Permian independent oil CEO optimistic in era of global upheaval
Q. You’ve had an interesting career trajectory, from professional tennis player to Diamondback chief executive. How did you do it?
I grew up in Southern California as a tennis player. My father was a very good professional tennis player, top 25 in the world. As the eldest son, I pursued that path and was fortunate enough to win the NCAA in doubles in 2008. I had the good fortune of playing in the U.S. Open in 2008 and 2009 and things were going fairly well. It wasn't like the job market was that great in 2008-09 [during the Global Financial Crisis], so I got to see the world and played some pro tennis.
By the end of 2009, it was kind of time to get a real job. I moved to New York City and started in investment banking and then proceeded to work at Wexford Capital, the private equity company that backed Diamondback. So, I was very familiar with the Diamondback story since its initial public offering and even pre-IPO. I decided to make the move full time to the company in 2016.
I call Texas home, and it's been amazing to see what's happened in Midland over the past 10, 15 years. It's the boomtown of all boomtowns.
Q. What sets Diamondback apart from the giants like Exxon and Chevron?
Diamondback is a relatively young company. I like to say that we're kind of the poster child for the shale revolution and the miracle that was the shale revolution, particularly in the Permian Basin. Diamondback went public in 2012, producing about 3,000 BOES [barrels of oil equivalent] a day and holding about 40,000 acres.
We had to go public because nobody wanted to buy the company. We tried to sell the company before going public and went out to eight bidders and got zero bids. That chip-on-our-shoulder feeling is what spurred us on to be, in my mind, the best-in-class operator in the best basin in the world.
We're producing well over 900,000 BOES a day, a more than 300x [times] growth in production in less than 15 years. A couple of things set us apart. We pride ourselves on best-in-class execution, low-cost operations and transparency.
We believe that in a commodity-based business, all you’re doing is manufacturing oil barrels. We manufacture oil barrels for $10 to $15 a barrel, and we sell them for whatever the price is. We've been traditionally the lowest-cost operator in the Permian Basin.
Q. What's so special about the Permian Basin?
You have a very friendly regulatory environment, an environment where you're able to build pipelines to get natural gas and oil to the bigger markets and the Gulf Coast. You [also] have probably the best oilfield services market in the world with the greatest abundance of oilfield service opportunities. Also, the rock is very, very good. My predecessor, [current Diamondback chairman] Travis Stice, always used to say, “The Permian Basin is just a big tank of oil.”
You put money in, and oil comes out. This basin's been around for well over 100 years. This latest [production] wave has moved it to a very meaningful percentage of not only U.S. oil production but global oil production.
Q. How has Permian Basin production changed in the roughly 15 years since the hydraulic fracturing and the shale boom began?
If you look at the history of the basin, production declined every year from the early 1980s all the way to 2008, when the first vertical Wolfberry play [in an area roughly northwest, from Midland to Gaines counties] kind of kicked things off in the Midland Basin.
In the beginning, we were drilling vertical wells, and those vertical wells took 20 days to drill. Then we started to drill horizontally. Those first horizontal wells took 35 to 40 days to drill. Now, here we are drilling two miles down and two miles out in less than five days.
That's a testament to the American engineer and the ability to continually improve. Those efficiency metrics are obviously a huge advantage to Permian producers. But if you think about it, shale has moved from an idea, a test case, to much more of a large-scale manufacturing business. I go back to that analogy that we're just a factory that manufactures barrels, and we're doing it more efficiently than our competitors.
Q. What kind of challenge does availability of workers pose?
Generally, we've seen labor get a little tighter in the Permian this year. It's always been pretty tight, right? The industry has evolved and gotten more efficient. There are some interesting data points. The number of oilfield workers has gone down, but the productivity per worker has gone up. It was very needed, given how tight labor is out in the basin.
The other thing I would say on labor is the consistency of the business and not having to change your [business] plan with every $5 [per barrel] move in price. This allows you to hire and retain people that end up getting more efficient at what they do. Having a rig count that's not moving all over the place for a company, like Diamondback, has allowed us to retain and develop the best crews that know how we do things. They're not worried about us dropping them the next day.
Q. Apart from labor, what other constraints do you encounter?
I'll start at the highest level: What do your investors want? If investors want you to return a lot of free cash, they don't want you to be spending too much money on capital expenditures.
We’re in a massive logistics business. If you think about Diamondback, we produce a little more than 600,000 barrels of oil a day. We produce almost 2.5 billion cubic feet of gas a day. With that comes about 2.5 million barrels of water a day. We're a large water distribution company that produces a lot of oil.
Having that infrastructure in place, making sure you spend the above-ground dollars to move your products most efficiently via pipeline to where they need to go is key. And then you think about other logistics in the field, like on the frack [hydraulic fracturing] side. If you think about the wells we drill, two miles down and two miles out, [for] every foot of that lateral [distance], we pump one ton of sand. We execute on almost 4,000 or 5,000 feet of that a day. That's 5,000 tons of sand that need to be moved to a location per day.
The amount of trucks and the amount of infrastructure that goes with that is kind of mind boggling. [It requires] a lot of truck drivers. Truck drivers have certainly been, from a labor perspective, one of the toughest [resources] to maintain in the Permian because if the cycle turns, they [drivers] just drive their truck somewhere else or drive something else.
Q. You’ve always promoted the Midland area. What success have you had getting people to move there, especially young families?
It's such a unique place. Travis [Slice, Diamondback chairman] told me when I moved there, “You'll cry when you move here, and you'll cry when you leave.” I think that totally fits the bill for Midland. Interestingly, Midland is becoming a fairly young, more metropolitan, cosmopolitan city.
It's not competing with Dallas, Fort Worth or Houston anytime soon. But the average age in Midland is 32 years right now. And the largest population bubble is 0- to 4-year-olds. At Diamondback, we are focused on getting people to come work for us. They want to make sure their kids have a good education and a good path toward their development.
We've been very forward and aggressive in donating to quality-of-life type investments around town. We just opened the Diamondback Energy Athletic Complex, which is an indoor athletic complex where we have basketball courts and an indoor soccer field. It's for the youth of Midland to come use for free.
All the oil companies donated a significant amount of money to it in a public-private partnership. Diamondback was the lead sponsor and donated a large chunk to get our name on the building, which we take a lot of pride in. Outside of that, there are two high schools [Legacy/Lee and Midland high schools] being built in Midland.
There hadn't been a high school built in Midland in 50 years. When you put two new high schools on the ground, that opens up the old high schools to be junior highs. And then it opens up the junior highs to be grade schools. So, we're preparing for this bubble of children to come into the education system and have a roof over their heads to do it.
Q. Demand for electricity keeps increasing for the energy sector and for data centers opening in the area. Is there enough to go around?
The only thing during COVID that didn't go down at Diamondback was our electricity consumption in the basin. Electricity consumption for the Permian has just gone through the roof. It's only gone up every year. In the next 10 years, our power needs as a company will double even if we keep all production flat.
That's because [for] every well you bring on or every [exploration] pad you bring on, each needs to be connected to some form of power to make them work. We have experience with modular power because we're waiting on the grid to get to us. We have [something] like 300 connection asks that have an average wait time of 950 days to get connected to the grid.
So, we started to build some microgrids, and we were one of the first users of VoltaGrid in the Permian Basin. [VoltaGrid builds natural gas-powered electricity generation plants.] It's funny, this intersection of tech and energy. The power demand for AI [artificial intelligence] has led a company like VoltaGrid to become a massive company.
VoltaGrid built us little mobile power sites for our frack crews. And now the VoltaGrids of the world are just scaling up gigawatt-plus size scale. That speed to power is something that you can pitch to a hyperscaler [data centers] to get your project built. I think [that during] the next wave of the Permian, these data centers are going to need to move closer to the [natural gas] resource.
We have almost an unlimited amount of gas. There is a lot of arid land that can be used for building these things [data centers] in West Texas. The next wave of the shale revolution is going to be this intersection of tech and energy. And we're trying to get it done in Midland and in the Permian Basin.
Q. How close is the Permian Basin to running out of oil?
It depends on the price. The shale revolution was born out of a period of much higher oil prices that allowed people to try new things to get more oil out of the ground at that higher price. We figured out how to do it really, really well. That drove the price down over the past 10 years or so.
I won't say there's an infinite amount of oil in the Permian Basin, but there's a lot of higher-priced inventory that can be delivered over the coming decades. I also think, don't underestimate the American engineer. We're only recovering, by our estimate, something like 10 percent of what's in the ground today. If we can crack the code to even increase that by 2 percent or 5 percent, that's a massive amount of oil that will be produced out of this basin.
I think the size of the prize is too big not to try some things to get more oil out of the ground.
This is an edited and abridged version of a conversation available on the Southwest Economy Podcast.