Stifel's notes from visit with Diamondback Energy
Posted: Tue Oct 03, 2023 1:49 pm
Diamondback Energy Inc. (FANG, Buy, $150.20) – DW
Diamondback Energy is an independent oil and gas exploration company with oil and gas properties in the Permian Basin in West Texas.
The company has an acreage footprint in both the Midland and Delaware Basins of the Permian, and also has 55% ownership in Viper
Energy Partners (VNOM, Buy, $27.58), a publicly-traded mineral and royalty subsidiary created by Diamondback. During our meeting with
management, we met with Daniel Wesson (EVP and COO).
In our view, the key takeaways from the meeting were:
Diamondback will remain disciplined despite high oil prices. Management expects to maintain a flat activity profile for the foreseeable
future as the global oil markets aren’t calling for U.S. onshore growth given the amount of OPEC production offline. Additionally, the
company noted the last decade proved the Lower 48 shouldn’t be swing producer for the world from an investment and returns perspective.
As a result, management intends to hold activity flat across its position and generate consistent cash returns for its shareholders through
the commodity cycle. The company will lean into dividends when commodity prices are above mid-cycle prices and pursue share
repurchases when prices are below mid-cycle prices or during dislocations.
Management remains focused on return of capital and growing cash flow per share. During our meeting, the company highlighted
the three ways it can drive value (cash flow per share growth) for its shareholders, including accretive transactions, share repurchases,
and operating/capital efficiencies. With M&A becoming increasingly more difficult to execute (as most of the remaining privates have
inventory issues), the company believes the value of being the low-cost operator has never been more important. While the company is
targeting longer laterals and new concepts on the well-bore construction side to drive a step-change in operating efficiency, management’s
primary focus is on achieving record wells more frequently.
The M&A landscape continues to be tight in the Midland Basin. The M&A landscape was a central point of focus during our meeting.
Management broadly expects consolidation to continue with the publics acquiring the privates over the next few years and then the
publics acquiring the publics near the turn of the decade. Outside of the potential “unicorn” transactions (Endeavor and CrownRock),
Diamondback does not view the landscape within the Midland Basin to be constructive for accretive acquisitions, noting that the company
would be paying a premium for less productive rock. Investors were interested in the company's views on the Delaware Basin side of the
Permian. While management likes the New Mexico side of the Delaware Basin, they noted there are very limited ways to gain scale due
to the size of the operators (COP, EOG, DVN, XOM) on that side of the basin.
Other notable items and quotes:
• Expect 15,000-foot lateral to account for 10% of the drilling program for 2024.
• Diamondback is expecting to be a full cash taxpayer in 2024.
Diamondback Energy is an independent oil and gas exploration company with oil and gas properties in the Permian Basin in West Texas.
The company has an acreage footprint in both the Midland and Delaware Basins of the Permian, and also has 55% ownership in Viper
Energy Partners (VNOM, Buy, $27.58), a publicly-traded mineral and royalty subsidiary created by Diamondback. During our meeting with
management, we met with Daniel Wesson (EVP and COO).
In our view, the key takeaways from the meeting were:
Diamondback will remain disciplined despite high oil prices. Management expects to maintain a flat activity profile for the foreseeable
future as the global oil markets aren’t calling for U.S. onshore growth given the amount of OPEC production offline. Additionally, the
company noted the last decade proved the Lower 48 shouldn’t be swing producer for the world from an investment and returns perspective.
As a result, management intends to hold activity flat across its position and generate consistent cash returns for its shareholders through
the commodity cycle. The company will lean into dividends when commodity prices are above mid-cycle prices and pursue share
repurchases when prices are below mid-cycle prices or during dislocations.
Management remains focused on return of capital and growing cash flow per share. During our meeting, the company highlighted
the three ways it can drive value (cash flow per share growth) for its shareholders, including accretive transactions, share repurchases,
and operating/capital efficiencies. With M&A becoming increasingly more difficult to execute (as most of the remaining privates have
inventory issues), the company believes the value of being the low-cost operator has never been more important. While the company is
targeting longer laterals and new concepts on the well-bore construction side to drive a step-change in operating efficiency, management’s
primary focus is on achieving record wells more frequently.
The M&A landscape continues to be tight in the Midland Basin. The M&A landscape was a central point of focus during our meeting.
Management broadly expects consolidation to continue with the publics acquiring the privates over the next few years and then the
publics acquiring the publics near the turn of the decade. Outside of the potential “unicorn” transactions (Endeavor and CrownRock),
Diamondback does not view the landscape within the Midland Basin to be constructive for accretive acquisitions, noting that the company
would be paying a premium for less productive rock. Investors were interested in the company's views on the Delaware Basin side of the
Permian. While management likes the New Mexico side of the Delaware Basin, they noted there are very limited ways to gain scale due
to the size of the operators (COP, EOG, DVN, XOM) on that side of the basin.
Other notable items and quotes:
• Expect 15,000-foot lateral to account for 10% of the drilling program for 2024.
• Diamondback is expecting to be a full cash taxpayer in 2024.