Permian Basin pure-play Diamondback Energy Inc. improved its environmental stewardship in the third quarter, with only 0.5% net natural gas production flared, down 74% year/year. The operations also are strong enough to not look for any merger partner, CEO Travis Stice said.

Diamondback flaring

The Midland, TX-based independent reduced its lease operating expenses and general/administrative costs in the quarter to “near all-time lows,” he said during a conference call to discuss quarterly results. Capital costs per lateral foot also are “continuing to decline to new records. 

“Our drilling and completion operations continue to become more efficient, and we are beginning to see the benefits from high-grading our development program after the downturn began earlier this year.”

Costs are 30% lower than 2019 levels in both the Midland and Delaware sub-basins.

“We are also beginning to see the benefits from high-grading our development program since the downturn started in our latest well results and have all of the impact of curtailments from the second quarter in the rearview mirror.”

Diamondback is on track to meet its 4Q2020 average production target of 170,000-175,000 b/d oil, which is expected to be “the baseline for our development plan in 2021.”

Too Soon For Growth

Stice stressed that it’s too soon for any operators to ramp up oil production at current commodity prices.

“We still firmly believe that the concept of production growth should not be considered until commodity prices recover and global inventories return to normalized levels, and any form of material production growth will only magnify the issues our industry is fighting today,” he said.

The investments and capital allocations at current oil prices “remain very simple and have not changed,” said the CEO. The plan is to protect the base dividend, spend maintenance capital to hold oil production flat, and use excess free cash flow to pay down debt. 

“We operate in a cyclical business, and while this downturn has been as severe as any in industry history, Diamondback has the size, scale, balance sheet, asset quality and cost structure to weather a prolonged downturn and thrive in the inevitable upcycle.”

Meanwhile, the operator is making strides in its commitment to reduce its carbon footprint, Stice said. Owning and operating assets “positioned on the low end of the global oil cost of supply curve is most important to our stockholders,” but “we recognize it is also important to own and operate assets that are also positioned on the low end of the greenhouse gas emissions cost of supply curve.”

Diamondback is in support of “public policies that eliminate routine flaring as long as those policies protect the safety of our operations and consider flaring contributions from all segments of the oil and gas industry. Upstream and midstream operators must continue to work together to address the flaring issue for our industry.”

Flaring was responsible for more than 50% of Diamondback’s Scope 1 emissions in 2019, defined as direct emissions from owned or controlled sources. 

“With flaring/net boe produced down 54% year to date, our Scope 1 emissions have materially declined this year, demonstrating our commitment to environmental responsibility,” Stice said. The use of recycled water for completion activities also rose year/year by 24%.

No Connection, No Flowback

The company has been proactive in building infrastructure “to ensure every development well completed is ready to be connected” to a gathering system, Stice said. “We will not flowback a well if that’s not the case.”

In addition, Diamondback has restructured gathering and processing contracts “at our expense, by converting contracts from our percent of proceeds contract to a fixed-fee contract. So the gatherer does not have an economic excuse not to take our gas. This puts all of the commodity exposure on us as the operator, but it ensures that our gas is not flared…”

Regarding the consolidation activity underway among some peer operators, Stice said Diamondback has no need to do so.

“We believe that consolidation in our sector is necessary as our sector is too fragmented, but that’s changing rapidly,” he said. “Industry consolidation has long been anticipated in U.S. shale. It has been touted as an avenue to create scale and improved cost efficiencies…The success of the acquisitions we’ve executed to date were largely driven by realizing hundreds of millions of dollars of savings through lower costs and higher returns…

“A well drilled in the Permian Basin by Diamondback today will be quicker, less expensive and operated with the lowest cost structure in the business. So we do not need to increase our scale to further reduce our cost structure…

“Even through this pandemic, there is not a piece of the supply chain that would be better for Diamondback if we are bigger than we are today for midstream contracts to service availability to access to capital. These facts should prove to investors that we have the scale necessary to compete in this industry…”
Arbitrary numbers, he said, “such as a level of production or market cap deemed to be relevant in our space is both specious and self-serving…Diamondback is not getting left behind. If we don’t do anything today, we prefer not to make rash decisions at the bottom of the cycle. Patience will be rewarded at the end of the day…Getting bigger does not always translate to getting better…”

During 3Q2020, Diamondback drilled 22 gross horizontal wells in the Midland sub-basin and turned 25 operated wells to production. It also drilled 10 gross horizontal wells in the twin Delaware sub-basin and turned 16 operated wells to sales. The average lateral length for the wells completed was 9,881 feet. 

Net losses in 3Q2020 totaled $1.1 billion (minus $7.05/share), versus year-ago profits of $388 million ($2.27). For 3Q2020, Diamondback recorded a one-time impairment of $1.45 billion as the value of its proved reserves declined. Total revenue fell to $720 million from $975 million.

Unhedged realized prices in 3Q2020 averaged $38.75/bbl for oil, $1.11/Mcf for natural gas and $12.09/bbl for natural gas liquids.