Diamondback Energy joins ranks of struggling shale operators

HOUSTON (Bloomberg) - Diamondback Energy Inc. said it’s fundamentally changing the way it forecasts future growth after becoming the latest Permian basin shale producer to hit operational hurdles.

The Midland, Texas-based explorer fell as much as 15% Wednesday after disclosing that its crude output over the third quarter fell more than 2% short of analyst estimates. Diamondback also warned it’ll miss oil-production forecasts next year despite plans to spend about the same amount of money on drilling.

“When you stub your toe like we did in the third quarter, you’ve got to be able to adjust your future forecast to make sure that you can hit those numbers,” Chief Executive Officer Travis Stice said on a conference call Wednesday. The company is better accounting for interference from wells fraced by neighboring producers, Stice said. “These are operational problems, not reservoir problems,” he said.

Analysts and investors are casting a critical eye on Permian oil producers after a spate of drilling mistakes. Diamondback’s woes come just three months after rival explorer Concho Resources Inc. lost about $5 billion in market value after crowding 23 wells too closely together.

Two of shale oil’s earliest innovators are warning the boom is about to fizzle.

‘Wow, Were We Wrong’. Analysts and investors had been cautious going into Diamondback’s third-quarter earnings. “We strongly believed sentiment was overly negative heading into the print,” said Scotiabank’s Matt Sorenson, one of more than three dozen analysts who has a buy recommendation on the stock. “Wow, were we wrong.“

Diamondback, heralded by analysts as an industry leader, has no hold or sell ratings, according to data compiled by Bloomberg.

Cowen analyst David Deckelbaum said the company’s third-quarter oil production miss was “widely expected” but worse than the bank’s estimate.

Challenges with well spacing, rising gas-to-oil ratios and depressed commodity prices are hitting the shale industry hard, and many explorers have vowed to slow output growth in a bid to generate free cash flow. Occidental Petroleum Corp., Apache Corp., Cimarex Energy Co. and Pioneer Natural Resources Co. all are trimming budgets.

Diamondback “did the old classic, and we say it yet once again, of over-promising and under-delivering,” Paul Sankey, an analyst at Mizuho Securities USA LLC, wrote in a note to clients.

Shrinking Oil Cut. Diamondback’s total output was 65% crude oil during the third quarter, with the rest comprised of natural gas and gas byproducts. That was the company’s worst ratio since at least 2011, according to Bloomberg data, and a bane to investors because it means the company is more exposed to depressed gas markets. Diamondback now expects oil to make up 66% to 67% of its total production for the year, down from previous guidance of 68% to 70%.

During the quarter, the company fetched, on average, $51.71 for each barrel of crude, $11.61 per barrel of natural gas liquids and just $0.62 for every million cubic feet of gas. Diamondback said it expects oil and gas prices to improve through the rest of the year and into next as new pipelines enter service.

Stice cited the company’s sale of an asset in a Permian region known as the Central Basin Platform for much of the drop in crude production. Excluding the impact of that deal, oil output actually rose, he said.

Diamondback also said it bought back almost 3 million shares for about $296 million in the quarter, as part of a program to repurchase $2 billion of stock by the end of next year.

“The company intends to purchase stock under the repurchase program opportunistically with funds from cash generated from operations and liquidity events such as the sale of assets,” the driller said in a statement, adding that the program can be stopped or suspended at any time.

Diamondback shares fell 13% to $78.53 at 11:06 a.m. in New York on Wednesday.