What happened
Shares of Diamondback Energy (FANG -0.77%) rose 17% in January, according to data from S&P Global Market Intelligence.
Diamondback doesn't report fourth-quarter earnings until Feb. 23, so the move in the stock price likely mirrored the rise in oil prices to start 2022.
Image source: Getty Images.
So what
Since the beginning of 2022, oil prices have risen nearly 20%, from $76 per barrel to about $91 as of this writing. So it's perhaps no coincidence that a pure-play exploration and production company like Diamondback saw its stock rise by nearly the same amount.
The company sold off its Williston Basin assets back in October, as well as some gas-gathering and water midstream assets, to become a pure play in the low-cost Delaware and Midland basins of the Permian Shale.
Diamondback has also been paying down debt in 2021. With the remaining assets in its most efficient basins, the company is primed to make big-time cash flows in 2022 should oil maintain its high prices. At $80 per barrel, management projects $3.5 billion in free cash flow for 2022. At $90 per barrel, that figure would surge to $3.9 billion, versus just a $23.6 billion market cap today.
Given the better-than-expected demand amid the strong U.S. economy, lower investment in oil exploration on the part of producers, and tensions between big producer Russia and Ukraine, oil prices have been on the rise, with some analysts predicting $100 oil in short order.
Now what
Now that Diamondback has shored up its balance sheet, management is going to raise returns to shareholders in 2022. The company recently raised its fixed dividend to $2 annually, up from $1.85 last year, and now forecasts returning up to 50% of free cash flow to shareholders in either variable dividends or share repurchases, with the rest going to further debt paydown.
Low-cost shale players seem like good bets as long as oil prices stay high, and Diamondback is definitely one of several top-tier pure shale plays after its divestitures. If you believe in a sustained high oil price or want to hedge against a further price shock, investors could do worse than Diamondback.
