Diamondback expects costs to climb 10% next year

The leaders of Diamondback Energy Inc. said Nov. 2 they are planning for some of their costs to jump 10% next year as inflation works its way from oilfield service companies to the exploration and production sector.

Diamondback Chief Financial Officer Kaes Van't Hof told analysts and investors on a conference call following the company’s third-quarter earnings report that the company plans to keep its 2022 capital spending in line with its expected fourth-quarter level of $435-475 million. (That number is down from Diamondback’s year-to-date 2021 pace because the company has been booking solid efficiency gains in its well operations.) Asked about the implied 2022 range of $1.74-1.9 billion, Van't Hof said the $1.9 billion upper bound accounts for 10% inflation as well as some more infrastructure and midstream spending.

Diamondback’s well costs fell to $500 per foot in the Midland basin from $538 for all of last year and $700 per foot in the Delaware basin versus $849 in 2020. Van’t Hof said his team came into 2021 expecting well costs to climb 7-10% but added that gains in the design and execution of drilling have offset increases in the price of commodities and labor, among other input costs.

“This is probably the base that we’re going to build off of in terms of inflation,” he said of the third quarter's well costs.

More broadly, Van’t Hof and Chief Executive Officer Travis Stice told analysts they intend to maintain their 2021 production levels next year. Rather than ramping up output, they said they are focused on free cash flow – which they expect will top $3 billion in 2022 if oil sells for $70/bbl – and returning more money to investors in this high-price environment.

“Capital discipline has worked for this industry,” Van’t Hof said. “This industry has tried a market share war with OPEC before and it didn’t work out. So why don’t we let OPEC bring back their spare capacity and us stay flat and we’ll see what the future holds in 2023 and beyond?”

Shares of  Diamondback (Ticker: FANG) were up more than 3% to more than $115 on the afternoon of Nov. 2. They have risen more than 35% over the past 6 months, growing the company’s market capitalization to nearly $21 billion. At least one analyst thinks they have more room to run: On the heels of the third-quarter report, Credit Suisse analyst William Janela reiterated his ‘outperform’ rating on Diamondback shares and lifted his price target to $125 from $115.