Diamondback Doubles Asset Sales Target to $1B, Reveals More Midland M&A

After boosting its footprint in the Permian Basin with two major acquisitions last year, Diamondback Energy Inc. has upped the ante for offloading  non-core assets and announced new upstream and midstream divestments.

Diamondback said on Feb. 21 that it has raised its non-core asset sale target to at least $1 billion by the end of 2023, doubling the company’s previous target of $500 million. Including midstream deals, the company has logged $750 million of completed and pending asset sales since announcing the initial target in October.

“We expected to sell more midstream assets than E&P assets, so that’s why we bumped the target,” said Kaes Van’t Hof, president and CFO at Diamondback on a Feb. 22 earnings call. “We still have some strategic midstream investments that are nearing the point where they should be monetized.”

Since third-quarter 2022, the Permian pure player’s upstream asset divestitures have totaled nearly $600 million, Diamondback Chairman and CEO Travis Stice said on the call.

The company disclosed some of its recent deal activity in its earnings. In Texas, the company recently signed agreements to sell about 19,000 net acres in Glasscock County and about 4,900 acres in Ward and Winkler counties for $438 million, excluding certain closing adjustments. Those sales will result in an estimated loss of 2023 production of 2,000 bbl/d of oil (7,000 boe/d).

“These assets simply did not compete for immediate capital within our portfolio,” Stice said.

During first-quarter 2023, Diamondback also divested a 10% equity ownership in the Gray Oak crude pipeline for gross proceeds of $180 million. Canadian midstream company Enbridge acquired the additional 10% interest from Diamondback subsidiary Rattler Midstream in January.

Expanding Midland Basin footprint

As Diamondback sheds non-core assets, the company has grown its footprint in other parts of the Permian. Diamondback completed a $1.75 billion acquisition of FireBird Energy LLC in fourth-quarter 2022. In January the company closed its acquisition of Lario Permian LLC for $1.55 billion.

Those deals boosted Diamondback’s position in the Midland Basin by about 83,000 net acres, added 500 drilling locations and increased the company’s 2023 production profile by approximately 37,000 bbl/d of oil (50,000 boe/d).

“This additional inventory, along with the associated production and cash flow, has solidified our size and scale in the Midland Basin, giving us a strategic advantage as we execute on our capital programs for the decades to come,” Stice said.

“We expected to sell more midstream assets than E&P assets, so that’s why we bumped the target.” —Kaes Van’t Hof, Diamondback 

In 2022, Diamondback reported drilling 197 gross wells in the Midland and 43 gross wells in the Delaware Basin . The company also turned 213 operated wells to production in the Midland and 42 operated wells to production in the Delaware .

Diamondback beats on earnings

Diamondback reported annual net income of $4.38 billion and made $1.01 billion in profit during the fourth quarter.

Excluding non-recurring items, fourth quarter adjusted net income came in at $948 million, or $5.29 per diluted share, diluted share, beating estimates by Tudor, Pickering, Holt & Co. analysts, who had anticipated fourth quarter adjusted earnings of $5.23 per share.

Diamondback reported total revenues of $9.64 billion in 2022, including $2.03 billion earned during the quarter.

For the year, the company said it averaged production of 223,600 bbl/d of oil (386,000 boe/d) and, in the fourth quarter, averaged 226,100 bbl/d (391,400 boe/d).

Diamondback said it remains committed to returning a significant portion of its free cash flow (FCF) back to investors in 2023. Last year, the company returned approximately $3.1 billion to shareholders through base dividends, variable dividends and share repurchases. In the fourth quarter, Diamondback returned $861 million to shareholders, representing about 76% of the company’s quarterly FCF.

“We intend to continue to return at least 75% of our free cash flow to our stockholders and we expect to further strengthen our investment grade balance sheet by reducing debt through cash flow and our increased target of at least $1 billion of non-core asset sales,” Stice said.

2023 guidance: more spending

Diamondback plans to ramp up 2023 spending to between $2.5 billion and $2.7 billion, up from the company’s 2022 capital spend of $1.94 billion. At the midpoint of guidance, Diamondback’s capex would increase by roughly 34% compared to last year.

Accounting for a full year of FireBird production and 11 months of Lario production, Diamondback’s guidance anticipates average production of 260,000 bbl/d and $2.6 billion in capital spend, while running 15 rigs and four simul-frac crews, Stice said.