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Shares of Diamondback Energy, Inc. FANG have been on animpressive run on the bourses for quite some time now.
The stock, which hit a new 52-week high earlier this month, has gained 74.2% since the start of the year compared with the 24.5% rise for the Zacks Oils-Energy sector and the 57.6% increase for the Zacks Oil and Gas - Exploration and Production - United States industry.
The surge in stock prices is driven by the recovery in crude prices to around $65 a barrel from the recently announced OPEC+ supply curbs until April. Also, Saudi Arabia announced that it will continue with its one-million-barrel-per-day voluntary production cut into April.
The stock appreciation is also attributable to regular vaccine-related updates and their successful deployment around the world that offers hope for an earlier-than-expected spurt in the commodity’s demand.
Therefore, if you are still mulling over taking advantage of this stock price rally, which is expected to rise further, 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?
Stellar Q4 Performance
The currently Zacks Ranked #1 (Strong Buy) Diamondback delivered strong fourth-quarter 2020 earnings. Better-than-expected production led to this outperformance. Precisely, overall volume came in at 299 thousand barrels of oil equivalent per day (MBOE/d), beating the Zacks Consensus Estimate of 291 MBOE/d. You can see the complete list of today’s Zacks #1 Rank stocks here.
Northward Estimate Revisions
The direction of estimate revisions serves as a key indicator of stock movement. The Zacks Consensus Estimate for Diamondback’s current-year earnings has been revised 17% upward over the past 30 days while the same for 2022 has moved 13.9% north.
Positive Earnings Surprise History
This Midland, TX-headquartered Diamondback has a solid surprise record. Its earnings surpassed the Zacks Consensus Estimate in all the preceding four quarters, the average beat being 119.98%.
Strong Balance Sheet
The company exited the fourth quarter with cash and cash equivalents worth $155 million. It’s debt to capitalization at the fourth-quarter end was 39%.
Consistency of Dividend Payouts
Most energy companies either slashed or suspended dividend payments as an effort to preserve cash amid the severe economic gloom. But Diamondback chose otherwise. The company recently approved a 6.7% hike in its annual payout to $1.60 per share. The current annual dividend yield of the company is 1.9%, based on per share value of $84.29.
The purchases of Energen and Ajax Resources transformed Diamondback into one of the leading Permian Basin oil producers. The combined entity 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 consolidated entity is expected to generate synergies in the range of $2-$3 billion, primarily driven by lower drilling and completion costs.
Diamondback recently announced an agreement to acquire smaller upstream player QEP Resources QEP in an all-stock deal worth $2.2 billion. If the transaction succeeds, it will add nearly 49,000 more acres to Diamondback’s Midland acreage in the Permian Basin where it is already a well-established top producer. Therefore, the QEP acquisition is a strategic fit for the company, which will further strengthen its position in the United States’ hottest shale region of lowest cost.
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.
The company’s substantial ownership interest in its infrastructure spin-off, Rattler Midstream, provides it with additional source of liquidity from its substantial assets in the Midland and Delaware basins.
Other Key Picks
Some other stocks worth considering in the energy space with the same Zacks Rank as Diamondback are Matador Resources Company MTDR and Denbury Inc. DEN.
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