Diamondback Energy Long
My unresearched opinion:
Diamondback Energy is a company is an oil company headquartered in Midland, Texas. As of December 31, 2020, the company had 1,788 million barrels of oil equivalent of estimated proved reserves, of which 52% was petroleum, 24% was natural gas, and 24% was natural gas liquids. I have researched about many oil companies this quarter and can say with confidence that they are having an amazing year so far. Something else that has made me confident in this company is their reduced EPS estimate compared to last quarter. I don’t exactly know the reason behind this but I believe it will come to their advantage in beating the EPS as it’s much lower than what they reported last quarter and they also have a very good track on beating the estimates. I also believe that they will report new record revenues this quarter considering the high increase of natural gas prices. Like I have also talked about many times in the past, while these types of companies might be dealing with higher operation costs, they still dont have the other expenses that most other companies are dealing with right now such as marketing or a smaller customer base. As they are also based in America, I believe they still have a very huge room for growth in places such as Europe now that more and more customers are starting to get their oil from other countries.
Analyst’s opinions:
Diamondback Energy now has seen a one-two punch of news flow this year. Starting with the roll-up of its captive partnership Rattler Midstream, the venerable Permian producer has now announced another acquisition in the Permian: the purchase of FireBird Energy. I don't really think this deal is much of a needle mover at the end of the day given my cash flow predictions - the price seems just fair - but at the same time it is hard to ignore Diamondback's proven history of buying companies at discounts to intrinsic value.
On October 11th, Diamondback Energy announced its intent to purchase privately-held FireBird Energy for $1,600mm in cash and stock. Expected to close before the end of the year, Diamondback is picking up 68,000 net acres with an estimated 316 net drilling locations. After positioning the drilling program from a current three rigs to one, this deal will have around twelve years of current drilling inventory, with the potential for additions given the stacked nature of the play. Management has been pressed to add proved reserves over the past several years, and it has built up its inventory into the double digits given Q2 2022 production pace. I'd view this transaction as them furthering their optionality on reserve life, as that part of the E&P story is likely to see more focus from investors going forward than it has over the past several years.
For the FireBird land specifically, expectations are for production to be around 25,000 barrels of energy per day ("boepd") in 2023, with three quarters of that being oil production. This works out to a transaction price of $64,000 per flowing barrel, a sign of the times that deals are back to being fairly expensive in the Permian Basin. As a good benchmark, Pioneer sold its Permian lands (Delaware Basin) to Continental Resources for $59,000 per flowing barrel at the end of 2021. Despite the lofty price tag, FireBird should be accretive to current metrics. The EBITDA acquisition multiple is 3.0x at current strip, implying EBITDA of around $500mm and $240mm in free cash flow, albeit with the latter benefiting somewhat from tapping the drilled but uncompleted ("DUC") inventory and tax benefits.
For the skeptics, I think it's worth remembering Diamondback history. When the firm went public in 2012, its production was barely a trickle. It had to grow by acquisition and since that time, management has been one of the premier acquirers in West Texas, never deviating from its strategy of being a Permian pure play. Big purchases are not foreign to it: Ajax Resources ($1,200mm), Energen ($9,200mm), Guidon ($1,100mm), and QEP Resources ($2,200mm) have all been purchased within the last five years. Despite that reality and being a prodigious issuer of equity, Diamondback Energy has soundly outperformed the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) over the long term.
Researched opinion:
After research, I still firmly believe Diamondback to go up tomorrow. They’re in a great position for a good forward guidance and in addition to that their drop in EPS comes from their new acquisition which eases my mind as it’s not because they are financially struggling.
P/E Ratio: 7.73
Forward P/E: 6.47
Market cap: 29,199,723,806
Time: Tonight after market close
Estimate: +4%