Analysis of Diamondback Q1 results

[Petroleum economist]

Diamondback reported solid Q1 results. Production met targets and will grow in 2025. The balance sheet is rock solid, profitability is good, and shareholder returns adequate.

Production
• Q1 production (461.1 K BoE/d) was in line with guidance (458-464 K BoE/d) and comparable with Q4 2023 (462.6 K BoE/d). The Q2 outlook is flat at 459-466 K BoE/d.
• Diamondback reiterated its 2024 outlook (458-466 K BoE/d), a modest 2% growth versus 2023 (448 K BoE/d).
• After the late 2024 merger with Endeavour, 2025 production should increase 75% to 800-825 K BoE/d.
• Diamondback proven reserves of 2,178 M BoE, combined with 1,500 M BoE from Endeavour, are equivalent to 12.2 years of 2025 production. This is well above industry average of 9.5-10 years and allows production in 2026 and beyond to grow with 3-5% per year.
• Q1 production was liquid dominated (oil 59%, NGL 21%, gas 20%).
• Q1 composition (59/21/20) is slightly out of tune with the reserve’s composition (52/24/23), meaning that over time oil share will slowly reduce. This accelerated by the merger with Endeavour which has a lower oil content (57%).

Balance sheet
• Solvency modestly increased from an already high 60.1% (2023) to an even stronger 61.0%.
• With 50% of the free cash flow directed towards the balance sheet, solvency late 2024 should be well above 63%.
• The 2024 debt/EBITDA ratio (< 0.80) will be very healthy.
• The $ 28 B merger with Endeavour, paid with 117.4 M shares and $ 7-8 B new debt, will reinforce the balance sheet. Solvency in 2025 will be 65% or more.
• The balance sheet is rock solid and allows increasing shareholder returns.

Profitability
• Q1 net profit of $ 768 M (eps of $ 4.28) and adjusted profit of $ 450 M (eps $ 4.50) were in line with the analyst forecast ($ 4.43).
• Diamondback has hedged 52% of 2024 oil production, therefore partially benefitting from the higher oil prices.
• Diamondback has hedged 53% of the 2024 gas production and is feeling no pain from the lower gas prices Gas revenues are only 2.7% of the total revenues.
• For 2024, using WTI = $ 80-85/bbl and excluding Endeavour, I expect an eps to $ 19.70-20.70 and a medium/high PE of 9.7-10.4. The eps is inclusive cash hedging results but ignores non-cash hedging results. I may update after I have seen Dan’s cost sheet.
• With growing production in 2025 and synergy savings with Endeavor of$ 550 M/year, the eps in 2025/2026 (despite a 65% share dilution) can increase to $ 22.00-24.00 and the PE can decrease to 8.4-9.1
• 2024-unit costs are below industry average at $ 25.60/BoE. Synergy with Endeavor can further lower the unit costs. Low unit costs make Diamondback robust under lower oil prices.
• Diamondback is a very profitable company.

Shareholder returns
• Diamondback paid in Q1 a fixed interim dividend of $ 0.90 and a variable dividend of $ 1.07. Share buyback was limited to 279 K shares or $ 42 M.
• Total Q1 shareholder returns were $ 394 M (dividends $ 352 M, buybacks $ 42 M),
• Diamondback intends to return 50% of the free cash flow to shareholders. Q1 returns (49.8%) were in line with this.
• I expect the free cash flow and thus the shareholder returns to pick up in Q2-Q4. Dividends and buybacks combined should be equivalent to a solid 5.5-6.0%.
• In 2025 and beyond - with further strengthening of the balance sheet and growing production – shareholder returns can be further increased.

Conclusion
Diamondback is an attractive investment.

In my oil and gas companies ranking, Diamondback ranks high (11th out of 72 companies).
I use risk factors in my oil and gas company ranking. for setting discount rates future earnings. Diamondback is the only company out of seventy-two, which has all the risk factors green. Risk factors for Diamondback:
Solvency: L, Free cash flow: L, Liabilities: L, Unit costs: L, Reserves: L, Market Value: L, Composition: L


If you want to know more on the ranking system or the results, than please drop me a private message with your email address. I will send you a set of PowerPoint slides with more details and the latest ranking.

[aja57]

Thank you ,PE for your update and analysis.

[dan_s]

Diamondback's Q1 results are in line with my forecast, which they always are since the company gives accurate and detailed guidance. FANG is good for growth and income.

[dan_s]

I will update my forecast tomorrow.