Permian Basin pure-play Diamondback Energy Inc. saw its oil and natural gas output bottom in the third quarter, and it is eyeing a slight increase through the end of the year — but not by much until  prices recover.

Fourth quarter output is expected to meet a production target of 170,000-175,000 b/d of oil, CEO Travis Stice said. However, he warned that the industry could fall over its skis if it does not watch the warning signs ahead.

“Diamondback’s production level in the fourth quarter is the proposed baseline for our future activity plans, and we anticipate we can hold this production flat in 2021 while spending 25-35% less capital than in 2020,” he said.

Diamondback, like many of its Lower 48 peers, curtailed production in the second quarter and shut down most completion activity because of the historic decline in commodity prices. The activity ramped up in July to stem the volume declines and stabilize the production base.

“While it is important that our industry recovers from this downturn and works to again attract attention and capital from the investment community with well thought-out, long-term investment frameworks, the concept of production growth should not be discussed until commodity prices recover and global inventories return to normalized levels,” Stice said.

The energy industry, “and particularly North American shale producers, must acknowledge two fundamental truths: we have a significant influence on the global oil market, and today that market is oversupplied.

“As such, if North American producers decide to grow again, even at mid-single-digit rates, we will magnify the issues our industry is fighting today and face repercussions from other global producers.”

If the investment community were to reward operators that opt for growth, “other producers are going to follow suit, and this downturn will carry on longer,” Stice said. “To that end, we will consider appropriately growing production again should the global oil market call on growth through a price signal, but that day is not today.”

Diamondback’s investment framework and capital allocation philosophy at current oil prices, he said, “remain very simple and have not changed: protect our base dividend, spend maintenance capital to hold oil production flat and use excess free cash flow to pay down debt, in that order.”

The industry, meanwhile, has shifted its focus to 2021 breakeven commodity prices, Stice noted.

“While this is an important metric, and Diamondback’s cost structure and asset quality stand out as differential in terms of 2021 breakeven price benchmarking, a breakeven price is just that, and does not mean the industry is generating sufficient returns to attract capital to the sector.”

The Midland, TX-based independent exited September “with no balance on our revolving credit facility, implying true free cash flow generation in the third quarter,” Stice said. “Diamondback is expected to continue to generate free cash flow at current forward commodity prices, with excess free cash flow above our dividend to be used for debt retirement.”

Diamondback’s oil and gas production averaged 287,300 boe/d in the third quarter, including 170,000 b/d oil. Thirty-two (gross) operated wells were drilled and 41 were turned to sales. Capital expenditures (capex) totaled $281 million.

The average realized hedged price in 3Q2020 was $26.22/boe, with $38.17/bbl oil, $12.09/bbl natural gas liquids and 95 cents/Mcf natural gas. 

For 2020, Diamondback is predicting full-year production to average 290,000-305,000 boe/d, with oil output of 170,000-175,000 b/d. Capex for the year is pegged at $1.8-1.9 billion.

The company now has an average of 162,200 b/d of oil protected in 4Q2020 and an average of 87,400 b/d hedged in 2021.