Diamondback Energy, Inc. (FANG) Q2 2026 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Diamondback Energy second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the call over to your host today, Adam Lawless, VP of Investor Relations. Adam, please go ahead.

Good feedback.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask the question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Neal Dingman with William Blair. Neal, you're live.

Morning, all, and happy birthday, Caves, for me and the coach. Turning to my first question, I really want to talk about your macro view, specifically your remarks last night. you seem to indicate your thoughts that worldwide inventory levels will remain low for the foreseeable future. So as such, am I correct in thinking that you all will continue to strategically grow production well into 27, given this low inventory backdrop and positive oil backdrop?

Yeah, Neil, you know what? Globally, we'll increase our production for three or four percent versus original plan. The team executed on that very, very quickly. From where we start of the year. And, you know, do we hold production flat, which elevated levels right now in Q3 spits out, you know, low single-digit organic growth? Our bet is Diamondback's growth trajectory.

Great point, Kaze. And then just secondly, turning to wealth productivity, you're definitely shown on your recent slide 10. You know, to me, what seems most intriguing there is not only the high productivity you have, but you're doing this by, you know, I'm looking at the left side of the slide also, why it sort of seems like maximizing value. You know, you're targeting the most zones, wells per section, and, you know, I think what you all would say probably the most appropriate completion level. So I'm just wondering, could you talk about how you're able to, you know, sort of target the leading productivity while maximizing value?

Yes, I mean, I have a mix of should generate or does generate the most NPV per section or acre or asset, you know, in the basin.

The DSU, Neil, when you think about wealth effectively, marketing side in the DSU, I think is what we're seeing leading page here.

Perfect.

Thank you. Our next question comes from the line of Neil Mado with Goldman Sachs. Neil, your line is live.

Yeah, thanks, Case. Appreciate you taking time. I guess the first question is just on the gas side. Waha has firmed up a little bit. So just how are you thinking about egress out of the base and recognizing this is probably a problem that will percolate again, but does this create some near-term relief? And then as you think about your gas strategy in general, maybe it's a good opportunity for you to update the market on where you stand around the data center side and the power side of your business.

Because I think, you know, I think we believe in the gas core to Diamondbacks value proposition, but it can be additive to, you know, the amount of oil we produce. And in general, I think that means, you know, and centers, data centers, and then, you know, the rest across the docks in the LNG terminals. And, you know, I think I'm not smart enough to figure this out today, but, you know, the question is going to be how much demand can the world, you know, handle from an LNG perspective? Because we're certainly going to have enough supply coming out of the U.S. on the LNG side. And to fill that, you know, I think the Permian is going to play a big role. and I think Diamondback's going to play a big role. So, you know, our gas production continues to outperform expectations. I think that will continue over the next, you know, 10-plus years, and therefore we need to have minutes to be in the conversation when the LNG optakers need supply. So relationships, because I...

30,000-acre Bryant Ranch location, ultimately to deliver scalable, reliable power near Midland, Texas. We have secured distributed power generation This should allow us to provide a shovel-ready development project delivering first gaps as soon as the back half of 2027 through the use of behind-the-meter re-sip units. Beyond this initial phase of power generation, we are working to secure grid-connected power as soon as 2028 via batch zero. We believe we are well positioned within the batch zero queue and are awaiting ERCOT's final determination regarding project eligibility for the next interconnection study as soon as they're meeting on August 20th. We are closely monitoring communication out of Austin and remain confident in a project like ours, ultimately meeting batch zero standards. we'll give the market a larger update once we've signed definitive documentation with a hyperscaler but are confident in the direction that this project is going yeah you know neil i'll add one thing you know i would be suggested to come to west um opportunity out here you know

at the end of the day diamondback's gonna stay yeah that's that's a really helpful update um and we'll stay tuned for more and then case just maybe give give the market an update around how you're thinking about return of capital, I think you adopted a little bit more of a flexible strategy or way of updating the market. How did you approach it in 2Q? How do you think about the balance of the year? And talk about that in the context of your largest shareholder too.

For us is to maximize and capitalize on the option value that is inherent in this business. Things can change overnight. And with shareholders explaining our case, and they were very supportive from the debt side of the equation to the equity side, because in my mind, our NAV, you know, wasn't, didn't go down much in the second quarter. In fact, it went up. So, you know, I think it's more about look at what we've done versus what we're going to do. And I do think investors know that we will lean in on the buyback when it presents itself. You look at a year like 2025, we bought back over 5% of our stock. You know, I wish it was 10, right? And now I think We're positioning the balance sheet to be in a position where we actually can lean on it to buy back shares when, you know, when the cycle turns in this, in this volatile business. So really just trying to make the right capital allocation decision every day. And just like the stacked innovation in the field, if we can stack up those wins on return of capital, I think that's a long-term win for our shareholders. Thanks, Case.

One moment for our next question. Our next question comes from the line of Scott Henold from RBC Capital Markets. Your line is live.

Yeah, thanks. I was wondering if you could delve into some of the production performance a little bit. You all are delivering more than oil barrels and, I guess, guided to, but NatGas is really outperforming. And can you just give a sense of why you think that is? Are you just being conservative with gas expectation, or is there any kind of zone targeting, you know, that's different that would cause that, and where do you see that going moving forward?

The selection in this of the Midland Basin, there were a little higher GOR, but the beat on gas, it's really related to what Danny mentioned before. But with the targeting of the Barnett and the Barnett becoming a bigger portion of the development plan moving forward, and I would expect to see that number kind of creep up a little bit.

Thanks for that, Scott. And then my follow-up is, you know, if you can give us a lens into what you're all seeing on the oil field service cost front, any kind of inflation pressures. And when you look at this higher, you know, the production base you're running at, when you think about, like, I don't know if it's good to think about, like, just kind of a steady state maintenance pace, you know, exiting this year, Like, what is the quarterly capital run rate you all see right now?

Yeah, another good question. I think, you know, we have optics into much, and we think we have efficiency gains. You know, if we continue to add rigs in the U.S. and continue to go and there's ish rigs being picked up, you know, we anticipate we're going to see some more pressure. But, you know, time will tell, and what happens in the gas basins along the way.

I appreciate the context.

One moment. our next question. Our next question comes from the line of Arun Diyaram from J.P. Morgan. Your line is live.

Good morning, Case and team. I was wondering if you could provide an update on what's going on in the field with the Barnett. Looks like you're running three or four rigs targeting that play right now in the basin. I was just kind of interested in your focus on reducing cost cost from $1,000 a foot to $800 and how you plan to lean into that program in 2027. Got it. Got it. Okay. And then my follow-up, I was wondering if you could give us some details on how the Enhanced Oil Recovery Program, I know you did a pilot of 50 wells, and I think you're expanding that pilot to another batch of wells. Maybe just give a little bit of an update on what kind of well productivity improvement you've seen from chemicals and surfactants, and do you plan to evolve that program into new completions?

I think we're going to from this batch of wells and take those learnings and apply it to the next group of wells, they will be like, you know, I think we're just scratching the surface on the and we're really excited.

There's two ways to think about it. I think it either, you know, reduces your base decline or it's a replacement of capital for something that's, you know, higher returning. You know, to date, we've only done remedial work where we go back in this treatment process, but we, you know, some of our pads.

Sounds interesting. Thanks, gentlemen.

One moment for our next question. Our next question comes from the line of John Freeman with Raymond James. John, you are live.

Thank you. Good morning. You highlighted a number of impressive operational achievements in the letter. And the one that really stood out for me is just that first full quarter of continuous pumping, over 21 hours of average pumping time per day, which is kind of hard for me to even wrap my head around. But just sort of what's, like, achievable there? I mean, like, is it, like, in a couple years, are we going to be talking about something that's, you know, bordering on close to, like, 24 hours or something? Just trying to understand what's even, what's achievable there.

Hey, John. Yeah, thanks.

Thanks for that, Danny. And then just one housekeeping item. It looks like there was some bolt-on sort of acquisitions during the quarter. looks like kind of netted investors like 385 million is there uh any production that was associated with those transactions is anything else we should be aware of get headlines but they

they add up right thanks guys appreciate it you know done done with cash which is important thank you one moment for our next question our next question comes from the line of philip jungworth at BMO. Your line is live.

Yeah, thanks. Good morning. I'm curious, when you look at the mid-cycle NAV, which I think you mentioned earlier, you feel like went up during the quarter, obviously oil price is the main driver here. I think you can certainly use around 65, but the question's more just how much do you think some of the operational improvements and resource expansion initiatives you've achieved can contribute to a higher NAV plus just more volumes or growth. So just wondering how meaningful overall these are based on your assessments to value and whether improvements to the business can contribute to the thought process around intrinsic value and future capital returns. That's great. And then on the shovel ready power project uh where's the most value creation for for diamondback on on a project like this is it more utilizing the surface acreage the the gas supply deal um uh or partnering on the data center cooling which i assume would be deep blue but let me only know if you're thinking of it otherwise and any color you could provide around the distributed power piece that you referenced earlier that's from the surface of what we're seeing so really excited about it but i

Yeah, I think the one thing I'd say is this is the first step in what I think will be a long process, right? This is us planting our flag, proving we can do this, we can make money for our shareholders, but also be repeatable. You get one of these done, you have a round two, round three, and if you hear the numbers that the tech guys throw about in terms of what kind of you know this could be uh this could be meaningful over time for for diamondback thank you one moment for our next question our next question comes from the line of kevin mccurdy with pickering energy partners kevin you are live hey good morning and thanks for taking my question um i guess for the first question i'll stick on the operation front maybe you can expand a little bit on what you saw on productivity and costs on the u-turn wells

and how you might be integrating that into your plan heading forward?

We haven't completed the six wells that we've drilled. On the drilling front, it was certainly an acquisition.

Great. And as a follow-up, maybe I'll hit on LOE. It looked like it fell below $6 a barrel and partially drove the EBIT this quarter.

You kind of talked about some of the reasons for that. Is there anything structural on there, you know, for that to continue, or how are you viewing LOE for the rest of the year?

Next number, you know, the dollars were actually flat quarter over quarter, production beat.

They do the little things they do, you know, a dollar a year and to see volume outperform.

You know, the team feels pretty confident in that $6.

Some of the things we've done in the field post-endeavor integration, you know, integrating two large field organizations takes a little longer than the office, but we're starting to see the benefits of that in terms of moving to a pump by exception, very big driver costing less to maintain.

That's great detail. Thank you.

One moment for our next question. Our next question comes from the line of Doug Legate with Wolf. Your line is now live.

Thanks, guys, for having me on. Okay, so I've got a couple of things. The first one, I want to take you back to your first comment about the trade-off between the balance sheet and your buybacks. I think you've been more vocal than most about avoiding pro-cyclical share buybacks, but you could do some serious damage to your balance sheet with the kind of free cash flow you're generating. So my question is, where do you prepare to take that to in terms of building cash and balance sheet as opposed to going after debt redemptions, but actually just sitting cash to resist net debt. That's my first question. And my follow-up very quickly is the capital efficiency is extraordinary. Your latest type curves are significantly above 2025. You've run through a number of the reasons why that's happening. My question is, would you take the capital efficiency and lower your spending in 27, or would you take the incremental production and keep the capex flat? And I know you talked a little bit about growth, but just curious on the trade-off between those two things as well. Thanks.

Yeah, I think on the debate, you know, it made sense.

I appreciate the answer, Kase. Thank you.

Thanks, Doug.

One moment for our next question. Our next question comes from the line of Jeff Jay with Daniel Energy Partners. Your line is live.

Hey, guys. Just wanted to follow up on what you said earlier, Kase, about the deployment of AI and you know like predictive maintenance and remote sensing etc.

How far down the pike are you on that and I guess what's the timeline look like to you kind of for the deployment of those technologies out there to try to even improve your uptime?

Production based but Chad anything we're doing and seeing? Yeah we're really excited about the progress but it is incredibly early. We're tackling it first on artificial lift to help manage that optimization on a day-to-day process, which is going really, really well for us. And then the team's doing a great job just managing downtime with some of these tools, and that's been, you know, so still very early, but lots of room to run. Yeah, it's kind of a numerator denominator thing, right? The lower downtime, you know, lower spend, lower decline rate, okay, then we don't have to spend as much capital to sustain production. So, I mean, just a 1% move and that decline rate, which we've been fighting for a long time, it can make a big difference.

Thanks, guys.

Thanks, Jeff.

One moment for our next question. Our next question comes from the line of Paul Sankey with Sankey Research. Paul, you are live.

Morning, all. Can you hear me okay?

Yeah, Paul, we got you.

Hey, guys. Hey, Case, you mentioned the NAV. you were kind of coy about it, but you said that the NAB went up more or less during the quarter. Could you just talk a little bit more about how you think about the NAB now, particularly, first of all, obviously on the upstream performance side? I don't know if you want to throw the oil price in there, but also the other businesses and whether or not it's still a key driver of buyback attractiveness.

One moment for our next question. Our next question comes from the line of Gabe Daoud with Truist. your line is now open.

Thanks, Operator. Morning, Kaze and everyone. Kaze, I was hoping maybe could get a little more color on just the last point that you hit on on the water side.

Is there anything that you're seeing just given some of the changes the RRC has made to injection? Are you seeing any constraints at this point or maybe concern about constraints moving forward?

Okay, that's helpful. And then just to follow up, I think this year, you know, you had non-DNC spend of $600 million across some science and midstream.

Just curious, how does that change to 27? Does the Barnett require any incremental midstream or facility spend that maybe we're not thinking of, or is the answer there no? Thanks, guys.

I think generally the mix will move as we get to...

Okay, makes sense.

One moment for our next question. Our next question comes from the line of Derek Whitfield with Texas Capital. Your line is live.

Good morning, all, and congrats on a solid update this quarter.

Thanks, Derek.

I wanted to start on the operational front. Could you speak to some of the design changes you incorporated this quarter to drive lower equipment costs per well? To creep up beyond $12,000.

Great, makes sense. And as my follow-up, maybe wanted to touch back on the EOR question from earlier.

Could you speak to the lessons you guys have learned so far and how you're thinking about broadening this program as you look out beyond the first 50 wells?

We're seeing the best return, which ones are working best and which different rock type. Sort of the ongoing process, really just early innings on this, and the team's learning a lot, and the initial results that we're seeing from this 12-well package are related to the next group of wells that we do in the future. And, you know, I think this is something that, like Case talked about earlier, where we could see some shallowing of the decline rate and then the decision on, you know, do we take capital out of the system or do we lean in? But, yeah, overall, that's sort of the details of where we are today.

Thanks, and great update.

One moment for our next question. Our next question comes from the line of Charles Mead with Johnson Rice. Charles, your line is left.

Good morning, Kay. It's to you and your team. I want to go back to your shareholder letter and your theme of volatility and see if you'd maybe share your view on the macro. We've been living in a world with a lot of volatility, but I'm curious. We see some this morning, but I'm curious. Do you think that, you know, stopping the bombing and opening straight from use is what's going to kind of end the volatility? Or are you anticipating that there's been some structural changes in the oil market that, you know, even if we do get these agreements that we're going to be living with more volatility going forward?

There's going to be, I think, you know, generally chasing headlines over the last three months has been exhausting. And, you know, over a multi-year period, that's built in a bid for oil for a period of time here.

Got it. Thank you. And then a second question on the Wolf Camp D. You wrote about that in your shareholder letter that you've been driving down costs there. And if I look at slide 11, it's actually interesting. That looks like the Wolf Camp D is actually the biggest rate of change from 25 to 26 as far as your lateral footage. So I'm curious, two things. Which direction does the causality work there? Are you getting the cost down because you're drilling more of them and learning more, or is it the other way around that you're drilling more because you've gotten the cost down? And perhaps you could also talk about the other side of the equation there, what you're seeing in productivity trends in the WolfCamp D. With more places to ask. Thanks for the color, Case.

One moment for our next question. Our next question. Oh, one moment for our next question. Our next question comes from the line of Leo Mariani with Ross. Your line is now open.

Good morning. I see there really hasn't been much in the way of Delaware Basin activity over the last, you know, handful of quarters. Can you just give us an update, kind of what's planned, you know, for that asset? Is that just going to kind of, you know, sit there and kind of slowly decline over time? it's something you're going to look to get back after kind of later on down the road just any color would be great yeah i mean while there's no capital being allocated to the delaware this year there are some interesting things okay uh and then just on eor i know it's kind of early days and you guys are still um analyzing results but at this point do you think that you've had you know clear economic benefit and at least some of the wells out there maybe not all of them i know it works better on some versus others, but are you convinced that there's economic benefit in terms of incremental capital that's gone into some of those existing wells?

Yes, 100%.

Okay, thank you.

Thank you. This concludes the question and answer session. I would now like to turn the call back over to Case Van Hoff, CEO, for closing remarks.

Well, thanks, everyone, for the time and the question.

Thank you for your participation in today's conference this does conclude the program you may now disconnect