Diamondback Energy – 2024 results

[Petroleum economist]

Summary
Diamondback reported good 2024 results. Q4 production was well above expectation. As a consequence, 2024 profit exceeded expectations. Reserves increased due to the Endeavor acquisition. The RRR was bit low. Production should continue to grow. Long-term debt is too high and Diamondback is implementing assets disposals. Profitability is good and PE is medium. Shareholder returns are at a decent level.

Reserves
• 2024 proven reserves (3,557 M BoE) were up 1,379 M BoE versus 2023 (2,178 M BoE). The reserves increase was due to the Endeavor acquisition (1,569 M BoE), partially compensated by 121 M BoE of assets sales.
• 2024 Reserves Replacement Ratio (RRR) of 0.68 was disappointing, not replacing volumes produced by new reserves.
• RRR over the period 2019-2024 (2.06) is very sound and well above industry average (1.09).
• Proven reserves are equivalent to a good 11.0 years of 2025 production (industry average 9.5-10.0 years).
• The reserves and RRR combined allow a further growth of production with 3.5-4.5% per year.

Production
• Q4 production (883.4 K BoE/d) was above guidance (830-850 K BoE/d) and also well above my anticipated 850 K BoE/d.
• 2025 production outlook is 893-909 K BoE/d. The outlook is inclusive 37 K BoE/d from the Double Eagle acquisition with 27 K BoE/d (start in Q2). The indicated Q1 production is 860-875 K BoE/ and Q2-Q4 production is 891-920 K BoE/d.
• The guidance above does not mention the $ 4.45 B dropdown of assets to Viper (announced in January 2025). My guess is that these assets have approx. 30 K BoE/d of associated production.
• Including both the Double Eagle acquisition and the Viper dropdown, I expect for 2025 production to be 880-885 K BoE/d.
• After 2025 production can grow to 1,000-1,050 K BoE/d by 2029.
• Fluids are liquid dominated and are 54% oil, 22% NGL and 24% gas.

Balance sheet
• Long-term debt late 2024 was $ 12.1 B, well up from the $ 6.8 B at the end of 2023. The increase was due to the Endeavor acquisition.
• 2024 debt/EBITDA ratio, with only one quarter of Endeavor included in 2024 was a high 1.53.
• In 2025, with Endeavor included for the full year, the ratio can fall to 0.88, lower if 2025 assets disposal is considered.
• The debt will increase with $ 1.0 B due to the already announced $ 4.45 B ($3.0 B cash) Double Eagle acquisition. The debt will reduce due to the $ 1.0 B cash from the assets drop down to Viper.
• Diamondback has indicated it wants to dispose of another $ 1.5 B of non-core assets and wants to reduce the debt to $ 10 B.
• The equity ratio (=equity/balance sheet total) at the end of 2024 was a good 59.2%.
• The balance sheet allows shareholder returns.

Profitability
• Diamondback is a profitable company.
• 2024 eps was $ 16.57, well above my expectation of $ 15.97.
• Realized gas prices recovered from a negative -$ 0.48/MM Btu (Q3) to a positive +$ 0.28/MM Btu (Q4).
• Q4 was the first quarter with Endeavor included. Some Q4 cost (depreciation/amortization and administration) were higher than I had anticipated.
• For 2025, with WTI- $ 70-75/bbl, I expect an eps of $ 15.10-17.10 (PE is a medium 9.1-10.3).
• After 2025 with a growing production the eps can increase to $ 19.10-21.50 (PE=7.2-8.1).

Shareholder returns
• Diamondback targets to return 50% of the FCF to shareholders.
• Diamondback paid in Q4 a $ 1.00 regular dividend, but no special dividend like it did in Q1-Q3.
• In the latest return of capital framework special dividends are no longer mentioned.
• Diamondback in Q4 bought back 2.3 M shares for $ 402 M.
• For 2025 I expect shareholder returns of 5.5-6.5%.
• After 2025 returns can increase to 8.0-9.5%.

Conclusions
Diamondback reported good 2024 results. Q4 production was well above expectation. As a consequence, 2024 profit exceeded expectation. Reserves increased due to the Endeavor acquisition. The RRR was bit low. Production should continue to grow. Long-term debt is too high and Diamondback is implementing assets disposals. Profitability is good and the PE is medium.
Shareholder returns are at a decent level.

In my oil and gas company ranking Diamondback ranks just above average, at 35th out of 84.

[dan_s]

I have updated my forecast/valuation model for FANG for their outstanding Q4 results and 2025 production guidance that was higher than expected. I am using the midpoint of their production guidance for 2025, but this Company likes to "Under-Promise and Over-Deliver". They are going to complete ~575 new high-rate horizontal wells in 2025, so I think their 2025 exit rate should be close to 940,000 Boepd (~55% oil).

Higher realized natural gas prices would be nice. The Permian Basin needs "Pipelines Baby Pipelines" before they can "Drill Baby Drill".

My current valuation of FANG is $245.

TipRanks: "In the last 3 months, 23 ranked analysts set 12-month price targets for FANG. The average price target among the analysts is $214.13." < The 7 price targets that have been updated since yesterday are $204 to $240.

FANG should generate close to $6 billion of free cash flow this year. I expect them to keep the dividend at $1.00/quarter (~$1.2 billion) and split the remaining FCF between stock buybacks and debt repayment, both of which should increase the per share value.