2023-04-18 06:12:52 ET
Summary
- Brent crude prices experienced a significant increase to $86 per barrel following OPEC+'s decision to production cuts amounting to 1.6 million barrels per day.
- The growth in crude oil prices led to a corresponding increase in Diamondback Energy's stock price.
- The appearance of an inverted head and shoulders pattern and double bottom suggests a bullish outlook and implies the potential for higher prices.
The financial landscape of the oil and gas industry has been subject to significant turbulence in recent years, with the COVID-19 pandemic and fluctuating market forces posing unique challenges for major players. Amidst this dynamic environment, Diamondback Energy, Inc. ( FANG ) has emerged as a shining example of resilience and growth, defying the odds to deliver remarkable performance and continue its upward trajectory. This article examines FANG's financial performance, the influence of the current oil market, associated risks, and the technical outlook that contribute to its success. By analyzing the impact of oil market fluctuations and examining the role of contraction in manufacturing activities, this article offers an overview of FANG's financial journey and the strategic initiatives that have driven its robust growth, positioning it as a formidable contender in the oil and gas sector. It is noted that FANG's stock prices are exhibiting a strong bullish pattern, which suggests strong upward momentum in the future.
Financial Performance of FANG
The latest financial report reveals that FANG's total revenue in 2022 reached $9.08 billion, marking a significant increase from the $6.40 billion generated in 2021. This figure represents a 4,266.83% growth since 2013, with the upward trend in revenue following a linear pattern, as demonstrated in the chart below. However, the COVID-19 pandemic significantly impacted the global oil and gas industry, affecting FANG's stock price and causing a slight drop in revenue for 2020 due to reduced demand and falling oil prices. Fortunately, the decline was less severe than anticipated due to the company's efficient operations and cost management strategies. These strategies included curtailing production, reducing drilling and completion activities, lowering capital expenditures, and optimizing hedging strategies.
In response to the volatile oil price market, FANG voluntarily curtailed 9.0 MBO/d (16.1 MBOE/d) of total Q2 2020 production, primarily in May, to preserve value. As oil prices recovered significantly, the company resumed this curtailed production in June, incurring minimal associated costs. To further enhance operational efficiency, FANG scaled back its drilling and completion activities. During Q2 2020, the company averaged 13 operated drilling rigs with minimal completion activity and subsequently reduced its drilling activity to seven rigs and three completion crews by July. Assuming a continuation of market conditions at that time, FANG planned to operate between five and six drilling rigs and three to four completion crews for the remainder of 2020.
In terms of capital expenditures , FANG revised its 2020 cash CAPEX guidance to $1.8 - $1.9 billion. The company spent $562 million on cash CAPEX in Q2 2020, with activity-based capital expenditures amounting to approximately $348 million. FANG anticipated both cash and activity-based capital expenditures to decline in the second half of 2020, normalizing by Q4 2020 in line with their 2021 maintenance capital run-rate. Lastly, FANG employed an effective hedging strategy to shield its revenues from oil price volatility. By the end of Q2 2020, the company had projected an average of 168.1 thousand barrels of oil per day for the second half of 2020, with 98% of those hedges providing unlimited downside protection.
In 2021, FANG experienced a robust resurgence in revenue , driven by a rekindled demand for oil and gas as economies steadily reopened. The favorable growth trajectory in FANG's profitability over recent years indicates a solid foundation for ongoing expansion and development in the years to come. As worldwide energy demand escalates and the sector progressively shifts towards cleaner energy alternatives, FANG's commitment to operational efficiency, cost management, and sustainable practices will be crucial in preserving its competitive advantage.
The company's acreage is predominantly organized in contiguous blocks, enabling a manufacturing approach that capitalizes on economies of scale and centralizes production and fluid handling facilities. As the operator of approximately 98% of its acreage , FANG can effectively oversee operating expenses, development initiatives, and the collection and marketing of products. The company has successfully kept capital costs in check, with a total capital expenditure of $1.9 billion, in line with their guidance. They plan to allocate between $2.50 billion and $2.70 billion in 2023, taking into account anticipated inflationary pressures. Furthermore, FANG's average 83% working interest in their acreage enables them to reap the majority of the benefits from cost efficiencies.
With extensive experience in the Permian Basin, FANG's executive team aims to continually identify opportunities to optimize hydrocarbon recovery by refining and enhancing drilling and completion methods. This emphasis on efficient drilling and completion strategies has mitigated execution risks linked to intricate good paths. Additionally, completion techniques are constantly evolving to improve recovery and minimize expenses. FANG possesses approximately 5,383 square miles of proprietary 3-D seismic data encompassing their acreage, which expedites the assessment of their existing drilling inventory and offers valuable insights into prospective development activities.
Impact of Oil Market on FANG's Profitability
Brent crude prices surged to $86 per barrel after OPEC+ announced voluntary production cuts of 1.6 million barrels per day in response to oil prices dropping below $73 per barrel. This decline was instigated by banking contagion involving Silicon Valley Bank ( OTC:SIVBQ ) and Credit Suisse Group AG ( CS ). As oil producers expect a decrease in demand due to a slowing global economy, these production cuts help support oil prices. However, further reductions might be required to ensure market stability. As a result, the initiatives to stabilize oil prices through production cuts boost investor confidence in FANG, potentially driving an increase in the stock price.
The chart below illustrates the data for US crude oil inventories, which carries positive implications for FANG. A reduction in US crude oil inventories contributes to upward pressure on oil prices, thereby benefiting FANG's revenue and profitability. Elevated oil prices typically result in improved financial performance, which, in turn, exerts a positive impact on FANG's stock price.
Risk Posed by Contraction in Manufacturing Activities
The recent decline in the ISM Manufacturing PMI to 46.3 indicates a contraction in the manufacturing sector. A contraction in the manufacturing sector implies that fewer goods are being produced. This can be caused by economic downturns or changes in consumer preferences. As manufacturing output decreases, the overall energy consumption by factories and other industrial facilities also decreases. Since oil is a primary source of energy for many industries, a contraction in manufacturing activity can lead to reduced demand for oil and subsequently lower oil prices. This situation can negatively impact FANG's revenue and profitability, potentially exerting downward pressure on its stock price. As a result, investors and stakeholders should closely monitor the economic landscape and its impact on the energy sector to make informed decisions regarding FANG.
It is important to recognize that a contraction in manufacturing activities may present FANG with unique opportunities. Leveraging the decreased demand for energy resources, FANG has the potential to reassess and reposition its assets and resources, ultimately supporting long-term growth. Furthermore, this environment may generate favorable conditions for acquisitions or partnerships, empowering FANG to fortify its market standing and diversify its portfolio. Capitalizing on this development, the company can streamline its operations, optimize cost structures, and concentrate on strategic investments. FANG's strong cash position in 2022, evidenced by $6.33 billion in net cash, $1.94 billion in capital expenditure, and a free cash flow of $4.59 billion, enables the company to strategically invest in the acquisition of FireBird Energy LLC and Lario Permian, LLC.
FANG is poised to benefit from the valuable acreage, resources, and expertise gained through these acquisitions. Consequently, FANG's oil production is projected to increase by approximately 37,000 barrels per day (50,000 barrels of oil equivalent per day) in 2023, providing 500 high-quality drilling opportunities.
Technical Outlook
The technical chart of FANG validates the fundamentals, displaying a robust bullish outlook as observed in the chart below. The chart showcases an inverted head and shoulders pattern with a neckline at $98, which was breached in October 2021, driving the price to $163.26. The price has since adjusted back to the neckline at $98 and is now poised for a bullish upward trajectory. Immediate resistance is found at the red line, originating from 2014 high of $79.84. FANG's bullish structure is further reinforced by a double bottom pattern, marked by March 2020 and November 2020 lows at $12.65 and $20.92, respectively. Such patterns signal bullish implications, creating long-term bullish scenarios for the stock. Consequently, investors may view any decline as a potential opportunity to consider buying the stock.
Conclusion
Upon examining the aforementioned factors, it becomes evident that FANG's recent performance is a promising indicator of its future prospects. The production cuts implemented by OPEC+ support oil prices, which in turn positively influence FANG's profitability. Furthermore, the decline in US crude inventories bolsters FANG's performance. However, the contraction in the manufacturing sector, as indicated by the ISM Manufacturing PMI, suggests a potential decrease in oil demand, posing a significant challenge for FANG in the near term. Despite this, the contraction in manufacturing activities presents opportunities for FANG to strengthen its market position. From a technical standpoint, FANG exhibits a strong bullish outlook due to the emergence of inverted head and shoulders patterns, which have already broken and indicate higher prices. Consequently, investors may consider buying FANG at current levels or in the event of a stock price drop.
For further details see:
Diamondback Energy: Buy The Market