Diamondback Earnings: Consistent Execution Blemished by Weaker-Than-Expected Price Realizations

Diamondback Energy FANG is staying the course it outlined in its year-end update. The firm has a strong track record for exceeding its own volume guidance and it did so again in the first quarter, though the outperformance was modest (volumes were 2% above the midpoint of guidance) and the firm’s full-year estimate remains unchanged. Capital spending was also slightly ahead of the guidance midpoint, though the firm’s activity was higher than the annual run-rate in the first quarter, with 16-17 operated rigs. Management intends to pare this back to 14-15 rigs for the balance of the year, which means the full-year average will remain consistent with previous guidance, and the firm is still planning for 330-350 total completions in 2023. The annual budget was left at $2.6 billion. Overall, the operating results indicate solid execution, but the firm’s financials were disappointing (adjusted earnings per share was $4.10, compared with FactSet consensus at $4.29). This was tied to a worse-than-expected oil price realization relative to WTI (7% vs 2%). We intend to incorporate these results shortly, but after this first look, our $126 per share fair value estimate is unchanged.

Management also provided an update on the ongoing divestiture program, announcing that the firm may exceed the targeted $1 billion in asset sales. This has primarily served to blunt the impact of recent acquisitions on the balance sheet. The firm has shelled out over $1.8 billion in cash over the last two quarters for Firebird and Lario, resulting in a steep increase in net debt despite $773 million in completed asset sales. Meanwhile, the decline in commodity prices has reduced EBITDA, resulting in a sharp uptick in the firm’s leverage ratio (from 0. 7 times to 1.2 times in the last six months).