Diamondback Energy, Inc. (FANG) is an independent oil and gas company headquartered in Midland, Texas, which is focused on the Permian Basin in West Texas. In addition, subsidiary Viper Energy Partners owns mineral interests in Permian and Eagle Ford shales and subsidiary Rattler Midstream owns midstream infrastructure assets in the Permian. FANG produces around 0.5 million barrels of oil and oil equivalents per day, of which oil is around 60% and the remaining natural gas and NGLs.
Investment Overview
Earnings outlook among the most positive among peers. While commodity prices are expected to moderate in 2024/25 compared to recent highs, earnings and cash flows for FANG are still expected to remain robust. While impact of higher volumes in FY24 will not be enough to fully offset the lower price realisations, we believe earnings growth in FY25 for FANG should be among the highest in the industry, given relatively steady oil & gas price outlook and production volume growth estimate of around 50%, driven mainly by inorganic growth.
Endeavor merger the key growth driver in 2025. In February 2024, FANG announced the landmark USD26bn merger with Endeavor Energy Resources (Endeavor), intended to create the biggest independent operator in the Permian, and second biggest overall after the Exxon-Pioneer combine. The merger has been completed by September 2024 and will lead to significant volume growth trend in both FY24 and FY25 for FANG. By 4Q24, FANG's production volumes had reached 883mboepd (from 440mboepd in 2023), including TRP Energy asset swap volumes. In addition, FANG just announced the USD4bn bolt-on acquisition of Permian Basin operator Double Eagle’s assets, which adds another 40,000 acres of mostly undeveloped acreage contiguous to FANG’s positions in the Midland Basin in Permian. With the inclusion of Endeavor and Double Eagle volumes, FANG expects net oil & gas production of 883–909mboepd in 2025 (485–498mbopd of oil), including around 27mboepd of production from 2Q25 onwards attributable to the Double Eagle acquisition. This is almost 50% higher at the midpoint compared to average 2024 production of 598.3mboepd.
Shareholder returns improving, gearing needs to be kept in check. Looking ahead, FANG expects its high-quality, oil-weighted asset base and low-cost structure to drive superior FCF/boe compared to peers. The company thus expects higher FCF exceeding USD5.8bn in 2025, compared to USD4.0bn FCF in 2024. Its current USD4.0/share base dividend is protected down to a USD37.0/Bbl WTI oil price. The board has also increased the share buyback authorisation in 2024, raising it to USD6.0bn from USD4.0bn (USD3.5bn completed so far). However, following the above transactions, gearing has increased, hence FANG has committed to return of capital of at least 50% of free cash flow (FCF), down from 75% earlier. A key challenge for FANG is its relatively high gearing compared to peers, primarily due to acquisitions and investments. To address this, FANG remains committed to using FCF and proceeds from non-core asset sales to reduce its debt profile.
We have a HOLD call on FANG with a TP of USD168. Our TP is based on a forward P/BV multiple of 1.4x, which is slightly above historical average, probably conservative given high growth estimates. Still, FANG's relatively higher gearing and modest ROEs compared to other US plays like DVN, EOG, OXY or COP limits valuation upside. Acquisition led earnings delivery and execution of its non-core asset sales plan could lead us to revisit our call in future.
Risks
Key risk is lower-than-expected commodity prices and high interest rates. The higher commodity prices (eg. Crude oil, natural gas, NGLs) has helped FANG to deliver superior earnings, cash flows and shareholder returns, thus significant drop in commodity prices may affect company performance. Higher for longer interest costs may also eat into earnings performance.
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