Analyst Note
| Dave Meats, CFA |We're lowering our fair value estimate for Diamondback to $116 per share from $125, after the firm reported its third-quarter results. But the firm actually turned in a very impressive report card for the period, and the decrease was mainly driven by the softening outlook for near-term crude prices since our last update on October 2021. Shares have had a terrific run recently, surging 35% in the last three months, and look rich at the current level. We believe market optimism about long-term oil prices explains the premium. The marginal cost of production for crude is still around $55/bbl for WTI, supporting our midcycle forecast. In contrast, the market price for Diamondback appears to be discounting a long-term average of about $65, which we think is too high. Essentially, this assumes global supply will keep lagging demand indefinitely, despite slowing demand growth now that the COVID-19 recovery is underway (other than in some zero-COVID-19 Asian countries, most notably China).