Diamondback Stockholders,
This letter is meant to be a supplement to our
earnings release and is being furnished to the Securities and
Exchange Commission (SEC) and released to our stockholders
simultaneously with our earnings release. Please see the
information regarding forward-looking statements and non-GAAP
financial information included at the end of this letter.
Endeavor Closing: Diamondback
closed the Endeavor transaction on September 10th, which began the
next chapter of the Company’s short history. In just under two
months, the Diamondback and Endeavor teams have worked quickly
towards a seamless integration. We onboarded more than 1,000
employees, moved over 650 combined offices and began working as one
functional organization in the first week post-close.
The teams have already begun sharing best
practices, which we witnessed in our first pro forma quarterly
operations reviews a few weeks ago. At a high level, we have
essentially merged two teams of basin experts. While we were once
competitors, we can now share best practices and learnings from
years of drilling and completing wells in the Midland Basin with
what we believe is more combined data and basin experience than any
competitor. This is a synergy that could not be modeled in our
spreadsheet when the deal was announced, but I am confident this
will accrue to the benefit of our stockholders in short order.
We are ahead of schedule in delivering the
operational synergies we promised in conjunction with the merger.
Our drilling and completions teams have already implemented the two
most significant operational synergies: clear fluids for drilling
and SimulFrac for completions. All our development in the fourth
quarter will be executed with SimulFrac completions crews, with
spot crews to be used for single-well tests like the Barnett Shale
in the Midland Basin. On the drilling side, as of today, all of our
rigs are operating with clear fluid drilling systems, and we have
already seen wells on legacy Endeavor acreage drilled below
post-synergy-expected cost per lateral foot.
At time of deal announcement, we promised to drill
and complete wells for $625 per lateral foot in 2025 on Endeavor's
acreage. I can say that today, in real time and two months
post-announcement, we are averaging $600 per lateral foot across
the combined Company - above expectations and ahead of
schedule.
We are also actively learning from the Endeavor
teams. On the execution front, we are optimistic about application
and integration of some early learnings around the post-completion,
drill-out process and believe there to be significant best
practices to be shared across the combined production operations
groups. We are also closely studying the various completion designs
from the two companies and are confident the combination of the
best completion design with the lowest cost execution will be a
winning formula.
As a result, I could not be more excited about the
early progress from integration and remain confident in the team’s
ability to meet or exceed the synergies promised at deal
announcement.
TRP Energy (“TRP”) Asset Trade:Our
new combined acreage footprint has given us the flexibility to look
at different opportunities across the Permian Basin. This is
exemplified by a trade we just executed, where we signed an
exchange agreement with TRP that allows us to play offense in our
backyard by swapping a PDP-heavy asset in the Delaware Basin for a
Midland Basin asset with more near-term development potential. In
exchange for our Vermejo asset and ~$238 million in cash, we will
receive TRP’s Midland Basin asset, which consists of approximately
15,000 net acres located in Upton and Reagan counties. The asset we
will acquire in this trade has 55 remaining undeveloped operated
locations, the majority of which compete for capital right away.
The trade is expected to be accretive to our 2025 Cash Flow and
Free Cash Flow per share and will high grade our inventory. We
expect this trade to close by year-end, subject to customary
regulatory approvals and closing conditions.
We will also continue to look for ways to improve
our asset base, whether it be through traditional trades to be able
to drill longer laterals and increase operated working interests or
“out of the box” ideas such as TRP.
Third Quarter Operational
Performance:I am proud of our team’s ability to execute
regardless of the circumstances and the third quarter was no
exception. Our team put operations first even as many moved
offices, integrated new team members and began to understand a
large new asset. We are currently running 20 drilling rigs and
expect to be down to 18 operated rigs by year-end. What we
originally expected to drill with 22 - 24 rigs in 2025, we now
expect we can drill with closer to 18 rigs. This is purely based on
continued efficiency gains, a testament to the prowess of our
drilling organization.
On the completions side of the business, we are
currently running four SimulFrac crews, three of which are
electric. We continue to exceed our original key performance
indicators for 2024. We are completing on average nearly 4,000
lateral feet per day per crew, 30% more than we originally planned
heading into the year. This increase is driven by higher pumping
hours per day, higher average pump rates, lower swap times per
stage and faster move times between pads.
Production:For the quarter,
Diamondback produced 321.1 MBO/d (571.1 MBOE/d), above the high end
of the guidance range of 319 - 321 MBO/d (565 - 569 MBOE/d) that we
released in October. As a reminder, this third quarter production
incorporates twenty-one days of legacy Endeavor production. Well
performance continues to meet or exceed expectations in our core
Midland Basin position, setting us up well to continue to execute
and achieve additional capital efficiency gains.
For the fourth quarter of 2024, we expect to
produce 470 - 475 MBO/d (840 - 850 MBOE/d). This includes a minor
contribution from Viper’s closed acquisition of Tumbleweed. It also
shows we expect to hit pro forma production expectations sooner
than originally expected.
Capital Expenditures:In the
third quarter, we spent $688 million on capital expenditures, which
is in the middle of our updated guidance range of $675 - $700
million. For the fourth quarter, we expect to spend $950 - $1,050
million of capex.
The macro environment for oil prices and near-term
global oil supply and demand dynamics remains volatile at best and
tenuous at worst. Diamondback’s base case 2025 plan is still what
was laid out with the Endeavor merger announcement in February
(“generate oil production of 470 - 480 MBO/d (800 - 825 MBOE/d)
with a capital budget of approximately $4.1 - $4.4 billion”), with
oil production expected to increase by approximately 5 MBO/d due to
contribution from the Viper Tumbleweed acquisition.
On the other hand, we are actively working all our
options for 2025, including continuing to refine this base case
plan. Should oil prices weaken from current levels, we will make
the correct capital allocation decision and focus on Free Cash Flow
generation and capital efficiency over oil volumes. Our size,
scale, cost structure and inventory quality position us well for
whatever direction the macro decides to take. Our return of capital
program, combined with a strong balance sheet, allows us to
increase stockholder returns when volatility increases.
Operating Costs:Total cash
operating costs decreased slightly quarter over quarter to $11.49
per BOE. Lease operating expense (“LOE”) in the third quarter was
$6.01 per BOE, within our annual guidance range of $5.90 -
$6.40 per BOE. Cash G&A was $0.63 within our annual guidance
range of $0.55 - $0.65 per BOE. We have announced a preliminary
look at run rate pro forma operating expenses and expect to
solidify these numbers when we update the market for 2025 unit cost
guidance. DD&A increased quarter over quarter to $14.12 as a
result of the Endeavor assets being added to our balance sheet.
Financial Performance and Return of
Capital:Diamondback generated $1.2 billion of net cash
provided by operating activities and operating cash flow before
working capital changes of $1.4 billion. Adjusted Free Cash Flow
was $1.0 billion. Unique to this quarter, we adjusted Free Cash
Flow upwards to account for two one-time items: $258 million of
merger and integration expense and $37 million of costs associated
with unwinding a portion of our outstanding swap to floating
interest rate hedges.
We will return ~78% of that Adjusted Free Cash Flow
to stockholders through our base dividend and share repurchases.
Our willingness to go above our base 50% return threshold was
driven by our opportunistic share repurchase program, as we bought
back ~$515 million worth of common stock at an average price of
$176.40 / share in the third quarter. This includes 2 million
shares repurchased for ~$350 million at a price of $175.11 per
share in conjunction with the September secondary offering, where
legacy Endeavor stockholders sold approximately 14.4 million
shares. Diamondback’s participation in the offering is consistent
with our opportunistic repurchase methodology, leaning into our
repurchase program when we view our stock to be attractively valued
at mid-cycle oil pricing.
We have continued to be active repurchasing shares
in the fourth quarter, and quarter to date have bought back over
$185 million worth of shares at an average share price of
approximately $180.13.
As previously announced, our Board recently
increased our share repurchase authorization to $6.0 billion from
$4.0 billion previously. This gives us the flexibility to allocate
capital appropriately and buy back shares in times of market
stress.
Balance Sheet:At quarter-end, we
had approximately $13.1 billion of gross debt and $12.7 billion of
net debt. We ended the quarter with $2.6 billion of liquidity at
Diamondback, as we increased our borrowing base and elected
commitments on our revolving credit facility to $2.5 billion from
$1.6 billion previously.
In September, we also received upgrades from two of
the three rating agencies, as S&P upgraded us to BBB from BBB-
and Fitch moved us to BBB+ from BBB. Moody’s remained at Baa2.
As we have stated previously, our near-term goal is
to lower consolidated net debt below $10 billion, which we expect
to achieve through Free Cash Flow generation and proceeds from
non-core asset sales. Our long-term priority is to maintain a
leverage ratio of approximately 0.5x at mid-cycle oil pricing, or
approximately $6 to $8 billion of net debt. We feel we can achieve
this goal within the next couple of years solely by dedicating 50%
of Free Cash Flow to debt paydown, while reserving the ability to
flex up stockholder returns through opportunistic stock repurchases
at times of excessive market volatility or one-time events such as
secondary equity sell-downs.
Other Business:We continue to
use our equity method investments as valuable tools to improve our
core operating business while also generating impressive returns,
adding significant cash to our balance sheet. As we previously
announced in July, Energy Transfer LP completed its acquisition of
WTG Midstream Holdings LLC (“WTG”). Additionally, during the third
quarter we completed the sale of our 4% interest in the Wink to
Webster Pipeline.
With the sales of WTG and Wink to Webster complete,
we now have three equity method investments remaining in our
portfolio: the EPIC crude pipeline (“EPIC”), the BANGL Y-grade NGL
pipeline and the Deep Blue sustainable water management company. We
recently increased our ownership in EPIC from 10.0% to 27.5% and
are excited about the growth potential of this long-haul crude pipe
as well as our other investments. As such, we do not feel now is
the right time to monetize these assets.
We continue to believe we can add significant value
to our minerals company Viper (NASDAQ: VNOM) and Deep Blue through
the potential drop down of Endeavor overrides and minerals to Viper
and the sale of Endeavor’s extensive water infrastructure to Deep
Blue, potentially accelerating our de-leveraging efforts in early
2025.
We are also excited about what we see as the next
wave of equity method investments for Diamondback: power generation
and potentially data center development. By leveraging our 65,000
surface acres in West Texas, cheap natural gas and abundant supply
of produced water, we believe we can be a premier partner in this
new wave of development. By generating our own in-basin power, we
can solve two long-term issues that have plagued the Permian Basin:
the need for natural gas egress and cheap, reliable electricity. We
look forward to updating our stockholders on our progress on these
initiatives in the coming quarters.
Closing:2024 has been a
transformative year for Diamondback. We are intensely focused on
delivering on the promises we made to the market around synergies
and believe, eight weeks in, we have a significant head start
relative to original expectations.
Thank you for your ongoing support and interest
in Diamondback Energy.
Travis D. SticeChairman of the Board and Chief
Executive Officer
Investor Contact:Adam Lawlis+1
432.221.7467alawlis@diamondbackenergy.com
Forward-Looking Statements:
This letter contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Exchange Act of 1934,
as amended, which involve risks, uncertainties, and assumptions.
All statements, other than statements of historical fact, including
statements regarding future performance; business strategy; future
operations (including drilling plans and capital plans); estimates
and projections of revenues, losses, costs, expenses, returns, cash
flow, and financial position; reserve estimates and its ability to
replace or increase reserves; anticipated benefits or other effects
of strategic transactions (including the recently completed
Endeavor merger and other acquisitions or divestitures); the
expected amount and timing of synergies from the Endeavor merger;
and plans and objectives of management (including plans for future
cash flow from operations and for executing environmental
strategies) are forward-looking statements. When used in this
letter, the words “aim,” “anticipate,” “believe,” “continue,”
“could,” “estimate,” “expect,” “forecast,” “future,” “guidance,”
“intend,” “may,” “model,” “outlook,” “plan,” “positioned,”
“potential,” “predict,” “project,” “seek,” “should,” “target,”
“will,” “would,” and similar expressions (including the negative of
such terms) are intended to identify forward-looking statements,
although not all forward-looking statements contain such
identifying words. Although Diamondback believes that the
expectations and assumptions reflected in its forward-looking
statements are reasonable as and when made, they involve risks and
uncertainties that are difficult to predict and, in many cases,
beyond Diamondback’s control. Accordingly, forward-looking
statements are not guarantees of future performance and actual
outcomes could differ materially from what Diamondback has
expressed in its forward-looking statements.
Factors that could cause the outcomes to differ
materially include (but are not limited to) the following: changes
in supply and demand levels for oil, natural gas, and natural gas
liquids, and the resulting impact on the price for those
commodities; the impact of public health crises, including epidemic
or pandemic diseases and any related company or government policies
or actions; actions taken by the members of OPEC and Russia
affecting the production and pricing of oil, as well as other
domestic and global political, economic, or diplomatic
developments, including any impact of the ongoing war in Ukraine
and the Israel-Hamas war on the global energy markets and
geopolitical stability; instability in the financial markets;
concerns over a potential economic slowdown or recession;
inflationary pressures; higher interest rates and their impact on
the cost of capital; regional supply and demand factors, including
delays, curtailment delays or interruptions of production, or
governmental orders, rules or regulations that impose production
limits; federal and state legislative and regulatory initiatives
relating to hydraulic fracturing, including the effect of existing
and future laws and governmental regulations; physical and
transition risks relating to climate change; those risks described
in Item 1A of Diamondback’s Annual Report on Form 10-K, filed with
the SEC on February 22, 2024, and those risks disclosed in its
subsequent filings on Forms 10-Q and 8-K, which can be obtained
free of charge on the SEC’s website at http://www.sec.gov and
Diamondback’s website at www.diamondbackenergy.com/investors.
In light of these factors, the events
anticipated by Diamondback’s forward-looking statements may not
occur at the time anticipated or at all. Moreover, Diamondback
operates in a very competitive and rapidly changing environment and
new risks emerge from time to time. Diamondback cannot predict all
risks, nor can it assess the impact of all factors on its business
or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those anticipated by
any forward-looking statements it may make. Accordingly, you should
not place undue reliance on any forward-looking statements. All
forward-looking statements speak only as of the date of this letter
or, if earlier, as of the date they were made. Diamondback does not
intend to, and disclaims any obligation to, update or revise any
forward-looking statements unless required by applicable law.
Non-GAAP Financial Measures
This letter includes financial information not
prepared in conformity with generally accepted accounting
principles (GAAP), including free cash flow. The non-GAAP
information should be considered by the reader in addition to, but
not instead of, financial information prepared in accordance with
GAAP. A reconciliation of the differences between these non-GAAP
financial measures and the most directly comparable GAAP financial
measures can be found in Diamondback's quarterly results posted on
Diamondback's website at www.diamondbackenergy.com/investors/.
Furthermore, this letter includes or references certain
forward-looking, non-GAAP financial measures. Because Diamondback
provides these measures on a forward-looking basis, it cannot
reliably or reasonably predict certain of the necessary components
of the most directly comparable forward-looking GAAP financial
measures, such as future impairments and future changes in working
capital. Accordingly, Diamondback is unable to present a
quantitative reconciliation of such forward-looking, non-GAAP
financial measures to the respective most directly comparable
forward-looking GAAP financial measures. Diamondback believes that
these forward-looking, non-GAAP measures may be a useful tool for
the investment community in comparing Diamondback's forecasted
financial performance to the forecasted financial performance of
other companies in the industry.
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