Citi raises Diamondback Energy stock to buy, target to $180

On Monday, Citi analyst Scott Gruber elevated Diamondback Energy’s (NASDAQ:FANG) stock rating from Neutral to Buy, while also increasing the price target to $180 from the previous $157. The upgrade reflects the firm’s recognition of Diamondback Energy’s position as a leading exploration and production (E&P) company due to its low break-even oil price of approximately $36 per barrel, the lowest within Citi’s coverage.

Gruber noted that Diamondback Energy’s operational efficiency allows for the generation of free cash even when crude oil prices are low. The company’s impressive 75.73% gross profit margin and 32.69% revenue growth over the last twelve months support this view. He also highlighted the company’s extensive inventory life, which is estimated at around 18 years at $50 per barrel according to management. This aspect provides a stable outlook for the company’s long-term production capabilities.

The analyst further mentioned that previous owners of companies acquired by Diamondback Energy are expected to divest their holdings gradually. However, this shift in ownership is anticipated to occur once the stock value has appreciated and is not seen as affecting the company’s long-term value proposition.

In addition to operational strengths, Diamondback Energy is actively pursuing strategic initiatives such as asset sales and a potential joint venture related to power in West Texas. These efforts are part of the company’s broader strategy to enhance its financial and operational position within the industry.

Gruber’s new price target of $180 for Diamondback Energy stock is based on a free cash flow (FCF) yield of approximately 9.5% at a West Texas Intermediate (WTI) crude price of $65, alongside a discounted cash flow (DCF) analysis that supports the valuation. Trading at a P/E ratio of 8.02 and offering a 5.28% dividend yield, with an 8-year track record of consistent dividend payments, the stock presents compelling metrics for value investors. The upgraded rating and revised price target indicate Citi’s increased confidence in the company’s ability to deliver value to shareholders. For detailed analysis and additional insights, including 12 more exclusive ProTips, check out the comprehensive research report available on InvestingPro.

In other recent news, Diamondback Energy has made several significant moves that investors may find noteworthy. The company has completed the issuance of $1.2 billion in senior notes, with a 5.550% interest rate, maturing in 2035. This financial maneuver is intended to support general corporate purposes, including the acquisition of subsidiaries from Double Eagle IV Midco, LLC. In terms of analyst perspectives, CFRA has upgraded Diamondback Energy’s stock rating to Strong Buy, citing the company’s undervaluation based on various valuation models and an anticipated improvement in natural gas pricing as pipeline capacity issues are resolved in the Permian Basin.

Benchmark has maintained its Buy rating on the company, with a price target of $195, as they expect Diamondback’s first-quarter earnings to align with market expectations. Meanwhile, Raymond (NSE:RYMD) James has adjusted its price target for the company to $214, acknowledging a strong performance in recent earnings despite a decline in oil prices. The company has also been recognized for its improvements in capital efficiency, with reductions in well costs and strategic use of drilled but uncompleted wells to lower capital expenditures.

Additionally, Diamondback Energy’s upcoming closure of the Double Eagle acquisition is expected to occur at the beginning of the second quarter, consistent with the company’s history of successful acquisitions. These developments highlight Diamondback Energy’s ongoing efforts to enhance its financial structure and operational efficiency amidst fluctuating global energy prices.

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