Up 22% in this bear market, is Diamondback Energy still a winner?

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what happened

The S&P 500 2022 ended 20% below its peak in early January, placing it in a bear market. Most stocks succumbed to the bear market and ended the year sharply lower.

however, Diamondback Energy (Fang 0.33%) That bucked the trend. Its stock price has risen more than 22% since inception In a bear market As of the end of the year, according to information provided by S&P Global Market Intelligence. Here’s a look at what fuels Oil stocksIts outperformance and whether it can continue to win.

so what

Diamondback Energy cashed in on higher crude oil prices last year. The oil company generated a record $1.3 billion in free cash flow in the second quarter as oil prices rose after Russia’s invasion of Ukraine. It continued its free-cash-flow gasher in the third quarter, generating another $1.2 billion.

The oil company has returned a growing portion of its growing free cash flow to shareholders throughout the year. It has set a new minimum target of returning 75% of its excess cash through base dividends, variable dividends and share repurchases. This was an increase from the initial target of 50%. As a result of that policy, the company paid significant dividends and repurchased $1.22 billion in shares through the third quarter.

The company uses its remaining free cash flow to reduce debt and make acquisitions. It ended the third quarter with its net leverage ratio down to 0.72 times, low for an oil company. Meanwhile, it acquired Firebird Energy and Lario Permian for a combined $3.3 billion in cash and stock. Diamondback also privatized its midstream subsidiary, Rattler Midstream, in an all-stock deal.

what now

Higher oil prices were a major catalyst for Diamondback Energy’s efficiency during the bear market. Although crude prices have cooled in recent months due to macroeconomic concerns, Several factors could send oil rebounding back to triple digits in 2023. Higher oil prices should enable Diamondback Energy to produce another gusher of free cash flow, giving it more money to return to shareholders.

The company is better positioned to capitalize on higher oil prices in 2023 thanks to its recent acquisitions. Diamondback Energy estimates that Firebird and Lario will increase its cash flow by $570 million in 2023, assuming stable oil prices. If oil is higher than the company projects, those deals could give its free cash flow an even bigger boost. Because of that, if oil strengthens, the Diamondbacks should have the fuel to continue producing winning returns.

Matthew DiLalo has no position in any of the stocks mentioned. Motley Fool has no position in any of the stocks mentioned. Motley Fool has a revealing policy.


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