(Idea) Diamondback Energy

Diamondback Energy (FANG) is a leading Permian E&P. It is the largest pure-play Permian operator after Pioneer Natural Resources (PXD), which is being acquired by ExxonMobil (XOM) Diamondback holds some of the highest-quality acreage in the basin. In 2023, it produced approximately 450,000 barrels per day (bpd) comprised of 58% crude oil, 21% NGLs, and 20% natural gas. Its acreage is weighted toward the Midland Bain, but it also has significant holdings in the Delaware Basin, as shown below.

Source: Diamondback Energy website.

As of its 2022 reserve report, the company possessed 14 years of proved and probable reserves.

Diamondback holds a 57% equity interest in Viper Energy Inc. (VNOM), its sponsored mineral and royalty interest holder. Dividends from Viper accounted for 6% of Diamondback’s free cash flow in 2023 through November 30.

Due to its low-cost operating model and conservative financial position, Diamondback is a sort of jack-of-all-trades for E&P investors. The company is able to emphasize returning capital to shareholders while also growing production in the mid-single-digit range.

At the same time, it is able to be an effective consolidator. In 2023, it acquired privately-held E&Ps Lario Permian and FireBird Energy for a combined $3 billion. The acquisitions brought an additional 500 drilling locations across 83,000 acres and increased Diamondback’s production by 37,000 bpd. They provided the company with additional scale in the Midland Basin, and we suspect they extended its reserve life, as well.

In the third quarter, Diamondback established Deep Blue Midland Basin, LLC, a joint venture to manage water in the Permian, in which it owns a 30% equity interest. Deep Blue is now the largest water business in the basin. While it will marginally increase Diamondback’s operating costs per barrel, the cost increase will be more than offset by reduced midstream capex requirements.

Diamondback has been actively disposing of non-core acreage. In the seven quarters ending November 30, 2023, it generated $1.7 billion of proceeds from asset sales. It has allocated the proceeds to fund acquisitions and pay down debt.

At the end of the third quarter, net debt stood at $5.5 billion, a conservative 0.8-times trailing cash flow. The company maintains a conservative debt maturity profile, as shown below.

Source: Diamondback Energy Q3 2023 November 2023 Investor Presentation.