On Wednesday, Barclays initiated coverage on Diamondback Energy (NASDAQ:FANG), assigning the stock an Equalweight rating and setting a price target of $214. The firm highlighted the potential impact of Diamondback Energy's upcoming acquisition of Endeavor, which is anticipated to close in the fourth quarter of this year.
The acquisition is expected to position Diamondback Energy as a leading independent exploration and production (E&P) company in the Permian Basin, one of the world's most cost-effective oil regions.
Diamondback Energy's stock has seen a significant rise, increasing by 35% since the announcement of the Endeavor deal, outpacing the S&P Oil & Gas Exploration & Production Select Industry Index (XOP) by approximately 14%. This increase has led to Diamondback Energy trading at the second highest multiple in the Integrateds & E&Ps universe, just behind Exxon Mobil (NYSE:NYSE:XOM), and the highest among E&Ps based on 2025 enterprise value to debt-adjusted cash flow (EV/DACF).
The firm's analysis suggests that the merger with Endeavor would be financially beneficial for Diamondback Energy, enhancing both the quality and quantity of its inventory.
Post-merger, Diamondback Energy is projected to have a leading industry position with a free cash flow (FCF) breakeven point of $40 per barrel pre-dividend and approximately $47 per barrel with dividend.
Furthermore, with an estimated 6,100 net locations that could break even at under $40 West Texas Intermediate (WTI), Diamondback Energy is expected to generate substantial free cash flow growth and cash return for the next decade and beyond.
Barclays' price target is based on a blended target multiple of 7 times the 2025 estimated enterprise value to EBITDAX (earnings before interest, taxes, depreciation, amortization, and exploration expenses) and 1 times net asset value (NAV).
The firm acknowledges the potential for additional upside from the realization of land synergies and the drop-down of mineral assets, although it views Viper Energy Partners (NASDAQ:VNOM) as potentially benefiting more from these catalysts.
Despite the positive outlook and premium valuation warranted by the quality and duration of inventory, Barclays maintains an Equalweight rating on Diamondback Energy.
InvestingPro Insights
Diamondback Energy's strategic moves and robust performance have drawn attention, and recent data from InvestingPro underscores the company's financial strength and market position. With a market capitalization of $36.68 billion, Diamondback Energy trades at a P/E ratio of 11.82, reflecting its earnings power relative to its share price. The company's revenue for the last twelve months as of Q4 2023 stands at $7.959 billion, although it has seen a revenue decline of 12.37% during the same period.
InvestingPro Tips suggest that while analysts have revised their earnings expectations upwards for the upcoming period, the stock price may be reaching overbought territory according to the RSI. This could indicate a heightened level of investor enthusiasm that may not be sustainable in the short term. On the flip side, Diamondback Energy is known for its low price volatility, which could appeal to investors seeking stability.
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