Market Overview

BofA: Diamondback Energy's Buyback Program Should Bring Upside

BofA: Diamondback Energy's Buyback Program Should Bring Upside

Diamondback Energy Inc (NASDAQ: FANG)'s share price has appreciated 3.5 percent over the past month, outperforming the S&P 500.

The shares could rise further given the recent announcement of a large $2-billion buyback program, which represents 12 percent of the company’s market cap, according to Bank of America Merrill Lynch.

The Analyst

Asit Sen maintained a Buy rating on Diamondback Energy and raised the price target from $165 to $170.

The Thesis

The hydrocarbon exploration company has cash remaining after allocating maintenance capital for growth projects and cash returns, Sen said in a Tuesday note. (See the analyst's track record here.) 

Diamondback has significant ability to return cash to shareholders given its “deep top-tier inventory," the analyst said. 

The company projected free cash flow of $750 million for 2020, and the recently announced buyback reflects management’s confidence in this outlook, Sen said. Every $10-per-barrel increase in oil price boosts the company’s annual cash flow by $384 million, the analyst said. 

The company has sustained best-in-class capex at 40 percent of annual cash flow versus the peer group average of 78 percent, according to BofA. 

Diamondback Energy has achieved a three-year CAGR in production growth that is 700 basis points higher than peers at higher cash margins, Sen said. More importantly, this CAGR gives it an inventory life of more than 20 years, the analyst said. 

The buyback program is not just significant: it has a clear timeframe of completion by Dec. 31, 2020, which should lend upside to the company’s shares, according to BofA. 

Price Action

Diamondback Energy shares were trading up by 3.17 percent at $113.14 at the time of publication Tuesday. 

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