Diamondback Energy Inc. (NASDAQ:FANG)

The period under review demonstrates significant fluctuations in financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, moving from US$521 million in 2017 to US$1,175 million in 2018, then declining to US$495 million in 2019. A substantial loss of US$5,563 million was recorded in 2020, followed by a recovery to a profit of US$3,031 million in 2021. The cost of capital decreased from 33.29% in 2017 to 24.43% in 2019, before increasing to 28.83% in 2021. Invested capital increased considerably from 2017 to 2018, peaking at US$22,002 million in 2019, then decreased in 2020, and rose again in 2021.

Economic Profit Trend

Economic profit consistently remained negative throughout the analyzed period. The magnitude of the negative economic profit increased from US$1,865 million in 2017 to US$4,955 million in 2018 and US$4,880 million in 2019. The largest negative economic profit was recorded in 2020, reaching US$9,603 million, coinciding with the significant NOPAT loss. While the loss narrowed in 2021, economic profit remained negative at US$3,090 million.

Relationship between NOPAT and Economic Profit

A clear correlation exists between NOPAT and economic profit. The years with higher NOPAT (2017, 2018, and 2021) experienced less negative economic profit compared to 2019 and particularly 2020, where NOPAT was substantially lower or negative. This indicates that while NOPAT is a key driver, it has not been sufficient to generate positive economic profit during this period.

Impact of Cost of Capital

The cost of capital plays a significant role in the negative economic profit. Although the cost of capital decreased between 2017 and 2019, it remained substantial. The increase in cost of capital in 2021, coupled with a moderate increase in NOPAT, contributed to a continued negative economic profit. The relatively high cost of capital consistently exceeded the returns generated by the invested capital.

Invested Capital and Economic Profit

The substantial increase in invested capital between 2017 and 2019 did not translate into improved economic profit. In fact, economic profit worsened during this period, suggesting that the returns on the increased capital were insufficient to cover the cost of that capital. The decrease in invested capital in 2020 did not prevent a record negative economic profit, highlighting the significant impact of the NOPAT loss in that year.

Net Income (Loss) Attributable to Diamondback Energy, Inc.

The net income experienced significant fluctuations over the five-year period. Starting at $482 million in 2017, it increased substantially to $846 million in 2018, indicating strong profitability growth. However, a sharp decline occurred in 2019, with net income dropping to $240 million. The year 2020 saw a drastic reversal, as the company reported a substantial net loss of $4,517 million, reflecting considerable financial distress or extraordinary losses. In 2021, the company recovered strongly, posting a net income of $2,182 million, the highest figure in the period under review, signaling a robust turnaround.

Net Operating Profit After Taxes (NOPAT)

NOPAT also displayed significant variability, mirroring the trends seen in net income. The value rose from $521 million in 2017 to $1,175 million in 2018, more than doubling, which suggests improved operational efficiency and profitability. In 2019, NOPAT decreased substantially to $495 million, indicating a drop in operating profitability. The year 2020 showed a severe negative NOPAT of $5,563 million, consistent with the net loss trend, indicating a substantial operational and tax burden. By 2021, NOPAT recovered to $3,031 million, reflecting a strong improvement in operational performance and effective tax management.

The financial data indicates significant volatility in the provision for income taxes over the five-year period. In 2017, the provision showed a tax benefit of $20 million, which shifted dramatically to a tax expense of $168 million in 2018. This was followed by a moderate tax expense of $47 million in 2019. The year 2020 saw a substantial reversal with a large tax benefit of $1,104 million, marking the most pronounced change within the timeframe. In 2021, the provision returned to a notable tax expense of $631 million.

Cash operating taxes also exhibited variability but on a relatively smaller scale compared to the provision for income taxes. From $14 million in 2017, cash operating taxes increased slightly to $15 million in 2018 and then rose more substantially to $35 million by 2019. In 2020, cash operating taxes decreased to a negative $22 million, implying a cash inflow or tax refund situation. By 2021, cash operating taxes had increased sharply to $64 million, the highest in the observed period.

Provision for Income Taxes:

Highly volatile with alternating tax expenses and benefits.

Significant tax benefit in 2020 contrasts with consistent tax expenses in most other years.

The peak tax expense occurred in 2021 at $631 million.

Cash Operating Taxes:

Gradual increase from 2017 through 2019.

Negative value in 2020 suggests tax refunds or credits received.

Sharp increase in 2021, reaching the highest cash tax outlay in the period.

Overall, the trends reveal considerable fluctuations in tax-related financial items, with 2020 standing out due to exceptional tax benefits and cash tax refunds. The years following show a return to positive tax expenses and increased cash tax payments, signaling potential changes in tax obligations and operational profitability.

Total reported debt & leases

The total debt and leases showed a significant increase from 2017 to 2018, rising from $1,477 million to $4,464 million. This upward trend continued in the following years, reaching $6,687 million by the end of 2021. The consistent rise indicates increasing leverage and possibly greater investments or acquisitions financed through debt.

Total stockholders’ equity

Stockholders’ equity increased markedly from $5,255 million in 2017 to a peak of $13,699 million in 2018. After a slight decline to $13,249 million in 2019, equity decreased further to $8,794 million in 2020, before recovering to $12,088 million in 2021. This pattern suggests volatility in retained earnings or equity capital transactions over the period, with a notable dip during 2020, possibly reflecting challenging market conditions or one-time charges.

Invested capital

Invested capital followed a similar upward trajectory from $7,167 million in 2017 to $22,002 million in 2019, indicating substantial growth in the company’s asset base. However, this figure declined sharply to $16,329 million in 2020, before increasing again to $21,230 million in 2021. The fluctuation mirrors the trends seen in equity and debt, implying adjustments in asset investment and financing approaches possibly influenced by external economic factors.

The period under review demonstrates significant fluctuations in economic performance. Economic profit consistently registers as negative across all observed years, indicating the company’s returns are insufficient to cover the cost of capital. Invested capital exhibits substantial growth initially, peaking in 2019, followed by a decrease in 2020, and a subsequent recovery in 2021. The economic spread ratio, a key indicator of value creation, reflects these trends and reveals a concerning pattern of diminishing returns.

Economic Profit

Economic profit begins at negative US$1,865 million in 2017 and declines sharply to negative US$4,955 million in 2018. While showing a slight improvement in 2019, it experiences a substantial deterioration in 2020, reaching negative US$9,603 million. A notable recovery is observed in 2021, with economic profit improving to negative US$3,090 million, though remaining negative overall.

Invested Capital

Invested capital increases significantly from US$7,167 million in 2017 to US$20,304 million in 2018, and continues to grow to US$22,002 million in 2019. A considerable decrease is then seen in 2020, falling to US$16,329 million. The final year, 2021, shows a rebound, with invested capital rising to US$21,230 million, approaching the levels seen in 2019.

Economic Spread Ratio

The economic spread ratio begins at -26.02% in 2017 and remains negative throughout the period. It shows a modest improvement from -26.02% to -24.40% in 2018, and then to -22.18% in 2019. However, the ratio experiences a dramatic decline in 2020, reaching -58.81%, indicating a significant underperformance relative to the cost of capital. The ratio improves considerably in 2021 to -14.55%, but still remains substantially negative, suggesting continued value destruction.

The substantial decline in the economic spread ratio in 2020, coupled with the lowest economic profit during the period, warrants further investigation. While 2021 shows improvement in both metrics, the continued negative economic profit and economic spread ratio suggest ongoing challenges in generating returns that exceed the cost of capital. The fluctuations in invested capital may be a contributing factor to the observed performance, requiring analysis of capital allocation strategies.

The period under review demonstrates significant fluctuations in economic profit and, consequently, the economic profit margin. Economic profit consistently registers as negative across all observed years, indicating the company’s return on capital employed is less than its cost of capital. However, the magnitude of these losses varies considerably.

Economic Profit

Economic profit exhibits substantial volatility. Losses increased from US$1,865 million in 2017 to US$4,955 million in 2018. While a slight improvement was noted in 2019 with a loss of US$4,880 million, 2020 saw a dramatic increase in the loss to US$9,603 million. A considerable reduction in the economic loss is apparent in 2021, falling to US$3,090 million, though remaining negative.

Revenue from Contracts with Customers

Revenue demonstrates an overall upward trend, though not consistently. Revenue increased significantly from US$1,186 million in 2017 to US$2,130 million in 2018 and further to US$3,887 million in 2019. A decrease was observed in 2020, with revenue falling to US$2,756 million, before a substantial increase to US$6,747 million in 2021. This suggests revenue is sensitive to external factors or company-specific strategies.

Economic Profit Margin

The economic profit margin mirrors the trends in economic profit, consistently negative throughout the period. The margin worsened considerably from -157.20% in 2017 to -232.64% in 2018. A moderate improvement occurred in 2019, reaching -125.55%, but the margin deteriorated sharply in 2020 to -348.45%. The most recent year, 2021, shows a substantial improvement to -45.79%, aligning with the reduced economic loss. The negative margins indicate that for each dollar of revenue, the company is destroying economic value.

The significant disparity between revenue growth and persistent economic losses suggests that while the company is increasing sales, it is not effectively managing its capital to generate returns exceeding its cost. The improvement in both economic profit and margin in 2021 is a positive sign, but continued monitoring is necessary to determine if this represents a sustained trend.