In a May 11 research note, Raymond James analyst John Freeman reported that Diamondback Energy Inc. (FANG:NASDAQ) "delivered a solid Q1/18 earnings beat, driven by an impressive beat on operating costs. The focus, however, remains on concerns around Permian takeaway and the ability to limit in-basin pricing exposure."
In Q1/18, the company reported adjusted EBITDA of $361.1 million ($361.1M), above both Raymond James and consensus' estimates of $349M and $337M, respectively. Similarly, adjusted earnings per share of $1.64 exceeded expectations of Raymond James and consensus, which were $1.53 and $1.58, respectively.
For 2018, Diamondback slightly increased the low end of its production guidance to 110–116 thousand barrels of oil equivalent per day (110–116 Mboe/day) from 108–116 Mboe/day. It lowered its lease operating expense guidance by 13% at the midpoint, to $3.75–4.50 per barrel of oil equivalent. Capital spending and completions remain unchanged.
As for current operations, Diamondback is operating 11 rigs and 5 fracking crews. Given the last rig came online in Q1/18 and the oil price recently has been strong, the company likely will bring on a 12th rig this summer, noted Freeman.
A likely temporary headwind for Diamondback is its lack of near-term solutions to the problem of "extremely limited takeaway through at least early 2019," Freeman indicated. The company did recently secure 50 Mboe/day in firm transportation on the Gray Oak pipeline, which should help improve its exposure to out-of-basin pricing, but that pipeline will not start up until late 2019. "In the meantime, basis hedges cover ~13% of forecasted 2018 production volumes," he added.
Freeman pointed out that while Diamondback is pursuing "multiple deals to increase international pricing exposure and while its scale should help lock in a price that is less than the cash market today (we model H2/18 differentials at ~$11 per barrel), any solution here will likely still be relatively expensive."
Despite the takeaway concerns, however, Freeman concluded, "we remain constructive on the name, given Diamondback's prime acreage position, strong operational prowess and very attractive growth profile."
Raymond James maintains its Outperform rating and $176 per share target price on Diamondback, whose stock is currently trading at around $134.58 per share.
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Disclosures from Raymond James, Diamondback Energy Inc., May 11, 2018
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