Why Diamondback Energy Stock Jumped 12% in the First Half of 2022


What happened

Shares of Diamondback Energy (FANG -4.21%) gained 12.3% in the first half of 2022, according to data provided by S&P Global Market Intelligence. That was an impressive showing by the oil company, especially considering that the S&P 500 tumbled 20.6% during that period.

Fueling the oil stock‘s rally were higher prices, which gave it the cash to return more money to its oil shareholders.

So what

Crude oil prices skyrocketed more than 40% during the first half of 2022. Oil supplies tightened due to underinvestment during the pandemic and Russia’s invasion of Ukraine. Those supply issues arose when demand was strengthening, fueled by the continued easing of pandemic-related travel restrictions.

Higher oil prices enabled Diamondback Energy to generate a gusher of free cash flow this year. The oil company produced $974 million of free cash flow during the first quarter, giving it a windfall to return to shareholders thanks to its capital allocation plan.

The company is allocating that cash across three buckets:

  • A growing base quarterly dividend: Diamondback increased its payout three times already this year, by 20% in February, 17% in May, and 7.1% in June. It continues to deliver industry-leading dividend growth.
  • A variable dividend: The company declared its first variable dividend in May and its second in late June. Combined with the base dividend, Diamondback offers an annualized dividend yield of more than 10%.
  • Share repurchases: The company has repurchased more than $250 million in stock this year.

Diamondback Energy also increased the amount of cash it plans to return to investors in the future. It now aims to send them up to 75% of its quarterly free cash flow across those three buckets, up from 50% to start the year. The oil company will use the remaining funds to continue strengthening its financial profile.

Finally, Diamondback Energy simplified its corporate structure by agreeing to acquire all the outstanding shares of its midstream arm Rattler Midstream. The all-stock deal will give the company full ownership of that entity and its associated cash flow.

Now what

This year’s spike in oil prices has Diamondback Energy generating much more cash than it needs to run its oil and gas business. It’s returning a growing portion of that windfall to shareholders across a fast-growing base dividend, sizable variable dividend, and share repurchases. That makes it an excellent way for investors to cash in on higher oil prices this year.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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