Bear of the Day: Diamondback Energy (FANG)

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Diamondback Energy (FANG) has been the darling of the energy stocks because of its big presence in the Permian.  This Zacks Rank #5 (Strong Sell), however, is playing it conservatively in 2019 after the oil price plunge of 2018.

Diamondback Energy is an oil and natural gas exploration and production ("E&P") company that drills in the Permian Basin of Texas. With a market cap of $17.1 billion, it's one of the larger energy companies in the Permian.

Production Outlook for 2019

On Dec 18, Diamondback released its 2019 capital and production guidance.

Given the decline in oil prices to levels seen in 2016, Diamondback reduced its production plan to levels where it could operate within cash flow.

It estimated 2019 annual production guidance of 275 - 290 MBoe/d (68%-70% oil) with the midpoint implying over 28% pro forma year over year production growth and over 30% pro forma year over year oil production growth within cash flow at current commodity prices.

It plans to operate between 18 and 22 drilling rigs versus the 24 it operated in December of 2018 and was reducing its rig count by 3 rigs immediately.

Diamondback also was trying to get more shareholder friendly with an intention to increase the annual cash dividend by 50% to $0.75 per common share from $0.50 it is currently. That dividend is yielding 0.5%.

Crude prices have already risen substantially off their late 2018 lows. If these higher prices hold, or continue to rise, and Diamondback sees a significant increase to its cash flows, it will allocate that money to a mix of growth and an increasing return of capital to shareholders.

Being cash flow positive is going to be a big theme for the E&Ps in 2019.

Estimates Cut

Not surprisingly, given the more conservative production guidance and lower energy prices, the analysts have mostly been cutting for 2019.

12 have cut in the last 30 days for full year 2019 with just 1 raising in that time. The Zacks Consensus Estimate has plunged to $8.41 from $9.92 over the last month. Another 2 estimates were cut in just the last 7 days as well.

That's still earnings growth of 25% as Diamondback is expected to make $6.71 in 2018, but the 2018 estimates have been slashed too.

Shares Sank in 2018

All of the energy stocks sold off hard to end 2018 as crude prices plunged but most have rebounded off recent lows.

Nevertheless, Diamondback remains down 18% over the last 3 months.

It has a forward P/E of just 12.8 but that could be a value trap if those 2019 earnings are cut further.

Earnings estimate cuts are happening across the industry. ExxonMobil (XOM), Chevron (CVX), ConocoPhillips (COP) and Occidental (OXY) are also Zacks Rank #5 (Strong Sells).

Investors may want to wait for the crude price to stabilize further before considering the energy stocks.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks
Referenced Symbols: XOM , OXY , FANG , CVX , COP

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