Diamondback Energy is looking for new outlets for its Permian Basin natural gas, including power generation for data centers.

Kaes Van't Hof, Diamondback CFO, said the message is clear from FANG investors.

“It’s time to stop selling gas at zero and diversify our risk,” he said during the company’s third-quarter earnings call on Nov. 5. “That’s what we’re going to do, particularly as more and more gas gets produced in this basin.”

Diamondback sees power generation and, potentially, data center development as the next wave of equity investments for the growing Permian producer.

In a Nov. 4 letter to shareholders, CEO Travis Stice touted Diamondback’s portfolio of 65,000 land acres, cheap natural gas and abundant supply of produced water within the Permian Basin.

“By generating our own in-basin power, we can solve two long-term issues that have plagued the Permian Basin: the need for natural gas egress and cheap, reliable electricity,” Stice wrote.

With Permian Basin spot natural gas prices near record lows, a growing number of producers are considering opportunities in power generation to earn revenue from gas production.

Permian associated gas volumes are a byproduct of drilling oil wells in America’s most active onshore play, and pipeline constraints make getting gas out of the basin difficult.

Prices at the Waha hub in West Texas, located near Permian Basin drilling activities, increased from -$0.86/MMBtu to $0.11/MMBtu during the week ended Oct. 31, according to U.S. Energy Information Administration data.

Conversations with data center builders have started, but developers largely “have not been focused on the Permian yet,” Van’t Hof said.

“We’re kind of putting the flag out there that this is a very cheap way to execute their business model while benefiting Diamondback shareholders,” he said.

Diamondback is looking at other options to satisfy power needs in the Permian. Earlier this year, Diamondback signed a 20-year power purchase agreement with California-based Oklo Inc. for a 50-megawatt (MW) small nuclear reactor unit for its Permian operations.

Other players are also looking to get in on the power and data center fervor. Riley Exploration Permian Inc., a public producer on the Permian’s Northwest Shelf, expanded a joint venture (JV) with Conduit Power to build new power generation and storage assets in the ERCOT market.

Riley Permian increased its stake in the JV, RPC Power, from 35% to 50% and agreed to sell up to 10 MMcf/d of natural gas to the JV as feedstock supply for generation facilities.

LandBridge Co., which listed its shares on the New York Stock Exchange this summer, doesn’t produce oil and gas but manages a huge portfolio of surface acreage in the Permian’s Delaware Basin.

LandBridge has a land-lease agreement in place with a data center developer in the Delaware Basin, and construction could potentially begin within two years, executives said.

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Midland moves

Diamondback continues to make progress integrating people and processes from a blockbuster $26 billion acquisition of private E&P Endeavor Energy Resources LP.

The transformational acquisition, closed in September, added 344,000 net acres in the Midland Basin and roughly 2,300 core drilling locations to Diamondback’s portfolio.

Since combining, Diamondback has brought Midland Basin DC&E costs down to around $600/ft, compared to Endeavor’s legacy costs of $775/ft.

Some of Diamondback’s well costs come in below that number, like the core Spraberry and Wolfcamp wells, Van’t Hof said. But the company is also baking in pricier projects in its drilling plans.

“We’re adding more Wolfcamp D to the plan—that’s a more expensive well to drill,” Van’t Hof said. “There’s a couple of Barnett [and] Woodford wells throughout the portfolio.”

Stice cited two other significant operational synergies since combining: clear fluids for drilling and SimulFrac for completions.

Using clear fluid drilling systems has already led to decreased drilling costs on Endeavor’s legacy acreage, and all the company’s wells will be completed with SimulFrac crews in the fourth quarter.

Diamondback said it will use the occasional spot crew for single-well tests, like the Barnett Shale in the Midland Basin.

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Diamondback is also pruning its portfolio to sell non-core assets after completing the Endeavor takeover.

On Nov. 3, Diamondback and TRP Energy entered into an agreement under which Diamondback will trade certain Delaware Basin assets and pay $238 million in cash in exchange for TRP’s Midland Basin assets. 

TRP’s Midland assets include around 15,000 net acres in Upton and Reagan counties, Texas, 55 remaining undeveloped operated locations and 18 DUCs.

Diamondback said it traded TRP in exchange for assets in its Vermejo development area, located across Reeves, Loving, Ward and Winkler counties, Texas.

Diamondback doesn’t necessarily want to part ways with operated Permian Basin inventory, Van’t Hof reiterated. But the trade with TRP “was pretty unique in that TRP gets to move into the Delaware Basin and test some things in secondary zones,” he noted.

“We’re basically moving third- and fourth-quartile inventory into first- and second-quartile inventory, all while getting the benefit of capital efficiency from 18 DUCs added to the program and assets in our backyard,” Van’t Hof said.

Van’t Hof said Diamondback is looking at other A&D options like its trade with TRP.

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