I’m a growth investor, but I’m also a student of the market, and I continue to think that energy stocks — which had been out of favor for many years and only got going in November 2020 — are in the midst of a longer-term uptrend, notes Mike Cintolo, editor of Cabot Top Ten Trader.

Part of that is sentiment; indeed, who is overweight energy stocks these days? But a lot has to do with a sea change in the industry: Out is the debt-financed, drill-at-all-costs expansion, and in is flat-ish production, cost controls and massive free cash flow.

There are many names that look decent, but one I think will do well next year even in a modest energy environment is Diamondback Energy (FANG), whose Q3 results were amazing.

Free cash flow (cash flow less all CapEx) totaled $4 per share (~4% of the stock price), another dividend hike was announced (its third of the year; yield now 2.0%) and further debt reduction ($1.3 billion worth since March; no debt maturities for three years) occurred as output came in a bit above expectations.

But all of that pales in comparison to what’s possible in 2022 and beyond — the top brass believes it can keep output level with relatively tame CapEx (its breakeven oil price around $32!), and that should lead to ridiculous results, with nearly $13 of free cash flow per share even if oil averages $60 per barrel and natural gas averaged $3, and a ridiculous $19 per share if oil averages $80.

And shareholders will see half of whatever the total is paid back in dividends and share buybacks (with the rest slashing debt even further). Translation: Even if oil energy prices have hiccups, Diamondback is likely to pay out a few percent in dividends and buy back a few percent of the company, starting in Q4.

Just as impressive to me is how FANG (and others) have held up during the latest market decline — even as oil prices have fallen 16% and natural gas is down 30%, this stock and its peers are down far less than that.

And that’s the key: While the dividends are nice, what I’m betting on is a gradual change in investor perception by big buyers who are willing to build positions in these names (especially on dips), hiking the valuations as the boom-bust history of the industry is in the past. FANG certainly looks like one of the winners of the movement and I think 2022 will be fruitful.

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