Diamondback Stockholders,
This letter is meant to be a supplement to our
earnings release and is being furnished to the Securities and
Exchange Commission (SEC) and released to our stockholders
simultaneously with our earnings release. Please see the
information regarding forward-looking statements and non-GAAP
financial information included at the end of this letter.
The third quarter of 2023 can be summarized as a
significant quarter over quarter increase to stockholder returns
and reduced capital and operating expenses. Total debt and net debt
also decreased by over $300 million and $1 billion,
respectively, in the quarter due to the closing of multiple
non-core asset sales. In summary, Diamondback continues to execute
on our business plan with our best-in-class cost structure and
strong balance sheet.
Production:Third quarter oil
and total production, at 266.1 MBO/d and 452.8 MBOE/d respectively,
were both above the high end of our third quarter guidance ranges.
As a result of this outperformance, combined with the addition of
volumes from Viper’s mineral acquisition from GRP that closed last
week, we are increasing our full year oil and total production
estimates above their prior ranges. The midpoint of annual daily
oil production moves to approximately 263 MBO/d from 261 MBO/d,
while the midpoint of annual total daily production moves to
approximately 447 MBOE/d from 440 MBOE/d.
Production is again expected to grow in the
fourth quarter, with estimated fourth quarter oil production
projected to be 269 - 273 MBO/d (455 - 460 MBOE/d). We continue to
expect to grow oil production organically at a low single digit
annual pace next year with a similar level of activity to this
year. This is primarily a result of the quality of the acreage we
are developing in the Midland Basin with long laterals, multi-well
pads and a high mineral interest across the portfolio.
Oil realizations increased quarter over quarter
to 99% of West Texas Intermediate (“WTI”) pricing for the quarter.
We still expect to realize at least 95% of WTI when WTI is at least
$65 per barrel, with most quarters above that number. Gas and NGL
realizations increased quarter over quarter as each commodity
rallied in the third quarter.
We continue to protect our downside exposure
through a hedge program where we buy deferred premium puts up to 12
months in advance for oil, with a goal of being at least 60% hedged
heading into a respective quarter. For gas, we hedge with wide
two-way collars and a well-protected basis exposure. To us, this
hedging philosophy is an insurance policy against the extreme
downside where we protect our dividend, still generate FCF and
manage our leverage ratio while leaving upside exposure to higher
commodity prices for our investors.
Capital Expenditures:Cash capex
for the third quarter was $684 million, in the upper half of our
quarterly guidance range. We expect cash capex to decline by 5% -
10% in the fourth quarter to $610 - $650 million as we continue to
see the benefits of lower well costs, lower drilling activity and a
slightly slower completion cadence. We think the midpoint of fourth
quarter capex should be a reasonable representative baseline for
our 2024 plan assuming current commodity prices. This implies we
can grow production organically with lower capex in 2024, thereby
generating more FCF and FCF per share assuming the same commodity
prices as this year.
This fourth quarter guidance raises our full
year 2023 cash capex guidance range to $2.66 - $2.70 billion, or
the high end of our initial 2023 guidance range. Through the third
quarter, we have drilled approximately 78% of our estimated total
lateral footage and completed approximately 77% of our estimated
total lateral footage for the year. We are increasing our estimated
wells drilled this year to 340 - 350 and reducing our estimated
wells turned to production to 325 - 335, as we have outperformed
original volume expectations. Our drilled but uncompleted well
(“DUC”) count has increased by almost 50 wells this year to 150
wells today versus 100 wells at the beginning of 2023, which will
increase our operational flexibility heading into 2024.
Our drilling team continues to push the limits
of efficiency. During the third quarter, they drilled two Midland
Basin 7,500 foot lateral wells from spud to total depth in under
four days each, which is a basin record to our knowledge. On the
completion side, we completed over 3,100 lateral feet per day per
crew and used ~90% recycled produced water for our Midland Basin
program. Pumping hours almost reached 19 hours per day per crew,
all at or near efficiency records for Diamondback.
Operating Costs:Total cash
operating costs decreased by $0.15 per BOE quarter over quarter as
increases to lease operating (“LOE”) and gathering and
transportation expenses were more than offset by decreases to
production and ad valorem taxes. General and administrative
expenses were essentially flat quarter over quarter. As a result,
we have decreased our annual cash operating cost guidance by a
combined $0.15 per BOE as well as reduced our expected severance
and ad valorem tax rate to 7% of revenue (from 8% previously).
As it relates to non-cash costs, we increased
our DD&A guidance to $10.50 - $10.75 per BOE from $10.00 -
$10.75 previously and we reduced our non-cash G&A estimate for
the year by another $0.05 per BOE to $0.30 - $0.40 per BOE.
Return of Capital:We generated
$1.4 billion of Net Cash Provided by Operating Activities
($1.5 billion after adjusting for working capital changes), $820
million of FCF and $884 million of adjusted FCF in the third
quarter.
We repurchased 406,700 shares in the third
quarter for a cost of $56 million ($136.59 / share average).
Repurchase opportunities were limited in the third quarter, as
commodity prices and our stock price rallied significantly.
Therefore, we are planning to pay our base dividend of $0.84 /
share and a variable dividend of $2.53 per share, or a total cash
dividend of $3.37 per share for the quarter. So far in the fourth
quarter, we took advantage of some early weakness in October to
repurchase 217,900 shares at a cost of $32 million ($146.97 /
share average).
As a reminder, we repurchase shares when we
believe we can generate a low-teens rate of return on that
repurchase at a Company Net Asset Value run at a mid-cycle price
deck of $60 oil, $20 NGLs and $3 gas. Capital discipline is
important in this industry, and we view returning capital to our
stockholders through the same lens as allocating capital in the
field. We would rather be conservative and err on the side of
caution when buying back shares pro-cyclically, which is why we
leaned into the variable dividend this quarter. There may come a
time when we should direct all our FCF to buying back shares (after
paying our base dividend), but that day is not today at current oil
prices.
Balance Sheet:Total debt and
net debt decreased to just under $6.4 billion and $5.6 billion,
respectively, in the third quarter, with net debt down over
$1 billion from $6.7 billion in the second quarter.
Consolidated net debt is now back to levels reached prior to the
announcements of both the Lario and Firebird acquisitions late last
year. We will continue to use 25% of our FCF to reduce debt at both
Diamondback and Viper.
Non-core Asset Sale Update:We
have now announced and closed non-core asset sales for gross
proceeds of approximately $1.7 billion, significantly
exceeding our target of at least $1.0 billion of sales by year
end 2023. While we still have significant value remaining in our
portfolio of midstream assets that may be monetized at some point
in the future, we are not going to increase our non-core asset sale
target at this point.
In September, we announced a joint venture
(“JV”) with Five Point Energy LLC (“Five Point”) that formed Deep
Blue Midland Basin LLC (“Deep Blue”). This JV, of which Diamondback
retained 30% ownership, creates the largest independent water
business in the Midland Basin and brought in proceeds of ~$500
million to Diamondback. We are excited about the early commercial
success of the JV, and believe there is significant potential for
future growth in this business, both organic and inorganic. The
Deep Blue team also brings expertise for the next wave of oilfield
water management, including water recycling, enhanced evaporation
and eventually desalination. The expected full-year financial
impact of the JV will be a mix of higher LOE (~10% increase),
significantly lower midstream capex (>75% decrease), reduced
midstream operating expense and slightly higher well costs ($15 -
$20 / lateral foot). All in all, we believe the upfront cash
proceeds and potential for value creation at the JV far outweigh
the go-forward financial impacts.
Other Business: Industry
ConsolidationIndustry consolidation has been a recurring
theme in recent years as the shale industry has matured, and we are
seeing an acceleration of that theme with the recent announcement
of two significant transactions in the last month. While this is
exciting for the industry, it does not change Diamondback’s
business model or continued focus on executing on our business plan
to create value for our stockholders, the owners of the
Company.
Diamondback was built through an acquire and
exploit strategy, where our execution prowess and low-cost
structure allowed us to create value on acquired assets over the
last decade. This remains our core competency as we believe the
low-cost operator in a commodity-based business “wins”. We expect
Diamondback to remain a consolidator in the future, and our
underwriting criteria have not changed. A deal must meet the
following criteria for it to make sense to Diamondback
stockholders:
- Sound industrial logic (physical
adjacencies, tangible cost and operations synergies)
- The assets compete for capital
right away (get “better”, not just bigger)
- Accretive on financial metrics
(CFPS, FCFPS, EPS)
We remain confident in our business model, the
durability of our inventory and our ability to convert that
inventory into cash flow efficiently for many years to come. We
believe in the pure-play independent E&P business model, and
know we can compete for investor capital in a consolidated space.
While we recognize size and scale are being rewarded by the public
markets, we have to get “better” when we get “bigger,” which we
have proven through many acquisitions and subsequent execution over
the years.
Thank you for your interest in Diamondback
Energy,
Travis D. SticeChairman of the Board and Chief
Executive Officer
Important Information Regarding Forward-Looking
Statements and Non-GAAP Financial Measures
This letter contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended, which involve risks, uncertainties and
assumptions. Important information regarding forward-looking
statements is included in our earnings release furnished to the SEC
simultaneously with this letter.
This letter also contains certain Non-GAAP
financial measures. For definitions and reconciliations of the
Non-GAAP financial measures to the most directly comparable GAAP
financial measures, please see our earnings release furnished to
the SEC simultaneously with this letter.
Investor Contact:Adam Lawlis+1
432.221.7467alawlis@diamondbackenergy.com
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