FANG - Diamondback Energy: An Attractive Stock To Consider

2023-12-04 10:31:08 ET

Summary

• Sales for this quarter totaled $2.324 billion, which is 3.85% less than the $2.417 billion sales for the same period last year.
• This quarter's oil-equivalent production was 452.848K Boepd, up from 449.912K Boepd a year earlier.
• I recommend buying FANG between $151 and $147 with potential lower support at $141.

Introduction

Midland, Texas-based Diamondback Energy, Inc. ( FANG ) released its third-quarter 2023 earnings on November 26, 2023. This article updates my article published on August 7, 2023. I have been following Diamondback Energy since 2019.

Many analysts believe that Diamondback Energy, a tier-1 publicly traded company with significant leaseholds in the Permian Basin, namely in the Delaware and Midland basins , will be the next big acquisition to be announced in 2024. Diamondback Energy presents an attractive PDP reserve of 2,033 MMBoe in 2022, up 14% from the preceding year.

Since the 2020 COVID outbreak, there have been more major deals in the oil and gas market, and the number of large and medium E&P, primarily in the Permian, has decreased dramatically.

Diamondback Energy and EOG Resources (EOG) remain the primary candidates for possible acquisition/merger in this attractive segment. But we should not forget Devon Energy (DVN) and Marathon Oil (MRO), which are also searching to expand in the American shale patch and have expressed interest in expanding recently.

Endeavor Energy Resources and Mewbourne Oil are the two biggest privately owned producers in the Permian Basin of Texas and New Mexico that could be gobbled up in 2024.

This tremendous consolidation process started with the controversial acquisition of Anadarko by Occidental Petroleum, which overbid Chevron in a surprising move, and then many other companies were subsequently acquired (e.g., Anadarko, Noble Energy, PDC Energy, Hess, Concho Resources, Pioneer Natural Resources...).

A few major buyers were Chevron Corporation (CVX), Exxon Mobil (XOM), ConocoPhillips (COP), and Occidental Petroleum (OXY), with Warren Buffett's financial support. However, they have all acquired major players recently. They may not be inclined to expand further anytime soon after Exxon recently acquired Pioneer Natural Resources for $59.5 billion. At the same time, Chevron will soon complete its acquisition of Hess Corporation for $53 billion.

We recently learned that Occidental Petroleum emerged as the lead contender for buying Privately-held CrownRock L.P. A deal valued at approximately $12.5 billion .

ConocoPhillips also considered acquiring the privately held company, which is interesting and could indicate that it is actively looking now and might be the next buyer involved with a deal in the American shale patch. Stay tuned.

Performance in this sector has dropped significantly year over year, as shown in the chart below:

Still, FANG outperformed the group with an increase of 6% YoY.

In conclusion, Despite mixed results in 2023 and a valuation that is still too pricey, I support Diamondback Energy, Inc. as a great long-term prospect. Free cash flow has also decreased due to the return to normalcy of oil and gas prices. Still, the company utilizes the extra cash to provide investors with dividends and buybacks, which is excellent news.

The FANG board of directors declared in 3Q23 that its common shareholders would receive a cash dividend of $0.84 per share. In addition to the standard dividend, FANG declared a special dividend of $2.53 per share, for a total of $3.37 per share, or a yield of 5.09% .

Travis Stice, the CEO, said in the conference call:

our main focus remains a sustainable in growing base dividend that we think represents the most efficient way for our shareholders to understand what our shareholder return program looks like. Following that is the share repurchase program, which we laid out the -- what we've done in the third quarter in so far in the fourth quarter. And then we honor our commitment to return at least 75% of our free cash flow

In the third quarter of 2023, the company repurchased $56 million worth of shares for $136.59 each.

But in case of a fall in 2024, now is the time to collect profits and add to your cash position. One thing is always certain in the oil business: volatility and periodic ups and downs.

Thus, technical and fundamental analysis-based LIFO trading is the only realistic method to reduce short-term risks and provide a decent, secure long-term return.

1 - 3Q23 Results Snapshot and commentary

Although the company's third-quarter adjusted 2023 earnings of $5.49 per share topped analysts' estimates, it was lower than the adjusted result of $6.48 from the previous year because of a large decline in total realization.

Diamondback's cash operating costs for the third quarter of 2023 were $10.51 per BOE compared to $11.97 in 3Q22.

Sales for this quarter totaled $2.324 billion , which is 3.85% less than the $2.417 billion sales for the same period last year. Revenue rose by 22.6% over the previous quarter, as shown in the chart below:

The cash from operating activities and less capital expenditures generally represent free cash flow. However, because it is a non-GAAP determination according to a separate method used by the company, the total value of the FCF comes out to $820 million this quarter. There is $852 million in CapEx and $1,358 million in operating cash flow. Thus, a more standard calculation was $506 million in free cash flow for the third quarter, with a trailing 12-month free cash flow currently at $1,012 million.

On the debt front, as of September 30, 2023, FANG had approximately $827 million in cash and cash equivalents and an LT debt of $6,230 million , representing a net debt-to-Adj. EBITDA 0.83x.

FANG's total debt, excluding its subsidiary VNOM, is $5,697 million . Liquidity on a standalone basis is now $2.3 billion. Finally, the consolidated net debt was $5.55 billion in 3Q23.

The company completed the Joint venture transaction with Five Point Energy LLC for gross proceeds of $516 million and 30% in the Deep Blue Midland Basin LLC's new Joint Venture.

The debt situation is top-notch, with net debt to annualized 3Q23 adjusted EBITDA of 0.87x.

Details are shown below:

Finally, at a composite oil price of $54.37 per Boe, it was sharply up from the preceding quarter but well below $67.25 per Boe realized in 3Q22.

This quarter's oil-equivalent production was 452.848K Boepd , down from 449.912K Boepd a year earlier.

We can see above that the company has performed extremely well since 2016.

Oil production was 266.109K Bopd, or 58.8% of the entire output.

What to expect in the fourth quarter?

This bullish trend is expected to continue in 4Q23, with an expected 447K Boepd , up from the previous estimate of 435K-445K Boepd and slightly lower sequentially.

Oil volumes are likely to be around 263K Boepd . Also, the company expects a 2023 CapEx of between $2.66 billion and $2.7 billion.

Technical Analysis (Medium Term) and Commentary

FANG forms a descending channel pattern with resistance at $157.3 and support at $150. RSI is now 49 and is not particularly indicative.

Although descending channel patterns frequently result in a significant mid-term breakout, they are typically bearish in the near term.

However, if FANG is bought out, we can expect a 5%-10% sudden increase. Conversely, if FANG acquires significant assets, the stock could tank the same amount. The probability of this event happening in 2024 is high.

Thus, I lower the short-term trading strategy to trade LIFO to 50% of your position and keep your long-term core holding for a much higher payday or as a good source of steady income with a dividend yield now at 5%.

I suggest selling between $162.5 and $166 with possible higher resistance at $170 and waiting for a retracement between $151 and $147 with potential lower support at $141.

Warning: The TA chart must be updated frequently to be relevant. The chart above has a possible validity of about a week, maybe two. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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