Diamondback Earnings: Exceeds Capital Return Target, Boosts Dividend, and Raises Guidance

Diamondback FANG is executing well on its maintenance capital strategy. The firm delivered oil production of 263.1 thousand barrels of oil equivalent per day and total volumes were 449.9 thousand barrels of oil equivalent per day (both ahead of the high end of previous guidance). That sets the firm up to deliver 2%-3% organic production growth in 2023, and full-year volume guidance was nudged up at the midpoint by about 1% as a result. Capital spending in the period was $711 million, and while the activity plan is front-end-weighted, the full-year total now looks likely to land in the upper half of the previous budget range. Management raised its spending forecast by 1% to compensate. It now expects to bring slightly fewer wells online in 2023 but with slightly longer laterals, which explains the uptick in expected spending and production. The revised guidance incorporates the same assumption for well costs per lateral foot, but the firm reports improving raw materials and service costs that should benefit the 2024 budget (consistent with our previous model).

With more moderate commodity prices, the firm has been unable to maintain the gush of free cash flow it enjoyed last year, but it is still only reinvesting a fraction of the cash it generates. And the surplus is still being funneled to shareholders (it returned 86% of its free cash in the second quarter, well in excess of the 75% target). However, we’d rather see more emphasis on dividends than buybacks given the current stock price is at a premium to our fair value. Management did underscore its commitment to the base dividend in its letter to stockholders, and this was raised, for the second time this year, to $3.36/share (2.3% annual yield). However, buybacks still accounted for two thirds of the total capital return in the period.

We intend to incorporate these results shortly, but for now our narrow moat and $124 per share fair value are unchanged.