Introduction
Midland, Texas-based Diamondback Energy (NASDAQ:FANG) released its first-quarter 2022 on May 2, 2022.
Also, On May 16, 2022, Diamondback Energy announced a deal to acquire Rattler Midstream LP (RTLR) for about $2.2 billion.
Note: This article is an update of my article published on March 10, 2022, about the preceding quarter.
1 – 1Q22 results snapshot
The company reported the first quarter of 2022 adjusted earnings of $5.20 per share, beating analysts’ expectations.
This quarter’s oil-equivalent production was 381.378K Boepd (58.4% liquids) above expectations, sold at a record oil composite price of $69.60 per Boe compared with $42.36 a year ago.
This quarter’s record revenues of $2.408 billion also beat estimates, more than doubling the year-ago quarter’s sales of $1.184 billion. The outstanding results can be attributed to the surge in energy prices in 1Q22.
Shareholders were not forgotten. Diamondback raised its regular quarterly payout by almost 17% to $0.70 a share and declared a variable dividend of $2.35 for a total dividend this quarter of $3.05.
Finally, the company bought back $6.7 million of shares in 1Q22 for $117.34.
Travis Stice, the CEO, said in the conference call:
Diamondback remains committed to maintaining our current oil production levels of approximately 220,000 net barrels of oil per day. While we believe that efficiently growing our production base is achievable over the long term, we do not feel that today is the appropriate time to begin spending dollars that would not equate to additional barrels into multiple quarters from now.
2 – Investment Thesis
The investment thesis for FANG is complex due to the high valuation triggered by elevated oil and gas prices that cannot be sustainable for the long term.
In my preceding article, I indicated that the short-term resistance (sell) was between $141 and $142 and suggested buying back at $127. I was right, and FANG hit a low of $118, which was plenty enough for a serious accumulation.
A few months later, we experienced the same situation, and I believe the stock is now overvalued and overbought.
Oil prices are above $120 per barrel again due to the Ukraine war and sanctions against Russia and its oil industry. However, the risk of a recession in 2023 is increasing, and oil prices will surely come down to a more rational valuation.
Diamondback Energy should be considered a long-term investment even if it has reached a stock price that I think is too high technically.
Thus, it’s compelling to trade short-term LIFO FANG using at least 30% of your entire position.
This two-level strategy has prevailed in my marketplace, “The Gold and Oil Corner,” and I believe it is the most rewarding strategy in those circumstances. Unfortunately, only US investors can use LIFO, but there is still an alternative for others. Please read my note at the end of this article.
3 – Stock Performance
Diamondback Energy owns two subsidiaries trading separately: Viper Energy Partners (VNOM).
Diamondback Energy’s performance on a one-year basis is solid, with a jump of 53%. However, the rally is now showing some signs of fatigue.
4 – Diamondback Energy acquired Rattler Midstream for $2.2 billion.
Under terms of the deal, Diamondback (FANG was its primary stakeholder) provided 0.113 of its shares for each Rattler share outstanding that it doesn’t already own, or about 26%.
Rattler Midstream had a net debt of $716 million in 1Q22.
Diamondback Energy – 1Q22 Quarterly Financial Table: The Raw Numbers
Diamondback FANG | 1Q21 | 2Q21 | 3Q21 | 4Q21 | 1Q22 |
Total Revenues and others in $ Million | 1,183 | 1,679 | 1,910 | 2,022 | 2,408 |
Net income in $ Million | 220 | 311 | 649 | 1,002 | 779 |
EBITDA $ Million | 619 | 820 | 1,261 | 1,681 | 1,372 |
EPS diluted in $/share | 1.33 | 1.71 | 3.56 | 5.54 | 4.36 |
Operating cash flow in $ Million | 624 | 954 | 1,199 | 1,167 | 1,252 |
CapEx in $ Million | 296 | 367 | 828 | 808 | 733 |
Free Cash Flow in $ Million | 328 | 587 | 371 | 359 | 519 |
Cash and cash equivalent $ Million | 121 | 344 | 457 | 654 | 149 |
Total Debt in $ Million | 7,656 | 7,364 | 6,945 | 6,687 | 5.848 |
Dividend per share in $ | 0.40 | 0.45 | 0.50 | 0.60 | 3.05 |
Shares outstanding (diluted) in Million | 164.93 | 181.97 | 182.15 | 180.18 | 178.56 |
Oil Production | 1Q21 | 2Q21 | 3Q21 | 4Q21 | 1Q22 |
Oil Equivalent Production in K Boepd | 307.42 | 401.45 | 404.27 | 387.07 | 381.38 |
Oil Composite realized price ($/Boe)/Hedge $Boe |
42.36/ 35.75 |
45.63/ 36.82 |
51.00/ 40.76 |
56.47/ 45.30 |
69.60/ 61.30 |
OIL % | 60.0% | 60% | 59% | 59% | 58% |
Oil in Bo | 16,578 | 22,067 | 22,058 | 20,819 | 20,055 |
NG in Mcf | 34,109 | 44,506 | 45,571 | 45,220 | 42,645 |
NGL in Boe | 5,405 | 7,047 | 7,540 | 7,254 | 7,161 |
Total in Boe | 27,668 | 36,532 | 37,193 | 35,610 | 34,324 |
Source: Diamondback Energy press release
Analysis: Revenues, Free Cash Flow, Net Debt, and Oil & Gas Production
1 – Quarterly revenues and others were $2,408 million in 1Q22
Lease operating expense LOE was $4.34 per Boe, compared with $4.21 in the fourth quarter of 2021. Gathering and transportation expenses increased in the first quarter of 2022 to $1.72 per Boe from $1.63 end of 2021.
2 – Generic free cash flow was $519 million in 1Q22
Operating cash flow is $1,252 million, and CapEx is $733 million.
Trailing 12-month free cash flow is now $2,182 million, with the first quarter’s free cash flow at $519 million.
3 – Net debt is $5.7 billion in 1Q22 (incl. subsidiaries) – debt reduction on the way. Total debt-to-total capital of 29.5%
4 – Quarterly Production was 381,378 Boep/d in 1Q22
Production for 1Q22 was 381.378K Boep/d, down 1.5% sequentially and up from 307.42K Boep/d the same quarter a year ago (see chart above).
The percentage of oil is 58.4% in 1Q22. Below is the chart repartition between oil, NG, and NGL.
The average oil composite in 1Q22 (unhedged) was $69.60, up from $42.36 a year-ago quarter and up 23.3% sequentially.
During the first quarter, the average realized oil price was $97.03, and realized natural gas prices were $3.61 per thousand cubic feet (Mcf) from $3.05 in the year-ago period.
5 – 2022 guidance
- In 2022, Diamondback kept its total net production guidance between 369k-376k Boep/d.
- FANG expects its oil production to be in the 218k-222k Bop/d.
- The company forecasts CapEx between $1.75 billion and $1.9 billion. In the second quarter of 2022, the company expects capital spending of between $435 and $475 million.
- FANG increased its expected cash tax rate to 10-15% of the pre-tax income from 6-11%. The move came from the higher commodity prices.
Technical Analysis (Short Term) and Commentary
FANG forms an ascending channel pattern with resistance at $157.5 and support at $129. FANG rallied on May 20 from $125 to the new resistance at $157.5. RSI is indicating an overbought situation with nearly 70.
The short-term trading strategy is to trade LIFO about 30% of your position and keep your core long-term amount for a much higher payday. I suggest selling between $156 and $160 and waiting for a retracement between $130 and $127.
However, the buyback can eventually start at $134 (50MA), often natural support.
If oil prices turn bearish, even if it is not likely right now, FANG could quickly drop to the lower support I see at $117.50.
Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States by Generally Accepted Accounting Principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stock, one for the long term and one for short-term trading.
Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.
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Read More: Diamondback Energy Stock: The Planets Are Aligned (NASDAQ:FANG)