Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Diamondback Energy Inc (FANG, Financial) has achieved significant drilling and completion efficiencies, increasing from 24 to 26 wells per rig per year and from 80 to over 100 completions per crew per year.
- The company has a flexible return of capital program, allowing it to adapt to varying oil price environments by balancing share buybacks and variable dividends.
- Diamondback Energy Inc (FANG) has successfully reduced its base dividend breakeven to $40 per barrel of crude oil, ensuring sustainability even in lower price scenarios.
- The integration of Endeavor assets is expected to enhance operational efficiencies and deliver significant synergies, benefiting shareholders.
- The company has made strategic asset sales and generated free cash flow to reduce net debt, aiming to reach a $10 billion debt level quickly.
Negative Points
- Diamondback Energy Inc (FANG) faces challenges in maintaining production levels if crude prices drop significantly, potentially requiring production declines.
- The company has experienced gas price volatility, impacting margins and necessitating strategies to improve gas marketing and transportation.
- There are operational risks associated with integrating Endeavor assets, including aligning drilling and completion practices and achieving projected synergies.
- The company’s focus on reducing costs and improving efficiencies may face limitations, particularly in achieving further significant gains in well performance.
- Diamondback Energy Inc (FANG) has a high dependency on the Permian Basin, which could expose it to regional risks and market fluctuations.
Q & A Highlights
Q: Travis, my first question is on the leading capital efficiencies you all continue to highlight. Specifically, you talked about dropping to 10 from 12 rigs and how you anticipate the same type of efficiency as once you take over the Endeavor assets?
A: The first half of the year was typified by doing more with less. We estimated 24 wells per rig per year in January, now up to 26 wells per year. Similar efficiency gains on completions, from 80 to over 100 completions per crew per year. These efficiencies are permanent, and we anticipate continuing these results with the Endeavor assets, significantly below our February estimates, benefiting shareholders.
Q: On shareholder return plans, how would your plan vary depending on oil prices, and would there be any changes in a high oil price environment versus a lower price environment?
A: We've always had a flexible return of capital program. We flex between buying back shares and paying variable dividends. If oil prices are weak, we buy back more shares; if strong, we pay a big variable dividend. Our low break-even on capital and base dividend allows us to generate free cash flow even at lower oil prices.
Q: How do you see yourself lowering net debt post-transaction? Is it through asset sales or organic free cash flow generation?
A: We planned the Endeavor merger with a cash-stock mix to avoid being forced sellers of assets. We've sold multiple assets, almost adding up to $1 billion, reducing the cash outflow burden for the Endeavor deal. We focus on delevering through free cash flow, with asset sales as a kicker.
Q: What are your latest thoughts on managing gas price volatility and the Matterhorn pipeline?
A: We need to start making more money on our gas in the Permian. We've been taking control of our molecules as contracts roll off, committing to pipelines like Whistler and Matterhorn. We're also participating in the Blackcomb Pipeline. We're looking at creating local markets in the Permian to avoid selling gas at low prices.
Q: Can you describe the drivers of the efficiency gains in drilling and completions, and what's underwritten in the pro forma guide for Endeavor for 2025?
A: On the rig side, improvements in bit and bottom hole assembly, and a focus on every decision made. On the completion side, design changes and optimizing equipment mobilization. These efficiencies are permanent and will be incorporated into the pro forma model, reducing the number of rigs and simul-frac crews needed.
Q: You raised your oil guide and CapEx. Can you help reconcile the increase in completed footage with the oil increase?
A: Wells are not completed as they appear in spreadsheets. Moving wells from 2023 to 2024 increased the well count. We're preparing for the Endeavor acquisition, focusing on drilled lateral footage for less CapEx, providing flexibility for the second half of the year and into 2025.
Q: Are there any parts of the efficiencies you're seeing that you don't think you could accomplish with the Endeavor assets?
A: We'll need to get the two assets together first. Quick changes include using clear drilling fluids and more simul-frac operations. We'll also seek to understand what the Endeavor team is doing and combine the best practices from both teams.
Q: How do you think about the potential for trimul-frac in your portfolio, especially after the Endeavor acquisition?
A: We've looked at trimul-frac, but the infrastructure spend required is significant. We would pursue it in areas with existing infrastructure and enough development to dedicate a trimul-frac crew.
Q: Can you talk about the productivity improvement in drilling and completion over the next two to three years?
A: The biggest potential lies in down-hole sensing technology, allowing the bit to stay in the best rock and optimizing frac energy placement. These technologies are evolving rapidly and will be game changers for the industry.
Q: How do you see the growth outlook for Deep Blue, especially with potential Endeavor drop-downs?
A: Deep Blue has been very acquisitive and has grown significantly. Endeavor has an impressive water system that could merge with Deep Blue, but the price has to be right for Diamondback shareholders. We're pleased with Deep Blue's progress and see it as a long-term investment.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
