Diamondback Energy is reportedly exploring the sale of its Delaware Basin assets in Pecos County, Texas, according to an April 11 Bloomberg report.

The report, which quoted unnamed sources familiar with the matter, said no final decision had been made on a divestiture.

Such a sale would likely attract buyers looking to shore up Permian Basin inventory.

Tim Rezvan, an analyst at KeyBanc Capital Markets, said “there is validity to this news,” given the company has upped it divestiture target earlier this year. The company increased leverage following a pair of Midland Basin acquisitions in the past year. Diamondback purchased  Lario Permian LLC in 2023 for $1.55 billion and FireBird Energy LLC in 2022 for $1.75 billion.

In February, Diamondback raised its non-core asset sales target to at least $1 billion by the end of 2023— doubling its previous $500 million target.  At that time, the company had logged $750 million of completed and pending asset sales since announcing the initial target in October 2022.

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

Rezvan, writing in an April 11 note, said Diamondback’s Delaware Basin assets “are inferior to its core Midland Basin footprint, in our view, and struggle to compete for capital.”

“Management's 2023 capital allocation (only 15% of net lateral footage is in the Delaware Basin) has reiterated that fact, and we wonder why the Delaware Basin even warrants that much capital,” he said.

Diamondback Energy Reportedly Exploring Delaware Basin Asset Sale
(Source: Diamondback Energy)

Diamondback's Pecos wells screen well compared to the broader industry, Rezvan said.

“As inventory concerns intensify among operators and oil prices remain at $80/ bbl, we expect ample industry interest for portions of Diamondback's ~146,000 net acre Delaware Basin footprint (pro forma for pending sale), much of which is in Pecos County,” he said.

However, Diamondback's overall Delaware Basin wells underperform peer averages, leading Rezvan to argue that a capital allocation shift to the Midland Basin is warranted.

“After digging into Pecos County well results from Diamondback and peers, we see that Diamondback is actually drilling stronger wells than industry peers in this part of the basin,” Rezvan said. “Above-average results naturally increase the attractiveness of this acreage, especially to smaller, inventory-constrained peers.”

Additional non-core asset sales by Diamondback could close the balance sheet gap with large-cap peers, Rezvan said.

“The timing of this story does not seem accidental, coming on the heels of Ovintiv paying $4.3 [billion] to acquire three EnCap portfolio companies, and on the heels of the OPEC+ production cut, which provides more certainty on near-term oil prices,” Rezvan said.