On Monday, Citi resumed coverage on Diamondback Energy (NASDAQ:FANG), issuing a Neutral rating and setting a price target of $195.00 for the company's stock.
The firm highlighted Diamondback Energy's strong position in the exploration and production (E&P) sector, noting its valuable acreage, cost-effective volume delivery, and solid capital deployment strategy.
"FANG checks all these boxes and thus should be a core holding within E&P and trade at a persistent premium to the peer group," said Citi.
The company’s current trading metrics show a 7.1x multiple on its anticipated 2025 debt-adjusted cash flow (DACF) and an 8.8% free cash flow (FCF) yield based on strip pricing. These figures place Diamondback slightly above competitors EOG Resources (NYSE:EOG) and Occidental Petroleum (NYSE:OXY) in both multiple and yield.
The recent 15% increase in the stock price followed a positive third-quarter volume update and an uptick in crude oil prices. However, Citi's Commodities team anticipates potential risks for West Texas Intermediate (WTI) crude prices in 2025. Additionally, Diamondback Energy is expected to focus on debt reduction following the completion of its acquisition of Endeavor.
Citi's current stance on Diamondback Energy reflects a wait-and-see approach, suggesting that investors may find a more favorable entry point in the future. The firm's set price target of $195.00 remains unchanged as coverage on the stock resumes.
In other recent news, Diamondback Energy reported mixed third-quarter results, with net losses on cash settlements for derivative instruments at $4 million, but anticipating a net non-cash gain on derivative instruments of $135 million. The company 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.
Diamondback also completed the acquisition of Endeavor, which has resulted in analyst upgrades from firms such as Mizuho Securities, BMO Capital Markets, TD Cowen, and Barclays. RBC Capital maintained its Outperform rating on the company, highlighting the potential for increased activity on the newly acquired Endeavor assets. Truist Securities also retained its Buy rating on Diamondback, anticipating stable proforma production levels.
InvestingPro Insights
Diamondback Energy's financial metrics and market performance align with Citi's analysis, as reflected in recent InvestingPro data. The company's P/E ratio of 10.1 and adjusted P/E ratio of 16.9 for the last twelve months as of Q2 2024 suggest a relatively attractive valuation, despite Citi's neutral stance. This is further supported by an InvestingPro Tip indicating that the stock is trading at a high P/E ratio relative to near-term earnings growth.
The company's strong financial position is evident from its revenue growth of 11.34% over the last twelve months and an impressive 25.05% quarterly growth as of Q2 2024. This robust performance is complemented by a healthy gross profit margin of 79.36% and an operating income margin of 55.05%, underscoring Diamondback's operational efficiency.
Investors should note that Diamondback offers a dividend yield of 5.55%, with an 8.85% dividend growth rate, aligning with Citi's observation of the company's solid capital deployment strategy. An InvestingPro Tip highlights that Diamondback has maintained dividend payments for 7 consecutive years, which may appeal to income-focused investors.
For those considering Diamondback Energy, InvestingPro offers 13 additional tips that provide deeper insights into the company's financial health and market position. These tips can help investors make more informed decisions in light of Citi's recent coverage resumption and the current market dynamics affecting the E&P sector.
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