By: Andrew Baker – NGI – Diamondback Energy Inc. is aiming to keep oil production flat in the Permian Basin this year, part of a larger trend among Lower 48 exploration and production (E&P) firms to ensure healthy shareholder returns amid a bullish price cycle.
“We are at the beginning of an incredible period of value creation for the industry, and I’m confident that the capital discipline demonstrated by us and our peers in 2021 will continue, putting returns and, therefore, shareholders first,” CEO Travis Stice told analysts during a call to discuss fourth-quarter results. “We believe this is the best near-term path to equity value creation as our shift from a consumer of capital to a net distributor of capital cements itself as our long-term business model.”
Stice pointed to a supportive macroeconomic environment for oil prices, citing demand and supply-side factors. The call was held Wednesday (Feb. 23), one day before Russian forces invaded Ukraine, driving oil prices above $100/bbl for the first time since 2014.
“Two months into 2022, economies are rapidly reopening around the world, stoking demand which we believe to be close to, if not above, pre-pandemic levels,” Stice said. “On the supply side, we are witnessing some underperformance from OPEC-plus to meet this increasing demand, calling into question spare capacity, with global inventory numbers now approaching 2010 to 2014 levels.
“We cited both global oil inventories and OPEC spare capacity as impediments to any discussion around U.S. public company oil growth and those issues appear to have subsided for now.”
Stice cautioned, however, that “the global balance remains tenuous at best with up to 1 million b/d of additional Iranian barrels potentially coming online sometime this year and U.S. growth expectations continuing to climb higher, led by private companies and more importantly or more recently, majors. Both of these supply factors could be bearish signals for oil.”
Therefore, “Going forward, we will remain committed to capital discipline by maintaining flat Permian oil production,” said Stice.
Diamondback plans to maintain total oil production of about 220,000 b/d with capital expenditures (CAPEX) between $1.75 billion and $1.9 billion. This is up from $1.49 billion spent in 2021. Most of the forecast 2022 total is earmarked for drilling, completion, capital workovers, and non-operated properties.
The company is guiding for full-year total net production of 369,000-376,000 boe/d this year, with oil accounting for 218,000-222,000 b/d. Full-year production in 2021 averaged 375,300 boe/d (223,300 b/d oil).
Diamondback expects to drill 270-290 gross (248-267 net) wells and complete 260-280 gross (240-258 net) wells with an average lateral length of about 10,200 feet in 2022, management said.
“In 2022, at current strip pricing, we expect this maintenance capital plan to generate nearly $4 billion of free cash flow, of which at least 50% will be returned to stockholders through a combination of our growing base dividend, our opportunistic share repurchase program and, if needed, a variable dividend,” Stice said.
As for the remainder of free cash flow, “if we do not have a use for this capital that creates unreasonable value for our shareholders, then we will return it through the method our board believes presents the best return to our stockholders at the time.”
Innovation Offsetting Inflation
Stice cautioned that “History has taught us that oil is a volatile commodity and that the macro environment will not always be this favorable.”
Diamondback, therefore, continues to target efficiency improvements in areas such as clear fluid drilling and simultaneous fracturing (simul-frac) technology, in order to ensure resilience against less favorable market conditions.
Stice said that “our clear fluid design lowered our average drilling days in the Midland Basin by approximately 35%” in 2021, calling this “an astounding achievement for our drilling department.”
Meanwhile, Diamondback’s simul-frac crews “continue to reduce our time on pad as we are now averaging 3,200 feet per day with our four-well simul-frac design.” He explained that “these operational efficiencies have helped us mitigate the substantial cost pressures we’ve seen related to consumables and labor and…these gains will be permanent, giving us more variable cost control than our peers due to these industry-leading drilling and completion times.”
Stice explained that “when you bake in these cost increases and offset them with our efficiency gain, this equates to about 10% of additional capital spend year-over-year, which is baked into our  guidance.” We will try to offset this inflation by doing what we do best, innovating, implementing new technology, and drilling more efficient and better wells.”
“At the same time,” Stice said, “we are fortunate to have multiple pieces of our capital cost structure locked in with contracts and dedications like our water and sand supply.”
Stice said that “As the rig count in the Permian climbs, we will continue to work to control other components of our cost structure, particularly services, labor, and consumable products while continuing to be the leader in cash margin and capital efficiency.”
Stice said Diamondback will build off operational efficiencies achieved in 2021 “by controlling the variable portion of our operating and capital costs, which will help mitigate the inflationary pressures we are seeing across our business. As a result, we are confident we can maintain our best-in-class capital efficiency and cost structure through the cycle.”
Toward Zero Routine Flaring
On the environmental front, Diamondback met four of its five targets during 2021, Stice said. The targets related to natural gas flaring, water recycling, greenhouse gas emission intensity, produced liquid spills, and total recordable incidents.
“Unfortunately, we did not meet our expectation of flaring less than 1% of gross gas produced,” said Stice. He said Diamondback achieved the flaring goal on its legacy acreage, but not on the assets it acquired in its takeover of QEP Resources. Diamondback in 2021 flared 1.55% of its gross production. The company is aiming to eliminate all routine flaring by 2025.
For full-year 2021, Diamondback drilled 175 gross horizontal wells in the Permian’s Midland sub-basin and 41 gross horizontal wells in the Delaware sub-basin. The company turned 207 operated horizontal wells to production in the Midland, 64 in the Delaware, and four in the Williston Basin.
The average lateral length for wells completed during the year was 10,602 feet.
Diamondback reported average unhedged realized oil, natural gas, and natural gas liquids prices of $74.50/bbl, $4.56/Mcf, and $35.02/bbl, respectively, during 4Q. These are up from $38.64/bbl, $1.35/Mcf, and $14.68/bbl in the year-earlier period.
Production in 4Q2021 averaged 387,065 boe/d with oil accounting for 226,293 b/d of the total. These figures compare to 298,978 boe/d and 175,793 b/d in 4Q2020.
Diamondback on Tuesday (Feb. 22) also announced that Stice will take over as chairman, effective immediately while continuing to serve as CEO. Outgoing chairman Steven West will remain as a board member. CFO Kaes Van’t Hof, meanwhile, will take on the additional role of president.
Diamondback reported net income of $1 billion ($5.56/share) during the fourth quarter, versus a net loss of $739 billion (minus $4.68) in 4Q2020. Full-year 2021 profits totaled $2.18 billion ($12.35/share), compared to 2020 losses of $4.52 billion (minus $28.59) in 2020.
Featured Picture Credit: Photo by Donald Giannatti on Unsplash