In the Diamondback Energy Second Quarter 2023 Earnings Conference Call, the VP of Investor Relations, Adam Lawlis, welcomed everyone and gave a caution that actual results could differ from those indicated in forward-looking statements. He then handed the call over to Travis Stice, Chairman and CEO, who discussed the shareholder letter and opened the line for questions.

Travis Stice and Danny Wesson of a company discussed the current rig and frac rate environment and the expected change in costs for the remainder of the year. They believe that the E&P space's reluctance to increase spending will lead to a softening in service costs. Additionally, they are driving cost out of the equation with increased efficiency and seeing input costs come down on steel, cement and other items. However, it is too early to call any deflation for next year.

In the Midland Basin, drilling costs are expected to decrease to the low 600s per foot by the end of the year. Upstream capital expenditure is increasing slightly, as the company drilled 98 wells in the quarter, and will be building a few DUCs. Midstream capital expenditure is also increasing slightly, as the company will be connecting to neighbors who need water or need to dispose of it.

Diamondback has successfully integrated the two companies it acquired earlier in the year and is currently running fewer rigs than they acquired. The M&A landscape in the Permian is limited and Diamondback is focused on acquiring deals that make them better, not bigger. Diamondback is also mindful of its optimal capital structure.

Travis Stice discussed the optimal cash level and leverage level for Diamondback Energy, noting that a leverage ratio of less than one is appropriate and building a bit of cash on the balance sheet is a good idea. Kaes Van't Hof then discussed the drivers of the lower CapEx in 4Q compared to 3Q, noting that it is a combination of lower activity and lower costs. He also suggested that a $600 million per quarter run rate is a good baseline for the next year and that well costs are expected to decrease to the low 600s by the end of the year.

QEP Resources has integrated FireBird and Lario and are now able to efficiently run four simul-frac crews which can complete 80 wells a year, which is the baseline they are using to plan their capital allocation for 2024. They have also outlined a forecast of their capital expenditure by quarter in their investor deck.

Kaes Van't Hof states that they are confident in the forward outlook for well productivity and have timed deals well, resulting in steady productivity. The productivity is expected to remain flat, and if it is better than that, it will be a positive. This is due to their shift to co-development four or five years ago.

Travis Stice explains that Diamondback's confidence in their future business plan is demonstrated by their ability to continually increase their base dividend, with a quarterly CAGR of 10% since 2018. Charles Meade then asks what is driving the improved cycle times that is allowing them to increase their gross well count for the year. Travis Stice explains that it is not one individual piece of technology, but rather Diamondback's culture that has an extreme focus on cost control and efficiencies. Danny will provide specific examples.

The company incentivizes its completion crews and rigs to make efficiency and cost control gains, which are then made permanent for future capital allocation decisions. These gains have resulted in measurable reductions in the amount of time it takes to drill a well, with some wells being completed in as little as four days. To ensure these improvements are sustained, the teams measure every little thing they can and present detailed quarterly reviews to the company.

The Board of Directors views the base dividend as the primary form of shareholder return, and it is designed to be sustainable and growing. Share buybacks are determined based on future cash flows and stock prices in order to measure when to purchase shares. The Board is confident that the base dividend will be covered even with oil prices at $40 per barrel.

Kaes Van't Hof answered a question about oil cuts going forward into 2024, noting that the Northern Midland Basin is very oily, and that they guide people to expect a baseline of 59-60% oil. He also noted that in a world where they are not growing as much, the oil cut may stay flat or come down slightly. Subash Chandra then asked a follow-up question about asset sales, to which Van't Hof replied that they have been largely midstream.

Kaes Van't Hof discussed the upstream asset market, noting that they had been doing some leasing and netting up, as well as divesting noncore acreage. They had also received good prices for the divested acreage. In terms of production, they had drilled a record number of wells in the second quarter, but the third quarter production guide indicated that production would be down a little bit.

Kaes Van't Hof explains that the company is focusing on generating free cash flow in the second half of the year and returning it to shareholders, which is why they are not stepping on the accelerator and spending more capital. He also mentions that the completion cadence was high in the first half of the year, but will come down to 80-ish for the 3rd and 4th quarter, which will lead to a decrease in capital. He also states that the service cost benefit will start to be seen in the 4th quarter, as the cost per foot is expected to go from low 700s to low 6s by the end of the year.

Diamondback is a technology company that produces oil and is constantly looking to improve EURs, recoveries, and technologies. They are on the front foot in pursuit of better mousetraps and can do so at a lower cost than their competitors and peers. They are fast followers in anything that looks to be working and do not plan to spend a lot of money testing it.

Paul Cheng and Kaes Van't Hof discuss the profitability of pursuing activities in the Midland Basin, with Kaes noting that they want to allocate capital to the highest returning projects. They also discuss the lateral length of wells, with Kaes noting that the 10,000 to 11,000 foot range feels about right, and that they would rather drill two 10,000 footers than one 20,000 footer, as it is a risk-reward decision. Travis Stice then closes the call, thanking everyone for listening and encouraging them to reach out with any questions.

The conference has ended and participants may now disconnect.

This summary was generated with AI and may contain some inaccuracies.