What happened

Crude oil ended 2019 on a high note. The U.S. oil benchmark price, WTI, jumped 11% for the month, closing above $61 a barrel. 

That uptick in the oil market fueled shares of U.S. shale-focused energy companies last month. Notable drillers Continental Resources (NYSE:CLR)Concho Energy (NYSE:CXO)Diamondback Energy (NASDAQ:FANG), and Parsley Energy (NYSE:PE) all rallied more than 10% in December, according to data provided by S&P Global Market Intelligence.

Several oil pumps in a row at sunrise

Image source: Getty Images.

So what

Oil prices surged to end 2019, thanks in part to a move by OPEC to curb its output. The group of oil-producing nations and their non-member partners agreed to hold back an additional 500,000 barrels per day of supply from the market starting in January. That reduction is on top of the 1.2 million barrel-a-day cut the group approved in October of 2018. This additional production curb will help offset the growing oil supplies coming from producers in the U.S.

That rally in the price of crude oil helped perk up the stock prices of U.S. oil drillers. Continental Resources, for example, rallied 11% last month as $60 oil is the sweet spot for the company. At that oil price point, Continental estimates that it can generate $5 billion in cumulative free cash flow via its five-year vision plan. That would give it the funds to achieve its debt reduction goal as well as return cash to investors through its recently initiated dividend and share repurchase program. 

Diamondback Energy, meanwhile, rallied 20% last month thanks to higher crude prices. That's because it can thrive on a much lower oil price in 2020. In the company's view, it can support its drilling program and dividend at $45 oil this year. As such, Diamondback estimates that it can produce $675 million in free cash this year if oil averages $55 a barrel, with even more at its current price above $60. That will give it the funds to make quick work of its share repurchase authorization, which is why analysts believe Diamondback Energy could be a big winner in 2020

Concho Resources' stock rebounded about 21% last month as shares continued their recovery from a nasty tumble earlier in the year. One of the drivers of the company's rebound has been its stock repurchase program, which it jump-started by selling a non-core asset. With crude prices now in the low $60s, the company is on track to generate an estimated $750 million in free cash flow this year, which it can use to buy back even more shares. 

Parsley Energy enjoyed the biggest rally of this group as its stock surged 26% last month. That helped the driller recover from its plunge in October, fueled by an agreement to acquire rival driller Jagged Peak Energy. Investors initially punished Parsley Energy because they were growing tired of oil companies pursuing growth at all costs. However, with crude prices rallying, the deal could pay bigger dividends in 2020 as it will enable Parsley Energy to generate more free cash that it could use for shareholder-friendly moves such as a buyback program. 

Now what

The uptick in oil prices last month was great news for these producers because it sets them up to generate lots of free cash in 2020. That will give them the funds to pay dividends and buy back shares, which could help drive their stocks even higher in 2020. However, the inverse is true, too, as a slump in the oil market this year would cut into the companies' cash flow figures as well as their ability to buy back shares. Because of that, risk-averse investors might want to focus their attention on energy stocks with less direct exposure to crude prices, such as pipeline companies.