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This Energy Stock Has Doubled in 2021 — Could it Keep Rising?

Diamondback Energy (NASDAQ: FANG) has more than doubled in 2021 so far, but there's reason to believe it could keep climbing. In this Motley Fool Live video clip, recorded on Oct. 4, contributors Jason Hall and Matt Frankel discuss Diamondback's performance and future potential.

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Matt Frankel: This is Diamondback Energy. Jason, take it away.

Jason Hall: I love it. It's funny guys, I was telling in Slido. I was actually trying really hard to not pick a couple of energy stocks to include in this. But the end of the day, I decided for two reasons. Number one, there were a ton of energy stocks that have doubled or more this year. There are a lot of oil and gas stocks that have done that. If you look in the energy sector, all you're going to see as oil and gas. Renewable energy companies, solar, wind, all of those companies are not actually in the energy sector, they're either tucker industrials because they're manufacturers.

I thought we probably have a lot of members that are looking at the sector as an opportunity, as a place to invest, so talking a little bit about it might be an interesting thing.

Number two, I really wanted to talk about Tellurian. I'm going to talk about Tellurian (NASDAQ: TELL) and it makes sense to bring in another traditional oil and gas company in here. Diamondback Energy, ticker FANG, F-A-N-G. What is this? This is an independent oil and gas producer. It has some other ownership in midstream assets, like the toll booth pipeline companies and logistics companies that move the product around. Those are some subsidiaries that it has, but its primary business is exploration and production, mainly of oil, also some natural gas, and it lives in the Permian Basin.

This is the massive West Texas reserves that are primarily shale that were discovered a long time ago. Geologists have known for decades that there was a tremendous amount of oil there. The issue has been the technology and their capability to be able to access it. All of that change with hydraulic fracking and some other technologies to get access to that. Fast-forward to today, what's happened? This is a company that has focused on this area. It's steadily added more and more acreage. It's leveraged technology to drive its production costs down.

Just to quote you some numbers here. Second quarter, the company generated $2.40 per share in earnings. I think something like $400 million in free cash flow last quarter, and that was selling oil for $45.63 a barrel. That was its realized price. Oil is over $70 a barrel now. This is a company that has very, very low production costs. When you're in a business producing oil, lower production costs is your key to survival and how you can thrive when you get in an environment like we have today.

What do we have today? Global transportation has recovered pretty substantially. Air travel and a lot of that hasn't recovered, but ground transportation in most of the world has recovered. Economic activity has also increased, so that means industrial use of oil and gas. You think about things like fertilizers, car tires, plastics, that kind of thing, has increased, so demand has increased, but global production has not fully recovered, that's why prices have come up so substantially.

Now, why did I pick this company to even put on The Rank versus some of the others? I think the CEO of this company and their leadership has done a really good job. Travis Stice has been there for about a decade now. This is a company that really put in a different approach as a producer to paying a dividend. They have a variable dividend policy now. Their goal is to pay out about half of their operating cash flow and dividends. The dividend will go up and down based on oil prices and what they're able to realize the profits. That's a really smart way. If you're going to pay a dividend in this industry, that's a smart way to do it and not get your balance sheets in a mess.

With oil prices continuing to rise with a really good management team in place, it's proven to be disciplined. I think this is one of the few independents that offers some things about it to be compelling as a long-term investment even right now.

Jason Hall owns shares of Tellurian Inc. Matthew Frankel, CFP 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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