Analyst Note| Dave Meats, CFA |
Diamondback extended its exemplary track record for execution in the second quarter, posting volumes of 381 mboe/d for the period. That's about 2% above the midpoint of guidance, giving management the confidence to move the full-year goal posts in the direction slightly (2022 volume guidance was increased by about 1%). The firm's financial results were slightly better than consensus estimates, too. But like other E&Ps, it is grappling with inflationary pressure. Steel, labor, and fuel are significant inputs for Diamondback and these items have contributed to rising well costs. Much of this was anticipated with the prior budget, and was already incorporated in our model as well. The firm has been attempting to mitigate further cost spiraling by prioritizing electric frack fleets (which save money on fuel while reducing emissions in the field) and in some cases swapping high power rigs for cheaper alternatives. That's on top of marginal advances with casing and cement usage. The result is that the high end of the original budget was left intact, albeit with a minor increase at the midpoint. However, higher fuel costs also pushed up lease operating expense by $0.50/boe, and incorporating this weighs on our valuation. We have also now incorporated further well cost inflation in 2023.