Diamondback Curtails Permian Oil Output Amid Associated Gas Glut

Diamondback Energy, one of the Permian’s largest oil producers, curtailed some Permian oil output to limit associated gas production. Permian gas output is near record highs, and takeaway capacity out of the basin is bottlenecked.

Chris

Mathews

Hart Energy

Wed, 08/07/2024 - 05:03 PM

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Diamondback Curtails Permian Oil Output Amid Associated Gas Glut

Diamondback Energy, based in Midland, Texas (pictured), curtailed some of its Permian oil output in the second quarter as natural gas prices hovered near record lows. (Source: Shutterstock.com/ Diamondback Energy)

Diamondback Energy cut some Permian Basin oil production to limit its natural gas output in the oversupplied shale basin.

Midland, Texas-based Diamondback “curtailed a little bit of oil” during the second quarter and into the third quarter to bring down associated gas production, CEO Travis Stice said during the company’s second-quarter earnings call on Aug. 6.

Producers across the basin are seeing record volumes of associated gas from their Permian oil wells.

“We did take a couple of our highest [gas-oil ratio] wells down for a month or two to ease that pressure,” Stice said during the call. “I think even in the face of that, the gas curve continues to outperform expectations.”

Diamondback produced an average of 474,670 boe/d during the second quarter, including 276,143 bbl/d of oil output.

Second-quarter gas volumes, totaling 51.31 Bcf, averaged approximately 563.85 MMcf/d, up 1.4% quarter-over-quarter; NGL volumes averaged 104,549 bbl/d, up nearly 10% from the first quarter.

Diamondback Acreage 2Q24 — Diamondback has around 484,000 net acres in the Permian Basin, including 347,000 net acres in the Midland Basin and 137,000 in the Delaware Basin. *(Source: Diamondback investor presentation)*

Diamondback has worked to move greater NGL volumes out of the basin as natural gas prices languish, Stice said.

“We just have a lot of gas production out of this basin, and that's kind of why we have such a focus now on trying to generate more value for the gas that we're producing, whether that be in basin or out of basin,” Stice said.

Gas pipeline capacity out of the basin is also severely bottlenecked. The expected startup of the Matterhorn Express pipeline in September should provide some pricing relief.

Diamondback CFO Kaes Van’t Hof said the company has secured “a little bit of gas” transport capacity on the Matterhorn pipeline.

The company is also thinking about new applications for natural gas within the Permian Basin.

That includes in-basin power needs, Van’t Hof said. He cited the company’s plans alongside Verde Clean Fuels Inc. to explore building a gas-to-gasoline project in the Permian, using Diamondback’s associated gas volumes as feedstock to produce commodity-grade gasoline.

Other producers see potential to send gas to power-hungry data centers as artificial intelligence (AI) computing capacity grows.

Permian landowner LandBridge Co., which went public on the New York Stock Exchange in late June, has a land-lease agreement with a data center developer in the Delaware Basin. Construction could potentially begin in two years, according to LandBridge.

In the Permian Basin, data centers could eventually take up to 2 Bcf/d of Permian gas production off of oil producers’ hands, according to LandBridge estimates.

Endeavor M&A

Diamondback continues to work toward closing a blockbuster $26 billion acquisition of Endeavor Energy Resources LP, the largest buyout of a private U.S. E&P ever, according to Enverus research.

The company received stockholder approval to move forward with the transaction in April. Later that month, Diamondback and Endeavor received a “second request” from the U.S. Federal Trade Commission (FTC) seeking more information about the proposed combination.

Diamondback continues to work cooperatively with the FTC to comply with its requests, and the company anticipates closing the Endeavor acquisition during the third or fourth quarter.

The deal will yield one of the largest landowners and producers in the Midland Basin.

Diamondback Endeavor Map — The combination of Diamondback Energy and Endeavor Energy Resources will create one of the largest landowners and producers in the Midland Basin. *(Source: Diamondback investor presentation)*

As Diamondback waits to close the transformational deal, the company is making moves in other parts of its portfolio.

During the second quarter, Diamondback sold non-operated properties in the Delaware Basin for approximately $95 million.

Diamondback also sold interests in WTG Midstream to Energy Transfer LP for pre-tax consideration of approximately $375 million.

Those divestitures, layered on top of free cash flow generation since the start of the year, will reduce the cash outflow burden for the Endeavor deal, Van’t Hof said.

“I think we planned on looking at the deal as a de-levering process through free cash flow, but the asset sales are a kicker that accelerates that,” he said.

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Chris Mathews

Chris is the Senior Reporter of Shale and A&D at Hart Energy. He covers the North American upstream shale energy industry and the acquisition and divestiture deal markets.