Diamondback Energy – mixed Q3 results

[Petroleum economist]

Diamondback Energy reported mixed Q3 results, with profits slightly below my expectation. The merger with Endeavor closed in Q3. Production was as expected, but the 2025 production outlook looks low. Profit was lower than expected, mainly due to once-off high merger and integration cost. Shareholder returns are decent and can increase in the future.

Production
• Q3 production was 571.1 BoE/d), just above the outlook (566-569 K BoE/d) provided in October.
• Q3 was the 11th consecutive quarter that Diamondback beats its outlook.
• Q3 (571.1 Boe/d) was well above the Q2 production(474.7 K BoE/d), as the merger with Endeavor (production 350 K BoE/d) closed on the 10th September and Endeavor contributed 20 days of production in Q3.
• Diamondback provided an outlook of 840-850 K BoE/d for Q4. I expect Q4 production to be at the top end at 850 K BoE/d.
• Diamondback also provided its first outlook (587-590 K BoE/) for 2024 with Endeavour included. My 2024 estimate (589 K BoE/d) is close.
• With Endeavor included, 2025 production can increase to 840 K BoE/d. Diamondbacks outlook of 800-825 K BoE/d looks meagre compared to Q4, also in view of their track record of under promising and overdelivering.
• With ample reserves (equivalent to 15.9 years of 2024 production) and a high Reserves Replacement Ratio (RRR 2019-2023 = 2.52), production can grow with 3-5%/year to 1,000 K BoE/d in 2028.

Balance sheet
• Long term debt was $ 11.923 B, similar to the $ 12.0 B in late Q2.
• Cash at hand decreased from $ 5.9 B to $ 0.4 B due to the Endeavour payments.
• With only one quarter of Endeavour included in 2024, 2024 debt/EBITDA ratio is heading for a high 1.57.
• With Endeavour included for the whole of 2025, debt/EBTDA ratio will reduce to a good 0.9.
• The equity ratio (=equity/balance sheet total) increased from 54.2% (Q2) to a good 59.0% (Q3).
• The equity ratio should increase to a healthy 59.5% late 2024
• The balance sheet allows shareholder returns.

Profitability
• Q1 net profit was $ 4.28, and $ 4.52 in Q2.
• Q3 net profit was well below with an eps of $ 3.19, partially due to lower oil prices.
• Q3 eps was lower than I had expected due to $ 258 M merger and integration expenses.
• Realized gas prices (-$ 0.26/MM Btu) went negative in Q3. (Q1 +$ 0.99/MM Btu, Q2 +$ 0.10/MM Bu)
• With WTI=$ 71.77/bbl in Q4, 2024 net eps can be $ 16.25, PE=11.1).
• In 2025 the eps can increase to $ 18.30 (PE=9.8).
• By 2027/2028 the eps can reach $ 23.40-24.70 (PE=7.3-7.7)
• Diamondback is a very profitable company.

Shareholder returns
• Diamondback pays a fixed dividend of $ 0.90.
• There was also a variable dividend of $ 1.08 (Q1) and $ 1.44 (Q2).
• There was no variable dividend in Q3
• For Q4 and H1 2025 I expect there will be no variable dividends.
• Diamondback buys shares: $ 47 M in Q1, none in Q2 and $ 515 M in Q3
• Diamondback announced that that the already bought back shares in Q4 for $ 185 M.
• Total yield in 2024 will be 4.7%.
• Diamondback targets to return 50% of the FCF to shareholders.
• In 2025 yield can be like 2024 at 4.8-5.2%, increasing to 7.5-8.0% over time with increasing production.

Conclusions
Diamondback Energy reported mixed Q3 results, with profits slightly below my expectation. The merger with Endeavor closed in Q3. Production was as expected, but the 2025 production outlook looks low. Profit was lower than expected, mainly due to once-off high merger and integration cost. Shareholder returns are decent and can increase in the future.

Diamondback ranks a relatively high 21h out of 82 in my oil and gas company ranking.

[KGardiner]

Thanks Harry,
Glad to see they are buying back shares on the cheap!
Kevin