MIDLAND, Texas—Even as the EPA works to set emissions regulations in the industry, companies like Diamondback Energy Inc. are seeking to meet a different, likely stricter, set of expectations.
Speaking during the opening keynote for Hart Energy’s Executive Oil Conference, Diamondback Energy President and CFO Kaes Van’t Hof said the company’s shareholders are pushing the company to do better on emissions than regulations dictate.
“We don’t know exactly what the rules are, but a convenient Friday afternoon EPA drop hit us last Friday after the election,” he said.
While uncertainty remains around the expected regulations, “our shareholders demand we do better than the regulations anyway,” he said. On the other hand, regulations may ultimately help the industry to get “credit from the general public that we are doing the right environment and producing the barrels.”
Under the original EPA methane tax, Diamondback would not pay any fees because “we’re already well ahead of those numbers,” Van’t Hof said.
At the same time, he noted that flaring has, unfortunately, begun picking up in the Permian Basin again.
“I think it's going to be temporary this time versus the past where we wait multiple years for a pipeline to get built,” Van’t Hof said. “Flaring is an industry issue. It's not just a producer issue, it's not just a gatherer issue. It's an industry issue. We’ve got to solve it together.”
Political rhetoric around the oil and gas industry has been “disheartening” and contributes to a lack of an understanding about the industry, he said.
“Generally, rhetoric does not help. It hasn't helped this industry acquire talent, hasn't helped us recruit engineers out of school. I mean engineering applications at the big schools are down significantly over the last five years. So, it certainly hurts the business,” Van’t Hof said.
But, he noted, companies like Diamondback are generating cash flow, and more investments are coming back.
“This is a business that generates real cash in a world where interest rates are rising,” he said. “We're returning profit to investors.”
Diamondback is also focused on the right growth “in our backyard where we know the rock best,” he said. In the Permian Basin, “we think we have a differential advantage from our cost structure and our understanding of the rock.”
In 2007, Diamondback started with 10,000 acres in Midland Basin and has since built that up to 500,000 acres in the Permian today.
“What we're not good at is making big bets on exploration. We're an acquire and exploit company,” he said.
And that strategy led to Diamondback’s October purchase of FireBird Energy LLC.
“In this case, we saw significant well control and good well performance,” he said.
Now, shale in the Permian Basin has matured.
“Oil and gas have obviously been around for a long time, and it hasn't been a high growth sector for a long time,” Van’t Hof said. “But shale is a high growth sector within the oil and gas industry, and I think it's natural that as we learn about this business it's time to slow down, generate returns and return that cash to our shareholders.”
He noted some rumors of some really good tests of the Barnett in the basin. “I think that just is a testament to how much rock resource there is,” he said.
Diamondback has a Limelight position on the western side of the basin, but he said there were no promises about when the company would test the reservoirs.
“We’re certainly keeping our eye on what some recent results have looked like from peers,” Van’t Hof said.
And after the company has worked to build itself from nothing, he said the company isn’t seeking an exit.
“We manufacture barrels and manufacture barrels cheaper than anybody else. And in a commodity-based business, the low-cost operator wins,” Van’t Hof said. And that a producer should “own more factories or more production over time. So that's how we think about the business. We don't think about an exit. Certainly, we will do what's right for our shareholders if there ever was an exit approach to us.”
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