Diamondback Energy Q3 2024 Earnings Call Summary

Management Comments

1. Historical and Forecast Production Levels

   • Average Q3 2024 production: 321.1 thousand barrels of oil per day (MBO/d), or 571.1 thousand barrels of oil equivalent per day (MBOE/d)

   • Forecast for Q4 2024: 470 - 475 MBO/d, total 840 - 850 MBOE/d.

   • Full-year guidance (updated post-Endeavor acquisition): 587 - 590 MBOE/d, with oil at 335 - 337 MBO/d.

   • Full-Year 2025: No specific numbers for 2025 were not detailed, management indicated a strategy focused on maintaining steady production levels and maximizing free cash flow. They plan to achieve similar production targets with improved cost efficiency, fewer rigs and frac crews due to operational synergies from the Endeavor acquisition.

2. Drilled wells, TIL (Turned-in-Line) and DUCs (Drilled but Uncompleted Wells)

   • In Q3 2024, Diamondback drilled 71 gross wells in the Midland Basin and completed 87 operated wells. For 2025, they project ongoing strong activity in the Permian, supported by a forecasted production of approximately 11 MBO/d from new Midland Basin assets.

   • Endeavor acquisition added 18 DUCs in the Midland Basin.

   • These wells are expected to enhance capital flexibility and provide production support.

3. Realized Commodity Prices, Hedging Strategy, Break-even Costs

   • Q3 2024 average unhedged realized prices:

     • Oil: $73.13 per barrel

     • Natural gas: -$0.26 per Mcf

     • NGL: $17.70 per barrel.

   • Corporate breakeven lowered to $37 per barrel WTI (post-dividend).

4. Hedging Strategy Comments

   Diamondback's approach to hedging aims to maintain upside exposure to market price increases while mitigating extreme downside risks. The company's specific strategy includes:

   • Crude Oil Hedges:

     • Long Puts (Brent): Protecting 82,000 barrels per day at $57.44 (Q4 2024) to 10,000 barrels per day at $60 (Q3 2025).

     • Long Puts (WTI): Protecting 125,000 barrels per day at $57.28 (Q4 2024) down to 38,000 barrels per day at $55 (Q3 2025).

     • Costless Collars (WTI): Covering 46,000 barrels per day in Q4 2024 with a $60.87 floor and $89.91 ceiling, tapering off in early 2025.

   • Natural Gas Hedges:

     • Costless Collars (Henry Hub): Covering over 60% of estimated 2025 gas production, with floor prices around $2.49-$2.78 and ceiling prices up to $6.53, providing broad downside protection while allowing for potential gains in a rising price environment.

   Quote: “Diamondback’s hedge strategy is to maximize upside exposure to commodity prices while protecting the extreme downside.”

5. Rig and Frac Crew Numbers

   • Expected rig count reduced to 18 (from an anticipated 22–24) due to efficiency improvements.

   • Plan to operate with 4 frac crews instead of 5, achieving efficiencies through increased pump rates.

6. New Pipelines or Infrastructure

   • EPIC pipeline investment increased to nearly one-third ownership, preparing for potential increased Permian crude capacity.

7. Market Activity and State of the Oil Market

   • Management conveyed a cautious outlook for 2025 due to anticipated global oversupply.

   • No immediate plans for volume growth to avoid contributing to potential 2025 oversupply.

8. Merger and Acquisition Activity

   • Endeavor acquisition closed on Sept 10, 2024.

   • TRP trade: Swapping Delaware assets for Midland Basin assets, adding 55 high-capital-priority locations and 18 DUCs.

Q&A Session Highlights

1. Production and Efficiency Gains

   • Efficiency gains have allowed Diamondback to reduce the required rig count while maintaining production targets.

   • Costs have dropped to $600 per foot for Midland Basin wells due to synergy realization from the Endeavor acquisition.

2. Capital Spending and Break-even Costs

   • Forecast for 2025: $41–$44 per BOE to maintain 475,000 barrels per day production, trending toward the lower end due to cost reductions.

   • Synergies from Endeavor acquisition delivered early, aiding in cost savings.

3. Infrastructure and Asset Monetization

   • Actively planning a mineral interest dropdown to Viper Energy in early 2025.

   • Exploration of non-core asset sales, including Delaware Basin acreage, which may enter a strong market soon.

4. Market Strategy and Flexibility

   • Cautious approach in 2025, prioritizing free cash flow and shareholder returns over growth due to macro concerns.

   • The company retains flexibility to adjust activity based on market conditions without long-term commitments in its supply chain.

5. Share Buyback Program

   • Commitment to counter-cyclical buybacks as part of a flexible capital return strategy; a $2 billion increase in share repurchase authorization approved, with $2.9 billion still available.