Energy Prospectus

Diamondback Energy, Inc. (NASDAQ: FANG) (“Diamondback” or the “Company”) today announced financial and operating results for the second quarter ended June 30, 2021.

SECOND QUARTER 2021 HIGHLIGHTS

Q2 2021 average production of 242.5 MBO/d (401.5 MBOE/d) < Beat my forecast of 389,000 Boepd including 234,000 BOPD.

Generated Q2 2021 cash flow from operating activities of $954 million; Operating Cash Flow Before Working Capital Changes (as defined and reconciled below) of $944 million, or $5.19 per diluted share < Compares to my forecast of $987 million Adjusted Operating Cash Flow per share.

Q2 2021 cash capital expenditures of $366 million; Q2 2021 activity-based capital expenditures incurred of approximately $418 million

Generated Q2 2021 Free Cash Flow (as defined and reconciled below) of $578 million, or $3.18 per diluted share < Very close to my forecast.

Increasing annual dividend by 12.5% to $1.80 per share; declared Q2 2021 cash dividend of $0.45 per share payable on August 19, 2021; implies a 2.3% annualized yield based on the July 30, 2021 share closing price of $77.13

Closed previously announced divestitures of non-core Permian assets for net proceeds of $82 million

Previously announced divestiture of Williston Basin assets expected to close in late Q3 2021

As previously announced, Diamondback fully redeemed the $191 million aggregate principal amount of remaining 4.625% 2021 Energen bonds in June

Announced full redemption of $432 million remaining aggregate principal amount of 5.375% bonds due 2025

Flared 1.0% (2.0% including QEP) of gross natural gas production in the second quarter of 2021; 0.9% (1.7% including QEP) in the first half of 2021
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I will take a closer look tomorrow morning and update my forecast/valuation model.

Stifel's take

Diamondback Energy, Inc. (FANG, $76.75, Buy; Target $141.00) < Compares to my valuation of $138 before I've had a chance to update my forecast/valuation model for FANG's outstanding Q2 results.
Announces capital efficient beat and raise and strengthens return of capital program - Derrick Whitfield at Stifel
We view the release as very positive. The positives include: i) a total equivalent and oil production beat (3.0% and 3.2% above consensus) on lower than expected capex (6.9% below consensus), ii) better than expected Q321 guidance (6.6% and 6.0% above consensus on total equivalent and oil volumes, respectively) on lower than expected capex (6.3% below consensus), and iii) a 12.5% increase in the quarterly dividend (2.3% annualized yield). The only negative was lower than expected Q421 implied production guidance (1.6% below on oil). We note the implied Q421 capex guidance is 7.8% below consensus. Net-net, we expect a positive reaction based on Diamondback's beat and raise for production volumes, improving capital efficiency, and the shareholder-friendly return of capital program.
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MY TAKE: FANG and VNOM always provide conservative production guidance and regularly beat the high end of their guidance.

I have updated my forecast/valuation model for FANG and I have increased my current valuation by $2 to $140/share.
> FANG is generating a lot of free cash flow despite having some very "Bad Hedges" that have reduced operating cash flow by $484 million during 1H 2021.
> Their "Bad Hedges" expire at year-end and if oil prices average $70/bbl the Company should generate over $3 Billion of free cash flow from operations in 2022.
> Based on my 2022 forecast, FANG should generate close to $28/share of operating cash flow next year, so a reasonable 12-month price target is 6X operating cash flow or $168.

Another plus is that the West Texas natural gas and NGL takeaway capacity issues have been resolved, so all of our Permian Basin companies should now be getting much better realized gas prices.

My updated forecast/valuation model has been posted to the EPG website.

PS: All of the analyst that said US shale companies could not make money will be eating a lot of crow if oil stays in the $70s.

PPS: If you are looking for companies that don't have "Bad Hedges" check out MGY and MNRL.