Diamondback to begin growing output amid higher prices

May 5-Last year, Diamondback Energy watched the oil market "stoplight" flash yellow for caution, Diamondback chief executive officer Kaes Van't Hof wrote in a letter to stockholders included in the first-quarter earnings report.

Since the last letter, he wrote, "the oil market has completely flipped from a projected supply-demand surplus to a historic global deficit."

He added that he closed his last letter to stockholders by writing that the company was positioned with ultimate flexibility, with its inventory depth and operational capacity allowing for quick activity acceleration if the market tightens and moderation if conditions significantly soften.

"While our 'stoplight' analogy for the macro environment served its purpose over the last year, we are going to put it on the sidelines for now as the light has turned green, and Diamondback is well-positioned to respond to the current macro environment," Van't Hof wrote.

Diamondback executives are convinced there is a legitimate supply-demand imbalance and that associated price signals are the catalyst to begin growing production, he told stockholders.

"Because of our positioning, our preparation and this price signal, we are bringing incremental barrels to the market immediately. We have made the decision to begin to work down our drilled but uncompleted well ("DUC") balance to maintain our current production level of over 520,000 Bo/d - up 3% from our original 2026 guidance. Diamondback is capturing the production response now and will subsequently backfill activity to maintain our future operational flexibility," Van't Hof wrote in the letter.

To execute this plan, the company expects to run five completion crews consistently for the rest of the year and add two or three rigs to preserve a healthy backlog of projects and maintain operational flexibility. This level of incremental activity maintains Diamondback's current capital efficiency and puts the company in a differentiated position.

This revised plan would generate more free cash flow per share in 2026 if WTI averages more than $60 for the rest of the year. This gives the company the ability to maintain current activity levels even if oil prices decline, according to Van't Hof.

In the first quarter, oil production averaged 521,000 barrels per day, exceeding the high end of the company's 502,000 to 512,000 barrels-per-day guidance range. This outperformance was not the result of higher cash capital expenditures: Diamondback invested $933 million for the quarter, below the midpoint of its $900 million to $975 million guidance range.

Diamondback is also changing the structure of how it returns free cash flow to its stockholders. Since late 2021, the company has maintained a commitment to return a minimum percentage of its quarterly adjusted free cash flow to stockholders through a base dividend, share repurchases and variable dividends. Over the past four years, the company has returned about $12.1 billion to stockholders through $3.4 billion of base dividends, $5.9 billion of share repurchases and $2.8 billion of variable dividends.

Next quarter, Diamondback plans to remove its quarterly adjusted free cash flow return commitment and instead retain the flexibility to allocate post-dividend free cash flow to the opportunity that best creates long-term stockholder value. Diamondback is increasing its base dividend by 5% to $4.40 per share annually, now up 10% this year.

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