Source: Diamondback Energy

Investment Thesis

The Midland, TX-based Diamondback Energy (FANG) released its third quarter of 2020 on November 2, 2020. The company delivered strong third-quarter 2020 earnings with better-than-expected production.

Adjusted net income per share was $0.62 per share well ahead of analysts’ expectations. However, it is far from the earnings results posted the same quarter a year ago.

The main culprit is, of course, the weaker average oil price realization.

Travis Stice, the CEO, said in the conference call:

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we’re on track to meet our fourth quarter average oil production target of between 170,000 and 175,000 barrels per day and expect to carry this momentum into 2021 as the baseline for our maintenance capital development plan in 2021. We expect to execute on this capital plan with 25% to 35% less capital than 2020. And this plan implies a reinvestment ratio of about 70% at $40 oil.

Diamondback has two subsidiaries: Viper Energy Partners (VNOM) and Rattler Midstream (RTLR).

ChartData by YCharts

Diamondback Energy – 3Q’20 Quarterly Financial Table: The Raw Numbers

Diamondback FANG 3Q’19 4Q’19 1Q’20 2Q’20 3Q’20
Total Revenues and others in $ Million 975 1,104 899 425 720
Net income in $ Million 368 -487 -272 -2,393 -1,113
EBITDA $ Million 714 807 138 -2,703 -1,070
EPS diluted in $/share 2.26 -3.04 -1.72 -15.16 -7.05
Operating cash flow in $ Million 809 882 849 324 542
CapEx in $ Million 1,204 890 900 581 306
Free Cash Flow in $ Million -395 -8 -51 -257 236
Cash and cash equivalent $ Million 100.0 123 149 51 92
Total Debt in $ Million 4,774 5,371 5,677 5,984 5,847
Dividend per share in $ 0.1875 0.375 0.375 0.375 0.375
Shares outstanding (diluted) in Million 162.8 162.0 158.5 157.8 157.8
Oil Production 3Q’19 4Q’19 1Q’20 2Q’20 3Q’20
Oil Equivalent Production in K Boepd 287.1 301.3 321.1 294.1 287.3
Oil Composite realized price ($/Boe)/Hedge $Boe 36.59 39.28 30.23 15.39/ 22.95

26.75/ 26.22

OIL % 65% 65% 63% 60% 59%
Oil in Bo 17,064 17,937 18,325 16,045 15,639
NG in Mcf 26,271 28,219 32,120 31,857 32,505
NGL in Boe 4,974 5,308 5,538 5,411 5,377
Total in Boe 26,417 27,718 29,216 26,765 26,434

Source: Diamondback Energy pr

Analysis: Revenues, Free Cash Flow, Net Debt, and Oil & Gas Production

1 – Quarterly revenues and others were $720 million in 3Q’20

FANG announced the third-quarter 2020 results on November 2, 2020. The quarter’s revenues were $720 million, with a net loss of 1,113 million or $7.05 per diluted share.

The Q3 2020 cash operating costs were $7.61 per BOE.

Diamondback’s board of directors announced a quarterly dividend of $0.375 per share in Q3, unchanged from the preceding quarter again. The dividend yield of the company is now 3.75%.

Highlights of the third quarter:

Source: Presentation

2 – Generic free cash flow was $236 million in 3Q’20.

Note: The generic free cash flow is cash from operating activities minus CapEx.

Cash flow from operations is $542 million, and CapEx was $306 million.

The yearly free cash flow (“ttm”) is now a loss of $88 million, with the free cash flow for the third quarter at $236 million.

Diamondback Energy has a different way of calculating the free cash flow and $153 million in Q3.

I will not go more in-depth on this issue and give you the two estimates. One interesting element that I found in the presentation is the free cash flow sensitivity to the West Texas oil price.

However, one important issue here is that the free cash flow is insufficient to allow the company to pay a yearly dividend of $1.50 per share unless oil prices start to go higher.

3 – Net debt is $5.80 billion in 3Q’20

Note: Cash on a FANG’s standalone liquidity is $2.07 billion as of September 30 (consolidated liquidity of over $3 billion) with cash and a $92 million cash equivalent.

Per the presentation:

4 – Quarterly Production was 287.32K Boepd in 3Q’20

Production for 3Q’20 was 287.32K Boepd, which was slightly lower sequentially and about the same quarter a year ago (see chart above).

The company drilled 32 gross operated horizontal wells and turned 41 wells to production in the third quarter.

The percentage of oil is 59.2% in 3Q’20. Below is shown the chart repartition between Oil, NG, and NGL.

Average oil composite in 3Q’20 (unhedged) was $26.75, down 26.9% from a year ago quarter and up 16.6% sequentially.

The average oil composite hedged was $26,22 per barrel.

5 – Guidance 2020 from Presentation

Diamondback anticipates 2020 average daily production to be 290-305k Boepd, with an expected CapEx of $1.8-1.9 billion.

The company intends to complete 170-200 net wells and drill 153-215 gross wells in 2020.

Conclusion and Technical Analysis (Short Term)

The situation in the Permian Basin is getting better now. According to Baker Hughes, the weekly oil rig tally was 161, higher than the prior-week count of 156, increasing for over five weeks in a row. It is an encouraging sign for the long term, assuming a demand recovery by H2 2021.

The price of West Texas Intermediate crude is now $45.21 per barrel. It is a significant improvement from a few months ago, and this momentum may push oil prices above $50 next year since the vaccine(s) results have raised hopes of a more robust fuel demand next year.

Thus, it is time to look again at this battered sector cautiously.

Technical Analysis (short term)

FANG experienced a breakout on November 9-10 after the news of the potential vaccine.

The stock reached an overbought situation (RSI >70) at $47.40 and quickly retraced since. The first support test is the range of $37-$34, where I recommend accumulating again.

If oil prices turn bullish, FANG could eventually retest its top at $47.0-$47.5, at which point I recommend selling about 30%+ of your position assuming a profit.

However, if oil prices turn bearish suddenly, the new support may not hold, and FANG may drop below $30 as indicated in the chart above.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.