Q1 2024 Earnings Summary
- Diamondback Energy is achieving significant capital efficiency improvements, including drilling longer laterals and reducing drilling times, resulting in lower costs and enhanced operational performance. They averaged almost 13,000 feet per well in the quarter , exceeding their expected average lateral length of 11,500 feet.
- The company is aggressively pursuing operational efficiencies, such as transitioning to grid-powered frac fleets to reduce energy costs and meticulous drilling optimizations, further driving down costs. They are implementing simul-frac and clear fluids, achieving cost reductions of $150 per foot.
- Diamondback is expanding its inventory with promising results from new formations like the Upper Spraberry and Wolfcamp D, extending the duration of their operations in the Midland Basin and enhancing future growth prospects, especially with the Endeavor acquisition. They reported favorable initial results from Upper Spraberry wells and are considering adding this to future developments.
- Potential regulatory hurdles: Diamondback Energy is facing a second request from the FTC regarding their transaction with Endeavor, which could indicate potential regulatory delays or challenges.
- Increase in production severance tax: The company expects production severance tax to be 7% of revenue moving forward, which is higher than the 5% to 6% they've experienced in recent quarters, potentially impacting profitability.
- Gas egress and pricing pressures: There are concerns about gas egress issues in the Permian Basin, leading to pricing pressures. While Diamondback is confident in their plan, increased gas production may lead to lower prices and challenges in gas marketing.
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Endeavor Deal Timing
Q: What's the status of the Endeavor deal and its timing?
A: The Endeavor deal is now expected to close at the end of the year due to regulatory review. The delay means we'll need to provide less cash at close, and we're earning minimal negative carry on the cash raised. -
Asset Sales Linked to Endeavor
Q: How are you approaching non-core asset sales related to the Endeavor transaction?
A: Our strategy for non-core asset sales hasn't changed but timing has shifted. We plan to integrate Endeavor's midstream business with our JV and combine their significant mineral business with Viper, which could be a game changer. -
Gas Capacity and Waha Pricing
Q: How are you addressing gas capacity constraints and Waha pricing softness?
A: We're proactively contributing to new pipelines like Whistler and Matterhorn. We need more pipelines every 12 to 18 months to handle associated gas. Projects in the works should alleviate bottlenecks past the end of this year. -
Confidence in Gas Egress
Q: Are you confident in your gas capacity, and do you expect others to face constraints?
A: We're 100% confident in our plan with more physical space coming. Every molecule has moved to date, and we're focused on Diamondback's position rather than speculating about others. -
Capital Efficiency Gains
Q: Can you discuss real-time deflation and steps to lower costs?
A: Deflationary pressures from declining rig and crew counts are tailwinds. We're averaging almost 13,000 feet per well this quarter, drilling faster, and increasing lateral feet completed per day. -
Impact on Stock Buybacks
Q: How does the Endeavor deal affect your stock buyback plans?
A: Since announcing the deal, buybacks are limited and will likely remain so until close. Post-merger, returning 50% of free cash flow allows us to build cash, pay down debt, and make bigger buyback bets at the right time. -
Intrinsic Value and Cost of Capital
Q: What's your view on the combined company's intrinsic value and cost of capital?
A: We see mid-cycle prices of $60 to $70 per barrel. The Endeavor acquisition adds significant inventory and NAV accretion, potentially lowering our combined cost of capital. We target an after-tax 12% rate of return as a conservative threshold for buybacks. -
Future Efficiency Improvements
Q: Where do you see further efficiency gains in operations?
A: We're transitioning to electric frac fleets powered by grid electricity to lower energy costs. Variable costs are becoming minimal, so achieving large savings will require rethinking well plans and fixed costs. -
Upper Spraberry Development
Q: Will you add Upper Spraberry to your inventory?
A: Yes, after successful completions, we like the initial results and competitive costs. Adding zones like Upper Spraberry and Wolfcamp D extends our inventory without degrading corporate cumulative curves. -
Project Flexibility Post-Endeavor
Q: Will you maintain flexibility on large projects after acquiring Endeavor?
A: Yes, we'll continue our dynamic, quick-moving culture even as we grow larger. We plan to keep a flat, non-siloed organization with a high level of trust. -
Activity Cadence and Efficiencies
Q: Is a slowdown expected after a strong Q1?
A: Q1 was higher due to pushing completions from Q4. We may reduce a frac crew over the summer and reduce rigs to 12-13, maintaining efficiency and setting up for the Endeavor close in Q4. -
ESG Investments
Q: Can you elaborate on investing in projects to offset Scope 1 emissions?
A: We have a subsidiary, Cottonmouth Ventures, exploring projects like a plant converting 35 million cubic feet per day of gas into 3,000 barrels per day of gasoline. These investments are small relative to our $4-5 billion annual capital program. -
AI Applications in Operations
Q: Are you applying AI to improve EUR and productivity?
A: We're using AI to process data quicker, especially from electric frac fleets. While it's early, we're excited about AI's potential to improve EUR and efficiencies. -
Severance Tax Guidance
Q: Is 7% the right severance tax rate going forward?
A: Yes, 7% is our annual average. Recent quarters were lower due to working off accruals, but we expect it to stabilize.
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