Diamondback Energy, Inc. Q1 FY2025 earnings call

• Response to macroeconomic challenges: Reduced capital budget by $400 million, cut 3 drilling rigs and 1 frac spread to maximize CapEx reduction while minimizing volume impact. - Production guidance: Q1 net ~475,000 barrels of oil a day, Q2 guide around 495,000, Q3 down to ~485,000 then flat. - View on U.S. oil production: U.S. oil production poised to roll over due to base decline and need for significant capital reinvestment. - Capital allocation: Focus on share buybacks and potential asset sales, with 25-30% of free cash flow allocated to debt reduction and 70-75% to share buybacks. - Operational efficiencies: Under 8 days average per well on 120+ wells in Q1, with completions team achieving mid-3,000 feet per day average and potential for higher efficiencies. - Gas pipeline projects: Continued support for new pipelines out of the Permian Basin, with plans for diverse gas marketing arrangements.

No specific product segment financial performance data provided in the transcript.

• Capital budget reduced by $400 million, cutting 3 drilling rigs and 1 frac spread. - Production guidance: Q1 net ~475,000 bbl/day, Q2 guide ~495,000, Q3 ~485,000, then flat. - 2026 CapEx guidance around 900 million per quarter to keep production flat, with expectation of market recovery. - Allocation of free cash flow: 25-30% to debt reduction, 70-75% to share buybacks, with potential for more share repurchases as market conditions improve.

• Macro economic uncertainties: Oil price volatility and slowing global economies impacting demand. - Geologic headwinds: Outpacing efficiency gains in mature basins, leading to challenges in further reducing costs. - Volatility in service costs: Fluctuations in casing tariffs and input prices affecting operational costs.

Q: Good morning, Travis, Kaes. And, Travis, congratulations as you position for retirement. And Kaes, congratulations again on taking on the new role. I think some important news this morning around changes in the activity plans and in response to obviously what is a tougher oil macro. So, Travis, can you spend some time talking about the thought process that went into the decision and how you're thinking about the approach from here?

A: Sure. Neil, our job is to allocate capital and allocate capital for the most profit we can for the shareholders who own the company. Part of our role is we have to have a view of the macro as we allocate capital. And the current view of the macro is certainly challenging at best. Over the weekend, OPEC made the decision to put an extra million barrels a day on the market in what's already an oversupplied world. And we still are looking at headwinds with what we're seeing as slowing economies around the world, which obviously has a re-through to demand. So, what we tried to put together was a response to those kind of macro conditions, which by taking $400 million out of our capital budget and three drilling rigs and one frac spread allowed us to maximize the CapEx reduction while minimizing volume impact. And at the same token, provide us a runway for maximum flexibilities to respond in either direction in the future quarters as this evolving supply demand imbalance works its way through the system. So that's sort of the background of what we talked to the board about well before Saturday's decision by OPEC. And again, it stems to how can we create the most value when we allocate capital? And when you look at what we've done with this announcement, we've actually made our program more capital efficient by spending less dollars this year.

Q: Yes, Travis, the follow-up on that is we've certainly reduced your cash capex by $400 million. The impact on production is not that significant, at least for 2025. And so, is that a function of the delay between changes in activity and in production, or is that you guys were just really tracking well in terms of your productivity to start the year?

A: Yes, Neil, let me give you some color on that because I think it's important, right? On the outside, it looks like a 1% hit to production, but if you just look at Q2, peak to trough, we're going to probably be down 20,000 net barrels of oil a day, which on a gross basis is close to 30. So, we had a great April. Things were humming along. We were well over 500,000 net barrels of oil a day. Obviously, now hitting the brakes a little bit with the reduction in the frac crews. And so, if you think about it, we're about 475,000 barrels a day net Q1. Q2 guide around numbers is about 495. And then we're going to decline off a bit into Q3 down to about 485. And at that point, in today's market, hold that flat. So, on the outside, it looks like a flattish program, but this is why we've kind of been saying that we think gross oil production is coming down in the Permian in the U.S. You just look at ours, for example, going from five frac crews down to four is going to be a 30,000 barrel a day impact in just a quarter.

Q: Yes, thanks. And Travis, again, congrats too on your next stage. And look, I would say it's unfortunate it has to be on a bad macro note, but I think it’s a testament to what you've created that Diamondback able to kind of manage this pretty well. My first question is just your broad view of the oil macro. I thought it was pretty interesting in your investor letter how you thought the U.S. oil production was ready to roll over. And obviously you all have some pretty good eyes and feelers out on the ground. Can you give us a sense of what you're seeing real time in the Permian Basin and other places and your view on maybe where oil production goes from here. And it's more of a U.S. perspective versus Diamondback one?

A: Sure. Well, certainly as the Permian Basin goes, U.S. production is going to follow that. And at roughly 6 million barrels of oil a day, we've got a base decline that we have to offset every year of about 2.5 million barrels a day. And it doesn't take much capital to come out of the equation for that base decline to really be seen in production. And so you can apply that also to the 13 million barrels a day that the U.S. is producing. That's roughly 4.5 or 5 million barrels a day of production that has to be replaced. So I think as capital continues to come out of the investment equation, this decline that we're on is really going to be magnified. And because we are in the more mature stage of the development, this is not one of the types of declines that can be offset by improved efficiencies, although we highlighted continued efficiency gains at the Diamondback level in the quarterly results, but we're picking pennies up now. And when we were going through this earlier in our history, probably most recently, 2014 and early 2015, we were able to pick up dimes and quarters back then. And it's just where we are in the maturation cycle of depleting these resources that I think you're going to see a really remarkable response on this base decline that's part of the equation.