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It’s Deal Time for Permian Shale Stocks

by | Apr 11, 2023

Yesterday, I explained the opportunity in Permian shale stocks. Exxon Mobil (XOM) is exploring a possible deal for shale giant Pioneer Natural Resources (PXD). Shares of PXD popped as much as 8% on the news Monday. 

The news also helped push shares of other Permian shale stocks like Occidental (OXY) and Devon Energy (DVN) higher.

This morning, The Wall Street Journal reported that more deals are expected across the energy patch in the year ahead. 

Today, I want to walk you through it all, and give you a great stock to own to take advantage of the M&A trend.

The Deals for Permian Shale Stocks Will Heat Up

Truist analyst Neal Dingmann states that the Permian Basin is the best place for deal-making in the oil-and-gas sector. 

Over the last few years, shale producers have benefited from lower costs, solid margins, and stable demand. 

Meanwhile, larger names like Exxon and Chevron (CVX) have built massive cash reserves that they haven’t adequately deployed. 

Oil companies have paid down debt, returned capital to shareholders through dividend hikes and buybacks, and created fortress balance sheets. But they haven’t adequately deployed capital in a manner that has increased production by a significant amount. 

Given the political climate and concerns about inflation and cost of capital, most energy names have been content to ride out the current business cycle. 

But the macro-economic picture has changed. Higher inflation has eaten into margins. The U.S. government hasn’t provided support for oil giants by refilling the Strategic Petroleum Reserve (SPR). 

OPEC, meanwhile, has pressed for higher oil prices in order to support their member nations’ budgets. 

A rising tide lifts all boats. (Note: I initially wrote this sentence the opposite way, boy am I tired.) That’s the case with both increasing energy prices, and increasing premiums that a company like Exxon might pay for a company like Pioneer. 

Meanwhile, this could put more pressure on Berkshire Hathaway (BRK.A) to accelerate its timeline to purchase 50% of shale giant Occidental. 

But there’s another name that I think investors need to consider.

Sink Your FANG Into This Permian Shale Stock

Investors looking for another successful player in the Permian Shale space look to
Diamondback Energy (FANG). The Texas-based oil-and-gas operates in the Permian Basin in Texas and New Mexico.

The company owns roughly 2.03 billion barrels of oil equivalent thanks to a 14% jump in discovery. 

While it’s currently producing about 70% of its assets, it’s still sitting on a large swath of unexploited oil reserves. Diamondback also owns roughly 57% in Venom Energy (VNOM). 

Diamondback has significant inventory in a highly profitable region for oil output (net margin sits above 45%, according to GuruFocus). 

But the company also has a very strong management. It has a near-perfect F score of 8, and executives have provided significant cash flow to investors over the last year. 

In Q4 2023, Diamondback returned roughly $861 million to its shareholders, with roughly 39% of that effort consisting of buybacks. In addition, the company has hiked its dividend by an average of 10% annually over the last five years. 

The current dividend is extremely safe. In fact, that dividend is easily covered by oil prices sitting between $40 to $45 per barrel. 

It would take a significant economic downturn to push crude prices lower. By that point, I’d anticipate that the Biden administration would refill the SPR or OPEC would continue with cuts. 

The average price target for Diamondback sits at $173 on Wall Street. But a push in oil prices back toward $100 per barrel at the end of the year could easily lift this stock well above $180. 

Add on an uptick in valuations in shale assets, and we could see this stock rally as high as $200 (in line with expectations from Truist Financial and Piper Sandler). 

Diamondback could become an acquisition target as well – for majors like Chevron or Exxon as they look to deploy capital. 

There’s a lot of money to be made in the Permian shale stocks, and Diamondback could pay serious dividends for investors.

To your wealth,

Garrett signature
Garrett Baldwin

P.S. For monthly in-depth market analysis + value and income picks, become a member of Tactical Wealth Investor right here.

Market Momentum is Yellow

Another choppy day in the market has investors and traders focused on the 4,100 support level. Tomorrow, we’ll get an update on the Consumer Price Index (CPI) and the minutes from the Federal Reserve’s meeting in March. It could be a wild day, and it’s worth being very cautious in this environment.

*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.

WRITTEN BY<br>Garrett Baldwin

Garrett Baldwin

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