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Earnings call: Diamondback Energy boosts guidance, focuses on efficiency

Published 2024-08-07, 10:38 a/m
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FANG
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In its second quarter 2024 earnings call, Diamondback Energy (NASDAQ: NASDAQ:FANG) presented a positive outlook, emphasizing operational efficiencies and financial flexibility. The company announced increased production guidance and a raised capital expenditure budget, underscoring its confidence in maintaining capital efficiency and generating free cash flow, even in weaker markets.

Diamondback Energy also detailed its strategy to manage gas price volatility in the Permian Basin and its plans to reduce net debt through asset sales and organic cash flow. The acquisition of Endeavor assets is expected to further enhance the company's operational capacity and shareholder returns.

Key Takeaways

  • Diamondback Energy has increased its production guidance and capital expenditure budget.
  • The company highlighted capital efficiency and the ability to maintain this post-Endeavor acquisition.
  • Plans to adjust share buybacks and variable dividends based on oil prices were emphasized.
  • Diamondback is focused on reducing net debt through asset sales and free cash flow.
  • Management discussed handling gas price volatility in the Permian Basin.
  • Efficiency gains from drilling and completion process improvements were highlighted.
  • The company is preparing for a major acquisition, aiming to increase flexibility for 2025.

Company Outlook

  • The company raised its production guidance and boosted its capital expenditure budget.
  • Diamondback Energy expects Q3 to be the low point for activity and Q4 to be the low point for capital expenditures.
  • The company is considering merging its water business, Deep Blue, with Endeavor's water system if the price is favorable for shareholders.

Bearish Highlights

  • The company acknowledges the need for infrastructure investment and cost-benefit analysis before implementing trimul-frac technology.

Bullish Highlights

  • Diamondback Energy is prioritizing free cash flow generation over growth and is confident in its efficiency gains.
  • The company is satisfied with the progress of Endeavor and the performance of the Wolfcamp D zone.

Misses

  • There were no specific misses mentioned in the summary provided.

Q&A Highlights

  • The company discussed the potential for a merger between Deep Blue and Endeavor's water system, adding that any deal must be favorable for Diamondback's shareholders.

Diamondback Energy's focus on operational efficiencies was evident throughout the call, with executives detailing improvements in drilling and completion processes. The company's ability to do more with fewer rigs and crews was a recurring theme, and they expressed confidence in sustaining these efficiencies, which are now factored into their pro forma guide for Endeavor for 2025. The strategic management of gas price volatility through pipeline commitments and the creation of local markets was also discussed as a means to stabilize revenue.

The Diamondback team is working closely with Endeavor post-merger to optimize operations. They highlighted their focus on cost gains over well performance gains, which is expected to bolster free cash flow. The company's water business, Deep Blue, is also experiencing growth, with potential for expansion through mergers and acquisitions, which would further reduce costs and improve connectivity in the Permian Basin.

Diamondback Energy's second quarter 2024 earnings call painted a picture of a company adept at navigating market challenges while positioning itself for sustainable growth and shareholder value enhancement. The company's strategic initiatives and operational efficiencies are set to underpin its performance in the coming quarters.

InvestingPro Insights

Diamondback Energy's second quarter 2024 earnings call highlighted several strategic initiatives aimed at enhancing operational efficiency and shareholder returns. The company's focus on reducing net debt and managing gas price volatility is particularly noteworthy. InvestingPro provides additional insights that could further inform investors about Diamondback Energy's financial health and market performance.

InvestingPro Data indicates that Diamondback Energy has a market capitalization of $33.04 billion, reflecting the size and scale of the company within the energy sector. The company's P/E ratio, which stands at 9.78, suggests that its stock is trading at a reasonable valuation relative to its earnings. This is supported by the adjusted P/E ratio for the last twelve months as of Q2 2024, which is slightly higher at 9.95. The company's revenue growth is also impressive, with a 13.2% increase over the last twelve months as of Q2 2024, signaling strong operational performance.

Among the InvestingPro Tips, two are particularly relevant in the context of Diamondback Energy's current position. First, the company has been profitable over the last twelve months, which aligns with the positive outlook presented in the earnings call. This profitability is crucial for investors looking for stable returns. Second, the company's stock has experienced a significant price uptick over the last six months, with a 28.64% return, indicating robust investor confidence and market momentum.

For investors seeking more comprehensive analysis, InvestingPro offers additional tips on Diamondback Energy. There are currently 10 more InvestingPro Tips available at https://www.investing.com/pro/FANG, which provide deeper insights into the company's financial metrics, stock performance, and analyst predictions, helping investors make more informed decisions.

Full transcript - Diamondback Energy Inc (FANG) Q2 2024:

Operator: Good day and thank you for standing by. Welcome to the Diamondback Energy Second 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 your first speaker today, Adam Lawlis, VP of Investor Relations. Please go ahead.

Adam Lawlis: Thank you, Steven. Good morning, and welcome to Diamondback's second 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: Thank you, Adam, and I appreciate everyone joining 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 contained in the text. Operator, would you please open the line for questions?

Operator: Yes, thank you. [Operator Instructions] Our first question comes from the line of Neal Dingmann with Truist. Your line is now open.

Neal Dingmann: Good morning, Travis and nice results. Travis, my first question is on sort of the leading capital efficiencies you all continue to highlight. Specifically, you talked about the latest announcement and I think you guys talked about dropping to 10 from 12 rigs and I think what that's even versus 14 a few months ago. And I'm just wondering, are the drilling efficiencies so good that you're able to maintain the pace from nearly 30% rigs than just a few months ago? And just wondering how you anticipate or if you anticipate the same type of efficiency as once you take over the Endeavor assets?

Travis Stice: Sure. Good question, Neal. The first half of the year was really typified by us doing more with less. And you gave some numbers there, but just to, just to repeat some of those in January of this year, we estimated that we could get 24 wells per rig per year and now we're up to 26 wells per year for the rest of the year. And you see a similar efficiency gain on the completions, where we previously signaled 80 completions per year per crew, and now we're up to over 100 completions per crew per year. Those are simul-frac crews. And look, as we look into the future, one of the things that I get excited about is that these efficiencies are things that we don't get back. And so as we incorporate after close the new assets from Endeavor, I fully anticipate our operations organization combined with Endeavor's operations organization will be able to continue these results. And what's significant about that is when we talked to the market on February 12 announcing this deal, one of the biggest, the biggest synergy that we talked about was being able to apply Diamondback's current D&C cost on a larger asset. And I'm pleased to say today we're significantly below where we were in February. So that just accrues the benefit to our shareholders and, and really supercharges the delivery of the synergies that we were talking about. So, yes Neal, I'm very confident that we'll be able to continue this leading edge capital efficiency on a larger asset base.

Neal Dingmann: Great to hear. Then I want to ask just quickly, on shareholder return plans, maybe just on sort of broad strokes, specifically, how would your plan vary? I mean, obviously, oil prices are jumping around. It could be anywhere from $90 to $70 environment. I'm just wondering, given your market sort of leading costs that we see on Slide 9, I'm just wondering, depending on where oil prices go, is that just a matter of having more free cash for buybacks and variable dividends or would there be any other changes we see in a high oil price environment versus a lower price environment?

Travis Stice: Yes Neal, I mean I think the key point here is we've always had a very flexible return of capital program. Since the very beginning, when we put this in place in 2021, we've said we'd like to be able to flex between buying back shares and paying a variable dividends and we take that capital allocation decision very, very seriously. So we're set up in a way where if you have periods of weakness like we've seen over the last week or two, that's when the buyback kicks in. And if it continues to be weak, we'll continue to buy back more shares. That's the benefit of having a low break even on your capital program, low break even on your base dividend, and continuing to generate free cash flow down to much lower numbers than peers or than what the market is used to. So I think we're excited. If things do stay weak, we'll flex that buyback and be aggressive there. And if things improve and we have a good quarter in the 80s or 90s on crude then and we'll pay a big variable dividend. But I think that flexibility has been very, very advantageous to our shareholders over the last three years.

Neal Dingmann: How low has that breakeven gotten down to?

Travis Stice: Listen, we were very focused on looking at our base dividend breakeven at $40 crude, so mid-cycle capital costs $40 crude, we could keep production flat. I don't think in a $40 crude scenario we would do that. I think kind of lessons learned from what we've seen through the cycles over the years is that it's okay to let production decline if we were in a very, very weak commodity price scenario. But in that scenario, we should be allocating 100% of our free cash flow or even more to buying back shares, because in that situation, your share price is going to be likely to be very weak. So we're really trying to move the capital allocation decision from the field and the assets to what do you do with your free cash flow and that's I think is a good place to be.

Neal Dingmann: Thank you so much.

Operator: Thank you. Our next question comes from the line of Neil Mehta of Goldman Sachs (NYSE:GS). Your line is now open.

Neil Mehta: Yes. Good morning and congrats again on very strong execution here. You've talked about getting that net debt level lower post transaction case. Kaes and Travis, how do you see yourself doing that? Is it through asset sales or through organic free cash flow generation? Just your perspective on the asset sale market recognizing you did some small deals here in the quarter?

Kaes Van't Hof: Yes, Neil. I mean, I think when we announced the deal, we were very conscious of the cash stock mix that we put in place for the Endeavor merger. I don't think we put it -- we didn't put so much cash in the deal that we had to be a seller of assets. But what you've seen us do is, sell multiple things now over the last couple quarters that start that up. Right? We sold a little bit of our Viper ownership to take some risk off the table and get some cash in the door. We sold our interest in WTG West Texas Gas to Energy Transfer (NYSE:ET). That will get some cash in the door. And then little things like our little mono [ph] sale that we did last quarter, all that kind of almost adds up to $1 billion, which on top of free cash flow generation between January 1 and today is going to reduce the cash outflow burden for the Endeavor deal. I think we planned on looking at the deal as a delevering process through free cash flow, but the asset sales are a kicker that accelerates that. And I think we're highly focused on getting to $10 billion as quickly as possible. And then I think things can slow down from there. But I don't think you'll see us be a forced seller of assets post deal close. And I think we're going to be very, very stingy on keeping operated properties in the Permian because they're kind of worth their weight in gold right now.

Neil Mehta: Yes. Makes a ton of sense. And then just your perspective on managing gas price volatility, first of all, what are your latest thoughts on Matterhorn and when that comes in? And then secondly, how do you mitigate some of the risks around gas prices so you can really earn the margin that you deserve on the oil side of the equation?

Kaes Van't Hof: Yes, that's been a big topic lately and obviously we need to start making more money on our gas in the Permian and Diamondback specifically. If you look back to the history of Diamondback, we've grown through acquisition. A lot of the deals that we've done have come with marketing contracts where we don't control the molecule much further than the wellhead. And so what we've been doing over the last, I'll call it five years, is that as contracts roll off, we've been taking advantage of that and getting taken kind of rights on that molecule. We started with our commitment to Whistler and have grown that. That combined with Matterhorn will have a little bit of gas on both of those. And then I think you saw our press release last week that we're going to be a participant in the next pipeline from those guys, the Blackcomb Pipeline. And I just think that fits the strategy of let's take control of our molecules and see what we can do with them and I don't think that stops at pipeline commitments. We're really looking at power needs in the basin. Things like our Verde gas to gasoline plant and trying to find ways to create a local market here in the Permian, because it's a shame that we continue to sell gas near zero or below zero. So it's on us to continue to improve that portfolio and I think with size and scale and time we'll be able to do that.

Neil Mehta: Thanks, Kaes.

Kaes Van't Hof: Thanks, Neil.

Operator: Thank you. Our next question comes from the line of Arun Jayaram of JPMorgan (NYSE:JPM) Securities. Your line is now open.

Arun Jayaram: Yes. My first question is just on the efficiency gains you highlighted in the letter. It looks like you're pushing you're drilling cycle times to 26 wells per rig and on the completion side, pushing 100 wells per frac fleet, simulfrac fleet. I was wondering, Kaes and Travis, if you could describe what the drivers of that those efficiency gains are and perhaps help us think about what's underwritten in the pro forma $1 billion to $4.4 billion guide for Endeavor for calendar 2025?

Kaes Van't Hof: Sure. On the rig side, we specifically talked about bit and bottom hole assembly improvements and again, that's not necessarily the adoption of some new emerging technology. I think it's really another example of what our guys do really, really good, which is a laser-like focus on every decision that's made. They measure almost every attribute of drilling the well and they seek for improvement and they compete against one well versus the other and we pay bonuses to the crews out there when they execute in a stellar fashion. So it's not something, again, that's easily repeatable and it's not a shelf item that someone can go take, but it's a culture of execution that's always been part of this business. On the completion side, there's been some design changes where we've increased rate, but we've also continued to try to optimize the exact way that we mobilize equipment. We've done some changes on some pipe down hole that allows a greater rate with less friction loss. So, again, it's nothing that's a marquee item, but it's just intense focus on doing what it is that we do, which is really, really execute well when we convert rock into cash flow.

Danny Wesson: Yes, listen Arun, I mean all these things certainly have accrued to us since we announced the Endeavor merger in February. I think, as Travis mentioned earlier on the call, these are permanent items that aren't going to go away from service cost inflation or deflation. So as we work through the pro forma model, we're probably thinking that we're going to run closer to 18 to 20 rigs next year, versus 22 to 24 a while back, and closer to four to five simul-frac crews versus five plus. So we're certainly modeling these things accruing for the good guys, and it only give us a head start on the promises we made on 2025 numbers.

Arun Jayaram: Great. My followup is just on the raised production guide. You raised your oil guide at the high end by close to 1.5%, just under that and then you took up CapEx. Kaes, one thing that wasn't quite intuitive is that you're completing 7% more feet on a net basis. And so one of the questions that's come in is, would have thought maybe the oil increase would have been a little bit higher based on that level of completed footage. But maybe you could help reconcile that for us this morning.

Kaes Van't Hof: Yes, I mean, I don't think wells are completed like they look to be completed in the spreadsheet. Right? I mean, in 22 well pads, you move one pad from 2023 into 2024 and you got 22 extra wells. So we kind of moved almost, I think, 30 wells from 2023 into 2024. So our well count is a little bit higher than maybe a true level loaded run rate would be. But I think we're also just preparing room for a major acquisition to close. And I think we're doing everything we can on our side to be prepared to hit the ground running and hit numbers right away and do exactly what you would expect us to do. So I think more importantly, it's the more drilled lateral footage for less CapEx that gives us a lot of flexibility in the second half of the year and carry that momentum into 2025.

Arun Jayaram: Makes total sense. Thanks, Kaes and Travis.

Kaes Van't Hof: You bet. Thanks, Arun.

Travis Stice: Thanks, Arun.

Operator: Thank you. Our next question comes from the line of David Deckelbaum of TD (TSX:TD) Cowen. Your line is now open.

David Deckelbaum: Hey, Travis, Kaes, Danny and team, thanks for taking my questions. I wanted to followup on some of the earlier questions. You've obviously seen a lot of field efficiencies, particularly on the drilling side. You've lowered the Midland footage costs down, I guess 20 some dollars to midpoint. But I'm curious, like as you approach this 3Q to potentially 3Q or 4Q Endeavor closing, are there any parts of the efficiencies that you're seeing that you don't think that you could accomplish with as a synergy here? Because it would seem like that $300 million or so of synergies that you apportioned to just CapEx savings is increasing by the day.

Danny Wesson: Well, that's why I highlighted, David, that where we are today is much better in performance and execution than where we were just in February when we talked to you about this deal. These are cultural elements, this attention to detail, this focus, this laser-like attention to execution. And we look forward to bringing on our new friends from Endeavor. And look, David, from what we hear from them anecdotally, they're seeing similar efficiency gains as well, too. So when we put the two cultures together, I expect it to be an add or not a detractor when we actually put the two companies together here before too much longer.

David Deckelbaum: I appreciate that and then just a followup to that. You've also seen the benefits of longer lateral progression, I guess, relative to your original plan this year. I know one of the things you highlighted with the Endeavor deal was the potential increase of lateral lengths to 15,000 further [ph] and beyond given 100,000 plus number of acres, how do you see the progression, I guess, into next year and then 26 in terms of lateral lengths relative to where we're at today or is this something that's a longer term endeavor?

Travis Stice: Well, first we're going to have to get the two assets put together, which we obviously can't do that currently. I'll let Kaes answer the synergy question specifically, but I wanted to highlight something that we talked about in our earnings release and our stockholder letter was that we drilled a 20,000 foot lateral well in under eight days, under nine days, seven, eight days. And longer is not going to be a problem. It's just we need to make sure we have the least geometry to be able to drill even longer wells.

Kaes Van't Hof: Yes, I mean, I think, David, on the plan we can't put anything together until post close, but I think the priority for the teams right now is what does the plan look like end of 2024 and into 2025 post close and then what are the projects look like starting to back out to 2025 and into 2026, start to extend laterals. I mean, I think holding the level that we have this year, almost 12,000 feet on average for 300 wells is a pretty stellar number that we should probably look to maintain. I think going much further than that for a full program of 500 plus wells a year is going to be tough to do. But I don't think the guys are scared of drilling to 20,000 feet and if we have those opportunities, we'll take advantage of them.

David Deckelbaum: I appreciate the color, guys.

Kaes Van't Hof: Thanks, David.

Operator: Thank you. Our next question comes from the line of John Freeman of Raymond James. Your line is now open.

John Freeman: Good morning, guys. First topic I just wanted to followup on is on the return of capital framework. When you look at Slide 6 and just sort of think about, again the efficiency gains that are really impressive, and is over time as that sort of drives that maintenance CapEx or reinvestment rate lower, should we think of maybe the first kind of evolution of that return of capital framework just being that creates like a bigger, I guess for lack of a better word, wedge that can go to that base dividend? Is that more likely kind of the way it would evolve as opposed to maybe increasing that 50% plus that's going to shareholders overall?

Travis Stice: Yes John, I mean, I think those are two separate decisions, but I think you hit the nail on the head on as efficiencies accrue and our decline rate shallows over time and your balance sheet shrinks over time, that should create room there between your breakeven and your $40 dividend breakeven. So I think that's how we're still going to look at it. I think we see dollar $40 on the E&P side as a very well protected number. We're still going to buy puts at right now we're buying them at $55, $60 crude, but eventually probably reduce the value of our put buying down to closer to $50 just to protect the extreme downside scenario. And I think the rest of the free cash, we did move back from 75% of free cash going to equity down to $50. But that doesn't mean that number is not going to be higher in the future in times of stress. I think in times of stress or significant stress, the number should be a lot higher than 50% of free cash going to equity. And when things are going well, the numbers should be closer to 50, and we'll continue to build a fortress balance sheet. I've been very pleased with the response from our large shareholders on cutting back to 50% of free cash going to equity, because they want us to have a more fortress balance sheet than we even thought going into the deal. So I think that's been a pleasant relief and allows us to build a lot more cash and be ready for the inevitable down cycle in this sector.

Kaes Van't Hof: And John, I think a good way to demonstrate or a good way to visualize the Board's commitment to this sustainable and growing dividend is on Slide 7. Go all the way back to 2018, when we initiated the dividend and you can see on that slide the growth rate. And on the bottom half of that slide, you can see that our commitment has translated into almost $8 billion of capital returned to our shareholders. So it is a meaningful lever that we have as a company and the Board's commitment to continue the sustainable and growing dividend.

John Freeman: That's great. And then just my followup when we take these efficiency gains that have allowed you all to basically pump the brakes on rigs and frac crews in the second half of the year without missing a beat on the original production plan, is there any environment where you all would choose to basically just sort of plow ahead at the run rate you all were on in the first half of the year and just sort of allow production growth to accelerate? Is there any sort of an environment where you would foresee that ever kind of occurring?

Kaes Van't Hof: Yes, just where we sit right now, John, that's not a logical scenario that we see playing out in the next six months, three, four quarters.

Travis Stice: Yes, I mean, historically we've tried post-COVID favor free cash flow generation over growth, and I think you've seen that trend continue here with what we're doing in 2024.

John Freeman: Thanks, guys.

Operator: Thank you. Our next question comes from the line of Scott Hanold of RBC (TSX:RY) Capital Markets. Your line is now open.

Scott Hanold: Yes, thank you. There's been a lot of talk of good operational efficiencies. Could you maybe pivot in and talk about what you're seeing in terms of, well performance of productivity over the last year. Is it pretty much status quo on apples to apples basis or are you seeing some gains there as well?

Travis Stice:

Mill. We're: So I think we've had a few really, really good years of well performance. We're always trying to keep pushing the performance side, but I think this year has been a year of cost gains versus well performance gains, but that doesn't mean there's not significant inventory expansion going on across our portfolio.

Energen: So I think we've had a few really, really good years of well performance. We're always trying to keep pushing the performance side, but I think this year has been a year of cost gains versus well performance gains, but that doesn't mean there's not significant inventory expansion going on across our portfolio.

Scott Hanold: Thanks for that. And then my follow up question is, you kind of highlighted obviously all the drilling efficiencies again and I think you made a comment that from what you understand, the Endeavor folks are seeing some similar stuff. But can you give us some context like based on what you can see from your understanding at this point? Where is Endeavor relative to where Diamondback is? So just trying to get a sense of should we expect once the merged company comes together, there's still some work to do to get it back, to get it all toward where Diamondback is right now, or is it going to be pretty much just hitting the ground running?

Travis Stice: Well, it's going to be hard work for sure. It's our job to do that hard work and make it look easy for you guys. There's some decisions that we'll make pretty soon after we combine the two companies. One would be the use of clear drilling fluids and the second would be to put more of the frac operations onto simul-frac. So those are the two biggest levers that have the quickest change. But look, we're also going to, like we've always done, check our egos at the door and make sure we seek to understand what the Endeavor team is already doing. And historically that's generated better results when we seek first to understand and then pick the best path forward with the combined inputs from legacy Diamondback, and the new asset, new management from Endeavor. So we're going to make it look easy, but there's going to be, it's hard work behind the scenes, but I'm really confident that both of the two leadership teams are going to be able to pull this off and make it look good.

Kaes Van't Hof: Yes, I mean, I think from a numbers perspective, the way we're thinking about it is the pro forma business will be running basically kind of 21, 22 rigs off the start, and then by 2025, we'll probably be averaging closer to 18 to 19 combined.

Scott Hanold: It's good color. Thank you.

Operator: Thank you. Our next question comes from the line of Bob Brackett of Bernstein Research. Your line is now open.

Bob Brackett: Good morning. Following up on those intriguing operational efficiencies, you mentioned the average of 26 wells per rig year, 100 wells per crew. What's the pace setting, rig or crew look like? Is it significantly ahead of that or is there a big opportunity to grab?

Danny Wesson: Hey Bob, it's Danny. Yes, I mean I think the crews and the rigs are pretty well all within a margin of error of each other in their performance. We've been really pretty active on fleet management over the past few years and continue to optimize our fleet where we see dwindling performance. And the best thing about our operation is the collaboration we have between the teams on sharing best practices on best-in-class rigs. So when we look at the rigs across the board there's always one pace setting rig, but that tends to move around as we share best practices and the other rigs catch up and then another one will pass that rig. So not one unique standout that's driving that number. It's pretty well across the board at that same level of efficiency.

Travis Stice: We do have a pretty healthy competition between internally and then we also every quarter we look externally and there's a pretty healthy competition. And that's why in our Stockholders Letter, I talked about in this quarter in the Midland Basin the drilling team got over 20,000 feet with a single bit run and that represents a record in the Midland Basin. So I'm sure that record will fall, but it's just part of the culture of evaluate internally and externally and compete to win and that's what our organization does.

Bob Brackett: Yes, very clear. Quick follow up along that line. How do we think about the relative price between pulling on that ROP lever versus reducing nonproductive time or even reducing mob/de-mob time? Are they equal sized prices or is one the more obvious of the three?

Travis Stice: I think it kind of moves but you're getting to the point in time where, there's the little things we're focusing on now or the efficiency drivers. We talked in the last call about the guys focusing on pipe makeup speeds because that was where they saw the most NPT [ph] time on a well was just how long it takes them to break and make a pipe. And we're constantly looking at where that dead space is in these jobs and trying to attack it. And we don't just attack one dead space, we attack them all at the same time. And I think, you know, NPT [ph] time has been a focus of coming out of the really aggressive activity levels we saw in 2023. And we've really done a good job of reducing NPT time, but there are certainly always things we can focus on there to continue to drive uptime and drive constant performance and not waiting on the sidelines for something to be fixed.

Kaes Van't Hof: And when we look at those details, we do it every quarter for sure. And what Danny is talking about requires a great deal of collaboration across all the teams. And even though I emphasize the competition aspect of what it is that we do, the collaborative aspect is really where this sits home, because when one team finds a solution, it's quickly shared with all the other teams internally. And in a similar fashion, if we find something externally, we would quickly adopt that as well, too.

Bob Brackett: Very clear, thanks.

Operator: Thank you. Our next question comes from the line of Roger Read of Wells Fargo (NYSE:WFC) Securities. Your line is now open.

Roger Read: Yes. Thank you, good morning.

Travis Stice: Good morning, Roger.

Roger Read: Congrats on another solid quarter, guys. Just a couple of questions kind of operating focused here. One, if we look at the production beat here in the second quarter, you got it on NGL and gas. We were just sort of curious. We kind of figured maybe you stripped more liquids out of the gas, but then you would have lower gas production. So maybe a little bit of insights into kind of what's lifting the NGL side and keeping the gas production up?

Travis Stice: Yes, I think on the NGL side, trying to put as much ethane as you can in the NGLs to get them out of the basin, we even probably throughout the second quarter, we saw obviously a lot of gas price weakness. So we did take a couple of our highest GOR wells down for a month or two to ease that pressure. So I think even in the face of that, the gas curve continues to outperform expectations. But we kind of even curtailed a little bit of oil to make sure our gas production was a little bit lower in the quarter, which we kind of have continued in the third. So we just have a lot of gas production out of this basin, and that's kind of why we have such a focus now on trying to generate more value for the gas that we're producing, whether that be in basin or out of basin.

Danny Wesson: Yes. And just to add to that, the focus on around environmental performance has driven a lot of decisions to not burn gas in the field for energy consumption and instead convert that energy demand to electrical demand. And so you're seeing a lot of gas that would have otherwise been burnt in the field to run our operation being put down the pipeline. And then on top of that, the focus on reducing, flaring those are all things that send gas to sales and get reported as a production number. That's driving some of that increase you're seeing across the basin.

Roger Read: Okay, that's helpful. Thanks. And then just coming back to the drilling efficiencies and the completion efficiencies going from 24 to 26 wells on our completions, can you give us an idea of maybe where the upper 10% or upper quartile is? In other words, I'm trying to think of if 24 went to 26 is the best 30, and that's where you can ultimately go or it's a much tighter dispersion so it's 26 the average best 28, maybe worse, is 24. I'm just trying to get a feel for the further improvements kind of the same idea on the completion side.

Danny Wesson: I think, it's a good question. It just depends. But we certainly have some rigs that are drilling at a pace of 30 plus wells a year. Just depends on which zones and lateral links and all that kind of stuff. But we're really focusing on pad cycle times and how to reduce the full pad cycle time. These are large pads and give driving flexibility in the plan by reducing that cycle time on the pads is really what's important to us. And so if we have one rig that's outperforming the others in one zone, we want to look at that zone, what that rig is doing and kind of share it with the other rigs so that we can accrue that benefit to all the pad development across our portfolio.

Roger Read: Got you. And maybe if I could just clarify on that. Three mile laterals versus something less than that as a percentage of total.

Danny Wesson: I'm sorry, just to rephrase your question, are you asking what's their percentage of three mile laterals to?

Roger Read: Yes, you said, it depends on what you're drilling and which zones. I was just curious, is there, obviously, it would take not as long to drill a lesser length lateral, but I was just – is there a percentage that you offer of the much longer lateral wells?

Danny Wesson: I think our 15,000 footers this year were like at 25%-ish of our development.

Travis Stice: Yes, listen, the rig per year number is an output of getting 300 wells per year drilled. Right? It's really about net lateral footage or gross lateral footage drilled per year per rig. I think Danny is talking about 30 wells per rig. Well, I think if we're drilling more Wolfcamp D with a particular rig, that rig is going to be a little slower. But I think the general standard Wolfberry development is pushing that upper, upper echelon, but we really see the rig count as the output of what we need to do from a drilling perspective on hitting production guidance.

Roger Read: All right, thanks for indulging me the extra question, guys.

Travis Stice: No problem.

Danny Wesson: Thanks, Roger.

Operator: Thank you. Our next question comes from the line of Geoff Jay of Daniel Energy Partners. Your line is now open.

Geoff Jay: Hey, guys, just one quick one from me. I'm just kind of curious how you think about the potential for trimul-frac in your portfolio, kind of especially after Endeavor closes.

Travis Stice: Yes, I mean, we've looked a lot at trimul-frac, and the struggle for us is the infrastructure spend we'd have to implement to get to trimul-frac across our portfolio. And does that additional infrastructure spend, do we recognize the return on that from the efficiency gains from moving from simul-frac to trimul-frac? We think the cost benefit somewhere in the move from simul-frac to trimul-frac, certainly something we would pursue in areas where we have the infrastructure in place to do so. And if we have available enough development in that area, in those areas to dedicate a trimul-frac crew, you would see us move that direction very quickly.

Geoff Jay: Excellent, thank you.

Operator: Thank you. Our next question comes from the line of Charles Meade of Johnson Rice. Your line is now open.

Charles Meade: Good morning. Travis, Kaes and the rest of the Diamondback team there.

Travis Stice: Hi, Charles.

Charles Meade: Travis, yes thank you. I want to -- I think you really tantalized a lot of people with that metric. I really appreciated it, that 24 wells a year, 26 wells a year. But I thought Kaes' comment was really, really interesting in that I've been focused on that. I think other callers have been, but really, that's the output rather than the. It's kind of a manifestation or an indicator rather than a driver, if I understand case correctly and so if that's the right way of looking at it. When I look at the other pieces of your guidance, you've actually increased the lateral length a little bit, and you've increased the well count a little bit. And so is the delta on the drilling side actually a little bit bigger the delta, the improvement you've seen since your initial plan than that 24 over or 26 over 24 would indicate?

Kaes Van't Hof: Yes. I mean, I think so, Charles. I think the point I was trying to make is that as a public company that has public guidance and quarterly guidance, we really work from guidance backwards, and we make what looks like an easy output on the surface is very difficult below the surface. There's a lot going on in terms of the teams being able to move things around and add rigs here and drop rigs there and the plan isn't always the plan. We got to be nimble and work together as a group. And I think that harmony we have across all of our functions is what makes us pretty unique, particularly also given that we're in one basin. So I would say the drilling improvements this year have been more surprising than the completion improvements because we always kind of thought that drilling was already near the asymptotic curve of what they've been able to do. Not to knock the frac guys, but the drilling improvements probably supersede the frac improvements here today.

Charles Meade: Thank you for those comments. Kaes, go ahead. That's all from me.

Kaes Van't Hof: That's a little test for the FRAC guys to step it up next quarter.

Charles Meade: Yes. Glad to put the ball in the tee for you there. Have a great day.

Kaes Van't Hof: Thanks, Charles.

Travis Stice: Thanks, Charles.

Operator: Thank you. Our next question comes from the line of Paul Cheng of Scotiabank (TSX:BNS). Your line is now open.

Paul Cheng: Thank you. Good morning, guys.

Travis Stice: Good morning, Paul.

Kaes Van't Hof: Good morning, Paul.

Paul Cheng: Travis and Kaes, that we appreciate that about great improvement in your result. But just curious that, I mean, over the next two or three years, if we're looking at the productivity improvement in drilling and completion, is that one or two areas you see as the biggest potential for you and will you be able to also quantify on that? And the second question is that if we look at oil pro forma over the next couple of years, I mean, in order to maintain a flat production post-Endeavor, I mean, how many wells that we need, is it 500, 520, 550 any kind of rough idea? And also that do you have what Endeavor gas pricing right now, are they all in the Waha basin or that they're also spread? Thank you.

Travis Stice: Well, I'll talk specifically about your look ahead for two to three years and I think if you put it in one bucket, it would be in the down-hole sensing technology that allows the bit to stay in the best rock, the highest percentage of time. And then on the completion side, understanding using downhill sensing, where you can place the most frac energy in the most efficient way that creates the greatest stimulated rock volume. And these sensing technologies are evolving very, very rapidly. I think before too long we'll be able to actually sense in front of the drill bit and drill towards a target rather than drilling past it and making adjustments. And that sounds like a small change, but I think the sensing technology that we're right on the cusp of having some of those problems solved is going to be a real game changer for our industry.

Kaes Van't Hof: Paul, on your well count question, I think kind of low 500 is a good place to start and as low 500 dwells per year, but as you know, the land efficiencies accrue to us and laterals extend and the decline rate shallows a bit, you probably start to get below that 500 number should production stay flat. Now, if things are a market that's conducive to growth, that probably changes, but on a flat basis, it's more capital efficiency, less CapEx, less wells to hit the same numbers longer term.

Paul Cheng: Great. And Kaes, do you have an idea that what Endeavor gas exposure to Waha?

Kaes Van't Hof: Yes. So listen, we've seen what exposure Endeavor has. I do think there's going to be a lot of opportunities for both of us combined to get gas outside of the basin. We got to close the deal first and then we can start making decisions. But I think both companies are aligned that more gas needs to get out of the basin and less exposure to Waha.

Paul Cheng: Okay, thank you.

Kaes Van't Hof: Thanks, Paul.

Operator: Thank you. Our next question comes from the line of Leo Mariani of ROTH. Your line is now open.

Leo Mariani: I wanted to followup on some of the comments you made around the share buyback. Obviously you guys had leaned more on the variable dividend in the past quarter, but you certainly kind of indicated from some of your comments here on the call that given the recent pullback in the stock and the sector, the buyback was looking more palatable. I'm just trying to get a sense if you guys are able to start executing on the buyback here post quarter. Are there some restrictions in place with respect to the Endeavor deal that would prevent some of that over the next couple of months until the deal closes?

Travis Stice: Yes, Leo, I don't think there's any more Endeavor specific restrictions. Obviously, we're now reporting earnings today, so we're in a blackout day. But I think these periods of weakness allow us to step in and we pre wire the buyback for every blackout period. And I think if we continue to see weakness here, we'll get opportunities. We just have a little more flexibility if the windows open versus closed.

Leo Mariani: Okay, I appreciate that. And then just in your comments here and your guidance for the rest of the year, it looks like third quarter CapEx is coming down some versus 2Q. It certainly sounds like activity is falling a little bit in the second half of the year and some of the OFS cost reductions are kind of rolling through as well. I mean, do you see standalone without Endeavor, CapEx continuing to kind of drop a little bit and activity kind of dropping a little bit in 4Q as well. I'm just trying to get a sense that that's kind of the low point for spend and activity on a standalone basis here.

Kaes Van't Hof: Yes, I think it'll be the low point for spend because we're a cash CapEx reporter. I think the low point for activity will be this quarter. So I think we'll probably bring back our fourth simul-frac crew end of this quarter into the beginning of next quarter. That's all on a standalone basis and probably bring back a rig or two, but not much more than that, so I would say Q3 is the low for activity, Q4 is the low for CapEx.

Leo Mariani: Okay, thanks.

Operator: All right, thank you. Our next question comes from the line of Kalei Akamine of Bank of America (NYSE:BAC). Your line is now open.

Kalei Akamine: Hey, good morning, guys. Thanks for taking my questions. A lot of focus on field efficiency, so I'll leave that alone. I want to ask you guys about Deep Blue. The team over there continues to be very acquisitive. It looks like that business has grown about maybe 20% plus or minus over the past year in terms of capacity. Can you talk a little bit about the growth outlook for that business potential Endeavor, drop down included, and maybe help us understand what the scale of the business could be once it matures?

Travis Stice: Yes. Listen, I think we're very pleased with what the Deep Blue team has done in a short period of time. It's kind of exactly why we did the deal with them. Right? They've got a lot of third party wins, wins that Diamondback wouldn't get if Diamondback was trying to gather someone else's water. And on top of that, a little bit of M&A to boost capacity and reduce costs there. So we're really excited with what they're doing. Endeavor has a very impressive water system that could be a candidate to merge with Deep Blue, but I think that the price has got to be right for Diamondback shareholders, and that's what we're focused on first. But, yes, listen, they're doing a really good job building a sizable business on the water side. And with the amount of water that it takes to run multiple simul-frac crews at the same time, you're moving hundreds of thousands of barrels of water a day at low cost. So very, very impressed with what they're doing. I don't think they're ready to monetize yet. It's a longer term investment for us and we look forward to continuing to support that business.

Kalei Akamine: Okay. From numbers, given the size of Endeavor, does it potentially double the size of that business?

Travis Stice: It's probably a little less than double, probably about two-thirds the size of the business today. But it adds a lot of capacity and really moves into that Western Martin or Eastern Martin County area and connects the system nicely.

Kalei Akamine: Thanks for that. And then maybe following up on your comments on Wolf D and the Upper Sprayberry, can you talk a little bit about that program for this year? Talk about how you're layering those zones into your development plans, whether they're co-developed with other zones, for example, and if there's any learning to take away from this 2024 program.

Travis Stice: Yes, I think so, we added the Upper Sprayberry as a test. Well, kind of in the North Martin area, like Kaes mentioned a couple of years ago, really pleased with the performance of that well. This year we've tested it in a co-developed fashion and like Kaes said, we're not seeing any real degradation there. And so what we plan to do going forward is to add that to the development zones for the North Martin area.

Kaes Van't Hof: I think we have some tests that are co-developed and some tests that are standalone. There are certain areas where the Wolfcamp D is significantly deeper than the Wolfcamp B, and we're not seeing communication. And there are some areas where it probably just makes sense to develop it with the stack because of above ground efficiencies.

Travis Stice: Yes, I think that's right. We tested the Wolfcamp D kind of in that same North Martin area and really not seeing any communication with Wolfcamp B. So we think it's a zone that we can come back and get or where it competes for capital we'll add it to the stack.

Kalei Akamine: That's awesome. I appreciate that, guys.

Travis Stice: Thank you.

Operator: All right, thank you. I am showing no further questions at this time. I would now like to turn it back to Travis Stice, CEO, for closing remarks.

Travis Stice: Thank you again for everyone participating in today's call. If you've got any questions please reach out to us using the contact information we’ve previously provided. Thank you and have a great day.

Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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