Alpha Buying: Smart Cuts and Big Payoffs in the Oil Patch

Friends, if we have learned anything from decades in the markets, it is that the energy business runs in cycles.

Always has, always will.

There is a certain rhythm to these things.

Boom, bust, consolidate, repeat.

What separates the winners from the also-rans is not how they perform when crude hits $100, but the decisions they make when the storm clouds gather.

Diamondback Energy’s FANG latest letter to shareholders reads like a textbook case of smart management facing reality head-on. No sugar coating, no fancy consultant-speak – just the cold hard facts about our energy markets.

CEO Travis Stice did not mince words about the current environment, noting that “on an inflation-adjusted basis, there have only been two quarters since 2004 where front month oil prices have been as cheap as they are today.” That is a sobering reality check.

This is not just another dip in the cycle.

We are witnessing what could be a fundamental shift in American oil production. The shale revolution that transformed our national energy landscape is entering a new phase, one where easy growth is no longer the name of the game.

Diamondback believes we are at a “tipping point for U.S. oil production at current commodity prices.”

The numbers back this up.

U.S. frac crew counts already down about 15% this year with the Permian Basin crew count down approximately 20% from January peaks. The oil-directed rig count is expected to drop almost 10% by the end of Q2 with further declines anticipated.

What separates good management from great management is knowing when to tap the brakes. Rather than chasing volume in a weakening price environment, Diamondback is making the prudent choice.

They are reducing their 2025 capital budget by about $400 million (10%) to $3.4-$3.8 billion and dropping three rigs and one completion crew. As Stice colorfully explained: “We are taking our foot off the accelerator as we approach a red light. If the light turns green before we get to the stoplight, we will hit the gas again, but we are also prepared to brake if needed.”

This is exactly what shareholders should demand, capital discipline when markets weaken. Too many energy companies have destroyed billions in shareholder value by drilling their way through downturns, hoping prices would recover.

Hope, friends, is not a strategy.

In a cyclical business, balance sheet strength separates the survivors from the casualties. Diamondback understands this fundamental truth.

The company had approximately $15.7 billion of gross debt after the Double Eagle acquisition, but they are systematically reducing this through Free Cash Flow, non-core asset sales, and opportunistic bond repurchases.

They have already repurchased about $220 million of long-dated bonds for just $167 million in Q2 – buying their debt back at a 25% discount.

This is textbook value investing applied to corporate finance, using market volatility to strengthen the balance sheet at a discount.

What impresses me most about Diamondback’s approach is their clear-eyed realism about current market conditions combined with the financial flexibility to navigate through them. They are not panicking, nor are they ignoring the warning signs. They are making the tough but necessary adjustments that will position them to thrive when the cycle eventually turns.

As Diamondback reduces activity to preserve capital while maintaining production levels through efficiency gains, they are showing exactly the kind of approach that creates lasting shareholder value through market cycles.

In the energy business, it is always about cycles.

Diamondback is not the only energy company taking this approach.

Matador Resources MTDR recently announced that it was taking a measured approach, announcing a modest reduction from nine drilling rigs to eight by mid-2025. This adjustment will reduce capital spending by $100 million, bringing their full-year drilling, completing and equipping budget to $1.275 billion.

If you have followed my investment approach over the years, you know I prioritize balance sheet strength above all else. When storms hit, financial flexibility is what keeps companies afloat.

Matador has clearly embraced this philosophy as well, repaying $190 million in credit facility borrowings during Q1 alone. They have also monetized approximately $440 million in non-core assets through smart divestitures by selling their 19% ownership in Piñon Midstream for around $115 million and divesting Eagle Ford positions for about $30 million.

Cutting back on activity and fortifying the balance sheet is a smart play right now. Diamondback and Matador are putting shareholders first and building a margin of safety.

Diamondback is buying back debt and has also repurchased over $800 million in stock so far this year.

Matador has been repaying debt and just announced a new $400 million buyback program.

Insiders at both companies have made open market purchases recently.

At Matador, insider activity has been particularly robust with six different insiders buying stock in the last month.

Executives at both companies own a significant amount of stock so there is plenty of skin in the game.

It is also worth noting that 95% of all Matador employees participate in the Employee Stock Ownership Plan.

Prudent operational choices, debt repurchases and payoffs, stock buybacks, dividends and skin in the game.

It is a cornucopia of good decisions and practices at both Diamondback and Matador. These are factors that are usually well rewarded by the market over time.