Diamondback Energy: Solid Execution Offset by Weaker-Than-Expected Oil Realization

Diamondback Energy FANG sold off on the first trading day after it announced its first-quarter financial and operating results, albeit on a very difficult day for both oil prices and energy stocks. The market presumably balked at disappointing earnings (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, with the discount to WTI ballooning to 7% (this compares with 3% in the fourth quarter and a quarterly average of 2% over the past two years). And in its letter to shareholders, management indicated that it hopes to receive at least 95% of WTI in future quarters, which leaves room for the discount to remain wider than it has been.

In contrast, field operations are going smoothly. Production was 2% ahead of the midpoint of guidance, thanks to a front-loaded capital schedule with 16-17 rigs operating at the beginning of the year (tapering to 14-15 in the back half). On average, the full-year activity average is consistent with previous communications from the company, and there was no change to guidance for production, full-year capital spending, well completions, well costs, or unit operating costs. While some may question the first-quarter investing level running hot on an annualized basis, we think the projected activity slowdown will enable the company to deliver on its original budget (which management noted it is heavily incentivized to do). In fact, we now think the full-year outflow will be near the midpoint of guidance, making our prior forecast (at the high end) look pessimistic. At the same time, we have updated our 2023 production forecast to 453 mboe/d, which is slightly above the high end of guidance. These positive changes offset the impact of weaker-than-expected crude realizations, resulting in a slight net increase to our fair value estimate, to $127 per share (from $126).