Diamondback Energy Stock: Reliability at a Great Price (NASDAQ:FANG)

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Diamondback Energy, Inc. (NASDAQ: FANG) is a mid-sized oil producer that, like most other shale companies, had a difficult last month, with a drop of more than 20%. The company’s current market capitalization is just over $21 billion. However, the company has one of the strongest operations in its peer group, with a disciplined focus on margins, which we believe will deliver substantial returns for shareholders.

Diamondback Energy First Quarter 2022 Results

Diamondback Energy posted impressive results in the first quarter of 2022 as the company focuses on maintaining production and boosting yields.

Diamondback Energy

Diamondback Energy

Diamondback Energy is focused on maintaining oil volumes at approximately 220,000 barrels/day in production. The company plans to slightly increase cash margins on this fixed cost structure, while rapidly and opportunistically increasing FCF for shareholders. As we will see later in the article, the company has a substantial FCF yield.

Financially, the company is working to improve its balance sheet with a net debt of $5.8 billion, it will be able to continue improving to save on interest expense. This, combined with EBITDA growth, will support the company’s overall balance sheet. The company continues to focus on returns and improving ESG metrics.

Diamondback Energy 2022 Directions

The company’s guidance for 2022, combined with strong execution in the first quarter, should enable continued returns.

Diamondback Energy

Diamondback Energy

The guidance from the company is to keep production at a stable level with nearly 300 wells drilled, and so far the company is operating within that guidance. The company is increasing capital spending to catch both inflation, mid-cost improvements, and other growth at approximately $1.825 billion as the median capital budget.

A 29% improvement in drilled side legs will also help the company minimize costs. The company’s FCF forecast calls for a 49% increase to a low of $3.6 billion and, as we’ll see later in the article, we expect the company to comfortably increase that forecast, with incredibly strong 2022 performance.

Diamondback Energy Balance

Combined with stable production and a strong balance sheet, Diamondback Energy is looking to further increase shareholder returns.

Diamondback Energy

Diamondback Energy

The company has net debt of $5.8 billion and total cash of $2.4 billion. Its liquidity means it can handle any debt due through the end of the decade, and the company’s annual interest payments of around $222 million are manageable and may decline as the business continues. to repay its debt. The company’s FCF means it can comfortably repay its debt when it comes due.

The company managed to issue $750 million of 30-year debt at 4.25%, although we’d like to see it continue to opportunistically buy back debt with its strong FCF. Either way, however, the company’s balance sheet is more than manageable.

Returns to Diamondback Energy shareholders

At current share prices, Diamondback Energy has the ability to generate incredibly strong returns for shareholders.

Diamondback Energy

Diamondback Energy

Current WTI prices are around $110 per barrel. At this price, the company should be able to generate an FCF return comfortably above 20% at nearly $5 billion in FCF for the company with a market capitalization of less than $22 billion. At this level, the company’s dividend forecast implies a double-digit dividend yield for the year.

Even after that, the company will have billions of dollars left over. He will maintain production, but he can use that money for buyouts, even more dividends or debt repayment. The company has a $2 billion stock buyback program to repurchase nearly 10% of the stock, although we’d like to see the company expand that.

Thesis risk

The biggest risk to the thesis is the price of oil. The company is at a comfortable valuation, even outside of FCF 2021 the company had a double-digit return and, at $70/barrel WTI, that return is closer to 15%. This strong FCF will have a dividend yield of nearly 8% along with other shareholder returns. Redemptions will save on dividends and paying down debt will save on interest charges.

However, prices have spent a lot of time below $70/barrel WTI and this could drive prices lower. This would make the company overvalued in such an environment.

Conclusion

Diamondback Energy is one of the strongest midstream shale companies. The company has steadily improved its balance sheet and has an incredibly manageable net debt of $5.8 billion and an even more manageable interest payment. The company has the cash to cover all debt maturities through the end of the 2020s.

The company’s current forecast calls for a double-digit dividend yield for 2022, with plenty of other rewards. We’d like to see the company expand its share buybacks, however, however it spends the money, 2022 will be a year of transition as its balance sheet continues to improve, enabling even stronger rewards and growth. next year.

Eleanor C. William