Permian Basin pure-players Callon Petroleum Co. and Diamondback Energy Inc. continued with divergent strategies in the third quarter, with Callon seeing first production from its so-called “mega-pads” and Diamondback’s new midstream subsidiary grabbing more takeaway capacity.

Natchez, MS-based Callon, which is active in the Permian’s Delaware and Midland sub-basins, reported progress in its transition to full asset development. Callon said production totaled 34,913 boe/d (78% oil) in 3Q2018, up 54.9% from the year-ago quarter (22,543 boe/d, 77% oil).

“We are very encouraged by the results from our larger 2018 development concepts,” Callon CEO Joe Gatto said during an earnings call Wednesday. He said the concepts would see “steadily increasing usage across our asset base next year. As part of our near-term plans, we will also be evaluating options to rationalize noncore and non-operated assets to complement near-term drilling returns on capital.”

While Spur is the company’s sole operating area in the Delaware, it operates three areas — Monarch, Ranger and WildHorse — in the Midland. The company drilled 15.2 net horizontal wells in 3Q2018, and placed 13.8 net horizontal wells targeting the Wolfcamp A, Wolfcamp B and Lower Spraberry intervals into production during the quarter. Callon said more than 70% of the wells placed into production were in the Midland.

Of the Midland wells placed into production in 3Q2018, Callon said the Wright and Gibson pads in the WildHorse area exceeded type curves by about 20% and 38%, respectively. In the Monarch area, oil production from Casselman 16, its first mega-pad, outperformed offsetting, legacy pads by about 30%.

Callon hopes to produce 40,000 boe/d in 4Q2018, and changed its full-year production guidance to a new range of 32,000-33,000 boe/d, of which 77-78% is expected to be oil. Under the previous forecast, the lower end of guidance was 31,500 boe/d. The company also honed in on a full-year capital budget of $560 million for 2018. Previously, the capital budget ranged from $530-560 million.

During the quarter, Callon closed on its acquisition of about 28,000 net acres in the southern part of the Delaware from Cimarex Energy Co. in a deal valued at $750 million. The acreage is primarily adjacent to the Spur operating area in Ward County, TX.

Callon reported net income of $37.9 million (16 cents/share) in 3Q2018, compared to net income of $17.1 million (eight cents) in the year-ago quarter. Operating revenues totaled $161.2 million in 3Q2018, compared to $84.6 million in 3Q2017. Callon also announced that Jeff Balmer would succeed Gary Newberry as COO, effective Dec. 10.

Diamondback Focused on ‘Wellhead to Water’

Meanwhile, Midland, TX-based Diamondback announced that its midstream subsidiary, Rattler Midstream, intends to exercise its right to acquire a 10% equity interest in Phillips 66 Partners LP’s (PSXP) Gray Oak crude oil pipeline system, and said it had increased its volume commitment to Gray Oak to 100,000 b/d, up from 50,000 b/d.

During an earnings call Wednesday, Diamondback COO Mike Hollis said the company was working with marketers “to secure a true ‘wellhead to water'” solution. “These deals remove the Midland market risk from our future while building our midstream business via strong strategic partnerships,” Hollis said.

PSXP announced last month that Gray Oak would be expanded to 900,000 b/d based on strong demand to connect the Permian and the Eagle Ford Shale with the U.S. Gulf Coast. Diamondback also has a long-term agreement with Epic Crude Oil Pipeline for 100,000 b/d of takeaway capacity. Both pipelines are currently under construction.

“Long-term, the upside for us is not one of our barrels on our current position will touch the Midland market for the foreseeable future,” Hollis said. “If you think about the systems that we’re going to be on and the long-haul systems we’re going to be on, we’re going to be paying ourselves via our equity ownership to move our barrels to the water. Essentially, we’re getting to Corpus Christi almost for free. And then that’s where exports take over.”

Diamondback reported total production of 122,975 boe/d (72% oil) in 3Q2018, up 44.6% from the year-ago quarter (85,029 boe/d, 73% oil) and 9.2% sequentially (112,592 boe/d, 73% oil).

The company said it drilled 40 gross horizontal wells in 3Q2018, and turned 43 operated horizontal wells to production. Of those, 18 targeted the Wolfcamp A, while 11 were drilled into the Wolfcamp B and 10 targeted the Lower Spraberry. Diamondback also drilled two wells each into the Middle Spraberry and the Second Bone Spring.

Diamondback operated 13 rigs and five completion crews during the third quarter. It picked up a rig in the $1.2 billion deal to acquire 25,493 net acres in the Midland from Ajax Resources LLC. The company expects to complete 146-154 net horizontal wells in 2018, and will retain the former Ajax rig for the remainder of the year to help meet that goal. The Ajax deal closed on Oct. 31.

Shareholders at Diamondback are scheduled to vote Nov. 27 on a proposed $9.2 billion merger with Energen Corp. If approved, Diamondback shareholders would own around 62% of the combined company, with Energen’s shareholders owning the remainder.

During an earnings call Wednesday, Diamondback CEO Travis Stice said his company was currently operating 14 rigs, while Energen had 10 deployed. Stice said the rigs were “split evenly” between the Delaware and the Midland.

“We see this rig count as the baseline for our 2019 operating plan as we integrate the merger,” Stice said. “We’re going to continue to look at capital to high rate of return projects within cash flow and pay dividends. That’s going to be the initial allocation of capital. Depending on commodity prices and free cash flow, we’ll look to see if we need to increase [the rig count] in the back half of 2019.”

The company raised its full-year production guidance to 118,500-119,500 boe/d and its capital budget to $1.5-1.575 billion. Last quarter, those figures ranged from 115,000-119,000 boe/d and $1.4-1.5 billion, respectively.

Diamondback reported net income of $157 million ($1.59) in 3Q2018, compared to net income of $73 million (74 cents) in the year-ago quarter. Revenues totaled $538 million in 3Q2018, compared to $301.3 million in 3Q2017.