In a Feb. 20 research note, analyst John Freeman reported that Diamondback Energy Inc. (FANG:NASDAQ) had a strong Q4/18 despite oil price weakness and that its 2019 forecasted spending looks slightly better "on improved capital efficiency."
Freeman relayed that the company beat Q4/18 production estimates, with oil volumes coming in at about 5% and 7% above Raymond James and consensus' forecasts, respectively. As for 2019 production, Diamondback reiterated guidance.
The company's Q4/18 capex and operating costs were mixed relative to projections. Diamondback missed on earnings per share and earnings before interest, taxes, depreciation and amortization (EBITDA) due in large part to weak oil prices.
A significant positive for the company looking forward, Freeman indicated, is lower horizontal drilling and completion (D&C) costs. Diamondback reduced its 2019 D&C budget to $2.3–2.55 billion, a roughly 4% decrease at the midpoint. Regardless, the company "expects to complete an additional five net wells at the midpoint (255–280), with the average lateral length up 2% from prior guidance, to 9,400 feet," added Freeman.
Two factors make it possible for the company to stay within the decreased budget, Freeman explained. One is that D&C costs per lateral foot "are coming down meaningfully." In the Delaware Basin, for instance, they are down 7% since this time last year.
Second, synergies from the Energen acquisition have started to kick in for Diamondback, particularly with respect to general and administrative (G&A) expense and well costs. "Cash G&A is expected to come in below $1 a barrel of oil equivalent."
Regarding synergies relative to Midland Basin operations, well costs are $215 per foot lower than they were for Energen. With this, Diamondback already achieved 96% of the projected D&C synergies in the Midland.
As for synergies with respect to the Delaware Basin, well costs are down $55–60 per foot, which surpasses the original target of $50 per foot. G&A savings are $30–40 million, in line with the goal.
"Taken together, these three items represent 2019 savings of over $200 million," commented Freeman.
He lastly pointed out yet another highlight for Diamondback, that "recent completions on Energen acreage are outperforming." The three wells Energen completed in the Northern Delaware Wolfcamp A before the closing of the merger exceeded average IP30s, delivering 436 barrels of oil equivalent per day (436 boe/d) per 1,000 feet. Similarly, its three recently completed Wolfcamp B wells delivered 261 boe/d per 1,000 feet.
Raymond James has an Outperform rating but no target price on Diamondback. Its stock is currently priced at about $104.19 per share.
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Disclosures from Raymond James, Diamondback Energy Inc., February 20, 2019
ANALYST INFORMATION
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analyst John Freeman, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
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Raymond James & Associates, Inc. makes a market in the shares of Diamondback Energy, Inc.
