Permian Basin pure-play Diamondback Energy Inc. plans to sell some assets acquired from its merger with Energen Corp. last year for $322 million, as production surged and synergies from the merger continued into the first quarter.
Diamondback has agreements with an undisclosed buyer to sell 103,423 net acres in the Central Basin Platform (CBP), the Eastern Shelf in West Texas and the Northwest Shelf in New Mexico as part of its "grow and prune" strategy following its merger with Energen last November. The sale, set to be completed in early July, also includes 6,589 net acres in the West Texas counties of Crockett and Reagan.
The assets being sold have estimated full-year 2019 net production of about 6,500 boe/d from more than 3,000 producing wells. As a consequence, Diamondback lowered its full-year production guidance to 272,000-287,000 boe/d (68-70% oil) from previous guidance of 275,000-290,000 boe/d. The capital budget for 2019 remains unchanged at $2.7-3.0 billion.
"Capital discipline is important to Diamondback and we have no intention to exceed this budget or well count in 2019, regardless of commodity price," CEO Travis Stice said during an earnings conference call Wednesday.
Production was 262,600 boe/d (68% oil) in 1Q2019, up 156% from the year-ago quarter and 44% sequentially. Natural gas production totaled 21.7 Bcf, up 232% from the year-ago quarter and 67.4% sequentially, while oil production totaled 16.1 million bbl, up 137% from the year-ago quarter and 34.7% sequentially.
During the first quarter, Diamondback drilled 83 gross horizontal wells and placed 82 wells into production with average lateral lengths of 9,630 feet. Diamondback has 21 rigs deployed.
The company is on pace to exceed its previous synergy targets following the merger with Energen. Drilling and completion (D&C) costs have decreased by about $240/lateral foot to date in the Midland sub-basin and $55-60 in the twin Delaware sub-basin. This year Diamondback expects to save $155-175 million per well in the Midland and $25-30 million in the Delaware.
Diamondback also expects realized prices to improve through the remainder of 2019 and 2020 as fixed differential contracts roll off and convert to its commitments on the Epic and Gray Oak pipelines. Based on current market differentials and estimated in-basin gathering costs, the company expects to realize about 90-95% of West Texas Intermediate (WTI) for the rest of 2019 and about 100% of WTI in 2020, including current basis hedges, firm transportation agreements and in-basin gathering costs.
The board of the Midland, TX-based independent has launched a stock buyback program of up to $2 billion through the end of 2020. Executives said the buybacks represented the next step in the capital return program. Diamondback expects to generate at least $750 million of free cash flow from operations in 2020, based on a WTI price of $55/bbl.
"Our capital allocation philosophy is grounded on achieving leading year-over-year growth, supporting a growing dividend, reducing debt consistently and continuing to replace and maintain a deep inventory of Tier 1 acreage," Stice said. "Excess free cash flow above this will be returned to stockholders. Diamondback will not spend every dollar of free cash flow on growth or acquisitions...we feel buying back our stock is the best acquisition opportunity we see today."
Diamondback reported net income of $10 million (6 cents/share) in 1Q2019, compared with $163 million ($1.65) in the year-ago quarter. Revenues totaled $864 million, versus $479 million in the year-ago quarter.