Diamondback Energy Stock Up 3% Today – Time to Buy FANG Stock?
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The price of Diamondback Energy stock is surging 3% today in pre-market stock trading action at $82.3 per share while the stock is up almost 4% already since September started.
Yesterday, after the closing bell, the company announced that its Board of Directors approved a plan to repurchase up to $2 billion in stock by allocating at least 50% of its free cash flows to this activity.
The firm cited a “supportive macro backdrop and increasing financial strength” as the reasons behind this decision as the price of oil is expected to remain strong in the following quarters amid a strong rebound in the global economy.
The company also mentioned the possibility that proceeds from asset sales may support the rollout of these buybacks while Diamondback could also issue special dividends instead of repurchasing shares if the first alternative is considered a better choice as a result of how the price of the stock behaves in the future.
Moving forward, can this news trigger a sustained uptrend in the price of Diamondback Energy stock? In the following article, I’ll take a closer look at FANG’s price action and fundamentals to outline plausible scenarios for the future.
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Diamondback Energy Stock – Technical Analysis
The price of Diamondback Energy stock has been attempting to make a comeback in the past few weeks following the sharp decline that the price experienced back in July amid weak crude prices.
The $82 level seems to be the resistance to overcome at the moment and this is exactly where today’s pre-market uptick is leading the price action. Interestingly, the stock tagged this threshold two days ago during a high-volume trading session and managed to break above its short-term moving averages for the first time since July.
Momentum oscillators for the stock have turned positive as the MACD has just climbed to positive territory accompanied by positive histogram readings while the Relative Strength Index (RSI) is sitting on bullish territory at 57.
Moving forward, a break above the $82 level could result in the continuation of the current uptrend. This scenario seems highly likely based on the technical readings outlined above and the news cited above.
Diamondback Energy Stock – Fundamental Analysis
Sales of Diamondback Energy were surging at a fast pace in the years that preceded the pandemic, moving from $527 million back in 2016 to $3.8 billion in 2019 at a compounded annual growth rate of 93.2%.
During that same period, the company managed to ramp up its gross margins to 82% although its bottom-line margins remain on a downtrend.
In the past year, Diamondback generated $1.78 billion in positive EBITDA during a year that saw oil prices declining to negative levels. The company has been deploying billions of dollars in capital expenditures in the past few years and that has kept a lid on how much it has been able to give back to shareholders.
This plan to deploy $2 billion in buybacks and dividends seems feasible as long as the company trims its capital expenditures or sells some of its less productive assets. Considering the size of the program, which accounts for nearly 14% of the firm’s current market capitalization, the impact on the stock price could be sizable.
At the moment, the stock is being valued at only 6.5 times its forecasted earnings per share for the next twelve months while its enterprise value is standing at $22.5 billion. If we estimate a future EBITDA of around $2 billion – in line with FANG’s historical performance – that would result in an EV/EBITDA multiple of 11.
By the end of the latest quarter, the firm had $7.4 billion in long-term debt on assets of $22.3 billion including $344 million in cash and equivalents. This elevated debt may be one of the reasons why Wall Street is assigning such low valuation multiples to the firm. However, the firm seems more than able to cover its interest expenditures amid its strong EBITDA margins.
Given Diamondback’s seemingly conservative current valuation and its positive past performance, the deployment of this $2 billion repurchase program could be the catalyst needed to push the price of FANG stock higher in the following weeks and a break of the $82 threshold might be a clear signal that bulls are on the move.