Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Why Diamondback Energy Stock Rallied 21% in December

By Matthew DiLallo - Jan 4, 2021 at 3:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The oil producer ended the year on a high note.

What happened

Shares of Diamondback Energy ( FANG 6.80% ) surged 21.1% in December, according to data provided by S&P Global Market Intelligence. Fueling the oil stock's rally was a double dose of acquisition news

So what

Diamondback Energy joined the oil patch's recent M&A wave with not one, but two deals last month. The big one is an all-stock transaction to acquire QEP Resources ( QEP ) for $2.2 billion, including its $1.6 billion in debt. On top of that, Diamondback agreed to buy the assets of Guidon Energy in a cash-and-stock deal valued at around $1 billion. Both deals are accretive to the company's cash flow and free cash flow per share, its leverage metrics, and will reduce its reinvestment ratio in 2021.

A silhouette of an oil pump in an oil field at sunset.

Image source: Getty Images.

The two deals will add more than 81,500 net acres in the Midland Basin side of the Permian Basin to Diamondback's portfolio. They'll also add 95,000 barrels of oil equivalent per day (BOE/D) to its production capacity. That will push the company's proforma Midland Basin acreage position to 276,000 and its production on that side to 228,000 BOE/D, making it the second-largest player in the region. Meanwhile, the acquisitions will increase its exposure to the Midland Basin from 56% of its acreage to 64%. 

Now what

Diamondback Energy continues to gobble up rivals in the Permian Basin. The company believes that these deals will enhance its scale in the Midland, which will reduce its costs so that it can produce more cash at lower oil prices. If oil prices cooperate, these deals could pay dividends by fueling further gains in Diamondback's stock price. However, if they tumble, its shares will take a hit, especially since Diamondback is taking on nearly $2 billion in additional debt to make these acquisitions, even if they'll reduce its overall leverage ratio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Diamondback Energy, Inc. Stock Quote
Diamondback Energy, Inc.
FANG
$115.59 (6.80%) $7.36
QEP Resources, Inc. Stock Quote
QEP Resources, Inc.
QEP

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
633%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/08/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.