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Earlier this week our portfolio company Diamondback Energy (FANG), announced an oil megadeal by acquiring its fellow Permian Basin fracking company Endeavor Energy Resources LP in a cash plus stock deal worth $26 billion. Market reaction to the deal was very positive helping Diamondback’s stock gain 17.65% this week and register a gain of 88.53% since we added the company to the model portfolio in September 2021.
Diamondback Energy shareholders will own 60.5% of the combined company after the deal is consummated and it will have the ability to produce 816,000 barrels of oil per day (816 MBOE/d), making it the third largest producer in the Permian Basin. What attracted us to Diamondback Energy was its commitment to return value to shareholders instead of constantly increasing its CapEx spending to increase production as was often the case with frackers during the previous oil cycle.
Following the announcement of this deal, Diamondback said that it will return at least 50% of its free cash flow to shareholders through buybacks and dividends. This is a drop from the 75% it had previously committed to return to shareholders but makes sense because some of the cash flow could be used to reduce debt. The company also increased its annual dividend by 7% to $3.60 per share.