The View from The Permian Basin

[dan_s]

Comments below are from Keith Kohl:

Looking at the macro picture, Diamondback’s CEO told us that the company has hit a
holding pattern. In other words, the goal for the company right now is to keep its oil
volumes relatively flat, and seek to grow its per share metrics through a reduced share
count; this is what Diamondback considers a “yellow” zone.

Think of it as a stoplight, as he put it. When things are green, production growth will
accelerate and it’s full steam ahead. Likewise, a red zone means that they’re going on
the defensive and reducing activity to preserve inventory.

We haven’t hit that full stop just yet, but if crude truly does find a home in the $50/
bbl range, you can bet this defensive strategy will be on the table (and not just for
Diamondback, either!).

As you know, current supply forecasts are all over the place. Depending on which
report is making headlines that day, global oversupply during the first half of 2026
ranges widely from as little as 500,000 barrels per day according to OPEC, or the IEA’s
wild fantasy of an oversupply of 4 million barrels per day.

You should know where we stand on these projections. Chances are likely we
won’t see either come to fruition, with OPEC underestimating supply and IEA
overestimating it (so it’s been for years).

One thing I CAN tell you with near certainty is this: Oil prices are dirt cheap at current
prices, and may be trading well below established breakeven prices in prominent oil regions like
the Permian Basin.

After all, this is what Texas drillers were warning us earlier this year in the Dallas Fed
survey that showed breakeven prices in the Permian were $65 per barrel. Even larger
oil companies require $61 per barrel to profitably drill.

And yet, these warnings have gone ignored as WTI prices languish right around $60
per barrel.

Getting back to Diamondback, the company’s Q3 oil production hit the top of the
company’s revised guidance range, and the key for drilling (in the U.S.) is now all
about efficiency.

We can see this directly in the company’s latest quarter. During Q3, Diamondback’s
average number of days from spud to total depth fell to 8.19 days — a new record for
them. Moreover, the average days from spud to rig release has improved by about 10
days.

Well costs have officially fallen below pre-COVID levels thanks to extended lateral
lengths, which has helped Diamondback keep its capital spending on the lower half of
its guidance range.

On the completion side of things, Diamondback has made simulfrac standard for its
completion program, and recently started a new concept called “continuous pumping.”

These fleets are now able to complete over a mile of lateral footage per day, and
management is expecting to convert ALL of its fleets to continuous pumping over the
next several quarters.

Welcome to the new oil dynamic, folks, and when oil starts its next rally, we’ll be in
the right positions to capitalize.

Diamondback Energy (NASDAQ: FANG) is a “Buy” under $215.