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Diamondback (FANG) Down 1.2% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research
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A month has gone by since the last earnings report for Diamondback Energy (FANG). Shares have lost about 1.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Diamondback due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Diamondback Q4 Earnings Miss Estimates on Lower Oil Prices

Diamondback reported fourth-quarter adjusted net income per share of $1.21, below the Zacks Consensus Estimate of $1.62 and the comparable 2017 period profit of $1.56 on lower realized prices.

The Permian pure play’s total revenues of $633.1 million came below the Zacks Consensus Estimate of $663 million but increased 58.6% year over year on strong production.

The company saw its fourth-quarter adjusted EBITDA of $456.4 million increase 51.2% from $301.9 million a year ago.

Production & Realized Prices

The production of oil and natural gas averaged 182.8 thousand barrels of oil-equivalent per day or MBOE/d (71% oil), up 96.8% from last year and ahead of the Zacks Consensus Estimate of 171.5 MBOE/d. Diamondback’s oil production increased 88.6% year over year, while natural gas volumes more than doubled. The 2018 purchases of Energen Corporation and Ajax Resources has transformed Diamondback into one of the leading Permian Basin oil producers.

The average realized crude oil price during the fourth quarter was $45.51 per barrel, representing a decrease of 15% from the year-ago realization of $53.59. Moreover, the average realized natural gas price during the December quarter of 2018 was $1.62 per thousand cubic feet (Mcf), down 32.5% from the year-ago period. Overall, the company fetched $37.01 per barrel compared with $45.31 a year ago.

Expenses

Fourth-quarter cash operating cost was $8.1 per barrel of oil equivalent (BOE), down from $8.28 per BOE in last year’s corresponding period. Diamondback’s lease operating expense and cash G&A expense came in at $4.51 and 67 cents, respectively, increasing from $4.50 and 59 cents incurred in the fourth quarter of 2017. Meanwhile, production taxes fell 14.2% to $2.36 per BOE. The company, which closed the previously announced acquisition of Energen Corporation during the quarter, shelled out $424 million on drilling, completion and non-operated properties, while infrastructure and midstream budget was $101 million.

Financial Position

As of Dec 31, 2018, the Permian-focused operator had $215 million in cash and cash equivalents, while having total debt of $4.5 billion. At the end of 2018, Diamondback had $2.7 billion undrawn credit facility.

But Diamondback – that generated $12 million in free cash flow during the first three quarters of 2018 – admitted its failure to keep spending within cash flows in the fourth quarter. This was mainly on account of the dramatic decline in oil prices at the end of 2018, coupled with merger-associated costs.

Proved Reserves Update

Diamondback reported year-end 2018 proved oil and natural gas reserves rose 196% year over year to 992,001 thousand barrels of oil-equivalent (MBOE) - 63% oil, 65% proved developed.

Guidance

The company updated 2019 guidance and looks for production growth of more than 27% during the year. Diamondback is forecasting full-year output range of 275-290 MBOE/d, of which 68-70% is oil. While the company trimmed its 2019 capital spending outlook to $2.7–$3 billion from $2.7–$3.1 billion earlier, the estimated figure is significantly higher than the previous year’s outlay of $1.7 billion. Further, management cautioned that realized prices in the first quarter of 2019 will be weak.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -12.86% due to these changes.

VGM Scores

At this time, Diamondback has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Diamondback has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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