Skip to Content
Stock Strategist

Don't Be Scared of Diamondback and Viper

Here are two undervalued ideas to ride out the challenging times in energy.

Mentioned: ,

The coronavirus outbreak has created a huge dent in near-term oil demand and triggered a meltdown for commodity prices. The market appears to be extrapolating the current oil environment to infinity, and that doesn’t make any sense: Shale still accounts for over 10% of the global supply stack, and unless prices rebound to encourage drilling, the painful glut will eventually become a shortage. As a result, oil stocks are cheap. Our top upstream pick, Diamondback Energy (FANG), hasn’t traded at this level since shortly after its 2012 initial public offering, and its publicly traded mineral rights subsidiary, Viper Energy Partners (VNOM), has reached an all-time low.

Both are pure plays on some of the best U.S. shale acreage. Diamondback checks many of the boxes for investors, with a strong balance sheet, an underappreciated narrow economic moat, and an increasingly prominent focus on free cash flow and environmental, social, and governance concerns. Viper presents an attractive way to piggyback on Diamondback’s attractive Permian acreage. Diamondback is the operator on over 50% of Viper’s acreage and offers exposure to a mineral rights market that could double in size with potential for further upside. Viper is the industry leader in consolidating the royalties market, having spent $2.4 billion in acquiring rights in the past few years.

Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.