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Morningstar | Commodity Weakness Affects 4Q for Diamondback

Diamondback Energy delivered production of 182.8 mboe/d in the fourth quarter, which was 97% higher year over year, owing to the recently closed acquisition of Energen. Excluding the contribution from the Energen assets, full-year volumes were 121.4 mboe/d, ahead of guidance and 53% higher year over year. Diamondback has now exceeded the high end of its production guidance for five consecutive years, reflecting its continuous advancement on the Permian Basin learning curve. Despite this, fourth-quarter financial results were weaker than expected, with adjusted EBITDA and adjusted EPS coming in at $456 million and $1.21, respectively (consensus estimates were $491 million and $1.61). Weaker-than-expected commodity prices appear to be the main culprit of the miss (Diamondback’s long-term shipping strategy won’t come to fruition until the second half of 2019, when the EPIC and Gray Oak pipelines enter service).

We plan to incorporate these operating and financial results in our model shortly, but after this first look, our fair value estimate and no-moat rating remain unchanged. The wider thesis appears to be intact, though. There was no change to the firm’s production outlook for 2019, which calls for 27% pro forma year-over-year growth. But the capital budget was slightly reduced based on improving well costs, particularly in the Delaware Basin. The firm also appears to have expanded its inventory by about 10% in the fourth quarter in both the Midland and Delaware basins. Yet the spacing assumptions underpinning these estimates remain relatively conservative at 28 and 20 wells per section in the Midland and Delaware, respectively. We continue to believe that Diamondback has one of the strongest cost advantages in the U.S. upstream space, supporting its narrow economic moat and setting it up for more than 10 years of excess returns on invested capital.