Diamondback Energy, Inc. (NASDAQ:FANG) Q1 2026 Earnings Call Transcript

Diamondback Energy, Inc. (NASDAQ:FANG) Q1 2026 Earnings Call Transcript May 5, 2026

Operator: Good day, and thank you for standing by. Welcome to the Diamondback Energy First Quarter 2026 Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Adam Lawlis, VP of Investor Relations. Please go ahead.

Adam Lawlis: Thank you, Cory. Good morning, and welcome to Diamondback Energy’s First Quarter 2026 Conference Call. During our call today, we will reference an updated investor presentation and letter to stockholders, which can be found on Diamondback website. Representing Diamondback today are Kaes Van’t Hof, CEO; Danny Wesson, COO; Jere Thompson, CFO; and Al Barkmann, Chief Engineer. During this conference call, the participants may make certain forward-looking statements relating to the company’s financial condition, results of operations, plans, objectives, future performance and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors.

Information concerning these factors can be found in the company’s filings with the SEC. In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I’ll now turn the call over to Kaes.

Kaes Van’t Hof: Thanks, Adam, and welcome, everyone. As with the last few years, we’re going to go straight into Q&A. So operator, please open the line for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Neil Mehta of Goldman Sachs.

Neil Mehta: Yes. So I guess the big development here today that you’ve been signaling is the move to a green light framework from yellow light, adding the 2 to 3 rigs and moving to the fifth completion crew. So maybe you can just take a moment for the investors on the line to talk about the thought process that went into this decision and just how you’re thinking about where and when to add activity?

Kaes Van’t Hof: Yes, Neil, I mean, it’s a good question. I think there’s some macro elements as well as some micro elements and we’ll go through both of those. I think from a macro perspective, obviously, there’s a clear market signal. We’re 2 months into the world’s largest oil supply disruption in history. And I think Diamondback and Diamondback shareholders are very fortunate that we’re solely based in West Texas, we’re kind of tourists in this situation, but it’s obviously very serious situation with a lot of oil supply off the market. And so if that isn’t a signal to grow production and an advantaged area like the Permian Basin that I don’t know what is. And we hope there’s a resolution to the conflict. But even if there is, there’s a lot of noise in the system and a lot of barrels that have been taken off the market.

So that’s kind of the macro signal that we’ve been looking at as a Board and the management team, Obviously, global inventories are starting to decline very rapidly, and we’re going to do our small part to add some production into the mix. And then you go down to the micro level or the Diamondback level, I mean, listen, with the best inventory, quality and depth in North America being executed at the best cost structure. If this isn’t the time to grow now, then I don’t know when it is. And so that decision at a micro level was honestly fairly easy. And I think the last piece about it is we’re able to do this in a very capital-efficient manner and get it done very quickly. Because we have this backlog of DUCs and we prepare our business for up, down or sideways, we’re able to just make one decision and had a frac crew a lot earlier in the year and get that production up immediately.

So I think it’s a testament to the team’s preparation, everybody in the organization working together and be able to do this very, very quickly, whereas I think in other organizations, it might take a little longer to make that decision.

Neil Mehta: And then the follow-up is just on the return of capital framework. You didn’t move away from the fixed framework in while you bumped the dividend, you indicated that you might be slowing down the buyback a little bit. So can you talk a little bit about that what you intended to communicate with that? And then there is a very concentrated ownership base here and if the family ultimately is going to sell into the market or sell down their stake, do you still view Diamondback as a logical buyer to help offset that potential risk on the stock .

Kaes Van’t Hof: Yes. I mean, let’s take it a little higher level, right? I mean I think allocating capital is the most important job we have to do as a management team. And the history of the return of capital program for both ourselves and the industry was put in place after the COVID near extinction events of the industry and investors said, “Hey, I will my money back and I wanted in a formulaic manner. And I think that’s worked very, very well over the last few years. And I don’t expect our ability to return capital to stockholders to change. We just want the flexibility to make more cyclical moves versus moves within a 90-day window within a quarter. So we have a really, really good track record of buying back our own stock.

We bought back 42 million shares for $6 billion to date at $148 a share. Clearly, with the stock where it is today, that’s a very positive rate return for our stockholders, and I expect that to continue. We recognize you also have a large shareholder that we found a way to help monetize their stake in a very efficient manner. And I think outside of their stake, they’re most focused on us creating long-term value. and allocating a ton of free cash to the balance sheet in times of extremely high oil prices does create long-term value with , in our mind, a higher floor for the stock long term. So I wouldn’t expect anything to change. We have a great relationship with the family. I think we have the ability to help them monetize. And if we use kind of excess free cash flow over the next couple of quarters to pay down debt, we can help monetize their stake actually more efficiently coming out of this.

They’re long-term holders, and they want the stock higher.

Operator: Our next question comes from the line of Scott Hanold of RBC Capital Markets. .

Scott Hanold: We all had some pretty robust production performance in 1Q. And based on our chat last night, it sounds like you’re — completions are playing. Can you just walk through some of the specifics why performance was so strong? It sounds like there was a lot more well performance just versus any other kind of dynamic just give us a little bit of thought on that. And is that something we should anticipate moving forward and what’s embedded in guidance? .

Kaes Van’t Hof: Yes, Scott. I’ll give a couple of high level and I’ll let Danny talk about some of the details, but high level, our well performance year-to-date looks up relative to last year. And I think that it’s probably a surprise even to us internally, but we’ve always continued to try new things in terms of completion design, and efficiency that I think is starting to pay dividends. So I think that’s helping. That’s one thing. I think the other side of the business, the production side of the business, which we’ve been talking a lot about over the last couple of quarters, there’s just kind of A lot of good things happening in the field in terms of less downtime, more automation, call it AI, call out automation impacting that side of the business. So I think better wells and lower downtime, that’s a good recipe for production beat.

Daniel Wesson: Yes. Scott, kaes alluded to it, but we — post the Endeavor merger and getting the team together, we started trading a lot of ideas on what we were doing to really optimize primary completions as well as the base, and we’ve talked about it over the past few quarters, but some of the things we’re seeing on the completion optimization side with perforating strategies, rate design and sand loadings we think we’re seeing some uplift in the wells and time will tell as we continue to implement that completion design. But also on the production side, some of the stuff we’re doing on the workover side, some of the acid jobs, the coring to oxide jobs, the [ surfactant ] jobs, we’re starting to see that pay dividends. And and really layering on that machine learning, as we continue to look at our data streams and processes and and layered on machine learning and trying to start working towards implementing AI into our field operations, we’re seeing that downtime come down, and it’s been a big part of our — of the beat in Q1, just really that little bit of optimization across the board starting to show through to the top line number.

Scott Hanold: Great. And as my follow-up, when you guided oil and you talked about like a — it looked like you’re referring greater than 1050 a day. Can you just talk through if you continue to see this macro environment, is there how much desire is there to kind of continue to let that oil production grow versus curtail it? And is there a scenario where you actually even look to step it up even higher if the macro continues to be heightened.

Kaes Van’t Hof: Yes. I mean it’s a great question, Scott. I think it’s kind of a — it’s a very fluid situation, and I think the board wanted us to take this kind of quarter-by-quarter. Obviously, if there’s outperformance and then we still have triple-digit oil prices and the market is still calling for oil to come to market. And I think this is a year where instead of pulling back activity, you kind of just keep the efficiencies going and production continuing to climb. But listen, it’s going to be it’s going to be fluid, right? We’re only 2 months into this conflict and it could be resolved today, but — and who knows what happens in the macro. So I think we’re just ready to react. We still have some things in our back pocket to grow further. But for now this kind of 520-plus 000 barrels a day on oil is the new baseline.

Operator: Our next question comes from the line of Neal Dingmann of William Blair.

Neal Dingmann: My question is also on your activity. Specifically, case, how much, if any, will at negative Waha prices impact what you might or might not do? And then the same question with oil service prices and maybe ask about are you expecting [indiscernible] inflation given what’s going on with prices?

Kaes Van’t Hof: Yes, Neal, I mean on the Waha side, obviously, the pricing is deeply negative. We’re well protected with financial and physical hedges our mix of physical to financial is going to be moving more towards physical when these 2 new pipes come on, hopefully, second half of the year. So I think we’re pretty well protected to get through this tight spot from a financial perspective where we can continue to add oily inventory, right, where we’re drilling some of the oilier stuff in the basin. So I think we’re pretty well protected there. We’ll continue to work on our physical protection on the gas side. We’ve worked on a power project now for almost a year, and we’ll see if we can get that done. But we talked at length about monetizing our gas, and we’re kind of on the cusp of that. That’s starting to happen here when these pipes come on. But Danny, on the service side, what are you seeing?

Daniel Wesson: Yes. I mean we haven’t really seen much pressure to date on the service inflation or service pricing side of the story. It’s really a capacity question and what does the service capacity look like and haven’t seen industry activity ramp aggressively the release first couple of months of this conflict. And so there’s still quite a bit of capacity out there in the rig space and in the completion space. And — we’re — the calendars are not squeezed enough yet for them. I feel like to be able to push pricing on to the guys when they go out and look for this additional equipment. We have seen obviously some inflation in some of the consumables and things that are tied directly to the commodity price. But those have been pretty minimal thus far, and we’ll just have to see what activity does. — not only in the Permian, but in the Lower 48 to see what we anticipate service inflation to do through the rest of the year.

Neal Dingmann: And then second question just on capital allocation, especially given the continued record free cash flow growth per share you’d likely have a just wondering specifically, how do you believe capital for M&A stacks up maybe against buybacks or simply the near-term debt repayment, I mean do you factor that in? Or maybe just talk about capital allocation.

Kaes Van’t Hof: Yes. I mean, Neal, I think my first day and my first finance job in New York City, I was asked the question. What can the company do with their free cash flow. And if we’re going to go through all the options, you can grow, right, either organically or inorganically. So organic growth, we’ve decided to hit that lever today in a small way by going to the top end of our CapEx guidance. Inorganic growth, which is M&A. We’ve obviously been very, very good in M&A over the years. I think this volatility is kind of difficult to get deals done, private or otherwise. So I think generally, M&A is probably fairly quiet at Diamondback for the foreseeable future. Then you go down the other options of what you can do with your free cash, you can pay up as dividends, which we did and decided to increase today.

or you can pay down debt, buy back shares or you can just put the cash in the balance sheet. And I think with oil prices where they are, I don’t know if investors are capitalizing this price environment yet today. And so for us, the bigger use of free cash is going to be to pay down debt rapidly and convert that debt value to equity value in our NAV and keep some cash for a rainy day because this is a very volatile environment, and it can it can flip pretty quickly.

Operator: Our next question comes from the line of Arun Jayaram of JPMorgan Securities.

Arun Jayaram: Case, the calendar ’26 and ’27 strips are around 90 and 75. How do you think about your approach to development in a much stronger oil price than we sat just, call it, 90 days ago. And I was wondering if you could just maybe highlight for the 2 to 3 incremental rigs, how does — how are you thinking about capital allocation across your asset base? And is the deeper benches now an area that are now competing with capital as you get down some of those well costs in the Barnett?

Kaes Van’t Hof: Yes. I’ll let Danny and I’ll talk about latest far net developments. But just from a capital allocation perspective, even with higher commodity pricing we’re still going to hold to the vast majority of our spacing assumptions throughout the basin. We always got to look at each project, and that’s kind of on a DSU by DSU level basis. and kind of say, “Hey, let’s get as many wells in this section as possible to where the incremental well, the last well that we had generates a 40% rate of return at $60 oil. And so we think that provides prudent spacing, but also a solid rate of return to our shareholders despite the commodity price volatility. So I think drilling our best stuff first and sticking to that knitting in terms of spacing is going to continue.

Clearly, the Barnett, particularly with the size of these wells from a production perspective generates more PV today, so that’s getting more attention. But Al, do you want to give anything on the latest Barnett?

Albert Barkmann: Yes, I think that’s right, Arun. I mean looking at the acceleration of the plan coming in with these 2 rigs, really that’s the acceleration of the Barnette [indiscernible]. And we’re focused on that development and really, it’s just kind of getting ahead of the Barnett obligations that we talked about last quarter.

Kaes Van’t Hof: Yes. And I’ll just add that the Barnett activity and the obligation activity is almost entirely focused on the JV area that we have with another partner. And those wells are not as high working interest. They’re about half and half, a little bit heavier weighted on the Diamondback side. So the 2 or 3 rigs are picking up on the Barnett activity to get ahead on the JV area is really like 1.5 net rigs at Dynamex. So well, the top line looks like we’re adding a bunch of activity in the back of the year. Net to us, it won’t be nearly as impactful.

Arun Jayaram: Yes. Great. My follow-up is maybe for Jere. You guys have taken, call it, pro forma debt, I believe, net debt down to $12.7 billion, Jere, I was wondering if you could highlight, given the intention to pay down more debt and a higher commodity price environment, what are some of the targets you’re looking for, for the balance sheet from either a gross or a net debt perspective?

Kaes Van’t Hof: Yes, Arun, great question. I think we’ve talked previously about hitting that $10 billion net debt figure sometime in the next 12 to 18 months. Obviously, with where we are from a commodity pricing standpoint and some excess free cash flow generation, it looks like we’ll be able to hit that much earlier to the tune of a couple of months from now. And then as we move into the back end of the year, I think we’ll have an opportunity to not only reduce net debt but also gross debt. So like we build cash on the balance sheet through the fourth quarter. And then once we get into the fourth quarter, take a look at, obviously, calling our $750 million of [ $26 million ] is outstanding. And then as we move into 2027, take a look at maybe doing a larger liability management exercise with additional cash on the balance sheet.

With the idea of trying to take out as much as we can from a near-term maturity perspective, particularly as it relates to anything that matures prior to 2030. So I think we’re in a really advantaged position to move our balance sheet from a position of strength to really kind of an adjective of fortress, and we can do that in the very near term.

Operator: Our next question comes from the line of John Freeman of Raymond James.

John Freeman: Even after increasing our activity the reinvestment rate for you all still fell pretty sharply from what you are originally planning last quarter from 44% to 34% at the current strip. So obviously, you’ll have the ability if you wanted to even increase activity more and still would have likely had kind of an industry-leading kind of low reinvestment rate. I know that returns ultimately drive all decisions, but is there like a reinvestment rate that you all just want to stay below regardless of kind of the commodity environment?

Kaes Van’t Hof: John, I mean, that’s a good question. I mean I think I’d probably take it a little different direction where obviously, we’ve been pulling investors that own the stock to get their opinion on how they feel about growth and ramping activity. And I think the general consensus was Yes. I think a little growth in the plan will differentiate Diamondback and makes a lot of sense. I just don’t want you to do it in a capital inefficient manner. And so if you think about what we’re basically doing here, we were going to run somewhere between 4 and 5 frac crews in the model to hit our original guide. And that fifth frac crew was going to go away for 5 or 6 months and then come back. And it’s a Halliburton e-fleet, simul-frac as efficient as it gets crew.

And so we’re just bringing that crew back and going to run the 5 crews essentially consistently. And I think that will ensure we maintain capital efficiency in the field versus trying to go too fast too soon. which sometimes drives — has driven some inefficiencies in E&P’s plans and Diamondback plans in years past. So I think trying to learn from the history of development in this basin, staying capital efficient is probably the priority and I think the reinvestment rate becomes the outset of that. .

John Freeman: That’s great. And then just along those same lines, I know the original 2026 plan didn’t forecast sort of any meaningful draws or builds. can you just give us a rough idea of kind of how that looks now with the new plan? .

Kaes Van’t Hof: Yes.It’s kind of a story through the year, right? So we’re going to draw down the DUCs and backfilled that with 2 rigs worth of activity to make sure we build our DUC balance back up, we’re basically repeat it a little over 200 DUCs in Q1. That number is going to come down over and then the backfill rigs start to build that back up. So in general, and Danny can opine, but we’re going to have to keep a little bit higher DUC balance than we would running 4 crews because we have — we like to have 2 projects behind each crew ready to go because if something that happens and we just moved to another project, and it looks like everything is going great at Diamondback on a quarterly basis. So probably need to maintain somewhere in the high hundreds, around 200 DUCs and — that’s kind of where we are today, but there’s going to be some movement throughout the year.

Albert Barkmann: Yes. I mean we like to keep kind of a quarter to 1.5 quarters worth of inventory ahead of each crew just so that we can have flexibility if we run into an issue on a pad with takeaway constraints or something like that. And so if you think about each of these crews we’ll do about 100-ish wells a year, maybe a little more. And so to Kate’s point, he hit the nail on the head, a couple of hundred wells ahead of these 5 fleets is kind of the right carry number of the DUC balance. But Obviously, the more efficient we get and the guys are always chasing the efficiency curve, and you can see it in — I think it’s Slide 9 in our deck today, the improvement quarter-over-quarter and as the crews get more efficient and get more wells done, it either means we got to release crews to keep the same well count or we got to build more DUCs to stay ahead of them.

So it’s a dynamic and fluid situation, but I think we’re talking about adding 20 to 30 wells for the year in total. So — and still being able to stay within our original guidance window, which we took the momentum from Q1 beat and just kind of kept it going through the rest of the year.

Operator: Our next question comes from the line of Betty Jiang of Barclays.

Unknown Analyst: I actually want to ask about your crude oil marketing. So 1Q pricing was a bit stronger. Can you just remind us your exposure to premium price indices and yes, the marketing strategy in general on the oil side? .

Kaes Van’t Hof: Yes. I mean, from a strategy perspective, Betty, we learned from the kind of the Permian takeaway crisis of what was in 2018 that we needed to use our balance sheet to get our crude to the biggest markets. And for us, that was — let’s get more crude down the Corpus Christi and — as well as Houston. And so we have — if you remember, we invested in 3 pipelines. Epic [indiscernible] and Weatebster, all of which made our investors a lot of money, but also protected Diamondback from a commercial perspective. So we have about 300,000 barrels a day going down to Corpus on EPIC and Gray Oak. And then we have about another 100,000 a day going down Wink to Webster, feeding kind of refinery row in Houston. And so we’re kind of pretty exposed to, call it, water-based pricing, even have 1 small contract that had some dated Brent exposure.

So that’s been really helping us out. And I think I think that’s a good playbook for what we’re going to try to do on the gas side, right? I think we’re a little behind because oil is 90-plus percent of our revenue, and we’ve done a good job there. But the next trend is to improve that on the gas side. SP579192376 Got it. That makes sense. And then I want to ask about the acquisition line item in 1Q, there are just a few hundred billion. Are you guys seeing any organic acquisitions and maybe picking up bolt-on things that the pricing yes, can you just speak to that. .

Jere Thompson: Yes, Betty, this is Jere. There’s a couple of small acquisitions that are in our backyard in the Midland Basin. As a reminder, in that line item, we do have capitalized interest and capitalized G&A., and that made up the vast majority there. So that plus a couple of small acquisitions and then let’s call it $50 million to $75 million in leasehold files as well.

Operator: Our next question comes from the line of Philip Jungwirth of BMO.

Phillip Jungwirth: Can you talk about how you’re viewing Viper ownership and what’s optimal for Diamondback just because you did sell some in the quarter, but still own 39%. The company’s free cash flow outlook is obviously stronger so less need for divestitures. Is there any minimum level of ownership you kind of look to maintain? And how does that play into the overall capital allocation decisions?

Kaes Van’t Hof: Yes. I mean we did sell down a little bit of ownership in Viper. It’s kind of a follow-on from the drop-down where we took the Diamondback side took a lot of stock from Viper in that deal. We could have probably taken more cash, but instead decided to wait and then sell a little bit here last quarter. I would say we’re we’re done selling Viper shares at Diamondback. I do think the growth opportunity set for Viper is pretty significant. So could there be a world where Diamondback’s ownership is reduced through dilution. I think that’s possible. But no desire today to monetize any more shares. I think if you just think about where both companies are going to be from a balance sheet perspective in another few months, they’re going to be well positioned to kind of do anything from an M&A perspective, and that’s where we want it to be.

Phillip Jungwirth: Okay. Great. And then in the 2022, ’23 up cycle, private operators, they did drive an outsized share of rig additions overall oil growth. You guys have a unique view here being based in Midland. I’m just wondering how you’d characterize the ability to privates in the Permian to respond to what we’re now seeing as far as higher oil prices versus a couple of years ago just because it also has implications for tightening of OFS markets?

Kaes Van’t Hof: Yes. That’s a very important question and it’s gone into our calculus on thinking about the market and thinking about adding activity. If you go back to that 2022 up cycle, you had a company like Endeavour that’s now part of in Diamondback — part of Diamondback, they went from 2 rigs to 15 rigs. The Crown Rock went from 2 rigs to 8 rigs. That’s now part of Oxy in-cap North, which is now part of [indiscernible], went from 2 rigs to 6 rigs. Double Eagle is now part of us, combinations and Exxon went from 1 rig to 6 rigs. I mean, these were big moves on the private side. And back then, there was still a lot of private activity growth, particularly in the Midland Basin that has now been consolidated. . So I think there’s going to be private growth.

I mean the private model has shifted to more of a smaller asset packages that they develop very, very quickly, farm in the larger operators positions there’s been a big growth in kind of that northern New Mexico area. But by our math, right, that’s 20, 30 rigs. It’s not 100 rigs like it was in 2022. So I think they’re going to move very quickly. I just don’t think the volume impact will be nearly what we saw in that 2022 time frame.

Operator: Our next question comes from the line of Scott Gruber of Citigroup.

Scott Gruber: Maybe I’ll extend upon the last line of inquiry kind of in light of what you just mentioned about the impact of the private case. How do you think about Diamondback volumes, say, over the next 5 to 10 years on an organic basis, do you think about Diamondback kind of being a in modest kind of growth mode over the next 5 to 10 years? And this may happen kind of step-wise when called upon by the market. But do you step higher during periods of elevated prices right today and then maintain that need level that net-net, you’re growing? Or when commodity prices are soft, you you pare back on activity and let production fade back down? Just curious on how you think about the longer-term trajectory? .

Kaes Van’t Hof: Yes. I mean, is Scott, I think I’d go back to my earlier comment that the operator with the best inventory quality and the lowest cost structure with the longest inventory depth probably has the right to grow organically and the right to do that and creates shareholder value. So I think we’ve been talking about trying to hit the organic growth accelerator for a while now. We just haven’t had the macro conditions to support it. But I think in a world of — and who knows what’s going to happen where mid-cycle pricing is a little higher, call it, 70-plus on WTI, 75 plus. I think that’s a world where from a total shareholder return perspective, a couple of percentage points of organic growth really adds to the NAV of the business and adds to the long-term free cash generation.

And that’s going to one of the important points that we ran in the model this year was that this new plan generates more free cash flow in 2026 per share than any other [indiscernible] — sorry, more free cash flow per share than any oil price above $60 oil. And so a $70-plus world, this is advantageous to shareholders long term.

Scott Gruber: It would certainly help differentiate Diamondback. And then turning back to the capital efficiency of the investment program. It does appear to improve on the margin with the the updated plan, but it’s hard to separate the [indiscernible] impact from adding rigs in the Barnett, where you’re still ramping on learnings and efficiencies. So just in general, how would you describe the kind of underlying trend in capital efficiency especially as you lap the impact of the doctor, I’ll say, kind of into 2027, do you think you’ll be able to show improvement kind of relative to the initial program this year?

Kaes Van’t Hof: Yes. Listen, I think things like duck draws and bringing back DUCs [indiscernible], when you develop, I mean, I think that’s all kind of noise, right? So below that noise, the team is executing flawlessly. I mean we said records on the drilling side on 2, 3, 4-mile laterals, Wolfcamp D development, we gave the team a goal of $300 a foot for drilling down from $360 a foot drilling last year. They’re already at $300 a foot. Barnett drilling, we said the drilling guys need to be below $400 a foot to be able to get to $800 a foot to make the Barnett competitive with the base program, while we already put a well in the ground under $400 a foot. So I think at the highest level, the business is firing on all cylinders, efficiencies continue to improve above ground, but the big move also is going to be are we drilling and completing actually better wells, subsurface.

And those are all the drivers that — that separate the noise of — or are you drawing down DUCs this quarter or this month versus years past, and that’s the long-term benefit to capital efficiency.

Operator: Our next call comes from the line of Derrick Whitfield of Texas Capital.

Derrick Whitfield: Perhaps for you, just regarding your share buyback and its guiding principles, where do you view mid-cycle pricing now in light of the current Middle East conflict and the risk premium associated with that? And could you speak to what you’re seeing in degradation of inventory quality across the Permian, clearly behind down and back .

Kaes Van’t Hof: I mean I’ll take the macro question first, Derrick. If I wasn’t long-term bullish, I’d be out of a job, right? So I guess we have to be long-term bulls, but but also think about in practical terms, where the situation is right now. And within 3 months, we went from the projected largest oversupply in history, which I think we can debate was not going to be the case to now the largest undersupply in history, and we’re only 2 months in. So I think it’s hard for us to move off our mid-cycle pricing environment, which is kind of a mid-60s TI kind of mid-teens NGLs and $3 gas, obviously with Waha dips. But there’s certainly a case to be made for energy security becoming a much more important being for the — for countries around the world to think about, I guess, wearing my oil hat, that probably means more storage, more landed storage versus storage that you can buy somewhere that’s in a riskier geopolitical area.

I think that means the U.S. barrel is more important than it’s ever been. But again, I think it’s early for us to say mid-cycle pricing has gone up by [x ] — the way we do think about kind of our positioning relative to U.S. shale and where U.S. shales mid-cycle pricing is going is that we do believe the cost curve is going up. We do think operators have done a really good job with efficiencies, longer laterals, better development, but geologic time catches up to you, and there are certain clearly signs of degradation throughout the U.S. in terms of production or productive quality. So we just try to keep ourselves at the low end of that cost curve. And I think we’ve done a very good job on that front, both from an inventory depth and quality perspective, but also the cost at which we execute on that inventory.

So I think we’re very well positioned — and I think it’s a little too early for us to go higher on mid-cycle pricing today.

Derrick Whitfield: Fair enough. And then as my follow-up, I wanted to shift over to the Barnett referencing the playout line on Page 16. How large could you reasonably grow this position beyond 200,000 that you’re highlighting on the slide deck. And you clearly have 1 of the most prolific buyers of assets and business working with us to certainly have that in our favor?

Kaes Van’t Hof: Yes. I mean we did announce this position after we thought we had a pretty solid position on what we could get. I do look forward to — we have continued to add to the position in Q1, small on a small basis. But I think what’s exciting is now we’re just starting to do a lot of trades. A lot of the big operators have their Barnett physicians, and we’re all now looking at how can we block up to 3-mile laterals, 4-mile laterals. There’s obviously a lot of private equity kind of the small Midland-based private equity that’s looking to build 6, 7, 8 section positions, those probably come to market. So I think it’s going to happen. I think the position is going to grow. But I think we have the sizable base we need to continue to grow it.

Operator: Our next question comes from the line of Kevin MacCurdy from Pickering Energy Partners.

Kevin MacCurdy: Can you provide any color on the cadence of the net lateral footage per quarter throughout the year and also the lateral length per well we would assume the additional 200,000 lateral feet is back half weighted, any color there would help.

Kaes Van’t Hof: Yes. So I think it’s going to be pretty evenly weighted here towards the back half, looking at Yes, we went up to kind of that 6.2 million lateral fee, right? So you’re — we’re looking probably at 1.5 to 1.6 per quarter for the back half of the year there.

Kevin MacCurdy: Great. And lateral lengths per well should increase throughout the year 2? Is that right? .

Kaes Van’t Hof: Yes. So looking at Q1, I think that was probably 1 of our lighter quarters, I think we were like 11.5% for Q1. And so we — for the full year of 2026. We still expect to be at 12.9%. So we expect that to ramp kind of going through the back half of the year.

Kevin MacCurdy: Got it. Appreciate that. And maybe as a follow-up, any updates on the surfactant [indiscernible]

Kaes Van’t Hof: Yes. So we had a big push for towards the end of the year last year, really wanted to get some tests in the ground and try some different surfacing combinations with some different rock types and understand what was driving the well performance there. And so we got those tests in the ground. We’re looking at it team studying it. And so we’re refining the process and plan to move forward with our next deployment kind of early this quarter. Yes. And Kevin, one thing I’d add to that, we tested 5 wells or so last year. On average, I think we got 100-barrel a day uplift but some wells were up by 400 or 500 barrels a day and some wells were 0. And now we’re trying to figure out what do we do right in the 400, 500-barrel a day wells and what do we do wrong in the 0s we’re going to figure that out.

This is version 1.0, and that’s what kind of gets me excited, like I think from a high level, this basin and Diamondback, we’re kind of on the cusp of some technological breakthroughs related to increasing recoveries past primary development. And I think that’s probably going to be a mega theme over the next 4, 5, 6 years that you’re going to see a lot of dollars in time spent on. And that’s kind of why we’ve held as much acreage as we have. We have some of the best oil in place in the basin. And we got some of the smartest people in the industry working on this to do what I think could be something that extends this basin’s life by a decade or 2.

Operator: Our next question comes from the line of [indiscernible] at Truist.

Unknown Analyst: Just going back to the return on capital framework and pursuing growth this year, which obviously makes sense. But just curious if you could maybe talk a little bit about what an upper bound of oil production growth would be for Diamondback. Again, assuming you have the green light on the macro. Is it fair to assume that it’s 5% for Diamondback? Or would there be an environment where it could be even higher than that?

Kaes Van’t Hof: Yes, I don’t want to get into a specific number. I mean, I think right now, we’ve already grown low single digits year-to-date. I don’t think there’s a ton of investor appetite for a large CapEx bump in something more than mid-single digits growth, but I think it’s early. I think there’s a lot of noise in the system and no one’s really sure how this macro is going to unfold. And that’s why I think we’re keeping our cars kind of close to the vest here. coming out with a good forecast in Q1, and we’ll see how the rest of the year unfolds. But just pulling investor appetite, I don’t think there’s a lot of appetite for something like the go-go days of 2017, 2018, we had multiple CapEx increases in a year and double-digit — mid double-digit production growth. So we’re going to keep it steady and capital efficient. And I think that’s what we put out there today and kind of take this macro kind of quarter-by-quarter.

Unknown Analyst: Got it. Okay. That’s helpful. And then a follow-up for me would just be, is there any update on your surface position in light of maybe a new market entry in that regard, Curious if there’s any update on the conversations you’re having there?

Kaes Van’t Hof: Yes, Kaes alluded to it earlier as it relates to our power project, but we’re still making pretty meaningful progress with our partners here and really view this power and data center opportunities is something that has a unique opportunity for us to use our natural gas in basin and advantaged pricing. I think once once we do get a project finalized, we’ll be able to talk about it in more detail, but it continues to move forward. .

Operator: Our next call comes from the line of Charles Meade of Johnson Rice Charles.

Charles Meade: As you and your team there. I’d like to go back to the — I think the big question this morning of the acceleration of CapEx. Can you give us kind of an inside baseball account of how that how you came to that decision? And I can imagine it could be the case that your Board left with the set amount of latitude or alternatively, is this kind of thing where you kind of arranged in short order, maybe telephonic or Zoom Board meeting and you just had a quick in meeting where you made the case and then activate. I’m not so much interested in the sort of all tops of your decision, but I’m more trying to get some insight into how the dynamics for work for you guys as a fast mover in response in this volatile [indiscernible].

Kaes Van’t Hof: Yes. I mean that’s actually a good question. There’s a couple of things I’d say. I’d say our board is a very is a very nimble board for its size, right? We have 13 board members, but they are very responsive, and they move relatively quickly, particularly when the decision is very obvious. And second, I would say just some inside baseball. We’ve tried to — I got some advice from Jamie Dimon last year, which was communicated with your Board often and tell them everything. And we just decided to overcommunicate with our Board through this crisis. Obviously, the crisis kicked off just a week after earnings, right? We have set the budget, but I think we sent 3 or 4 notes to the Board in March just to update them on how we’re thinking.

And then it was a simple meeting to get together ahead of earnings to make this decision. And I think the Board was — had resounding support for this plan. But that’s all insight based on how Diamondback works with our Board.

Operator: Our next question comes from the line of Leo Mariani of Roth.

Leo Mariani: Everybody, there’s been some discussion of some pretty weak Waha prices Wanted to get a sense whether or not you think that could be some short-term negative volume impact for the company? Are there some wells that have maybe a lower oil cut where you say, hey, maybe it’s worth setting some of those wells in for a little period of time here, just given how bad the gas price is? Or just any color kind of around that dynamic, how you’re thinking that would be helpful.

Kaes Van’t Hof: Yes. I mean, listen, at these NGL prices, we kind of think negative $3 Waha basically cuts out the value of your NGLs. And above that or worse than that, negative [ 4 and 5 negative 6]. You start to eat into the value of your oil production. Now oil is $100 a barrel, not $60, so it’s a little different math on should you shut in oil barrels because of Waha pricing. But I do think that, that’s happening throughout the basin, I think in an area like New Mexico with tighter restrictions on midstream development and flaring. That’s probably a question for others, but it’s probably something that’s happening. For us, if we go back to October of last year, Waha blew out due to some maintenance issues, we shut in 2,000 or 3,000 barrels a day of production for a period of time.

And then Waha came back and we brought that production back. I would bet we’re probably around somewhere in that range today with Waha as weak as it is. But it’s not impeding new development, particularly with the amount of hedges that we have on the financial side.

Leo Mariani: Okay. That’s helpful. It sounds like you still have flow assurance, this would be more of an economic decision for the company.

Kaes Van’t Hof: That’s right. Every molecule we produced has moved, it’s just moving at a negative price. .

Leo Mariani: Yes. Okay. And then just want to follow a little bit on what you got said on the growth part of it. Obviously, your guidance for the year on oil is a little bit open-ended with the 520,000-plus. Clearly, you guys did the 520,000 in [indiscernible]. It looks like your guys tell us we’re getting 520,000, again, you did talk about a little growth. So I mean, if the oil environment holds here, people should be thinking about probably that plus and a little bit of growth here in the second half of the year. Is that kind of a fair way to look at it?

Kaes Van’t Hof: Yes, I think that’s fair. Again, we’re going to take it quarter-by-quarter. I think this is a year where the plan is if we’re outperforming the plan, we’re going to hold activity and produce more oil into a market that needs it. .

Operator: [Operator Instructions] Our next question comes from the line of Doug Legate of Wolfe Research.

Douglas George Blyth Leggate: Guys, I wonder if I could come back to one of the comments earlier about the balance sheet. Jere, is it is it inconceivable that when we look out with no variable dividend taken out of the capital return structure, but your net debt balance sheet could basically go to 0 over the next 2 or 3 years. Would you allow it to go to that level?

Kaes Van’t Hof: Yes, Doug, I mean, that would not be a good problem to have. I think generally, we’re going to be transferring a lot of value from the debt side of the NAV to the equity side over this quarter, and who knows what happens after this as as we’ve kind of said, we’re going to take this quarter by quarter. This is — we’re early into this oil price environment should it persist and the stock continue to go up, then we’ll allocate less capital to buybacks and continue to put cash on the balance sheet. But at the end of the day, we know this is a cyclical business. And in this highly cyclical business, we want to have the ability to pounce on opportunities when the cycle turns. And then those opportunities could be M&A that could be buying back a ton of stock.

It could be leaning on your balance sheet to buy back stock. So I think the key term here is flexibility, but also long-term value creation because at the end of the day, we want to get to 0 debt. We want to get to 1 share outstanding, and it’s going to be a race between those 2 with free cash generation over the coming decades.

Douglas George Blyth Leggate: I appreciate that. My follow-up, Phil, is not so much about your growth than what you’re seeing from your nonoperated positions. And I guess this is particularly, it might be a Viper question. But Obviously, we’ve seen some private add rigs, and there’s a lot of nonoworking interest that basically can influence what happens to the growth story for you guys on a consolidated basis. How would you characterize that? What are you seeing on your non-op, I guess, request for [indiscernible]?

Kaes Van’t Hof: Yes. I mean, Diamondback carries very little not up, but Viper obviously sees half the wells in the basin round numbers. And I think we’ll talk about it on the Viper call, but early signs are nothing major on permitting, but the discussions that we’re hearing in the field in Midland are that rigs are getting picked up on the private side. I think if we had to give a rig count forecast for the Permian today, by the end of the year, we’re probably up 25, 30 rigs from where we are today. .

Operator: Our next question comes from the line of James West of Melius Research.

James West: I just wanted to — I know everything is pretty fluid right now and your kind of quarter-by-quarter, but you have to be thinking about a market that’s significantly changed in the last 60 days and an oil price that will be structurally higher. So understanding you’ve raised your guidance for this year, but how are you thinking about the out years and how you want to set up the company to either continue to grow at this mid-single-digit rate or not, ’27, ’28, ’29, I’m not looking for guidance, but just kind of how your longer-term thinking is evolving.

Kaes Van’t Hof: Yes. Obviously, we have to think about the long term. And I do think if we aren’t a higher for longer world, an advantaged company with advantaged inventory like Diamondback should answer the call for production growth in that higher for longer world. So I think that’s we don’t live in a vacuum that’s static, but if we did, I think, some sort of organic growth in the story moving this business from a steady-state kind of bonds like free cash generator to a free cash flow per share growth generator over the next few years into the into the decade. So long as it maintains capital efficiency, I think that’s something that investors would support. So Again, it’s early. We’ll see what the macro holds. But certainly, it feels like the world changed a lot since our last conference call.

James West: Absolutely. That’s very helpful. And then as you think about your inventory depth versus your peers, you guys are obviously in a leading position, but what would you consider your or how would you kind of phrase it your position versus probably the peers in the market today given the huge longevity we think you have?

Kaes Van’t Hof: Yes, we’re very fortunate. We have an incredible inventory quality and duration. But I’ll say that within Diamondback, we’re always looking for that next stick, right, whether it’s organic generation and Arnet development, Upper Spraberry development over the last few years or inorganic, this machine is built to do significant transactions like Endeavor, but also I don’t want 1 unit in the Midland Basin trading hands without Diamondback knowing that, that unit could be in our hands. So we’re set up to do the sub-$20 million deals, and the teams actually do a really good job at those, but also not so small that we’re not in the picture for every other deal that transacts in this basin.

Operator: Thank you very much. I’m showing no more questions at this time. I would now like to turn it back to Kaes Van Hoff for closing remarks.

Kaes Van’t Hof: Thank you, everybody, for your interest. We’re always available to answer any questions, just reach out to the number or e-mail on the notices.

Operator: Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect.