting and infrastructure perspective, are there any broad activity outlines you could share with us on average pad size and lateral lengths that are possible for 2022?

Richard P. Dealy -- President and Chief Operating Officer

Yes. I think as we've talked about in the past, as we talk about that pad size of basically four wells per pad, on average four this year, I think that's going to be fairly consistent for 2022. And then when we talk about longer laterals, we're still in the midst of developing the exact locations for 2022 and how many of the longer laterals we'll drill, but it will be definitely a bigger part of our portfolio in '22 than what has been in the past and in '21 as we've looked. Then, obviously, the capital efficiency drilling longer laterals continues to improve. So it's probably an, overall, on 15,000-foot laterals on a drilling and completions per foot basis, 15-plus percent cost savings on an average per foot basis.

Derrick Whitfield -- Stifel -- Analyst

All right. Great update and thanks again for your time.

Richard P. Dealy -- President and Chief Operating Officer

Sure

Operator

We can now take the next question from Doug Leggate from Bank of America.

Doug Leggate -- Bank of America -- Analyst

Thanks. Good morning, everybody. Thanks for taking my question. Scott, I've got 2. I think they're probably more for you. And I guess the first one is on -- both related to M&A. There's obviously been some -- a little bit of criticism over the price of the DP acquisition. Obviously, all stock means your share price, given where it is today, you have an opportunity to reset the acquisition cost by buying in some of your shares. Now I understand the variable dividend policy. So I'm just curious if that ever occurred to management or the opportunity that's been given by this overhang that you clarified, your -- the implied acquisition price is a lot cheaper today, if you like, and you have a chance to lower that cost by buying in your stock. Why not?

Scott D. Sheffield -- Chief Executive Officer

Yes, Doug. First of all, I think the market totally misunderstood the DoublePoint transaction. When you look at unproved property, and each of you all can do that on our balance sheet, we paid the same -- exact same price as we paid for Parsley. It's in the low $20,000 per acre. So anybody that's criticizing us for paying $40,000 per acre, had no idea what they're talking about. Secondly, it was a great transaction. In regard to buybacks, I'm listening to the shareholder base. As we drive our debt-to-EBITDA below 1, I've stated already in prior conference calls that the -- we will definitely be, subject to Board approval, we'll be buying back stock when we see dislocations. So I'm a firm believer when we're at the bottoms of the markets, like we saw last year, I want to have one of the best balance sheets, so I can buy a lot of stock at $50. And so I think buying it at today's price, I think I'd rather distribute all of our cash flow, 75% or 80% of it back to the investor. So I sort of agree with you, but at the same time, I'd rather save my firepower if we see -- I hope we don't see dislocations like we saw last year in the marketplace. I've got more confidence in what OPEC is doing and creating stability, less volatility than we've seen in the last five years, over the next five years based on what's happening, what's happening with U.S. shale and other places around the world. So that's how we're thinking today.

Doug Leggate -- Bank of America -- Analyst

Okay. I appreciate that answer, we can take the acreage mark offline. I think that's the output rather than the input, but I completely agree with you. My follow-up, Scott, is a little bit more of an obtuse question. The Cimarex-Cabot S-4 came out, and appeared at least, if we join the dots, to suggest that Pioneer had taken a hard look at Cabot. So in light of everything that you've said about the two best opportunities being Parsley and DoublePoint, I wonder if you could help understand the thinking that might have gone into that, and you were drilling yourself out of the possible shale packages for sale in New Delaware?

Scott D. Sheffield -- Chief Executive Officer

Yes. During the extreme downturn, we had a lot of discussions with a lot of different CEOs. Obviously, just like Exxon and Chevron did at the top. And so we don't comment on specific opportunities, but we were looking at Parsley early on and continued to look at Parsley all during last summer. So we are 100% focused on the Permian Basin and probably 99.9% focused, obviously, on the Midland Basin. So that's where our focus lies.

Doug Leggate -- Bank of America -- Analyst

All right. Thanks for trying to answer the question. Appreciate it.

Operator

We can now take the next question from Charles Meade from Johnson Rice. We can now take the next question from Scott Hanold from RBC Capital Markets.

Scott Hanold -- RBC Capital Markets -- Analyst

Yes thanks. Congrats on the quarter. I'm going to ask a question maybe a little bit more again back to the hedging and your strategy there. And certainly, I have to commend you for your effort to listen to investors and then appropriately adjust your business model. But what feedback have you been getting from investors to this point on hedging? And has that determined the path you're moving forward at this point in time.

Scott D. Sheffield -- Chief Executive Officer

Yes. We have -- due to what's happened with COVID-19 and the ability to travel, we're just now going to start getting out over the next few weeks and talk with several shareholders. Obviously, the conferences, it's sort of hard to get feedback during those virtual conferences. We like to do it in one-on-one meetings. So you're going to see the Pioneer team over the next eight to 10 weeks travel throughout the U.S. and talking to shareholders. So at this point, I'll have to reserve the feedback on what they give us in regard to hedging, in regard to the variable dividend. So probably it's a good question for us in November to ask.

Scott Hanold -- RBC Capital Markets -- Analyst

Okay. So this is still a developing sort of thought process going forward? Because I guess the point I would make is that, certainly, with your $23 billion of free cash flow outlook and, obviously, I think you've stated a pretty strong return to shareholder plan with that. To a certain extent, obviously, that's underpinned by operations, but also the current commodity price. And so, obviously, we know oil is volatile. It looks good now, but like the thought process like why put that -- the $23 billion of free cash flow at risk when you can lock some of that in. But it sounds like that's something that you all need to evaluate a little bit further with shareholders. Is that sort of right?

Scott D. Sheffield -- Chief Executive Officer

Yes, that's right. And that's because it's totally changed. We used to spend every dollar to drill a well. It would protect the capital budget primarily. And now we're -- the free cash flow, essentially, all -- most of it all goes back to the shareholder base. So we're going to visit with our shareholders to get feedback. So there probably won't be consensus above them, but it is something that we've done historically, is get shareholder feedback and develop our long-term policies.

Scott Hanold -- RBC Capital Markets -- Analyst

Absolutely. Look forward to it. Thank you.

Operator

We can now take the next question from Charles Meade from Johnson Rice.

Charles Meade -- Johnson Rice -- Analyst

Good morning. Scott and team -- am I live this time?

Scott D. Sheffield -- Chief Executive Officer

Yes, it working. Sorry about last--

Charles Meade -- Johnson Rice -- Analyst

Not sure would happen. But anyway, Scott, I apologize, I had time for belaboring this A&D question. But in your prepared comments, I believe I heard you say we're not looking at any other big Midland Basin acquisitions. And I think -- so I guess, literally, you might think, "Oh, well, are you guys looking to tack on in the Delaware Basin, but maybe the right way to think about it is it really you're, at your core, are a Midland Basin company. And so you really -- the way to interpret that is that you really just focus on the Midland Basin as the future of Pioneer. So how should we interpret that?

Scott D. Sheffield -- Chief Executive Officer

Well, it's 95% of our company in our locations is the Midland Basin. So that's why I say that. The Delaware, as Rich said, we're focused on drilling wells. We're moving in several rigs. We're averaging one rig, but we're moving in more than one rig for a short time frame, and we need to develop our own economics. The returns at today's price look tremendous in the Delaware also. And so where higher oil prices go, the Delaware is close to being equal with the Midland Basin. So this inventory moves up significantly in the $60, $70 range versus the $40 to $50 range. So we're just focused on our current asset base and try to get every dollar back to the shareholder is where we're focused on, both the Delaware and the Midland Basin. We are continuing to do trades. I think Rich may have mentioned that we're doing drill code two on our Tier two properties. We'll continue to look at small divestitures. So there could be some small opportunities on the small side, but it's insignificant and doesn't affect free cash flow. And that's where the focus is.

Charles Meade -- Johnson Rice -- Analyst

Got it. And then, Scott, I wondered if you could offer your more kind of maybe macro thoughts, but maybe not so much on price. But what do you think the world is expecting to see in terms of volume growth from U.S. onshore in '22? And what do you think they're likely to get versus those expectations?

Scott Hanold -- RBC Capital Markets -- Analyst

Most of the numbers I look at, EIA has the highest numbers. They're at 11.85%. I think they're way too high. Most of the other tanks that I look at, they're around 11.5%. That's probably more realistic. But I'm still looking at about a 5% growth in the Permian, and most other basins will be flat to declining. And when you put all that together, we'll be lucky to grow 5% a year over the next several years in the U.S. lower 48. That's my general opinion. And I think as more companies deliver their free cash flow model, they can't change it. So just like Diamondback committed to 50; the Cabot-Cimarex merger is committed to 50; Devon was committed to 50. So more and more companies, whether they commit to 50 or 75, they're not going to change. And so I'm getting more comfortable with the fact they're just not going to grow that much U.S. shale, which helps. We can now take the next question from Scott Gruber from Citigroup.

Scott D. Sheffield -- Chief Executive Officer

No, a dislocation is what happened last year or in late 2014. That's what I call dislocations. When -- and we want to have the best balance sheet. So our debt-to-EBITDA gets below 0.5 in 2023. So as it gets down to below 0.5, then we'll have the firepower when we see a dislocation. I'm talking about a major dislocation. I'd rather buy shares all day long at $50 instead of using firepower to buy shares at $140 or 150 million. I'd rather not risk the balance sheet and distribute 80% of our free cash flow back to the investor. So that's the plan.

Scott Gruber -- Citigroup -- Analyst

Got it. And then just turning back to us, just given the efficiency gains that you guys are seeing in potential future gains as you roll out simul frac and the 15k laterals, what is the rig count and frac crude count that we should be thinking about for Pioneer to maintain a 5% growth rate in '22? And then thinking about the inflation that's percolating up through the industry today, how much of the underlying industry inflation do you think you'll be able to offset, with efficiency gains around these initiatives next year based on what you're seeing today?

Richard P. Dealy -- President and Chief Operating Officer

Yes, Scott, it's Rich. On the just longer-term growth plans like we've talked about before, I mean, to accomplish the 5% growth as you got one to two rigs that we would add, drilling rigs per year to accomplish that. And so that's really how I would, from a modeling perspective, look at it going forward. On inflation, we are seeing some pressure and, fortunately, our efficiency improvements and our long-term contracts have dampened that. But overall, we're seeing it in tubulars, diesel, cement, chemicals, but we're also starting to see a little bit in labor as well. And so for this year, we're projecting, what I'd call in the mid-single digits of inflation, most of which were offsetting with efficiencies. But in the back half of this year, we do expect that to grow to about 10%. And so that's something that we'll have to look at in 2022 of where do we see inflation versus what efficiency gains we've been able to capture this year. So we're still going to be highly focused on getting efficiency gains, but I do think inflation is going to play a part in our '22 capital budget.

Scott Gruber -- Citigroup -- Analyst

Got it. Appreciate it. Thank you.

Richard P. Dealy -- President and Chief Operating Officer

You're welcome.

Operator

We can now take the next question from David Heikkinen from Pickering Energy Partners.

David Heikkinen -- Pickering Energy -- Analyst

Good morning, guys and thank you for taking the question. As I thought through the acquisition and you all really helping clean up the Permian, can you provide what Parsley's flaring intensity was relative to where you've been at the lowest, and same thing for DoublePoint? Just trying to put it into a percent, quantify how big an impact the moves you're making in the second and third quarter will impact their flaring and then their venting.

Richard P. Dealy -- President and Chief Operating Officer

Yes, David, I don't have the exact numbers, but we can get them for you. But they are definitely coming down and making progress. They were higher than where pioneers were, but I don't have to -- I can't remember the exact numbers. But like I said, we can get them for you. But definitely, the capital that we're -- from an integration standpoint and improving their facilities, is a big focus and a big focus on those continuing to lower our emissions footprint. So it's definitely something that we're spending capital on.

Scott D. Sheffield -- Chief Executive Officer

And David this is Scott. If you look at Rystad, we were down to 0.1% before the two acquisitions. Now we're about half of 0.5%. And so we're like six in the Permian Basin. Our goal is to get back to being one. So that's -- when you look at the Rystad report, you can get a better feel if you look at them on a quarterly basis.

David Heikkinen -- Pickering Energy -- Analyst

That will be in your updated sustainability report, too, so that will be helpful. Did you quantify the barrels of -- like do you have some curtailment as you do the pneumatics and you do the VRUs? Maybe I missed the third quarter, like what amount of curtailment did you have? I was just trying to dial in an exact number of kind of that -- this cleanup work that you all are doing?

Richard P. Dealy -- President and Chief Operating Officer

Yes, Dave, I don't have the exact numbers on that. What I'd tell you is our Q3 guidance is right where we expected it to be. And so -- and it takes into account our focus on being capital efficient and making sure that our -- we're not overspending capital on facilities and choking back wells. So we still, as we've talked about in the past, have agreed the choke wells to be capital efficient, and therefore, we have lower IP rates and flatter declines. But also, it takes into account this integration capital that we're spending to upgrade the Parsley and DoublePoint facilities and the time that those are down. So it factors all that in. And so really, no change to what we've forecasted for the full year production guidance is exactly where we are in Q3 is what we would have expected.

David Heikkinen -- Pickering Energy -- Analyst

Thanks guys. Keep cleaning it up.

Operator

We can now take the next question from Arun Jayaram from JPMorgan.

Arun Jayaram -- JPMorgan -- Analyst

Yeah, good morning. I wanted to get some of your thoughts on 2022. Scott, you've outlined up to 5% oil growth and I wanted to get your thoughts on how capex could trend. There's obviously some pushes and pulls with $150 million of synergy tailwinds from Parsley and DoublePoint. There's simul frac, but obviously some inflation. So I know the Street expectations next year around 405,000 barrels for KBD for oil in just under $3.6 billion in capex. I was just wondering to see if you could maybe frame how you think the business playing out relative to where The Street's at for next year?

Richard P. Dealy -- President and Chief Operating Officer

Yes, Rich. A little too early for us to comment on the details, specifically for 2022 capex and production. But I'd tell you that we're committed to our investment framework that yields that maximum of 5% oil growth for 2022. And then broadly speaking, I think that equates to much of what we said last quarter, about 400,000 barrels of oil per day for the year and about slightly over 700,000 BOEs per day for 2022.

Arun Jayaram -- JPMorgan -- Analyst

Got it. Got it. Okay. Fair enough. And just my follow-up is, in the quarter, you guys turned to sales, I think 157 wells. I was wondering if you could maybe give us a bit of a mix between double point acreage versus maybe legacy Pioneer-Parsley? And then how would you frame the well productivity on the acquired acreage on DoublePoint?

Richard P. Dealy -- President and Chief Operating Officer

Yes. Our teams did a really a great job. As I mentioned early on about the integration and drilling completion efficiencies during Q2 were great, and so that led to the higher pop cadence during the quarter. We do anticipate that to step down in Q3 in about 10% to 15% in terms of what that pop cadence will look like. But, overall, our production was -- for Q2 was very strong. We were very happy with the performance of all our wells. I mean, at this point, we look at them all as Pioneer. And so Parsley, DoublePoint, Pioneer wells all performed at expectation and did well. So everything is progressing just as we would have liked.

Arun Jayaram -- JPMorgan -- Analyst

Great. Thanks a lot Rich.

Operator

We can now take the next question from Paul Cheng from Scotia Bank.

Paul Cheng -- Scotia Bank -- Analyst

Thank you. Good morning. Two questions. First, I think, is for Neal. Neal, can you give us some idea how is the cash tax progression is going to be over the next several years, given oil price at the $70-plus currently? The second question is that is just a theoretical. Scott, if we look out for the next, say, two or three years, in the event we still see OPEC is curtailing production to support the oil prices, under that kind of macro environment, will Pioneer still try to grow at 5%, or that should pioneer to grow the oil production net or under that circumstances?

Neil Mehta -- Goldman -- Analyst

Paul, I'll kick it off, and I'll turn it over to Scott. I mean, if you look at our current NOL balance, it's approximately $8 billion. But if you consider the increase in commodity prices and the forward strip and the expectation for substantial free cash flow profile that Scott and Richard spoke to, our cash tax time frame did accelerate into 2023. So that's based on the current strip and our free cash flow generation. So a slight acceleration, but good based upon the free cash flow profile. If you look at our current portion of taxes, those are state related. So that's kind of where we sit as it pertains to a cash tax payer and the profile on a go-forward basis. In regards...

Paul Cheng -- Scotia Bank -- Analyst

So can you talk about becoming a tax -- I'm sorry, Scott, I was just asking when you become cash tax payer in 2023, what kind of the percent of the cash tax represent your total tax going to look like?

Neal H. Shah -- Senior Vice President and Chief Financial Officer

So it starts to layer in, Paul, in 2023. So we're not a maximum payer at that point, but it does layer in 2023, 2024 and start to step up throughout that time frame.

Scott D. Sheffield -- Chief Executive Officer

Yes, on the OPEC question, Paul, the -- we say up to 5%. So as long as demand is strong, and I'm still on the assumption that the Delta variant is going to roll over, people will continue to get vaccinated and demand is going to pick up significantly in the back half of this year and next year going into '23. So I still anticipate strong demand. And as long as that's happened, we'll be growing 5% a year. If for some reason there's any softness, we can actually -- we can easily back off the 5%, grow 2%, 3%, grow 0. So -- but right now, we're modeling 5% growth over the next five years.

Paul Cheng -- Scotia Bank -- Analyst

I just want to make one observation or comment on the hedging. Personally, that I actually log the people, who guys don't hedge, you can look at whether it's a single company or the industry over a 10-year, 20-year, 30-year, whatever you see. Hedging is always a losing money proposition. I don't think the industry happen make money. And with your very low breakeven requirement and your very strong balance sheet, I'm not sure that why do you want to hedge. Your investors really want to get the upside.

Scott D. Sheffield -- Chief Executive Officer

Hopefully, you're a shareholder and give me feedback, Paul.

Operator

We can now take the next question from Bob Brackett from Bernstein Research.

Bob Brackett -- Bernstein Research -- Analyst

Thank you for that. Most of the good questions have already been asked. So let me just chime in, which is uncharacteristic for me and say I truly appreciate the variable dividend strategy and the oxygen-reducing cash return to shareholders and that modest growth. So I'll just leave it there.

Richard P. Dealy -- President and Chief Operating Officer

Thanks.

Operator

We can now take the next question from Phillips Johnston from Capital One.

Phillips Johnston -- Capital One -- Analyst

Hey, guys. Thanks. Just one question for me, and it's really just a follow-up on the mechanics of the variable. I think the prior plan was to tie the variable component to the prior year's actual annual cash flow and just sort of pay that evenly throughout the year, every quarter. Whereas the variable that you announced last night is tied to actual second quarter free cash flow. So just to clarify a little bit, will variable now always be tied to the prior quarter's free cash flow? And if so, can you maybe talk about the trade-off between the new format, which sort of pays out free cash flow in more of a real-time fashion, which I think is a real plus, but it also does bring a little bit more volatility into this quarterly payout.

Scott D. Sheffield -- Chief Executive Officer

Yes. I mean it's driven more by the fact, the oil strip, since we announced our plan in last February, the oil strip, five year-old moved up significantly. We've made two highly accretive transactions. And we saw the benefit of what Devon was doing already, so we decided to go ahead and move it forward. So it will fluctuate, but at least -- I mean, it's like the third quarter is already pretty -- is almost closed from a commodity standpoint. Brent is trading in October already as of now. So you pretty much know the third quarter. So it would be easy for, I think, analysts and investors to estimate the free cash flow with their models. Obviously, it will vary. If we had gone the old route, we would have to wait. It had been delayed 18 months. That was the negative.

Phillips Johnston -- Capital One -- Analyst

Yes, OK. Makes sense. Got it. Thanks.

Operator

We can now take the next question from David Deckelbaum for Cowen.

David Deckelbaum -- Cowen -- Analyst

Thanks for squeezing me in guys. I just had a couple, hopefully, quick ones for you. And congrats on the inaugural variable payments. Just curious, Scott, after the DoublePoint deal, if you look back where the 12-month strip was, I guess, there between then and now, you had a $10 move. Is the plan, I guess, still to drop those rigs and then bring that production down to a level of like 100,000 equivalent a day to maintain that? Was there a weighing, I guess, against just maintaining that higher flush production that you had acquired?

Scott D. Sheffield -- Chief Executive Officer

No. That's still the plan. No change.

David Deckelbaum -- Cowen -- Analyst

And I guess just as a follow-up to that, as you talk about this potential for 5% growth every year, I guess is this always occurring as like a year-end process where there's -- it's arbitrary in terms of calendar, but is it making decisions for the following year always sort of in this fall time frame where the 5% growth would be determined off of that point? Or are there going to be points along the way throughout the year where perhaps there's a return-based function that chooses you maybe to be positioning for bringing more activity forward at that current point?

Scott D. Sheffield -- Chief Executive Officer

We had to make the decision to go to 5% in '22 and early this year. You can't wait until the end of '21 to go 5%. You'll end up spending way too much capital. So our capital program is setting us up this year to go 5%, with adding very few rigs. If any, we're dropping some this year. And at most, we'll be adding back one to two next year. So we have to make the decisions a year ahead of time. That's why it's best to have a great balance sheet so you can drill through the cycle. But we also learned from what happened last year, we can shut down. We shut down how many rigs, Joey, in a short time frame during the pandemic. I mean in two weeks, we shut down...

J. D. Hall -- Executive Vice President, Operations

18.

Scott D. Sheffield -- Chief Executive Officer

18 rigs. So I mean we've gone through so many down cycles over the last 11 years, sad to say, that in 2009, 2014. And then 2020 that we've learned, we can make quick decisions at Pioneer and get to a free cash flow. And what's amazing is 2020 was our first free cash flow model even in the worst oil price year. But that's how fast we can react and change.

David Deckelbaum -- Cowen -- Analyst

I appreciate the clarity. If I could just squeeze in a quick one. Just on the affluent water coming out of Midlands right now, where do you estimate the amount of the capacity that you'll be utilizing out of that system in 2022?

Richard P. Dealy -- President and Chief Operating Officer

Yes, it's still ramping up, but we can have the ability to take up to about 220,000, 240,000 barrels a day from that system. And so it really just depends on logistics and mechanics and hydraulics of the system and where the drilling is, and we're going to optimize the lowest-cost water, which Midland is one of our lowest cost waters and -- so it's -- that's the game plan, and it's still being modeled, but it's -- that's basically where we would anticipate getting up to, over time.

David Deckelbaum -- Cowen -- Analyst

Thank you guys.

Richard P. Dealy -- President and Chief Operating Officer

Sure.

Operator

This concludes today's question-and-answer session. I'd like to now pass call back over to Scott Sheffield for any additional or closing or max.

Scott D. Sheffield -- Chief Executive Officer

Again, we appreciate all the questions. We look forward to seeing everybody, and hopefully, we can see everybody on the road at some point in time. Stay safe, and we'll see you in November. Thank you.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Neal H. Shah -- Senior Vice President and Chief Financial Officer

Scott D. Sheffield -- Chief Executive Officer

Richard P. Dealy -- President and Chief Operating Officer

J. D. Hall -- Executive Vice President, Operations

Neil Mehta -- Goldman -- Analyst

John Freeman -- Raymond James -- Analyst

Derrick Whitfield -- Stifel -- Analyst

Doug Leggate -- Bank of America -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

Charles Meade -- Johnson Rice -- Analyst

Scott Gruber -- Citigroup -- Analyst

David Heikkinen -- Pickering Energy -- Analyst

Arun Jayaram -- JPMorgan -- Analyst

Paul Cheng -- Scotia Bank -- Analyst

Bob Brackett -- Bernstein Research -- Analyst

Phillips Johnston -- Capital One -- Analyst

David Deckelbaum -- Cowen -- Analyst

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