Diamondback Energy Inc. is aiming to capture more value from the immense volumes of associated natural gas it produces as a byproduct of oil extraction in the Permian Basin, according to management.
Gas price risk has “been a big topic lately,” CFO Kaes Van’t Hof said during a conference call to discuss second quarter earnings for Midland, TX-based Diamondback. “Obviously we need to start making more money on our gas in the Permian.”
Diamondback is a Permian pure play, with operations in the Midland and Delaware sub-basins, as well as the Central Basin Platform.
Takeaway constraints out of the basin have caused natural gas prices at the Waha hub in West Texas to periodically trade in negative territory, meaning producers and marketers must pay offtakers to accept physical gas deliveries, rather than the other way around. NGI’s Waha daily cash market price averaged negative $1.330/MMBtu on Thursday.
As a result of this dynamic, Diamondback has sought to reduce its Waha exposure, according to Van’t Hof.
Diamondback historically has grown through acquisitions, he explained, and “a lot of the deals that we’ve done have come with marketing contracts where we don’t control the molecule much further than the wellhead. And so what we’ve done over the last, I’ll call it five years, is that as contracts roll off, we’ve been taking advantage of that and getting take-in-kind rights on that molecule.”
In other words, the company is gaining more control over where to market its gas production in order to capture a better realized price.
Van’t Hof cited Diamondback’s firm transport capacity commitments on the Whistler and Matterhorn Express pipelines, as well as its participation in the recently announced Blackcomb Pipeline, as part of the effort to access higher prices outside the Permian.
Notably, NGI’s Forward Look shows Waha forward prices for September averaging at negative 53.8 cents. September is when Matterhorn is expected to begin operations. Forward prices are seen improving from there, averaging around $1.024 for the balance of the year and around $2.110 in 2025.
[Forward Look: Quickly understand where the price of natural gas is headed with these graphic day-on-day comparisons of NGI's forward curves at 70 locations. View Now.]
The strategy does not stop at pipeline commitments, Van’t Hof said. “We’re really looking at power needs in the basin, things like our Verde gas to gasoline plant, and trying to find ways to create a local market here in the Permian because it’s a shame that we continue to sell gas near zero or below zero. So it’s on us to continue to improve that portfolio, and I think with time we’ll be able to do that.”
Van’t Hof said management of privately held Endeavor Energy Resources LP, with whom Diamondback announced a $26 billion merger this year, is on the same page with regard to moving Permian gas out of the basin.
“We’ve got to close the deal first and then we can start making decisions,” Van’t Hof said, “but I think both companies are aligned that more gas needs to get out of the basin [with] less exposure to Waha.”
Diamondback’s natural gas production totaled 51.3 Bcf in 2Q2024, equal to some 564 MMcf/d, versus 50.8 Bcf in 2Q2023. The company realized an average unhedged natural gas price of 10 cents/MMBtu, from 94 cents in the year-ago period.
The company reported net income of $837 million ($4.66/share), from $556 million ($3.05) a year earlier. Total revenue was $2.48 billion, up from $1.92 billion.
