Diamondback Energy, Inc. Q2 FY2025 earnings call

• View themselves as the consolidator of choice in the Permian due to lower costs and better execution, leveraging an acquire and exploit strategy.
• Target $1.5 billion noncore asset sales, with progress on EPIC pipeline stake and Endeavor Water assets.
• Focus on production tail optimization via workover programs, seeing encouraging results in improving older well production.
• Drilling and completion teams achieving faster spud to TD times, pushing lateral lengths, and aiming for consistent top-tier performance.
• Gas production improved via WTG and Energy Transfer, with increased NGL yields and reduced flaring.
• Increasing focus on other zones like Wolfcamp B and Upper Spraberry, leveraging Endeavor acreage for better returns.

No detailed breakdown of product segment financial performance and revenue contributions provided in the transcript.

• Use noncore asset sales proceeds to pay down debt, particularly the 2-year term loan from the Double Eagle deal.
• Expect cash tax rate to level out at 18%-20% of pretax income in 2026, down from 15%-18% in 2025.
• Aim to hold oil production around 490,000 barrels per day with approximately $900 million quarterly CapEx, with flexibility to adjust based on macro conditions.

• Commodity price volatility affecting activity decisions and capital allocation.
• Supply chain issues such as casing cost inflation and service pricing dynamics.
• Market consolidation challenges and maintaining competitive edge in the Permian.

Q: Sorry about the AC situation. I hope you have a couple of fans because it can get hot in Midland in the middle of the summer. Yes. Hopefully, this is not part of -- Kaes, your thoughts on reducing costs at the company because AC is pretty important. Yes. But let me shift gears a little bit. Kaes, I want to hit this one kind of head on. There's been a lot of consolidation talk in the industry, particularly from some of your big cap peers who've highlighted some of the benefits they've received from synergy capture from previous deals. I was wondering if you could comment on how you think about the consolidation road map in the Permian and FANG's role within the industry and just overall M&A thoughts.

A: Yes. I mean good question, Arun. I mean I think, first and foremost, we have to remind everybody that our job is to maximize shareholder value. And I think we've done that very successfully at Diamondback over the last 15 years and what I think and -- I think investors would agree is an extremely -- has been an extremely tough tape. So generating alpha and creating value in a tough tape is what we've done. And we've done that via an acquire and exploit strategy in the Permian, where we've been able to cut costs and execute better than anybody else on the assets we acquired. And I think that ability to integrate acquisitions and not have any issues executing post doing it. The most recent example is Endeavor, almost doubled the size of the company and outside to investors, it looked like we didn't skip a beat. So listen, we've got a young team executing at the highest level in the prime of all of our careers, and we're only getting better quarter in, quarter out as proven with the results today. So I think the way we see it is we're -- we should naturally be the consolidator of choice as we execute at a lower cost and better overall development strategy, some slides we put in the deck today that are pretty interesting. And until someone else can prove they can do it better than us and we lose our edge, then we should be the consolidator of choice. So that's what I spend my time thinking about. I think it's interesting to see larger peers get bigger in the basin and talk about M&A. But I think we're singularly focused on continuing to execute at the highest level, and we exhibited that today.

Q: I'm wondering if you can contextualize a bit more Kaes, the opportunity to address some of the production downtime and focus on the production tail. Can you quantify the size of that opportunity that you think can be addressed over the next couple of years?

A: Yes, I'll give it a high level. This commentary is kind of new to us, right? I mean if you look back at the development of Shale or Diamondback, it used to be 80% of our spend was on capital and 20% was on op costs. And now here we are at the size that we are, capital is 65% or so of our spend. Op costs are 35% and we think it's going to 50-50. And I think there's a lot of things to work on, on the tail of our production, some of which came over from ideas the Endeavor team had, and we're seeing some interesting results on some of our -- we call them HTL jobs. But I think if we can get a lot of little wins on the production side of the business, reduce downtime by 1% here, 1% there, do some of these workover jobs that bring some of the old wells back to life, so to speak, that kind of adds up over a very large program. So I don't know, Danny or Chad, do you want to add anything that we've been doing on that and our focus on that, but that's the highlights.

Q: You all every quarter seem to find ways of squeezing out more efficiency, getting drilled aids down and et cetera. Look, how many more things can you do? I mean drilling days can't go to 0, but like do you have a line of sight on how you can continue to improve efficiencies? Or are you getting to a point where you're more at the optimal level? And maybe if we understand what the leading-edge kind of metrics right now are versus averages, that would be helpful.

A: Scott, yes, thanks for the question. I'd love to talk about the ops guys and the nice reprieve and some of the stuff we talked about in these calls. So I think the drilling guys, in particular, have done a phenomenal job of really chasing that leading edge well and getting to that leading edge well more consistently. I think we've hit these 4- and 5-day wells that we talk about kind of sporadically throughout quarters in the past, but they're getting to where they're hitting them more consistently. And I think that's the real efficiency driver is how do we become more consistent and chasing those really record wells. We continue to push lateral lengths longer. We put in our letter highlighted a well that we drilled 30-plus thousand feet. I think it was a record well in Texas. And so, we're really pushing the limit of what we've known to be capable to do on the drilling side and I really don't know where the threshold limit is going to take us there. But the guys have done a really good job of just consistently eliminating the downtime out of the operation and chasing that leading edge well in every section of the drilling well. And on the completion side, they continue to do the same thing. They're just chasing that final frac efficiency, continuing to get better pad after pad and you see that in the results of the aggregate lateral footage per day, pushing 4,000 foot per day on the SimulFRAC crews. And look, I think there's opportunity to do some different things in the SimulFRAC world where we can -- we can grow that efficiency 15% to 20% more on top of that. So we're not done chasing those things. I think we'll continue to try and lead the pack in the Permian with regards to drilling and completion efficiency. I think at some point in time, we will reach a plateau, but we don't see it here in the near future.