Diamondback Energy Q1 2024 Earnings Call Transcript

Well, from a macro perspective, I think we've been pretty clear that we're going to continue to need pipes being built about every 12 to 18 months out of the Permian to accommodate the associated gas that goes along with the 6 million barrels a day that we produce out here. Natural gas is right now being almost treated like a waste product, and we've got it -- this -- when Matterhorn comes on this fall, we'll see some of that reverse. But Kaes, do you want to give him some description of what we're doing with the rest of the gas?

Yes, Neil. I mean, listen, we -- long term, we want to be able to contribute to more pipes. We've done that in the last couple of years with commitments on Whistler and Matterhorn. We've relinquished taking chondrites in other areas to commit to other pipes that were built. As Travis said, we just need to do more. And I think with our size and scale and balance sheet, we should be taking a leadership position on, on these new pipes.

We've talked to a lot of people that are working on them today, and it seems that there are projects in the works that, that will help the bottleneck past the end of this year. But as we control or have the ability to control more gas flows on our side as contracts roll off, etc., We're going to keep pushing on more pipes and more markets out of this basin.

Well, I think the deflationary pressures we continue to see in the Permian are being driven by the decline in the rig count and the decline in the completion crew count. Those will be tailwinds for us as we look through the rest of this year. But also, with that regards to those deflationary impacts, we continue to push the envelope on our D&C operations where we're getting -- I think we averaged almost 13,000 feet for the quarter this year and we continue to get these wells drilled faster. And then our completion crews continue to push the envelope on the number of lateral feet that are completed in a 24-hour period. So we're working on the numerator and the denominator of capital efficiency and really like the way the rest of the year sets up for us.

Thanks, Neil.

Yeah. Arun, in this case, I think the combination of those longer laterals, 12,000 plus with some efficiencies on the completion side that we probably weren't expecting going into the year as well as some softening on the service side makes us feel pretty good that we're in the lower half of that $600 to $650 a foot in the Midland Basin. As you know, 90% of our capital is being allocated to that basin. So, with those costs trending in the right direction, I think on a real-time basis, closer to $600 a foot, we feel really, really good about our plan this year, as well as carrying that momentum into Q4 close to the Endeavor deal and into 2025. Very clearly, we laid out some strong synergy targets and a very strong capital efficient 2025 plan, and we still feel very, very confident in that plan.

Thanks, Arun.

You're welcome, David. Good morning.

Yeah. I mean I think what's changed is just timing, right? I think the projects we see as noncore asset sales or the asset sales to subsidiaries we have is still the same. Endeavor has a really good midstream business that would fit well with our midstream JV. They have a significant mineral business that I think is going to be a game changer for Viper if those two businesses are combined, and our strategy to execute on those trades has not changed. It's just been pushed out to the right.

So -- on top of that, it was an $8 billion cash consideration. That continues to be worked down with free cash flow between sign and close. I think that just means we have to pony up less cash at close in Q4. And we raised the money a couple weeks ago because we were preparing to potentially close the deal as early as today.

Unfortunately, the deal has been pushed out due to regulatory review. But we had to be ready to fund the deal. And that's where we were. Fortunately, the bond deal was pretty well timed. We're actually earning very minimal, negative carry on the cash that we have sitting at the banks today, and we'll be ready to use it when we close in a couple of quarters.

Yeah, well, I mean, we're facing them right now, egress issues, right? Not on the physical side, but certainly on the price side. So I think if we can remove the pricing aspect of pricing molecules at Waha versus pricing them further downstream and just paying a fixed fee on the pipe, that to us is a risk mitigation strategy that makes sense for Diamondback's shareholders. So, I think we see the gas forecast continuing to increase.

If you do look backs on the big publics, the big public third-party services and what they thought gas production was going to be in 2024, they're all been wrong. So, it's always been more gas sooner. And so, for us, we need to handle that physically where we can. And with our balance sheet and size and scale, we can sign those 10-year deals because we know we're going to be around to produce for a very, very long time.

Thanks, David.

Yeah. Scott, we're 100% confident in our plan. I think we have a lot of visibility. We have more and more physical space coming our way. Every molecules move to date. I don't like the speculation blame game in the Permian about who's going to be able to move or not. I'm focused on Diamondback, and we're going to be in really good shape.

Yeah, I think philosophically part of the move back to 50% of free cash flow returned every quarter allows us to build more cash paid on debt faster, but also make the bigger bets on buybacks, right? In a single quarter if you're having to distribute 75% of your free cash flow, you don't get to really make the big bet on the buyback at the right time. And so, this flexibility will allow us to do that.

Clearly, we've been a little limited on buybacks since announcing the deal. I would expect that to stay about the same here in the second and third quarters depending upon the market. If we see some weakness, we're going to step in and support the stock. But longer-term, we want to make the nine-figure, 10-figure bets on buybacks at the right time, and that's the flexibility we want on capital return.

I think we still see kind of mid-cycle in the $60 to $70 range. I think we were firmly $60 for a long time. We're probably closer to $70 [Indecipherable] gas. And on the combined business, if you look at what we have with Endeavor, there's a significant amount of inventory and a lot of NAV accretion, so -- and probably a lower combined cost of capital. So, I think we feel like we can raise that buyback cost a little bit, but we're probably going to be cautious until we close.

Yeah, we've always been a little higher than 10. I think an after-tax PV 12%, it felt like a -- at a mid-cycle price, felt like a very conservative price to buyback shares, and that also makes sure we don't get trapped into a positive feedback loop of buying back shares all the way to the top. So I think an after-tax 12% rate return in this business is a really good rate of return at a mid-cycle price, and that keeps you in a good spot through the cycle.

Yes. Good question. We are continuing to drive cost out of the business through our operational plan and execution. On the completion side, a lot of that's going to come in the way of getting these e-fleets off of generated power and on to some form of grid power where we can recognize a lower energy source cost.

We're continuing to try to drive days out of our execution and we're kind of on the asymptotic slope of that efficiency gain that we are getting to a point where the fixed cost of the wells are a significant -- significantly larger portion of the cost of the well than the variable cost. So, we're getting to a point where the variable cost that we're going to impact our pennies and nickels and not as much the dollars anymore. And to get those large chunks, we're going to have to think about doing things differently as far as the physical plan for the wells and what we are going to consume as part of the fixed cost of the wells.

You know, Roger, I give our guys some joke with them a little bit on the drilling side, because they're almost to the point where they're spending more time screwing pipe together and unscrewing pipe together than they are actually rotating hours in the lateral. Not quite, but they keep certainly pushing the envelope.

And really, if you go back to what we said during the acquisition announcement, with the merger announcement with Endeavor, we talked about $150 a foot, $100 of that foot was from just simply going to the simul frac and the other $50 a foot was going to clear fluids, and really that's what we're doing today. So, we emphasize at that time that's not a big stretch. It's just simply doing what we're doing today on a new set of assets. And in Danny's comments, we're spot on as well.

Yeah. I mean, listen, Roger, one other comment on that. I mean, the guys are so good on the drilling side, now they're measuring how thick the threading is between casing and on the drilling side to say, can I screw that pipe together half a second faster versus what I used to do? I mean, it is down to the absolute second on site to reduce those variable costs.

Thanks, Roger.

Hey, John.

Yeah, John, I think in that -- in the first quarter, those longer laterals were really just a function of where we were completing the wells. That average lateral length of 11,500 is what we expect to see for the rest of the year.

Yeah, John, we got to operate separate companies until the deal closes, and those things will all come to the benefits of the combined company. But certainly can't influence any outcomes until we're closed.

Thanks, John.

Yeah. I don't think we're going to see much more improvement. I think for us, it's more about risk aversion, right? And having our barrels and molecules go to different bigger markets downstream. So, we have a lot of oil that goes to the Gulf Coast in corpus and is exported. We now have a good amount of oil going to Houston feed refineries there. So, I think we've kind of grown up as a company in terms of marketing, and very clearly, mistakes were made five, six, seven years ago when the Permian got tight. And we're just not looking to make those mistakes again. So, with our size and scale, we're going to be contributing to oil pipes, contributing to new gas pipes. We've made some investments in gatherers and processors. And many midstream investments throughout the years here that, one, made our shareholders money on the investment side, but two, protected us on the commercial side. So, I would expect that trend to continue as we get bigger.

Yeah. I think our philosophy is to get our barrels to the most liquid bigger market, and very clearly, selling within Midland or in the Midland market has not always been the most beneficial to our shareholders. There are pockets of time when the Midland market is very loose, but there are also periods where it gets very, very tight. So, the way we see this physical marketing protection is a long-term insurance policy to make sure barrels move to the right market.

Yeah, I mean that you can go on for hours about that. I mean, that ties to culture, right? And our biggest benefit at Diamondback is that we have a small company, dynamic culture, with a large asset base that's now growing larger. So, we are going to have to make sure we maintain that gritty, quick, fast-moving, adaptive culture to a larger asset base. I'm fully confident that we have the executive team and employee base at both the Diamondback and Endeavor to do that.

And I think these big projects, there's a lot of capital being put in the ground before. First oil, sometimes upwards of $250 million, $300 million. But as long as you have the ability to move crews and rigs within a quarter, within a year, you keep hitting numbers. We're going to keep doing that at a larger scale.

And you know, Neal, as we built this company over the last 10 years, we've always maintained a couple of constants. One is the fact we keep a real flat organization. And we keep a non-siloed organization as well too. And the only way that you can grow an organization and maintain that effectively is to have an unreasonable level of trust.

And as we encourage our Endeavor employees to come over, we're going to be demonstrating this high level of trust because it's going to be a very important part of our evolving culture as a much larger company. But those two things will stay the same. Flat organization. No silos.

Thanks, Neal.

Thanks, Neal.

Thank you, Derrick.

Yeah, that's consistent.

Yeah, Derrick. We followed up this year with -- in Q1 with three additional Upper Sprayberry completions kind of following up that success that we had in the North Martin area with that first test. And we really liked the initial results from those wells. And I think that from a cost perspective, we're seeing those costs be pretty competitive and I think we'll probably look at adding that development to subsequent developments in the future.

And I think philosophy on top of that, Derrick, if you start to add in zones like the Upper Sprayberry, Wolfcamp D, we've got some really good Wolfcamp D tests in some of those same pads. If you start to add those in and you don't see degradation on a corporate basis in terms of the Q curves that everyone looks at so closely every year, that's inventory extension in our existing asset base.

And with the combination of us and Endeavor adding in zones like the Upper Sprayberry, Wolfcamp B and the full scale development, it only extends the duration of what we can do here in the Midland Basin.

Thanks, Derrick.

Good morning, Paul.

The first emphasis on AI has been not the generative AI, but using AI to process data information a lot quicker. And so, look, we're really excited about the long-term implications of AI on our industry and whether that translates to improvements in AUR or improvements in efficiencies, or hopefully both, I think it's yet to be determined, but it's one of those things that we're trying to be fast followers on. This is an arena of our industry that's moving incredibly fast. These electric frac fleets that we're using right now actually are accumulating more information than we can process. So we're storing some of that information and hoping to use smart algorithms or AI to help us process that information in a more usable and more real-time fashion. Kaes, the first question was income generating tech to offset that scale...

Yeah, I mean we have a subsidiary snake company called Cottonmouth Ventures, that's kind of our new venture; snake, I'll call it. But it's not a huge business today. I think one of the more exciting projects we're working on is with our Verde Clean Fuels partnership, where we are in the scoping phase of building a plant, a gasoline plant in the basin that's going to be tapped into one of the pipelines that we are a participant in. That plant will convert 35 million cubic feet a day of gas -- natural gas, lean gas into 3,000 barrels a day of gasoline.

So that, I think, fits our motto of, if we can contribute molecules and expertise to a project, not just capital, but the other things to drive value, we're going to look at it. I would say that project might FID by the end of this year and be up and running in a couple of years, and that might be a good little offtake for 35 million a day of gas. And if it works, we're going to build more of them.

Paul, when you look at a capital program, it's going to spend between $4 billion and $5 billion a year on a pro forma basis. The percent of that that we're going to allocate to income generating projects is probably pretty small, and that, in an individual sense, it'll probably have a larger impact, but I wouldn't expect it to move up to the noticeable level at a company that's spending between $4 billion and $5 billion a year.

Thanks, Paul.

Yeah, Leo, a couple of things. I think we're having a pretty good end of the year last year into Q4. And so we pushed some completions into Q1. So Q1 looks a little high relative. I think generally you can think about that 70 to 80 overall completions of a quarter as the base case. Q2 might be a little towards the high end there, but because we're a little bit ahead of plan in terms of efficiencies and timing, we're probably going to reduce our frac crew count by one for a period of time over the summer as well as kind of get down into that 12, 13 rigs on the drilling side to complete -- to drill the same number of wells.

So, we look at the plan almost weekly with the planning team, and I think generally the efficiencies have led to less overall activity, more capital efficiency and setting us up well for this potential close here in Q4 with Endeavor.

Yeah, not many. We sold a piece of our Viper ownership in the first quarter, and that put another $450 million of cash on the balance sheet. And I think I go back to, when we structured this deal, we certainly did not want to put so much cash into the deal with Endeavor that we had to be a seller of assets and that's exactly what we've done now.

I think we've had some price help here in the last couple of months that has boosted free cash flow and reduced the cash portion of the transaction. And listen, I think the price has got to be right for any asset sale, whether it's the Deep Blue, Viper or otherwise. And we're going to be patient post close. I think -- I do think those assets make sense in other hands, but it's got to be the right value.

Yes, it was just higher than that before that, a couple of quarters before that. And we had to work off the accruals. That number has been 7% for 10 years. We had a consultant that told us it was going to be higher last year, and that consultant's no longer working for us, but it's going to be 7% on an annual basis on average.

Thanks, Leo.

Thank you, again, to everyone participating in today's call. If you've got any questions, please reach out to us using the contact information provided. Thank you, and have a great day.