Diamondback Energy is an interesting way to get exposure to oil.
An energy company focused on returning capital to investors.
Lee Samaha (Diamondback Energy): There’s no point ignoring the elephant in the room. Diamondback is an oil and gas exploration & production company, meaning its earnings and ability to pay a dividend are energy-price-led. As such, the stock is only really suitable for investors looking to capture some upside from an elevated price of oil.
That said, Diamondback also offers downside security, at least regarding dividends. In common with many oil companies, Diamondback pays a base dividend (which it intends to maintain) and a variable dividend that fluctuates with its earnings and cash flow. Moreover, the company uses commodity hedging to protect the base dividend down to a price of oil of $40 a barrel.
The current base dividend is $0.84 a quarter or $3.36 annually, equating to a 2.2% dividend yield. Management claims it “hedge protection at $55 oil,” so anything above that implies upside exposure to the price of oil and therefore variable dividends. The current dividend rate (base plus variable rate) is $6.88, meaning a 4.5% yield at the current price. In addition, Diamondback uses share buybacks as a way to return capital to investors.
Moreover, it is backed by a strong track record of improving estimated net proved reserves. This is always a critical number to look at because the actual value of an oil company lies in its long-term production. The good news is Diamondback doubled its estimated net proved reserves from 2018-2022, so they stood at 2,033 million barrels of oil equivalent – Diamondback’s produced 151 million barrels of oil equivalent in 2022.
All told the company has a good track record of increasing reserves, and the stock is an interesting strategy that provides downside protection and upside potential to the price of oil.
