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Diamondback (FANG) Lags on Q2 Earnings, to Buy Ajax for $1.2B

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Diamondback Energy, Inc. (FANG - Free Report) reported mixed second-quarter 2018 results, with earnings lagging the Zacks Consensus Estimate while revenues surpassing the same.

The company reported adjusted net earnings per share of $1.59, missing the Zacks Consensus Estimate of $1.64. The weaker-than-anticipated earnings can be attributed to lower-than-expected natural gas price realizations along with increase in total costs. The company fetched $1.54 per thousand cubic feet (Mcf) for realized natural gas prices, missing the Zacks Consensus Estimate of $1.92 per Mcf. Notably, operating expenses per barrel of oil equivalent increased to $8.83, reflecting a 15.3% rise from the year-ago level of $7.66.

However, the bottom line improved from the prior-year quarter’s adjusted income of $1.40 per share on higher production and improved oil price realizations.

Diamondback’s total operating revenues in the second quarter amounted to $526.3 million, which increased substantially from $269.4 million a year ago. The top line also surpassed the Zacks Consensus Estimate of $477 million.

Diamondback Energy, Inc. Price, Consensus and EPS Surprise

 

Diamondback Energy, Inc. Price, Consensus and EPS Surprise | Diamondback Energy, Inc. Quote

Production and Prices

Diamondback's average quarterly volume increased 46.3% year over year to 112.6 thousand barrels of oil equivalent per day (MBoe/d). Of the volume, 73% or 7,478 thousand barrels was oil. While oil production increased 42.8% year over year, natural gas volumes surged 49.2%.

Average realized oil price jumped about 35.5% from the year-ago quarter to $61.57 per barrel, while average natural gas price realization decreased 40% to $1.54 per Mcf. Overall, the company fetched $50.26 per barrel compared with $38.18 a year ago.

Expenses

Total operating expenses in the quarter under review came in at around $245 million, up 78.6% from the second-quarter 2017 figure of $137.1 million. The increase was mainly driven by higher depreciation costs, which rose 72.7% year over year to stand at $129 million. While lease operating expenses rose 47.1% to a total of $42.6 million, production and ad valorem taxes were up by a whopping 102.8% to come in at $32.2 million. Notably, midstream services costs incurred in the quarter totaled $17.6 million compared with $1.8 million in the corresponding quarter of 2017.

Dividend Declaration

The company announced a quarterly dividend of 12.5 cents per share payable on Aug 27, 2018 to shareholders of record at the close of business as of Aug 20, 2018.

Financial Position

During the quarter under review, the company spent around $370 million on drilling, completion and infrastructure activities. As of Jun 30, Diamondback’s consolidated cash and cash equivalents balance was $113.9 million. Long-term debt of the company was $1,967.1 million, representing a debt-to capital ratio of 24.6%.

Strategic Updates

Alongside its earnings release, Diamondback announced that it has inked a cash and stock deal with a private-equity backed player Ajax Resources LLC, in a bid to further sharpen its focus on the prolific Permian play. The deal will add around 25,493 net leasehold acres to Diamondback’s portfolio. The to-be-acquired acres in the Northern Midland Basin has a production capacity of around 12,100 Boe/d (88% oil). Diamondback will buy the Houston-based Permian focused player for $900 million in cash and around $300 million in stock. Subject to satisfactory closing conditions and regulatory approvals, the deal is scheduled for closure by the end of October. 

Diamondback has also entered into a drop-down deal with its subsidiary Viper Energy Partners LP (VNOM - Free Report) , per which the former will sell 1,696 net royalty acres to its MLP arm for $175 million. Subject to closing adjustments, the deal is set for culmination by the end of this month.

Updated Guidance

In view of the acquisition of Ajax, Diamondback has increased its output outlook by 4% from the prior guidance. The company now anticipates its full-year production volumes to average 115-119 MBoe/d, indicating around 45% increase (at the midpoint of the guided range) from the 2017 level. Management has also updated its capex budget from the prior range of $1.3-$1.5 billion to $1.4-$1.5 billion. 

Zacks Rank and Key Picks

Diamondback currently carries a Zacks Rank #3 (Hold).

Some better-ranked players in the same industry include Bonanza Creek Energy, Inc. (BCEI - Free Report) and KLR Energy Acquisition Corporation (ROSE - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Bonanza Creek delivered an average positive earnings surprise of 74.88% in the trailing four quarters.

KLR Energy’s earnings are expected to grow 1,231.3% year over year in 2018.

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