Divesting Non-Core Assets Will Streamline Operations And Reduce Debt

Key Takeaways

• Strategic mergers and acquisitions have improved capital efficiency and cash flow, indicating potential for future earnings growth.
  
• Plans to leverage DUC inventory and innovative practices aim to reduce costs, boost net margins, and increase operational efficiency.
  
• Reliance on oil prices poses risks to earnings stability, while operational challenges and high debt could strain financial flexibility and impact future returns.

Catalysts

An independent oil and natural gas company, acquires, develops, explores, and exploits unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas.

• Diamondback Energy's recent mergers and acquisitions, including the Endeavor deal, have resulted in significant improvements in capital efficiency and free cash flow per share, with lower breakeven oil prices, suggesting enhanced future earnings potential.
  
• The company's plan to leverage DUC (Drilled but Uncompleted) inventory, particularly drawing down from a significant inventory acquired through deals, offers cost savings and operational flexibility, which can positively impact net margins by reducing capital expenditure.
  
• Diamondback's focus on share repurchases, encouraged by their largest shareholders, highlights an intention to enhance shareholder value through capital returns, potentially boosting earnings per share (EPS).
  
• Through innovative practices like SimulFRAC and increased pump rates, Diamondback aims to enhance operational efficiencies, thereby improving well completion timelines and reducing costs, which may lead to higher future net margins.
  
• Diamondback's intentions to monetize and potentially divest non-core assets, including midstream operations, aim to streamline operations and bolster financials by reducing net debt and potentially increasing net margins through enhanced focus on core assets.

Diamondback Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Diamondback Energy's revenue will grow by 11.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.4% today to 27.1% in 3 years time.
• Analysts expect earnings to reach $4.0 billion (and earnings per share of $13.89) by about March 2028, up from $3.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.0 billion in earnings, and the most bearish expecting $2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.3x on those 2028 earnings, up from 12.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.84%, as per the Simply Wall St company report.

Diamondback Energy Future Earnings Per Share Growth

Risks

• Significant reliance on oil prices for maintaining free cash flow and capital efficiency could be impacted by price volatility, affecting net margins and overall earnings stability.
  
• A large debt burden and the need for asset sales to reduce leverage could strain financial flexibility and impact net earnings if market conditions are unfavorable for asset divestures.
  
• Dependence on synergies and operational efficiencies post Double Eagle acquisition to maintain cost efficiencies, with execution risks potentially leading to increased capital expenditures and reduced net profits.
  
• The presence of significant legacy shareholders, like the Stephens family, may influence financial decisions, posing a risk to optimal capital allocation, potentially impacting share repurchase programs and shareholder returns.
  
• Long-term inventory plans are based on sustaining high-return streams, which could be adversely affected by fluctuations in oil prices or operational challenges, impacting future revenue and earnings potential.

Valuation

• The analysts have a consensus price target of $210.211 for Diamondback Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $245.0, and the most bearish reporting a price target of just $170.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.8 billion, earnings will come to $4.0 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $140.11, the analyst price target of $210.21 is 33.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.