Diamondback Energy (FANG) Update - Dec 29
Posted: Tue Dec 29, 2020 11:05 am
Notes below are from Simmons Energy, a division of Piper Sandler
They raised their price target on FANG by $5 to $53 and rate it as Overweight
We reiterate our Overweight rating and raise our NAV-derived PT to $53 (from $48) on the back of FANG’s acquisitions that add core inventory depth and strengthen visibility on reinvestment and capital return. FANG announced it will acquire QEP and Guidon for $3Bn (22.9mm shares or 14.5% of the current shares outstanding, $375mm cash and $1.6bn QEP debt) increasing its Midland Basin position by 81.5k net acres, adding 60 mbbls/d of oil production (95 mboe/d total) and ~1,100 core locations. FANG expects to realize $60-80mm of synergies from the transactions from G&A savings, refinancing QEP debt and optimized operations. FANG remains focused on keeping pro-forma 4Q20 volumes flat through 2021 and expects to reallocate capital to Tier 1 assets being acquired. The transaction is expected to be accretive on 2021 financial metrics, as well as reduce the reinvestment rate with the addition of 56 DUC locations.
Easing Core Inventory Concerns. With core inventory depth being a persistent overhang on the FANG story, a subject we tackled several weeks ago in our “Simmons Upstream Data Monitor: Quantifying FANG Inventory Depth”, FANG is taking decisive action to increase reinvestment visibility in its development program with the QEP and Guidon acquisitions. FANG estimates the acquisitions add over 1,000 Tier 1 Midland locations, or more than five years of project inventory at the 2020 pace of development, and expects to reallocate activity from its legacy business to Guidon. We look at relative operating performance between the three operators below, and FANG delivered 9% and 15% better performance than Guidon and QEP in 2019, respectively. FANG discussed that it plans to increase inter-lateral well spacing and completion intensity as it moves forward with QEP development.
Accretive on 21/22 Multiples and FCF. FANG management stressed that the deal was accretive on all key financial metrics, and while it did not provide updated guidance, we take a first pass on pro-forma 2021 estimates. FANG stated on the deal call that it plans to run two rigs on the Guidon assets and we assume a two rig cadence with QEP as well. Our 2021 capex estimate increases to $1.53bn (from $1.21bn), which we estimate results in FY21 oil and total production of 220 mbbls/d and 359 mboe/d, respectively. Incorporating ~$60mm of G&A synergies, which is the low-end of FANG’s $60-80mm total annual synergy guidance and offset by $22mm of added quarterly interest expense, we forecast ~$1.34bn of pre-dividend FCF in 2021 (from $1.06bn) which increases to $1.52bn in 2022 (from $1bn). We project strip leverage of 1.9x at YE21 which improves to 1.5x at YE22, which is right in line with our previous estimates. On valuation we see FANG trading 4.8x/4.1x 2021/22E EBITDA compared to 5.1x/4.7x pre-deal (compares to peers at 4.5x/4.5x), while the deal enhances the pre-dividend FCF/EV yield, reinvestment rate estimates and estimated WTI breakeven of the program.
They raised their price target on FANG by $5 to $53 and rate it as Overweight
We reiterate our Overweight rating and raise our NAV-derived PT to $53 (from $48) on the back of FANG’s acquisitions that add core inventory depth and strengthen visibility on reinvestment and capital return. FANG announced it will acquire QEP and Guidon for $3Bn (22.9mm shares or 14.5% of the current shares outstanding, $375mm cash and $1.6bn QEP debt) increasing its Midland Basin position by 81.5k net acres, adding 60 mbbls/d of oil production (95 mboe/d total) and ~1,100 core locations. FANG expects to realize $60-80mm of synergies from the transactions from G&A savings, refinancing QEP debt and optimized operations. FANG remains focused on keeping pro-forma 4Q20 volumes flat through 2021 and expects to reallocate capital to Tier 1 assets being acquired. The transaction is expected to be accretive on 2021 financial metrics, as well as reduce the reinvestment rate with the addition of 56 DUC locations.
Easing Core Inventory Concerns. With core inventory depth being a persistent overhang on the FANG story, a subject we tackled several weeks ago in our “Simmons Upstream Data Monitor: Quantifying FANG Inventory Depth”, FANG is taking decisive action to increase reinvestment visibility in its development program with the QEP and Guidon acquisitions. FANG estimates the acquisitions add over 1,000 Tier 1 Midland locations, or more than five years of project inventory at the 2020 pace of development, and expects to reallocate activity from its legacy business to Guidon. We look at relative operating performance between the three operators below, and FANG delivered 9% and 15% better performance than Guidon and QEP in 2019, respectively. FANG discussed that it plans to increase inter-lateral well spacing and completion intensity as it moves forward with QEP development.
Accretive on 21/22 Multiples and FCF. FANG management stressed that the deal was accretive on all key financial metrics, and while it did not provide updated guidance, we take a first pass on pro-forma 2021 estimates. FANG stated on the deal call that it plans to run two rigs on the Guidon assets and we assume a two rig cadence with QEP as well. Our 2021 capex estimate increases to $1.53bn (from $1.21bn), which we estimate results in FY21 oil and total production of 220 mbbls/d and 359 mboe/d, respectively. Incorporating ~$60mm of G&A synergies, which is the low-end of FANG’s $60-80mm total annual synergy guidance and offset by $22mm of added quarterly interest expense, we forecast ~$1.34bn of pre-dividend FCF in 2021 (from $1.06bn) which increases to $1.52bn in 2022 (from $1bn). We project strip leverage of 1.9x at YE21 which improves to 1.5x at YE22, which is right in line with our previous estimates. On valuation we see FANG trading 4.8x/4.1x 2021/22E EBITDA compared to 5.1x/4.7x pre-deal (compares to peers at 4.5x/4.5x), while the deal enhances the pre-dividend FCF/EV yield, reinvestment rate estimates and estimated WTI breakeven of the program.