Diamondback Energy (FANG 0.07%) reported Q4 and fiscal 2021 earnings results following the market close on Tuesday, Feb. 22. The Midland, Texas-based oil and gas exploration firm delivered outstanding results -- beating expectations for revenue and earnings.
Diamondback produces oil through a technique called hydraulic fracturing -- also known as fracking. This process involves injecting sand, water, or chemicals at high pressure deep underground to break or 'fracture' the existing bedrock. This method releases oil and gas trapped within the bedrock.
Rising energy prices supplied a strong tailwind for Diamondback, as worldwide energy demand has picked up as the coronavirus pandemic has waned. Even with the stellar report and rosy outlook, Diamondback's shares are up only 4.9% since the earnings release -- owing to the broader market sell-off following the Russian invasion of Ukraine. So is this an opportunity for investors to load up on Diamondback? Let's take a closer look.
Revenues and earnings hit all-time highs
Diamondback reported revenue for the fiscal fourth quarter (period ending on Dec. 31, 2021) of $2 billion. That beat analysts estimates by 23% and represents a year-over-year increase of 163%.
Earnings also hit record highs. Fourth-quarter adjusted earnings per share were $3.63. This beat the consensus estimate by $0.25 and was much higher than the year-ago figure of $0.82.
For a fracking company like Diamondback, revenues result from two factors: the amount of oil they produce and the price they sell it at. Obviously, Diamondback has more control over their production levels than price (although they do hedge a portion of their production in the futures and derivative markets).
This quarter, the increase in revenue came exclusively from a rise in the price of oil. Production was flat: 224,000 barrels of oil per day in Q4 vs. 223,000 barrels of oil per day in Q3. It's part of Diamondback's strategy to keep costs in check by holding production steady and de-emphasizing the need for production growth.
Even with steady production numbers, analysts still see growth in Diamondback's future. Consensus estimates are 28.6% annualized growth over the next five years. This is driven by two main factors: First, a rise in oil prices -- oil is currently hovering around $100/barrel, already up 28% year to date. Second, on a longer-term basis fuel needs will likely multiply, causing production to grow to meet demand.
Image source: Getty Images.
Shoring up the balance sheet
Another piece of good news in Diamondback's quarterly report was the health of its balance sheet. Like many oil and gas producers, the pandemic drove Diamondback deep into debt. In Q1 2021, its total debt hit an all-time high of $7.6 billion. However, as revenues and earnings have picked up, Diamondback has reduced its debt load. At the end of the fourth quarter, total debt is now $6.7 billion -- a reduction of $900 million (12%) in nine months.
Rating agencies have taken notice. Moody's recently upgraded Diamondback's credit rating to Baa3 (Investment grade) from Ba1 (non-investment grade). All three rating agencies now list Diamondback's corporate debt as investment grade. This is important because it means Diamondback can secure additional funding -- or refinance existing debt -- on more favorable terms. With $4.6 billion of debt set to mature between 2024 and 2029, management will be in a stronger position when deciding whether to retire or refinance that debt load. What's more, cash on hand has soared to $654 million -- a record high.
Enhancing shareholder returns
As its overall financial health has improved, it has returned more of its profits to shareholders. Diamondback's stated goal is to return at least 50% of free cash flow to shareholders through dividends or share buybacks. For the most recent quarter, it reported $772 million in free cash flow or $4.72 per share.
Diamondback easily surpassed its 50% goal with its buyback program alone. It spent $409 million on share repurchases at an average cost of $105.96/share, driving down the overall number of shares outstanding from 180.7 million to 177.6 million. In addition, it raised its regular quarterly dividend to $0.60/share -- a 20% hike.
What it means for investors
With its financial house in order and oil prices high, there's every reason to believe Diamondback can generate even more free cash flow in 2022. Management expects annual free cash flow between $3.0 billion (assuming a $70/barrel price for oil) and $4.4 billion ($100 oil) -- a substantial increase over the $2.4 billion of free cash flow in 2021.
Assuming it sticks with its 50% return plan, that would mean it would return at least $1.5 billion to shareholders in 2022. In September 2021, Diamondback's board of directors authorized management to repurchase up to $2.0 billion worth of shares. As of Q1, only 25% of that authorization has been used.
Diamondback may not be the cheapest U.S. driller from a valuation standpoint, but it remains affordable. Its current forward price to earnings of 6.6 is in-line with peers, such as Coterra Energy (5.9) and PDC Energy (4.3). Stock performance-wise, its 26% year-to-date return has blown away the S&P 500's 8% year-to-date loss.
Nevertheless, Diamondback's earnings results have flown under the radar. With long-term growth expected to remain well into the double digits for years to come, savvy investors might want to sink their teeth into Diamondback energy stock -- before the market catches up.
