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 32.98% in 2017 to 24.21% in 2019, before increasing to 28.57% in 2021. Invested capital increased considerably from US$7,167 million in 2017 to US$20,304 million in 2018, peaking at US$22,002 million in 2019, then decreasing to US$16,329 million in 2020, and recovering to US$21,230 million in 2021.

Economic Profit Trend

Economic profit consistently remained negative throughout the analyzed period. The magnitude of the negative economic profit increased from US$1,843 million in 2017 to US$4,899 million in 2018 and US$4,833 million in 2019. The largest negative economic profit was recorded in 2020 at US$9,567 million, coinciding with the substantial NOPAT loss. While economic profit improved in 2021 to US$3,034 million, it remained negative, indicating that returns did not exceed the cost of capital.

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 significantly lower or negative. This suggests that the primary driver of economic profit is the absolute level of NOPAT.

Impact of Cost of Capital

The decreasing cost of capital between 2017 and 2019 did not translate into positive economic profit, as the decline in NOPAT offset the benefit of a lower cost of capital. The increase in cost of capital in 2021, coupled with a recovery in NOPAT, still resulted in a negative economic profit, highlighting the substantial gap between returns and the cost of funding those returns.

Invested Capital and Economic Profit

The substantial increases in invested capital in 2018 and 2019 did not lead to corresponding improvements in economic profit. This suggests that the returns generated on the increased invested capital were insufficient to cover the cost of that capital. The decrease in invested capital in 2020, while coinciding with a large NOPAT loss, did not prevent a record negative economic profit.

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$1,843 million in 2017 and deteriorates significantly, reaching a low of negative US$9,567 million in 2020. A notable improvement is observed in 2021, with economic profit increasing to negative US$3,034 million, though still remaining negative. This suggests a period of substantial underperformance culminating in 2020, followed by a partial recovery in the most recent year.

Invested Capital

Invested capital increases markedly from US$7,167 million in 2017 to US$22,002 million in 2019, representing a substantial expansion of the company’s asset base. A decrease to US$16,329 million is then seen in 2020, potentially indicating asset sales or write-downs. The figure rebounds to US$21,230 million in 2021, approaching the 2019 level. These fluctuations suggest active capital allocation and potential restructuring activities.

Economic Spread Ratio

The economic spread ratio demonstrates a generally declining trend from -25.71% in 2017 to -58.59% in 2020. This indicates a widening gap between the company’s return on invested capital and its cost of capital. The ratio improves to -14.29% in 2021, coinciding with the improvement in economic profit, but remains substantially below zero. The significant deterioration in 2020 is particularly noteworthy, suggesting a substantial erosion of shareholder value during that year. The 2021 improvement, while positive, does not fully offset the prior decline.

In summary, the analysis reveals a period of consistent negative economic profit, coupled with volatile invested capital and a declining economic spread ratio, particularly pronounced in 2020. While some improvement is evident in 2021, the overall trend suggests ongoing challenges in generating returns that exceed the cost of capital.

The economic profit margin exhibited significant volatility between 2017 and 2021. Initially negative, the margin deteriorated substantially before showing improvement in the most recent period. A consistent pattern of negative economic profit is also apparent throughout the analyzed timeframe.

Economic Profit

Economic profit demonstrated a pattern of negative values across all five years. The largest negative economic profit occurred in 2020, reaching negative US$9,567 million. Prior to this, 2018 experienced the second-largest negative economic profit at negative US$4,899 million. A notable reduction in the magnitude of the negative economic profit is observed in 2021, decreasing to negative US$3,034 million, suggesting a potential shift in profitability.

Revenue from Contracts with Customers

Revenue generally increased over the period, although with fluctuations. Revenue more than doubled from 2017 to 2018 and nearly doubled again from 2018 to 2019, reaching US$3,887 million. A decrease in revenue occurred in 2020, falling to US$2,756 million, before a substantial increase in 2021, reaching US$6,747 million. This suggests revenue is sensitive to external factors and does not consistently translate into positive economic profit.

Economic Profit Margin

The economic profit margin was consistently negative throughout the period. The most substantial decline in the margin occurred between 2017 and 2018, moving from -155.34% to -230.02%. The margin reached its most negative value in 2020 at -347.14%. A significant improvement in the economic profit margin is evident in 2021, increasing to -44.97%, coinciding with the increase in revenue and the reduced negative economic profit. Despite this improvement, the margin remained substantially negative, indicating that the cost of capital continues to exceed returns generated from revenue.

The observed trend suggests that while revenue has increased, the company has struggled to generate economic profit. The improvement in both economic profit and the economic profit margin in 2021 is a positive sign, but continued monitoring is necessary to determine if this represents a sustainable trend.