FAANG was once a casual investment term for a group of high-flying investment stocks. Since then, as they have dropped, investment views have changed. The best FANG to invest in, in our view, is the NASDAQ ticker for Diamondback Energy, Inc.NASDAQ: FANG) As we’ll see throughout this article, Diamondback Energy, with its strong assets and financials, can drive substantial shareholder returns.
Diamondback Energy Capital Framework
The company has a capital structure that it can use to generate strong shareholder returns.
The company generates $4.6 billion in free cash flow (“FCF”) in 2022. Against its $26 billion market cap, that’s an 18% FCF yield. The company returned $3.1 billion, or 12% of its market capitalization, through stock repurchases and dividends. This is 68% of the company’s 2022 FCF. The company has the right to repurchase 15% of its stock and has repurchased 6% so far.
The company increased its annual base dividend to $3.2/share, up 33% YoY, to around 2.5% now. Its total dividend payout is roughly $12 annually, or an 8% yield. The company is instructing to continue share buybacks. The company’s net debt of just $6 billion represents ~16 months of 2022 FCF, a level it can comfortably afford.
Diamondback Energy 2022 Financials
Diamondback Energy has been able to achieve strong financial results in 2022 as prices remain high.
The company kept the company’s production flat YoY below 225 thousand barrels/day. The company’s annual cash capex of $2.2 billion, managed comfortably, and the company was able to realize 82% of unrealized value. It reinvested 32% of its cash flow into its business and F&D costs of $10.1 were manageable.
The company’s FCF per share was just under $26. It is about 20% of its market capitalization, showing the financial strength of the company. The company has opportunistically divested assets and continues to target that. It recently announced a plan to sell non-core Permian Basin assets that we expect it to operate comfortably.
Diamondback Energy Reserve
The company continues to opportunistically invest in its business and improve reserves.
The company has been able to grow its reserves by 14% YoY and now has one of the strongest reserves in the industry. The company has 2 billion barrels of reserves, or 20 years worth of reserves. 53% of the company’s proven reserves consist of oil, and the company continues to find reserves cheaply. This is double the 10-year reserves in most countries.
These reserves will enable the company to increase production and continue its growth.
Diamondback Energy 2023 Guidelines
Diamondback Energy’s 2023 guidance represents growth in the company’s business.
The company spent billions of dollars on opportunistic new acquisitions. It increased by 16% YoY from 224 thousand barrels/day to 259 thousand barrels/day. The company expects to return capital as its capital budget increases. At the same time, it plans to increase its drilling substantially to improve margins.
The company’s production of 100 million barrels for the year is a significant capital budget at $26/share, but will enable continued growth for the company.
The company’s oil production and cash capital expenditures are strong. The company’s mission is to drive significant shareholder returns. The company’s FCF yield is 10% at $60/barrel, a side effect of its incredibly strong hedging program. It is one of the strongest in the industry and covers about 70% of the company’s production.
At current prices, its FCF yield is 15%, and at $100/barrel, it is around 20%. At current prices, the company aims for a $2.3 billion shareholder return, or a 9% shareholder return yield. This is expected to be through a combination of company dividends and share buybacks. Previously weighted share repurchases can help support the company’s long-term returns.
The biggest risk to our thesis is crude oil prices. The company’s yield drops substantially to $60/barrel, however, it has built a huge hedging portfolio, which shows its financial strength. Meanwhile, there is still a risk: if prices fall significantly and remain low, the company will struggle to generate returns in the long term.
Diamondback Energy, Inc. is one of the most powerful companies in the shale industry. The company has a market capitalization of about $27 billion with net debt of about $6 billion, an incredibly manageable debt load equivalent to about 16-months of the company’s FCF. The company also has incredibly strong hedging to protect its earnings.
At $60/barrel, supported by its hedging program, Diamondback Energy, Inc. Its FCF yield is 10%. The company plans to return 75% of FCF to shareholders, a yield of around 8%. Both dividends and share buybacks will enable the company to generate strong and sustained returns. This limited downside and strong upside make Diamondback Energy, Inc. a strong investment.