Good day, ladies and gentlemen, and welcome to the Diamondback Energy fourth quarter earnings call. At this time, all participants are in a listen only mode. Later, we will come to the question and answer session, and instructions will follow at that time. If you require any assistance during the call, please press star on the touch tone telephone. As a reminder, today's call is being recorded. I would now like to turn the conference over to Adam Lawlis of Investor Relations. Sir, you may begin.
Thank you, Shannon. Good morning, and welcome to Diamondback Energy's fourth quarter and year-end conference call. Representing Diamondback today are Travis Stice, CEO, Teresa Dick, CFO, and Russell Pantermuehl, Vice President of Reservoir Engineering. 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. During our call today, we'll reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of those measures to GAAP in our earnings release. I'll now turn the call over to Travis Stice.
Thank you, Adam. Welcome everyone, and thank you all for listening to Diamondback's fourth quarter and year-end 2013 conference call. Since our last call, we've issued an operations update that not only provided additional new Wolfcamp B well test data, but also highlighted an increase in well EURs, reported significant increases in both total proved and proved developed reserves, detailed a very encouraging Lower Spraberry test and positive down spacing tests. Since it was just a few weeks ago when I was offering my last operating update, today I'll provide more detail on our pending acquisitions in addition to discussing our strong quarter. On Tuesday, we announced we had entered into definitive purchase agreements to acquire approximately 6,450 gross, or 2,825 net operated acres in the Midland Basin from private parties for $174 million.
Late last night, we agreed on an additional 28.8% working interest, bringing the current totals for this acquisition to approximately 72% working interest and 4,683 net acres for a total purchase price of $288 million. The current combined production is approximately 2,150 BOEs a day. With more than 50% working interest upon closing, Diamondback now anticipates that it will be designated as operator. The assets located in southwestern Martin County provides us with a complementary acreage block that is prospective across 6 horizontal zones. The acreage includes 147 gross producing vertical wells as of February. Growth potential in this acreage exists in multiple zones with 42 locations in the Wolfcamp B, 42 locations in the Lower Spraberry, with 112 gross locations in the Middle Spraberry, Wolfcamp A, Cline, which is also known as the Wolfcamp D, and the Clear Fork combined.
This brings our current inventory of horizontal wells to more than 1,600 gross locations. Once all of the outstanding offers to purchase the additional interest are finalized, we will issue new guidance for 2014 with more fulsome development plans. Switching now to the fourth quarter, I'm proud of the quarterly results as we again demonstrated our ability to reduce operating expenses to what I believe is among the best in the Midland Basin. At just over $6 BOE, we have now had five consecutive quarters of double-digit declines in LOE on a percentage basis. Our low-cost operating metrics, combined with a higher percentage of oil production, drives our peer-leading cash margins, with fourth quarter coming in at over $64 a BOE. We continue to be an aggressive developer of horizontal inventory as we will add a fifth horizontal rig as planned in the coming weeks.
In 2013, we grew production by nearly 150%. We expect to grow production by more than 100% again this year. As mentioned in our previous operations press release, we have four wells in various stages of development on our Northern acreage. Our first horizontal Wolfcamp B Martin County well is still cleaning up, now cutting good oil, and our second Martin County well, also targeting the Wolfcamp B, just began flow back operations yesterday. Additionally, we are drilling our second Wolfcamp B well in Andrews County, and our first horizontal Wolfcamp B well in Dawson County has been drilled and is waiting on completion. We're running two horizontal rigs on our minerals acreage in Midland County and plan to add another rig in the coming weeks that will split time in our minerals acreage and continue to delineate Martin, Dawson, and Andrews County.
In Midland County, we're excited about our most recent Wolfcamp B test, the Spanish Trail 705H, as it is our highest 24-hour IP rate to date for a 7,500-foot lateral at 1,185 BOEs a day with a 96% oil cut. Also, we have previously indicated that our 8,926-foot lateral, the Spanish Trail South 501H well in Midland County, is our best well to date. This well has now produced over 75,000 barrels of oil and is still making over 600 barrels of oil a day. Note both the cum and the rate I just quoted are for oil only.
As exciting as the horizontal Wolfcamp B has been and continues to be, early indications from the Lower Spraberry seem to be competitive with our existing Wolfcamp B program with respect to both the rate of return and the EURs. We are currently drilling our first operated Lower Spraberry well in Upton County, and we will drill our first operated Lower Spraberry well in Midland County next month. Lastly, our fourth quarter total LOE per BOE decreased 17% to $6.04 during the fourth quarter, down from $7.27 a barrel in the third quarter of 2013. Again, we've now achieved five consecutive quarters of double-digit decline, which are down 55% from this same period last year. With those comments complete, allow me to turn the call over to Teresa.
Thanks, Travis. Our net income for the fourth quarter was $20.1 million, or $0.42 per diluted share. Net income for the period included a non-cash gain on commodity derivatives of $1.6 million. Excluding the non-cash gain and the related income tax effect, our adjusted net income was $19.1 million, or $0.40 per diluted share. Our production for the fourth quarter was approximately 10,400 BOE per day, and for the full year, our average production was 7,300 BOE per day. These volumes generated revenues in the fourth quarter of approximately $76 million and $208 million of revenue for the full year. Our average realized price before the effect of hedges for the fourth quarter was $79.14 per BOE, and for the full year, $77.84 per BOE.
Our average realized price, including the effect of hedges for the fourth quarter, was $77.47 per BOE, and for the full year, $75.14 per BOE. Quarter-over-quarter, our realized price decreased, which was due mainly from decreased oil prices. EBITDA for the quarter was $62 million, and for the full year, we generated EBITDA of approximately $165 million. Turning to cost, our lease operating expense was $6.04 per BOE in the fourth quarter, as compared to $7.27 per BOE in the third quarter. Our lease operating expense for the full year was $7.92 per BOE. Our general and administrative costs came in at $3.99 per BOE for the fourth quarter and $4.13 per BOE for the full year. Our current hedge positions through 2014 have been laid out in our earnings release.
We continually assess our hedging opportunities. We will continue to layer on additional hedges as our production grows. In the fourth quarter of 2013, we generated $64 million of operating cash flow, or $1.36 per diluted share. During 2013, we spent $298 million for drilling, completion, and infrastructure. This compares favorably to our 2013 annual capital guidance of between $290 million-$320 million. Additionally, we spent approximately $640 million on acreage and mineral acquisitions. Our liquidity position remains strong, with approximately $16 million of cash on hand at December 31, 2013. Our $225 million revolver currently has $21 million drawn against it. We are planning to perform a redetermination in the near future.
Through preliminary discussions with our lead bank, we believe that the combination of increased reserves and reserves associated with the pending acquisition support a borrowing base in the range of $375 million-$400 million to provide us further liquidity. I'll now turn the call back over to Travis for his closing remarks.
Thank you, Teresa. To summarize, I'm proud of our accretive acquisition in Martin County, further building on our horizontal inventory. We again delivered exceptional fourth-quarter results, demonstrating our ability to not only reduce drilling cycle time, but also continue to reduce our operating expenses and continue our production ramp. Our cash margin during the fourth quarter, as I've talked about earlier, were almost $65 a BOE, and I believe we're delivering results and returns to our stockholders that are among the best in the Midland Basin. On behalf of the board and employees of Diamondback Energy, I would like to thank you for your participation today. This concludes our prepared comments. Operator, please open the call to questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press the star, the number one key on your touch-tone telephone. Our first question is from Ryan Oatman of SunTrust. You may begin.
Hi, good morning.
Good morning, Ryan.
Travis, on this acreage to be acquired, could you just describe its location relative to your Spanish Trail asset and any industry activity that gives you confidence on that leasehold?
Sure. Ryan, this acreage fits hand in glove with what we've got in our Spanish Trail acreage. It's at the northern end of our Spanish Trail acreage, about three miles north and just over the Midland County, Martin County line. This acreage block, as I've talked about earlier, is laid out perfectly for horizontal development. It's about two miles wide and about five miles tall. As I mentioned, it's perfectly suited for horizontal development. If you're looking at it relative to in the county, it's in the southwestern corner of the county. Immediately to the west is a block that's operated by RSP Permian, and they've got a couple of good Wolfcamp B horizontal wells there that really gave us some encouragement. They typically run about 10%-15% better than what we're seeing on our updated type curves in Midland County.
Immediately to the east Oxy's got a large horizontal development program underway, and we understand that those results are also very, very nice. There's a couple of privates that are also in the area that have posted really nice results in different zones, even outside the Wolfcamp B. This is an area that the Wolfcamp development has certainly been trending towards, and we couldn't be more proud that we've got this position now.
Very good. On this well that's produced over 75,000 barrels of oil, can you just provide a little detail on how long that well has been on production and any EUR or cost estimates you have for that well?
Yeah, that well came on in early October. What's really kind of unique about that well was that it flowed for such a long period of time before we put it on artificial lift. While it's been on for several months now, I think what's really remarkable is not only the cum, but its current rate. If you look at that cum and that current rate on anybody's type curves out there, you'll see that this well is performing above any of the industry's expectations. It's just a good story. Ryan, would you ask me the cost question again?
Just any cost estimates for that well and potential EUR.
Yeah. Ryan, this is the same well that we talked about in our operations update that's on track to make 1 million barrels. It's a longer lateral, so that's not unexpected. Then a cost perspective, we'll look at that, Ryan, during the call, I'll get back with you on that. If we can look it up during the call.
Absolutely. No worries. One final one for me, I'll hop back in the queue. Shifting north to the previously acquired acreage, one of your competitors was talking yesterday about the potential for the Wolfcamp B or Cline on its acreage near your Northern Martin and Southern Dawson leasehold. Do you see that as a potential target up there? I was wondering if you could talk about the relative prospectivity of the zones on that leasehold up north as you see it. That'll do it for me. Thank you.
Sure. Thanks, Ryan. What we're excited about in that northern acreage is, as we previously talked about, it's got four or five or six different prospective zones, we drilled our first well in the Wolfcamp B. That's the well that's called the Kent County School Lands, and it's not yet completed. We're about two weeks away from fracking that well. Like I said, we did put that in the Wolfcamp B. We also cut whole core in that well before a vertical well immediately offset that. We've got a little bit of science that we've taken for that area, and we see prospectivity certainly in the Wolfcamp B. The Lower Spraberry looks really good, and the Cline or the Wolfcamp D looks very good up there as well, too. I think you've got the Wolfcamp A up there as well.
We'll watch certainly when our well comes on. We'll measure the results, but I think probably, right after that, in terms of ranked order of prospectivity, that kind of Wolfcamp C, Wolfcamp D combo zone that's up there looks pretty good.
Great. Thank you.
Thank you. Our next question is from Tim Rezvan of Sterne Agee. You may begin.
Hi. Good morning, folks. I just had one quick one. Given you have a concentrated acreage position and you just took down this block here, you obviously have the liquidity with kind of the visibility on the revolver going up. Organizationally, how big can you get right now, and how actively are you looking to bolt on acreage?
Tim, we've talked before that here in the Permian Basin, you're either in the acquisition role or you're not. We are certainly in the acquisition role. We're continuing to look for additional acquisitions. I think one of the things that I want to continue to commit to my shareholders is that our story really hasn't changed since we went public. We talked about cutting cost, best-in-class execution, and doing accretive deals. We've now done four and five deals, each of them accretive to our shareholders, and we couldn't be more proud of that. At the same time, keeping our story very simple. Bandwidth organizationally, we talk about that internally. We try to increase the bandwidth by adding key personnel. That's a process that's undergoing as well.
We'd probably somewhere, just in terms of operated rigs, from where we are today, our bandwidth is probably somewhere in the seven to 10 rigs with our current organization or immediately planned growth in our organization.
Okay. I appreciate that color. Finally, as you've given that rig count, when you give updated guidance, will you maybe have something to say on activity, horizontal activity on the new acreage?
Yeah, absolutely. I think at this point, Tim, it's fair to say that we're going to be drilling in the second half of the year there. Our rig cadence sort of depends on how continued aggressively we exploit Northeast Andrews, the rest of the stuff in Martin County, and then in Dawson County, as we're waiting on results there as well. It's kind of a moving target. Don't forget, Tim, that a big piece of our story is our outstanding execution in how we're able to continue to cut days and cost out of these horizontal wells. We're actually continuing to see improvements in that cycle time. There's two ways to accelerate activity. One is to just pick up more rigs, and the other is to do the same amount or more with fewer rigs or the same amount of rigs.
That's actually what we're seeing. That's why it's a little, at least in early February, that's why it's a little hard to forecast what my rigs are going to look like in the second half of the year because we're drilling these things so dang fast.
Sure. Okay. Well, thank you for the color.
Thank you. Our next question is from Gordon Douthat of Wells Fargo. You may begin.
Thank you. Good morning, everybody. Looks like, just running through quickly the numbers in the K last night, some pretty good improvements on the capital efficiency side. What can you say how that's progressed? What color can you give us there as you shift from horizontal to from vertical? Then what upside do you see as laterals get longer, et cetera, as you gain momentum in this program?
Yeah. Certainly, Gordon. We're no longer shifting to horizontal. We shifted full horizontal in the early parts of 2012 or 2013, late 2012. We continue to see improvement in costs primarily associated with the execution. Of course, in the Permian Basin, when you drill these wells, each day represents dollars, and we feel like the performance that we're delivering out there is cutting significant days relative to any of the competition that's out there. We continue to push the cost lower. We've guided towards a 7,500-foot well between $6.9 million and $7.4 million. That's the range that we're running right now. Just while we're talking about costs, the Spanish Trail 501H, the well that we were talking about a second ago, that total well cost for that roughly 10,000-foot lateral was $9.1 million.
Okay. Thanks.
Thanks, Gordon.
Thank you. Our next question comes from Eli Kantor of Iberia Capital Partners. You may begin.
Hey, good morning, guys.
Good morning, Eli.
Congrats on another nice quarter. Just one quick question from me. Wondering what the gross production is from this acreage block that you're acquiring in Martin County. I see the gross acreage figure, but wondering what the gross production is.
Yeah, stand by on that, Eli.
3,900.
Yeah, right around 3,900 BOEs a day.
Okay. Thanks, guys.
Thank you. Our next question is from Jeff Grampp of Northland Capital. You may begin.
Morning, guys. I was just curious on the acquisition you guys have here. Is there any potential to increase that working interest beyond the 72%? I know you guys had placed offers to bump that up to 100%, but did you get essentially nos from the remaining parties, or is there some still working parts there where you guys could bump that up higher?
Yeah, Jeff, we're still in conversations, and I probably better just leave it at that, to increase the working interest.
Okay. Fair enough. Just curious on the Upton County Lower Spraberry test. Can you guys comment on how you see the Lower Spraberry changing from the northern part of the play? Should we still be expecting the lower IPs and lower declines, or any kind of commentary you'd like to provide on that?
Sure, Jeff. I'm going to let Russell answer that question.
Jeff, as we look at that Lower Spraberry shale from north to south, the thickness remains about the same. You get a slight degradation in porosity. We know the Spraberry down there is productive as well. Right now, our anticipation for Upton County would be that we'd see slightly lower results down there than what we're seeing in the Midland County acreage. Of course, as Travis mentioned before, the results we've seen around our Midland County acreage, and if you look at some of the other recently reported operator results in the Lower Spraberry, the results have been really good. Obviously, we want to see some production results, but we think that the Lower Spraberry in Upton's going to be a very economic development play for us.
Okay. Got it. Last one I have, just was curious if you guys have any plans similar to your operators there in Midland for any stacked or staggered lateral tests in 2014 or coming up here in the near term?
Yeah. Really, what we're looking at, in our operations update there a few weeks ago, we talked about that staggered lateral test that we have a working interest in, that RSP did, where we had some nice results. What we're doing right now is we're doing pad drilling in the Wolfcamp B, where we can zipper frac the wells. We think that's going to give us an uplift, but we need a little more data to find that out. If we see a significant uplift from the zipper fracs in the same zone, what you'll probably see us do is drill pads of Wolfcamp B wells, then come back and drill pad wells in other zones as opposed to doing the stacked laterals. We've got some more production results to evaluate before we make that decision.
Got it. All right. Thanks, guys.
Thank you. Our next question is from Richard Tullis of Capital One. You may begin.
Hey. Thank you. Good morning. Travis Stice, what do you estimate the approximate rates of return for, say, your Wolfcamp Spraberry horizontal wells using current commodity prices and, say, the midpoint of the well cost guidance range?
It varies by county and depending on what our royalty interest is. Obviously, where we own mineral interest, the returns are a lot higher. I'll just throw out some rough numbers. This is not on our mineral acreage, just where we have a standard 25% royalty interest. For our Lower Spraberry wells, based on the results that we've seen there and assuming about a $7 million development cost for a 7,500-foot lateral, we're up there in the 70% rate of return kind of range using SEC pricing of that $96 a barrel, less deducts. Our Wolfcamp B, real similar numbers there, a little higher cost, fairly similar EUR, but a little higher IPs.
Okay.
Obviously, those are very attractive rates of return, and those are for our Midland County area. As we've talked about before, Upton is a little lower, but still in that 40%-50% rate of return kind of range.
Okay.
Even in that Midland County area, this new block that we see, we think that there's a slight uptick in the performance of those wells also.
Okay. Of course, they go higher using today's pricing.
Correct.
Yeah. Looking at the 4Q actual OPEX per BOE, it looks like you're already, I guess, close to the low end of the guidance range for 2014, if I'm reading it correctly. What's the potential to keep it in that low end or perhaps even drive it lower than, say, $6 a barrel, give or take?
I'll never be ultimately satisfied on LOE. You always want to continue to push the envelope to low cost. I'll tell you, we're picking up pennies now. Early on, we were picking up quarters and dimes, but we're picking up pennies now. I'm very comfortable with what our guidance is for 2014, and that's where I'll stick right now, at our guidance level.
Okay. Well, that's all from me. Thank you.
You bet. Thank you, Richard.
Thank you. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press the star, the number 1 key. Our next question is from Jason Wangler of Wunderlich Securities. You may begin.
Morning. Just curious, oil pricing looked pretty solid. How you're seeing Longhorn and everything else with obviously the basin seeing more oil coming out of it, and you guys are too, what you're seeing as far as pricing and being able to get it out?
So far, we've not had any issues moving our barrels, we've got a contract on that Magellan Longhorn pipeline for 8,000 barrels a day of firm transportation, which again, for a company our size, is kind of unique that I can offer that up to my shareholders. What's also good about that contract is it's a better of pricing. When you get to Midland tank farms, we evaluate it on a monthly basis where your pricing is enhanced, whether going to Longhorn or going to Cushing, Oklahoma. In a general sense, we've been pleased with the pricing we've been able to get.
Great. Teresa, if I could you just give me the level of the revolver you're looking at and when that would be reviewed again? I'm sorry, I just missed that part.
That's okay. We're looking at real shortly here in the next few weeks, we'll get started up on our redetermination. Preliminary look looks to be between $375 and $400.
Perfect. Thank you very much.
Thank you. I am showing no further questions at this time. I would like to turn the conference back over to Travis Stice, CEO, for closing remarks.
Thanks everybody for listening in this morning. I know it was a late night and an early morning. I appreciate everyone joining in this morning and look forward to visiting with you in the future. You all have a great day.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.