Diamondback Energy (FANG) has the second-highest percentage of “buy” ratings among the constituents of the S&P 500 Index (SPY), based on a FactSet report. Assurant, Inc has the highest percentage of “buy” ratings.
Diamondback Energy stock has a “buy” rating of 97%. In 2019 so far, FANG has fallen just 1.5%.
FANG is an upstream stock that operated with a production-mix of 64.6%, 18.8%, and 16.7% in oil, NGLs (natural gas liquids) and natural gas, respectively, in the third quarter. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) tracks upstream stocks and has declined 10.3% this year.
Stocks that are the top constituents of the S&P 500 in the upstream subsector—including ConocoPhillips (COP), EOG Resources (EOG), and Occidental Petroleum (OXY)—have returned 4.3%, -4.1%, and -34.6%, respectively, this year. The upstream subsector has been an underperformer among the energy subsectors.
Diamondback 2020 guidance
In Q3 2019, Diamondback Energy’s total production grew 133.5% on a year-over-year basis. Diamondback Energy production doubled at a time when other oil producers had lowered production growth guidance. Next year, its production is expected to rise by 12.8%. Oil prices could rise in 2020. FANG’s oil output growth might increase its top line.
FANG also expects to generate positive free cash flow with WTI (West Texas Intermediate) crude oil prices more than $45 per barrel, realized natural gas prices at $1.50 Per Mcf and NGLs (natural gas liquids) at $13 per barrel in 2020. NGLs prices follow oil prices. Since Q2 2018, Diamondback has reported negative free cash flow.
Diamondback Energy’s recent Investor Presentation report also outlined that “unhedged realized oil prices expected to improve to ~100% of WTI in 2020.” The price differential between WTI at Cushing and WTI at Midland also impacts upstream stocks’ profitability in the Permian Basin. WTI Midland is a benchmark for oil produced in the Permian Basin. Usually, WTI at Midland prices remains below WTI at Cushing. A pipeline bottleneck pushed this discount to as high as $17.8 per barrel in August 2018.
Wall Street analysts’ update
On December 6, Barclays reduced its price target on FANG by $64 to $125. And last month, Northland Capital Markets and J.P. Morgan reduced their target prices by $25 and $21 to $105 and $118, respectively. On November 20, Moody’s upgraded Diamondback Energy’s unsecured notes rating to “Ba1.”
Yesterday, Diamondback Energy closed at $91.31. Analysts’ mean price target suggests an upside of 36.1% in the next 12 months. And among Reuters’ 35 analysts surveyed, only one has a “hold” recommendation on the stock. The remaining have a “strong buy” or “buy” recommendation for FANG.
Moving averages and implied volatility
Diamondback’s 200-DMA (day moving average) at $96.14 level is a significant resistance zone. Since June, stock prices have failed to move above the 200-DMA. Yesterday, FANG closed 9.4%, 11%, and 3.7%, above the 20-, 50- and 100-DMAs, respectively. Technically, when prices move above the short-term moving average, a short rally might be possible.
Compared to Diamondback’s technical indicators, WTI crude oil active futures were 3.7%, 7%, 8.7%, and 5.9% above the 20-, 50-, 100- and 200-DMAs, respectively. If oil prices rise further, Diamondback Energy could test its 200-DMA.
Also, on Thursday, FANG’s implied volatility was at 32.3%. In 2019, its implied volatility averaged 36%. Like Cabot Oil and Gas (COG), FANG’s could be a less risky investment. See Could Cabot Oil, and Gas Trouble Rise In 2020? to find out more.