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 second quarter of 2023 was characterized by
volume outperformance, reduced operating and administrative
expenses, decreased net debt, additional non-core divestitures and
another increase to our base dividend. Further, we have line of
sight to significant capex reductions through the remainder of the
year, which will result in higher expected Free Cash Flow ("FCF")
at current commodity prices. To summarize, we continue to execute
across all facets of our business model.
Production:Diamondback
continued to execute and exceed expectations in the second quarter,
with both oil and total production above the high end of our second
quarter guidance ranges. As a result of this year-to-date
outperformance and our continued confidence in the forward outlook,
we are increasing our full year oil and total production estimates
to the high end of their respective annual ranges. The midpoint of
annual daily oil production moves to 261 MBO/d from 259 MBO/d,
while the midpoint of annual total daily production moves
to 440 MBOE/d from 435 MBOE/d.
Oil production is expected to grow slightly in
the second half of the year, with third quarter oil production
projected to be 262 – 265 MBO/d (440 – 445 MBOE/d). We anticipate
we will continue 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 on a large scale in the Midland Basin, combined
with a high mineral interest across the development plan.
Oil realizations increased quarter over quarter
to 97% 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 some quarters above that number. Gas and NGL
realizations declined significantly quarter over quarter
commensurate with the respective declines in each commodity.
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 that protects against the
extreme downside where we protect our dividend, still generate FCF
and manage our leverage ratio.
Capital Expenditures:Cash capex for the second
quarter was $711 million, in the upper half of our quarterly
guidance range. We expect cash capex to decline ~5% in the third
quarter to $650 - $700 million as we begin to see the benefits of
both lower well costs and lower drilling activity, with a minor
benefit from a slower completion cadence. We also expect cash capex
to decline further in the fourth quarter, which should set a
baseline for our 2024 capital plan. Both raw materials (including
steel, diesel and sand) and service costs continue to decline,
setting us up for lower completed well costs as we head into
2024.
Our revised full year 2023 cash capex guidance
is $2,600 - $2,675 million, which is up just over 1% at the
midpoint from our initial guidance. We drilled almost 1.1 million
lateral feet in the second quarter, including almost 1 million
lateral feet in the Midland Basin. Through the second quarter, we
have drilled approximately 56% of our estimated total lateral
footage and completed approximately 54% of our estimated total
lateral footage for the year. This translates to 180 (53%) out of
our estimated 335 - 350 wells drilled and 177 (53%) out of our
estimated 330 - 345 wells to be completed for the year, coinciding
with our spend year to date of 52% of our capex budget.
We also expect to have higher than previously
expected capital spend on midstream projects in 2023, primarily for
high-return third-party water business that utilizes our extensive
existing recycling and disposal infrastructure in the Midland
Basin.
Operating Costs:Lease operating
expenses (“LOE”) were lower than guidance expectations in the
second quarter, primarily due to the ability of our field and
operations organizations to "control what they can control", which
is primarily the variable costs that make up LOE. Therefore, we are
reducing our LOE guidance by $0.10 per BOE for the year to $4.90 -
$5.40 per BOE, implying LOE will still increase from second quarter
levels in the second half of the year primarily due to third party
produced water disposal obligations.
Cash G&A has trended lower than expectations
due to cost control and the increase in production seen this year.
Therefore, we feel comfortable reducing our annual guidance by
$0.05 per BOE at the midpoint to $0.60 - $0.75 per BOE. Due to
continued and expected debt reduction and higher volumes, we also
feel comfortable reducing our interest expense guidance per BOE by
$0.10 to $1.20 - $1.30 per BOE. Taken together, these reductions to
cash operating costs amount to $0.25 per BOE of total savings
relative to initial expectations.
As it relates to non-cash costs, we increased
our DD&A guidance to $10.00 - $10.75 per BOE due to the impact
of higher development and leasehold costs from recent acquisitions.
We also reduced our non-cash G&A estimate for the year by $0.05
per BOE to $0.35 - $0.45 per BOE.
Return of Capital:Our Board
continues to believe the primary method to return capital to
stockholders needs to be through our base dividend, one that is
sustainable and well-protected through the cycles inherent in a
cyclical industry. The Board considers the base dividend to be a
“debt” owed to our stockholders, and stress-tests that debt to
ensure it is protected down to $40 per barrel oil prices. Due to
our lower debt burden, lower share count and low reinvestment rate,
they have made the decision to raise our base dividend this quarter
by 5% to $3.36 annually ($0.84 quarterly). The Board will continue
to review our corporate breakeven and fixed obligations as we focus
on sustainable base dividend growth in the future.
We generated $1.51 billion of Net Cash
Provided by Operating Activities and $547 million of FCF in the
second quarter, and repurchased 2.43 million shares for $321
million ($132.21 / share average). Therefore, including our
increased quarterly base dividend commitment, we exceeded our
commitment to return at least 75% of our FCF to stockholders in the
second quarter as the market presented consistent opportunities for
us to repurchase shares. We are confident in our path towards
further debt reduction and we currently see FCF increasing in the
second half of the year due to increased commodity prices and lower
capex.
Year to date, we have repurchased 5.36 million
shares, which is more shares than were issued for our Lario
acquisition that closed in January 2023. Since the inception of our
share repurchase program in 2021, we have repurchased 18.2 million
shares for $2.2 billion ($122.99 / share average), while also
distributing $13.24 per share in base and variable dividends over
the same period.
Balance Sheet:Total debt and
net debt decreased to just under $6.7 billion in the second
quarter, down from just over $7 billion in the first quarter. We
expect net debt to continue to decrease in the third quarter
through a combination of FCF generation, proceeds from asset sales
closing in the quarter, and the continued reduction of our income
tax receivable.
Other Business:We exceeded our
non-core asset sale target of $1.0 billion by year end 2023
this quarter by announcing and closing the sale of our equity
interest in the OMOG oil gathering system. Since initiating the
non-core asset sale program, we have announced or closed
transactions with $1.1 billion of gross proceeds. As a
reminder, proceeds from these asset sales will go towards further
debt reduction. We are not planning to increase our non-core asset
sale target at this time, but still have significant value in our
midstream assets and equity method investments that may be
monetized at some point in the future.
To summarize, we remain confident in the forward
outlook for the business. We continue to develop our best assets in
the core of the Permian Basin, are seeing costs come down in real
time and should see FCF increase into the second half of the year
and 2024 at current commodity prices.
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
Diamondback Energy (NASDAQ:FANG)
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