Diamondback Energy

Methodology

Diamondback Energy's Permian Basin oil production earnings fluctuate dramatically with oil prices, requiring normalized assumptions for meaningful fair value calculations. The high-quality Permian assets provide above-average returns but don't eliminate commodity exposure. Fair value works best using mid-cycle oil prices ($65-75 WTI) rather than spot prices that swing with global supply-demand dynamics.

Methodology

Diamondback typically trades at very low PEG ratios (0.3-0.8x) during strong oil markets, reflecting market anticipation of inevitable commodity price normalization. Production growth remains modest as capital discipline prioritizes returns. PEG misleads for E&P companies because earnings volatility reflects oil price swings rather than Diamondback's superior Permian asset quality.

Methodology

Diamondback pays a substantial base dividend plus variable returns tied to free cash flow, yielding 4-8% depending on oil prices, making PEGY significantly more attractive than PEG. The company's return-focused framework prioritizes cash distributions over production growth. Total shareholder yield can exceed 10-15% during strong oil environments, making yield-adjusted valuations far more relevant.