Diamondback Energy Inc. press release

Letter to Stockholders Issued by Diamondback Energy, Inc.

2026-11-02

NASDAQ - Nasdaq Stock Market · Oil · Natural Gas · Natural Gas Liquids · United States · Corporate Finance

MIDLAND, Texas, Nov. 02, 2026 (GLOBE NEWSWIRE) --

Diamondback Stockholders,

This letter is meant to be a supplement to our earnings release and is being furnished to the Securities and Exchange Commission (SEC) and released to our stockholders simultaneously with our earnings release. Please see the information regarding forward-looking statements and non-GAAP financial information included at the end of this letter.

Mega Themes

Before we talk about the quarter, we would like to give you some insight into what we see as the mega-themes of the Permian Basin over the next decade, Diamondback’s potential role in those mega-themes and why our strategy will benefit Diamondback stockholders. In our mind, these three mega-themes are: increased recoveries of oil in place, gas production growth and monetization through LNG and power demand and the growing AI / power / infrastructure buildout in West Texas and the Permian Basin.

The past decade in the Permian Basin was dominated by capital efficiency improvements, resource expansion and consolidation. This resulted in more assets in the hands of larger, well-run operators turning the dream of the shale revolution into a reality, producing more consistent returns on and of capital to the stockholders that helped fund it.

While we expect to maintain consistent returns, we anticipate the next decade will look different. Upstream consolidation in the Permian will continue, albeit at a more measured pace given how much has already occurred to date. Capital efficiency will continue to improve, but the pace of above ground mechanical improvements will naturally slow relative to what has been accomplished over the last ten years. Resource expansion will continue and new zones like the Barnett and Woodford (more on that later) are exciting, but it will be tough to match the resource growth we saw from developing the Wolfcamp B as a standalone horizontal bench in 2012 in the Midland Basin to the 8+ zones we are developing today.

Therefore, we will need to do more with what we have, directly and indirectly. We will continue to improve our position by increasing working interest (and mineral interest at Viper Energy, Inc. (“Viper”), our consolidated mineral and royalty subsidiary), extending laterals through trades, grinding down costs and being prepared for M&A opportunities if or when they present themselves.

As we mentioned earlier, we are also working on being at the forefront of three Permian mega-themes:

1. Improving Recoveries

We currently estimate that we extract approximately 10% of the oil in place in the Permian Basin today. Every percentage point of incremental recovery carries significant value to our stockholders, and we are therefore very focused on improving recoveries. There are several factors that contribute to the ultimate recovery of hydrocarbons from a well, but the list below represents the main factors we are focused on.

a) Development design: Each project Diamondback executes is designed to maximize the return the Company receives on capital while ensuring resource recovery is maximized at an appropriate incremental rate of return hurdle. Our philosophy has resulted in Diamondback's projects generating the highest average returns relative to our peer group. These outcomes are clearly seen on slide #10 of this quarter’s investor presentation.

Broadly, our relatively higher wells per section × better per well performance ÷ the lowest cost structure in the basin = the maximum return for every dollar of capital invested. Diamondback was an early adopter of co-development in the Midland Basin, moving to this methodology in 2019 for the core zones from the Middle Spraberry to the Wolfcamp B. Co-development of 8+ benches in the Midland Basin, optimized spacing and targeting, longer laterals and creative wellbore trajectories allow us to optimize our developments while preserving the value of our remaining inventory – an advantage we believe is unmatched in the basin.

b) Completion design: Proper completion sizing is imperative to maximizing value from each development project. The advancement of completion technology into simulfrac and continuous pumping are positive cost stories from an operational standpoint, but they have also allowed us to pursue more aggressive stage designs with tighter cluster and stage spacing to increase reservoir contact and near-wellbore fracture complexity. We believe this, combined with our efforts around advanced chemical additives, is contributing to recent well outperformance relative to previous vintages seen on slide #10 of this quarter’s investor presentation.

c) Enhanced Oil Recovery (“EOR”): Chemical EOR has the potential to meaningfully improve recovery factors and shallow base decline rates in unconventional reservoirs. Shallowing our corporate base decline by just 1% at current capital efficiency implies drilling 10 to 15 fewer wells to maintain flat oil production, extending inventory quality and duration.

Chemical EOR makes it easier for oil to flow through the reservoir to the wellbore. We have several ongoing pilots testing various surfactant designs both in the remedial and completion phases of our operations. These pilots are in the early stages, and we have seen a wide range of outcomes from our initial tests. We will continue to learn from these tests and refine our methodologies to continuously improve, just as we did on the completion side of the business over the last fifteen years.

Our goal is and has always been to be the best at converting rock into cash flow. We have demonstrated this ability consistently over the past decade and will continue to do so moving forward. We are confident the technologies and workflows we are developing today will propel us to higher recoveries in the future and we look forward to keeping our stockholders updated on our progress.

2. Gas Production and Monetization

In the third quarter, future gas growth out of the Permian Basin received significant attention as a WhiteWater-led consortium (that includes Diamondback) reached Final Investment Decision (“FID”) on another large diameter pipeline out of the basin. This pipe is called Solitude and is set to enter service in the second half of 2029. This project consists of two twin 48" lines able to move 4.5 bcf/d out of the Permian to Katy and Gulf Coast markets, with potential to expand to 7.5 bcf/d. While the market was surprised that another pipe reached FID this quickly after multiple announcements over the last 18 months, we were not.

As we have said many times, the Permian Basin has not tried to produce gas yet. We expect the Permian to be the largest natural gas play as well as the largest oil play in the United States in the 2030s. Gas to oil ratios will naturally continue to expand, secondary zones in both the Midland and the Delaware Basins are gassier than what operators have targeted to date and there are gas-weighted exploratory zones that have not even been tested yet given the perpetual egress issues out of this basin.

As for Diamondback’s strategy, our goal is to continue to control more of our gas further downstream to a mix of end markets, primarily feeding the Gulf Coast LNG complex. We are working to build relationships with LNG players who are long offtake and short physical molecules. There should be beneficial deals to get done with those companies in the coming years. We also believe in-basin and in-state power demand will continue to grow, driven by both behind-the-meter power development and the expansion of the Texas grid.

At the highest level, the gas theme in the Permian Basin has moved from supply-push to demand-pull, which should be beneficial to the owners of the molecule long-term and therefore Diamondback stockholders.

3. West Texas AI / Power / Infrastructure Buildout

We believe that the incremental large-scale data center development in the United States should go through West Texas and that Diamondback can be an integral part of that value chain without overstepping our core competencies. In our mind, our Company owns or has access to all the key components of data center development:

Fuel: We have significant natural gas reserves that we control. These can grow if needed. Land: We own surface in areas conducive to development and know how to strategically grow our position. Water: We are invested in and understand the water business, which is vital to our upstream business and becoming increasingly important as industrial use cases including data center and power cooling needs grow. Deal Execution: We have a long track record of sourcing, structuring, financing and integrating transactions across our value chain. Since our 2012 IPO, Diamondback, along with Viper, have successfully completed approximately $60 billion in trades across dozens of transactions, and in parallel, have formed, scaled and successfully exited joint ventures in midstream and water infrastructure, creating value beyond the drillbit. In short, we know how to get deals done, upstream and non-upstream alike, that benefit our stockholders.

Therefore, we believe companies like Diamondback with credible projects will continue to rise to the top. Our hope is to build relationships and partnerships across this space that put us in the middle of the AI revolution, and we think a company like ours can add significant value to advancing this mega-theme.

We have already developed significant relationships with strong, reliable partners in working our first project. We expect these partnerships to grow, but also see room for more. West Texas has a significant amount of private land, an abundance of fuel for power and our industry (Diamondback in particular) knows how to build things with unmatched efficiency. Diamondback’s own production has grown more than 330x since 2012 – a growth rate competitive with the tech industry that is naturally intersecting with ours.

Barnett / Woodford Update

We received significant market curiosity after revealing our Barnett position in the Midland Basin earlier this year. Since that announcement, we have grown our position to 224,000 net acres, up 12% since February. We are also entering a period of increased activity in the play as we move to full-field development so we can maximize capital efficiency while honoring lease obligations.

When we revealed our position, we told our investors we needed to work the well costs down to $800 per lateral foot for the play to be competitive with our core program. We are on our way to this number, with drilling costs down over 10% per lateral foot year-to-date including a recent well below $350 per lateral foot. Completion costs have also been reduced to below $400 per lateral foot as we have moved to large pad simulfrac operations on most current and future Barnett projects.

Recent well results also continue to increase our excitement about the Barnett. Today we revealed data around our best wells in the play on slide #11 of this quarter’s investor presentation, which had previously remained private as we worked through our leasing program. This performance, combined with our improving cost structure, further strengthens our conviction in this emerging opportunity.

Governance

In September, we disclosed an agreement with our largest stockholder, SGF FANG Holdings, LP (“SGF”), to revise the stepdown thresholds for SGF’s board designation rights. In connection with SGF’s most recent stock sale that reduced its ownership below 25% and reduced its corresponding right to designate board members from four board members to two board members, we essentially agreed that SGF could continue to designate two board members for so long as it owns at least 10% of our outstanding stock.

The Diamondback Board now has 11 members, in line with S&P 500 and large-cap energy peer averages. We believe this size balances breadth of expertise with cohesion. While we have two Board members who are SGF designees and nine who are not, we feel we are one Diamondback Board with a unified strategy to drive stockholder value while ensuring our largest stockholder feels appropriately represented on the Board with two well-qualified members who collectively bring over 75 years of experience in the oil and gas industry. We believe this is best-in-class governance.

Macro Update

The macro backdrop is almost exactly as we described last quarter: highly volatile and impossible to predict. The timing of the eventual global oil supply normalization is anyone’s guess, and we therefore expect the current volatility to continue. Through this volatility, our priorities remain unchanged: execute with the best capital efficiency in the industry and allocate Free Cash Flow appropriately to maximize long-term stockholder value.

Third Quarter 2026 Operational Performance

Third quarter oil production averaged 525 MBO/d, flat with the second quarter and above the midpoint of our guidance range. Total production for the quarter averaged 1,034 MBOE/d, up 2% quarter over quarter. Third quarter cash capital expenditures were $1.03 billion, within our $950 million to $1.05 billion guidance range. With one quarter remaining, we have updated our full-year 2026 oil production guidance to ~524 MBO/d, total production guidance to ~1,015 MBOE/d; and our full-year capex guidance to approximately $3.95 billion to $4.00 billion.

Fourth quarter guidance is 518 to 528 MBO/d (1,025 to 1,045 MBOE/d) on $1.00 to $1.05 billion of capex. Our current expectation for activity in 2027 is to run five electric simulfrac fleets consistently for maximum efficiency while running enough rigs ahead of those crews to maintain the execution buffers one would expect from Diamondback.

On the drilling side, our blended cost per lateral foot rose in the quarter as the program shifted toward deeper Barnett and Wolfcamp D targets, which now make up roughly a fifth of the wells we drill. On a like-for-like basis, drilling costs per foot in each formation remain flat to lower than a year ago. In total, we drilled 105 gross wells and completed 135, with average completed lateral length up roughly 13% quarter over quarter to 13,584 feet per well. Our completion crews finished 1.86 million lateral feet, 10% more than last quarter, at a cost per lateral foot essentially flat with both the prior quarter and a year ago. These results absorbed higher diesel, sand and water costs, consistent with the inflation pressure we flagged last quarter in casing, fuel and fuel-adjacent items. Service pricing outside those categories has remained largely stable, but it is logical that inflation could build if oil prices stay in the triple digits and the Permian rig count keeps rising. We expect any increase to be more modest than the 2022 upcycle, when rig activity surged while supply chains were still recovering from the pandemic. We continue to challenge our teams to offset cost pressure with efficiency gains in the field; we expect those gains to materialize, but the net effect will depend on the macro environment.

Technology is increasingly part of how we deliver these results. Artificial intelligence continues to grow in importance to our daily operations. We now have ~500 plunger-lift wells, about a third of our current count, that run autonomously, and we expect to convert the remainder in short order. We are also in the early stages of integrating drones into our field operations where the drones can identify issues ahead of human interaction, improving human efficiency and reducing corporate downtime.

These gains are visible in our unit costs. Lease operating expense was $5.97 per BOE, flat with the second quarter and roughly 4% below the first quarter, and total cash operating expense was $10.91 per BOE, down slightly from $10.96 in the second quarter and about 3% below the first quarter. Behind those numbers is a production organization doing more work at lower unit cost: our well-maintenance teams completed 1,448 jobs, 19% more than in the second quarter, at an average cost per job roughly 10% lower. Additionally, electric submersible pump repair costs are 14% less on average. Keeping downtime and the workover backlog in check as our well count grows is what is holding lifting cost down.

Third Quarter 2026 Financial Performance

We generated $2.6 billion in net cash provided by operating activities in the third quarter, which translated to $2.1 billion of Free Cash Flow. Cash capital expenditures of $1.0 billion represented 39% of net cash provided by operating activities for the quarter and 37% year to date. Our corporate reinvestment ratio (defined as cash CAPEX divided by Operating Cash Flow Before Working Capital Changes) was 32% for both the quarter and year to date, meaning two of every three dollars of cash flow we generated this year have been converted to Free Cash Flow.

Since the Endeavor merger closed eight quarters ago, oil production per share has increased every quarter and is up 15% over that span. Year over year, oil production per share has grown 7.5% on absolute oil growth of 4%. Year over year, net cash provided by operating activities per share has grown 12.5%, and Free Cash Flow per share has grown 26%, with our diluted share count down 3%.

Capital Allocation

Earlier this year, we removed our commitment to return a minimum amount of Free Cash Flow on a quarterly basis to stockholders. Since then, we have focused on taking advantage of what the market gives us. We have repurchased $1.1 billion of notional bonds outstanding for ~$970 million (including accrued interest) this year. It is rare for an E&P to be able to do this pro-cyclically. On top of that, in 2026 through September 30, we have reduced total debt at Diamondback (excluding Viper) by approximately $1.5 billion, to $11.0 billion, and net debt at Diamondback by approximately $2.0 billion. On a consolidated basis, total debt has decreased approximately $1.3 billion and net debt approximately $1.7 billion this year through September 30.

"Ground game" has been a hot topic in the Permian Basin this year, and Diamondback has always prided itself on executing deals of all sizes. Year to date, we have executed 34 acquisitions for $406 million, adding over 28,000 net acres and 95 net locations, and closed 10 trades covering more than 20,000 net acres. While each deal is small relative to our enterprise, in aggregate they matter: this year's ground game activity has added 1.9 million lateral feet to inventory, replacing roughly a full quarter's worth of completed footage. Every one of these deals creates value for our stockholders through higher working interest, longer laterals and extended inventory duration – little wins that add up year in and year out.

We also saw periods of stock price weakness in the third and early fourth quarters, and we took advantage of this weakness and bought back 1.7 million shares at an average price of $186.11. As we continue to generate cash flow at what we believe are above mid-cycle commodity prices, the “top” that we use to ensure we buy back stock at an accretive value relative to mid-cycle commodity pricing and our cost of capital will continue to go up – accreting value to the stockholders long-term. On the other hand, we are also preparing our balance sheet to be able to be aggressive on stock repurchases at the appropriate time of the natural commodity cycle.

Lastly, today we announced we increased our base dividend by over 7% to $4.72 per share annually from $4.40 previously. As a reminder, base dividend growth remains a core tenet of the value proposition at Diamondback and our base dividend is now up over 9x since initiating at $0.50 per share in 2018.

In closing, we continue to execute exceptionally well on the base business. This execution and the trust we have in our team frees us up to think more strategically about the future of the Permian Basin and Diamondback’s role in that future. We gave you a glimpse into that thinking today, see exciting things on the horizon and will update our stockholders as we progress on these initiatives with the transparency you should continue to expect from us.