Breaking Down Diamondback Energy, Inc. (FANG) Financial Health: Key Insights for Investors

Understanding Diamondback Energy, Inc. (FANG) Revenue Streams

Understanding Diamondback Energy’s Revenue Streams

Diamondback Energy, Inc. generates revenue primarily through the sale of oil, natural gas, and natural gas liquids. The breakdown of revenues for the nine months ended September 30, 2024, compared to the same period in 2023, is as follows:

The total revenue for the nine months ended September 30, 2024, increased by 9.3% from the previous year, driven largely by a 12.4% increase in oil sales. However, natural gas sales experienced a significant decline of 80.7%.

Year-over-Year Revenue Growth Rate

For the three months ended September 30, 2024, the total revenue was reported at $2,645 million, compared to $2,340 million for the same period in 2023, reflecting a year-over-year growth rate of 13%. The breakdown of revenue sources for this period is as follows:

Contribution of Different Business Segments to Overall Revenue

The primary business segment for revenue generation is the upstream segment, which focuses on the acquisition, development, exploration, and exploitation of oil and natural gas reserves. For the nine months ended September 30, 2024, the contribution from different segments was as follows:

Analysis of Significant Changes in Revenue Streams

The Endeavor Acquisition completed in September 2024 significantly impacted revenue streams. The acquisition contributed approximately $297 million in total revenue for the three months ended September 30, 2024. Additionally, net sales of purchased oil increased to $698 million in the nine months ended September 30, 2024, compared to $59 million in the same period in 2023, indicating a strategic shift in operations to optimize pipeline capacities.

Overall, the company’s revenues have shown resilience despite fluctuations in natural gas prices, with oil sales remaining the dominant revenue driver.

A Deep Dive into Diamondback Energy, Inc. (FANG) Profitability

A Deep Dive into Diamondback Energy, Inc.'s Profitability

Gross Profit Margin: For the third quarter of 2024, the company reported revenues of $3,877 million with a gross profit margin of approximately 25.4%. This is a decrease from the 55.0% margin reported in the same quarter of 2023 due to rising costs associated with oil production.

Operating Profit Margin: The operating income for the third quarter of 2024 was $983 million, resulting in an operating profit margin of 25.4%. In comparison, in Q3 2023, the operating income was $2,228 million, yielding a margin of 55.0%.

Net Profit Margin: The net income attributable to Diamondback Energy, Inc. for the third quarter of 2024 was $853 million, leading to a net profit margin of 22.0%. This reflects a decline from 39.2% in Q3 2023 when net income was reported at $1,582 million.

Trends in Profitability Over Time

The following table summarizes the trends in profitability metrics over the past two years:

Comparison of Profitability Ratios with Industry Averages

As of Q3 2024, the industry average for gross profit margin in the oil and gas sector stands at 45.0%, while the average operating profit margin is 32.0% and the net profit margin is 20.0%. This indicates that while the company is performing close to industry standards for net profit, it is significantly below the industry averages for gross and operating profit margins.

Analysis of Operational Efficiency

The company's cash operating costs for Q3 2024 were reported at $11.49 per BOE. This includes:

• Lease operating expenses: $6.01 per BOE
• Cash general and administrative expenses: $0.63 per BOE
• Production and ad valorem taxes, and gathering, processing and transportation expenses: $4.85 per BOE

In comparison, cash operating costs were $10.50 per BOE in Q3 2023, illustrating a rise in operational costs that has impacted profitability metrics.

Gross Margin Trends: The company has observed a decline in gross margin from 55.0% in Q3 2023 to 25.4% in Q3 2024, primarily driven by increased production costs and lower average selling prices for oil and gas products.

Production Volumes: Average production for Q3 2024 reached 571.1 MBOE/d, an increase from 474.7 MBOE/d in Q3 2023, indicating improved operational output despite declining margins.

Debt vs. Equity: How Diamondback Energy, Inc. (FANG) Finances Its Growth

Debt vs. Equity: How Diamondback Energy, Inc. Finances Its Growth

Debt Levels

As of September 30, 2024, Diamondback Energy, Inc. reported total long-term debt of $11.9 billion, an increase from $6.6 billion as of December 31, 2023. The breakdown of the long-term debt consists of various senior notes and loans as follows:

Debt-to-Equity Ratio

The company's debt-to-equity ratio stood at approximately 0.33 as of September 30, 2024, which is below the industry average of around 0.5. This indicates a conservative approach to leveraging, suggesting that the company is primarily financed through equity rather than debt.

Recent Debt Issuances

On April 18, 2024, Diamondback Energy issued $5.5 billion in senior notes to finance the Endeavor Acquisition. The notes include:

• $850 million of 5.200% Senior Notes due 2027
• $850 million of 5.150% Senior Notes due 2030
• $1.3 billion of 5.400% Senior Notes due 2034
• $1.5 billion of 5.750% Senior Notes due 2054
• $1.0 billion of 5.900% Senior Notes due 2064

The company anticipates incurring additional cash interest costs of approximately $130 million in 2024 as a result of this issuance.

Credit Ratings

As of September 30, 2024, the company maintained a credit rating of Baa2 from Moody's and BBB from S&P, reflecting a stable outlook and moderate credit risk.

Balancing Debt Financing and Equity Funding

Diamondback Energy balances its financing strategies by committing at least 50% of its free cash flow to stockholder returns through share repurchases and dividends, while using the remaining funds primarily to pay down debt. The company has increased its stock repurchase program authorization to $6.0 billion as of September 30, 2024.

In summary, Diamondback Energy's financial structure is characterized by a prudent mix of debt and equity, allowing it to finance growth while maintaining a manageable level of financial risk.

Assessing Diamondback Energy, Inc. (FANG) Liquidity

Assessing Diamondback Energy's Liquidity

Current and Quick Ratios

The current ratio as of September 30, 2024, stands at 1.53, indicating that the company has $1.53 in current assets for every $1.00 of current liabilities. The quick ratio is reported at 1.24, suggesting a strong liquidity position as it excludes inventory from current assets.

Analysis of Working Capital Trends

As of September 30, 2024, working capital is approximately $2.1 billion, reflecting a notable increase compared to $1.4 billion from the previous year. This increase is primarily driven by higher cash reserves and accounts receivable from operations.

Cash Flow Statements Overview

The cash flow statements for the nine months ended September 30, 2024, reveal the following trends:

• Operating Cash Flow: $4,072 million
• Investing Cash Flow: ($9,366 million) (includes significant capital expenditures for property acquisitions)
• Financing Cash Flow: $5,082 million

Operating cash flow has decreased slightly from $4,296 million in the previous year, largely attributed to increased operating costs and merger-related expenses. The investing cash flow reflects substantial capital investments, particularly in the Endeavor Acquisition, while financing activities show robust capital raising efforts.

Potential Liquidity Concerns or Strengths

The company maintains a solid liquidity cushion, with total cash and cash equivalents amounting to $1.1 billion as of September 30, 2024. Additionally, the available credit under the revolving credit facility is approximately $2.4 billion, providing further financial flexibility. However, the significant capital outflows for acquisitions may pose risks if cash flows do not meet projections in volatile market conditions.

Is Diamondback Energy, Inc. (FANG) Overvalued or Undervalued?

Valuation Analysis

In assessing whether the company is overvalued or undervalued, we can examine several key financial metrics: the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and enterprise value-to-EBITDA (EV/EBITDA) ratio.

Price-to-Earnings (P/E) Ratio

As of September 30, 2024, the basic earnings per share (EPS) was $12.00. With the stock price trading around $176.40, the P/E ratio can be calculated as follows:

P/E Ratio = Stock Price / EPS = $176.40 / $12.00 = 14.70

Price-to-Book (P/B) Ratio

The book value per share can be derived from the total equity. As of September 30, 2024, total equity was approximately $38.8 billion with 292.7 million shares outstanding. Thus, the book value per share is:

Book Value per Share = Total Equity / Shares Outstanding = $38,819 million / 292.743 million = $132.00

The P/B ratio is then:

P/B Ratio = Stock Price / Book Value per Share = $176.40 / $132.00 = 1.33

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

To calculate the EV/EBITDA ratio, we first determine the enterprise value (EV). The formula for EV is:

EV = Market Capitalization + Total Debt - Cash and Cash Equivalents

Using a market capitalization of approximately $51.7 billion (calculated from the stock price and shares outstanding), total debt of $11.1 billion, and cash and cash equivalents around $679 million:

EV = $51.7 billion + $11.1 billion - $0.679 billion = $62.12 billion

Assuming EBITDA for the last twelve months is approximately $4.8 billion, the EV/EBITDA ratio is:

EV/EBITDA = EV / EBITDA = $62.12 billion / $4.8 billion = 12.95

Stock Price Trends

Over the last 12 months, the stock has shown a volatile trend. The stock price ranged from a low of $140.00 to a high of $200.00. Currently, it is trading at $176.40.

Dividend Yield and Payout Ratios

The company declared a dividend of $0.90 per share for the fourth quarter of 2024. With the current stock price of $176.40, the dividend yield is calculated as:

Dividend Yield = Annual Dividend / Stock Price = $0.90 / $176.40 = 0.51%

The payout ratio can be calculated using the EPS:

Payout Ratio = Dividend per Share / EPS = $0.90 / $12.00 = 7.5%

Analyst Consensus on Stock Valuation

Analyst consensus indicates a majority rating the stock as a buy, with a target price range between $180.00 and $210.00.

Key Risks Facing Diamondback Energy, Inc. (FANG)

Key Risks Facing Diamondback Energy, Inc.

Overview of Internal and External Risks:

Diamondback Energy, Inc. faces various internal and external risks that could impact its financial health. Major risks include:

• Commodity Price Volatility: The company is highly sensitive to fluctuations in oil and natural gas prices. For instance, oil sales for the nine months ended September 30, 2024, were $6.025 billion, reflecting a price-sensitive revenue stream.
• Regulatory Changes: Changes in environmental regulations and taxes, such as the 1% excise tax on stock repurchases introduced by the Inflation Reduction Act, can affect profitability.
• Market Competition: Increased competition in the Permian Basin may pressure margins and market share. As of September 30, 2024, the company reported total assets of $65.747 billion, which may reflect competitive positioning.

Operational Risks:

Recent earnings reports highlight several operational risks:

• Production Costs: The average cash operating cost was $11.49 per BOE, which includes lease operating expenses and other costs, impacting overall profitability.
• Acquisition-Related Costs: The Endeavor Acquisition incurred costs of $273 million for the nine months ended September 30, 2024, which could strain financial resources.

Financial Risks:

Financial risks include exposure to credit and interest rate fluctuations:

• Debt Levels: As of September 30, 2024, the company had $11.087 billion in long-term debt. The weighted average interest rate on borrowings was 6.64%.
• Credit Risk: Receivables from oil and gas production totaled approximately $1.197 billion as of September 30, 2024, heightening exposure to customer credit risk.

Mitigation Strategies:

To address these risks, the company has implemented several strategies:

• Hedging Activities: The company has engaged in derivative contracts to hedge against commodity price fluctuations, including a net asset derivative position of $77 million.
• Capital Management: The company increased its stock repurchase program to $6 billion, indicating a commitment to manage capital effectively.

Future Growth Prospects for Diamondback Energy, Inc. (FANG)

Future Growth Prospects for Diamondback Energy, Inc.

Analysis of Key Growth Drivers

The recent Endeavor Acquisition, completed on September 10, 2024, for approximately $7.3 billion in cash and 117.27 million shares of common stock, significantly enhanced the company's asset portfolio, particularly in the Permian Basin. This acquisition included proved properties valued at $20.9 billion and unproved properties valued at $13.9 billion.

Future Revenue Growth Projections and Earnings Estimates

For the nine months ended September 30, 2024, revenues increased to $11.8 billion, compared to $10.77 billion in the same period of 2023, reflecting a growth rate of approximately 9.5%. The company anticipates continued revenue growth driven by increased production volumes and strategic acquisitions.

Strategic Initiatives or Partnerships That May Drive Future Growth

The company has expanded its operational footprint through strategic acquisitions, including the recent asset exchange with TRP Energy, LLC, involving approximately 35,000 net acres in the Delaware Basin. This transaction is expected to close by the end of 2024, further diversifying the company's asset base.

Competitive Advantages That Position the Company for Growth

Diamondback Energy benefits from its established presence in the productive Permian Basin, where it has successfully drilled 71 gross horizontal wells in the Midland Basin and 5 gross horizontal wells in the Delaware Basin during the third quarter of 2024. The company has also maintained a strong balance sheet with total assets amounting to $65.75 billion as of September 30, 2024.

The company has also approved a return of capital commitment of at least 50% of free cash flow to stockholders, which is expected to enhance shareholder value.

Updated on 16 Nov 2024

Resources:

1. Diamondback Energy, Inc. (FANG) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Diamondback Energy, Inc. (FANG)' financial performance, including balance sheets, income statements, and cash flow statements.
2. SEC Filings – View Diamondback Energy, Inc. (FANG)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.