Diamondback Energy, Inc. (FANG), an independent oil and gas producer, plans to release its third quarter 2023 financial results on November 6, 2023, after the market close. Analysts expect revenue and EPS for the third quarter (ended September 2023) to decline 9.7% and 23% year-over-year to $2.20 billion and $4.99, respectively.

The energy company posted mixed earnings in the second quarter of 2023. FANG reported second-quarter revenue of $1.92 billion, beating the analysts’ expectations of $1.89 billion. However, the company’s adjusted net income came in at $3.68 per share, lower than the consensus estimate of $3.89.

During the second quarter, FANG drilled 86 gross wells in the Middle Basin and 12 gross wells in the Delaware Basin. The company turned nearly 71 operated wells to production in the Midland Basin and 18 gross wells in the Delaware Basin with an average lateral length of 10,967 feet.

The oil and gas company raised the midpoints of both total and net oil production for the full year 2023 due to production outperformance year-to-date and narrowing unit costs, capital expenditures, and activity levels owing to increased confidence in its forward outlook.

FANG expects net production of 435-445 MBOE/d for 2023, up from the previous guidance of 430-440 MBOE/d. Its oil production is expected to be between 260 MBO/d and 262 MBO/d, compared to prior guidance of 260-262 MBO/d.

The company also increased the annual base dividend by 5% to $3.36 per share. FANG currently pays $3.36 per share annually, translating to a yield of 2.07% at the prevailing share price. Its four-year average dividend yield is 3.62%. Its dividend payouts have grown at a CAGR of 34.5% over the past three years and 66.4% over the past five years.

Moreover, the company has raised the dividend for four consecutive years.

In addition, last year, FANG’s Board of Directors increased total authorized common stock repurchases to $4 billion. During the second quarter, the energy company repurchased 2,427,880 shares of common stock at an average share price of $132.21 for a total cost of nearly $321 million, excluding excise tax.

Shares of FANG have gained 7.9% over the past month and 25.9% over the past six months to close the last trading session at $162.10.

Here’s what could influence FANG’s performance in the upcoming months:

Positive Recent Development

On September 11, FANG and Five Point Energy LLC formed a new joint venture (JV) entity, Deep Blue Midland Basin LLC. This strategic JV creates the largest independent water infrastructure platform in the Midland Basin with substantial excess capacity to pursue third-party growth.

Kaes Van’t Hof, FANG’s President and CFO, said, “This strategic joint venture has the assets, management and producer support to create significant value for Diamondback stockholders. We have spent nearly a decade building a differentiated water infrastructure platform in the Midland Basin, and believe this is the opportune time to monetize this business while retaining meaningful upside through our equity ownership.”

“The joint venture has already had significant third-party commercial success, and we look forward to participating in the future growth of this business,” he added.

Deteriorating Financials  

FANG’s revenues declined 30.7% year-over-year to $1.92 billion for the second quarter ended June 30, 2023. Its costs and expenses increased 16.3% from the year-ago value to $919 million. The company’s income from operations was $1 billion, down 49.4% from the previous year’s quarter. Its adjusted EBITDA declined 31.5% year-over-year to $1.42 billion.

Furthermore, the company’s adjusted net income came in at $703 million or 3.87 per share, compared to $1.40 billion or $7.93 per share in the prior year’s period, respectively.

Impressive Historical Growth

FANG’s revenue and EPS grew at respective CAGRs of 34.2% and 33.3% over the past three years. Its normalized net income improved at a CAGR of 60.2%. In addition, the company’s total assets increased at a CAGR of 10.7% over the same period.

Mixed Analyst Estimates

Analysts expect FANG’s revenue to decrease 13.8% year-over-year to $8.32 billion for the fiscal year ending December 2023. The consensus earnings per share estimate of $18.10 for the ongoing year indicates a 24.7% year-over-year decline.

However, the company’s revenue and EPS for fiscal year 2024 are expected to grow 10.3% and 16.4% year-over-year to $9.17 billion and $21.07, respectively.

Elevated Valuation

In terms of forward EV/Sales, FANG is currently trading at 4.37x, 103.4% higher than the industry average of 2.15x. The stock’s forward Price/Sales of 3.49x is 125.9% higher than the industry average of 1.54x. Moreover, its forward non-GAAP PEG multiple of 2.56 is 38% higher than the industry average of 1.85.

Robust Profitability

FANG’s trailing-12-month gross profit margin of 87.08% is 83.9% higher than the industry average of 47.34%. Its trailing-12-month EBITDA margin and net income margin of 80.82% and 44.23% favorably compared to the industry average of 38.58% and 14.06%, respectively.

In addition, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 23.75%, 13.93%, and 12.54% are higher than the industry averages of 20.51%, 9.80%, and 7.62%, respectively.

POWR Ratings Reflect Uncertainty

FANG’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a C grade for Sentiment, consistent with its mixed analyst expectations.

In addition, FANG has a C grade for Stability, justified by its 24-month beta of 1.04.

Within the Energy - Oil & Gas industry, FANG is ranked #57 out of 85 stocks.

Beyond what I have stated above, we have also given FANG grades for Quality, Value, Growth, and Momentum. Get all FANG’s POWR Ratings here.

Bottom Line  

While FANG’s second-quarter revenue beat analysts’ estimates, the company lagged on the bottom line. Further, analysts appear bearish about the company’s prospects in the near term. Given its poor financials, stretched valuation, and bleak near-term outlook, it could be wise to hold FANG and wait for a better entry point in this energy stock.

Stocks to Consider Instead of Diamondback Energy, Inc. (FANG)

Given its uncertain short-term prospects, the odds of FANG outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three B-rated (Buy) stocks from the Energy - Oil & Gas industry instead:

Cheniere Energy Inc. (LNG)

Centennial Resource Development, Inc. (CDEV)

Adams Resources & Energy, Inc. (AE)

To explore more A and B-rated energy stocks, click here.

What To Do Next?

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FANG shares rose $1.01 (+0.62%) in premarket trading Monday. Year-to-date, FANG has gained 23.19%, versus a 15.19% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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