Diamondback Energy (FANG) Update - May 29

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Wells Fargo Equity Research update on FANG dated May 16

Our Call
As a top Permian operator, FANG prudently revised its FY25 plan to prioritize FCF and capital efficiency amid macro headwinds, boosting cash returns to shareholders via share buybacks—steps we fully support in the current environment.

FANG (OW; PT $207)—Modeling Adjustments. Our Q2'25 and FY'25 adjustments reflect our assumptions for production/cost deflation/opex items. We lower our Q2'25 estimates on lower production volumes, commodity price realizations, and higher cash opex. We are modeling FY25/26 oil production of 485.9/484.8 mbbl/d, vs consensus estimates at 494.2/502.3mbbl/d, respectively. At recent strip pricing, we forecast FCF generation of $5,087MM/$4,783MM in 2025/26. We maintain OW rating and our $207 PT.

Production Trajectory & Activity Cadence. In response to softer commodity prices and rising uncertainty around global oil supply-demand dynamics, FANG revised its FY25 plan to prioritize capital efficiency and maximize FCF. The company is reducing its rig/frac counts by 3/1 in Q2 and plans to maintain this cadence through most of Q3 unless macro conditions worsen. Mgmt expects oil volumes to peak in Q2 at ~495 mbbl/d before declining to 485 mbbl/d in Q3, holding flat into Q4.

If WTI stabilizes above $65/bbl, FANG could reaccelerate activity and grow production. Under the revised plan, FANG expects to draw down fewer DUCs in FY25 vs prior guidance, while maintaining flexibility to scale operations if prices recover. Mgmt views a ~$900MM/qtr D&C budget as appropriate to sustain 2026 oil vols flat at ~485 mbbl/d. We model an oil/total/capex cadence in Q2-Q4’25 of 495.0/485.1/487.3mbbl/d, 899.0/880.6/877.1mboe/d, and $862.2MM/$869.2MM/$925.9MM, respectively.

Operations Update. While tariffs have increased casing costs by over 10%, mgmt expects these headwinds to be more than offset by declining service costs and continued efficiency gains, amid broader slowdown in industry activity. FANG set multiple drilling efficiency records in Q1, including an average 8.8 days from spud to TD, 2,500 lateral feet drilled per day, and 3,500 feet completed per day.

Shareholder Returns. FANG returned $865MM (~55% of adj. FCF) to shareholders in Q1 via base dividend and $575MM in share buybacks. The company continues to prioritize buybacks over variable dividends amid macro volatility, planning to allocate ~70-75% of FCF to base dividends and buybacks and ~25-30% to debt reduction. Non-core asset sales, including the recently announced BANGL divestiture, are expected to further reduce debt. At the WFS price deck, we model ~$2.4bn in share buybacks in FY25.
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Keep in mind that Wells Fargo's oil price forecast is now based on "Gloom & Doom".