Diamondback Energy: ‘Converting Rock Into Cash Flow’

Time is money in the oil business, even when it’s less than a minute, and every dollar counts, one can surmise from listening to the head of Diamondback Energy Inc.

After finishing an operational review several weeks ago, CEO Travis Stice said the company’s drilling team showed him how it shaved off about seven-tenths of a minute from the amount of time it takes to screw pipe together.

It may not sound like much, but “that’s a dollar a foot per well times 20 rigs,” Stice told analysts on a call Aug. 7 before sharing one of its operations mantras—“you got to inspect what you expect.”

“It’s that level of scrutiny across our cost spend that I think truly differentiates our organization. … Our business is not that complicated. It’s converting rock into cash flow, and you’ve got to measure every facet of that conversion process to ensure you’re most efficient,” he said.

The Efficiency Front

The Permian Basin pure-play, which closed its $9.2 billion all-stock acquisition of Energen Corp. last year, continues to make strides on the capital efficiency front. The company’s post-close well costs have fallen below that of Diamondback stand-alone wells costs in second-quarter 2018. Per lateral foot well costs fell 16% to $1,131 in the Delaware Basin and 7% to $735 in the Midland Basin in second-quarter 2019 compared to a year earlier.

Diamondback saw its quarterly adjusted profit surge by 77% to $280 million, compared to a year earlier, lifted by a 149% increase in production. The company produced 280,365 barrels of oil equivalent per day (boe/d), nearly 70% oil, compared to 112,592 boe/d a year ago.

But despite the gains, Diamondback—like its peers—were still struck by unfavorable oil market conditions. Average sale prices for oil dropped by $7.15 to $54.41 per barrel for the quarter. Company executives believe the worst of its widest basis differentials have passed.

“Our economics are better than they’ve ever been,” Stice said. “We’re more profitable. We’ve got more operational capability. Just across the board, we’re firing on all cylinders, and it’s unfortunate in this market backdrop. But we’re going to be OK because [of] our cost structure, our execution prowess, our capital efficiency. We’re going to continue prosecuting our development plan.”

Permian Projections

Stice’s words were delivered as the CEO of larger Permian independent player—Pioneer Natural Resources Co.—warned of production challenges in the basin as Tier 1 acreage is exhausted. Pioneer CEO Scott Sheffield believes the Midland Basin is the Permian’s only area for future growth.

RELATED: Pioneer Takes Aim At High-Grading Prized Permian Basin Position

In December 2018 the U.S. Geological Survey (USGS) said the Permian Basin’s Wolfcamp shale and Delaware Basin’s Bone Spring Formation could hold an estimated 46.3 billion barrels of oil plus 281 trillion cubic feet of gas and 20 billion barrels of NGL.

Using well landing zones, well production and unit depths and thicknesses data from IHS Markit’s Enerdeq and ProdFit databases, the USGS said it assessed undiscovered technically recoverable continuous oil and gas resources in six assessment units in the Wolfcamp shale and five units in the Bone Spring Formation. Of these, the Delaware Basin’s Wolfcamp A appeared the most promising for oil, while potential resources were highest in Wolfcamp D for gas and Wolfcamp B Upper for NGL.

RELATED: USGS Report Expands Permian’s Wolfcamp, Bone Spring Potential Bounty

‘A Great Machine’

Diamondback is on the prowl for oil at its Limelight prospect, where it plans to drill a well in the third quarter. Located in Andrews County, along the Central Basin Platform and Midland Basin boundary, Limelight has emerging Mississippian oil potential and is analogous to recent successful activity in the area, the company said.

If the well is successful, given the area’s footprint of some 24,000 acres, “it could be a nice place to park a rig for multiple years,” Stice said. But data is needed before any capital allocations are considered.

In the meantime, work continues on getting costs down further, including in the Delaware, by incorporating learnings from other parts of the basin and benefiting from some softening on the service side, according to COO Mike Hollis.

The company is also vetting new technologies, including electric frac later this year, looking to save money while not harming well production efficiency, he added.

Having completed major strategic objectives and exceeded synergies related to the Energen acquisition, the company is also moving forward with goals to buy back up to $2 billion in shares and generate more than $750 million of free cash flow in 2020 if U.S. oil prices stay around $55 per barrel.

Diamondback expects to realize greater than 95% of West Texas Intermediate pricing for second-half 2019, Stice said.

“I think we’ve got a great machine,” he said. “If we didn’t have the machine that we have, we couldn’t have delivered on the cost results after doing $10 billion worth of acquisitions at the end of last year.”

Velda Addison can be reached at vaddison@hartenergy.com.