On Wednesday, Barclays upgraded Diamondback Energy (NASDAQ:FANG) from Equalweight to Overweight, setting a price target of $210.00. The firm believes Diamondback Energy presents a notably positive outlook, as it is set to fully integrate its recent acquisition of Endeavor and unveil a 2025 program that promises greater capital efficiency than initially expected.
The upgrade comes after the company's announcement of third-quarter production volumes that exceeded forecasts, with both Diamondback and Endeavor's oil volumes surpassing their respective plans without increasing capital expenditures. The analyst pointed out that Diamondback's well costs are improving, now at approximately $600 per foot, compared to the $625 per foot initially estimated, due to enhanced drilling and completion efficiencies. This could enable the company to maintain its program with fewer rigs and crews than originally planned.
Barclays also took into account the Tumbleweed acquisition by Viper Energy Partners (NASDAQ:VNOM), projecting Diamondback's 2025 oil production at 487 thousand barrels per day (MBbld), which is 6% above the consensus and surpasses initial guidance of 470-480 MBbld. The firm's capital expenditure estimate of $4.1 billion aligns with the Street's view and sits at the low end of the guidance range, with an estimated post-dividend free cash flow breakeven of around $45 per barrel, positioning Diamondback among the lowest in the sector.
The analyst highlighted potential long-term benefits from development optimization strategies, such as drilling longer laterals and capturing infrastructure synergies, which could further reduce operating costs. Diamondback's management has also indicated initiatives like in-basin gas generation as a cost-saving measure.
Despite Diamondback's historically rich valuation, its shares have declined by approximately 13% over the past three months, underperforming its oil-weighted exploration and production peers. This recent underperformance, attributed in part to a liquidity event by Endeavor sellers, has been seen as a compelling entry point for investors. Diamondback's proactive share repurchase activities, including a 2 million share buyback from a secondary sale, demonstrate its counter-cyclical investment approach.
Based on strip prices, the company trades at 6.5 times its 2025 enterprise value to EBITDA estimate, which is double that of its oil-weighted peers, yet it still yields a robust 8.7% organic free cash flow. Barclays' price target of $210 is derived from a blended target multiple of 8 times the 2025 estimated enterprise value to EBITDA and 1 times net asset value, reflecting a 6.5% free cash flow yield in 2025.
In other recent news, Diamondback Energy has seen significant developments following its $26 billion acquisition of Endeavor. The merger positions Diamondback as the largest pure-play Permian producer, with JPMorgan subsequently raising its price target for the company from $167 to $182 and upgrading its rating to Overweight. The company's operational efficiency and advantageous position in the Midland Basin are expected to ensure performance, even in a potentially challenging oil macro environment.
In addition, Diamondback has revised its Q3 2024 production and capital expenditure guidance, now projecting to produce between 319,000 to 321,000 barrels of oil per day, with capital expenditure ranging from $675 million to $700 million. This updated guidance reflects the impact of the Endeavor merger on Diamondback's operations.
The company has also initiated a secondary public offering of 11.27 million shares and a share repurchase of 2 million shares. Its subsidiary, Viper Energy, further solidified its presence in the Permian Basin with the acquisition of Tumbleweed Royalty assets for $650 million.
In related developments, the Public Utility Commission of Texas approved the Permian Basin Reliability Plan to support the growing electricity demand from the oil and gas sector, which is particularly relevant for Diamondback Energy.
Finally, Mizuho Securities maintained an Outperform rating for Diamondback Energy, while adjusting the stock's price target, and Jefferies reinstated coverage with a Hold rating, suggesting a cautious stance on the company's near-term growth prospects.
InvestingPro Insights
Diamondback Energy's recent upgrade by Barclays aligns with several key metrics and insights from InvestingPro. The company's P/E ratio of 9.17 suggests it may be undervalued relative to its peers, supporting Barclays' view of a compelling entry point. This is further reinforced by InvestingPro's fair value estimate of $180.18, which is above the current trading price.
InvestingPro Tips highlight that Diamondback Energy has maintained dividend payments for 7 consecutive years, with a current dividend yield of 6.1%. This consistent dividend policy, coupled with the company's share repurchase activities mentioned in the article, underscores its commitment to shareholder returns.
The company's strong financial position is evident from InvestingPro Data, which shows an impressive operating income margin of 55.05% for the last twelve months. This robust profitability supports Barclays' optimistic outlook on Diamondback's ability to generate free cash flow and maintain its capital efficiency.
For investors seeking more comprehensive analysis, InvestingPro offers 11 additional tips for Diamondback Energy, providing a deeper understanding of the company's financial health and market position.
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