Diamondback Energy Inc.’s Permian Basin production climbed 38% year/year and was 16% higher sequentially during the fourth quarter as the company raised more rigs in the Southern Delaware.

The Midland, TX-based independent, which is focused entirely on West Texas oil and gas, said 4Q2016 production rose to 51,900 boe/d. Full-year output of 43,000 boe/d was 30% higher than in 2015.

CEO Travis Stice, speaking with analysts during a conference call Wednesday, said the “two halves” of 2016 “could not have been more different. We reacted appropriately to the unprecedented decline in commodity prices in the first half of the year by deferring completion activity and subsequently responded quickly with increased activity and asset acquisitions in the second half of the year.”

Six horizontal rigs are working today, five in the Midland sub-basin and one in the Southern Delaware sub-basin. Two more rigs are to be raised in the Delaware once the pending $2.43 billion takeover of Brigham Resources is completed, now expected in 2Q2017.

However, depending on the direction of prices, even more rigs could go up.

“We could potentially increase our operated rig count to 10 rigs in the back half of the year should commodity prices continue to strengthen,” Stice said. “As a result, we are increasing our 2017 production guidance, a range which implies over 65% production growth at the midpoint and positions us to continue to have multi-year organic growth at or near cash flow breakeven prices at current strip.”

Management is wary of oilfield service costs, which undoubtedly are going to increase, he said. “Mathematically, we’ve dialed between a 10% and 15% total well cost increase starting in the first quarter. We’re not seeing that just yet. We actually believe that if oil stays kind of rangebound between $50 and $55, the impetus behind service cost increases will be muted a little bit.

“However, if we continue to see commodity prices strengthen to that $55-60/bbl, we believe that you’ll see these service cost increases start to accelerate in the back half of this year.”
Diamondback has no plans to “acquiesce on these cost increases. We’re working diligently with our service providers and our business partner…to try to mitigate those costs. We know that for a healthy industry, as we continue to build rigs in the Permian, we are going to have to have a service company that’s well-capitalized and ready to support increased activity.

“I think last week here in the Permian, we eclipsed 300 rigs, and we’re adding anywhere between five and 10 rigs per week. And so if that pace continues, you’ll start to see some tightening. We’ve not just opened our eyes to this phenomenon this quarter; it’s something we’ve been doing really since the back half of last year when all activity increased.”
Diamondback “may not be not insulated from all service cost increases” but “we feel like we’ve been proactive enough to be able to offset some of the service cost increases that we’re forecasting.”

Diamondback achieved 40%-plus production growth in the second half of 2016 “by showcasing our ability to respond quickly to a rising commodity price environment,” Stice said. “We ended the year operating five rigs, and as I said in November, we are just beginning to bear the fruit of our activity ramp.”

After doubling Tier 1 acreage in the Delaware during the second half of 2016, “our focus now shifts to execution…Our updated 2017 guidance implies over 65% production growth at the midpoint, while conservatively preparing for potential service cost inflation with respect to capital guidance.”

The Permian pure-play drilled 25 gross horizontal wells and completed 23 operated horizontal wells with an average of two completion crews during the final quarter. Operated completions included 14 Lower Spraberry wells, two Middle Spraberry wells, six Wolfcamp A wells and one Wolfcamp B well.

Last month Diamondback added a sixth operated horizontal rig to begin developing Southern Delaware Basin acreage. Once the Brigham Resources transaction is completed, two more rigs will go up.

During 4Q2016, Diamondback drilled an 8,200-foot lateral well in Glasscock County, TX in less than nine days from spud to total depth, a new company record. It also drilled a 13,500-foot lateral in Midland County, TX in 20.3 days, another record.

The company expects to complete 130-165 gross wells with average lateral lengths of 8,500 feet.

In the Midland Basin of West Texas, Howard County wells targeted the Lower Spraberry, Wolfcamp A and B with average completed lateral lengths of 9,725 feet. A Glasscock County two-well Wolfcamp A pad recently was completed with an average lateral of 10,660 feet.

Two Lower Spraberry wells also were completed in Andrews County with an average laterals of 10,000 feet. The wells achieved an average peak 15-day initial production rates of 1,564 boe/d per well.

Diamondback earned $26 million (32 cents/share) in 4Q2016 from a year-ago loss of $187.4 million (minus $2.80). Cash operating costs were $8.48/boe, including lease operating expenses of $4.89/boe and cash general and administrative expenses of 92 cents/ per boe.

In the final three months of 2016, Diamondback spent $104 million on drilling and completion, $10 million on infrastructure and $8 million on nonoperated properties. Additionally, $87 million was spent on acquisitions in 4Q2016. At the end of December Diamondback had $1.667 billion in cash and an undrawn $500 million credit facility.

To account for the increased activity and completing the Brigham Resources acquisition, the company has increased its 2017 capital expenditure guidance for drilling, completion and infrastructure to $800 million to $1 billion, including $75 million of one-time capital expenditures for oil and natural gas gathering systems in the Southern Delaware Basin.