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 fourth quarter of 2023 rounded out a great
year for Diamondback Energy and our stockholders. We seamlessly
integrated our acquisitions of Lario and FireBird, exceeded
production guidance, generated $5.9 billion of Net Cash Provided by
Operating Activities, $2.9 billion of Free Cash Flow and returned
$2.3 billion of that Free Cash Flow back to our stockholders
via our $3.38 per share of base dividends, $838 million of share
repurchases and $4.74 per share of variable dividends. We exceeded
our non-core asset sale targets set out when we acquired FireBird
and Lario, and exited the year with $6.8 billion of total debt and
$6.2 billion of consolidated net debt, below 1.0x 2023 EBITDA.
Last Monday, we announced a transformational
combination with Endeavor Energy Resources (“Endeavor”). This
combination will create a “must-own” North American independent oil
company. Combined, the two companies produced 468 MBO/d (816
MBOE/d) in the fourth quarter of 2023 across approximately 838,000
acres in the core of the Permian Basin. The combined business will
have an unmatched depth of high-quality inventory, which, when
combined with Diamondback’s cost structure, is set to generate
significant long-term Free Cash Flow accretion to our stockholders.
The combination is subject to stockholder and regulatory approvals,
and we look forward to providing more information when
permitted.
Production:Fourth quarter oil
and total production, at 273.1 MBO/d and 462.6 MBOE/d respectively,
were both above the high end of our fourth quarter guidance ranges.
As a result of this outperformance, full year oil production was
approximately 263.5 MBO/d, up almost 18% year over year with an
average diluted share count that was up only 2% year over year,
despite closing two acquisitions. Diamondback is focused on per
share growth, and we have now grown oil production per share 14x
since our 2012 IPO.
Looking ahead to 2024, we have shifted our
production philosophy from what we previously described as “low
single digit growth with the same amount of activity” to a plan
where we are expecting to hold fourth quarter 2023 oil production
flat with less capital and activity than last year, emphasizing our
commitment to capital efficiency and “value over volumes.” As
mentioned in last week’s merger announcement, Diamondback released
2024 production guidance of 270 - 275 MBO/d (458 - 466 MBOE/d).
First quarter oil production is expected to be 270 - 274 MBO/d (458
- 464 MBOE/d). The global oil market appears to be well-supplied,
and there is currently significant OPEC spare capacity. Therefore,
Diamondback is positioned to maintain our production, grow Free
Cash Flow and return that Free Cash Flow to our stockholders.
Should there be a "call for growth" from the global oil market,
Diamondback has the inventory quality and depth to answer that
call, but that is not today.
Oil realizations decreased quarter over quarter
to 97% of West Texas Intermediate ("WTI") pricing for the quarter,
but in line with our average realization for the year of 97% of
WTI. 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 decreased quarter over quarter as each commodity
declined in the fourth quarter.
Capital Expenditures:Cash capex
for the fourth quarter was $649 million; at the high end of our
quarterly guidance range, but still down 5% quarter over quarter.
We expect cash capex to decline by 5% - 11% in the first quarter to
$580 - $620 million as we continue to see the benefits of lower
well costs and strong capital efficiency from long-lateral,
multi-well pad development.
As mentioned in our announcement last week,
Diamondback released full year 2024 capex guidance of $2.30 - $2.55
billion. The midpoint of this range is down 10% year over year due
to a combination of lower well costs and lower activity expected to
maintain fourth quarter 2023 oil production. We expect to drill
approximately 275 wells and turn approximately 310 wells to
production, with almost 30% of those wells expected to be turned to
production in the first quarter of 2024. Average estimated
completed lateral length is expected to be the longest in our
Company history at approximately 11,500 feet, highlighting our
contiguous and advantaged acreage position.
Operating Costs:Total cash
operating costs increased by $0.32 per BOE quarter over quarter
primarily because of an increase to lease operating expenses
(“LOE”) as the fourth quarter was the first full quarter where our
Deep Blue joint venture was in place, raising our water disposal
costs. While this is a structural change to our LOE profile, we
believe the cash received from the sale of 70% of the business and
the upside value creation potential far outweigh this change. As a
result, we expect run-rate LOE to be in the $6.00 - $6.50 per BOE
range.
We do not expect any other major changes to our
cash operating cost structure this year except for interest
expense, which will increase to fund the cash portion of our
proposed merger with Endeavor. We will update our full cash
operating cost structure at the appropriate time pending deal
approval and executing the financing.
As it relates to non-cash unit costs, we expect
non-cash G&A to be between $0.40 and $0.50 per BOE and DD&A
to remain between $10.50 and $11.50 per BOE, respectively.
Return of Capital:We generated
$1.6 billion of Net Cash Provided by Operating Activities
($1.6 billion after adjusting for working capital changes) and $910
million of FCF in the fourth quarter.
In conjunction with our announcement last week,
we increased our annual base dividend by 7% to $3.60 per share. We
believe consistent base dividend growth is a key tenet to long-term
success, and we will continue to target a base dividend that is
protected down to $40 per barrel oil.
We repurchased 872,667 shares in the fourth
quarter for a cost of $129 million ($148.15 / share average). So
far in the first quarter, we took advantage of some early weakness
to repurchase 279,266 shares at a cost of $42 million ($149.50
/ share average). Because we did not return 75% of fourth quarter
Free Cash Flow through the combination of our base dividend and
executed buybacks, we are paying a variable cash dividend of $2.18
per share to keep our stockholders whole on our return of capital
commitment.
Concurrent with our announcement last week, we
reduced our going-forward return of capital commitment to 50% of
Free Cash Flow from 75% previously. Because we are adding debt to
fund the cash portion of the merger, we are going to allocate more
Free Cash Flow to pay down our debt quickly. Our near-term goal
will be to get pro forma net debt below $10 billion, which will be
done through Free Cash Flow generation and potentially supplemented
with non-core asset sales. Our long-term priority is to return cash
to stockholders, but using Free Cash Flow to pay down newly-added
debt is in the best long-term interest of the stockholders.
Balance Sheet:Total debt and
net debt ended the year at $6.8 billion and $6.2 billion,
respectively. Net debt increased quarter over quarter primarily due
to an increase at our mineral subsidiary, Viper, for the cash
portion of its acquisition of GRP minerals.
Other Business:Last quarter, I
noted that “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”.”
I also laid out Diamondback’s criteria for
successful M&A, including:
- 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)
Looking at the Endeavor merger through the lens of
the above, we believe this combination checks all of these
boxes.
Thank you for your 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 transaction on anticipated terms and
timing or at all, including obtaining Diamondback stockholder
approval, 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; potential 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 announcement,
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 this
announcement and 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 23, 2023, 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 that will be more fully described in the definitive
proxy statement on Schedule 14A that is intended to be 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 and NPV10. 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.
Additional Information about the Merger and
Where to Find It
In connection with the potential transaction
between Diamondback and Endeavor, Diamondback expects to file
relevant materials with the SEC including a proxy statement on
Schedule 14A. Promptly after filing its definitive proxy statement
with the SEC, Diamondback will mail the definitive proxy statement
to each stockholder entitled to vote at the meeting relating to the
proposed transaction. This letter is not a substitute for the proxy
statement or for any other document that Diamondback may file with
the SEC and send to its stockholders in connection with the
proposed transaction. INVESTORS AND STOCKHOLDERS ARE URGED TO
CAREFULLY READ THE PROXY STATEMENT (INCLUDING ANY AMENDMENTS OR
SUPPLEMENTS THERETO AND ANY DOCUMENTS INCORPORATED BY REFERENCE
THEREIN) AND ANY OTHER RELEVANT DOCUMENTS IN CONNECTION WITH THE
TRANSACTION THAT DIAMONDBACK WILL FILE WITH THE SEC WHEN THEY
BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION
ABOUT THE TRANSACTION AND THE PARTIES TO THE TRANSACTION. The
definitive proxy statement, the preliminary proxy statement, and
other relevant materials in connection with the transaction (when
they become available) and any other documents filed by Diamondback
with the SEC, may be obtained free of charge at the SEC’s website
www.sec.gov. Copies of the documents filed with the SEC by
Diamondback will be available free of charge on Diamondback ’s
website at www.diamondbackenergy.com/investors.
Participants in the Solicitation
Diamondback and its directors and executive
officers may be deemed, under SEC rules, to be participants in the
solicitation of proxies from Diamondback’s stockholders in
connection with the transaction. Information about the directors
and executive officers of Diamondback is set forth in (i) in
Diamondback ’s proxy statement for its 2023 annual meeting,
including under the headings “Proposal 1—Election of Directors”,
“Executive Officers”, “Compensation Discussion and Analysis”,
“Compensation Tables”, “Stock Ownership” and “Certain Relationships
and Related Transactions”, which was filed with the SEC on April
27, 2023 and is available at
https://www.sec.gov/ixviewer/ix.html?doc=/Archives/edgar/data/1539838/000130817923000793/fang-20221231.htm,
(ii) Diamondback ’s Annual Report on Form 10-K for the year ended
December 31, 2022, including under the headings “Item 10.
Directors, Executive Officers and Corporate Governance”, “Item 11.
Executive Compensation”, “Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters”
and “Item 13. Certain Relationships and Related Transactions, and
Director Independence”, which was filed with the SEC on February
23, 2023 and is available at
https://www.sec.gov/ixviewer/ix.html?doc=/Archives/edgar/data/1539838/000153983823000022/fang-20221231.htm
and (iii) subsequent statements of changes in beneficial ownership
on file with the SEC. Additional information regarding the
participants in the proxy solicitation and a description of their
direct or indirect interests, by security holdings or otherwise,
will be contained in the proxy statement and other relevant
materials filed with the SEC when they become available. These
documents may be obtained free of charge from the SEC’s website at
www.sec.gov and Diamondback’s website at
www.diamondbackenergy.com/investors.
No Offer or Solicitation
This letter does not constitute an offer to sell
or the solicitation of an offer to buy any securities, or a
solicitation of any vote or approval, nor shall there be any sale
of securities in any jurisdiction in which such offer, solicitation
or sale would be unlawful prior to registration or qualification
under the securities laws of any such jurisdiction.
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