Diamondback Energy Inc. will return 50% of the free cash flow (FCF) it generates to stockholders by the fourth quarter, accelerating previously announced plans which analysts believe will likely boost the Permian Basin operator’s stock.

“Diamondback is accelerating its previously announced capital return program due to continued strong operational performance and improved capital efficiency, a supportive macro backdrop and increasing financial strength,” commented Diamondback CEO Travis Stice in a company release announcing the move on Sept. 16.

To complement the acceleration of its capital return program, Diamondback also said Sept. 16 it had initiated a share repurchase program for the company to acquire up to $2 billion of its common stock, effective immediately.

“While our consistent and growing base dividend remains our primary means of returning capital, we plan to opportunistically repurchase shares of our common stock with the remaining free cash flow allocated to our stockholders when we expect the return on that repurchase to be well in excess of our cost of capital at mid-cycle commodity prices, which is the case today,” Stice said.

The follow-through by Diamondback on its commitment of returning 50% of FCF to equity holders should drive the name higher, according to analysts with Tudor, Pickering, Holt & Co. (TPH).

“We’re expecting a positive response and outperformance today as Diamondback crystallized (and moved forward to Q4’21) plans to return 50% of FCF to shareholders going forward,” wrote TPH analysts in a Sept. 17 research note. 

“FANG remains a top pick in the SMID cap space, and yesterday’s announcement will likely continue to attract capital to the name for investors focused on shareholder returns,” the analysts added.

Stice also noted in the company release that Diamondback expects to close on its previously announced sale of the North Dakota assets it acquired through its $2.2 billion purchase of QEP Resources in the next few weeks, timing dependent on final government approval. Net proceeds from the sale, along with cash on hand, will be used to pay off the remaining $650 million in outstanding callable debt in Diamondback’s capital structure, according to Stice.

“As stated previously, we intend to be flexible on returning capital through the method our board believes presents the best return to our stockholders at that time,” Stice added. “While the form of return may be flexible, we remain committed to consistently returning free cash flow to stockholders.”

Comments