Why Diamondback Energy Is One of the Best Upstream Stocks
Diamondback Energy’s net debt to EBITDA
Diamondback Energy’s (FANG) net debt to EBITDA (earnings before interest, tax, depreciation, and amortization) has been volatile, but had generally been falling until 1Q15. During 2Q15, Diamondback Energy’s indebtedness, or net debt to EBITDA, was 11.2x, which is six times higher than it had been a quarter ago.
Net debt to EBITDA reflects how easily a company can repay its debts from its operational earnings and available cash. Diamondback Energy’s peers Energen (EGN) and Parsley Energy (PE) had net-debt-to-EBITDA ratios of ~1.3x and ~3.3x at the end of 2Q15, respectively.
Diamondback Energy’s net debt to EBITDA had been on a downtrend since 4Q13 as its EBITDA grew faster than its net debt. The ratio reached a low of 1.54x in 1Q15. But in 2Q15, net debt increased 16%, while EBITDA crashed due to lower energy prices. With cash and marketable securities remaining around the same level, this pushed up FANG’s net debt to EBITDA in 2Q15.
Diamondback Energy’s debt in comparison to peers
Diamondback Energy’s long-term debt was $718 million at the end of 2Q15 compared to $496 million in 2Q14, an increase of ~45%. Of this, $450 million in senior note debt is due in October 2021 or after. The company had $268 million in revolving credit facility outstanding. In August 2015, FANG issued shares worth $175 million, which will be used to repay the revolving credit facility. This should also help improve the company’s net debt to EBITDA in the next quarter.
In comparison, EOG Resources’ (EOG) long-term debt increased 8% in 2Q15 over 2Q14, Continental Resources’ (CLR) long-term debt decreased 20%, while Denbury Resources’ (DNR) long-term borrowings decreased 3.6% during the same period. Diamondback Energy makes up 0.28% of the iShares U.S. Energy ETF (IYE).
In the next article, we’ll discuss Diamondback Energy’s capital expenditures.
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