Company Reports

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.

Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most recently Endeavor Energy in 2024. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a maintainable margin advantage.

Israel has launched strikes against Iran in retaliation for an attack on April 14 (see our April 15 note for more analysis). The limited scope of Israel’s attack, which also included targets in Syria and Iraq; Iran's subdued response; and the ample warning Israel provided confirm our view that both parties wish to de-escalate tensions. We’d characterize this as a de-escalation attack. This view is in line with broader US and Group of Seven goals.

We believe the Iranian drone and missile attack on Israel over the weekend places some additional stress on the oil markets. However, the ample warning from Iran ahead of time publicly and privately amid rising geopolitical tensions means the attack was already reflected via a higher geopolitical risk premium in oil prices, in our view. We attribute nearly all of the increase in oil prices to around $91 a barrel from the mid-70s in February to geopolitical concerns versus supply risks. On the supply side, Saudi Arabia and OPEC+ have about 5 million barrels per day of supply—if not more—that can be returned to the oil markets if prices were to overheat and spike well above $100 a barrel. We expect there to be more downside risks than upside at the moment to oil prices. In fact, we see higher potential to touch $75 by the end of 2024 versus a sustained movement beyond $100 a barrel.

After taking a deeper dive through the Endeavor assets and merger materials, we are raising our Diamondback fair value estimate to $172 from $161 per share. The major changes are reducing our cycle times for the Midland, Delaware, and Endeavor assets to more closely match expected actuals post-close. These changes increase our expected capital spending levels and production in the near term. Our narrow moat rating is unchanged.

Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most recently Endeavor Energy in 2024. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a maintainable margin advantage.

Each year, we reevaluate well productivity for our entire US shale coverage. For each covered company, we scrutinize third-party data on both a basin and region basis. As in prior years, our process prompted mostly modest valuation changes but left our moat, capital allocation, and uncertainty ratings unchanged.

Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most recently Endeavor Energy in 2024. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a maintainable margin advantage.

OPEC announced that its voluntary cuts due to expire at the end of March have been extended until the end of June. Since oil markets remain weak, we had expected OPEC and its allies to extend the voluntary cuts for another quarter. The 2.2 million barrels per day in voluntary cuts, largely shouldered by Saudi Arabia and to a lesser extent Russia, were originally implemented as a temporary effort last year but have been extended several times as the market has remained oversupplied, in our view.

Narrow-moat Diamondback Energy delivered a production total of 463,000 barrels of oil equivalent per day in the fourth quarter, a hair above guidance, 2% higher from the prior quarter, and in line for the full year. For 2024, management expects lower development costs and flat volumes compared with the fourth quarter, not including the Endeavor Energy merger scheduled to close at the end of this year. (Please see our Feb. 12 note for more on that deal.)

Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most recently Endeavor Energy in 2024. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a maintainable margin advantage.

Narrow-moat Diamondback surprised markets by announcing the purchase of Endeavor Energy Resources. We knew Endeavor was in play, but we had expected a peer like ConocoPhillips as a possible acquirer, not Diamondback. Still, we think the fit is good, especially given Diamondback's strengths in driving down costs. We forecast the combination to achieve significant per-barrel cost savings while increasing production from 462,000 barrels of oil equivalent per day in the fourth quarter of 2023 to well over 800,000 barrels of oil equivalent per day in 2025. As a result, we are nudging up our fair value estimate to $169 from $164 per share.

Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most recently Endeavor Energy in 2024. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a maintainable margin advantage.

Angola announced that it will leave OPEC in what we think is more of a blow to the group’s unity than a material impact on the overall oil markets. The timing is not ideal, as OPEC+ is struggling to defend oil prices. Angola’s recent production level of about 1.2 million barrels per day is only about 2% of the total output of OPEC+. The imminent addition of Brazil (3.8 million bbl/d of oil production), while not subject to a quota, helps offset this loss. We had suggested in our Nov. 30 note that Angola's departure was a possibility, since the country had immediately said it would produce above the 1.11 million bbl/d quota set for it at the last OPEC meeting.

Our key takeaway from the latest OPEC meeting is that the internal member dynamics are highly divisive and chaotic. We don't anticipate this to bode well for the overall oil markets, as investors have less certainty and trust with regard to expected OPEC+ volumes delivered to the market, putting upward pressure on prices. However, even allowing for that uncertainty, we believe the production cuts of 896,000 barrels per day are likely to keep the market in a supply deficit or close to one, keeping prices in what seems to be OPEC+'s preferred band of $80-$100/bbl for the time being. However, we do expect Saudi Arabia will likely need prices to average $100/bbl over the next five years to support its more than $1 trillion investment in Saudi Vision 2030.

Diamondback’s third-quarter results were solid. However, our fair value estimate falls slightly to $164 from $167 per share, due to slightly higher 2023 capital spending and an increased tax rate (15%-17% from 10%-15%). Our narrow moat rating is unchanged.

Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most recently Firebird Energy and Lario Permian in 2022. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a maintainable margin advantage.

The Hamas attack against Israel over the weekend should ultimately not be material for oil markets, in our view. Gaza produces no oil, while Israel produces only a small amount for its own use. However, oil prices were up as much as 5% at one point before retreating, as we think investors are concerned the conflict could destabilize the wider Middle Eastern region, which serves as a transit point for nearly one in every five barrels produced globally.

We have adjusted our valuation methodology for U.S. exploration and production companies. Our multistage DCF valuation incorporates explicit projections for a fixed period, typically 5 years. Terminal values are derived by assuming firms eventually earn their cost of capital in perpetuity. This contrasts with our previous methodology, which modeled the harvesting of all company assets over a 30-year timeframe The change brings our E&P valuations in line with Morningstar's standard equity research methodology.

Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most recently Firebird Energy and Lario Permian in 2022. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a maintainable margin advantage.