Why Diamondback Energy Stock Rallied 21% in December


By Matthew DiLallo, MotleyFool

What happened

Shares of Diamondback Energy (NASDAQ:FANG) 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 (NYSE: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.


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.

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