Diamondback Energy Inc (FANG) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Diamondback Energy fourth quarter earnings call.

(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.

Thank you, Shannon. 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, result of operations, plans, objectives, future and 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 be 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.

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 have issued an operations update that not only provided additional new Wolfcamp B well test data, but also highlighted an increase in well to [URs], 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 private 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 southwestern Martin County provides us with a complimentary acreage block that is perspective across six horizontal zones. The acreage includes 147 gross producing vertical wells as of February.

Growth potential on this acreage exists 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 interests 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 of 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 the higher percentage of oil production drives our pure 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 began 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 in our mineral 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 are excited about our most Wolfcamp B test, the Spanish Trail 705H, as it is our highest 24 hour IP rate to date for a 7,500-foot lateral at 1,185 BOEs a day with a 96% oil cut.

Also we have previously indicated that our 8,926-foot lateral, the Spanish Trail South 501H well in 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 come 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 have now achieved five consecutive quarters of double-digit decline, which are down 55% from this same period last year.

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

Thanks, 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 effect, 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 $76 million and $208 million of revenue for the full year.

Our average realized price before the effective hedges for the fourth quarter were $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 cost, our lease operating expense was $6.04 per BOE in the fourth 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 costs came in at $3.99 per BOE for the fourth quarter and $4.13 per BOE for the full year. Our current hedge position through 2014 has 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 $1.36 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 in 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 are 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.

Thank you, Tracy. To summarize, I'm proud of our accretive acquisition in Martin County further building on our horizontal inventory. We again 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 our 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.

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

Hi. Good morning.

Good morning, Ryan.

Travis, on this acreage to be acquired, could you just describe its location relative to your Spanish Trail asset? And any industry activity that gives you confidence on that leasehold?

Sure. Ryan, this acreage it kind of fits hand in glove with what we've got in our Spanish Trail acreage. It's at the northern end of our Spanish Trail acreage about three 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 it's -- as I mentioned it's perfectly suited for horizontal development. And it's in the -- if you're looking at 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's 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 then immediately to the east, Oxy's got a large horizontal development program underway and we understand that those results are also very, very nice. So we're -- 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 -- 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 position now.

Very good. And then on this well that's produced over 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 have for that well.

Yes, 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 -- while it's been on for several months now, I think what's really remarkable is not only the come but its current rate. And so if you look at that cumm and that current rate on anybody's type curves out there, you'll see 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?

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

Yes, 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, I'll have to -- we'll look at that, Ryan, during the call and I will get back with you on that, if we can look it up during the call.

Absolutely. No worries. One final one for me and I'll hop back in the queue.

Shifting north to the previously acquired acreage, one of your competitors was talking yesterday about the potential for the Wolfcamp D or Cline 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.

Sure, thanks, Ryan. Yes, what we're excited about in that northern acreage is as we've 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's called the Kent County School Lands and it's not yet completed. We're about two weeks away from fracking that well.

And like I said we did put that into Wolfcamp B. And when we also cut -- we also cut whole core in that well before vertical well immediately offset that. So we've got a little bit of science that we've taken for that area. And we see prospectivity certainly into Wolfcamp B. The lower Spraberry looks very good up there and the Cline or 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. I think probably right after that in terms of ranked order or prospectivity that kind of Wolfcamp C, Wolfcamp D combo zone that's up there looks pretty good.

Great. Thank you.

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

Good morning, folks. 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?

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 continue 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 costs, best-in-class execution and doing accretive deals. And we've now done four and five deals, each of them -- 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 probably somewhere in just in terms of operated rigs from where we are today, our bandwidth is probably somewhere in the 7 rigs to 10 rigs with our current organization or immediately planned growth in our organization.

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?

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 cadence 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 in 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's two ways to accelerate activity.

One is to just pick up 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 are seeing. So that's why it's a little at least in early February that's why it's a 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.

Sure, sure. Okay. Well thank you for the color.

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

Thank you. Good morning, everybody. Looks like just running through quickly the numbers in the K last night, some pretty good improvements on the capital efficiency side.

What can you say how that's progressed? What color can you give us there as you shift from horizontal from vertical? And where do you see -- what upside do you see as laterals get longer, et cetera as you kind of gain momentum in this program?

Yes, certainly, Gordon, yes, we're no longer shifting to horizontal. We've been -- we shifted full horizontal in early parts of 2012 -- or 2013, 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 days 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 to push the cost lower.

We've guided towards a 7,500-foot well between $6.9 million and $7.4 million. And that's about the range, that's the range that we're running right now. And just while we're talking about 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.

Okay. Thanks.

Thanks, Gordon.

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

Hi. Good morning guys.

Good morning, Eli.

Congrats on another nice quarter. 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.

Yes. Standby on that, Eli. Yes, right around 3,900 BOEs a day.

Okay. Thanks, guys.

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

Good morning, guys. I was curious on the acquisition you guys have here. Is there any potential to increase that working interest beyond the 72%?

I mean I know you guys had placed offers to bump that up to 100%, but did you get essentially no's from the remaining parties or is there kind of some still working parts there where you guys could bump that up higher?

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

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? I mean should we still be expecting the lower IPs and lower declines? Or any kind of commentary you'd like to provide on that.

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

Yes, Jeff, kind of as we look at that lower Spraberry shale kind of from north to south, the thickness remains about the same. You get a slight degradation in porosity. But, we know the 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 is going to be a very economic development play for us.

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

Yes, really what we're looking at, we of course -- in our operations update there a few weeks ago we kind of talked about that staggered lateral test that we have a working interest in that RSP did where we had some nice results. 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 zipper fracs in the same zone, what you'll probably see us do is drill pads of Wolfcamp B wells and then come back and drill pad wells in other zones as opposed to doing the stacked laterals. But -- so we've got some more production results to evaluate before we make that decision.

Got it. All right. Thanks, guys.

Thank you. Our next question is from Richard Tullis of Capital One. You may begin.

Thank you. Good morning. 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?

Yes I mean of course we got -- it varies by county dependent on what our royalty interest is. And obviously where we own mineral interest the rig returns are a lot higher. So I'll throw out rough numbers and this is not on our mineral acreage, just where we kind of have a standard 25% royalty interest.

So for our lower Spraberry wells, based on -- based on the results that we have seen there and assuming about a $7 million development cost for a 7,500-foot lateral, we're up there in the 70% rate of return kind of range using SEC pricing of that $96 a barrel less deducts.

And so our Wolfcamp B, real similar numbers there. A little higher cost, fairly similar EUR but a little higher IPs.

Okay.

So, obviously those are very attractive rates of return. And those are kind of for our Midland County area. As we've talked before, Upton is a little lower but still in that 40% to 50% rate of return kind of range.

And then --

Even if that Midland County area, this new block that we see we think that there's a slight uptick in the performance of those wells also.

Okay. And of course they go higher using today's pricing.

Correct.

Yes. And looking at the 4Q actual OpEx per BOE, it looks like you 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?

I'll never be -- I'll never be ultimately satisfied on LOE. You always want to continue to push the envelope to low cost. But I'll tell you, we're picking up -- 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 stick right now at our guidance level.

Okay. Well that's all for me. Thank you.

You bet. Thank you, Richard.

Thank you. (Operator Instructions)

Our next question is from Jason Wangler of Wunderlich Securities. You may begin.

Good morning. Just curious, oil prices looked solid. How you're seeing longhorn and everything else with obviously the basin seeing more oil coming out of it and you guys are too. What you're seeing as far as pricing and being able to get it out.

Well, so far we have not had any -- any issues moving our barrels. And we've got a contract on that Magellan longhorn pipeline for 8,000 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 of pricing. When you get to Midland Tank Farms we evaluate on a monthly basis where your pricing is enhanced. Whether they're going to longhorn or going to Cushing, Oklahoma. But in a general sense we've been pleased with the pricing we've been able to get.

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

That's okay. We're looking real shortly here in the next few weeks we'll get started up on our redetermination and preliminary looks -- preliminary looks to be between $375 million and $400 million.

Perfect. Thank you very much.

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.

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

Ladies and gentlemen, this concludes today's conference. Thank you for participation and have a wonderful day.