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    FANG
    Earnings call· Dec 2024(Q4 FY24)

    Diamondback Energy, Inc. FANG

    Feb 25, 2025 Source

    Executive summary

    Diamondback Energy Q4 FY24 — Enhanced Capital Efficiency and Strategic Integration

    Diamondback Energy delivered a strong Q4 FY24, showcasing significant improvements in capital efficiency and D&C operations, enabling a lower oil price to generate the same free cash flow per share as the prior year. The company is focused on integrating the Double Eagle acquisition, which provides a decade of high-return inventory, and is actively leaning into share repurchases given the attractive valuation. Management is also exploring innovative power generation solutions in the Permian, including potential hyperscaler data center deals, while managing increased capitalized interest from recent acquisitions.

    Highlights

    5

    • Improved capital efficiency, now generating the same free cash flow per share at $67/bbl oil as at $76/bbl last year, a $9/bbl improvement.

    • Strong D&C efficiency with SimulFRAC fleets completing ~100 wells/fleet/year (up from 80), with potential to reach 110-120 wells/year.

    • Planned significant DUC drawdown in 2025 expected to result in approximately $200 million in CapEx savings.

    • Double Eagle acquisition provides a decade of high-return inventory, with $100 million free cash flow upside in 2026 from accelerated Southern Midland Basin development (0 capital carry for FANG).

    • Attractive valuation (12.5-13% FCF yield at $70 oil) makes share repurchases a priority, with a commitment to at least 50% free cash flow return.

    Concerns

    3

    • Capitalized interest has increased due to the Endeavor deal, related to undeveloped acreage and debt, though management expects this to diminish with debt paydown.

    • The 2025 midstream infrastructure budget includes approximately $60 million for the Endeavor Water business (EDS) and $60-70 million for accelerated environmental CapEx, which are one-time or expected to be reduced in future years.

    • Integration of the Double Eagle field organization is a significant undertaking for 2025, requiring focus on shared learnings and best practices for longer-term LOE and OpEx improvements.

    Guidance & targets

    7
    CategoryTargetConfidence
    Full-year 2025 Capital Expenditure
    $3.8 billion to $4.2 billion
    high materiality
    High
    Double Eagle Oil Production
    27,000 barrels a day of oil
    medium materiality
    High
    Double Eagle BOE Production
    40 something like that, 1,000 BOEs a day
    low materiality
    Medium
    Q1 2025 Oil Production (legacy FANG)
    470 oil to 475 oil
    medium materiality
    High
    Midstream Infrastructure Budget (long-term target)
    5% to 7% of total capital
    low materiality
    Medium
    Free Cash Flow per share (2025)
    $20 a share
    high materiality
    High
    Free Cash Flow (2026, from Double Eagle Southern Midland Basin development)
    about $100 million
    medium materiality
    High

    Operational metrics

    20
    Free Cash Flow per share
    $20
    FY25

    Management's target for 2025 at $70/bbl oil.

    Free Cash Flow per share breakeven oil price
    $67down $9/bbl from $76/bbl last year
    Current

    Oil price required to generate the same free cash flow per share as the prior year, indicating improved capital efficiency.

    SimulFRAC wells completed per fleet per year
    100up from 80 a year ago
    Current

    Efficiency improvement partly due to higher pump rates.

    Drilled Uncompleted (DUC) wells acquired
    50
    Q4 FY24

    Acquired with Double Eagle, in addition to Endeavor and TRP DUCs.

    DUC drawdown CapEx savings
    $200M
    FY25

    Estimated savings from completing DUCs rather than drilling new wells in 2025.

    Midstream Capital Expenditure
    $60M
    FY25

    Expected to be reduced if EDS is monetized into Deep Blue JV.

    Accelerated Environmental Capital Expenditure
    $60M-$70M
    FY25

    Expected to be a one-time expense this year and possibly next.

    Facility design savings per facility
    $1.5M10%
    Future

    Expected savings per facility over time as asset base is developed.

    Internal power infrastructure CapEx
    $70M-$75M
    FY25

    Annual spend for power needs, separate from potential power JV.

    Noncore asset sales target
    $1.5B
    Future

    Target for divestitures to reduce net debt, without selling operated acreage.

    Free Cash Flow yield
    12.5%-13%
    FY25

    Calculated based on $20/share FCF at $70 oil and current stock prices, making share repurchases attractive.

    Capitalized interest
    —going up
    Recent quarters

    Increased due to Endeavor deal, related to undeveloped acreage and debt raised. Excluded from CapEx budget but included in shareholder commitments.

    Rigs running
    15down from 18-19 rigs
    Current

    Pace expected to be maintained for most of the year.

    Wells drilled
    400+
    FY25

    Compared to 280 wells expected with 15-16 rigs for Diamondback stand-alone last year.

    Wells drilled run rate
    525-540up from low 500s before Double Eagle
    FY25

    Apples-to-apples run rate assuming flat capital efficiency.

    Oil productivity
    as good as any year
    FY25

    Expected to remain strong despite higher gross TILs.

    Drilling cost per foot
    $220
    Current

    Almost as cheap as it's been in the last 5-6 years.

    Well cost
    $625-$650
    Prior

    Estimated prior well cost for Double Eagle assets before FANG integration.

    Surface acreage
    1,000
    Current

    Available for potential hyperscaler data center development.

    Ownership stake
    50%+
    Current

    Diamondback's stake in VNOM, structured to keep Viper under-levered for market consolidation.

    Industry KPIs

    1
    MetricValueDetails
    D c efficiency rig activity100wells/fleet/year

    Deals & partnerships

    4
    Double EagleAcquisition of core Midland Basin assets

    Considered the 'last meaningful asset' opportunity in the core Midland Basin. Integration of field organization is a key focus for 2025.

    Endeavor Water business (EDS)Potential monetization of Endeavor Water business

    Likely to be merged into the Deep Blue JV. Part of the $1.5B noncore asset sales target.

    Deep Blue JVWater infrastructure joint venture

    Potential recipient of the Endeavor Water business (EDS).

    Large IPP & Hyperscaler data center operatorPotential large behind-the-meter gas power plant in the Permian

    Aims to address power scarcity in the basin, increase uptime, and reduce LOE for Diamondback. Diamondback has 1,000 acres of surface land available.

    Risks & headwinds

    3
    Capitalized interest increaseRecent quarters, expected to continue until debt reduction.

    Not quantified, but noted as 'going up.'

    Mitigation: Paying down significant amount of debt over the coming couple of years.

    Integration of Double Eagle field organizationHot and heavy this year.

    Not quantified.

    Mitigation: Teams are working on best practices and shared learnings to improve LOE and OpEx in future years.

    Volatility in market conditions for capital returnOngoing.

    Not quantified, but implies potential for market conditions to impact ability to exceed 50% capital return.

    Mitigation: Focus on noncore asset sales and debt reduction before potentially increasing capital return above 50%.

    What to watch in Q1 FY25

    5

    Noncore asset sales progress

    Next quarter
    Current$1.5B target
    TargetProgress towards $1.5B target, specifically monetization of equity method investments or EDS Water business.

    Why it matters

    Achieving this target is crucial for debt reduction and potentially increasing capital returns beyond 50%.

    I think most of that -- that gets you most of the way there. We've started to uncover a lot of assets from Endeavor that we acquired that are all over the country. But the biggest one is probably a sizable non-op position in the Delaware Basin, and that's likely your last kind of monetization candidate to get to that $1.5 billion.

    Q&A highlights

    6

    What drives the improvement in FCF sensitivity, allowing the same FCF at $67/bbl as $76/bbl last year?

    Kaes Van't Hof explained this metric shows capital efficiency improvement or accretive deals. The $9/bbl reduction is due to the Endeavor deal's accretion, lower share count, lower cost structure, and quality inventory.

    “It's basically what oil price gets you the same free cash flow per share as the prior year. And if that number is going down, capital efficiency is improving where you've done an accretive deal.”

    asked by Neal Dingmann · answered by Kaes Van't Hof

    2 min read7 chapters

    Detailed Narrative

    01

    Capital Efficiency Improvement

    Diamondback has significantly improved its capital efficiency, now able to generate the same free cash flow per share at $67/bbl oil as it did at $76/bbl last year, representing a $9/bbl improvement. This enhancement is attributed to a lower share count, reduced cost structure, and high-quality inventory, with management aiming to continue this positive trend in future periods.

    02

    D&C Plan and DUC Drawdown

    The company plans a significant DUC (Drilled Uncompleted) drawdown in 2025, drilling fewer wells than it completes. This strategy is partly due to being ahead of plan last year and acquiring DUCs through the Endeavor and TRP deals. This drawdown is expected to result in approximately $200 million in CapEx savings for the year, providing operational flexibility.

    03

    M&A Strategy and Share Repurchases

    Following the Double Eagle acquisition, management views this as potentially the last meaningful opportunity in the core Midland Basin, suggesting a pause in large-scale M&A. The focus is now shifting towards capital allocation, with share repurchases being a priority due to the attractive valuation, citing a 12.5-13% FCF yield at $70 oil for 2025.

    04

    Midstream Infrastructure and Cost Savings

    The 2025 midstream budget includes approximately $60 million for the Endeavor Water business (EDS) and $60-70 million for accelerated environmental CapEx, both of which are expected to be one-time📎 or reduced in future years. The company aims to reduce its infrastructure budget to 5-7% of total capital, with new combined facility designs expected to save $1.5 million (10%) per facility.

    05

    Hyperscaler Data Center Power Initiative

    Diamondback is actively pursuing a large-scale power generation project in the Permian with a large IPP, utilizing Diamondback's gas. This project aims to supply power to hyperscaler data centers while also providing power back to Diamondback for its own operations, enhancing uptime and reducing LOE. The company holds significant surface acreage in the Permian, which could facilitate such a deal.

    06

    Asset Divestment Program

    The company plans to execute $1.5 billion in noncore asset sales, primarily from equity method investments and the EDS Water business, without selling operated acreage. A sizable non-op position in the Delaware Basin is also a potential monetization candidate to reach the target, aiming to reduce net debt.

    07

    Capitalized Interest Dynamics

    Capitalized interest has increased due to the Endeavor deal, particularly related to undeveloped acreage and debt raised to pay for it. While not included in the operational CapEx budget, it is factored into overall shareholder commitments and free cash flow calculations. Management expects this issue to diminish as a significant amount of debt is paid down over the coming years.

    AI-generated summary of the company’s earnings call. Not investment advice.