Diamondback Energy for the Win. (FANG)

Submitted by v10climbz t3_yhs505 in wallstreetbets

So let me teach you degenerates a little about the oil and gas industry. They have a P/E ratio of 7.45 their EV/EBITDA is steadily decreasing its currently at around a 10.0. Debt to equity ratio is around .41 and continues to decline over the past five years. When looking into oil companies you need to understand something called proven reserves. These are the oil/gas reserves the company has access to but doesn’t utilize all at one time. They have it under lease (mineral lease) per acre of land. Almost all their reserves are in Texas which isn’t a bad things. Often oil companies list these reserves on their balance sheet or especially their income statements. Be very wary of companies that do this. Diamond Back isn’t one of them.

They have 1.8 billion barrels of oil under their control. Which is very good they can keep the wheel spinning for years. They deal primarily in unconventional shale horizontal drilling operations. That basically means they drill down into a porous oil rich shale rock turn the drill head into the oil producing zone and go horizontally for a couple miles. They then put a perforator with explosive charges on it and send it down into the hole. They then blow up the shale allowing the oil and gas to flow smoothly. They have multiple years of drilling possibilities and peak production in the Permian basin isn’t expected until 2028. Plenty of time for profit to be made. I wouldn’t hold this company for more then two years because their business model isn’t going to last forever, just long enough for the stock price to move up as the continue to increase their cash flow. Their operating cash flow jumped to 3.5 billion last quarter. These wells in the Permian and Eagle Ford shale can be redrilled in multiple directions and multiple depths. All you need to know is Permian Basin/Eagle Ford/west Texas/Eastern New Mexico is all very prime drilling opportunities rich with oil and accessible drilling formations. It’s cheap to drill in Texas. The average break even price for the Eagle Ford is actually 49$ per barrel for a new well. These shale wells won’t produce for more then four years so these companies will eventually be in trouble but that prediction is far from the 10ks they’ll produce over the next five years.

But talking about oil companies we also need to talk about the price of oil. Most of these oil companies in west Texas produce profit at 53$ a barrel for new wells. There’s a lot of money to be made. OPEC+ supply cuts seem like they’re here to stay. Inflation seems high as well. Projecting oil WTI at around 85-105 a barrel for the next year. Record profits to be expected yet the P/E ration in oil and gas is low. Nobody thinks oil is the future. It isn’t but these companies and their liquidity streams aren’t going anywhere in the next five years. Revenue will keep going up for small/medium cap US shale producers. Record profits to be expected yet no one is holding these companies because they don’t wanna seem environmentally unconscious. They’re a bargain for the retail investors. Some of the best value in the market is in the oil and gas sector. DM me for more oil companies.

Here’s their 10k

https://www.diamondbackenergy.com/node/14026/html

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kit19771979 t1_iufs8zq wrote

OP is definitely onto something here. There’s a reason Warren Buffet has been buying Chevron and OXY.

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v10climbz OP t1_iufsl8x wrote

I also hold both those companies in my portfolio, including other names like PR, NEX, AR, WES, XOM, APA and BP

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Crafty_Ranger_2917 t1_iufhsnj wrote

Not sure what the point of this post is. Gas / oil demand isn't nearly as stable as you make it out to be.

Isn't it supposed to be an unseasonably warm winter?

Here's some more wagging (not mine):

https://www.reddit.com/r/wallstreetbets/comments/yhsg96/natural_gas_prices_have_reduced_40/

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LionRoars87 t1_iuft2d1 wrote

Actually oil and gas demand is fairly inelastic so I have to disagree.

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v10climbz OP t1_iuftrkd wrote

Yeah it’s been pretty stable. It’s much more influenced by supply rather then demand.

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LionRoars87 t1_iufugkz wrote

Agreed, and the supply side is the reason oil prices will stay high for awhile. Most investors seem to be ignoring that there is an energy shortage. And none of the main suppliers are motivated to increase production. Years of under investment in oil and gas has led to low levels of spare capacity. And any further supply disruptions could spike oil much higher yet again.

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v10climbz OP t1_iufvpa9 wrote

Reading this comment is beautiful. Very rarely do come across someone on Reddit that understands commodity pricing or the energy industry. Hats off to you good sir. Yeah the big boys aren’t doing a lot of new drilling but rather they’re taking profits from existing wells. Which is fine by me. They’ll keep crushing revenue and cash flow streams if oil stays at the price. I mean there’s some new drilling going on but companies are paying of debts and waiting to see what happens in the coming elections. There’s plenty of oil left in the ground. Just look at the Baker-Hughes inland rig count to get a scope of things. It’s nothing like pre-covid times but there’s some new exploration. Private equity and investors are just much more hesitant with handing out cash for new drilling operations. But, I think oils at a price and will stay at a price that makes sense for upstream/midstream suppliers. Rig count should stay steady

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Crafty_Ranger_2917 t1_iug0iik wrote

I should have said price not demand. At any rate Texas sweets have been from $70 to $120 in the last six months. What am I missing here, that seems fairly volatile? Based on last couple years it looks like the current $80-ish isn't cheap either....under the theory that demand might shrink.

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v10climbz OP t1_iug4r33 wrote

You’re not wrong but if companies are locking in profits at 60 dollars a barrel and the lowest WTI has gone in the last sixth months is 78 with a high of 122ish. Supply is the key factor in oil price I.e Brent Crude or WTI. There’s a bunch of oils but these are the two benchmarks. With inflation and OPEC+ supply cuts oil prices should stay at a level where massive profits can be made. OPEC tried to destroy the American shale producers years ago. The flooded the market and many American oil companies went bankrupt. But, recently OPEC has decided if you cannot beat them join them. The oil cartels including OPEC, XOM and BP don’t wanna exacerbate their reserves they wanna influence demand to a point where everyone in the energy sector is happy. That’s my hypothesis.

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Crafty_Ranger_2917 t1_iug0xb1 wrote

I should have said price not demand. Price definitely swings....though its all relative, lol.

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v10climbz OP t1_iufirtf wrote

Natural gas isn’t what this company specializes in. They specialize in light sweet crude oil. A warmer winter could actually keep oil prices higher due too more traveling from point a/b. I’m not as concerned about LNG prices all the models for this year predict oil to hover around 95$ a barrel. If oil falls bellow 75 a barrel this winter I’ll send you 100$ take the bet

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Crafty_Ranger_2917 t1_iufjx1n wrote

Tempting bet! I don't think it'll fall that low but won't be surprised if it does from economy retraction with all this recession / fud talk. We'll probably have a much better idea within a couple weeks after elections.

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v10climbz OP t1_iufkf2t wrote

If you want wanna take the bet let me know. It goes both ways. We can end the bet on Jan. 1st

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LionRoars87 t1_iufsty5 wrote

Love this company. Been in it since 2020.

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Hypnotizmindz t1_iug0qug wrote

Likewise. Got in during the pandemic when it was $22. Casual 200% return and gotta love the $3/share dividend.

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Crafty_Ranger_2917 t1_iug3pfh wrote

Lol, yeah anyone who bought then would! Held a year earlier would have been sweaty palms or downright disaster through the 2020 drop.

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LionRoars87 t1_iug4416 wrote

It was by no means an easy ride. Straight up rollercoaster. Lol

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VisualMod t1_iuffjoj wrote

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>TL;DR: The oil and gas industry is a great place to invest your money. The companies have strong balance sheets, low debt, and plenty of cash flow. The price of oil is expected to rise in the next year, which will lead to increased profits for these companies. However, you should not hold these companies for more than two years as their business model is not sustainable in the long term.

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VisualMod t1_iuffkbb wrote

>I completely agree with your analysis of the oil and gas industry. These companies are definitely a bargain for retail investors, and I believe that their profits will continue to grow in the next few years. Thanks for teaching me more about this sector!

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