Report Interpretation

Overview

This earnings update covers Diamondback Energy (FANG) and Viper Energy (VNOM). Goldman Sachs remains constructive on both companies, citing FANG’s capital-efficient growth and Barnett development potential, and VNOM’s attractive royalty-model valuation, organic growth and more flexible cash-return policy.

Core views

Goldman Sachs updates its estimates for FANG and VNOM following 2Q26 results, activity updates and revised macro assumptions, while reiterating Buy ratings on both. The institution argues that elevated oil prices amid a prolonged Middle East supply disruption have encouraged FANG to pursue capital-efficient volume growth rather than growth for its own sake. It views FANG as a high-quality, pure-play Permian Basin operator whose technical improvements in well construction and stimulation are supporting strong Midland oil productivity relative to peers. FANG’s operating performance underpins the more positive outlook. Total 2Q26 production of 1,018 Mboe/d exceeded the high end of company guidance, with natural-gas output of 1.4 Bcf/d stronger than expected because of continued Barnett development and improving downstream gas marketing. Management indicated that the growing Barnett program could increase gas’s share of consolidated production over time. The report highlights a 12-well surfactant program with positive initial results as a driver of continuing well-productivity strength. It also notes that the first four-well Spanish Trail pad targeting the Barnett had been drilled and was expected to be completed within the next couple of months. Goldman Sachs says the Barnett opportunity has added significant value to FANG’s internal NAV estimates, though it seeks additional clarity on the development program and its eventual effect on production mix. The Barnett program also links the two companies: Goldman Sachs sees continued exploration and development as a tailwind for VNOM because VNOM has a high net-revenue interest in Spanish Trail. VNOM’s 3Q26 guidance of 67.5–68.5 Mbo/d implies roughly 15% annualized oil-production-per-share growth versus 4Q25, supported by approximately 9% annualized organic growth, share repurchases and the Riverbend acquisition. Goldman Sachs continues to view VNOM’s no-capex royalty business model as undervalued, citing an 11% average FCF yield on its 2027/2028 estimates versus a 6% peer average. Capital allocation is a second central thesis. FANG removed its minimum return-of-capital commitment, which Goldman Sachs considers a way to maximize the business’s option value during extreme oil-price volatility and macro uncertainty. Management may build cash and strengthen the balance sheet ahead of potential near-term debt elimination; FANG reduced debt by about $1.3 billion and repurchased $141 million of shares in 2Q26. VNOM likewise removed its commitment to return at least 75% of cash available to shareholders, shifting away from a variable dividend toward a larger base dividend and opportunistic repurchases. Its base dividend rises 32% in 3Q26 to an annualized $2.00 per Class A share, with management committed to increasing it over time. Goldman Sachs views this flexibility favorably given commodity volatility, VNOM’s discounted valuation, and a robust royalty M&A market that could create incremental deployment opportunities. For FANG, Goldman Sachs raises its 12-month target to $220 from $212 and lowers its target FCF yield to 11.5% from 12.0% on average 2027/2028 estimates, using $75/bbl Brent and $3.50/MMBtu Henry Hub gas. The lower yield target reflects the perceived durability of capital-efficiency gains and a stronger balance sheet. The target combines an approximately $216 fundamental valuation with an approximately $245 M&A theoretical valuation, weighted 85% and 15%, respectively; the M&A case uses $80/$80 Brent and $3.75/$3.75 Henry Hub assumptions for 2027/2028. FANG’s revised EBITDA estimates for 3Q26/2026/2027/2028 are $3.16/$13.24/$12.46/$12.84 billion, versus $2.71/$12.18/$11.91/$12.66 billion previously, reflecting higher production, productivity outperformance, a deeper Barnett position and updated macro inputs. For VNOM, Goldman Sachs raises its 12-month target to $57 from $55 and uses an 8.0% target FCF yield on average 2027/2028 estimates under the same $75/bbl Brent and $3.50/MMBtu Henry Hub assumptions. Its valuation is weighted 85% to a roughly $57 fundamental value and 15% to a roughly $59 M&A theoretical value, with the latter based on $80/$80 Brent and $3.75/$3.75 Henry Hub for 2027/2028. The higher target reflects increased production estimates, strong organic growth and accretive M&A. Revised VNOM EBITDA estimates for 3Q26/2026/2027/2028 are $519/$2,177/$2,064/$2,192 million, compared with $445/$1,945/$2,064/$2,121 million previously.

Analysis framework

Goldman Sachs incorporates 2Q26 results, updated operating activity, management commentary and revised commodity assumptions into production and EBITDA forecasts. It evaluates FANG through well productivity, production growth, Barnett development, balance-sheet actions and a blended fundamental/M&A valuation; it evaluates VNOM through oil-production-per-share growth, royalty economics, FCF yield versus peers, dividend and repurchase policy, and M&A optionality.

Methodology notes

• Valuation methods

  Target free cash flow yield valuation

  Goldman Sachs derives target prices using target FCF yields on average 2027/2028 estimates: 11.5% for FANG and 8.0% for VNOM. A lower target yield for FANG reflects the report’s view that capital-efficiency gains and balance-sheet improvement are more durable.

• Event-Driven and Behavioral Finance

  Blended fundamental and M&A theoretical valuation

  For each stock, Goldman Sachs weights fundamental valuation at 85% and an M&A theoretical valuation at 15%, consistent with each company’s M&A rank of 2.

• Industry AnalysisVolume-price decomposition

  Production and well-productivity analysis

  The report links FANG’s growth outlook to production volumes, natural-gas mix, Barnett development and technical improvements that are improving well productivity.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Diamondback Energy Inc. (FANG)

  Primary covered E&P company benefiting from capital-efficient Permian growth, productivity gains and Barnett development.

  Strengths

  Strong Midland oil productivity, 2Q26 production above guidance, capital efficiency, debt reduction and a deepening Barnett position.

  Weaknesses

  The report seeks greater clarity on the Barnett development program and its effect on the natural-gas production mix.

  Comparison

  Goldman Sachs describes FANG’s well productivity as strong relative to peers.

  Risks

  Costs, well results, commodity-price volatility and government pronouncements.

• Viper Energy Inc. (VNOM)

  Primary covered royalty company positioned to benefit from FANG’s Barnett activity and capital-return flexibility.

  Strengths

  No-capex business model, 11% estimated FCF yield versus 6% peer average, organic growth, share repurchases and potential accretive M&A.

  Weaknesses

  Operations are concentrated with FANG.

  Comparison

  Its estimated 11% average 2027/2028 FCF yield compares with a 6% average for peers including PSK, LB, BSM, FNV and WPM.

  Risks

  Lower Permian Basin activity, concentrated operations with FANG, commodity-price volatility and government pronouncements.

Key data

• FANG 2Q26 total production1,018 Mboe/dExceeded the high end of company guidance.
• FANG 2Q26 natural-gas production1.4 Bcf/dStronger-than-expected output was attributed to Barnett development and improved downstream gas marketing.
• VNOM 3Q26 production guidance67.5–68.5 Mbo/dImplies approximately 15% annualized oil-production-per-share growth versus 4Q25.
• VNOM estimated FCF yield11%Average 2027/2028 estimates, versus a 6% peer average.
• VNOM base dividend$2.00 per Class A share annualizedEffective 3Q26 after a 32% increase.
• FANG target price$22012-month target, raised from $212.
• VNOM target price$5712-month target, raised from $55.
• FANG EBITDA estimates3Q26/2026/2027/2028: $3.16/$13.24/$12.46/$12.84 bnPrior estimates were $2.71/$12.18/$11.91/$12.66 bn.
• VNOM EBITDA estimates3Q26/2026/2027/2028: $519/$2,177/$2,064/$2,192 mnPrior estimates were $445/$1,945/$2,064/$2,121 mn.

Impact & implications

Goldman Sachs argues that FANG’s productivity gains, capital-efficient growth and Barnett position support higher production estimates and a higher valuation. For VNOM, the report sees a combination of royalty-linked growth, discounted FCF-yield valuation, a higher base dividend, repurchase flexibility and potential royalty M&A as supportive of its outlook.

Risks

• For FANG: costs, well results, commodity-price volatility and government pronouncements.
• For VNOM: lower Permian Basin activity, concentration of operations with FANG, commodity-price volatility and government pronouncements.

What to watch

• Further detail on FANG’s Barnett development program and its potential effect on the company’s natural-gas production mix.
• Completion results from the first four-well Spanish Trail Barnett pad.
• FANG’s well-productivity progress, including results from its surfactant program.
• FANG’s use of capital-return flexibility, cash accumulation and progress toward potential debt elimination.
• VNOM’s delivery against 3Q26 production guidance, base-dividend growth, repurchases and potential royalty M&A.