Diamondback, Expand Energy Named Top Picks at Scotiabank

Investing.com -- Scotiabank sees significant upside in Diamondback Energy and Expand Energy, citing their capital efficiency, durable cash flow potential and undervalued asset portfolios as it identifies investment opportunities across the U.S. oil and gas sector.

The brokerage assigned both companies Sector Outperform ratings, setting a $250 price target for Diamondback Energy and a $111 target for Expand Energy. The targets imply potential returns of about 38% and 29%, respectively, based on share prices in Scotiabank’s October 7 coverage summary.

Diamondback stands out for its low-cost operations and extensive drilling inventory in the Midland Basin, where Scotiabank expects it to grow production while spending less of its cash flow than its peers. The brokerage expects the oil producer to reinvest about 34% of discounted cash flow through fiscal 2028 to achieve annual production growth of 5%, compared with a peer-group median reinvestment rate of about 52% just to maintain output.

The company has more than a decade of low-breakeven drilling inventory, including undeveloped acreage acquired through Endeavor. Scotiabank estimates Diamondback’s shares trade at a 38% discount to its proved developed plus net asset value of $250 per share, arguing that investors are underestimating its ability to grow production while retaining cash for debt reduction, dividends and share buybacks.

For Expand Energy, the investment case rests on its position as the largest independent natural gas producer in the United States and its expanding commercial operations following the acquisition of Twin Eagle. Scotiabank said the company’s combination of basin diversification, below-peer reinvestment requirements and broader marketing capabilities could deliver more durable free cash flow than a conventional upstream business.

Expand Energy’s portfolio spans the Haynesville, northeastern Pennsylvania and southwestern Pennsylvania. Its Haynesville assets provide access to Gulf Coast liquefied natural gas export terminals and power markets, while its Appalachian operations offer low-cost dry-gas production and exposure to natural gas liquids.

Scotiabank expects Expand Energy to benefit as LNG demand and power consumption increase, although it cautioned that rising gas supplies from the Permian Basin could limit price gains in the near term. The brokerage sees the Twin Eagle acquisition as an opportunity to improve gas marketing, transportation and storage capabilities, allowing the company to capture more value beyond production.

Expand Energy’s valuation also underpins the recommendation. Scotiabank estimates the company will generate free-cash-flow yields of 11.8% in fiscal 2027 and 17% in fiscal 2028, above gas-sector averages of 9% and 12.7%, respectively. It expects the valuation gap to narrow as the company converts its commercial advantages into sustained cash generation.

The brokerage said both companies offer investors exposure to efficient U.S. energy producers, but their near-term drivers differ: Diamondback’s case centres on low-cost oil production and inventory depth, while Expand Energy’s hinges on natural gas demand, Gulf Coast market access and the expansion of its integrated commercial platform.

Scotiabank identified concentrated family ownership, single-basin exposure and uncertainty around further consolidation as risks for Diamondback. For Expand Energy, execution of its commercial strategy and competition from growing Permian gas supplies remain key factors to watch.

Original Article

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