Analyst Note| Dave Meats, CFA |
We have increased our fair value estimate for Diamondback to $119 per share, from $88 previously. The increase partly reflects the much-improved outlook for near-term crude prices. But the biggest modeling change supporting the valuation increase was a reduction in our base decline percentage estimate, which is now in the mid-20s (based on data from Rystad Energy). We were previously expecting a base decline of around 35%. That higher estimate made sense when the company was still in growth mode, but the pandemic severely dented global demand, reducing the call on U.S. firms. Like most peers, Diamondback has responded by reducing its capital program to keep production more or less flat. Shale wells exhibit steep declines after first coming online, but the decline rate typically tapers quickly. With reduced activity levels, fewer rapidly declining new wells are being drilled, so the weighted average decline across the Diamondback portfolio is now skewed further to its more slowly declining legacy wells.