Diamondback Energy (FANG) Update - Dec 28

[dan_s]

New report from Wells Fargo dated 12/19/2018: 2019 budget foreshadows adoption of a new E&P business paradigm:

Diamondback became the first of the independent E&Ps to provide a budget for 2019 under the significantly lower oil price outlook following the OPEC meeting on December 6. True to its roots, FANG cut activity from the previously discussed 24 rigs (pro forma for Energen acquisition) by dropping 3 rigs and 2 crews in December to continue to operate within cash flow from operations while still building momentum towards F2020 when the company is expected to be free cash flow positive under most commodity price scenarios.

Critically, management explicitly indicated a shift in its strategic priorities as it will balance the use of incremental 2019 cash flows from potentially higher commodity prices than recent strip levels towards both growth and shareholder cash returns above its base dividend (which was increased by 50% to $0.75/share annually) versus a focus on growth alone previously.

In our opinion, markets should perceive this unique mix of free cash flow discipline and growing shareholder returns positively. Moreover, FANG has set the bar for other large cap E&Ps that should provide 2019 outlooks in the coming weeks and we believe (see Post OPEC Update), if other operators follow suit, the sector could attract renewed investor interest after declining over 30% since late October.

We remain Outperform rated on FANG, while cutting our Price Target marginally to $151/sh (vs $157/sh prior) on marginally lower capital efficiency estimates (see below). FANG remains one of the top picks in our coverage of U.S. E&Ps.

[dan_s]

Diamondback closed the merger with Energen on 11/29/2018, so the Wall Street Gang won't see the full impact of the merger until the company reports Q1 2019. When they do, I think they will be stunned at how accretive the deal is for FANG's earnings and cash flow per share.