J.P. Morgan: Diamondback’s third-quarter cash flow beats expectations; fourth-quarter oil production guidance is weak

Why did third-quarter cash flow exceed expectations?

Diamondback’s third-quarter cash flow per share was $11.34, approximately 2% and 4% above JPMorgan’s forecast and the market consensus, respectively; EBITDAX was $3.752 billion, approximately 3% and 6% higher, respectively.
Average daily crude production was 524.9 thousand barrels, broadly in line with expectations; total production averaged 1.034 million barrels of oil equivalent per day, approximately 2% above JPMorgan’s forecast, partly because natural gas production exceeded the bank’s forecast.
Cash production costs were $10.91 per barrel of oil equivalent, $0.87 below JPMorgan’s forecast, supporting cash flow. However, capital spending was also above the bank’s forecast, and free cash flow was $2.148 billion, only slightly above the forecast of $2.121 billion.

The company expects fourth-quarter crude production to average 523 thousand barrels per day, below JPMorgan’s forecast of approximately 528 thousand barrels and the market consensus of approximately 526 thousand barrels; it raised its full-year capital spending guidance from $3.9 billion to approximately $3.98 billion.
The additional spending reflects the company’s shift of more activity to the Barnett and Wolfcamp D formations. JPMorgan believes more Barnett activity will help expand the Permian Basin resource base and therefore expects strong financial performance and the increased dividend to offset the impact of weaker guidance, with a mixed share-price reaction.
The company raised its base dividend by 7% to an annualized $4.72 per share; it also repurchased 1.3 million shares in the third quarter at an average of $186 per share.

The company said that if the cost of a Barnett well falls to $800 per foot, its returns could match those of core Midland Basin development projects; the latest drilling and completion costs are moving toward that target.
The company’s operated Barnett wells completed in 2025 performed approximately 50% above the core Midland Basin crude oil type curve after 12 months of production. Barnett and Wolfcamp D account for approximately 20% of the fourth-quarter development plan.
Efficiency gains offset increases in diesel, water and sand costs, leaving unit costs for completed operations flat year over year. The company expects oilfield services costs to rise again in 2027 if oil prices remain well above mid-cycle levels, but at a slower pace than in 2022.

The company shifted to coordinated development in 2019 and adopted longer horizontal laterals and denser fracturing designs to improve resource recovery. Chemical enhanced oil recovery remains under testing, with results observed so far varying considerably.
The company continues to add natural gas takeaway capacity, including the Solitude pipeline, which is scheduled to enter service in 2029 with daily capacity of 4.5 billion cubic feet. The expansion is intended to give it greater control over downstream natural gas flows and could serve the liquefied natural gas market.
The company believes its natural gas resources, surface land and existing water investments make it well suited to partner on data center projects.