Diamondback Energy: Comments from an industry expert

[dan_s]

In Keith Kohl's most recent "Energy Investor" newsletter he highlighted Diamondback Energy. Here are Keith's comments.

When we first established our position in Diamondback Energy, it was a small
Permian oil stock that most people outside of the industry would not recognize.

Slowly but surely, we’ve had the distinct pleasure of watching Diamondback grow
into one of the largest independent operators in the Permian Basin. In our humble
opinion, it’s a must-own pure Permian player that controls roughly 885,000 net acres
in the area.

Recently, this Permian powerhouse made a deal to get even bigger.

This month, Diamondback announced a deal to acquire Double Eagle for $3 billion in
cash and approximately 6.9 million shares of Diamondback.
It was a huge move for us considering Double Eagle was one of the last attractive
assets in the Midland Basin.

Once the deal closes (which is expected to happen on April 1, 2025), here’s what
Diamondback stands to gain:
• Approximately 40,000 net acres in the core of the Midland Basin.
• Estimated run-rate production of approximately 27 MBo/d (69% oil).
• $200 million of capital expenditures anticipated in 2025 at current Midland
Basin well costs of $555 to $605 per foot.
• Extended pro forma inventory life in the core of the Midland Basin.
• 68% of the asset that’s undeveloped with 407 estimated gross (342 net)
horizontal locations in primary development targets with an average lateral
length of approximately >11,000’.
• 44 gross upside locations primarily located in emerging zones.

This isn’t the first time we’ve seen Diamondback make a major move like this. You
might remember a year ago when the company merged with Endeavor Energy
Resources.

Let’s take an updated look at what the company’s acreage map post-deal:

Diamondback is a premier Permian producer, and I think the company’s CEO Travis
Stice was spot-on in his recent letter to shareholders when he said that 2024 was a
transformational year for the company.

During the fourth quarter of 2024, the company’s production averaged 883,424 Boepd
(475,924 barrels of oil per day), which came in above the company’s previous guidance
of between 470,000-475,000 bopd.

Not only was the company outperforming from a production standpoint, but it was
also making huge strides where it counted — cost and efficiency. Diamondback spent
roughly $933 million in Q4 in capital expenditures, which was well below its
guidance range.

Not surprisingly, it was better economics that led to the cost savings.

In total, the company generated $1.4 billion in adjusted free cash flow during Q4,
more than half of which was given right back to us in the form of dividends and share
repurchases.

In fact, Diamondback announced an 11% increase to its most recent dividend, which
now pays out $1.00 per share per quarter. More importantly, management believes
that it can protect this dividend and its current drilling activity level if oil price were
to fall under $40 per barrel.

During the fourth quarter, the company posted net income of $1.1 billion, or
approximately $3.67 per share, which exceeded analysts’ expectations.

But let’s take a look at what’s in store for us in 2025, shall we?

Right now, current 2025 production guidance estimates are for output to average
between 883,000-909,000 Boepd (485,000 to 498,000 barrels of oil per day), with capital
expenditures expected to fall between $3.8 billion and $4.2 billion. < Cash flow from operations s/b approximately $10.5 billion.

Operationally, Diamondback expects to drill up to 471 gross (428 net) wells this year,
and complete up to 592 gross (560 net) wells.

The weakness in the oil sector that we’ve seen this quarter has pushed shares below
$160 this month. The stock is looking more attractive now than it has in a long time,
with shares trading under 10 times their forward and trailing twelve-month earnings.

Diamondback Energy is a strong buy for us at current prices.

[dan_s]

FANG closed at $158.96 on February 28.

My current valuation is $245, which compares to TipRanks' consensus price target of $214.13