Good day and thank you for standing by. Welcome to the Diamondback Energy Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Lawlis, VP of Investor Relations. Please go ahead.

Thank you, Daniel. Good morning, and welcome to Diamondback Energy's fourth quarter 2023 conference call. During our call today, we will reference an updated investor presentation and Letter to Stockholders, which can be found on Diamondback's website. Representing Diamondback today are Travis Stice, Chairman and CEO; Kaes Van't Hof, President and CFO; and Danny Wesson, COO. During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I'll now turn the call over to Travis Stice.

Thank you, Adam, and I appreciate everyone joining this morning. I hope you continue to find the stockholders letter that we issued last night an efficient way to communicate. So obviously a lot of the material is in that stockholders letter. So with that operator, would you please open the line for questions?

Our first question comes from Neal Dingmann with Truist Securities. Your line is now open.

Well, good morning, Travis and team. Thanks for the time. Guys, my first question is on Endeavor specifically, just want to go back to this. You highlighted about 344,000 acres with about 2,300 locations, that compares to 494,000, 3,800 for you all. And I'm just wondering, does this slightly smaller current core footprint provide a material amount of immediate incremental locations, Travis? And I'm just wondering, or potential upside and I'm wondering how you would think about, I know it's still a while until this thing likely closes but how you will attack these assets.

Yes, Neal. I mean listen, we wanted to be conservative in how we laid out the inventory counts for both us and them, sub 40. I mean I think there's been a lot of aggressive inventory counts put in deals lately. And I think for us to be able to say that combined we have about 12 years of sub 40 breakeven inventory is truly a best-in-class number in North American shale, and that's kind of why we put it there. I mean I think generally, as with Diamondback's position, there's a lot of inventory that breaks even well above those numbers. I think there's a lot of testing going on throughout the basin. There's probably some zones like the Upper Spraberry that we'd probably call a sub 40 breakeven zone today. But I don't think they're ready to fully put it in the location count. So I think it's just conservatism. And I think on a relative basis, not all locations are created equal, and within that combined 6,000 location count, there are some that breakeven below 30. It's all about what we're developing today and saving the upside for later. We know that that upside is going to accrue to us with the size of the acreage position pro forma.

Neal, just to add to that point, if you think about a company's future, two things are really important for the oil and gas sector. One is kind of this durable inventory, and I just walked you through some numbers there. But it's also the conversion efficiency of that inventory, and I think now with the announcement of this Endeavor merger, we're in control of both the numerator and denominator of that ratio. So our durable inventory greatly extends, and then our conversion efficiency that we've been known for a long time actually gets to come to bear on a larger asset base. To give you a little bit more color and comfort, we didn't put our thumb on the scale as we looked across the barbed wire fence. What I mean by that is we simply applied what Diamondback is doing today on drilling and completion and operating wells, and then physically adjacent, this case was just explaining, made the assumption that can be applied across the barbed wire fence. So I wanted to give you a little bit more color there, Neal. Thanks for your question.

No, I appreciate both, and I definitely appreciate the conservatives. I think you're right; Kaes has been somewhat inflated. My second question is about your current Slide 11 regarding the multi-zone development strategy specifically. I really like that you projected an average project size of around 24 wells for 2023. Will that be approximately the same this year? Additionally, how do you continue to mitigate the frac hits that seem to affect other operators so much when they undertake these larger projects?

Yes. Well, I mean I think generally Neal, the project size is up; I mean 25 is not an exact number. It's going to be different, different counties where you have different spacing within different zones. We don't use a cookie-cutter strategy to develop the asset. We use a unique development strategy for each area. I think we've had a lot of experience with practice over the years. We've learned, and our planning group has gotten significantly better at looking around the corner and seeing what issues might arise. Certainly, there's a benefit of size and scale, right? If we have one of these 24 projects coming on every quarter, well, there's a lot of risk in that one particular project. But here we have four, five, six of these coming on every quarter. That allows us operational flexibility to move around and plan our business. That's just one of the other benefits of size and scale that will only be magnified with the potential with the Endeavor merger.

And Neal, when you look at our 2024 budget, you kind of see that the capital efficiency shining through because we're essentially maintaining the volumes profile that we had in the fourth quarter, but we're doing so with 10% less CapEx. As Kaes was just talking, our development strategy yields the same well performance. So as we look across the industry universe, capital efficiency for this year is going to be very important. I like the way that our budget execution is shaping up in terms of that capital efficiency.

Agreed times, and seems even better next year. Thank you all.

Thank you.

Thank you. And one moment for our next question. Our next question comes from David Deckelbaum with TD Cowen. Your line is now open.

Thanks for taking my questions, Travis, Kaes, and team. I appreciate the time.

Thank you, David.

I was just curious, Travis, if you could provide an outlook. I know when you announced the Endeavor deal; I think you said that you weren't going to sell anything, obviously, until the deal closes, which makes plenty of prudent sense. But I'm interested just with all of the minority interest that you have in various pipeline investments. How should we think about just where that pipeline cycle is right now relative to investing versus harvesting? Is that something that we might see if we think about the risk for probability around 2024, seeing some of those investments being harvested? Is the market kind of ripe for that right now, or do you expect these to be more long-term investment harvesting Endeavor?

Yes, some are ready for sale today while others may take more time. We've successfully sold several non-core equity method investments in the past year, including our interests in the Gray Oak Pipeline and the OMOG oil gathering joint venture. It makes sense for us to consider selling some of our controllable assets, although others may be tied to larger sales that I can't predict. These assets will help us reduce debt efficiently, either on a significant scale or through a potential merger. I believe it's crucial that we don't need to sell major assets to pay down our debt, and the cash-stock mix of our deal was structured to avoid that scenario, which we outlined last week.

Yes, I can't emphasize that point enough, David that we're not going to be forced sellers of any of our assets. We're going to be very thoughtful as we move forward post-close in looking at monetization strategy for these minority interests, particularly in relation to debt reduction. So we'll be very thoughtful and do the right thing.

Appreciate that. And just maybe a little bit in the weeds on this one, but the 2024 plan, when you lay out the Midland Basin development, this year maybe coincidentally or not, there's a more - a little bit more on the margin going to Wolfcamp D and some of the other zones. Is that just more coincidence of geography where you're developing this year and presumably years beyond? Or are there some things that you saw in 2023 that are sort of increasing your confidence of wanting to allocate more capital there? If there's any color you could provide?

Yes. I mean I think both from our drill bit and from others' drill bit, we've seen really good results in the Wolfcamp D. I think it makes sense to put it into the stack today, maybe not in every situation, but in more and more situations. So more Wolfcamp D in the plan, and then in the other bucket, we have more Upper Spraberry in the plan. I think generally, if we're able to add these zones to our development plan and see similar productivity per foot, that only extends the inventory duration that we have, both on a standalone basis and pro forma with Endeavor. They've been developing a lot more Wolfcamp D than us and we talked a little bit about that last week, but I think it just shows the beneficial nature of the Midland Basin and stack bay that we're adding zones like the Upper Spraberry and the Wolfcamp D that we didn't talk about three, four, five years ago and now becoming core development targets.

Thank you. One moment for our next question. Our next question comes from Neil Mehta with Goldman Sachs. Your line is now open.

Yes. Good morning, team. Thanks for doing this. I guess I have a couple of pricing-related questions, and the first, would love your perspective on just hedging as standalone and then also pro forma once you roll in the Endeavor assets. Historically, you talk about trying to maximize upside exposure while protecting extreme downside. Just curious what that means for you as you think about hedging in 2024.

Neil, I mean I think we need to protect our side of the ledger through the period between signing and closing, so we can generate free cash that reduces the cash portion of the purchase price. I think we've done that. We've historically bought funds in the kind of $55 WTI range. We now kind of stepped it up to kind of that $60 range. And we'll probably be a little more hedged on our side between sign and close than we have been in the past, closer to, I don't know, two-thirds, three-quarters hedge, so that we can make sure that cash is there to reduce the cash portion of the purchase price. I think longer-term, it all depends on the strength of the balance sheet and the break-even that we have with our base dividends. We've always tried to buy hedges at kind of 50 to 55. That protects free cash flow, the balance sheet doesn't blow out, and the dividends are well protected in that extreme downside scenario. So I don't expect us to move to a non-hedging company because we just believe it's prudent to protect the balance sheet and our base dividend, which we see like debt.

Okay. That's helpful. The follow-up is just on natural gas. I know it's a smaller part of your economics, but gas prices have been under a lot of pressure. In the Permian, we've been surprised to see associated gas supply up as much as it is year-over-year. Just your perspective on how the gas market rebalances and the Permian in particular, do you see this as a structural challenge of continued associated supply or as we move towards more oil discipline gas markets can calibrate with it?

I believe that, in general, the gas production in the Permian Basin consistently exceeds expectations, regardless of oil discipline. We tend to be quite conservative with our gas projections, and the results often surpass what we anticipate, leading to more annual growth in the basin than expected. I anticipate this trend will continue. Even if we were to set the gas price at zero in the Permian, we would still achieve great returns on our oil wells. We take measures to safeguard our gas price through hedging and pipeline commitments to access larger markets, while also managing our basis exposure. Overall, I think that even if you maintain discipline in oil production, you will eventually need to shift towards areas with more gas. There remains a significant amount of gas and associated gas ready to be extracted in the Permian.

That makes sense. Thanks again.

Thanks, Neil.

Thank you. One moment for our next question. Our next question comes from Arun Jayaram with JPMorgan Securities. Your line is now open.

Good morning, gentlemen. Travis, Kaes, I'd like to know if maybe you could walk us through kind of the path to get to the $10 billion net debt target in terms of timing and how do asset sales, would that influence the timing of reaching that target?

Yes, Arun. I think we kind of laid out in a $75 world generally the two businesses throughout the course of this year will combine to generate about $5 billion of free cash flow. If we're looking at a late 2024 close, just high-level, half that number, $2 billion to $2.5 billion will be used to reduce the cash portion of the purchase price. That kind of puts you in the kind of $12 billion of total net debt at close, and with the business continuing to generate more free cash in 2025, with the numbers we laid out, you could see that $10 billion number by the middle of 2025. That excludes any asset sales or acceleration, and I think we try to be an under-promise over-deliver company, and there's a lot of things that we can do to accelerate that outside of commodity price. We are looking at what's available to sell down in the next couple of months here and beat that target.

Got it. And just maybe a follow-up. If you do plan to do something in the Delaware Basin, would you wait until kind of reaching close on the transaction or talk us through maybe the timing when you would contemplate doing asset sales?

Yes. I think we're highly focused on deal certainty and getting the deal closed, and we're not going to do anything that derails that process. The Delaware Basin is great cash flow for us, great free cash flow and a very low decline rate. We've reduced our capital commitments there and necessary wells we need to drill for lease holding purposes. It's a good asset to have for the time being with good option value over the long run, but certainly not looking to do anything in the near-term.

Great. Thanks a lot.

Thanks, Arun.

Thanks, Arun.

Thank you. One moment for our next question. Our next question comes from Derrick Whitfield with Stifel. Your line is now open.

Yes. Good morning, everyone. I wanted to...

Good morning, Derrick.

Wanted to start by really commending you guys for the leadership you're demonstrating on capital discipline, as many of your peers are treating the environment as if it were naturally balanced today.

Thank you, Derrick.

With my first question, I wanted to focus on the service environment. In light of the collapse in gas-directed activity that is underway now and the preexisting lower utilization rates the service industry experienced last year, is there an opportunity to revisit service prices on some of the higher spec equipment?

Yes, Derrick, that's a good question. We anticipate some softening in the service market this year if the gas basins continue to have muted activity levels. We don't control the service market prices; we're price takers. However, we'll keep working on determining the market prices for all of our service lines where we don't have existing commitments.

Terrific. And as my follow-up, wanted to touch on Endeavor, since you guys have been out meeting with investors since the deal was announced, are there any aspects of the transaction that are underappreciated in your view?

I think the first question that came up was on the synergies of the $3 billion worth of synergies, most of those underpinned by our existing cost structure, applied to the Endeavor assets. Those are usually the entry questions. But once we explained that the cost assumptions that we embedded are the same cost assumptions we're currently doing today, a lot of comfort was gained, and then we went to the more strategic questions with the shareholders. I think probably the cost efficiencies were the first, and then secondarily, were some of the debt retirement strategies that Kaes just went through were probably the two most topical questions that we dealt with.

Terrific. Thanks. Great quarter and update.

Thanks, Derrick.

Thanks, Derrick.

Thank you. One moment for our next question. Our next question comes from Roger Read with Wells Fargo. Your line is now open.

Yes. Thank you. Good morning.

Good morning, Roger.

I just wanted to come back, you talked earlier about some of these other benches that might work, and it's a question of whether they'll be as productive and efficient or the productivity and efficiency in those benches. Give us an idea of maybe some of the, let's call it science or just applied efforts that you're seeing that can open up some of these other benches. And I'm thinking within your footprint, as well as what will be an expanded footprint here before you're in.

Roger, I mean I think for zones like the Wolfcamp D, we've had some testing on our assets, but also seen a lot of results across the fence line. Diamondback doesn't spend a lot of time; we spend a lot of time looking ourselves. We also spend a lot of time looking across the fence line at what other people are doing, either through M&A process or just general competitor analysis. We've seen that the Wolfcamp D has been very competitive, particularly in that kind of Midland Glasscock County line area. As you get into Southern Martin County, that's getting more attention. I would say the Upper Spraberry, we've done a lot of work on ourselves; actually, an old energy well drilled in the Upper Spraberry in 2016 or 2017, and we revisited that well recently last year, and some of the Upper Spraberry wells that we've completed, one in particular is probably one of the best wells in our portfolio. I'm not ready to say that the Upper Spraberry exists across our entire acreage position, but it's certainly getting more capital and attention this year, particularly with the co-development strategy. The fact that these zones talk to each other in some form or fashion means we've got to get it now. We've added the Upper Spraberry into our kind of Northern Martin County development plan. I think the results speak for themselves because you haven't seen a degradation in productivity. The key to this exploration resource expansion story is if you can expand your resource without impacting productivity, that's a win for our shareholders.

Roger, I'll just add a comment from a high level on what Kaes just mentioned. In my experience, as companies get bigger, the more inwardly focused they become. They focus more on their own results and less on what others are doing around them. It's been a hallmark of Diamondback since the very beginning. One, you could say, out of necessity when we first started, but it's been a hallmark of ours to really pay attention to what goes on around us. Right now, it's culturally ingrained not only to rigorously examine our own internal results but also spend intellectual capital looking across the barbed wire fence at what others are doing. As we move into a much larger position post-close, I promise you that culture will stay intact. We will continue to look and find what others are doing potentially better than we are and adopt accordingly.

I appreciate that clarification. That's my only question. Thank you.

Thanks, Roger.

Thanks, Roger.

Thank you. One moment for our next question. Our next question comes from Jeoffrey Lambujon with TPH & Co. Your line is now open.

Good morning, everyone. I appreciate the time.

Hey, Jeoff.

My first question is on the step change in capital efficiency you are looking forward to in 2025. Could you talk more about the pathway there? I know you're already there for the legacy portfolio of well costs, as you mentioned, Travis, but can you comment maybe on the larger buckets or moving pieces you'll be focusing on on the Endeavor side, both in terms of that well cost reduction and in terms of the non-DMC line items that you think about as we shift from this year into next.

Yes, Jeoff, I think generally there's two big buckets on the DMC side that we see across the fence Endeavor that we'll probably look to put in place with the team there as we start integrating. On the completion side, it's really the SimulFRAC development plan, as well as probably half that plan being a SimulFRAC e-fleet, which only reduces the cost of the completion side of the business. I don't even think we've modeled the benefits of a much larger supply chain to these numbers. This is just us getting their costs down to our costs on the capital side. So there's probably some upside there at some point. And then on the drilling side, we've been a big proponent of clear fluids not using oil-based mud to drill these wells. It saves time and money. That was something we put in place and learned from the QEP team three or four years ago. That’s just a decision to make. That saves significant dollars. I'm excited about getting under the tent with the Endeavor team and learning what they're doing that we can do better. We've learned something from both energy and QEP are two large mergers that we've done to date. I think there's some upside there. But really, all we're doing is looking to put in place what we're doing today on a larger asset base.

And, Jeoff, as I mentioned earlier regarding some cultural aspects of Diamondback, another key element is our ability to set aside personal egos when we merge assets. We focus on understanding what truly works. Our culture emphasizes the importance of seeking to understand rather than simply being understood. As Kaes noted, we are eagerly looking forward to gaining insights from the combined companies, understanding their operations and motivations, and collectively making improvements on both our part and from the assets we are integrating.

Perfect. And then for my follow-up, I wonder if you could just speak to how the philosophy around the balance sheet longer-term will evolve, if at all, once the deal closes. We appreciate the commentary on the path to get to the $10 billion net debt level, but we're just thinking about how the pro forma math continues to push Diamondback to new levels in terms of weight class within the space.

Yes, we received that question frequently last year from investors who suggested that we need to reevaluate our long-term leverage strategy now that we are in a different weight class. This feedback resonated with us and aligns with our goals. Ultimately, we aim to reach a net debt level of around $6 billion to $8 billion while maintaining substantial cash on our balance sheet. The merger has likely alleviated concerns that Diamondback would pursue every deal using cash exclusively. This provides us with the flexibility to focus on capital allocation, allowing us to consider share buybacks in a downturn or pursue acquisitions, rather than being overly aggressive with capital allocation on either front. In the long run, a net debt of $6 billion to $8 billion is a solid target, though reaching zero would be ideal. Operating within that range is a favorable position.

Great. Appreciate the time. I have to turn it back.

Thanks, Jeoff.

Thanks, Jeoff.

One moment for our next question. Our next question comes from Paul Cheng with Scotiabank. Your line is now open.

All right. Thank you. Good morning, guys.

Good morning, Paul.

Last week when you announced the deal, you provided the pro forma for CapEx in 2024 and 2025, along with some other details. The pro forma for 2005 compared to 2004 indicated that our numbers are approximately $700 million lower. Can you break down how much of that is related to the expectation of lower costs or asset performance due to slower growth?

Yes. Sure, Paul, you kind of cut out a little bit, but I think I get your question. The question is, how do we bridge the gap between the combined 2024 CapEx guide with us and Endeavor separately, and the combined business in 2025, which is down $700-ish million? I would say most of it is running our cost structure on the Endeavor DMC. That's basically 175 wells at $1.5 million, $2 million cheaper; it gets you to about $300 million. I think combined business is not going to need as many wells to hit the production number. Endeavor was growing last year. They started slowing down mid-year, but their decline rate is shallowing. That'll help. Our decline rate continues to shallow; that will help. I think we're going to allocate capital to the best combined resource probably in North America, which will help. That kind of gets you to needing probably 50 less wells at $6 million, $6.5 million a pop. That's about another $300 million. I think generally we're spending some dollars this year, probably about $50 million on environmental CapEx. That is kind of one-time in nature and will be reduced on our side as well. You put all that together, and that's a very, very capital-efficient business in 2025, assuming existing well costs, and that can move around. But that's how we're thinking about 2025. We might have lost Paul. So we'll go to the next question.

Thank you. One moment for our next question. Our next question comes from Leo Mariani with ROTH MKM. Your line is now open.

Hi, guys. Wanted to just ask about the Endeavor FANG combination here. Do you guys see any tax benefit for the combined entity where you might be able to defer some of the cash tax payments as a result of combining these two companies? Have you had any preliminary look at that?

I mean there obviously be some benefit with the cash portion of the transaction and the associated interest expense, but we're continuing to do our combination work. I mean we're a full cash taxpayer, essentially. They're pretty close as well. I don't think there's going to be too much to do there, Leo, but certainly, the cash piece is going to shield a little bit of taxes on our side.

Okay. That's helpful. And then just jumping back over to M&A, obviously you guys got the big prize in the Permian, and the market has clearly rewarded the Diamondback shareholders here. As you look at kind of the remaining landscape, do you think there's anything out there left to do that's kind of chunky that would be of interest to FANG? Or is it maybe just kind of more little stuff over the years to kind of tie everything together?

Yes. Listen, Leo, we're on the sidelines here. We're fully focused on getting this deal closed as soon as possible, and we can assess the landscape when that happens. I am confident that the landscape will look different whenever that time does come.

Okay. Thanks.

Thanks, Leo.

Thank you. One moment for our next question. Our next question comes from Doug Leggate with Bank of America. Your line is now open.

My question is, does that have any impact on integration, planning, or does that go ahead anyway.

Hey, Doug, you have to speak up.

This is John Abbott on for Doug Leggate. Apologies I was on mute. Just one more, just one question going back to Paul's question on the difference in CapEx between 2024 and 2025. That's about $725 million. You talk about the $550 million in synergies. So when we think about that $725 million, is there an addition on top of that as we sort of think to 2025? Just sort of trying to reconcile the two numbers?

Yes. I think the difference between the two numbers is really activity between the $550 million and $725 million, right? The combined business has less activity in 2025 versus 2024, which is helping, but we kind of see the $550 million as more of a longer-term run rate, John.

Appreciate it. That's really it at this point in time, but thank you very much for taking our questions.

Thanks, John.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Travis Stice, CEO for closing remarks.

Great. Thank you. I really appreciate everyone listening in this morning and asking questions. If there's any follow-up, just reach out to us, and we'll address them then. Thank you. And you all have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.