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Diamondback Energy Is Weathering the Oil Market Downturn Relatively Well

By Matthew DiLallo - May 12, 2020 at 9:40AM

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The oil company believes it can start fracking wells again once oil rebounds to around $30 a barrel.

Diamondback Energy (FANG 0.26%) is navigating the current oil market downturn better than most peers. That was evident during the first quarter, for which it posted a surprisingly stronger profit than anticipated. It's also clear in its outlook, with it estimating that it can restart its growth engine once crude prices creep back up to around $30 a barrel. 

Drilling into Diamondback Energy's first-quarter numbers

Diamondback Energy handled all the turbulence in the oil market during the first quarter reasonably well. The company produced an average of 321,100 barrels of oil equivalent per day (BOE/D), including 210,400 barrels of oil per day (BPD). That oil output was 3% above its fourth-quarter tally and 12% higher than the year-ago period. 

Two oil pumps with a bright sun in the background.

Image source: Getty Images.

Meanwhile, the company was able to generate $230 million, or $1.45 per share, of adjusted net income. That was $0.15 per share ahead of the analysts' consensus estimate. The company delivered that stronger-than-expected earnings result by keeping a lid on cash operating costs -- which averaged $8.52 per BOE during the quarter -- and realizing an average of $49.32 per barrel of oil during the quarter, thanks to its hedging contracts.

A look at what Diamondback Energy sees ahead

Diamondback Energy, however, isn't immune to lower oil prices. Because of that, the company made several adjustments to its 2020 operating plan, including:

  • Immediately stopping all its well completion activities in early March for at least one month.
  • Hedging 100% of its expected 2020 oil production as well as half of next year's anticipated output.
  • Voluntarily curtailing 10% to 15% of its expected oil production in May, with additional volume reductions possible in future months depending on market conditions.
  • Reducing its capital budget by 40%.

While Diamondback Energy stopped completing new wells in March, it had 14 drilling rigs running at the end of the first quarter, though it expected to drop half of those by the fourth quarter. By continuing to drill, but not completing wells, the company will build up an inventory of more than 150 wells that it can quickly bring online when prices improve.

Diamondback Energy's moves will enable it to quickly capture higher oil prices. The company can bring back shut-in volumes and then start completing unfinished wells. In its view, it only needs oil pricing in the high-$20s or low-$30s before it can resume its well completion operations, according to comments by CEO Travis Stice on the accompanying conference call.  

Diamondback also has a solid financial position to help it navigate current market volatility. It ended the first quarter with $1.9 billion of liquidity -- cash and available credit -- and only has one debt maturity over the next five years, which is a $400 million bond that's due in September 2021. Because of that, the company has the financial flexibility to maintain its dividend, which yields nearly 3.6%. Meanwhile, it can utilize excess cash -- which it expects to generate in the second half of the year thanks to its oil hedges -- to pay down debt and further strengthen its balance sheet.

Well-positioned to excel when oil prices improve

Diamondback Energy entered this downturn in an admirable position. It has a strong balance sheet, low-cost operations, and a solid hedge book in place to protect its cash flow. Because of that, and the flexibility of its drilling program, the company was able to quickly adjust as crude oil prices plummeted to both preserve value and maintain its financial and operational flexibility. That puts it in a strong position to benefit from a future rebound in oil prices, which for Diamondback is around $30 a barrel. That's a much lower price point than most peers, which need oil closer to $50 before they can restart their growth engines.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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