Diamondback Energy Q2 2024 Earnings Report

Diamondback Energy EPS Results

• Actual EPS: $4.52
• Consensus EPS: $4.51
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $3.68

Diamondback Energy Revenue Results

• Actual Revenue: $2.48 billion
• Expected Revenue: $2.19 billion
• Beat/Miss: Beat by +$289.09 million
• YoY Revenue Growth: +29.40%

Diamondback Energy Announcement Details

• Quarter: Q2 2024
• Date: 8/5/2024
• Time: After Market Closes
• Conference Call Date: Tuesday, August 6, 2024
• Conference Call Time: 9:00AM ET

Diamondback Energy (NASDAQ:FANG) (NASDAQ: FANG) is an independent oil and natural gas company focused on the development, exploration and production of unconventional resources in the Permian Basin. Headquartered in Midland, Texas, the company concentrates its operations in the core Midland and Delaware sub‑basins of West Texas and southeastern New Mexico, where it pursues contiguous acreage positions to support repeatable drilling programs.

Diamondback’s activities span the upstream value chain, including leasehold acquisition, well planning, drilling, completion and production optimization. The company produces crude oil, natural gas liquids (NGLs) and natural gas from horizontal wells developed using multi‑stage hydraulic fracturing. In addition to drilling and completion operations, Diamondback manages gathering and marketing arrangements to move and sell hydrocarbons, and it employs subsurface, completion and operational technologies aimed at improving recovery and reducing per‑well costs.

As a publicly traded E&P operator, Diamondback balances capital allocation across drilling activity, infrastructure and returns to shareholders while responding to changing commodity price environments. Its concentrated Permian footprint and integrated approach to operations and midstream logistics support scalability and operational efficiency, enabling the company to pursue disciplined development of its unconventional assets.

Diamondback Energy Q2 2024 Earnings Call Transcript

Key Takeaways

• Diamondback achieved a ~9% drilling efficiency improvement, raising average rigs from 24 to 26 wells per year and boosting completions per simul-frac crew from 80 to over 100, driving down D&C costs across its asset base.
• The team expects to accelerate and exceed initial synergy targets from the pending Endeavor Energy merger by applying its current industry-leading capital costs to a larger footprint post-close.
• It maintains a highly flexible return of capital framework, shifting between share buybacks in weaker oil price environments and a variable dividend in higher markets, with a base dividend breakeven of $40/barrel.
• Diamondback aims to reduce net debt to around $10 billion through organic free cash flow and selective asset sales, with no intention of forced disposals of its core Permian operations.
• To improve gas realizations, the company is securing midstream commitments and building in-basin markets—via Whistler, Matterhorn and Blackcomb pipelines plus power/NGL projects—to mitigate low Waha pricing.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Diamondback Energy Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Adam Lawlis, VP of Investor Relations. Please go ahead.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

Thank you, Steven. Good morning, and welcome to Diamondback's second quarter 2024 conference call. During our call today, we will reference an updated investor presentation and letter to stockholders, which can be found on Diamondback's website. Representing Diamondback today are Travis Stice, Chairman and CEO, Kaes Van't Hof, President and CFO, and Daniel Wesson, COO. During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

I'll now turn the call over to Travis Stice.

[Travis Stice, CEO at Diamondback Energy]

Thank you, Adam, and I appreciate everyone joining this morning. I hope you continue to find the stockholders' letter that we issued last night an efficient way to communicate. We spent a lot of time putting that letter together, and there's a lot of material contained in the text. Operator, would you please open the line for questions?

[Operator]

Yeah, thank you. At this time, we will conduct a question-and-answer session. Once again, as a reminder, to ask a question, please press star one one. To withdraw your question, please press star one one again. Please stand by, we'll compile the Q&A roster. The first question comes from the line of Neal Dingmann of Truist. Your line is now open.

[Neal Dingmann, Managing Director - Energy Research at Truist.]

Morning, Travis, and nice results. Travis, my first question's on sort of the leading capital efficiencies you all continue to highlight. Specifically, could you talk about the latest announcement? I think you guys talked about dropping to 10 from 12 rigs, and I think what that's even versus 14 a few months ago. And I'm just wondering how the drilling efficiency is so good that you're able to maintain the pace, you know, with nearly 30% rigs than just a few months ago. And, you know, just wondering how you anticipate or if you anticipate the same type of efficiencies, you know, once you take over the Endeavor assets.

[Travis Stice, CEO at Diamondback Energy]

Sure. Good question, Neal. The first half of the year was really typified by us doing more with less, and you gave some numbers there. But just to repeat some of those, you know, in January of this year, we estimated that we could get 24 wells, you know, per rig per year. And now we're up to 26 wells per year for the rest of the year. And you see a similar efficiency gain on the completions, where we previously signaled 80 completions per year per crew, and now we're up to over 100 completions per crew per year. Those are some frac crews.

[Travis Stice, CEO at Diamondback Energy]

And look, as we look into the future, one of the things that I get excited about is that these efficiencies are things that we don't give back. And so as we incorporate after close, the new assets from Endeavor, I fully anticipate our operations organization, combined with Endeavor's operations organization, will be able to continue these results. And what's significant about that is when we talk to the market, you know, on February twelfth, announcing this deal, the biggest synergy that we talked about was being able to apply Diamondback's current DNC cost on a larger asset. And I'm pleased to say today, we're significantly below where we were in February. So that just accrues the benefit to our shareholders and really supercharges the delivery of the synergies that we were talking about.

[Travis Stice, CEO at Diamondback Energy]

So yes, Neal, I'm very confident that we'll be able to continue this leading-edge capital efficiency on a larger asset base.

[Neal Dingmann, Managing Director - Energy Research at Truist.]

Great to hear. And then I want to ask just quickly on shareholder return plans, maybe just on sort of broad strokes, specifically, how would your plan vary? I mean, obviously, oil prices are jumping around, could be anywhere from, you know, $90-$70 dollar environment. I'm just wondering, given your market, you know, sort of leading costs that we see on slide 9, you know, I'm just wondering, depending on where oil prices go, is that just a matter of having more free cash flow buybacks and variable dividends, or would there be any other changes we see in a high oil price environment versus a lower oil price environment?

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

Yeah, Neal, I mean, you know, I think, I think the key point here is, you know, we've always had a very flexible return of capital program. You know, since the very beginning, when we put this in place in 2021, we've said we'd like to be able to flex between buying back shares and paying a variable dividend. And, you know, we take, you know, we take that capital allocation decision very, very seriously. So, you know, we're set up in a way where if you have periods of weakness, like we've seen over the last, you know, week or two, you know, that's when the buyback kicks in. And if, you know, if it continues to be weak, you know, we'll continue to buy back more shares.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

You know, that's the benefit of having a low breakeven on your capital program, low breakeven on your base dividend, and continuing to generate free cash flow, you know, down to much lower numbers than, you know, than peers or than what, you know, the market's used to. So I think we're, we're excited. You know, if, if things do stay weak, we'll, we'll flex that buyback and, and be aggressive there. If things, you know, improve and we have a good quarter in the $80s or $90s on crude, then, then we'll pay a big variable dividend. But, you know, I think that flexibility has been very, very advantageous to our shareholders over the last three years.

[Neal Dingmann, Managing Director - Energy Research at Truist.]

Kaes, how low has that breakeven gotten down to?

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

You know, listen, we were very focused on looking at our, our base dividend breakeven at $40 crude. So, you know, mid-cycle capital costs, $40 crude, we could keep production flat. You know, I don't think in a $40 crude scenario, we would do that. I think kind of lessons learned from what we've seen through the cycles over the years is that it's okay to let production decline, if we were in a very, very weak commodity price scenario. But in that scenario, we should be allocating 100% of our free cash flow or even more to buying back shares, because in that situation, your share price is gonna be likely to be very weak.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

So we're really trying to move the, capital allocation decision from the field, you know, and the assets to, you know, what do you do with your free cash flow? And that's- that I think is a good, a good place to be.

[Neal Dingmann, Managing Director - Energy Research at Truist.]

Thank you so much.

[Operator]

Thank you. Our next question comes from the line of Neil Mehta of Goldman Sachs. Your line is now open.

[Neil Mehta, Managing Director at Goldman Sachs]

Yeah, good morning, and, and congrats again on very strong execution year. You know, you've talked about getting that net debt level lower post-transaction. Kaes and, and Travis, how do you see yourself doing that? Is it through asset sales or through organic, organic free cash flow generation? Just your perspective on the asset sale market, recognizing you did some small deals here in the quarter.

[Travis Stice, CEO at Diamondback Energy]

Yeah, Neil, I mean, I think when we announced the deal, you know, we're very conscious of the cash stock mix that we put in place for the Endeavor merger. You know, I don't think we put it-- we didn't put so much cash in the deal that we had to be a seller of assets. But what you've seen us do is, you know, sell multiple things now over the last, you know, couple of quarters that start that up, right? We sold a little bit of our Viper ownership to take some risk off the table and get some cash in the door. We sold, you know, our interest in WTG, West Texas Gas, to Energy Transfer, and we'll get some cash in the door.

[Travis Stice, CEO at Diamondback Energy]

And then little things like our little Monahans sale that we did last quarter. You know, all that kind of almost adds up to $1 billion, which on top of free cash flow generation between January first and today, is gonna reduce the cash outflow burden, you know, for the Endeavor deal. So I think we planned on looking at the deal as a delevering process through free cash flow, but the asset sales are a kicker that accelerates that. And, you know, I think we're highly focused on getting to $10 billion as quickly as possible. And then I think, you know, things can slow down from there. But, yeah, I don't think you'll see us be a forced seller of assets post-deal close.

[Travis Stice, CEO at Diamondback Energy]

I think we're gonna be very, very stingy on keeping operated properties in the Permian because they're kind of worth their weight in gold right now.

[Neil Mehta, Managing Director at Goldman Sachs]

Yeah, makes a ton of sense. And then, yeah, just your perspective on managing gas price volatility. First of all, what are your latest thoughts on Matterhorn and, you know, when that comes in? And then secondly, how do you mitigate some of the risks around gas prices, so you can really earn the margin that you deserve on the gas-oil side of the equation?

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

Yeah, you know, that's, that's been a big topic lately, and, you know, obviously, we, we need to start making more money on our, on our gas in the Permian and Diamondback, specifically. You know, if you look back to the history of Diamondback, we've grown through acquisition. A lot of the deals that we've done have come with, you know, marketing contracts where we don't control the molecule much further than the wellhead. And so what we've been doing over the last, you know, I'll call it five years, is that as contracts roll off, you know, we've been taking advantage of that and getting take-in-kind rights on that molecule. You know, we, we started with our commitment to Whistler, and have grown that.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

You know, that combined with Matterhorn, we'll have a little bit of gas on both of those. And then I think you saw a press release last week that we're gonna be a participant in the, the next pipeline from those guys, the Blackcomb Pipeline. And, you know, I just think that fits the strategy of let's, let's take control of our molecules and, and see what we can do with them. And I don't think that that stops at, at pipeline commitments. You know, we're really looking at, you know, power needs in the basin, you know, things like our Verde gas-to-gasoline plant, and trying to find ways to create a local market here in the Permian, because, you know, it's a shame that, you know, we continue to sell gas near zero or below zero.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

So it's on us to continue to improve that portfolio, and I think with size and scale, and time, we'll be able to do that.

[Neil Mehta, Managing Director at Goldman Sachs]

Thanks, Case.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

Thanks, Neil.

[Operator]

Thank you. Our next question comes from the line of Arun Jayaram of J.P. Morgan Securities. Your line is now open.

[Arun Jayaram, Research Analyst at JPMorgan Securities]

Yeah, my first question is just on the efficiency gains you highlighted in the letter. Looks like you're pushing your drilling cycle times to 26 wells per rig, and on the completion side, pushing 100 wells per frack fleet, simul frac fleet. I was wondering, Kaes and Travis, you could describe what the drivers of those efficiency gains are, and perhaps help us think about what's underwritten in the pro forma, you know, $4.1 billion-$4.4 billion guide for Endeavor for calendar 2025.

[Travis Stice, CEO at Diamondback Energy]

Sure. On the rig side, you know, we specifically talked about bit and bottom hole assembly improvements, and again, that's not necessarily the adoption of some new emerging technology. I think it's really

[Travis Stice, CEO at Diamondback Energy]

... another example of what our guys do really, really good, which is a laser-like focus on every decision that's made. They're, they measure almost every attribute of drilling a well, and they seek for improvement. And they compete against one well versus the other, and we pay bonuses to the crews out there when they execute in a stellar fashion. So, it's not something, again, that's easily repeatable, and it's not a shelf item that someone can go take, but it's a culture of execution that's always been part of this business. On the completion side, you know, there's been some design changes where we've increased rate, but we've also continued to try to optimize, you know, the exact way that we mobilize equipment.

[Travis Stice, CEO at Diamondback Energy]

We've done some changes on some pipe down hole that allows a greater rate with less friction loss. So, again, it's nothing, you know, that's a marquee item, but it's just intense focus on doing what it is that we do, which is really execute well when we convert rock into cash flow.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

Yeah, listen, Arun, I mean, you know, all these things certainly have occurred to us since we announced the Endeavor merger in February. You know, I think, as Travis mentioned earlier in the call, these are permanent items that aren't gonna go away from service cost inflation or deflation. So, you know, as we work through the pro forma model, you know, we're probably thinking that we're gonna run, you know, closer to 18-20 rigs next year versus 22-24 a while back and, you know, closer to 4-5 simul-frac crews versus 5+. So, you know, we're certainly modeling these things occurring for the good guys and, you know, it'll only give us a head start on the promises we made on the 2025 numbers.

[Arun Jayaram, Research Analyst at JPMorgan Securities]

Great. My follow-up is just on the raise production guide. You raised your oil guide at the high end by, you know, close to 1.5%, just under that, and then you took up CapEx. Kaes, one thing that wasn't quite intuitive is that you're completing 7% more feet on a net basis. And so one of the questions that's come in is, would have thought maybe the oil increase would have been a little bit higher based on that level of completed footage. But maybe you could help reconcile that for us this morning.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

Yeah, I mean, you know, I think, you know, I don't think wells are completed like they look to be completed in the spreadsheet, right? I mean, in 2022 well pads, you know, you move one pad from 2023 into 2024, and you got 22 extra wells. So, you know, we kind of moved almost, I think, 30 wells from 2023 into 2024. So our well count's a little bit higher than maybe, you know, a true level-loaded run rate would be. But, you know, I think we're also just preparing the room for a major acquisition to close, and I think we're doing everything we can on our side to be prepared to hit the ground running and hit numbers right away and do exactly what you would expect us to do.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

So I think more importantly, it's the more drilled lateral footage, you know, for less CapEx, that gives us a lot of flexibility in the second half of the year and carry that momentum into 2025.

[Arun Jayaram, Research Analyst at JPMorgan Securities]

Makes total sense. Thanks, guys, Travis.

[Travis Stice, CEO at Diamondback Energy]

You bet. Thanks, Arun. Thanks, Arun.

[Operator]

Thank you. Our next question comes from the line of David Deckelbaum of TD Cowen. Your line is now open.

[David Deckelbaum, Managing Director: Energy & Materials Equity Research at TD Cowen]

Hey, Travis, Kaes, Daniel, and team, thanks for taking my questions. You know, I wanted to follow up on some of the earlier questions. You've obviously seen a lot of field efficiencies, particularly on the drilling side. You've lowered the Midland footage cost down, you know, I guess, $20-some to the midpoint. But curious, like, as you approach this 3Q to, you know, potentially 3Q or 4Q Endeavor closing, you know, are there any parts of the efficiencies that you're seeing that you don't think that you could accomplish with the, as a synergy here? Because it would seem like that $300 million or so of synergies that you apportion to just CapEx savings is increasing by the day.

[Travis Stice, CEO at Diamondback Energy]

Well, that's why I highlighted, David, that where we are today is much better in performance and execution than where we were in February when we talked to you about this deal. These are cultural elements, this attention to detail, this focus, this laser-like attention to execution. And we look forward to bringing on our, you know, our new friends from Endeavor. And look, they're, you know, from what we hear from them anecdotally, they're seeing similar efficiency gains as well, too. So when we put the two cultures together, I expect it to be an adder, not a detractor, when we actually put the two companies together here before two months longer.

[David Deckelbaum, Managing Director: Energy & Materials Equity Research at TD Cowen]

Appreciate that. And then just a follow-up to that. You've also seen the benefits of longer lateral progression, you know, I guess, relative to your original plan this year. I know one of the things you highlighted with the Endeavor deal was the potential increase of lateral lengths to, you know, 15,000-footers and beyond on a given 100,000+ number of acres. How do you see the progression, I guess, into next year and then 2026 in terms of lateral length relative to where we're at today? Or is this something that's a longer-term endeavor?

[Travis Stice, CEO at Diamondback Energy]

Well, first, we're gonna have to get the two assets put together, which we obviously can't do that currently. I, I'll let Kaes answer the synergy question specifically, but I wanted to highlight something that we talked about in our earnings release and our stockholder letter was that, you know, we drilled a 20,000-foot lateral well with in under eight days, you know, under nine days?

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

7 days. Yeah, 7, 8 days.

[Travis Stice, CEO at Diamondback Energy]

Yeah, 7, 8 days. Longer is not gonna be a problem, you know, it's just, it's just we need to make sure we have the lease geometry to be able to drill even longer wells.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

Yeah, I mean, I think, David, on the plan, you know, we can't, we can't put anything together until post-close. But, you know, I think the priority for the teams right now is, you know, what does the plan look like end of 2024 and into 2025, post-close? And then what are the projects look like, you know, starting to back out to 2025 and into 2026, that start to extend laterals. I mean, I think, you know, I think holding the level that we have this year, you know, almost 12,000 feet on average for 300 wells, is a pretty stellar number that we should probably, you know, look to maintain. I think going much further than that for a full program of, you know, 500+ wells a year is gonna be tough to do.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

You know, I don't think the guys are scared of drilling to 20,000 feet, and if we have those opportunities, we'll take advantage of them.

[Scott Hanold, Managing Director at RBC Capital Markets]

Appreciate the color, guys.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

Thanks, David.

[Operator]

Thank you. Our next question comes from the line of John Freeman, Raymond James. Your line is now open.

[John Freeman, Managing Director at Raymond James]

Good morning, guys. First topic I just wanted to follow up on is on the return of capital framework. When you look at slide 6 and just sort of think about again the efficiency gains that are really impressive, and as over time as that sort of drives that maintenance CapEx or reinvest rate lower, should we think of maybe the first kind of evolution of that return on capital framework just being that creates like a bigger, I guess, for lack of a better word, wedge that can go to that base dividend? Is that more likely kind of the way it would evolve as opposed to maybe increasing that 50% plus that's going to shareholders overall?

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

Yeah, John, I mean, I think those are two separate decisions, but I think you hit the nail on the head on, you know, as efficiencies accrue, and, you know, our decline rate shallows over time, and your balance sheet shrinks over time, that should create room there between your breakeven and your $40 dividend breakeven. So I think that's how we're still gonna look at it. I think we see $40 on the EMP side as a very well-protected number. You know, we're still gonna buy puts at... You know, right now we're buying them at $55, $60 crude, but eventually probably reduce the value of our put buying down to closer to 50, just to protect, you know, the extreme downside scenario.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

You know, I think the rest of the free cash, you know, we did move back from 75% of free cash going to equity down to 50, but that doesn't mean, you know, that number is not gonna be higher in the future in times of stress. So I think in times of stress or significant stress, the number should be a lot higher than 50% of free cash going to equity. And when things are going well, you know, the numbers should be closer to 50, and we'll continue to build a fortress balance sheet.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

You know, I've been very, you know, pleased with the response from our large shareholders on cutting back to 50% of free cash going to equity, because they want us to have a more fortress balance sheet than we even thought going into the deal. So, you know, I think that's been a pleasant relief, and it allows us to build a lot more cash and be ready for the inevitable down cycle in this sector.

[Travis Stice, CEO at Diamondback Energy]

And John, I think a good way to demonstrate or a good way to visualize the board's commitment to this sustainable, sustainable and growing dividend is on slide 7. Go all the way back to 2018, when we initiated the, you know, the dividend, and you can see on that slide the growth rate. And on the bottom half of that slide, you can see that, that our commitment has translated into almost $8 billion of, of capital returned to, to our shareholders. So it's, it is a, it's a meaningful lever that we have as a company, and the board's commitment to continue that sustainable and growing dividend.

[John Freeman, Managing Director at Raymond James]

That's great. And then just my follow-up, when we take these efficiency gains that have allowed you all to basically pump the brakes on, you know, on rigs and frac crews in the second half of the year without, you know, missing a beat on the original production plan, is there any environment where, you know, y'all would choose to basically just sort of plow ahead at the run rate y'all are on in the first half of the year and just sort of allow production growth to accelerate? Is there any sort of an environment where you would foresee that ever kind of occurring?

[Travis Stice, CEO at Diamondback Energy]

Yeah, just where we sit right now, John, that's not a logical scenario that we see playing out in the next, you know, 6 months, 3-4 quarters.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

Yeah, I mean, historically, we've tried to, you know, post-COVID favor free cash flow generation over growth. And, you know, I think you've seen that trend continue here with what we're doing in 2024.

[John Freeman, Managing Director at Raymond James]

Thanks, guys.

[Operator]

Thank you. Our next question comes from the line of Scott Hanold of RBC Capital Markets. Your line is now open.

[Scott Hanold, Managing Director at RBC Capital Markets]

Yeah, thank you. You know, there's been a lot of talk of good operational efficiencies. Could you maybe pivot and talk about what you're seeing in terms of well performance and productivity, you know, over the last year? Is it pretty much status quo on an apples-to-apples basis, or are you seeing some gains there as well?

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

You know, I would say generally, on a yearly average basis, we see this year as kind of gonna be flat to last year. But I think what's unique is that, you know, we're adding a lot of Wolfcamp D, a lot of Upper Spraberry, more Jo Mill. You know, we're adding more zones to our Midland development plan and getting the same output in terms of productivity.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

And so, you know, the resource expansion story probably goes sometimes unnoticed in the Permian, but, you know, talking about a zone like the Upper Spraberry, where we haven't, you know, hadn't drilled a well until two years ago, outside of one Energen well in 2018, now becoming part of the, you know, stack of co-development without a degradation in well performance, is truly, you know, what makes the Midland Basin unique. So I think, you know, we've had a few really, really good years of well performance. We're always trying to keep pushing the performance side, but I think this year has been a year of cost gains versus well performance gains, but that doesn't mean there's not significant inventory expansion going on or across our portfolio.

[Scott Hanold, Managing Director at RBC Capital Markets]

Thanks for that. And then my follow-up question is, you kind of highlighted, obviously, all the drilling efficiencies again, and I think you made a comment that, you know, from what you understand, the Endeavor folks are seeing some similar stuff. But can you give us some context, like, you know, based on your—what you can see from your understanding at this point, you know, where is Endeavor relative to where Diamondback is? So just trying to get a sense of, you know, should we expect, you know, once the merged company comes together, you know, there's still some work to do to get it back to, to get it all toward where Diamondback is right now, or is it going to be pretty much just, you know, hitting the ground running?

[Travis Stice, CEO at Diamondback Energy]

Well, it's gonna be hard work for sure. It's our job to do that hard work and make it look easy for you guys. You know, there's some decisions that we'll make pretty soon, you know, after we combine the two companies. You know, one would be the use of clear drilling fluids, and the second would be to put more of the frack, frack operations onto Simul-frac. So those are the two biggest levers that have the quickest change.

[Travis Stice, CEO at Diamondback Energy]

But look, we're also gonna, like we've always done, check our egos at the door and make sure we seek to understand, you know, what the Endeavor team's already doing, and historically, that's generated better results, you know, when we seek first to understand, and then pick the best, pick the best path forward with the combined inputs from legacy Diamondback and the new asset, the new, new management from Endeavor. So, we're gonna make it look, we're gonna make it look easy, but it's, you know, there's gonna be... It's always- it's hard work behind the scenes, but I'm really confident that both of the two leadership teams are gonna be able to pull this, pull this off and make it look good.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

Yeah, I mean, I think from a numbers perspective, the way we're thinking about it is the pro forma business will be running basically kind of 21, 22 rigs off the, off the start, and then, you know, by 2025, we'll probably be averaging closer to 18-19 combined.

[Scott Hanold, Managing Director at RBC Capital Markets]

It's good color. Thank you.

[Operator]

Thank you. Our next question comes from the line of Bob Brackett of Bernstein Research. Your line is now open.

[Bob Brackett, Head, Americas Energy & Transition and Managing Director/ Senior Research at Bernstein Research]

Good morning. Following up on those intriguing operational efficiencies, you mentioned the average of 26 wells per rig year, 100 wells per crew. What's the pace-setting rig or crew look like? Is it significantly ahead of that? Is there a big opportunity to grab?

[Daniel Wesson, COO at Diamondback Energy]

Hey, Bob, it's Daniel. Yeah, I mean, I think there's... The crews and the rigs are they're pretty well, you know, all within a margin of error of each other and, in their performance. You know, we've been really pretty, you know, active on fleet management over the past few years and continue to optimize our fleet where we see, you know, dwindling performance. And, you know, the best thing about our operation is the, you know, the collaboration we have between the teams on sharing, you know, best practices on, you know, best-in-class rigs.

[Daniel Wesson, COO at Diamondback Energy]

So, you know, when we look at the rigs across the board, you know, there's always one, you know, pace-setting rig, but that tends to move around, as, you know, we share best practices and the other rigs catch up, and then another one will pass that rig. So not one, you know, unique standout that's driving that number. It's pretty, you know, pretty well across the board, you know, at that same level of efficiency.

[Travis Stice, CEO at Diamondback Energy]

We do have a pretty healthy competition between internally, and then we also, every quarter, we look externally, and there's a pretty healthy competition. And, you know, that's why in our stockholders' letter, you know, I talked about, in this quarter, in the Midland Basin, the drilling team got over 20,000 feet with a single bit run, and that represents a record in the Midland Basin. So I'm sure that record will fall, but, it's just part of the culture of, of evaluate, you know, internally and externally and, and compete to, compete to win. And that's what, that's what our organization does.

[Bob Brackett, Head, Americas Energy & Transition and Managing Director/ Senior Research at Bernstein Research]

Yeah, very clear. Quick, quick follow-up along that line. How do we think about the relative prize between pulling on that ROP lever versus reducing non-productive time or even reducing mob, demob time? Are they equal-sized prizes, or is one the more obvious of the three?

[Daniel Wesson, COO at Diamondback Energy]

You know, I think it kind of moves, but, you know, you're getting to the point in time where, you know, there's the little things we're focusing on now are the efficiency drivers. You know, we talked in the last call about the guys, you know, focusing on pipe makeup speeds because that was, you know, where they saw the most NPT time on a well, was just how long it takes them to break and make up pipe. And, you know, we're content-

[Daniel Wesson, COO at Diamondback Energy]

... looking at where that dead space is in these jobs and trying to attack it. And we don't just attack one dead space, we attack them all at the same time. And I think, you know, NPT time has been a focus of, you know, coming out of the really aggressive, you know, activity levels we saw in 2023. And, you know, we've really, you know, done a good job of reducing NPT time, but there's certainly always things we can focus on there to continue to drive, you know, uptime and drive, you know, constant performance and not waiting on the sidelines for something to be fixed.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

And when we look at those details, we do it every quarter, for sure. But what Daniel's talking about requires a great deal of collaboration across all the teams. And, you know, even though I emphasize the, you know, emphasize the competition aspect of what it is that we do, the collaborative aspect is really where this sits home, because when one team finds a solution, it's quickly shared with all the other teams internally. And in a similar fashion, if we find something externally, we quickly adopt that as well, too.

[Scott Hanold, Managing Director at RBC Capital Markets]

Very clear. Thanks.

[Operator]

Thank you. Our next question comes from the line of Roger Read, Wells Fargo Securities. Your line is now open.

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

Yeah, thank you. Good morning.

[Travis Stice, CEO at Diamondback Energy]

Hey, Roger.

[Daniel Wesson, COO at Diamondback Energy]

Hey, Roger.

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

Congrats on another solid quarter, guys. Just a couple of questions, kind of operating focused here. One, if we look at the, you know, production beat here in the second quarter, you got it on NGL and gas. We were just sort of curious, you know, we kind of figured maybe you strip more liquids out of the gas, but then you would have lower gas production. So maybe a little bit of insights into, you know, kind of what's lifting the NGL side and keeping the gas production up.

[Travis Stice, CEO at Diamondback Energy]

Yeah, I think on the NGL side, you know, trying to put as much ethane as you can into the, in the NGLs to get them out of the, out of the basin. You know, we even probably, you know, throughout the second quarter, we saw obviously a lot of gas price weakness. So we did take, you know, a couple of our highest GOR wells down, you know, for a month or two to ease that pressure. So I think even in the face of that, you know, the gas curve continues to outperform expectations. But, you know, we kind of even curtailed a little bit of oil to make sure our gas production was a little bit lower in the quarter, which we kind of have continued in the third.

[Travis Stice, CEO at Diamondback Energy]

So, you know, just have a lot of, a lot of gas production out of this basin, and that's kind of why, you know, we have such a focus now on trying to generate more value for the gas that we're producing, whether that be in-basin or out-of-basin.

[Daniel Wesson, COO at Diamondback Energy]

Yeah, and just to add to that, you know, the focus on around, you know, environmental performance has driven a lot of decisions to not burn gas in the field for energy consumption and, and instead, you know, convert that energy demand to electrical demand. And so you're seeing a lot of gas that would have otherwise been burned in the field to run our operation being put down the pipeline. And then on top of that, you know, focus on reducing flaring. You know, those are all things that send gas to sales and gets reported as a production number, that's driving some of that increase you're seeing across the basin.

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

Okay, that's helpful. Thanks. And then just coming back to the drilling efficiencies and the completion efficiencies, going from 24 to 26 wells on our completions. Can you give us an idea of maybe where the, you know, kind of upper 10% or upper quartile is? In other words, I'm trying to think of if 24 went to 26, is the best 30, you know, and that's where you can ultimately go, or it's a much tighter dispersion, you know, so it's 26, the average, best 28, maybe worse is 24. I'm just trying to get a feel for the further improvements, kind of the same idea on the completion side.

[Daniel Wesson, COO at Diamondback Energy]

I think, you know, that's a good question. It just depends, but, you know, we certainly have some rigs that are drilling at a pace of 30+ wells a year. Just depends on which zones and lateral lengths and all that kind of stuff. But, you know, we're really focused in on, you know, pad cycle times and how to reduce the full pad cycle time. These are large pads, and, you know, give driving flexibility in the plan by reducing that cycle time on the pads is really what's important to us.

[Daniel Wesson, COO at Diamondback Energy]

You know, if we have one rig that's outperforming the others in one zone, we want to look at that zone and what that rig's doing and kind of share it with the other rigs so that we can accrue that benefit to all the pad development across our portfolio.

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

Gotcha. Maybe if I could just clarify on that, three-mile laterals versus something less than that as a percentage of total?

[Daniel Wesson, COO at Diamondback Energy]

I'm sorry, just to rephrase your question, are you asking what's their percentage of three-mile laterals to-

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

Yeah. I mean, you said, you know, it depends on what you're drilling and which zones. I was just curious, is there, you know, obviously, it would take not as long to drill a lesser length lateral, but I was just, you know, is there a percentage that you offer of, you know, the much longer lateral wells?

[Daniel Wesson, COO at Diamondback Energy]

Like, I think our 15,000 footers this year were, like, at 25%-ish of our development.

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

Okay.

[Travis Stice, CEO at Diamondback Energy]

Yeah, you know, listen, the rig, rig per year number is, is an output of getting 300 wells per year drilled, right? So it's really about net lateral footage or gross lateral footage drilled per year per rig. You know, and I think, I think, you know, Daniel's talking about 30 wells per rig, while, you know, I, I think if we're drilling more Wolfcamp D with a particular rig, that rig's gonna be a little slower. But, you know, I think the general, you know, standard Wolfberry development is, you know, pushing that upper, upper echelon, but we really see the rig count as the output of what we need to do from a, from a drilling perspective on hitting production guidance.

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

All right. Thanks for indulging me the extra question, guys.

[Adam Lawlis, VP of Investor Relations at Diamondback Energy]

No, no problem.

[Travis Stice, CEO at Diamondback Energy]

Thanks, Roger.

[Operator]

Thank you. Our next question comes from the line of Geoff Jay of Daniel Energy Partners. Your line is now open.

[Geoff Jay, Partner at Daniel Energy Partners]

Hey, guys, just one quick one for me. I'm just kind of curious how you think about the potential for trimul-frac in your portfolio, kind of especially after Endeavor closes.

[Travis Stice, CEO at Diamondback Energy]

Yeah, I mean, we've looked a lot at trimul-frac, and you know, the struggle for us is the infrastructure spend we'd have to do to implement to get to trimul-frac across our portfolio. And does that additional infrastructure spend do we recognize the return on that from the efficiency gains from moving from Simul-frac to trimul-frac? We think the, you know, cost benefit somewhere in the $10-$15 a foot to move from those, from Simul-frac to trimul-frac. Certainly something we would pursue in areas where we have the infrastructure in place to do so. And if we have, you know, available enough development in that area, in those areas to dedicate a trimul-frac crew, we would—you would see us move that direction very quickly.

[Geoff Jay, Partner at Daniel Energy Partners]

Excellent. Thank you.

[Operator]

Thank you. Our next question comes from the line of Charles Meade of Johnson Rice. Your line is now open.

[Charles Meade, Large Cap E&P Research Analyst at Johnson Rice]

Good morning, Travis Stice and the rest of the Diamondback team there.

[Travis Stice, CEO at Diamondback Energy]

Hey, Charles.

[Charles Meade, Large Cap E&P Research Analyst at Johnson Rice]

Travis, yeah, thank you. I wanna, I think you really tantalized a lot of people with that, with that metric. I really appreciated it, you know, with that, 24 wells a year, 26 wells a year. But I thought Kaes's comment was really, really interesting in that, I've been focused on that. I think other callers have been, but really, that's the output rather than the, you know, it's kind of a - it's a manifestation or an indicator rather than a driver, if I understand Kaes correctly. And so to - if that's the right way of looking at it, when I look at the other pieces of your guidance, you've actually increased the lateral length a little bit, and you've increased the well count a little bit.

[Charles Meade, Large Cap E&P Research Analyst at Johnson Rice]

So is the delta on the drilling side actually a little bit bigger, the delta, the improvement you've seen since your initial plan than that 24 over or 26 over 24 would indicate?

[Travis Stice, CEO at Diamondback Energy]

Yeah, I think, I mean, I think so, Charles. And I think the point I was trying to make is that, you know, as a public company that has public guidance and quarterly guidance, you know, we really work from the guidance backwards, and we make what looks like an easy output on the surface, you know, is very difficult below the surface. There's a lot going on in terms of the teams being able to move things around and add rigs here and drop rigs there. And, you know, the plan isn't always the plan. We gotta, you know, be nimble and work together as a group. And I think that harmony we have across all of our functions is what makes us pretty unique, particularly, you know, also given that we're in one basin.

[Travis Stice, CEO at Diamondback Energy]

So, I mean, I would say the drilling, the drilling improvements this year have been more surprising than the completion improvements, 'cause we always kind of thought that drilling was already near the asymptotic curve of what they've been able to do. So, you know, not to knock the frac guys, but the drilling, the drilling improvements probably supersede the frac improvements here today.

[Charles Meade, Large Cap E&P Research Analyst at Johnson Rice]

Thank you for those comments, Kaes. Go ahead. That's all for me.

[Travis Stice, CEO at Diamondback Energy]

That's a little test, that's a little test for the frac guys to step it up next quarter.

[Charles Meade, Large Cap E&P Research Analyst at Johnson Rice]

Glad to put the ball on the tee for you there.

[Travis Stice, CEO at Diamondback Energy]

Thank you.

[Charles Meade, Large Cap E&P Research Analyst at Johnson Rice]

Have a great day.

[Travis Stice, CEO at Diamondback Energy]

Thanks, Charles.

[Operator]

Thank you. Our next question comes from the line of Paul Cheng of Scotiabank. Your line is now open.

[Paul Cheng, Managing Director at Scotiabank]

Thank you. Good morning, guys.

[Travis Stice, CEO at Diamondback Energy]

Good morning, Paul.

[Paul Cheng, Managing Director at Scotiabank]

Travis and Kaes, we appreciate that about the great improvement in your results. But just curious, I mean, over the next two or three years, if we're looking at the productivity improvement in drilling and completion, is there one or two areas you see as the biggest potential for you? And will you be able to also quantify on that? And the second question is, if we looked at for a performer over the next couple of years, I mean, in order to maintain a flat production, post Endeavor, I mean, how many wells that we need? Is it 500, 520, 550? Any kind of rough idea. And also that do you have what Endeavor gas pricing right now?

[Paul Cheng, Managing Director at Scotiabank]

Are they all in the Waha Basin or that they also spread? Thank you.

[Travis Stice, CEO at Diamondback Energy]

Well, I'll talk specifically about your outlook ahead for 2-3 years. And I think if you put it in one bucket, it would be in the downhole sensing technology that allows the bit to stay in the best rock, the highest percentage of time. And then on the completion side, understanding, using downhole sensing, where you can place the most frac energy in the most efficient way that creates the greatest stimulated rock volume. And these sensing technologies are, they're evolving very, very rapidly.

[Travis Stice, CEO at Diamondback Energy]

You know, I think before too long, we'll be able to actually sense in front of the drill bit and drill towards a target rather than drilling past it and making adjustments. That sounds like a small change, but I think the sensing technology that we're right on the cusp of having some of those problems solved is gonna be a real game changer for our industry.

[Daniel Wesson, COO at Diamondback Energy]

Yeah, then, Paul, on your, on your well count, you know, question, you know, I think kind of low 500s is a good place to start. And, you know, as low 500s wells per year. But as, you know, the land efficiencies accrue to us and laterals extend and, you know, the decline rate shallows a bit, you know, you probably start to get below that 500 number, should production stay flat. Now, if, you know, things are, if things are a market that's conducive to growth, that probably changes, but on a flat basis, it's, you know, more capital efficiency, less CapEx, less wells to hit the same numbers longer term.

[Paul Cheng, Managing Director at Scotiabank]

Great. And Stice, do you have an idea that what Endeavor gas exposure to Waha?

[Travis Stice, CEO at Diamondback Energy]

Yeah. So listen, you know, we've seen what exposure and Endeavor has. You know, I do think there's gonna be a lot of opportunities for both of us combined to get gas out of the basin. You know, we got to close the deal first and then we can start making decisions. But I think we're both—both companies are aligned that, you know, more gas needs to get out of the basin, and less exposure to Waha.

[Paul Cheng, Managing Director at Scotiabank]

Okay. Thank you.

[Travis Stice, CEO at Diamondback Energy]

Thanks, Paul.

[Operator]

Thank you. Our next question comes from the line of Leo Mariani of Roth. Your line is now open.

[Leo Mariani, Managing Director and Senior Research Analyst at ROTH Capital Partners]

I wanted to follow up on some of the comments you made around the share buyback. Obviously, you guys had leaned more on the variable dividend in the past quarter, but you certainly kind of indicated from some of your comments here on the call that given the recent pullback in the stock and the sector, the buyback was looking more palatable. Just trying to get a sense if you guys are able to start executing on the buyback here post-quarter, are there some restrictions in place with respect to the Endeavor deal that would prevent some of that over the next couple of months until the deal closes?

[Travis Stice, CEO at Diamondback Energy]

Yeah, Leo, there's no, I don't think there's any more Endeavor specific restrictions. Obviously, we're now, you know, we're reporting earnings today, so we're in a blackout day. But, you know, I, I think, you know, these periods of weakness allow us to, to step in, and we pre-wire the buyback for every, you know, every blackout period. And, you know, I think if, if we continue to see weakness here, we'll get, we'll get opportunities. We just have a little more flexibility if the window's open versus closed.

[Leo Mariani, Managing Director and Senior Research Analyst at ROTH Capital Partners]

Okay. Appreciate that. And then just in your comments here, and your guidance for the rest of the year. It looks like third quarter CapEx is coming down some, you know, versus QQ. It certainly sounds like activity is falling a little bit in the second half of the year, and some of the, you know, the OFS cost reductions are kind of rolling through as well. I mean, do you see, you know, standalone without Endeavor, you know, CapEx continuing to kind of drop a little bit and activity kind of dropping a little bit in 4Q as well? Just trying to get a sense if that's kind of the low point for spend, and activity, you know, on a standalone basis here.

[Travis Stice, CEO at Diamondback Energy]

Yeah, you know, I think it'll be the low point for spend because we're a cash CapEx reporter. I think the low point for activity will be this quarter. So I think we'll probably bring back our fourth simul-frac crew, you know, into this quarter, into the beginning of next quarter. That's all on a standalone basis, and probably bring back a rig or two, but not much more than that. So I would say Q3 is the low for activity, Q4 is the low for, you know, for CapEx.

[Leo Mariani, Managing Director and Senior Research Analyst at ROTH Capital Partners]

Okay, thanks.

[Operator]

All right, thank you. Our next question comes from the line of Kalei Akamine of Bank of America. Your line is now open.

[Kalei Akamine, Senior Equity Research Analyst at Bank of America Merrill Lynch]

Hey, good morning, guys. Thanks for taking my questions. A lot of focus on field efficiency, so I'll leave that alone. I want to ask you guys about Deep Blue. The team over there continues to be very acquisitive. It looks like that business has grown about maybe 10-20%, plus or minus, over the past year in terms of capacity. Can you talk a little bit about the growth outlook for that business, potential Endeavor drop-down included, and maybe help us understand what the scale of that business could be, once it matures?

[Travis Stice, CEO at Diamondback Energy]

Yeah, listen, I, you know, I think we're very pleased with what the Deep Blue team has done in a short period of time. It's kind of exactly why we did the deal with them, right? They've gotten a lot of third-party wins, you know, wins that what Diamondback wouldn't get if Diamondback was trying to gather someone else's water. And on top of that, you know, a little bit of M&A to boost capacity and reduce costs there. So, you know, we're really excited with what they're doing. You know, Endeavor has a very impressive water system, you know, that could be a candidate to merge with Deep Blue. But, you know, I think the price has got to be right for Diamondback shareholders, and that's what we're focused on first.

[Travis Stice, CEO at Diamondback Energy]

But, yeah, hey, listen, they're doing a really good job building a sizable business on the water side. And, you know, with the amount of water that it takes to run, you know, multiple simul-frac crews at the same time, you know, you're moving hundreds of thousands of barrels of water a day and at low cost. So, very, very impressed with what they're doing. I don't think they're ready to monetize yet. It's a longer-term investment for us, and we look forward to continuing to support that business.

[Kalei Akamine, Senior Equity Research Analyst at Bank of America Merrill Lynch]

Okay. Just from numbers, given the size of Endeavor, does it potentially double the size of that business?

[Travis Stice, CEO at Diamondback Energy]

... It's probably a little less than double, you know, probably about two-thirds the size of the business today. But it adds a lot of capacity and really moves into that Western Martin County or Eastern Martin County area, and connects the system nicely.

[Kalei Akamine, Senior Equity Research Analyst at Bank of America Merrill Lynch]

Thanks for that. Then maybe following up on your comments on Wolf D and the Upper Spraberry, can you talk a little bit about that program for this year? Talk about how you're layering those zones into your development plans, whether they're co-developed with other zones, for example, and if there's any learnings to take away from this 2024 program.

[Travis Stice, CEO at Diamondback Energy]

Yeah, I think so we added the Upper Spraberry as a test well, kind of in the North Martin area, like Case mentioned a couple of years ago. Really pleased with the performance of that well. This year we've tested it in a co-developed fashion, and like Case said, we're not seeing any real degradation there. And so what we plan to do going forward is to add that to the development zones for the North Martin area.

[Daniel Wesson, COO at Diamondback Energy]

Wolfcamp D, you know, I think we have some tests that are co-developed and some tests that are standalone. You know, there are certain areas where the Wolfcamp D is significantly deeper than the Wolfcamp B, and we're not seeing communication. And there's, you know, some areas where it probably just makes sense to develop it, you know, with the stack because of, you know, above ground efficiencies.

[Travis Stice, CEO at Diamondback Energy]

Yeah, I think that's right. We tested the Wolfcamp D, kind of in that same North Martin area, and, you know, really not seeing any communication with Wolfcamp B. So we think it's a zone that we can come back and get or where it competes for capital, we'll add it to the stack.

[Kalei Akamine, Senior Equity Research Analyst at Bank of America Merrill Lynch]

That's awesome. I appreciate that, guys.

[Kalei Akamine, Senior Equity Research Analyst at Bank of America Merrill Lynch]

Thank you.

[Operator]

All right, thank you. I am showing no further questions at this time. I would now like to turn it back to Travis Stice, CEO, for closing remarks.

[Travis Stice, CEO at Diamondback Energy]

Thank you again for everyone participating in today's call. If you've got any questions, please reach out to us using the contact information we've previously provided. Thank you, and have a great day.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Participants

Executives

• Adam Lawlis, VP of Investor Relations
• Daniel Wesson, COO
• Travis Stice, CEO

Analysts

• Arun Jayaram, Research Analyst at JPMorgan Securities
• Bob Brackett, Head, Americas Energy & Transition and Managing Director/ Senior Research at Bernstein Research
• Charles Meade, Large Cap E&P Research Analyst at Johnson Rice
• David Deckelbaum, Managing Director: Energy & Materials Equity Research at TD Cowen
• Geoff Jay, Partner at Daniel Energy Partners
• John Freeman, Managing Director at Raymond James
• Kalei Akamine, Senior Equity Research Analyst at Bank of America Merrill Lynch
• Leo Mariani, Managing Director and Senior Research Analyst at ROTH Capital Partners
• Neal Dingmann, Managing Director - Energy Research at Truist.
• Neil Mehta, Managing Director at Goldman Sachs
• Paul Cheng, Managing Director at Scotiabank
• Roger Read, Senior Energy Analyst at Wells Fargo Securities
• Scott Hanold, Managing Director at RBC Capital Markets