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 first quarter of 2024 was a great start of
the year for Diamondback. The Company continues to execute with
production and capital expenditures meeting expectations.
Additionally, we generated $1.3 billion of net cash provided
by operating activities and nearly $800 million in Free Cash Flow
with 50% of that Cash Flow returned to our stockholders through a
combination of our base dividend, variable dividend and share
buybacks.
Last week, our stockholders voted to approve our
transformational combination with Endeavor Energy Resources, L.P.
(“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.
This second request was factored into our previously announced
closing timeline. We still expect the Endeavor transaction to close
in the fourth quarter of this year and will provide more
information when possible.
Production:First quarter oil
production of 273.3 MBO/d was at the high end of our quarterly
guidance range of 270 - 274 MBO/d. Looking ahead to the second
quarter, we expect our oil production to stay relatively flat, with
guidance of 271 – 275 MBO/d. We continue to target a capital
program designed to maintain fourth quarter 2023 oil production
levels. By focusing on capital efficiency and increasing our Free
Cash Flow, we feel we are executing a plan that creates the most
value for our stockholders in the current macro environment.
On the pricing side, oil realizations stayed
relatively flat quarter over quarter at 98% of West Texas
Intermediate ("WTI") pricing. We expect to realize at least 95% of
WTI when WTI is at least $65 per barrel, with most quarters (like
the first quarter) above that number.
NGL realizations increased quarter over quarter,
while natural gas realizations decreased quarter over quarter due
to lower pricing, particularly as WAHA basis pricing declined
significantly. We have the majority of our basis exposure hedged
protecting this very small portion of our cash flow stream. More
importantly, we have not experienced any gas takeaway issues and
are confident that our product will continue to move to market.
About a third of our gas production exits the basin on our pipeline
space, and we will continue to find ways to increase this
percentage as our contracts allow. We will also do our part to try
and help new gas pipeline projects reach FID as more takeaway is
needed out of the basin.
Capital Expenditures:Cash capex
for the first quarter was $609 million and near the high end of our
quarterly guidance range, but down 6% quarter over quarter. In the
first quarter we drilled 69 wells in the Midland Basin with an
average lateral length of over 13,000 feet per well drilled, an 11%
increase quarter over quarter and our longest quarterly average to
date. This contributed to improved capital efficiency on the
drilling side, where our costs were down approximately 10% per
foot. In addition to the benefits we are seeing by drilling longer
laterals, we are also seeing price reductions, with our average rig
fleet rates now down nearly 20% since the peak in the first quarter
of 2023.
We are currently utilizing four simulfrac crews,
consisting of two diesel powered fleets and two e-fleets. Our
completions team continues to push the limits of efficiency and we
are now averaging over 3,200 completed lateral feet per day. We are
seeing cost savings of approximately $10 per foot when comparing an
e-fleet to a diesel fleet and are currently powering both e-fleets
with residue gas (vs. CNG), which reduces costs further.
As we move into the second quarter, we expect
capital costs to remain flat and within a guidance range of $580 -
$620 million. We remain comfortable with our full year 2024 capex
guidance of $2.30 - $2.55 billion. As a reminder, the midpoint of
this capital guidance range is down 10% year over year due to a
combination of lower well costs and lower activity needed to
maintain fourth quarter 2023 oil production.
Operating Costs:Total cash
operating costs increased by $0.69 per BOE quarter over quarter
primarily because of an increase to production and ad valorem taxes
as well as cash G&A. Production and ad valorem taxes per BOE
were up 16% quarter over quarter but still under our full year
guidance range of ~7% of revenue. Cash G&A per BOE was up 29%
quarter over quarter primarily due to various one-time items. We
expect cash G&A to decrease throughout the year and are
comfortable maintaining our guidance range of $0.55 - $0.65 per
BOE.
Earlier this month, we successfully priced a
multi-tranche senior notes offering totaling $5.5 billion at an
average coupon rate of approximately 5.5%. The proceeds from this
offering will be used to partially fund the cash portion of the
Endeavor merger. As a result of this offering, we have increased
our full-year net interest expense guidance range to $1.65 - $1.85
per BOE.
Return of Capital:We generated
$1.3 billion of Net Cash Provided by Operating Activities
($1.4 billion after adjusting for working capital changes) and $791
million of Free Cash Flow in the first quarter. As conveyed
previously in our Endeavor merger announcement, we have reduced our
go-forward return of capital commitment to at least 50% of Free
Cash Flow from at least 75% previously. This gives us the
flexibility to allocate more Free Cash Flow to quickly pay down
debt. Therefore, we will distribute $396 million to shareholders
this quarter, including $162 million ($0.90 per share) in the form
of our base dividend.
We repurchased 279,266 shares in the first quarter
for a cost of approximately $42 million ($149.50 per share
average). Because we did not return 50% of first quarter Free Cash
Flow through the combination of our base dividend and executed
buybacks, we are paying a variable cash dividend of $192 million
($1.07 per share) to keep our stockholders whole on our return of
capital commitment. We have not repurchased any shares so far in
the second quarter.
Balance Sheet:Total debt and
net debt ended the quarter at $6.8 billion and $5.9 billion,
respectively. Net debt decreased by over $330 million quarter over
quarter due to Free Cash Flow generation and Diamondback’s
previously announced sale of Viper common stock. Pro forma for our
$5.5 billion Senior Notes offering completed earlier this month,
our total consolidated debt is approximately $12.3 billion. 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 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.
Other Business:We continue to
focus on operational excellence, maintaining our industry leading
cost-structure and differentiated operational execution. We look
forward to closing the Endeavor merger, which we believe will make
us not only bigger, but better. The sound industrial logic and
accretive nature of the transaction has resonated with our
stockholder base and validates our acquire and exploit
strategy.
We are confident that the best is yet to come.
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 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.
Diamondback Energy (NASDAQ:FANG)
Historical Stock Chart
From Jan 2025 to Feb 2025
Diamondback Energy (NASDAQ:FANG)
Historical Stock Chart
From Feb 2024 to Feb 2025
