VNOM - Diamondback Energy Q2: Time To Take Some Profits Off The Table

2023-08-07 20:04:45 ET

Summary

• Diamondback Energy, Inc.'s Q2 2023 adjusted earnings per share were $3.68, missing analyst expectations.
• Oil-equivalent production increased to 449.9K Boepd, with oil production accounting for 58.5% of total output.
• The company declared a base dividend of $0.84 per share.
• I recommend buying Diamondback Energy stock between $148.2 and $144.2, with potential lower support at $137.75.

Introduction

Midland, Texas-based Diamondback Energy, Inc. (FANG) released its second-quarter 2023 earnings on July 31, 2023.

Note: This article updates my article published on June 13, 2023. I have been following Diamondback Energy since 2019.

1 - 2Q23 Results Snapshot

The company reported the second quarter of 2023 earnings of $3.68 per share . This compares to $7.07 per share in 2Q22. FANG missed analysts' expectations.

This quarter's oil-equivalent production was 449.9K Boepd at a composite oil price of $46.31 per Boe compared with $79.49 a year ago. Oil production was 263.1K Bopd or 58.5% of the total output.

Diamondback's second-quarter cash operating cost was $10.66 per Boe compared to $11.61 in the prior-year quarter.

This quarter's revenues were $1.919 billion , down 30.7% from the year-ago quarter's sales of $2.768 billion.

Commodity prices have dropped by nearly two dollars from the preceding quarter. The decrease reflects lower overall price realization, partially compensated by higher-than-expected production.

Diamondback declared a base dividend of $0.84 per share in 2Q23, an increase of 5%. However, the company did not pay any special dividend this quarter due to the drop in revenue.

Diamondback repurchased 2,427,880 shares in 2Q23 for $321 million (at a weighted average price of $132.21/share ); il also repurchased 397,800 shares of common stock to date in 3Q23 for $54 million, excluding excise tax (at a weighted average price of $136.40/share ).

Travis Stice, the CEO, talked about inflation and its effect on costs. He said in the conference call:

in May, we also see continued input costs coming down on steel, cement and other items. So it's hard to forecast into the future, but we definitely believe that we're going to see a softening in many of the costs that we've seen from the first half of the year. And we also continue to rely on the organization

2 - Investment Thesis

I continue to promote Diamondback Energy, Inc. as an excellent long-term opportunity despite a slow start in 2023, with free cash flow down significantly due to oil and gas prices back to normal.

The company is solid with excellent growth prospects, and oil and gas prices are going up again, pushing the stock price toward unsustainable new highs.

Thus, I continue to recommend a long-term investment in this industry. However, it is time to take some profit off and build a cash position for a possible retreat in a few weeks. One thing is certain in the oil business is the volatility and recurrent up-and-down waves.

Thus, trading LIFO using technical and fundamental analysis is the only viable strategy to provide a decent long-term reward while reducing short-term risks.

3 - Stock Performance

Diamondback Energy owns one subsidiary after acquiring Rattler Midstream. The subsidiary is Viper Energy Partners (VNOM) , which trades separately with comparable results.

Diamondback Energy's performance over the year is solid, with an increase of 23%. VNOM is unchanged.

Diamondback Energy - 2Q23 Quarterly Financial History: The Raw Numbers

Source: Diamondback Energy press release .

Analysis: Revenues, Free Cash Flow, Net Debt, and Oil and gas Production

1 - Quarterly revenues and others were $1,919 million in 2Q23

2 - Generic free cash flow was $657 million in 2Q23

Operating cash flow is $1,513 million , and CapEx is $856 million.

Trailing 12-month free cash flow is now $1,680 million , with the second quarter's free cash flow of $657 million .

FANG declared a 2Q22 base cash dividend of $0.84 per share but no extra cash dividend.

Diamondback repurchased 2,427,880 shares in 2Q23 for $321 million (at a weighted average price of $132.21/share ); il also repurchased 397,800 shares of common stock to date in 3Q23 for $54 million, excluding excise tax (at a weighted average price of $136.40/share ).

3 - Consolidated Net debt is $6.68 billion in 2Q23 (incl. subsidiaries). Standalone liquidity is ~1.6 billion.

As of June 30, 2023, FANG had approximately $18 million in cash and cash equivalents and a total debt of $6,693 million , representing a net debt-to-Adj. EBITDA 1.03x . (See table below.)

The cash position has always intrigued me. It would be better if the company could increase its cash position a little.

FANG's total debt, excluding its subsidiary VNOM, is $6,039 million . Details are shown below:

4 - Quarterly production was 449.9K Boep d in 2Q23

Production for 2Q23 was 449.9K Boepd, which is a new record. It was up 5.9% sequentially and up from 380.5K Boepd the same quarter a year ago (see chart above).

The percentage of oil is 58.5% in 2Q23. Below is the chart repartition between oil, NG, and NGL.

The average oil composite in 2Q23 (unhedged) was $46.31 per Boe , down from $79.49 a year-ago quarter and down 6.9% sequentially. We may have found a bottom here, and I believe prices will increase in 3Q23.

During the second quarter, the average realized oil price was $71.33 per barrel, and realized natural gas prices were $0.94 per thousand cubic feet (MMcf) from $3.61 in the year-ago period. NGL price was $16.42 per barrel against $40.69 last year.

5 - 2023 Guidance - Oil Production is expected to be 262K - 265K Bopd in 2Q23. 2023 CapEx between $2.6 billion and $2.675 billion.

• Full-year 2023 oil production guidance of 260 - 262 Kbopd.
• Full-year 2023 cash CapEx guidance of $2.6 - $2.675 billion.
• The Company expects to drill between 335 and 350 gross wells and complete between 330 and 345 gross wells with an average lateral length of approximately 10,500 feet in 2023.
• 3Q23 oil production guidance of 262 - 265 MBO/d and 3Q23 cash CapEx guidance of $650 - $700 million.

Technical Analysis (Short Term) and Commentary

FANG forms an ascending channel pattern with resistance at $151 and support at $148. RSI is now 71 , implying that FANG is overbought, which triggers a sell signal.

The trend of oil and NG prices is crucial before selecting a definitive trading/investing strategy. Oil and Gas prices have retraced significantly in 1Q23, but due to OPEC+ action, oil prices jumped well over $80 per barrel since July. Natural gas price in the USA has recovered from its low as well.

Thus, I raise again the short-term trading strategy to trade LIFO to 65% 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 2.26%.

I suggest selling between $149 and $151.5 with possible higher resistance at $152 and waiting for a retracement between $148.2 and $144.2 with potential lower support at $137.75.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. 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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