The energy sector has come roaring back in the fourth quarter after a relatively quiet summer. Oil prices have been surging lately, driven by consistently escalating hostilities in the Middle East, including recent speculation that Israel may be considering a retaliatory attack on Iran's oil fields. Last Friday, WTI crude oil futures (CLX24) racked up their biggest weekly gain since March 2023.
Against this backdrop, Diamondback Energy (FANG) emerges as a standout performer in the U.S. shale industry. The company just completed its acquisition of Endeavor, making it the biggest company focused on the asset-rich Permian Basin - and prompting JPMorgan to restart coverage of FANG at “Overweight.”
Plus, to help buffer against the inevitable volatility in energy prices, the stock pays a healthy 6% dividend. Diamondback also keeps costs low, adding to its resilience against potential oil and gas market fluctuations. Here's a closer look at this high-yield energy dividend stock.
About Diamondback Energy Stock
Valued at $34.7 billion, Diamondback Energy (FANG) is a leading independent oil and natural gas (NGX24) company focused on the acquisition, development, exploration, and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin. Their strong financial results and impressive stock performance have caught the attention of investors and analysts alike.
Over the past 52 weeks, FANG stock has gained 31.9%, including a market-beating 28.6% rise so far in 2024.
FANG's valuation seems reasonable at current levels, especially given the stock's outperformance. The forward price/earnings (P/E) ratio is 10.03, which is a modest discount to the energy sector median. It's also right in line with FANG's average historical valuations.
Plus, Diamondback's strong dividend policy shows its solid financial health and commitment to giving back to shareholders. The company announced a base cash dividend of $0.90 per share and a variable dividend of $1.44 per share for the second quarter of 2024, indicating an annual yield of 5.71%. With a payout ratio of 32.33% and 6 years of consistent dividend increase, Diamondback strikes a healthy balance between rewarding shareholders and investing in growth initiatives.
The Fundamentals Fueling Diamondback's Success
Looking at Diamondback's financials for the second quarter of 2024, they generated $837 million in net income, which breaks down to $4.66 per share. Adjusted net income was $813 million, or $4.52 per share - edging out Wall Street's consensus forecast. FANG produced an average of over 276,000 barrels of oil per day, bringing in $1.5 billion from operations. Plus, they generated free cash flow of $816 million and adjusted free cash flow of $841 million.
Diamondback Energy's recent merger with Endeavor Energy Resources is a smart deal for the company, boosting its footprint in the low-cost, asset-rich Permian Basin. This $26 billion merger not only adds to Diamondback's top-notch inventory, but also boosts its ability to support its own growth, as well. The company's upwardly revised guidance for the third quarter of 2024 shows this optimism, with expected oil production between 319-321,000 barrels per day and capital expenditures between $675-700 million. These numbers show Diamondback's commitment to using its bigger asset base to keep growing.
Alongside this major merger, Diamondback's subsidiary, Viper Energy, made a big purchase of mineral and royalty interests from Tumbleweed Royalty IV for about $459 million. This deal further diversifies Diamondback's assets and increases its revenue streams.
What's the Analyst Forecast for FANG?
Analysts are upbeat on Diamondback, and 19 out of 25 agree that it's a "strong buy." Three more suggest a “moderate buy,” and 3 recommend a “hold.” The average price target is $221.62, which is about 10.6% higher than Monday's close.
JPMorgan's decision to start covering Diamondback stock again with an "Overweight" rating shows the firm is confident in Diamondback's improved position as the biggest pure-play Permian producer. The bullish outlook is further supported by Barclays' recent upgrade from "Equalweight" to "Overweight," with a price target of $210. Barclays analysts cited Diamondback's better production outlook and cost efficiency, and expect 2025 oil production to hit 487,000 barrels per day - making Diamondback one of the most competitive players in the industry.
Why FANG Stock Looks Like a Buy Right Here
In summary, Diamondback Energy stands out as a compelling investment opportunity in the energy sector, backed by its strategic merger with Endeavor, robust financial performance, and strong analyst endorsements. With a promising production outlook and a commitment to shareholder returns through dividends, Diamondback is well-positioned to continue delivering value.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
