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Diamondback Energy Inc. (NASDAQ:FANG)

Q4 2013 Earnings Conference Call

February 20, 2014 08:00 AM ET

Executives

Adam Lawlis - IR

Travis Stice - CEO

Tracy Dick - SVP and CFO

Russell Pantermuehl - VP, Reservoir Engineering

Analysts

Ryan Oatman - SunTrust

Tim Rezvan - Sterne Agee

Gordon Douthat - Wells Fargo

Eli Kantor - IBERIA Capital Partners

Jeff Grampp - Northland Capital

Richard Telles - Capital One

Jason Wangler - Wunderlich Securities

Operator

Good day, ladies and gentlemen and welcome to the Diamondback Energy Fourth Quarter Earnings Call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder today's call is being recorded.

I would now like to turn the conference over to Adam Lawlis of Investor Relations. Sir, you may begin.

Adam Lawlis

Thank you, Sharon. Good morning and welcome to Diamondback Energy’s fourth quarter and year end conference call. Representing Diamondback today are; Travis Stice, CEO; Tracy Dick, CFO; and Russell Pantermuehl, Vice President of Reservoir Engineering.

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 we found in the Company’s filings with the SEC. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of those measures to GAAP in our earnings release.

I will now turn the call over to Travis Stice.

Travis Stice

Thank you, Adam. Welcome everyone and thank you all for listening to Diamondback’s fourth quarter and year end 2013 conference call. Since our last call we’ve issued an operations update that not only provided additional new Wolfcamp B well test data, but also highlighted an increase in well EURs, reported significant increases in both total proved and proved developed reserves, detailed a very encouraging lower Spraberry test and positive down spacing tests.

Since it was just a few weeks ago when I was offering my last operating update, today I’ll provide more detail on our pending acquisitions in addition to discussing our strong quarter. On Tuesday we announced we had entered into definitive purchase agreements to acquire approximately 6,450 gross or 2,825 net operated acres in the Midland Basin from product parties for $174 million.

Late last night we agreed on an additional 28.8% working interest, bringing the current totals for this acquisition to approximately 72% working interest and 4,683 net acres for a total purchase price of $288 million. The current combined production is approximately 2,150 Boes a day. With more than 50% working interest upon closing, Diamondback now anticipates that it will be designated as operator.

The assets located in South Western Martin County provides us with a complementary acreage block that is perspective across six horizontal zones. The acreage includes 147 gross producing vertical wells as of February. Growth potential in this acreage exist in multiple zones with 42 locations in the Wolfcamp B, 42 locations in the lower Spraberry with 112 gross locations in the middle Spraberry, Wolfcamp A, Cline, which is also known as the Wolfcamp D and the Clearfork combined. This brings our current inventory of horizontal wells to more than 1,600 gross locations. Once all of the outstanding offers to purchase the additional interest are finalized, we will issue new guidance for 2014 with more fulsome development plans.

Switching now to the fourth quarter, I’m proud of the quarterly results as we again demonstrated our ability to reduce operating expenses to what I believe is among the best in the Midland Basin. At just over $6 Boe, we have now had five consecutive quarters of double digit declines in LOE on a percentage basis. Our low cost operating metrics, combined with a higher percentage of oil production drives our peer leading cash margins with fourth quarter coming in at over $64 of Boe.

We continue to be an aggressive developer of horizontal inventory as we will add a fifth horizontal rig, as planned in the coming weeks. In 2013 we grew production by nearly 150% and we expect to grow production by more than 100% again this year.

As mentioned in our previous operations press release, we have four wells in various stages of development on our northern acreage. Our first horizontal Wolfcamp B Martin County well is still cleaning up now cutting good oil and our second Martin County well, also targeting the Wolfcamp B just again flow back operations yesterday. Additionally, we are drilling our second Wolfcamp B well in Andrews County and our first horizontal Wolfcamp B well in Dawson County has been drilled and is waiting on completion.

We’re running two horizontal rigs on our minerals acreage in Midland County and plan to add another rig in the coming weeks that will split time in our minerals acreage and continue to delineate Martin, Dawson and Andrews County. In Midland County we’re excited about our most recent Wolfcamp B test, the Spanish Trail 705H, as it is our highest 24 hour IP rate to date for 7,500 foot lateral at 1,185 Boes a day with the 96% oil cut.

Also we have previously indicated that our 8,926 foot lateral, the Spanish Trail south 501H well in the Midland County is our best well to date. This well has now produced over 75,000 barrels of oil and is still making over 600 barrels of oil a day. Note both the cum and the rate I just quoted are for oil only. As exciting as the horizontal Wolfcamp B has been and continues to be, early indications from the lower Spraberry seem to be competitive with our existing Wolfcamp B program with respect to both the rate of return and the EURs. We are currently drilling our first operated lower Spraberry well in Upton County and we will drill our first operated lower Spraberry well in Midland County next month.

Lastly, our fourth quarter total LOE per BOE decreased 17% to $6.04 during the fourth quarter, down from $7.27 a barrel in the third quarter of 2013. Again we’ve now achieved five consecutive quarters of double digit decline, which are down 55% from the same period last year.

With those comments complete, allow me to turn the call over to Tracy.

Tracy Dick

Thank you, Travis. Our net income for the fourth quarter was $20.1 million or $0.42 per diluted share. Net income for the period included a non-cash gain on commodity derivatives of 1.6 million. Excluding the non-cash gain and the related income tax effects our adjusted net income was $19.1 million or $0.40 per diluted share. Our production for the fourth quarter was approximately 10,400 Boe per day and for the full year our average production was 7,300 Boe per day. These volumes generated revenues in the fourth quarter of approximately of $76 million and $208 million of revenue for the full year.

Our average realized price before the effect of hedges for the fourth quarter was $79.14 per Boe and for the full year $77.84 per Boe. Our average realized price, including the effective hedges for the fourth quarter was $77.47 per Boe and for the full year $75.14 per Boe. Quarter-over-quarter our realized price decreased, which was due mainly from decreased oil prices. EBITDA for the quarter was $62 million and for the full year we generated EBITDA of approximately $165 million.

Turning to our cost, our lease operating expense was $6.04 per Boe in the four quarter as compared to $7.27 per Boe in the third quarter. Our lease operating expense for the full year was $7.92 per Boe. Our general and administrative cost came in at $3.99 per Boe for the fourth quarter and $4.13 per Boe for the full year.

Our current hedge positions through 2014 have been laid out in our earnings release. We continually assess our hedging opportunities and we will continue to layer on additional hedges as our production grows. In the fourth quarter of 2013, we generated $64 million of operating cash flow or $0.36 per diluted share. During 2013, we spent 298 million for drilling, completion and infrastructure. This compares favorably to our 2013 annual capital guidance of between $290 million and $320 million. Additionally, we spent approximately $640 million on acreage and mineral acquisitions. Our liquidity position remains strong, with approximately 60 million of cash on hand at December 31, 2013. Our $225 million revolver currently has $21 million drawn against it.

We’re planning to perform a redetermination in the near future and through preliminary discussions with our lead bank, we believe that the combination of increased reserves and reserves associated with the pending acquisition support a borrowing base in the range of $375 million to $400 million to provide us further liquidity.

I'll now turn the call back over to Travis for his closing remarks.

Travis Stice

Thank you, Tracy. To summarize I’m proud of the accretive acquisition in Martin County, further building on our horizontal inventory. We gain delivered exceptional fourth quarter results, demonstrating our ability to not only reduce drilling cycle time but also continue to reduce our operating expenses and continue oil production ramp. Our cash margin during the fourth quarter -- as I've talked about earlier were almost $65 of Boe and I believe we are delivering results and returns to our stockholders that are among the best in the Midland Basin. On behalf of the Board and employees of Diamondback Energy, I would like to thank you for your participation today.

This concludes our prepared comments. Operator, please open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Ryan Oatman of SunTrust. You may begin.

Ryan Oatman - SunTrust

Travis, on this acreage to be acquired, could you just describe its location relative to your Spanish trail asset and any industry activity that give you confidence on that lease hold?

Travis Stice

Sure. Ryan, this acreage, it’s kind of fits hand in glove with we’ve got in our Spanish trail acreage. It’s at the northern end of our Spanish trail acreage, about 3 miles north and just over the Midland County - Martin County line. This acreage block, as I’ve talked about earlier is laid out perfectly for horizontal development. It consists of about -- it’s about two miles wide and about five miles tall. So as I motioned it’s perfectly suited for horizontal development and if you’re looking it relative to in the county, it’s in the southwestern corner of the county and then immediately to the west is a block that operated by RSP Permian and they’ve got a couple of good Wolfcamp B horizontal wells there, that really gave us some encouragement. They typically run about 10% to 15% better than what we’re seeing on our updated type curves in Midland county and into the, moving to the east oxy has got a large horizontal development program underway and we understand that those results are also very, very nice. And there’s a couple of privates that are also in the area that have posted really nice results in different zones even outside the Wolfcamp B. So this is an area that the Wolfcamp development has certainly been trending towards and we couldn’t be more proud that we’ve got this, this position there.

Ryan Oatman - SunTrust

Very good and on this well that’s produced over a 75,000 barrels of oil, can you just provide a little detail on how long that well has been on production and any EUR or cost estimates you got for that well.

Travis Stice

That well came on in early October and what’s really kind of unique about that well was that it flowed for such a long period of time before we put it on artificial lift. So while it’s been on for several months now, I think what’s really remarkable is not only the cum but its current rate and so if you look at that cum and the current rate on anybody’s type curves out there, you’ll see that this well is performing above any of the industry’s expectations. So it's just a good story. And Ryan, would you ask me the cost question again.

Ryan Oatman - SunTrust

Oh, just any cost estimates for that well and potential EUR?

Travis Stice

Ryan, this is the same well that we talked about in our operations update. That’s on track to make a million barrels and it’s a longer lateral, so that’s not unexpected. And then a cost perspective -- we’ll look at that Ryan during the call and I’ll get back with you on that, if we can look it up during the call.

Ryan Oatman - SunTrust

Absolutely no worries, one final one from me and I’ll hop back in the queue. You’re shifting north to the previously acquired acreage. One of your competitors was talking yesterday about the potential for the Wolfcamp D or Klein on its acreage near your northern Martin and southern Dawson leasehold. Do you see that as a potential target up there and I was wondering if you could talk about the relative prospectivity of the zones on that leasehold up north as you see it, and that will do it for me, thank you.

Travis Stice

Sure, thanks Ryan. Yes, what we're excited about that northern acreage is, as we previously talked about, it's got four, five or six different prospective zones and we drilled our first well in the Wolfcamp B. That’s the well that called the Kent county school lands and it’s not yet completed. We’re about two weeks away from fracing that well, and like I said we did put that in Wolfcamp B, but we also cut whole core in that well before, A vertical well immediately offset that. So we got some, we’ve got a little bit of sides that we’ve taken for that area and we see prospectivity, certainly in the Wolfcamp B. The lower Spraberry looks really good and the Klein, the Wolfcamp D looks very good up there as well too, and I think you've got the Wolfcamp A up there as well. So we’ll watch certainly when our well comes on, we’ll measure results but I think probably right after that, in terms of ranked order prospectivity that kind of Wolfcamp C - Wolfcamp D, combo zone that's up there looks pretty good.

Operator

Thank you. Our next question is from Tim Rezvan of Sterne Agee. You may begin.

Tim Rezvan - Sterne Agee

I just had one quick one. Given, you have a concentrated acreage position and you just took down this block here, you obviously have the liquidity with kind of the visibility on the revolver going up. Organizationally how big can you get right now and how actively are you looking to bolt on acreage.

Travis Stice

You know Tim, we’ve talked before that here in the Permian basin you’re either in the acquisition role or you’re not and we are certainly in the acquisition role and we're continuing to look for additional acquisitions. I think one of the things that I want to continue to commit to my shareholders, is that our story really hasn’t changed since we went public. We talked about cutting cost, best in class execution and doing accretive deals and we’ve now done four and five deals, each of them accretive to our shareholders and we couldn’t be more proud of that and at the same time keeping our story very simple. Bandwidth organizationally, we talk about that internally and we try to increase the bandwidth by adding key personnel and that’s a process that’s undergoing as well, but we've probably somewhere, just in terms of operated rigs, from where we are today, our bandwidth is probably in the seven to 10 rigs, with our current organization or immediately planned growth in our organization.

Tim Rezvan - Sterne Agee

Okay, I appreciate that color. And then finally as you’ve given that rig count, when you give updated guidance, will you maybe have something to say on activity, horizontal activity on the new acreage?

Travis Stice

Yes, absolutely. I think at this point Tim, it’s fair to say that we’re going to be drilling in the second half of the year there and our rig guidance sort of depends on how continued -- aggressively we exploit northeast Andrews, the rest of the stuff in Martin county and then in Dawson county as we’re waiting on results there as well. So it’s kind of a moving target and don’t forget Tim that a big piece of our story is our outstanding execution and how we’re able to continue to cut days and cost out of these horizontal wells and we’re actually continuing to see improvements in that cycle time. So there is two ways to accelerate activity. One is to just pick more rigs and the other is to do the same amount or more with fewer rigs or the same amount of rigs and that’s actually what we’re seeing. So that’s why it’s little, at least in early February -- that’s why it’s little hard to forecast what our rigs are going to look like in the second half of the year because we’re drilling these things so dang fast.

Operator

Thank you. Our next question is from Gordon Douthat of Wells Fargo. You may begin.

Gordon Douthat - Wells Fargo

Looks like just running through quickly the numbers in the K last night, some pretty good improvements on the capital efficiency side. What can say how that’s progressed? What color can you give us there as you shift from horizontal to vertical and where do you see -- what upside do you see; laterals get longer et cetera as you gain momentum in this program?

Travis Stice

Certainly, Gordon. We’re no longer shifting to horizontal. We shifted full horizontal in early parts of 2012 or 2013 late, late 2012. We continue to see improvement in costs, primarily associated with the execution of course, in the Permian basin when you drill these wells. Each day represents dollars and we feel like the performance that we’re delivering out there is cutting significant days relative to any of the competition that’s out there. So we continue push the cost lower. We’ve guided towards 7500 foot well between $6.9 million and $7.4 million and that’s about the range that we’re running around now. And just while we’re talking costs, the Spanish Trail 5-1, the well that we were talking about a second ago, that total well cost for that roughly 10,000 foot lateral was $9.1 million.

Operator

Thank you. Our next question comes from Eli Kantor of IBERIA Capital Partners. You may begin.

Eli Kantor - IBERIA Capital Partners

Just one quick question for me. Wondering what the gross production is from this acreage block that you’re acquiring in Martin County? I see the gross acreage figure but wondering what the gross production is?

Travis Stice

Yes, standby on that, Eli. Right around, 3900 Boes a day.

Operator

Thank you. Our next question is from Jeff Grampp of Northland Capital. You may begin.

Jeff Grampp - Northland Capital

I was just curious on the acquisition you guys have here. Is there any potential to increase that working interest beyond the 72%? I know you guys had placed offers to bump that up to 100%, but did you get essentially nos from the remaining parties or is there kind of some still working parts where you guys can bump that up higher?

Travis Stice

Yes Jeff, we’re still in conversation and I probably better just leave it at that, to increase the working interest.

Jeff Grampp - Northland Capital

Okay fair enough. And then just curious on the Upton County lower Spraberry test. Can you guys comment on how you see the lower Spraberry changing from kind of the northern part of the play? Should we be still expecting the lower IPs and lower declines or any kind of commentary you’d like provide on that?

Travis Stice

Sure, Jeff, I’m going to let Russell answer that question.

Russell Pantermuehl

Yes Jeff. As we look at that, lower Spraberry sale kind of from north to south, the thickness remains about the same. You get a slight degradation in porosity but we noticed Spraberry down there is productive as well. So right now our anticipation for Upton County would be that we see slightly lower results down there than what we’re seeing in the Midland County acreage. But of course as Travis mentioned before, the results we’ve seen around our Midland County acreage, and if you look at some of the other recently reported operator results in the lower Spraberry, the results have been really good. So obviously we want to see some production results but we think the lower Spraberry in Upton going to be a very economic development play for us.

Jeff Grampp - Northland Capital

Okay, I got it. And then last one I have, just was curious if you guys have any plans similar to your operators there in the Midland for any stacked or staggered lateral tests in 2014 or coming up here near term?

Travis Stice

Yes, really what we're looking at -- in our operation updates there few weeks ago, we kind of talked about that, staggered lateral test that we have working interest in that RSP did, where we had some nice results. So what we’re doing right now is we’re doing pad drilling in the Wolfcamp B where we can zip refrac the wells. We think that’s going to give us an uplift but we need a little more data to find that out. If we see a significant uplift from the zip refrac in the same zone, what you'll probably see us do is drill pads to Wolfcamp B well and then come back and drill pad wells in other zones as opposed to drilling the stacked laterals, but we’ve got some more production results to evaluate before we make that decision.

Operator

Thank you. Our next question is from Richard Telles of Capital One, you may begin.

Richard Telles - Capital One

Travis, what do you estimate the approximate rates of return for say your Wolfcamp Spraberry horizontal wells using current commodity prices and say the midpoint of the well cost guidance range?

Travis Stice

Yes, we’ve got, -- it varies by county and depending on what our royalty interest is and obviously where we own mineral interest, the returns are a lot higher. So I’ll just throw out some rough numbers. And this is not on a mineral acreage, just where we kind of have a standard 25% royalty interest. So for our Lower Spraberry wells, based on the results that we’ve seen there and assuming about a $7 million development cost for 7500 foot lateral, we’re up there in the 70% rate of return kind of range using SEC pricing at $96 a barrel less deducts. So our Wolfcamp B, real similar numbers there, little higher cost, fairly similar EUR but a little higher IPs. So obviously those are very attractive rates of return and those are kind of for our Midland county area. As we've talked about before, Upton is a little lower but still in that 40% to 50% rate of return kind of range. Even in that Midland county area this new block that we see and we think that there’s a slight uptick in the performance of those wells also.

Richard Telles - Capital One

Okay, and of course they go higher using today’s pricing.

Travis Stice

Correct.

Richard Telles - Capital One

And looking at the 4Q actual Op Ex per boe, it looks like you’re already I guess close to the low end of the guidance range for 2014 if I’m reading it correctly. What’s the potential to keep it in that low end or perhaps even drive it lower than say $6 a barrel give or take.

Travis Stice

I’ll never be able to be satisfied on LOE. You always want to continue to push the envelope to low cost. But I’ll tell you, we’re picking up pennies now. Early on we were picking up quarters and dimes but we’re picking up pennies now. So I’m very comfortable with what our guidance is for 2014 and that’s where I’ll stake right now, on our guidance level.

Operator

Thank you. [Operator Instructions] Our next question is from JasonWangler of Wunderlich Securities, you may begin.

Jason Wangler - Wunderlich Securities

Just curious, oil price is looking pretty solid. How you’re seeing Longhorn and everything else with obviously the [indiscernible] and more oil coming out of it and you guys are too -- what are you seeing as far as pricing and being able to get it out.

Travis Stice

Well so far we’ve not had any issues moving our barrels and we’ve got a contract on that Magellan Longhorn pipeline through 8000 barrels a day of firm transportation, which again for a company our size is kind of unique that I can offer that up to my shareholders. But what’s also good about that contract is it’s a better off pricing. When you get to Midland tank forms, we evaluate it on a monthly basis where you’re pricing is enhanced, where they’re going to Longhorn and going to Cushing, Oklahoma. But in a general sense we’ve been pleased with the pricing we’ve been able to get.

Jason Wangler - Wunderlich Securities

Great and then Tracy if I could just -- could you just give me the level of the revolver you’re looking at and when that would reviewed again? I’m sorry, I just missed that part.

Tracy Dick

That’s okay. We’re looking -- we’ll shortly hear in the next few weeks, we’ll get started back on our redetermination and preliminary looks to be between $375 million and $400 million.

Operator

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

Travis Stice

Thanks everybody for listening in this morning. I know it was a late night and early morning. So I appreciate everyone joining in this morning and look forward to visiting with you in the future. You all have a great day.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day.

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