Diamondback Energy (FANG) Q2 Results - Aug 4

[dan_s]

Diamondback Energy, Inc. Announces Second Quarter 2020 Financial and Operating Results
MIDLAND, Texas, Aug. 03, 2020 (GLOBE NEWSWIRE) -- Diamondback Energy, Inc. (NASDAQ: FANG) (“Diamondback” or the “Company”) today announced financial and operating results for the second quarter ended June 30, 2020.

SECOND QUARTER 2020 HIGHLIGHTS

Generated second quarter cash flow from operating activities of $324 million. Operating Cash Flow Before Working Capital Changes was $390 million < My forecast was $352 million.
Q2 2020 cash operating costs of $6.44 per BOE; including cash general and administrative ("G&A") expenses of $0.41 per BOE and lease operating expenses ("LOE") of $3.85 per BOE
Declared Q2 2020 cash dividend of $0.375 per share payable on August 20, 2020; implies a 3.8% annualized yield based on the July 31, 2020 share closing price of $39.86
Included in the Company's Q2 2020 results are $2,539 million in impairment charges related to the lower average trailing 12-month commodity pricing ("SEC Pricing"). As such, the Company reported a net loss of $2,393 million; adjusted net income (as defined and reconciled below) of $23 million, or $0.15 per diluted share < My forecast was a net loss of $17 million.
Q2 2020 Consolidated Adjusted EBITDA of $441 million; Adjusted EBITDA net of non-controlling interest of $414 million
Standalone liquidity of $1.9 billion as of June 30, 2020
Lowering LOE and G&A unit guidance by a combined $0.35 per BOE at the midpoint of each guidance range, implying estimate of total cash cost savings of over $38 million for full year 2020
Current drilling and completion costs in the Midland Basin are between $450 and $500 per lateral foot, with an estimated additional $80 to $100 of equip costs per lateral foot
Current drilling and completion costs in the Delaware Basin are between $650 and $700 per lateral foot, with an estimated additional $100 to $150 of equip costs per lateral foot
Completed a four well pad in Spanish Trail in 10.5 days, completing approximately 4,000 lateral feet per day using 25% recycled water versus prior completions at 1,500 to 2,000 lateral feet per day
Using new rotary steerable technology, Diamondback set a Permian Basin record for most footage drilled in a 24 hour period with 8,150 lateral feet drilled in 24 hours
Reduced flaring as a percentage of net production to 0.3%, down 82% from Q1 2020 and down 84% from 2019

PREVIOUSLY ANNOUNCED SECOND QUARTER 2020 HIGHLIGHTS

Q2 2020 average production of 176.3 MBO/d (294.1 MBOE/d)
Q2 2020 cash capital expenditures of $562 million; Q2 2020 activity-based capital expenditures incurred of approximately $348 million
Q2 2020 average realized hedged prices of $35.21 per barrel of oil, $7.17 per barrel of natural gas liquids and $0.33 per Mcf of natural gas, resulting in a total equivalent price of $22.95 per BOE. Diamondback realized total hedging gains of $211 million in the second quarter, including $11 million of realized gains from the early termination of 10.0 MBO/d of Q3 2020 oil hedges
Q2 2020 average unhedged realized prices of $21.99 per barrel of oil, $7.17 per barrel of natural gas liquids and $0.63 per Mcf of natural gas, resulting in a total equivalent price of $15.39 per BOE
Drilled 58 gross operated horizontal wells and turned 15 wells to production in the second quarter, with nine wells turned to production in April, six in May and zero in June
Assuming a continuation of current market conditions, Diamondback plans to operate between five and six operated drilling rigs and between three and four completion crews for the remainder of 2020

“Diamondback’s operated rig count declined rapidly in the second quarter of 2020, from 20 rigs on March 31 to six rigs today. In response to historically low commodity prices, we made the decision to complete as few wells as possible in the second quarter, with zero wells turned to production in the month of June. We also curtailed 5% of our oil production during the second quarter. This curtailed production has been restored and is now receiving significantly higher realized prices than it would have received when the decision was made to curtail. We have three completion crews working to stem production declines to meet our fourth quarter production target of between 170,000 and 175,000 barrels of oil per day. Diamondback decreased activity levels throughout the second quarter while not spending excessive dollars on early termination fees or other ‘one time’ expenses that are headwinds to cash generation. Our cash operating costs declined dramatically in the second quarter, and we expect some of this decrease to become permanent,” stated Travis Stice, Chief Executive Officer of Diamondback.

Mr. Stice continued, “Diamondback is expected to generate significant free cash flow in the second half of 2020 and in 2021 at current forward commodity prices. Under a maintenance capital scenario next year, should that become the base case operating plan, Diamondback can hold expected fourth quarter 2020 oil production flat while spending 25% - 35% less than 2020’s capital budget, including lower midstream and infrastructure budgets. We remain focused on returning capital through our quarterly dividend while protecting our balance sheet, and continue to drill, complete and produce barrels with the highest margins at best-in-class capital and operating metrics.”

[dan_s]

Stifel's take:

Diamondback Energy, Inc. (FANG, $40.01, Buy; Target $91.00)
Q220 operations update reinforces the capital efficiency of the Diamondback machine - Derrick Whitfield

We view this release as positive. The positives include: i) a 24% decrease in cash operating costs sequentially despite lower volumes, ii) decreased LOE and cash G&A guidance with the majority expected to be structural, iii) strong leading-edge DC&E costs in the Midland and Permian (11% and 18% below current 2020 guidance), and iv) a reduction in flared volumes to 0.3% of net production (84% decrease from 2019). The only negative is increased GP&T and interest expense cost guidance, which is simply a function of lower volumes. Net-net, we believe this release is positive based on cost revisions. Additionally, we believe it proves the Diamondback machine is capable of continuing to improve its capital efficiency despite its leadership position on operating and capital cost measures.

[dan_s]

I have updated my forecast/valuation model for FANG. It will be posted to the EPG website this afternoon.

I've added $8 to my valuation, taking it to $62.00 per share. Why?
> Their declining cash expenses
> More confidence in their production forecast
> Oil prices now locked in by hedges for 2H 2020
> 2H 2020 CapEx should now be fully covered by cash flow from operations
> Their Q2 realized natural gas price was only $0.33/mcf. Obviously, they have significant upside if Permian gas prices improve, which should happen by Q4.
> Taking all of the above into consideration, I've decided to increase the multiple of cash flow from 4.0 to 4.5.
> In "normal time" a company of this quality should trade for 6X operating cash flow per share.

KEEP THIS IN MIND: The huge non-cash impairment charges required by GAAP accounting rules are extremely confusing. They have not abandoned the properties and the oil & gas reserves are still there. What is really confusing to most investors is that writedowns cannot be reversed even if the price of oil doubles tomorrow. During periods of volatile commodity prices (and this is about as bad as it gets) GAAP Net Income is a worthless number. ALWAYS FOCUS ON OPERATING CASH FLOW.