Devon, Diamondback raise Permian oil, gas production guidance, boost capex

US Permian Basin producers Devon Energy and Diamondback Energy both raised production guidance and capital budgets for 2022, owing to stellar well performance and inflationary pressures, their top executives said Aug. 2.

Devon is raising its full-year 2022 production forecast by 3% to a range of 600,000-610,000 b/d of oil equivalent, owing to better-than-expected well results so far this year and impacts from a bolt-in purchase in North Dakota's Williston Basin. Earlier in the year, its 2022 production forecast was targeted at 585,000 boe/d.

The updated capital budget stems from $100 million related to both ongoing inflation and the company Williston acquisition of RimRock Oil and Gas assets for $865 million in cash, which closed in July, Devon CEO Rick Muncrief said in webcast remarks during his company's second-quarter earnings conference call.

And while it is "still... too premature" for specifics on 2023, "there will be no shift to our strategy," Muncrief said. "We will continue to prioritize free cash flow and per-share financial growth, not the pursuit of top-line volume growth."

The company's capex for 2022 was also raised nearly 10% at midpoint, to a range of $2.2 billion-$2.4 billion – up from $2.1 billion earlier in the year.

Devon's second-quarter production averaged 616,000 boe/d, up 7% from Q1 and up nearly 9% from the same period in 2021. Fully 49% of the output was crude oil.

Also Aug. 2, upstream oil and natural gas producer Diamondback Energy raised both its oil production and total oil and gas production outlook for 2022 – by 1% for total boe/d, and kept oil essentially flat, citing better-than-projected performance seen year-to-date as well as the increased confidence in its forward outlook.

Diamondback's total oil and gas production target for 2022 was raised from a midpoint of 373,000 boe/d to 377,000 boe/d, while its oil production range was tightened by moving up the midpoint from 220,000 b/d earlier to a new oil output range of 220,000 b/d-222,000 b/d.

Diamondback's Q2 production averaged 380,450 boe/d, flat sequentially.

The company also increased its capital budget for 2022 by nearly 2% to a range of $1.82 billion to $1.90 billion, up from a midpoint of about $1.83 billion earlier. It did not raise its capex in the first quarter despite rising rates of inflation. Analysts expect most operators that did not increase capex in Q1 would do so in Q2.

Permian 'challenged' by inflation

The Permian environment continues to be "challenged" by inflation and supply chain pressures, Diamondback CEO Travis Stice said in webcast remarks Aug. 2 during his company's Q2 earnings conference call. But he added the comapny's focus is mitigating inflation by slashing pieces of its cost structure.

"We still haven't been able to offset all of the fixed pricing increases we've seen," Stice said. "This takes into account the roughly 10% cost increase we expect on the frac side, which is made up of increases in the cost of horsepower, wireline services and fuel."

On the drilling side, Diamondback sees a similar level of price hikes, particularly from rig day rates, casing and cement, Stice said.

For the rest of 2022, Diamondback plans to operate roughly 12 drilling rigs and three frac crews.

Diamondback has partnered with oilfield services company Halliburton to secure its first e-fleet frac crew, which is to run on the producer's Martin County, Texas, properties on power generated from a central location and delivered via existing lines.

That will reduce not only Diamondback's Scope 1 emissions, but lower its completion costs from fuel savings and improved operational efficiency, Stice said.

Stice said he expects the e-fleet to be operational early in Q4 and will be "swapped in" for one of its existing Halliburton crews. He added Diamondback recently secured a second e-fleet crew which will start work in Q1 2023.

The second e-crew is expected to further reduce costs and decrease its environmental footprint, and will also replace one of Diamondback's existing frac crews, Stice added.

E-crews bring savings

E-crews save money on horsepower but on fuel.

"These will be connected to line power and the back end of a gas plant with burning dry gas in the Permian," Stice said. "Gas prices have gone up [but not] as much as diesel. I would say we'd probably save $50 per foot with that e-fleet."

The company has also implemented other cost-cutting measures. It currently has one electric drilling rig in the Delaware Basin with two more expected in 2023.

"Electrification of our drilling fleet has multiple benefits," Stice said. "Additionally, we're utilizing spudder [older, lower-capability] and intermediate rigs to take advantage of lower pricing compared to the rest of our drilling fleet, and are exploring downsize and surface casing size, intermediate hole size to improve our drilling efficiencies."

Inflation has raised prices for oilfield services and equipment an estimated 15% from the start of 2022, and it will "probably exit [this year] a little higher than that," he said.

Also, Diamondback, a pure-play Permian producer, has all its oil on pipes headed to the US Gulf Coast, CFO Kaes Van't Hof, said.

"A third of it goes to Houston, getting MEH pricing, and two-thirds goes to Corpus [Christi] getting Brent pricing," Van't Hof said. "We've been the beneficiary of this water Brent-WTI spread. The selloff in WTI versus Brent has resulted in really good oil realizations."

Devon's Delaware output up 11%

In addition, Devon's production in the Delaware sub-basin – located within the greater Permian Basin of West Texas and New Mexico – during Q2 2022 rose to 436,000 boe/d, up 11% sequentially and up 22% year over year.

Devon said capital activity was "headlined" by a 12-well program at the company's Todd area in Lea and Eddy Counties, New Mexico, where initial 30-day initial production rates from that Wolfcamp horizon-oriented development averaged 4,500 boe/d apiece.

In addition, a series of acreage trades during the quarter optimized leasehold for future development in the State Line area spanning Texas and New Mexico, adding 7,000 net acres to existing drilling units and also unlocked more than 200 extended-reach drilling locations that were previously confined to 1-mile developments.

In Devon's Anadarko Basin operation, production averaged 74,000 boe/d, about flat sequentially and down nearly 8% year on year. Liquids-rich gas represented 81% of the output mix. Devon operated three drilling rigs in the basin, supported by a $100 million drilling carry with Dow and spud 14 during Q2.