Diamondback Energy Inc. is close to wrapping up its $1.6 billion acquisition of FireBird Energy in Diamondback’s backyard—the Midland Basin.

Kaes Van’t Hof, president and CFO of Diamondback Energy, spoke with Hart Energy following his opening keynote address at the Executive Oil Conference in Midland, Texas, about what’s next for the Permian company and the industry.

Nissa Darbonne: In terms of investors, I’m feeling like there are more retail. Retail is starting to return and generalist investors are starting to return to oil and gas. Are you seeing this as well?

Kaes Van’t Hof (00:46): Yeah, that’s a great question. I think, generally, we are seeing the mythical generalist investor start to come back into the space. We as an industry had a really tough couple years and I think a lot of companies, Diamondback included, have shifted our business model to a lower-growth, higher-return model and our investors seem to be enjoying that. So, I think success begets success. And as an industry, I think we all have healthier balance sheets, healthier companies, healthier business models, and that should over time attract investor capital.

So, this was always a good business. I think we just tried to all grow a little too much in a business that global demand grows one or 2% a year. So, now we’re slowing down as an industry, Diamondback included, and returning cash to our shareholders because at the end of the day, they gave us a lot of money to grow this business and they expect a return on that investment, and that’s what we’re all doing today. And it seems to be working. So, let’s not change the plan if it’s not broken. And I think this results in a healthier industry and a healthier sentiment between investors and the companies.

ND: That’s great to hear. You’re also closing on a big acquisition—FireBird Energy—in a couple weeks. It appears that the acquisitions you’ve done so far—Guidon, the QEP package, now FireBird—that you tend to favor adjacent property bolt-ons. Will that continue to be your focus or would you consider making a leap?

KVH (02:27): We started in the Midland Basin 10 years ago as a public company with 2,000 barrels a day of production and 30,000 or 40,000 acres, and now we’re at 500,000 acres and 400,000 barrels a day of production. So, we’re focused on our backyard where we know the assets very well. Our cost structure is competitive. Obviously, physical adjacencies matter a lot when it comes to midstream and infrastructure and all the dollars spent on long lateral development.

And the FireBird deal was a great tuck-in for us. We had a seller that had tested the western portion of the basin and they had some great success in doing that. So, they made a bet, and now the bet moves to Diamondback’s execution machine where we can drive costs down and build out the infrastructure needed for full field development there.

So, I’d expect us to continue to look at things, but there’s been a lot of consolidation done already in the Midland Basin, so I don’t know how much more there’s left to do.

ND: A really great deal. And you’re selling $500 million of noncore properties toward financing the FireBird acquisition, the cash portion of it. You’ve already signed to sell $155 million of that. I understand of the remaining, roughly $350 million that it’ll probably be more midstream in nature. You’re not going to sell actual acreage?

KVH (03:59): Listen, we ended up selling some acreage for the $150, but overall, the $500 million is a signal to the market that we’re serious about our balance sheet, we’re serious about keeping leverage down even in the upcycle and there could be some more E&P assets sold, but it is more likely that we sell some midstream assets that trade at much higher multiples than the E&P business. So, fingers crossed, we get some across the finish line here before the end of 2023, but we have some time.

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