Diamondback Energy (FANG 0.77%) has been an excellent investment over the last two years. Its shares have gained 246% during that time, compared to a 45% return for the S&P 500.
Diamondback is due to report first-quarter results on May 2. Is there still more room to the upside for this independent oil and gas producer?
The bull case: Rising earnings estimates and free cash flow
One thing smart investors know is that stock prices often move in tandem with earnings estimates and results. Wall Street analysts are constantly tinkering with their models, adjusting earnings estimates up or down based on company guidance, market conditions, or other relevant data. Here's a table highlighting how earnings estimates for the company have been steadily climbing as we get closer to earnings.
|Time of Estimate||Q1 2022||Full Year 2022||Full Year 2023|
|7 days ago||$4.71||$22.06||$18.84|
|30 days ago||$4.70||$20.74||$18.23|
|60 days ago||$4.43||$17.84||$15.88|
|90 days ago||$4.31||$17.00||$15.19|
As you can see, analysts have been boosting their estimates for Diamondback's earnings. Full-year 2022 estimates have jumped to $22.36 -- up 32% from 90 days ago. Estimates for 2023 are up to $19.27 -- 27% higher than 90 days ago.
What's more, Diamondback's free cash flow has surged in recent years -- reaching a record high of $1.65 billion in 2021. With crude oil prices still hovering around $100 per barrel, Diamondback may generate a record amount of free cash flow when it reports earnings on May 2.
The bear case: Richer valuation flashes warning signs
While earnings estimates and free cash flow paint a rosy picture, some data points to storm clouds on the horizon. One such figure is the stock's valuation. Its price-to-book value (PBV) is 1.84. This value isn't concerning in and of itself -- near peers like EOG Resources (2.95) and Pioneer Natural Resources (2.43) are more expensive. However, if you examine a seven-year chart, you'll see that Diamondback's long-term average PBV is 1.84 -- nearly identical to its current level.
That doesn't mean the stock is overpriced, but it does show that Diamondback has already bounced back from historic lows and is approaching a long-term equilibrium. Its share price could still go higher, but judging by PBV, Diamondback shares seem fairly priced.
Is it a buy?
A resurgence of COVID-19 cases in China has driven oil prices lower in recent weeks, which, in turn, has pushed share prices of oil and gas producers lower. Some analysts have backed off their predictions of $200 per barrel. However, others disagree. They note that travel demand has mostly returned to pre-pandemic levels in the United States and Europe.
As for Diamondback, I expect it to report another stellar quarter next week. If you're willing to ride out the volatility that comes with owning shares of an independent oil and gas producer, Diamondback can be a great name to add to your portfolio.