Today’s question is what does Diamondback Energy (NASDAQ:FANG) have to do with the FAANG stocks? The answer is, like the biggest tech stocks, Diamondback Energy stock has recovered but remains well below its high.
FANG stock traded Tuesday at about $105 per share, after selling for as much as $136 per share back in September. It’s an oil and gas producer, located deep in the Permian Basin, in Midland, Texas.
On Tuesday, Diamondback announced GAAP earnings of $306 million, $2.50 per share fully diluted, and revenues of $622 million. Unfortunately, its non-GAAP earnings missed estimates, and the company admitted it outspent its cash flow, leading to cutbacks in 2019 estimates.
In response, FANG stock fell by 3% in overnight trading and is off 3.86% at around $102.34 per share. The reason for the pullback can be found on this chart of crude prices.
What’s the Big Deal?
Diamondback is a Texas fracker; It managed to pick up rival Energen for $9.2 billion in stock in August, and Ajax Resources for another $1.2 billion, when its own stock was trading at about $120 per share.
Diamondback made those deals when crude oil was selling at about $65 per barrel, valuing Energen’s production at $63,000 per acre. After the ink was dried, however, prices plunged as low as $43 per barrel in December. They have since retraced about 40% of that loss, but prices, and thus, Diamondback’s value remain subject to events beyond its control.
Infrastructure is one of those things that are beyond its control. Permian producers have lately overwhelmed the region’s pipeline networks, leading to mass flaring (burning at the wellhead) of natural gas. Pipeline giant Kinder Morgan (NYSE:KMI) is running out new pipelines as fast as it can, but those lines won’t all be ready until next year.
Happy Days Ahead?
While producers have learned how to reduce their production costs considerably from the peak of the last oil boom in 2014, dropping their breakeven price, in some cases, to below $30 per barrel, prices have remained highly volatile.
This last fall’s plunge was the worst since the 2016 bust, which took prices from over $100 per barrel to near-2016 levels. This latest drop was arrested quickly, and prices have since recovered, but it’s still clear producers need scale and must be smart traders to profit.
Diamondback’s acquisitions have given it more scale and it seems to be a smart trader. The company’s latest financial report indicates it has hedged most of its production for 2019 at over $60 per barrel and has some short interest in the 30s. Even its natural gas production has contracts for 10% over the current price of $2.69 per million BTUs.
This push-pull on pricing has made Diamondback stock as volatile as the commodity it produces, despite its hedging. Shares traded at near $140 per share in October, and below $86 per share in December, before recovering to their current level. The price action in FANG stock mirrors that of the commodity.
Bottom Line on FANG Stock
Despite Diamondback’s best efforts, its stock remains closely tied to the price of West Texas Intermediate crude oil. That means its earnings are constrained by pipeline capacity, and the level of earnings is to some extent beyond the company’s control, regardless of how well its operations perform.
Diamondback analysts seem to believe that oil prices will stay high this year, with 32 of 36 recommending investors buy FANG stock. If you want to hedge your own portfolio against rising oil prices, join them.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.