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.
2024: Year in Review 2024 was
arguably the most transformational year in the Company’s history.
In February, we announced the $26 billion merger with Endeavor
Energy, creating the must own Permian Pure Play. The merger not
only made Diamondback bigger, with a combined ~722,000 net acres in
the core of the Midland Basin, but better, giving Diamondback the
ability to bring its industry leading operational structure onto a
world class asset with differentiated inventory quality and
duration. The deal closed on September 10th, and since then the
combined Diamondback team has seamlessly integrated, sharing best
practices and immediately delivering on the operational synergies
we highlighted to the market at deal announcement.
Even considering the potential challenges that
come with a large integration, our team was able to remain focused
and execute each quarter. In 2024, our daily average production was
598 MBOE/d (56% oil) with capital expenditures of $2.9 billion. We
generated $6.4 billion of net cash provided by operating activities
and $4.0 billion of Adjusted Free Cash Flow of which
$2.3 billion, or approximately 57%, was returned to
stockholders through our stable and growing base dividend, variable
dividends and buyback program. We repurchased nearly $1 billion
worth of stock in 2024 as our buyback program allowed us to
effectively buy during periods of market weakness and be an anchor
order in the secondary offering completed last September.
Operational UpdateOver the past
year, the team has seen a step change in efficiency improvements in
the field. We pushed well costs lower every quarter last year, and
today we are announcing a new Midland Basin well cost range of $555
- $605 per foot, down approximately $45 per foot (over 7%) year
over year. This is a testament to our drilling, completions and
production groups who continue to strive to be the best at what
they do, day in and day out.
On the drilling side, our use of clear fluids
combined with an improved downhole assembly has allowed us to
consistently achieve record drilling times. We drilled over 1.6
million lateral feet in the fourth quarter and are now averaging
approximately 7 days from spud to target depth on our average
Midland Basin 13,000’ lateral. We set a basin record in the fourth
quarter by drilling 20,386 total feet (vertical section, curve and
lateral) in one bit run.
Our completions teams continue to utilize
SimulFrac fleets for nearly all of our completions, which speed up
cycle times and reduce ancillary rental days. We are running four
electric SimulFrac fleets today and expect to average five
completion crews this year. Each crew can now complete
approximately 100 wells per year at an average of over 3,700
lateral feet per day, up from 80 wells and ~3,000 lateral feet per
day at this time last year. These electric fleets have enabled us
to realize meaningful value through higher uptimes and fuel cost
savings.
Since closing the Endeavor merger, we have also
started to see the benefits of some un-modeled synergies. We expect
a new standardized facility design, comprised of best practices
from Diamondback and Endeavor, to save us ~10% versus our prior
design. We are also seeing improved efficiencies and cycle times in
our drillout process, courtesy of the legacy Endeavor team. Lastly,
we are starting to see the benefit of size and scale in our
procurement process, with an estimated per well savings of 2% - 3%.
We believe we will continue to capture synergies, particularly on
the production side of our business, through shared learning as the
integration process continues.
Fourth Quarter PerformanceFor
the quarter, Diamondback produced 475.9 MBO/d (883.4 MBOE/d), above
the high end of the guidance range of 470 - 475 MBO/d (840 - 850
MBOE/d). Well performance continued to impress with strong results
in our Sale and Robertson Ranch areas and on the recently acquired
TRP acreage in Upton County. Capital expenditures were $933
million, below the low end of our guidance range of $950 million to
$1.05 billion. This beat was primarily driven by Midland Basin well
costs continuing to move lower, settling below our stated fourth
quarter $600 per lateral foot estimate.
We generated $2.3 billion of net cash provided
by operating activities and $1.4 billion of Adjusted Free Cash Flow
of which approximately $694 million, or approximately 51%, was
delivered to stockholders through our base dividend and buyback
program. We leaned into buybacks in the fourth quarter as we felt
our share price was below the intrinsic value of our business,
particularly during the volatility witnessed in December. We have
continued to buy back shares in January and February, and through
last Friday had repurchased 1,254,600 of shares at a weighted
average price of $167.42.
This quarter, we announced an 11% increase to
the base dividend, moving the dividend from $0.90 per share to
$1.00 per share per quarter ($4.00 per share annually). As we
continue to lower costs and develop our highest quality inventory,
our capital efficiency improves and lowers our corporate break even
(the dollar per barrel of oil needed for us to maintain our current
production levels and protect our dividend). Today, we are
confident we can protect the increased dividend and our base level
of activity below $40 a barrel at our current cost structure.
Drop Down AcquisitionIn
January, we announced a significant mineral and override drop down
of legacy Endeavor assets to our subsidiary, Viper Energy, Inc. in
a transaction valued at approximately $4.45 billion. Diamondback
will receive $1 billion in cash and 69.6 million units of Viper’s
operating subsidiary. The cash proceeds will be used to pay down
near-term debt and the units received will push Diamondback’s
ownership in Viper back above 50%, increasing Diamondback’s
exposure to Viper’s differentiated growth profile and robust
minerals position. We view Viper as a one-of-a-kind mineral
company, with an exciting trajectory that includes unique insight
into the Diamondback drill-bit. We believe in the long term
distribution growth potential at Viper, and our pro forma position
is worth approximately $7.5 billion assuming Friday’s stock
price.
Double Eagle AcquisitionLast
week, we announced a unique transaction with Double Eagle IV. We
agreed to purchase the northern portion of their acreage position
for approximately $4.1 billion. Consideration mix is made up of
approximately 6.9 million shares of Diamondback common stock
and $3 billion of cash.
We felt that this asset was the most attractive
remaining position in our backyard, public or private. The Double
Eagle team did an impressive job putting together undrilled units
in the highest returning parts of the Basin, and the roughly 400
core locations we expect to acquire immediately slot into our
near-term drilling profile. The acreage is also adjacent to our
existing position and we expect additional synergies from over 20
lateral length extensions and infrastructure sharing. We also
entered into a partnership to accelerate development on the
southernmost acreage we acquired from Endeavor, which is expected
to add significantly to Free Cash Flow in 2026 at no cost to
Diamondback.
Through this transaction, we continue to
high-grade our inventory base in the most productive parts of the
Midland Basin, maximize near-term Free Cash Flow generation and
extend inventory duration. While we recognize this deal was done
shortly after closing the Endeavor merger, we don’t often control
deal timing, and we prepare our organization to always “be ready”
when an opportunity arises. That said, the opportunity set is
shrinking, particularly for remaining quality private opportunities
in the Basin. As we have proven time and again, we expect to
seamlessly integrate this asset and execute flawlessly. We are
positioning Diamondback to have the best long-term capital
efficiency in the Permian Basin through a combination of inventory
quality, duration and execution cost structure.
2025 Guidance: Maximizing Capital
EfficiencyIn 2025, we have again chosen capital efficiency
and Free Cash Flow generation over volume growth for our capital
plan. This is a decision we have consistently made over the last
four years, and it has been consistently rewarded by the market and
applauded by our stockholders, who own the Company. The output of
this year's plan is the most capital efficient drilling program in
the Company’s history.
We measure our capital efficiency using oil
barrels produced divided by every dollar of capital spent. When we
announced the Endeavor transaction a year ago, we expected to be
able to produce approximately 470 - 480 MBO/d with a capital budget
of approximately $4.1 - $4.4 billion in 2025, which equated to
approximately 40.8 MBO per million dollars of capex spend. Today,
we are announcing a 2025 capital plan that generates 485 - 498
MBO/d with a capital budget of approximately $3.8 - $4.2 billion,
or approximately 44.8 MBO per million dollars of capex spend.
This ~10% improvement in capital efficiency is
the direct result of applying the lowest cost structure in the
Basin on top of our differentiated asset base. We plan to drill
approximately 460 wells and complete approximately 575 wells this
year, continuing to draw down on the DUC backlog we acquired from
Endeavor, TRP and Double Eagle. At this pace, we are confident we
can maintain this level of capital efficiency for nearly a decade,
once again highlighting Diamondback’s differentiated inventory
quality.
Balance SheetAt year-end we had
approximately $13.2 billion of gross debt and $13.0 billion of net
debt on a consolidated basis. We ended the year with ~$2.6 billion
of liquidity at Diamondback, with an undrawn credit facility. This
equated to a consolidated fourth quarter leverage ratio of
approximately 1.2x.
As we stated previously, we expect to fund the
$3 billion cash portion of the Double Eagle transaction
through a combination of cash on hand, borrowings under the
Company’s credit facility and/or proceeds from term loans and
senior notes offerings.
This increase in our total debt will be
partially offset by $1 billion of cash received from Viper upon the
anticipated closing of the drop-down acquisition in the second
quarter. In addition, we have committed to at least
$1.5 billion of near-term asset sales, which we expect to
include sales of our equity method investments, Endeavor’s water
infrastructure and non-operated assets.
We pride ourselves on our balance sheet strength
and continue to reiterate our intent to reduce net debt to $10
billion and maintain long-term leverage of $6 billion to $8
billion. We expect to achieve this de-leveraging naturally through
robust Free Cash Flow generation, dedicating approximately 50% of
Free Cash Flow to debt paydown, with acceleration from proceeds
from non-core asset sales as noted above.
Leadership TransitionOn
Thursday last week, we announced our leadership transition plan
where I will move from CEO to Executive Chairman effective as of
the Company’s 2025 Annual Meeting. At that time, Kaes Van’t Hof
will assume the CEO role and join the Board of Directors. This is
the culmination of a thorough succession planning process and Kaes
has my full support, as well as support from the Board of Directors
in taking on his new role.
I will remain close to the Company in my new
role as Executive Chairman as well as my future role on the Board
of Directors. While this is not my final stockholder letter, I
would like to say that representing the employees of Diamondback as
CEO over the last 13 years has been an incredible privilege. I
always believed in the growth opportunity for Diamondback, even
when we were a small cap oil producer that no one had ever heard
of. The success of this Company since the IPO in 2012 has never
been about any individual, but rather the collective efforts of an
extremely talented employee base with a strong culture based on
trust and a well-defined strategy.
Closing2024 was an incredible
year for Diamondback. We are uniquely positioned to succeed for the
long term, and continue to focus, day in and day out, on making our
company better. I am so proud of our team and the work they have
put in over the past 13 years to turn Diamondback into what it is
today.
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 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 or other effects
of strategic transactions (including the recently completed
Endeavor merger and other acquisitions or divestitures); the
expected amount and timing of synergies from the Endeavor merger;
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: 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; higher 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.
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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