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Bull of the Day: Diamondback Energy (FANG)

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Diamondback Energy, Inc. (FANG - Free Report) is ready for the economy to re-open after COVID. This Zacks Rank #1 (Strong Buy) is expected to grow earnings by 59% in 2021.

Diamondback is an independent oil and natural gas company headquartered in Midland, Texas. It explores for oil, onshore, and natural gas in the Permian Basin in West Texas.

Diamondback to Buy QEP Resources

With the coronavirus pandemic hitting the energy industry hard, it has meant that some companies have been able to make timely acquisitions.

On Dec 21, Diamondback announced it would acquire QEP in an all-stock transaction valued at about $2.2 billion.

It would acquire QEP's debt of $1.6 billion as of Sep 30, 2020 in addition to its other assets.

The deal will add material Tier-1 Midland Basin inventory and will be accretive in 2021 on cash flow per share, free cash flow per share and leverage.

QEP's Williston assets will be considered non-core and will be used to harvest cash flow or it will be divested, with potential proceeds being used towards debt reduction.

Earnings Estimates On the Rise

First first time in a long time, Diamondback Energy is a Zacks Rank #1 (Strong Buy) stock.

Only 3 other exploration companies, out of 49 in the industry, are Zacks Rank #1 (Strong Buy) stocks right now.

They are CNX Resources CNX, Highpoint Resources HPR and W&T Offshore (WTI - Free Report) .

How did Diamondback get the #1 Rank back?

The analysts have started raising earnings estimates again.

5 were raised in the last 30 days for 2021 but 1 was already raised in the last week, while another analyst also lowered in the last week.

But this has pushed the 2021 Zacks Consensus Estimate up to $4.85 from $4.20.

Diamondback is expected to make $3.04 in 2020 so that's earnings growth of 59%.

While some can be attributed to the recent acquisitions, not all of the gains are due to that.

It's still well below 2019, or pre-pandemic, when Diamondback made $6.93. But it looks like 2020 will be the bottom in earnings in the energy sector.

Shares Soar on Recovery Hopes

Energy was one of the hardest hit sectors by the pandemic. And it was one of the few where the stocks didn't immediately bounce back in a "V" recovery off the March lows.

Diamondback shares are still down 31% over the last year.

But, over the past 3 months, the shares have soared 104% on recovery hopes for the global economy.

Yet, Diamondback is still cheap with a forward P/E of 12.

Because of the increase in earnings, it also has a PEG ratio of just 0.5. A PEG under 1.0 usually indicates a company has both value and growth.

Do You Still Get a Dividend?

Diamondback has one of the strongest balance sheets in the Permian.

As of Sep 30, 2020, it had net cash of $68 million with no borrowings on its credit facility. Its stand-alone liquidity was $2.068 billion.

Additionally, it rewards shareholders by paying a dividend. Yes, even during the pandemic. It is currently yielding 2.6%.

Diamondback will report fourth quarter 2020 results on Feb 23, 2021.

For investors looking to dive into the energy trade, Diamondback is certainly one to keep on your short list.

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