VNOM - Diamondback Energy: Slipping Along With Oil Prices

Summary

• The quarter's revenues were $2,768 million, with a net income of $1,416 million or $7.93 per diluted share.
• Production for 2Q22 was 380.451K Boep/d, down slightly sequentially and down from 401.45K Boep/d the same quarter a year ago.
• I recommend buying FANG on any weakness at or below $125 with potential lower support at $112.25.

Introduction

Midland, Texas-based Diamondback Energy, Inc. ( FANG ) released its second-quarter 2022 on August 1, 2022.

Also, On August 24, 2022, Diamondback Energy completed the acquisition of Rattler Midstream LP.

Note: This article is an update of my article published on June 1, 2022 , about the preceding quarter.

1 - 2Q22 results snapshot and recent news

The company reported the second quarter of 2022 adjusted earnings of $7.07 per share, beating analysts' expectations.

This quarter's oil-equivalent production was 380.451K Boepd (58.1% liquids) sold at a record oil composite price of $79.49 per Boe compared with $45.63 a year ago. Oil production was 221.1K Bop/d.

This quarter's record revenues of $2.768 billion beat estimates, up 64.7% from the year-ago quarter's sales of $1.681 billion. The outstanding results can be attributed to the continued surge in energy prices in 2Q22.

Diamondback pays a regular quarterly of $0.70 a share and declared a variable dividend of $2.35 for a total dividend this quarter of $3.05 in 2Q22.

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

We once again delivered operationally, producing over 221,000 barrels of oil per day, near the high end of our quarterly guidance range. Our discretionary cash flow or operating cash flow before working capital changes totaled $1.8 billion, up 27% quarter-over-quarter, setting a new high for the company. This increase was primarily due to a favorable backdrop -- macro backdrop as well as improvement to our realized pricing as hedges put on last year continue to roll off.

2 - Investment Thesis

The investment thesis for FANG is still complex due to the high valuation triggered by elevated oil and gas prices, which are now going down after the FED signaled that it would continue hiking interest rates even if it is at risk of triggering a recession.

Oil prices are below $90 per barrel, which is down compared to the $135+ per barrel experienced a few months earlier. It is time to take some profits off.

However, Diamondback Energy should be considered a long-term investment, and it is reasonable to accumulate the stock on any significant weakness. However, the volatility attached to the oil segment should compel you to trade short-term LIFO FANG using at least 30% of your entire position.

This two-level strategy has prevailed in my marketplace, "The Gold and Oil Corner," and I believe it is the most rewarding strategy in those circumstances. Unfortunately, only U.S. investors can use LIFO, but there is still an alternative for others. Please read my note at the end of this article.

3 - Stock Performance

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

Diamondback Energy's performance on a one-year basis is solid, with a jump of 75%. However, the rally is now showing some signs of fatigue after the FED signaled that it is not done with its rate hike, which increases the risk of a recession.

Diamondback Energy - 2Q22 Quarterly Financial Table: The Raw Numbers

Source: Diamondback Energy press release

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

1 - Quarterly revenues and others were $2,768 million in 2Q22

Lease operating expense LOE was $4.59 per Boe, compared with $4.30 in the second quarter of 2021. Gathering and transportation expenses increased in the first quarter of 2022 to $1.76 per Boe from $1.53 end of 2021. we noticed some inflationary pressures building up in costs.

2 - Generic free cash flow was $1,154 million in 2Q22

Operating cash flow is $1,707 million, and CapEx is $553 million.

Trailing 12-month free cash flow is now $2,823 million, with the first quarter's free cash flow at $1,154 million.

FANG declared a 2Q22 base cash dividend of $0.75 per share and announced a variable cash dividend of $2.30 per share. It is a total base-plus-variable dividend of $3.05 per share for 2Q22.

Also, FANG repurchased 2,368,816 shares of common stock in 2Q22 for $303 million (at a weighted average price of $127.61/share) and repurchased 1,761,363 shares of common stock in 3Q22 (as of August) for $200 million (at a weighted average price of $113.70/share).

3 - Net debt is $5.618 billion in 2Q22 (incl. subsidiaries). Excellent profile.

FANG's total debt, excluding its subsidiary, is $4,205 million.

4 - Quarterly Production was 380.451 Boep/ d in 2Q22

Production for 2Q22 was 380.451K Boep/d, down slightly sequentially and down from 401.45K Boep/d the same quarter a year ago (see chart above).

The percentage of oil is 58.1% in 2Q22. Below is the chart repartition between oil, NG, and NGL.

The average oil composite in 2Q22 (unhedged) was $79.49 per Boe, up from $45.63 a year-ago quarter and up 14.2% sequentially.

During the second quarter, the average realized oil price was $108.80, and realized natural gas prices were $6.15 per thousand cubic feet (Mcf) from $2.40 in the year-ago period.

The oil prices have retraced significantly during the third quarter, and I expect an average realized price to drop by about 15% in 3Q22.

5 - 2022 Guidance revised

• In 2022, Diamondback slightly increased its total net production guidance between 374k-380k Boep/d.
• FANG expects its oil production to be in the 220k-222k Bop/d.
• The company forecasts CapEx between $1.82 billion and $1.9 billion. In the third quarter of 2022, the company expects capital spending of between $470 and $510 million.
• FANG increased its expected cash tax rate to 10-15% of the pre-tax income from 7-8%.

Technical Analysis (Short Term) and Commentary

FANG forms an ascending channel pattern with resistance at $141.2 and support at $125.

The short-term trading strategy is to trade LIFO about 30% of your position and keep your core long-term amount for a much higher payday. I suggest selling between $141.2 and $142.5 and waiting for a retracement between $125 and $121.2 with potential lower support at $112.25.

Note: The LIFO method is prohibited under International Financial Reporting Standards ((IFRS)), though it is permitted in the United States by Generally Accepted Accounting Principles ((GAAP)). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stock, one for the long term and one for short-term trading.

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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