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Diamondback Energy Raises Return of Free Cash Flow to Shareholders

·3 min read

Permian Basin pure play Diamondback Energy is ratcheting up its multifaceted approach to returning value to shareholders.

“This is a natural progression of our shareholder returns program that began with the initiation of our base dividend in 2018, which has been increased 500% since then and continues to deliver significant value to our stockholders,” said CEO Travis Stice in a statement.

Hart Energy June 2022 - Diamondback Energy Free Cash Flow Raise - Travis Stice headshot
Hart Energy June 2022 - Diamondback Energy Free Cash Flow Raise - Travis Stice headshot

“We have continued to use cash on hand to pay down debt and believe that we now have a strong balance sheet that can withstand another down cycle.”—Travis D. Stice, Chairman of the Board and CEO, Diamondback Energy Inc.

Diamondback announced on June 21 a board of directors’ decision to increase its current commitment to return at least 50% of its free cash flow (FCF). The net effect will return 75% of the Midland, Texas-based oil and gas producer’s FCF during the second half of the year.

“We have continued to use cash on hand to pay down debt and believe that we now have a strong balance sheet that can withstand another down cycle,” Stice added.

The boost will come in the form of a second-quarter base dividend increase to 75-cents/share per quarter from 70-cents/share, implying a 2.5% annualized yield. Diamondback’s base dividend will remain its primary mechanism for returning capital to stockholders, with additional return of capital expected to come in the form of variable dividends and opportunistic share repurchases.

Since implementing its $2 billion share repurchase program in September 2021, Diamondback has repurchased $690 million of its stock at an average purchase price of $112.20/share, according to Raymond James analyst John Freeman.

“We are excited by the enhanced capital return program, as it further emphasizes Diamondback’s commitment to shareholder returns and should be rewarded by the market,” Freeman wrote in a note to investors.

Operators are increasingly relying on a mix of base dividend increases, plus special dividends and share buybacks to return cash to shareholders. But it’s a relatively new habit designed to appease shareholders and investors who grew angry and fled the space after years of so-called capital destruction.

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In more recent years, E&P companies have worked toward—and more often, are achieving—debt reduction and slower growth to appease investors. Devon Energy Corp., ConocoPhillips Co. and Pioneer Natural Resources Co. are among the others companies to integrate a variable distribution.

In December, ConocoPhillips committed to returning 30% of its FCF to investors. Both Pioneer and Chesapeake Energy Corp. have targeted a 50% FCF return.

Diamondback will maintain its first-quarter 2022 base-plus-variable dividend payout of $3.05/share, implying 10% annualized yield based on the June 17 closing share price of $122.29. The company has also repurchased about 2 million shares of its common stock for approximately $253 million to date during the second quarter at a weighted average price of roughly $128.42 per share.

Diamondback expects the combination of these stock repurchases together with its expected base-plus-variable dividends for the quarter will amount to a return of capital to stockholders in excess of 50% of the company’s FCF for the period.