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Gauging the Crucial: Diamondback Energy’s Debt Position

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Diamondback Energy’s debt

As of December 31, 2015, Diamondback Energy’s (FANG) total debt stood at ~$495 million. With ~$20 million in cash and cash equivalents, FANG’s net debt was ~$475 million at the end of 4Q15.

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FANG’s net debt-to-EBITDA

Net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) is a debt ratio that shows how many years it would take for a company to pay back its debt under its current situation. As seen in above graph, as of 4Q15, FANG’s net debt-to-EBITDA was low at ~1.1x. Even when compared to its own net debt-to-EBITDA historical average of ~2x, FANG’s current net debt-to-EBITDA is low.

This low net debt-to-EBITDA ratio in the past two fiscal quarters can be attributed to the decrease in net debt as well as to the company’s increased EBITDA, despite lower crude oil and natural gas prices.

In 2Q15, 3Q15, and 4Q15 FANG reported significant one-time charges of ~$324 million, ~$274 million, and ~$218 million, respectively, related to the impairment of its proved reserves. Excluding these one-time charges, the 2Q15, 3Q15, and 4Q15 adjusted EBITDAs comes in around $106 million, $107 million, and $120 million, respectively. The green bars in the above graph show the net debt-to-EBITDA ratios calculated using these adjusted EBITDAs in trailing-twelve-month EBITDA calculations.

FANG’s leverage in 4Q15

Another metric used for gauging a company’s indebtedness is the debt-to-equity ratio. As of 4Q15, FANG had a debt-to-equity ratio of ~24%, which is much lower than those of other upstream companies the S&P 500 (SPY). Range Resources (RRC), EQT Corporation (EQT), and Cimarex Energy (XEC) have debt-to-equity ratios of ~96%, ~39%, and ~53%, respectively. Please note that a higher debt-to-equity ratio usually indicates higher risk because it reveals that a company has been aggressively financing its growth through debt.

But the question remains: How does FANG’s free cash flow look after 4Q15? Continue to the next part to find out.

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