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.
Diamondback built significant momentum in the
first half of the year. As a result of our first and second quarter
performance, we are increasing our full year production guidance
and lowering our annual capex guidance. Our operations team has
done an incredible job of focusing on what we do best: lowering
costs and generating additional efficiencies in the field, truly
differentiating Diamondback as we convert rock into cash flow.
Endeavor Energy Resources, L.P.
(“Endeavor”) Merger Update: As previously disclosed, we
received stockholder approval in April to move forward with the
transformational combination with Endeavor creating the “must-own”
North American independent oil company. As a reminder, the combined
business will have an unmatched depth of high-quality inventory in
the core of the Midland Basin, which, when combined with
Diamondback’s cost structure, is set to generate significant
long-term Free Cash Flow accretion to our stockholders.
On April 29, 2024, we received a second request
for information and documents from the Federal Trade Commission
(“FTC”). We continue to work cooperatively with the FTC to comply
with its requests and expect the Endeavor transaction to close in
the third or fourth quarter of this year. We will provide more
information when possible. I appreciate the tremendous effort from
both organizations as we move towards closing.
Second Quarter Operational
Performance: During the second quarter, we drilled 80
wells and brought online 86 wells across our position. When
combined with our activity in the first quarter, we have now
drilled 64% of our total lateral feet and brought online 60% of the
wells we originally budgeted for 2024 in the first six months of
the year, yet still have only spent 51% of the midpoint of our
original capital budget.
We are clearly doing more with less and becoming
more operationally efficient each quarter. To help put this into
perspective, at the beginning of the year we were anticipating a
rig would drill 24 wells a year, and now we are modeling one rig
drilling at least 26 wells per year. On average, we are drilling
wells approximately 10% faster than at the beginning of the year,
primarily due to bit and bottom hole assembly improvements. In
fact, we set a new record this quarter on one of our wells in the
Midland Basin, drilling over 20,000' with a single bit run.
Similarly, efficiency gains on completions have
allowed us to increase the per crew annual completion rate to
nearly 100 wells per year, up from our original budget of 80 wells
per year. As a result of these drilling and completion
efficiencies, in July we reduced drilling activity from 12 rigs to
10 and lowered our frac fleet count from four simulfrac crews to
three, while raising full year production guidance.
Production:Second quarter oil
production was 276.1 MBO/d, above the high end of our guidance
range of 271 - 275 MBO/d. We continue to target maintaining fourth
quarter 2023 oil production levels and have kept our quarterly
guidance range of 271 - 275 MBO/d flat for the third quarter. For
2024, we raised our oil production guidance range to 273 - 276
MBO/d to account for accelerated first half 2024 activity and
positive well performance year to date.
Capital Expenditures:In the
second quarter, we spent $637 million in capital expenditures,
above the high end of our guidance range of $580 - $620 million.
This was directly correlated to the accelerated activity noted
above. As a result of these improved cycle times, reduced activity
in the second half of 2024 and lower leading edge Midland Basin
well costs, we have moved the midpoint of our 2024 capital
expenditure guide down by $25 million, with an updated capex range
of $2.35 - $2.45 billion. This decision demonstrates our commitment
to capital discipline and Free Cash Flow generation. Additionally,
we have increased the number of wells we anticipate drilling and
completing in 2024 as a result of the accelerated pace of
development we saw in the first half of the year.
Our capital expenditure guidance range for the
third quarter is $570 - $610 million as lower activity flows
through our cash capex and cash flow statement.
Operating Costs:Total cash
operating costs remained relatively flat quarter over quarter at
$11.67 per BOE. Lease operating expenses ("LOE") in the second
quarter were $5.88 per BOE, below the low end of the guidance range
of $6.00 - $6.50 per BOE. As a result, we lowered our LOE guidance
range to $5.90 - $6.40 per BOE. Cash G&A per BOE decreased as
anticipated, and we are on track to be within our guidance range of
$0.55 - $0.65 per BOE for the year.
Financial Performance and Return of
Capital:During the quarter, Diamondback generated $1.5
billion of net cash provided by operating activities and $816
million in Free Cash Flow. Unique to this quarter, we adjusted Free
Cash Flow upwards to account for a $25 million loss on 30 year
treasury locks executed prior to, and fully settled upon, pricing
of the senior notes issued in April 2024, making Adjusted Free Cash
Flow $841 million for the quarter. Consistent with our capital
return commitment, we will return 50% of the Adjusted Free Cash
Flow to our stockholders through our base and variable dividend
totaling $421 million, or $2.34 per share. We did not repurchase
any shares during the quarter.
Balance Sheet:In April, we
successfully completed a $5.5 billion Senior Notes offering to fund
a portion of the cash consideration for the Endeavor merger. As a
result, total debt increased quarter over quarter and was $12.2
billion at quarter end. However, net debt decreased by
approximately $600 million to $5.3 billion as a result of Free Cash
Flow generation and proceeds from non-core asset sales.
As we have stated previously, our near-term goal
will be to lower pro forma net debt below $10 billion after the
completion of the Endeavor combination, which will be done through
Free Cash Flow generation and proceeds from non-core asset sales.
Our long-term priority is to maintain a leverage ratio of
approximately 0.5x at mid-cycle oil pricing, or approximately $6 to
$8 billion in net debt. We feel we can achieve this goal within the
next couple of years solely by dedicating 50% of Free Cash Flow to
debt paydown.
Non-Core Asset Sales:During the
quarter, we received proceeds of approximately $150 million as a
result of continued portfolio optimization. This included a
$95 million sale of non-operated properties in the Delaware
Basin as well as other smaller non-core transactions.
In July, Energy Transfer LP (NYSE: ET) (“ET”)
completed its previously announced acquisition of WTG Midstream
Holdings LLC (“WTG”). Total pre-tax consideration to Diamondback is
valued at approximately $375 million made up of cash and
approximately 10.1 million ET common units. The WTG sale
represents ~3.5x multiple on invested capital for Diamondback.
Other Business:We continue to
focus on our consistent, low-cost execution strategy and the
forthcoming integration of Endeavor. We are confident that the
operational gains realized so far in 2024 will benefit our expanded
Midland Basin asset base and that the pro forma company will
continue to generate differentiated returns for our
stockholders.
Thank you for your ongoing support and interest in
Diamondback Energy.
Travis D. SticeChairman of the Board and Chief
Executive Officer
Investor Contact:Adam Lawlis+1
432.221.7467alawlis@diamondbackenergy.com
Forward-Looking Statements:
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 Exchange Act of 1934,
as amended, which involve risks, uncertainties, and assumptions.
All statements, other than statements of historical fact, including
statements regarding the proposed business combination transaction
between Diamondback and Endeavor; future performance; business
strategy; future operations (including drilling plans and capital
plans); estimates and projections of revenues, losses, costs,
expenses, returns, cash flow, and financial position; reserve
estimates and its ability to replace or increase reserves;
anticipated benefits of strategic transactions (including
acquisitions and divestitures), including the proposed transaction;
the expected amount and timing of synergies from the proposed
transaction; the anticipated timing of the proposed transaction;
and plans and objectives of management (including plans for future
cash flow from operations and for executing environmental
strategies) are forward-looking statements. When used in this
letter, the words “aim,” “anticipate,” “believe,” “continue,”
“could,” “estimate,” “expect,” “forecast,” “future,” “guidance,”
“intend,” “may,” “model,” “outlook,” “plan,” “positioned,”
“potential,” “predict,” “project,” “seek,” “should,” “target,”
“will,” “would,” and similar expressions (including the negative of
such terms) are intended to identify forward-looking statements,
although not all forward-looking statements contain such
identifying words. Although Diamondback believes that the
expectations and assumptions reflected in its forward-looking
statements are reasonable as and when made, they involve risks and
uncertainties that are difficult to predict and, in many cases,
beyond Diamondback’s control. Accordingly, forward-looking
statements are not guarantees of future performance and actual
outcomes could differ materially from what Diamondback has
expressed in its forward-looking statements.
Factors that could cause the outcomes to differ
materially include (but are not limited to) the following: the
completion of the proposed Endeavor transaction on anticipated
terms and timing or at all, including obtaining regulatory approval
and satisfying other conditions to the completion of the
transaction; uncertainties as to whether the proposed transaction,
if consummated, will achieve its anticipated benefits and projected
synergies within the expected time period or at all; Diamondback’s
ability to integrate Endeavor’s operations in a successful manner
and in the expected time period; the occurrence of any event,
change, or other circumstance that could give rise to the
termination of the proposed transaction; risks that the anticipated
tax treatment of the proposed transaction is not obtained;
unforeseen or unknown liabilities; unexpected future capital
expenditures; litigation relating to the proposed transaction; the
possibility that the proposed transaction may be more expensive to
complete than anticipated, including as a result of unexpected
factors or events; the effect of the pendency, or completion of the
proposed transaction on the parties’ business relationships and
business generally; risks that the proposed transaction disrupts
current plans and operations of Diamondback or Endeavor and their
respective management teams and potential difficulties in retaining
employees as a result of the proposed transaction; the risks
related to Diamondback’s financing of the proposed transaction;
potential negative effects of the pendency or completion of the
proposed transaction on the market price of Diamondback’s common
stock and/or operating results; rating agency actions and
Diamondback’s ability to access short- and long-term debt markets
on a timely and affordable basis; changes in supply and demand
levels for oil, natural gas, and natural gas liquids, and the
resulting impact on the price for those commodities; the impact of
public health crises, including epidemic or pandemic diseases and
any related company or government policies or actions; actions
taken by the members of OPEC and Russia affecting the production
and pricing of oil, as well as other domestic and global political,
economic, or diplomatic developments, including any impact of the
ongoing war in Ukraine and the Israel-Hamas war on the global
energy markets and geopolitical stability; instability in the
financial markets; concerns over a potential economic slowdown or
recession; inflationary pressures; rising interest rates and their
impact on the cost of capital; regional supply and demand factors,
including delays, curtailment delays or interruptions of
production, or governmental orders, rules or regulations that
impose production limits; federal and state legislative and
regulatory initiatives relating to hydraulic fracturing, including
the effect of existing and future laws and governmental
regulations; physical and transition risks relating to climate
change; those risks described in Item 1A of Diamondback’s Annual
Report on Form 10-K, filed with the SEC on February 22, 2024, and
those risks disclosed in its subsequent filings on Forms 10-Q and
8-K, which can be obtained free of charge on the SEC’s website at
http://www.sec.gov and Diamondback’s website at
www.diamondbackenergy.com/investors/; and those risks more fully
described in the definitive proxy statement on Schedule 14A filed
with the SEC in connection with the proposed transaction.
In light of these factors, the events
anticipated by Diamondback’s forward-looking statements may not
occur at the time anticipated or at all. Moreover, Diamondback
operates in a very competitive and rapidly changing environment and
new risks emerge from time to time. Diamondback cannot predict all
risks, nor can it assess the impact of all factors on its business
or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those anticipated by
any forward-looking statements it may make. Accordingly, you should
not place undue reliance on any forward-looking statements. All
forward-looking statements speak only as of the date of this letter
or, if earlier, as of the date they were made. Diamondback does not
intend to, and disclaims any obligation to, update or revise any
forward-looking statements unless required by applicable law.
Non-GAAP Financial Measures
This letter includes financial information not
prepared in conformity with generally accepted accounting
principles (GAAP), including free cash flow. The non-GAAP
information should be considered by the reader in addition to, but
not instead of, financial information prepared in accordance with
GAAP. A reconciliation of the differences between these non-GAAP
financial measures and the most directly comparable GAAP financial
measures can be found in Diamondback's quarterly results posted on
Diamondback's website at www.diamondbackenergy.com/investors/.
Furthermore, this letter includes or references certain
forward-looking, non-GAAP financial measures. Because Diamondback
provides these measures on a forward-looking basis, it cannot
reliably or reasonably predict certain of the necessary components
of the most directly comparable forward-looking GAAP financial
measures, such as future impairments and future changes in working
capital. Accordingly, Diamondback is unable to present a
quantitative reconciliation of such forward-looking, non-GAAP
financial measures to the respective most directly comparable
forward-looking GAAP financial measures. Diamondback believes that
these forward-looking, non-GAAP measures may be a useful tool for
the investment community in comparing Diamondback's forecasted
financial performance to the forecasted financial performance of
other companies in the industry.
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