Diamondback Energy

Diamondback stressed to analysts that the company was focused on increasing returns to investors

Diamondback’s CEO: “we increased our return of capital commitment and stated that beginning this quarter, we would return at least 75% of free cash flow back to our shareholders, up from at least 50% previously. At 75%, total capital return was nearly $875 million.” “Travis Stice — Chairman and Chief Executive Officer: Our capex was once again within our guidance range, leading to free cash flow of nearly $1.2 billion. As we previously announced, we increased our return of capital commitment and stated that beginning this quarter, we would return at least 75% of free cash flow back to our shareholders, up from at least 50% previously. At 75%, total capital return was nearly $875 million, with dividends totaling $403 million or $2.26 per share. The remaining $472 million went toward our opportunistic share repurchase program, where we bought back nearly 4 million shares at an average price of approximately $120 a share.” (Diamondback Energy Q3 2022 Earnings Call, 11/8/2022)

Diamondback’s CEO told analysts the company had spent roughly $1.2 billion of their $4 billion stock buyback authorization.“Travis Stice — Chairman and Chief Executive Officer: To date, we’ve spent approximately $1.2 billion of our $4 billion buyback authorization, repurchasing nearly 6% of our shares outstanding since September of last year when we initiated our program. In October, we announced the pending acquisition of the assets of FireBird Energy, a company with a large, contiguous position in the Midland Basin. We feel FireBird has right balance of cash flow and inventory and the acquisition is immediately accretive on all relevant per-share financial metrics while providing a long runway of high-quality drilling opportunities. With over 350 locations, we expect to have well over a decade of run room at our projected one-rig development phase.” (Diamondback Energy Q3 2022 Earnings Call, 11/8/2022)

Diamondback’s CEO: “I will say that in conversations with our long-only shareholders. A lot of those guys prefer to get the cashback.” “Travis Stice — Chairman and Chief Executive Officer: Look, we’ve seen the volatility in the market that every quarter, we’ve had the opportunity to buy shares back. And when that opportunity presents itself, we’ll do so aggressively. I think the key to any of those questions is the ability to generate free cash flow. And that’s certainly what our focus is, and then maintaining the flexibility on how the return of that free cash flow gets prosecuted. I will say that in conversations with our long-only shareholders. A lot of those guys prefer to get the cashback. But again, we believe that we’ll have opportunities to repurchase shares back.” (Diamondback Energy Q3 2022 Earnings Call, 11/8/2022)

Diamondback CEO said that public companies would prioritize investors over increasing production

Diamondback’s CEO predicted that “ we’ll be able to generate low single-digit pro forma oil production growth next year.” “Travis Stice — Chairman and Chief Executive Officer: All of this will provide operational momentum as we move into 2023 we expect to deliver the same operational results you’ve come to expect from Diamondback. While we won’t be giving detailed for the 2023 guidance today, we believe that we’ll be able to generate low single-digit pro forma oil production growth next year by maintaining our current stand-alone activity levels plus the one additional FireBird rig. It’s not easy to operate in this environment, but our size, scale and quality of the inventory uniquely position us to deliver differentiated results and create meaningful value for our shareholders. Before I open up for questions, I want to address all the Diamondback employees that are on the phone.” (Diamondback Energy Q3 2022 Earnings Call, 11/8/2022)

Diamondback’s CEO: “ I think for public companies, the continued discipline that we’ve all been demonstrating on shareholder returns versus a commitment to growth. I think all of those factors weigh into more of a muted production growth from U.S. shale going forward.” Travis Stice — Chairman and Chief Executive Officer: A lot to unpack in that question, Neal, but I think it’s really all of the above. I think there is asset maturation. I think certainly, supply chain constraints are also limiting growth. I think for public companies, the continued discipline that we’ve all been demonstrating on shareholder returns versus a commitment to growth. I think all of those factors weigh into more of a muted production growth from U.S. shale going forward. That said, out here in the Permian, I think we’re still continuing to hit production records every month, somewhere close to 5.3 million to 5.5 million barrels a day. But that’s going to be challenged to continue to grow that into the future. Do we have the assets out here? Yes, we do. But some of those other topical constraints that I mentioned are going to be impediments to efficient growth assume we’ll probably see at higher commodity prices some people try to grow, but they’re allocating capital if they’re very trailing into of efficiency. So those also create headwinds as well for shareholders.” (Diamondback Energy Q3 2022 Earnings Call, 11/8/2022)

Diamondback Energy’s CEO said high prices and “capital discipline” had accelerated returns to shareholders

Diamondback’s CEO: 2021 was a great year for Diamondback and our industry with higher product prices, allowing the vast majority of our industry to… accelerate returns to shareholders” “Travis Stice — Chairman and Chief Executive Officer: Thank you, Adam, and welcome to Diamondback’s fourth quarter earnings call. 2021 was a great year for Diamondback and our industry with higher product prices, allowing the vast majority of our industry to: one, repair and improve balance sheets quickly; two, accelerate returns to shareholders; and three, make significant progress on environmental objectives. At Diamondback, we reduced our absolute debt by $1.3 billion, increased our base dividend every quarter, initiated a return of capital framework and announced ambitious environmental goals designed to help us earn our environmental license to operate. In the fourth quarter alone, buoyed by commodity price strength, Diamondback generated $772 million of free cash flow with production and capital, both positively exceeding expectations.” (Diamondback Energy Q4 2021 Earnings Call, 12/31/2021)

Diamondback’s CEO: “We are at the beginning of an incredible period of value creation for the industry, and I’m confident that the capital discipline demonstrated by us and our peers in 2021 will continue, putting returns and, therefore, shareholders first.” “Travis Stice — Chairman and Chief Executive Officer: We returned 67% of this free cash flow to stockholders, which was above our commitment to return at least 50% of our free cash flow to shareholders quarterly. We are at the beginning of an incredible period of value creation for the industry, and I’m confident that the capital discipline demonstrated by us and our peers in 2021 will continue, putting returns and, therefore, shareholders first. We believe this is the best near-term path to equity value creation as our shift from a consumer of capital to a net distributor of capital cements itself as our long-term business model. (Diamondback Energy Q4 2021 Earnings Call, 12/31/2021)

Diamondback’s CFO said investors were driving capital spending: “our large shareholders universally have said they want a base dividend that’s protected below $40 oil.” “Kaes Vant Hof — President and Chief Financial Officer: Yes. We look at it more on the breakeven side. So pre-dividend breakeven right now, $30 a barrel. I think that number stays fairly consistent here over the coming years as capital efficiency stays strong, base declines are reduced. And then above that, our large shareholders universally have said they want a base dividend that’s protected below $40 oil. Right now, the base dividend was protected at $35. That will go up over time, but you also might have less shares over time, less debt. So that frees up some more cash to go to the dividend. (Diamondback Energy Q4 2021 Earnings Call, 12/31/2021)

Diamondback repeatedly said no plan to increase production, saying it could risk shareholder returns

Citing potential Iranian oil, Diamondback’s CEO said “we have no reason to put growth before returns. Our shareholders, the owners of our company, agreed. And as a result, we will continue to be disciplined, keeping our oil production flat this year.” “Travis Stice — Chairman and Chief Executive Officer: However, the global balance remains tenuous at best with up to one million barrels per day of additional Iranian barrels potentially coming online sometime this year and U.S. growth expectations continuing to climb higher, led by private companies and more importantly or more recently majors. Both of these supply factors could be bearish signals for oil. Therefore, Diamondback’s team and board believe that we have no reason to put growth before returns. Our shareholders, the owners of our company, agreed. And as a result, we will continue to be disciplined, keeping our oil production flat this year. As such, our plan for this year is simple. Maintain oil production of approximately 220,000 barrels per day by spending between $1.75 billion and $1.9 billion. (Diamondback Energy Q4 2021 Earnings Call, 12/31/2021)

Diamondback’s CFO: “We’re certainly doing our part, not growing. I wish other people would grow less in the Permian too but that’s a different topic.” “Kaes Vant Hof — President and Chief Financial Officer: Yes. I mean I think, Arun, unlike the past, I think we have the size and scale now to contribute to pipelines and make sure it happens. We’re certainly doing our part, not growing. I wish other people would grow less in the Permian too but that’s a different topic. (Diamondback Energy Q4 2021 Earnings Call, 12/31/2021)

Diamondback’s CEO: “even with the announced growth from the majors, I’m not sure that the total barrels that they’re producing are growing into the global equation. So that’s kind of a plus.” “Travis Stice — Chairman and Chief Executive Officer: Well, look, I pointed out that on a global sense, the supply demand is pretty tenuous. And even with the announced growth from the majors, I’m not sure that the total barrels that they’re producing are growing into the global equation. So that’s kind of a plus. Now right here to look out my window, I know that the Permian is running about 300 rigs right now. We’re probably on the way to 350 or 400 rigs by the end of this year. And a large portion of that, of those rigs have been operated by Permian. But I think some of the growth you’re seeing on a go-forward basis will be from the majors. We’ve already talked about gas pipeline takeaway issues and a little bit on the NGLs, which I think Diamondback has been on our front foot, getting some strategic alliances there, and oil take away is in great shape, but it is going to create inflationary pressures.” (Diamondback Energy Q4 2021 Earnings Call, 12/31/2021)

Diamondback’s CEO: “I don’t know what the right level of growth will be or when it’s going to occur. I can tell you definitively right now, what’s being valued by our investors is a shareholder return program. And no one wants to see that shareholder return program put at risk with volume growth.” “Travis Stice — Chairman and Chief Executive Officer: Yes. I don’t know what the right level of growth will be or when it’s going to occur. I can tell you definitively right now, what’s being valued by our investors is a shareholder return program. And no one wants to see that shareholder return program put at risk with volume growth, not for Diamondback specifically for our industry in total. So look, the world will be calling for oil growth at some point in the future. And our industry is going to have to figure out the right way to respond while not putting the shareholder return program at risk. We’ve spent the last decade consuming capital and now we’ve got a little bit of sunshine in us where we can return that capital to our investors that have been waiting patiently and sometimes impatiently for this return. So it’s a good question to ask, Leo, but I can’t give you the time at which Diamondback or the industry is going to respond to growth. But I’ll tell you, when we do, it’s going to be in conjunction with creating unreasonable value for our shareholders. (Diamondback Energy Q4 2021 Earnings Call, 12/31/2021)

Diamondback’s CEO defended pessimistic projections on the price of oil: “the other thing is if we’re wrong and oil price is higher, we’re going to generate a lot of free cash flow, and our investors are going to get a lot of that return to them.” “Travis Stice — Chairman and Chief Executive Officer: Yes. We asked that question every day. But one of the things that’s — when I ask that question, one of the responses I got was, what do you think the average price was for the last seven years, and that’s $53 a barrel. It’s really easy to get you fork about $90-plus oil. And in fact, I’ve seen — I think I’m seeing some of that for you in our industry right now, certainly in the commentary that’s out there. But we know geopolitically, there’s dollars that are in today’s oil price that God willing will be resolved without arms conflict. We know that there’s Iranian barrels that are probably coming on, I said, by the end of the year, but it may be at the end of this month. And we’ve got this further in the Permian Basin that’s continuing to lift U.S. production forecast. And while OPEC hasn’t performed up to their 400,000 barrels per day per month production increases, but I think they’re getting closer to it. And I don’t know what their surplus is, but it’s not zero yet. So all of those things, to me, you add them together actually seem to be a little bit more bearish for crude than it does to be optimistic. And the other thing is if we’re wrong and oil price is higher, we’re going to generate a lot of free cash flow, and our investors are going to get a lot of that return to them. And if I’m right, then we’ve protected our investments, and we’ve made the right decisions. So $60, I don’t know that it’s a hard and fast number, but it’s kind of the aperture at which we start all of our decisions on investments, whether it’s M&A or drilling wells or share buybacks.” (Diamondback Energy Q4 2021 Earnings Call, 12/31/2021)

Diamondback called for industry consolidation 

Diamondback’s CEO called for further industry consolidation: “I wish I could articulate clearly what the catalyst is going to be that allows consolidation to occur because it’s needed in our industry.” “Travis Stice — Chairman and Chief Executive Officer: Yes, Neil. That’s a good question. And it’s really hard for me to see how kind of the excess of G&A that still exists in the Permian, how all of that gets consolidated. I wish I could articulate clearly what the catalyst is going to be that allows consolidation to occur because it’s needed in our industry. That being said, there’s a lot of companies that had one foot in the — whistling through the graveyard with one foot in the grave. And now a couple of years later, oil is at $90 a barrel and they’re expecting to sell out and get value on future cash flows at $90 a barrel.” (Diamondback Energy Q4 2021 Earnings Call, 12/31/2021)

Diamondback said it had cut production to reduce methane flaring, calling on others to do the same 

Diamondback’s CFO: “One thing to add is we also deferred 0.5 million barrels of oil last year. I mean we’re trying to do our part here,” citing the issue of flaring. “Kaes Vant Hof — President and Chief Financial Officer: Yes. One thing to add is we also deferred 0.5 million barrels of oil last year. I mean we’re trying to do our part here, Derrick. We deferred 850,000 BOEs, 0.5 million barrels of oil because of flaring. We’re just kind of asking that both sides, midstream and upstream get together to solve this industry issue.” (Diamondback Energy Q4 2021 Earnings Call, 12/31/2021)

Diamondback’s CEO: “We deferred over 0.5 million barrels last year just to avoid flaring. And that’s a behavior that represents a substantial pivot for Diamondback.” “Travis Stice — Chairman and Chief Executive Officer: And that shouldn’t be lost, Derrick. That’s a very key point. Think about that. We deferred over 0.5 million barrels last year just to avoid flaring. And that’s a behavior that represents a substantial pivot for Diamondback and a substantial pivot if our peers follow suit for our industry. And what I believe you’re seeing, Derrick, is you’re seeing environmental stewardship more of — more companies are viewing it as an operating philosophy as opposed to an expense, which it was historically or hit the volumes.” (Diamondback Energy Q4 2021 Earnings Call, 12/31/2021)

Diamondback Energy’s CEO said they had no plan to increase oil production because “ increase in activity now would result in capital efficiency degradation that would not meaningfully contribute to fixing the global supply and demand imbalance in the oil market today.” “Travis Stice — Chairman and Chief Executive Officer: As the war in Ukraine and the resulting governmental sanctions continue, Russia’s oil production is expected to be impacted by shut-ins, natural declines, storage limitations, and lower exports, creating a global shortage of oil. Over the next few years, we will need to make up for this lost production, and we believe that the U.S. oil and gas industry is best suited to provide the low-cost environmentally friendly barrels needed to ensure global energy supply. However, today, we are operating in a constrained environment with inflationary pressures continuing to increase across all facets of our business. Also labor and materials shortages are now present across the supply chain. We at Diamondback are fortunate to have secured the necessary equipment, personnel, and materials to run our 2022 capital program, but increase in activity now would result in capital efficiency degradation that would not meaningfully contribute to fixing the global supply and demand imbalance in the oil market today. Therefore, Diamondback remains committed to maintaining our current oil production levels of approximately 220,000 net barrels of oil per day. (Diamondback Energy Q1 2022 Earnings Call, 5/3/2022)

Diamondback Energy’s CEO: “While we believe that efficiently growing our production base is achievable over the long term, we do not feel that today is the appropriate time to begin spending dollars that would not equate to additional barrels into multiple quarters from now.”“Travis Stice — Chairman and Chief Executive Officer: While we believe that efficiently growing our production base is achievable over the long term, we do not feel that today is the appropriate time to begin spending dollars that would not equate to additional barrels into multiple quarters from now. We continue to focus on capital efficiency and strive to operate with the highest level of environmental and social responsibility. At Diamondback, we plan to invest approximately $60 million to reduce our direct emissions and lower our carbon intensity, including ending routine flaring by 2025. This figure does not include the hundreds of millions of dollars we expend to electrify our production fields and to build pipelines to ensure we produce and transport fluid with the lowest emission intensity possible. (Diamondback Energy Q1 2022 Earnings Call, 5/3/2022)

Diamondback Energy’s CEO: “ We believe our capital discipline and returns profile is still the best near-term path to equity value creation, while our operational execution provides differentiated returns to our shareholders.”“Travis Stice — Chairman and Chief Executive Officer: As we look to our outlook for the rest of 2022, our simple plan has not changed. Maintained oil production of approximately 220,000 barrels of oil per day by spending between 1.75 and $1.9 billion. At the current strip pricing, this production and capital spend equates to approximately 400 — 4.5 billion of free cash flow, which per our returns framework, gives us a minimum of 2.25 billion of cash back to our investors. We’re off to a good start for the year, mitigating inflationary pressures while justifying our social and environmental license to operate. We believe our capital discipline and returns profile is still the best near-term path to equity value creation, while our operational execution provides differentiated returns to our shareholders. “ (Diamondback Energy Q1 2022 Earnings Call, 5/3/2022)

Diamondback Energy’s CEO: “I think what matters most though, Neal, is that we’re returning cash to shareholders, and we’re giving our shareholders the flexibility to do with that cash as they see fit.” “Travis Stice — Chairman and Chief Executive Officer: Well, certainly, from a quarterly perspective, from an operational perspective, we’re pretty set on this year’s plan. And we have the ability, obviously, to ratchet things down, but as I tried to lay out in our prepared remarks, ratcheting things up right now is not really the right answer. If you’re asking a question specifically about buybacks, Neal, we’re going to stay disciplined in our approach to buying our stock back. When we look at mid-teens returns or mid-cycle pricing, that’s really not changing. I think what matters most though, Neal, is that we’re returning cash to shareholders, and we’re giving our shareholders the flexibility to do with that cash as they see fit. That’s kind of how I view the world right now, Neal.” (Diamondback Energy Q1 2022 Earnings Call, 5/3/2022)

Diamondback Energy’ CEO: “The administration’s comments are certainly causing a lot of uncertainty in the market, both in the terms of regulatory taxation, legislation, and negative rhetoric toward our industry. And that creates uncertainty in our owners’, our shareholders’ minds about what the future of this industry really is.” “Travis Stice — Chairman and Chief Executive Officer: I think what you’re asking us to do is start forecasting 2023 growth rates that we’re not really ready to talk about 2023. I think though, Derrick, if you look at the macro uncertainties that are still out there, let me try to enumerate some of those. You’ve still got Iranian barrels, whether they’re going to find a way in the market. You’ve got Venezuela, you’ve got Libya, you’ve got continued a little bit of surplus capacity in the OPEC plus. Those are all volumes that can come on to the equation of the supply demand equation. You’ve also got the continued demand impacts of COVID, particularly in the Asian markets right now. And then lastly, to say bluntly, the administration’s comments are certainly causing a lot of uncertainty in the market, both in the terms of regulatory taxation, legislation, and negative rhetoric toward our industry. And that creates uncertainty in our owners’, our shareholders’ minds about what the future of this industry really is. And so I think this represents on that front, a pretty unique time to have a sober assessment of what an energy policy really needs to look like for the United States, one that recognizes all forms of energy, while at the same time, having aspirational goals about a more sustainable future.” (Diamondback Energy Q1 2022 Earnings Call, 5/3/2022)

Diamondback Energy reported paying out billions to investors in 2022

Diamondback Energy’s CEO boasted to investors that the company “generated record cash flow” in 2022.“Travis Stice — Chairman and Chief Executive Officer: Thank you, Adam, and welcome to Diamondback’s fourth-quarter earnings call. 2022 was another great year for Diamondback. We successfully executed our capital program, accelerated our return of capital plan, and generated record cash flow. I’m very proud of all that we were able to accomplish and look forward to what I believe will be another strong year for the company.” (Diamondback Energy Q4 2022 Earnings Call, 2/22/2023)

Diamondback CEO told analysts the company funneled $3.1 billion to investors through dividends and buybacks in 2022. “Travis Stice — Chairman and Chief Executive Officer: Our ability to hold our capital budget flat and stay within our original guidance range while also exceeding our production target is something you should expect from Diamondback as we push to deliver differentiated results quarter after quarter. Financially, we generated over $7 billion in EBITDA and 4.6 billion in free cash flow, or nearly $26 per share, both records for the company. We made significant progress on our return of capital plan, increasing our cash return commitment in the middle of the year to return at least 75% of free cash flow to stockholders. In total, we returned 68% of our free cash flow in 2022, which equates to 3.1 billion, through a combination of our base and variable dividend and share repurchase program, buying back nearly 8.7 million shares at an average price of $126 per share for a total of 1.1 billion.” (Diamondback Energy Q4 2022 Earnings Call, 2/22/2023)

Diamondback’s CEO, noting that the company returned nearly 70% of free cash flow to investors, said, “our business model is working.” “Travis Stice — Chairman and Chief Executive Officer: In closing, 2022 was an outstanding year for the company. We generated record-free cash flow and distributed nearly 70% of it to our shareholders, strengthened our balance sheet, extended our inventory runway, and continued to produce one of the highest-margin barrels in the industry. Looking ahead, our business model is working, and we are confident in our 2023 outlook and our ongoing ability to continue generating peer-leading returns for our stockholders. With these comments now complete, operator, please open the line for questions.” (Diamondback Energy Q4 2022 Earnings Call, 2/22/2023)

Diamondback Executives stressed the company was prioritizing investor returns and claimed it was “growing oil production per share”

Diamondback’s CEO pushed back on growing production, saying, “the feedback we get from our shareholders is encouraging us to continue to embrace a shareholder return mode.“ “Travis Stice — Chairman and Chief Executive Officer: Yes, Neal, I don’t think the macro conditions are dictating any kind of production growth currently. I mean, you still have, you know, an uncertain Fed action, and you’ve got uncertainty around the China, COVID, demand recovery. You’ve still got Russian barrels that, you know, are still finding their way into the market. So, it doesn’t appear to me that the macro conditions have fundamentally changed. And certainly, the feedback, and perhaps most importantly, the feedback we get from our shareholders, are encouraging us to continue to embrace a shareholder return mode.” (Diamondback Energy Q4 2022 Earnings Call, 2/22/2023)

Diamondback’s CFO claimed the company was “growing oil production per share” thanks to a “significant amount of buybacks” and said the company was not “trying to follow the crude price.” “Kaes Van’t Hof — President and Chief Financial Officer: Yeah. I also think on top of that, Neal, you know, we’re going to be growing oil production per share significantly in 2023, you know, through two well-timed acquisitions and a significant amount of buybacks in 2022. So, you know, first-year metrics continue to improve. We continue to invest in high-return projects while not having to change our, you know, activity plan on a monthly basis trying to follow the crude price. You know, the plan is the plan, and the steady state of activity has produced good results today, and no need to change that while it’s working right now.” (Diamondback Energy Q4 2022 Earnings Call, 2/22/2023)

Diamondback’s CFO: “I really think the best benefit of this lower growth environment is that we can grow per share metrics while not having to change our development plan with every $10 moving oil price” “Kaes Van’t Hof — President and Chief Financial Officer: But I think we manage that in our guidance and also manage that in how we’re going to complete wells across the pro forma position. So — and certainly, the base decline is coming down. But I really think the best benefit of this lower growth environment is that we can grow per share metrics while not having to change our development plan with every $10 moving oil price, right? We — the plan is the plan right now. Shale has certainly become a longer cycle with these bigger pads. And so, we do not have to put a stress on the ops teams to move pads around if oil moves, you know, $5 or $10 a barrel.” (Diamondback Energy Q4 2022 Earnings Call, 2/22/2023)

Diamondback’s CFO noted the company’s tax manipulation was allowing the company to pay out more to investors

Diamondback’s CFO noted that “well-timed deals” allowed the company to defer taxes and “push out a little more cash” to investors.“Kaes Van’t Hof — President and Chief Financial Officer: Yeah. Good question, Kevin. The biggest benefit we did receive in the fourth quarter. Obviously, commodity prices came down quarter over quarter from Q3 to Q4. So, that was a surprise for the positive on cash taxes, I guess that hurts you overall. But the biggest deferral we got was when we closed the FireBird deal. It came with about $100 million of midstream assets and some other fixed assets that, you know, we’re able to depreciate right away. And so, that allowed us to defer more taxes into 2023. You know, as we’ve modeled 2023, you know, we still have about $1 billion NOL that will be exhausted this year. But on top of that, also closing the FireBird and Lario transaction, which added some, you know, midstream and fixed assets as well. So, you know, generally, this is, you know, kind of our last year before being a full cash taxpayer. We got two well-timed deals that allowed us to push out a little more cash. You know, obviously, it’s not the reason why we do the deals, but it’s a nice tangential benefit.” (Diamondback Energy Q4 2022 Earnings Call, 2/22/2023)