Diamondback Energy (FANG) Approves $2B Share-Buyback Plan, Analysts Bulled-up

September 17, 2021 9:10 AM EDT
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Price: $108.28 -0.51%

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Diamondback Energy (NASDAQ: FANG) announced yesterday it will accelerate the previously-communicated plan to return 50% of FCF to shareholders by saying it received permission to buy back up to $2 billion shares, starting in Q4 this year.

“Diamondback is accelerating its previously announced capital return program due to continued strong operational performance and improved capital efficiency, a supportive macro backdrop and increasing financial strength. Our plan to return 50% of Free Cash Flow quarterly through our base dividend and other return mechanisms will now begin in the fourth quarter of 2021,” stated Travis Stice, Chief Executive Officer of Diamondback.

“The remaining Free Cash Flow, as well as asset sale proceeds, will be earmarked for further debt reduction. We expect the previously announced sale of our North Dakota assets to close in the next few weeks, timing dependent on final government approval. The net proceeds from that sale, along with cash on hand, will be used to pay off the remaining $650 million in outstanding callable debt in our capital structure.”

The aggressive share repurchase program is possible amid robust operational performance, improved capital efficiency and supportive macro backdrop.

Morgan Stanley analyst and commodity strategist Devin McDermott reiterated an Overweight rating and a $111.00 per share price target following the announcement. The analyst projects about $1.2 billion of cash returns next year, based on the $60.00 WTI price.

“Unlike several peers that have committed to a fixed capital return framework, FANG has opted to retain the option to return cash to shareholders via variable dividends or buybacks. As long as the expected buying stock is above FANG's cost of capital at mid-cycle commodity prices, management will utilize repurchases. Conversely, if the expected return on repurchases should fall below FANG's cost of capital at mid-cycle commodity prices, investors will instead receive a variable dividend,” McDermott said in a note sent to clients.

“On our estimates, FANG offers an attractive 17% FCF yield in 2022, highest among large cap shale peers, and line-of-sight on leverage reduction. We see net debt/EBITDA decreasing from 1.8x as of 2Q21 to 0.7x by the end of 2022 while maintaining flat production. As the balance sheet improves, we believe FANG has optionality to return a rising percentage of FCFto investors over time. The company's pre-dividend breakeven of $30/bbl WTI is among the lowest in our coverage, while FANG continues to lead peers with operating costs below $8/boe,” the analyst added.

Similarly, Cowen analyst David Deckelbaum reiterated an Outperform rating and a $108.00 per share price target as he expects a positive response from investors related to the announcement.

“The company is uniquely employing a share repurchase program in the near-term as peers such as PXD, DVN and XEC/COG also look to return 50% of excess FCF but in the form of variable dividends. For the first time, FANG introduced the concept of future use of variable dividends as a return mechanism once the expected return on share buybacks is below the company's cost of capital. These initiatives around shareholder returns should provide greater clarity to investors and solidify long-term planning around FANG's differentiated framework. In theory, FANG could exhaust the current buyback authorization by 1H23 at strip,” Deckelbaum said in a note sent to clients.

Shares of the company are up 3.5% in pre-open Friday.

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