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Permian Pure-Players Diamondback, RSP, Callon to Add Rigs into Early 2018

Three pure-play operators in the Permian Basin -- Diamondback Energy Inc., RSP Permian Inc. and Callon Petroleum Co. -- reported increased production and unveiled plans to deploy additional rigs in the play, by year's end or during the first quarter of 2018.

Diamondback’s 10th Rig

CEO Travis Stice said Diamondback plans to deploy a 10th horizontal rig in the coming weeks, and would exit the year running at that level. The Midland, TX-based producer currently has six rigs deployed in the Midland sub-basin and three in the southern Delaware sub-basin.

"We're very comfortably staffed for 10 rigs right now," Stice said during an earnings call Monday. "As long as we build our rig fleet every three to five months as we generate enough free cash flow [for] that rig, we're not going to have internal constraints."

COO Michael Hollis said after the new rig drills its first pad in the Midland, it would be moved to the southern Delaware. Senior Vice President Kaes Van't Hof added that conversations had started over adding an 11th rig in 2018.

"I don't think we're there yet, but we definitely plan our business in the $50 [per bbl] world, and in the $50 world we're adding rig No. 11 at some point in 2018," Van't Hof said. "In a $55 world, where we are today, that's just going to happen little sooner."

Production averaged 85,029 boe/d in the third quarter of 2017, an 89% increase from the year-ago quarter (44,923 boe/d) and 10.4% above the second quarter (76,977 boe/d). Oil accounted for 73% of production. Full-year production guidance has been increased by 3% from guidance issued in August to 77,500-78,500 boe/d. It also narrowed full-year guidance for capital expenditures (capex), from $800-950 million to $850-900 million.

During 3Q2017, Diamondback drilled 42 gross horizontal wells and turned 24 operated horizontal wells to sales. As of the end of September, the company had drilled 106 gross horizontal wells year-to-date, with 85 gross operated horizontals turned to production. Diamondback expects to turn 35-40 gross operated wells into production during 4Q2017, and plans to end the year having turned 120-125 wells in production.

Net income was $73 million (74 cents/share) in 3Q2017, compared with a net loss of $2.2 million (minus three cents) in the year-ago quarter. Revenues more than doubled, from $142.1 million in 3Q2016 to $301.3 million in 3Q2017.

RSP’s Wolfcamp A Focus

Dallas-based RSP reported average production of 58,932 boe/d in the third quarter, nearly double from the year-ago quarter (29,761 boe/d). Oil accounted for 71% of production.

The company operated a total of seven horizontal rigs during 3Q2017: four in the Midland and three in the Delaware. RSP also drilled 26 operated horizontal wells and completed 22 wells. Eighteen of the 22 completed wells were in the Midland, while the remaining four were in the Delaware. The company said it expects to drill 26-28 wells and complete 16-20 wells in the final three months of this year.

Broken down by target, seven of the Midland wells completed in 3Q2017 targeted the Lower Spraberry formation, another seven targeted the Wolfcamp A, three were drilled into the Wolfcamp B, and one was directed toward the Middle Spraberry. In the Delaware, two wells targeted the Wolfcamp A, one the Wolfcamp B, and one the Third Bone Spring.

RSP said it plans to continue averaging four rigs in the Midland during 2018, drilling almost entirely in development mode. Meanwhile, the company plans to run a minimum of three rigs in the Delaware, and likely deploy a fourth rig sometime in 2018. The focus is to be on the Wolfcamp A. Pending additional results, RSP could devote assets to the Wolfcamp B and intervals of the Bone Spring.

"We intend to dedicate one rig to the Rudd Draw area on the western side of our acreage, where we've seen very prolific well results today, and now enjoy an above-average net revenue interest following recent mineral acquisitions," COO Zane Arrott said during an earnings call Tuesday. "We will also continue to test additional targets within the pay column and with a potential fourth rig.

"We drilled delineation and extension of wells on the east side of our properties for new 3-D seismic and offset wells show promising potential. And we'll continue research and development work to further refine our landing targets, completion designs and flowback methodologies."

RSP entered 3Q2017 with an inventory of 22 operated horizontal drilled but uncompleted (DUC) wells, and exited the quarter with 26 horizontal DUCs. Arrott said the company expects to exit 2017 with 32-38 horizontal DUCs.

Net income was $21.3 million (14 cents/share) in 3Q2017, compared with net income of $985,000 (1 cent) in the year-ago quarter and $31.1 million (20 cents) sequentially. Total revenues more than doubled, from $93.6 million in 3Q2016 to $201.7 million in 3Q2017.

Callon Testing Staggered Wells in 2018

Natchez, MS-based Callon recorded 22,543 boe/d of production in 3Q2017 -- a 35.8% increase from the year-ago quarter (16,598 boe/d) -- but the newest mark came just under the guidance range for the quarter (23,000-25,000 boe/d). Oil was 77% of production, up 1% from 3Q2016.

"While we did have another strong quarter of cash margin expansion, our production volumes fell short of our original expectations," CEO Joe Gatto said during an earnings call Tuesday. He said the decline was due in part to unplanned downtime from services such as wireline and coiled tubing operations, which support completions.

"While I expect these taxes issued to be transitory and have seen improvements in cycle times over the last several weeks, the resulting scheduling delays to this shift our completion schedule, and resulted in a reduction of total wells online for the year."

Callon expects to produce 24,000-25,500 boe/d in 4Q2017. "We're off to a solid start through October with strong production growth, which we expect to drive sequential fourth quarter growth of approximately 10% at the midpoint, including the assumption of increased December downtime for weather-related issues, and set the stage for a strong trajectory in 2018," Gatto said.

During the third quarter, Callon operated four rigs in four operating areas of the Midland where it is active -- Monarch, Ranger, Spur and WildHorse. The company drilled a combined 13 gross (10.3 net) horizontal wells in those areas during 3Q2017, and placed 11 gross (10.1 net) wells into production. Callon expects delivery of a fifth rig midway through 1Q2018.

COO Gary Newberry said next year the company plans to test staggered well placement targeting the Wolfcamp A and Lower Spraberry formations in its WildHorse operating area, which includes the West Texas counties of Borden, Howard and Martin.

"We believe there could be some level of interference between the two zones when developed in a stack pattern," Newberry said. "We are excited about testing tighter spacing within the Wolfcamp A in this area in 2018.

"If we can create the same quality outcomes with 10 wells per section -- versus our current assumption of eight wells per section -- the value uplift will be significant, as we would add roughly 25% to our inventory in this prolific area. We have also begun to test the Wolfcamp B and look forward to providing updates in this zone in coming quarters."

Net income totaled $15.3 million (8 cents/share) in 3Q2017, compared with net income of $19.3 million (14 cents) in the year-ago quarter. Total operating revenues were $84.6 million in 3Q2017, a 51.3% increase from 3Q2016 ($55.9 million).

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