Diamondback Energy continues Midland Basin focus in buying FireBird

US upstream producer Diamondback Energy, which recently announced a $1.6 billion acquisition of Midland Basin operator FireBird Energy, will continue pursuing that eastern area of the Permian Basin in West Texas, the company's top executives said Nov. 8.

The area is where its return rates and oil and gas yields have improved in recent years, the executives added.

Diamondback has seen double-digit percentage improvements in its Midland Basin well productivity in 2022 while combined Midland-Delaware Basin well productivity is up by single digits, company President Kaes Van't Hof said in webcast remarks during Diamondback's third-quarter earnings call.

"Our teams have done a good job of not only spacing within each zone, but on intrazonal spacing given that these zones talk to each other," Van't Hof said. "And the result is better overall assets here over the last couple of years."

The company, starting in 2019, has been co-developing its primary geological subsurface target zones instead of drilling and completing one zone at a time. Since then, it has learned how to optimize its development patterns and spacing, said Diamondback CEO Travis Stice.

"As a result, we're seeing material improvement in well productivity over the past 36 months," Stice said. "In fact, our well performance this year is back at 2019 levels, when we were primarily targeting one-off wells in our best zones, which while having great performance and economics."

In 2022, Midland Basin well productivity has risen 6% over 2021, 18% over 2020, and is up 11% versus 2019, according to Diamondback's November investor presentation slides.

Full-company well productivities that include both Midland and Delaware Basins are up 5% from 2021, 8% from 2020, and 1% from 2019.

The acquisition closes at month's end

The FireBird acquisition is poised to close at the end of November, and at that point, Diamondback—which recently celebrated its 10th anniversary as a pure Permian-focused company—will slow the development pace on that asset from three rigs to one, Stice said.

"We are working with our service providers to ensure that we have the most efficient and cost-effective personnel and equipment in place for next year, including the two e-fleet SimulFrac crews we've secured from Halliburton, the first of which is already in the field and performing well," he said.

FireBird comes with roughly 68,000 net highly contiguous acres in the Midland Basin and estimated production at closing of around 22,000 barrels of oil equivalent a day of which 17,000 b/d is oil.

Average production in 2023 is estimated at about 25,000 boe/d, including 19,000 b/d of oil.

While not providing firm guidance, Stice said he believes the company will be able to generate low single-digit pro forma oil production growth in 2023 by maintaining its current stand-alone activity levels plus the single FireBird rig.

The acquisition is "immediately accretive" on all relevant per-share financial metrics while providing a "long runway of high-quality drilling opportunities," Stice said, adding, "with over 350 locations, we expect to have well over a decade of run room at our projected one-rig development phase."

Oil, gas output grows sequentially

In Q3, Diamondback Energy's total oil and gas production grew 3% to 390,600 boe/d sequentially but was down about 3% year on year.

Also, the company's oil production grew 1.5% sequentially in Q3 to 224,000 b/d, but fell 6% from the same 2021 period.

Also, while not set in stone, Van't Hof estimated that Diamondback's 2023 capital budget pre-FireBird will probably rise less than 10% over the current year, plus about $250 million for the FireBird assets. Inflation for the company has been running at about 10%-15% this year.

Stice, in response to an analyst question, said that not only inflation but supply-chain constraints and upstream operators' capital discipline strategies have also limited overall US shale production growth, which accounts for much of the domestic production of just over 12 million b/d of oil and 97 Bcf/d of Lower-48 natural gas.

Permian production continues to grow, however, and is estimated to average about 5.49 million b/d of crude and 15.6 Bcf/d of natural gas in November, according to S&P Global Commodity Insights. That is up from 5.06 million b/d and 13.9 Bcf/d, respectively, in August.

But those numbers will be "challenged to continue to grow" in the future, Stice said. "Do we have the assets out here? Yes, we do, but some of those other ... constraints I mentioned are going to be impediments to efficient growth," he said.

"I assume we'll probably see at higher commodity prices some people try to grow, but they're allocating capital [while] trailing in efficiency," he added. "So those ... create headwinds as well for shareholders."