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Diamondback Plans 30% Spending Cut for 2021, Flat Output; Gives 2H20 Update

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   |    Tuesday,October 13,2020

Diamondback Energy Inc. reported an update for the third quarter of 2020 as well as a glimpse of its plans for 2021.

2021 Plans

CEO Travis Stice noted that for 2021 the company plans to spend 25-35% less than 2020, which would translate to $1.295 billion (at the midpoint).

The company also expects production to remain flat from Q4 2020 at 170-175 MBO/d in 2021 (280 – 290 MBOE/d).

3Q / 4Q 2020 Update

Q3 Spending, Drilling, Production
  • Q3 2020 average production of 170.0 MBO/d (287.3 MBOE/d)
  • Q3 2020 average realized hedged prices of $38.17 per barrel of oil, $12.09 per barrel of natural gas liquids and $0.95 per Mcf of natural gas, resulting in a total equivalent price of $26.22 per BOE; hedged pricing excludes $5.8 million of realized gains from the early termination of 6.55 MBO/d of Q4 2020 oil hedges
  • Q3 2020 average unhedged realized prices of $38.75 per barrel of oil, $12.09 per barrel of natural gas liquids and $1.11 per Mcf of natural gas, resulting in a total equivalent price of $26.75 per BOE
  • Q3 2020 cash CAPEX of $281 million. Q3 2020 activity-based CAPEX incurred of approximately $206 million
  • Exited the third quarter with $0 drawn on the Company’s revolving credit facility and over $2 billion of liquidity
  • Drilled 32 gross operated horizontal wells and turned 41 wells to production in the third quarter
Q4 Production Outlook
  • Reiterating Q4 2020 production guidance of 170 – 175 MBO/d (280 – 290 MBOE/d), full year 2020 production guidance of 178 – 182 MBO/d (290 – 305 MBOE/d) and full year 2020 cash CAPEX of $1.8 - $1.9 billion

CEO Travis Stice said: “After returning curtailed production in a second quarter that included minimal completion activity due to a historic decline in commodity prices, Diamondback returned to work in the third quarter to stem production declines and stabilize our production base. As expected, production bottomed in the third quarter and is set to rise slightly in the fourth quarter to meet our fourth quarter production target of between 170,000 and 175,000 barrels of oil per day. This production level is the proposed baseline for our future activity plans, and we anticipate we can hold this production flat in 2021 while spending 25% - 35% less capital than in 2020. We exited the quarter with no balance on our revolving credit facility, implying true free cash flow generation in the third quarter. Diamondback is expected to continue to generate free cash flow at current forward commodity prices, with excess free cash flow above our dividend to be used for debt retirement.

“While it is important that our industry recovers from this downturn and works to again attract attention and capital from the investment community with well-thought-out long-term investment frameworks, the concept of production growth should not be discussed until commodity prices recover and global inventories return to normalized levels. Our industry, and particularly North American shale producers, must acknowledge two fundamental truths: we have a significant influence on the global oil market, and today that market is oversupplied. As such, if North American producers decide to grow again, even at mid-single-digit rates, we will magnify the issues our industry is fighting today and face repercussions from other global producers. Should the investment community reward companies touting growth, other producers are going to follow suit, and this downturn will carry on longer. To that end, we will consider appropriately growing production again should the global oil market call on growth through a price signal, but that day is not today.

"Therefore, Diamondback’s investment framework and capital allocation philosophy at current oil prices remain very simple and have not changed: protect our base dividend, spend maintenance capital to hold oil production flat, and use excess free cash flow to pay down debt, in that order. Our industry has shifted its focus to 2021 breakeven prices. While this is an important metric and Diamondback’s cost structure and asset quality stand out as differential in terms of 2021 breakeven price benchmarking, a breakeven price is just that, and does not mean the industry is generating sufficient returns to attract capital to the sector.”

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