Diamondback Earnings: Higher Costs Are Within Reason as It Pulls Back on Buybacks

Narrow-moat Diamondback Energy delivered strong results, beating FactSet consensus estimates for earnings per share and sales by 4% and 6%, respectively. Both production and capital expenditures came within guidance, although the latter was on the high end. There were increases in cash costs across the board, with general and administrative, and lease operating expenses leading the pack. The higher costs could be concerning to investors, but we note that the variations are well within the historical norms. We also expect these costs to stabilize and fall as rig demand has stagnated in the Permian Basin. The focus, in our view, should be on the Endeavor merger that is slated to close at the end of this year, which investors have eagerly rewarded, and the update to shareholder returns. We are updating our fair value estimate to $174 from $172, largely due to changes in strip prices.