This FANG Stock Forecast article was written by Donovan Joseph, a Financial Analyst at I Know First.

Summary

• Through international supply chain and other issues in the gas crisis, FANG’s domestic location has thrived taking advantage of boycotts and a lack of international supply
• The company has seen increases in many important metrics including FCF through 2022
• Despite high gas prices, FANG and its competitors hit bearish trends

Overview

Diamondback Energy Inc. (FANG) is a domestic oil and gas company based in Midland, Texas. It focuses on the research and development of oil and natural gas reserves in the Permian Basin in Texas. 

Gas Prices Surpass $5 in June

Before delving into the stock, it is important to consider the industry and consider trends in gas prices. Throughout 2022, gas prices have progressively increased and hit record highs as the U.S. and other countries continue their sanctions on Russia. These sanctions have caused countries to rely more on domestic production. In early June, the U.S. scrambled as gas prices surpassed an average of $5 per gallon. This milestone of the gas crisis has caused a frenzy for U.S. consumers and has consequently left many looking for different alternatives to transportation. Additionally, many analysts believe that gas and oil prices have peaked and will soon begin to go down to moderate levels. This is because countries have already placed their sanctions on Russia. Gas companies are incentivized to produce more gas to fulfill supply shortages. As gas supplies increase prices will be driven back to normality.  

FANG Quarterly Revenue and Earnings

The loss in demand for Russian oil has expanded the U.S. domestic oil industry. This has allowed many companies, including Diamondback, to see a significant uptick in earnings and overall profits. The company has seen rises in Free Cash Flow from 2018 to 2022 with the metric up over 200% over the past four years. It increased 26% Quarter over Quarter and the company utilized this to improve the stock’s return of capital. The utilization of FCF led to a total return of capital in Q1 of 2022 of $555 million. Part of this was due to the company deciding to increase the base dividend as well as implement a variable dividend. Additionally, the company has recently seen a spike in revenue. It is apparent that despite the slow down of the oil company’s revenue in 2020 due to Covid, revenue bounced back up to this point. 

The consistently increasing consensus in earnings for the stock in the past four quarters causes the prediction for a high EPS for Q2. In the past quarter, the company beat the consensus by $0.69, significantly more than in past quarters as the EPS broke through from the relatively linear trend to an almost exponential one. The company is currently valued with a P/E of 8.63 which is roughly half that of the industry average.

Energy Stocks All Showing Similar Trends

Through the company’s strong numbers recently, FANG reached a relative peak on June 7, 2022, with a stock price of $160.40. However, as gas prices are believed to have reached their peaks, investors have shied away from domestic energy companies seen through the graph. FANG has quickly regressed to $122.29 per share. This was a similar date to the U.S. reaching an average gas price of $5, which is also why each of these stocks followed a similar trend of regression around the same date. Analysts have started considering the future outlook of gas and oil prices, as referred to above, and it is beginning to be believed that prices have peaked. Consequently, we see energy stocks follow a bearish trend as seen in the graph.

Valuation

Currently, FANG is trading at a trailing P/E of 8.63, a PEG ratio of 2.72, and an EV/EBITDA of 5.64. These numbers are fair, and as energy stock prices continue to fall their value will become more realistic. FANG’s strong trailing P/E ratio compared to its competition gives it an edge to succeed. If FANG’s earnings grow at the rate that analysts predict, a market cap of 30 Billion is attainable. Assuming that FANG maintains its total shares outstanding of 175.59M, a target price for FANG is set at approximately $170.85.

Conclusion

While this company is primarily inflated by a lack of international oil supplies, the modest E/P ratio and other strong and growing metrics along with the stock’s bearish trends over the past few weeks lead me to deem it undervalued. Therefore, while the stock will continue losing value in the short term, it is a good buy for long term value. Below is the I Know First AI powered FANG stock prediction for 1 month, 3 months and 1 year. It currently has a positive outlook for the long term, with a signal strength of 112.06 and a predictability indicator of 0.76 for the next year. 

Past Success With FANG Stock Forecast

On January 3, 2022, the I Know First algorithm issued a bullish forecast for FANG, with a 3-months signal of 20.17 and a predictability indicator of 0.62. The AI-driven FANG stock forecast was successful on a 3-month time horizon resulting in 28.36% return.

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Please note – for trading decisions use the most recent forecast.