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8 Factors That Make Diamondback (FANG) an Attractive Bet Now

Zacks Equity Research

Even though a stock shows an impressive run on the bourse, some investors may steer clear of adding it to their portfolios, thinking there is not much upside left for further growth. While this is true in certain cases, a high-flying company still necessarily means that it's a meatier option for bargain right now.

In case of oil and gas company Diamondback Energy, Inc. FANG, there are eight good reasons to buy the stock, which is already having an amazing run. While the unprecedented demand crisis due to coronavirus and the sector’s extreme volatility are responsible for the understandable reluctance on investors’ part to dip their toes into these stocks, Diamondback not only seems to be better placed but is also expected to come out of the current downturn relatively unscathed.

Therefore, if you are still mulling over taking advantage of this stock price rally, it’s time that you invest in it for your portfolio boost. Let’s assess the factors why Diamondback has enough momentum to carry on with.

What Makes It a Promising Pick?

An Outperformer

A glance at the company’s share price trend reflects that the stock had bull run in the past three months. Shares of Diamondback have surged 44% compared with the 39.1% increase of its industry.

Top Rank & Attractive VGM Score 

This independent oil and gas exploration & production company with its primary focus on the Permian Basin currently has a Zacks Rank #2 (Buy) and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best investment opportunities. Thus, the company appears to be a compelling investment proposition at the moment. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stellar Q1 Performance

Diamondback delivered strong first-quarter 2020 earnings. Better-than-expected production led to this outperformance. Precisely, overall volume came in at 321.1 thousand barrels of oil equivalent per day (MBOE/d), beating the Zacks Consensus Estimate of 306.7 MBOE/d.

The company’s adjusted net income per share of $1.45 outpaced the Zacks Consensus Estimate of $1.32 and also increased 4.3% from the year-ago figure of $1.39.

Northward Estimate Revisions

The direction of estimate revisions serves as a key indicator of stock movement. The Zacks Consensus Estimate for Diamondback’s 2020 earnings has been revised 6.16% upward over the past 30 days while the same for 2021 have moved 10.1% north.

Positive Earnings Surprise History

This Midland, TX-headquartered Diamondback has a decent surprise record. Its earnings surpassed the Zacks Consensus Estimate in two of the preceding four quarters and missed the mark on two occasions, the average beat being 0.18%.

Strong Balance Sheet

The company exited the first quarter with cash and cash equivalents worth $155 million, improving from the year-ago level of $126 million. It’s debt to capitalization at the first-quarter end was 28.4%.

Consistency of Dividend Payouts

Most energy companies either slashed or suspended dividend payments as an effort to preserve cash amid the severe economic decline. But Diamondback chose otherwise. The company sustained its quarterly dividend track with an approval of 37.5 cents per share. The current annual dividend yield of the company is 3.6%, based on per share value of $41.82.

Key Catalysts

The purchases of Energen and Ajax Resources transformed Diamondback into one of the leading Permian Basin oil producers. The new company owns 394,000 net acres in the Delaware and Midland regions with more than 7,000 drilling locations and production of 215,000 barrels of oil equivalent per day. Additionally, the combined entity is expected to generate synergies in the range of $2-$3 billion, primarily driven by lower drilling and completion costs.

Notably, Diamondback’s total production figure in the first quarter jumped 22.2% from the year-ago period and also topped the Zacks Consensus Estimate. While oil output was up 13.7% year over year, natural gas volumes soared 48.1% year over year.

Energy companies are increasingly resorting to dropdown transactions — transfer of assets from a sponsor to a master limited partnership — to monetize their properties. Over time, Diamondback is expected to follow suit through mineral asset dropdowns to its highly profitable royalty-focused partnership, Viper Energy Partners L.P. This should provide the company with a steady and growing revenue stream while increasing its equity participation in the unit.

Diamondback’s substantial ownership interest in its infrastructure spin-off, Rattler Midstream, provides the company with additional source of liquidity from its substantial assets in Midland and Delaware basins.

Other Key Picks

Some other stocks worth considering in the energy space with the same Zacks Rank as Diamondback are Gulfport Energy Corporation GPOR, Murphy USA Inc. MUSA and Core Laboratories N.V. CLB.

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Core Laboratories N.V. (CLB) : Free Stock Analysis Report
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