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Oil prices dropped more than 3 percent following an interview where Donald Trump downplayed the likelihood of new strikes on Iran. Prices are reacting to signs of progress in negotiations over Iran's nuclear program and the reopening of the Strait of Hormuz, a critical shipping lane for global energy supplies.
For a pure-play producer like Diamondback that operates entirely in the Permian Basin, lower global oil prices directly reduce the cash it brings in for every barrel it pumps. While the company has some of the lowest drilling costs in the industry, its stock price often moves in tandem with these shifts in the global energy market.
Source: WSJ
After Diamondback Energy reported its November results, we updated our fair value and cut our quality score to 3.4. We lowered our assessment of how much profit the company makes on its investments and how well it is protected from competitors. We raised our expectations for how much money the company must spend on drilling and equipment to a range of $3.95 billion to $4.00 billion for the year. We have added the impact of natural gas price volatility and the company's new equity stake in the Solitude Pipeline system to what we track.
Diamondback reported a strong quarter with revenue of $5.43 billion, well ahead of the $4.60 billion analysts expected. This was the first full quarter since closing its $26 billion merger with Endeavor Energy Resources, and the results show the combined company is already hitting its stride. Oil production reached 525,000 barrels per day, clearing the bar needed to prove the new land is performing as planned.
The company is using its high cash generation to reward owners, raising its annual base dividend by about 7 percent to $4.72 per share. It also spent $251 million buying back its own stock and began chipping away at the debt it took on for the merger. Even with oil prices moving around, Diamondback's ability to drill wells more cheaply than rivals keeps its profit margins healthy and its dividend secure.
See the full quarter, and how our tracked metrics did
Source: 8-K filing
Oil prices fell more than 4 percent on Monday as diplomatic talks to ease conflict between the U.S. and Iran reduced fears of a supply disruption. When the price of oil drops, it directly affects how much cash Diamondback earns for every barrel it pumps from the ground.
While lower oil prices are generally a negative for producers, Diamondback has some of the lowest costs in the industry. This means it can usually stay profitable and continue paying dividends even when prices soften, though a sustained drop would leave less cash available for share buybacks and extra payouts.
Source: WSJ
Diamondback Energy is set to report its latest quarterly results after the bell on Monday. Analysts expect the company to report revenue of about 4.6 billion dollars for the period. This report is an important check on how well the company is managing its massive merger with Endeavor Energy Resources. We are watching for two things: whether oil production remains above 520,000 barrels per day and if the company is keeping its drilling and operating costs low. These factors determine how much cash is left over to pay out as dividends to shareholders.
Management consistently clears the bar they set, beating expectations in six of the last eight quarters while integrating a massive merger. This pattern shows they have a firm grip on their costs even as the business grows much larger.
| Expectation | |
|---|---|
| EPS | $6.75 |
| Revenue | $5.31B |
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