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    Diamondback Energy Inc (FANG)

    New Share Buyback Program

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    Business Description

    Diamondback Energy, Inc. is an independent oil and natural gas company that focuses on the acquisition, development, exploration, and exploitation of unconventional, onshore oil and natural gas reserves, primarily in the Permian Basin in West Texas . The company's main business activities revolve around the horizontal development of the Spraberry and Wolfcamp formations of the Midland Basin and the Wolfcamp and Bone Spring formations of the Delaware Basin . Diamondback Energy operates through its upstream segment, which is engaged in oil and natural gas production, and also has midstream operations that include gathering, compression, water handling, disposal, and treatment services .

    1. Oil Sales - Engages in the production and sale of oil, with significant contributions from both the Midland and Delaware Basins.
    2. Natural Gas Sales - Involves the production and sale of natural gas, contributing to the company's overall revenue.
    3. Natural Gas Liquids (NGL) Sales - Produces and sells natural gas liquids, adding to the company's diverse energy product offerings.
    4. Midstream Operations - Provides services such as gathering, compression, water handling, disposal, and treatment, supporting the company's upstream activities.

    Q3 2024 Summary

    Initial Price$201.82July 1, 2024
    Final Price$177.52October 1, 2024
    Price Change$-24.30
    % Change-12.04%

    What went well

    • The merger with Endeavor is leading to significant cost synergies, reducing operating expenses such as lease operating expenses (LOE) and general and administrative expenses (G&A), and improving free cash flow margins .
    • The company's breakeven oil price has decreased from $40 to $37 per barrel, enhancing free cash flow generation and potentially allowing for increased shareholder returns .
    • Operational efficiencies through technological advancements like the use of clear fluids in drilling and SimulFRAC completions have lowered drilling costs to $600 per foot, with potential for further reductions, improving per-share cash flow and margins .

    What went wrong

    • Cautious Outlook on Future Growth Due to Macro Factors: The company's executives expressed concern over the global oil surplus of 4 to 6 million barrels per day, making it challenging to justify growth in the near term. They emphasized a conservative approach, focusing on free cash flow rather than expansion.
    • Significant Insider Selling May Pressure the Stock: The family shareholders plan to reduce their ownership from 35% to 25% over time, which could lead to ongoing selling pressure on the stock and may signal less confidence in future valuations.
    • Industry Overinvestment Could Negatively Impact Returns: Management indicated concern that the industry might be "getting ourselves in trouble again" by overinvesting based on optimistic projections, which could lead to lower returns and affect companies like Diamondback.

    Q&A Summary

    1. Capital Allocation Strategy
      Q: Why prioritize buybacks over dividends now?
      A: Management emphasized flexibility in capital allocation, leaning toward share buybacks due to stock undervaluation post-Endeavor merger. They are committed to returning 50% of free cash flow to shareholders, focusing on per-share cash flow growth.

    2. 2025 CapEx and Efficiency
      Q: How will efficiency gains affect 2025 CapEx?
      A: They expect to achieve the same lateral footage with 18 rigs instead of 22-24 , reducing variable costs. Well costs have decreased to $600 per foot, potentially lowering 2025 CapEx toward the low end of the $4.1 to $4.4 billion range.

    3. Production Growth Strategy
      Q: Is Diamondback planning to grow production in 2025?
      A: Given a cautious macro outlook, they plan to maintain oil production around 480,000 barrels per day, focusing on free cash flow over growth. They are flexible to adjust activity based on market conditions.

    4. Breakeven Costs
      Q: What are your corporate breakeven costs?
      A: Corporate breakeven has decreased by $2 to $3 per barrel, now at $37 per barrel post-dividend. This positions them well in a tenuous macro environment.

    5. Hidden Asset Values
      Q: Can you quantify value from equity investments?
      A: They see potential value from investments like the EPIC crude pipeline and Deep Blue, aiming to monetize these for shareholder benefit. They are exploring data center opportunities to capitalize on abundant natural gas and surface acreage.

    6. Gas Marketing Strategy
      Q: How will you improve realized gas prices?
      A: With increased scale, they have flexibility in gas marketing, utilizing capacity on pipelines like Whistler and Matterhorn. They aim to stop selling gas at low prices and diversify risk, including potential local markets like power generation.

    7. Synergies from Endeavor Acquisition
      Q: What operational synergies have you realized?
      A: Synergies are ahead of schedule, with delivered cost savings and efficiency gains. They've integrated best practices from both companies, enhancing drilling and completion operations.

    8. Operational Improvements
      Q: Tell us about using clear fluids and SimulFRAC.
      A: They implemented clear fluid drilling and SimulFRAC across all wells, improving efficiency and reducing costs.

    9. OpEx and Cost Structure
      Q: How are OpEx trends impacting costs?
      A: OpEx is moving lower due to the Endeavor integration, with LOE benefiting from internalizing water disposal. They expect further cost reductions as they refine combined operations.

    10. Surface Acreage Opportunities
      Q: How can surface acreage generate revenue?
      A: They plan to utilize 65,000 acres of surface land and abundant gas to develop power generation and attract data centers, creating new revenue streams.

    11. Tax Benefits from Endeavor Acquisition
      Q: Any cash tax benefits from Endeavor?
      A: They do not expect material changes, maintaining a cash tax rate in the mid to high teens.

    12. Flexibility in Activity Levels
      Q: Can you adjust operations without losing efficiency?
      A: Yes, they have flexibility to ramp activity up or down, maintaining efficiencies due to consistent operations and strong service provider relationships.

    13. TRP Asset Trade Valuation
      Q: How was the TRP asset trade valued?
      A: The trade swapped third and fourth quartile inventory for first and second quartile inventory, improving capital efficiency with similar PDP values but better immediate production and locations.

    14. Data Center Opportunities
      Q: How will data centers add value?
      A: By leveraging abundant natural gas and surface acreage, they aim to develop power generation for data centers, turning low-margin gas into higher-value electricity.

    15. Potential Asset Monetizations
      Q: Any plans to monetize assets?
      A: They are actively working on a mineral interest drop-down to Viper in early 2025 and considering other asset sales, including non-core acreage and midstream assets.

    16. Managing Efficiencies if Market Declines
      Q: How will you maintain efficiency if oil prices fall?
      A: They'll preserve efficiencies by possibly building DUCs and have flexibility due to their size and balance sheet.

    17. Shareholder Payouts and Debt Reduction
      Q: How will you balance payouts and debt reduction?
      A: Committed to returning 50% of free cash flow to shareholders , they also aim to reduce net debt to $10 billion quickly, balancing buybacks with deleveraging.

    18. Water Services Opportunities
      Q: Will you monetize water services?
      A: They see potential in water services as recurring revenue streams with high market multiples but specifics on capturing this value were not detailed.

    19. Operations in Lower Oil Price Environment
      Q: At what oil price will you adjust growth plans?
      A: They remain cautious with oil in the high $60s, focusing on free cash flow over growth and prepared to adjust plans based on the macro environment.

    20. Cash Taxes Post-Endeavor
      Q: Will cash taxes change after Endeavor?
      A: No material change expected; cash tax rate remains in the mid to high teens.

    21. Further Efficiency Gains
      Q: Can costs decrease beyond $600 per foot?
      A: The $600 per foot well cost is real-time and could decrease further with continued efficiencies and market deflation.

    22. Stevens Family Share Sales
      Q: Will the Stevens family sell more shares?
      A: They may reduce ownership to align voting rights with ownership at 25%, but no specific details were provided.

    23. Endeavor's Operational Strengths
      Q: What has Endeavor done better than you?
      A: Endeavor excelled in drill-out processes and completion work, which are being integrated to improve overall operations.

    24. Viper Mineral Drop-down
      Q: Any updates on the mineral drop-down to Viper?
      A: Actively ongoing with a goal to complete in early 2025, intending to drop down most, if not all, assets at once ,.

    25. TRP Trade Details
      Q: Can you elaborate on the TRP trade?
      A: Diamondback traded Delaware Basin assets for Midland Basin assets, gaining 18 DUCs and 55 locations, enhancing capital efficiency and inventory quality.

    26. Deep Blue Investment
      Q: Will you monetize Deep Blue assets?
      A: They continue to evaluate Deep Blue's efficiency and may monetize it for shareholder benefit, but details are pending ,.

    27. SimulFRAC and Electric Fracs
      Q: What's the status of SimulFRAC and e-frac?
      A: All wells now use SimulFRAC; they run four SimulFRAC crews, three electric, enhancing efficiency.

    28. Non-core Asset Sales
      Q: Any plans to sell non-core assets?
      A: They are considering monetizing small assets in the Bakken, Gulf of Mexico, and non-operated Delaware Basin positions.

    29. Environmental CapEx Impact
      Q: Will environmental CapEx affect 2025 spending?
      A: Approximately $50 to $60 million in one-time environmental CapEx is expected in 2025, but above-ground spend should reduce over time.

    30. Flexibility with Service Contracts
      Q: Do you have flexibility with service providers?
      A: Yes, with minimal long-term obligations, they can adjust activity levels without significant penalties.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Al BarkmannExecutive Vice President and Chief EngineerFebruary 2024Al Barkmann has served as the Executive Vice President and Chief Engineer since February 2024. He was previously the Senior Vice President of Reservoir Engineering from November 2021 to February 2024, and Vice President of Reservoir Engineering from February 2019 to November 2021. He joined Diamondback in November 2018 .
    Teresa L. DickExecutive Vice President, Chief Accounting Officer and Assistant SecretaryMarch 2019Teresa L. Dick has served as the Executive Vice President and Chief Accounting Officer since March 2019 and as Assistant Secretary since October 2012. She was previously the Executive Vice President and Chief Financial Officer from February 2017 to February 2019 .
    Travis D. SticeChief Executive OfficerJanuary 2012Travis D. Stice has been the Chief Executive Officer since January 2012 and a director since November 2012. He has served as Chairman of the Board since February 2022. Mr. Stice has extensive experience in the oil and gas industry, starting his career at Mobil Oil in 1985 .
    Jere W. Thompson IIIExecutive Vice President – Strategy and Corporate DevelopmentFebruary 2024Jere W. Thompson III has served as the Executive Vice President – Strategy and Corporate Development since February 2024. He was previously the Senior Vice President of Strategy and Corporate Development from February 2023 and Vice President of Strategy and Corporate Development since March 2021 .
    M. Kaes Van’t HofPresident and Chief Financial OfficerFebruary 2022M. Kaes Van’t Hof has served as the President and Chief Financial Officer since February 2022. He was previously the Chief Financial Officer and Executive Vice President of Business Development from March 2019 to February 2022 .
    Daniel N. WessonExecutive Vice President and Chief Operating OfficerFebruary 2022Daniel N. Wesson has served as the Executive Vice President and Chief Operating Officer since February 2022. He was previously the Executive Vice President of Operations from March 2020 to February 2022 .
    P. Matt ZmigroskyExecutive Vice President, Chief Legal and Administrative Officer and SecretaryFebruary 2023P. Matt Zmigrosky has served as the Executive Vice President, Chief Legal and Administrative Officer, and Secretary since February 2023. He was previously the Executive Vice President, General Counsel, and Secretary from February 2019 to February 2023 .

    Questions to Ask Management

    1. Given the accelerated synergy realization and cost savings achieved ahead of schedule, will you revise your 2025 CapEx guidance downward from the original $4.1 to $4.4 billion range, and how sustainable are these cost reductions?
    2. With the plan to reduce operational rigs from 22-24 to 18 while maintaining the same lateral footage, do you foresee any risks to production levels or well performance due to the significant decrease in operational capacity?
    3. Can you elaborate on the strategic rationale behind your investments in the EPIC pipeline, Deep Blue, and data center projects, and how these non-core investments align with your main business and contribute to shareholder value?
    4. Regarding the integration of the Endeavor assets, are there any one-time or ongoing costs required to bring these assets up to your operational standards, and how might these impact your CapEx and efficiency targets in 2025 and beyond?
    5. As the family shareholders reduce their ownership from 35% to 25% to align voting rights with their stake, what implications does this have for corporate governance, and how might it affect your strategic decision-making and relationship with public shareholders?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateSeptember 18, 2024
    End Date/DurationNo specific end date
    Total additional amount$6.0 billion
    Remaining authorization amount$3.1 billion (as of September 30, 2024)
    DetailsThe program can be suspended, modified, or discontinued by the board at any time.

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2025
    • Guidance:
      1. Oil Production: 480,000 barrels of oil per day for 2025, including 5,000 barrels a day from Viper's guidance .
      2. Capital Expenditure (CapEx): $4.1 to $4.4 billion for 2025; $950 million to $1,050 million for Q4 2024 .
      3. Breakeven Oil Price: $37 per barrel post-dividend .
      4. Operational Costs: $600 per lateral foot .
      5. Production Efficiency: Higher barrels per dollar of CapEx .
      6. Cash Tax Rate: Mid- to high teens .
      7. Flexibility in Operations: Ability to adjust operational levels .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2025
    • Guidance:
      1. Production Guidance: Raised oil production guidance by close to 1.5% .
      2. Capital Expenditure (CapEx): Expected decrease in Q3 and Q4 2024 .
      3. Drilling and Completion Efficiency: 26 wells per rig; 100 wells per frac fleet .
      4. Operational Activity: 18 to 20 rigs; 4 to 5 SimulFRAC crews .
      5. Well Count: 500 wells per year needed .
      6. Lateral Lengths: Average of 12,000 feet .
      7. Free Cash Flow and Shareholder Returns: Flexible return of capital program .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q1 2024
    • Guidance:
      1. Severance Tax: 7% of revenue .
      2. Lateral Length: 11,500 feet .
      3. Completion Activity: 89 wells completed; 70 to 80 wells per quarter .
      4. Capital Efficiency: 10% improvement per lateral foot .
      5. Cost per Foot in the Midland Basin: Lower half of $600 to $650 per foot .
      6. Buybacks and Free Cash Flow: 50% of free cash flow returned .
      7. Gas Pipeline and Egress: Securing firm capacity .
      8. Cost of Capital: After-tax rate of 12% .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Net Debt Target: $10 billion by mid-2025 .
      2. Capital Expenditure (CapEx): $725 million difference between 2024 and 2025; $700 million lower CapEx in 2025 .
      3. Production and Inventory: 12 years of sub-$40 breakeven inventory .
      4. Debt Reduction Strategy: Long-term net debt level of $6 billion to $8 billion .
      5. Capital Efficiency: 10% less CapEx in 2024 .
      6. Development Strategy: Average project size of 24 wells .

    Latest news

    Recent developments and announcements about FANG.

    Financial Actions

      New Share Buyback Program

      ·
      Sep 23, 2024, 12:00 AM

      Diamondback Energy has announced a new buyback program as part of its existing stock repurchase initiative. The company has authorized the purchase of 2,000,000 shares of common stock from the underwriters involved in the recent secondary offering. This repurchase will be funded from the company's existing cash on hand and is expected to be completed without any compensation to the underwriters for the shares being repurchased .

      Strategic Assets

      ·
      Sep 10, 2024, 12:00 AM

      Summary of Diamondback Energy's Acquisition of Endeavor Energy Resources

      On September 10, 2024, Diamondback Energy, Inc. (NASDAQ: FANG) announced the completion of its merger with Endeavor Energy Resources, L.P. This significant transaction involved Diamondback acquiring 100% of the Endeavor Interests from the Endeavor Stockholders. The acquisition was executed for a total consideration of approximately $7.1 billion in cash and 117.3 million shares of Diamondback's common stock .

      Transaction Details

      • Cash Consideration: Approximately $7.1 billion, subject to customary post-closing adjustments.
      • Stock Consideration: 117.3 million shares of Diamondback's common stock were issued to Endeavor Stockholders, who now hold about 39.7% of the outstanding shares of Diamondback .

      Strategic Impact

      Travis Stice, Chairman and CEO of Diamondback, described the merger as transformative, positioning Diamondback as a leading independent oil company in North America. The acquisition enhances Diamondback's inventory in the Permian Basin, which is expected to drive future cash flow and operational efficiency .

      Financial and Operational Effects

      • Increased Scale: The merger significantly increases Diamondback's scale and operational footprint in the Permian Basin, a key area for oil and gas production.
      • Synergies and Cost Efficiency: The integration of Endeavor's assets is anticipated to yield operational synergies and cost efficiencies, bolstering Diamondback's low-cost operational model.
      • Long-term Growth: The acquisition is expected to support Diamondback's long-term growth strategy by expanding its high-quality asset base and enhancing its ability to generate cash flow .

      Governance Changes

      As part of the merger agreement, three former Endeavor executives, Lance Robertson, Charles Meloy, and Robert K. Reeves, have been appointed to Diamondback's board of directors, expanding the board to twelve members. These appointments are expected to bring valuable industry experience and insights to Diamondback's leadership team .

      Conclusion

      The merger with Endeavor Energy Resources marks a pivotal step for Diamondback Energy, enhancing its position in the oil and gas sector and providing a robust platform for future growth and value creation for shareholders .

      Dividend Policy

      ·
      Feb 12, 2024, 12:00 AM

      Diamondback Energy, Inc. has announced a 7% increase in its base dividend to $3.60 per share annually, which equates to $0.90 per share quarterly. This change is effective for the fourth quarter of 2023 .