2023-04-13 10:15:34 ET
Summary
- FAANG might have once been one of the most popular investments, but we now recommend investing in FANG aka Diamondback Energy, Inc.
- Diamondback Energy has a strong portfolio of assets, with one of the longest reserve lives of 20 years.
- The company is growing production and maintaining strong margins, taking advantage of opportunistic acquisitions.
- We expect Diamondback Energy, Inc. to generate strong 10% free cash flow at $60 / barrel supported by its strong hedging, along with strong shareholder returns.
FAANG was once a casual investment term for a group of high-flying investment stocks. Since then, as they've dropped, investment opinions have changed. In our view the best FANG to invest in, is the NASDAQ ticker for Diamondback Energy, Inc. ( FANG ). As we'll see throughout this article, Diamondback Energy, with its robust assets and financials, can drive substantial shareholder returns.
Diamondback Energy Capital Framework
The company has a capital framework that it can utilize to generate strong shareholder returns.
The company generated $4.6 billion of free cash flow ("FCF") in 2022. Versus its $26 billion market capitalization, that's an 18% FCF yield. The company returned $3.1 billion, or 12% of its market cap, through stock repurchases and dividends. That's 68% of the company's 2022 FCF. The company has the rights to repurchase 15% of its stock, and has repurchased 6% so far.
The company has increased its annual base dividend to $3.2 / share, up 33% YoY, to now hit almost 2.5%. Its total dividend payout annualized is roughly $12, or an 8% yield. The company is guiding to continued share repurchases. The company's net debt of just over $6 billion represents ~16 months of 2022 FCF, a level it can comfortably afford.
Diamondback Energy 2022 Financials
Diamondback Energy managed to achieve strong financial results in 2022 as prices remained high.
The company kept the company's production flat YoY at just under 225 thousand barrels / day. The company's cash capex of $2.2 billion annualized, was comfortably managed, and the company managed to realize 82% of the unhedged price. It reinvested 32% of its cash flow back into its business, and F&D costs of $10.1 were manageable.
The company's FCF per share was just under $26. That's almost 20% of its market capitalization, showing the company's financial strength. The company has opportunistically divested assets and continues to have that target. It recently announced a plan to sell non-core Permian Basin assets which we expect it to comfortably handle.
Diamondback Energy Reserves
The company has continued to opportunistically invest in its business and improve reserves.
The company managed to increase its reserves by 14% YoY and now has one of the strongest reserves in the industry. The company has 2 billion barrels of reserves, or 20 years' worth of reserves. Oil comprises 53% of the company's proven reserves, and the company continues to cheaply find reserves. That's double most countries 10-years of reserves.
These reserves will enable the company to grow production and continue its growth.
Diamondback Energy 2023 Guidance
Diamondback Energy's 2023 guidance represents growth across the company's businesses.
The company has spent several $ billion on opportunistic new acquisitions. It's grown production 16% YoY from 224 thousand barrels / day to 259 thousand barrels / day. The company expects return of capital along with its capital budget to grow. At the same time, it's planning to increase its drilling substantially to improve margins.
The company's 100 million barrels of production for the year is a substantial capital budget of $26 / share, but will enable continued growth for the company.
The company's oil production and cash capital expenditures are strong. The company's goal is to drive significant shareholder returns. The company's FCF yield is 10% at $60 / barrel, a side effect of its incredibly strong hedging program. That's one of the strongest in the industry and covers roughly 70% of the company's production.
At current prices, its FCF yield is 15%, and at $100 / barrel, it's almost 20%. At current prices, the company's target is $2.3 billion in shareholder returns, or a 9% shareholder return yield. That's expected to be through a combination of the company's dividends and share repurchases. Earlier weighted share repurchases could help support the company's long-term returns.
Thesis Risk
The largest risk to our thesis is crude oil prices. The company's yield drops substantially at $60 / barrel, however, it built up a massive hedging portfolio, showing its financial strength. Meanwhile, there's still a risk: were prices to drop substantially and remain low, the company would struggle to generate returns over the long run.
Conclusion
Diamondback Energy, Inc. is one of the strongest companies in the shale industry. The company has an almost $27 billion market capitalization with around $6 billion of net debt, an incredibly manageable debt load equivalent to roughly 16-months of the company's FCF. The company also has incredibly strong hedging protecting its earnings.
At $60 / barrel, supported by its hedging program, Diamondback Energy, Inc. has a FCF yield of 10%. The company is planning a 75% return of FCF to shareholders, an almost 8% yield. Both dividends and share buybacks will enable the company to generate strong and continued returns. That capped downside and strong upside makes Diamondback Energy, Inc. a strong investment.
For further details see:
Diamondback Energy: The Best FANG To Invest In