How Did Diamondback Increase Production without More Leverage?



Diamondback Energy’s high cash and low debt

As of March 31, 2016, Diamondback Energy’s (FANG) total debt stood at only ~$486 million. With ~$236 million in cash and cash equivalents, Diamondback Energy’s net debt was ~$250 million at the end of 1Q16.

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Diamondback Energy’s debt and equity trends

Since 4Q13, despite a ~371% increase in its total production, Diamondback Energy’s total debt has increased by only ~6%. In order to achieve its tremendous production growth, Diamondback Energy has spent a total of ~$2.5 billion in capital expenditure.

Diamondback Energy funded its capital expenditure from its OCF (operating cash flow) and by means of equity issuances. Since 4Q13, Diamondback Energy has increased its total stockholders’ equity by ~$1.4 billion, or ~180%, to ~$2.3 billion, mainly via common stock issuances.

Diamondback Energy’s leverage trend

Due to the negligible increase in its total debt and the bigger increase in total equity, Diamondback Energy’s total debt-to-equity ratio (or leverage) has decreased from ~54% in 4Q13 to ~21% in 1Q16. This leverage level is one of the lowest in the oil and gas industry.

A higher debt-to-equity ratio usually indicates higher risk because the debt-financed growth might not necessarily be in a position to generate enough cash to repay the time-bound debt.

Diamondback Energy’s net debt to EBITDA

Another metric used for gauging a company’s indebtedness is the net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization). Net debt to EBITDA 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 of 1Q16, Diamondback Energy’s net debt to EBITDA was a mere ~1.3x. Other larger upstream companies like ConocoPhillips (COP), Marathon Oil (MRO), and Devon Energy (DVN) have net-debt-to-EBITDA ratios of 4.1x, 2.9x, and 2.6x, respectively. The Vanguard Energy ETF (VDE) invests into the broader energy market.

In the next article, we’ll look at institutional investors’ activity in Diamondback Energy.


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