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Why Diamondback Energy Has Best Profit Margins in the Industry



Diamondback Energy’s production costs in 1Q16

Diamondback Energy (FANG) operates in the Permian Basin in West Texas, which is one of the lowest cost, highest quality basins in the US. As a result of its well-placed resources and diligent focus on cost reductions, Diamondback Energy has emerged as one of the lowest cost producers in the US.

In 1Q16, Diamondback Energy’s LOE (lease operating expenses) was one of the lowest among peers at just $5.23 per boe (barrel of oil equivalent). Other upstream companies like Energen (EGN), EOG Resources (EOG), and Pioneer Natural Resources (PXD) from the Permian Basin have LOEs of $5.8 per boe, $8.62 per boe, and $12.04 per boe, respectively. The SPDR S&P Oil and Gas Exploration & Production ETF (XOP) generally invests at least 80% of its total assets in oil and gas exploration companies.

In 1Q16, Diamondback Energy’s cash production cost and total production cost was $9.64 per boe (barrel of oil equivalent) and $26.97 per boe, respectively, which was ~24% and ~33% lower, respectively, when compared with 1Q15.

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Cash production costs include the cash expenses like LOE, production and ad valorem taxes, transportation and compression expenses, and G&A (general and administration) cash expenses. Total production cost includes cash production cost plus interest expense and other non-cash expenses like DD&A (depletion, depreciation, and amortization) and G&A non-cash components.

Diamondback Energy’s realized price and profit margins

For 1Q16, Diamondback Energy’s realized price was $26.56 per boe, which is much higher than its cash production cost. In other words, this means that Diamondback Energy’s cash margin is $16.92 per boe of production, and this is when crude oil and natural gas prices were at their lowest in a decade. Even when viewed from the angle of total production cost, Diamondback Energy’s total profit margin is almost flat. Considering that crude oil (USO) (SCO) (UCO) is down ~62% from its high, these kinds of margins speak volumes about the robustness of Diamondback Energy’s business model.

Diamondback Energy’s production cost guidance

For 2016, Diamondback Energy expects its cash production cost and total production cost in the range of $9.75–$12.25 and $26.75–$33.25, respectively, which are much lower when compared with the current NYMEX WTI crude oil price near $50 per barrel.

Now it’s time to look at two important factors for Diamondback Energy: debt and leverage.


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