Wall Street analysts love Diamondback Energy (NASDAQ:FANG). Entering this year, 97% of the ones who covered the Permian Basin-focused oil producer rated its stock a buy or something equivalent. Fueling that view is the upside they see ahead for the oil company this year as it transitions into a cash flow generating machine. On average, analysts set a 12-month price target for Diamondback's stock at $124 per share, nearly 60% above the current price.

The energy company didn't disappoint analysts during the fourth-quarter as its results exceeded their lofty expectations. With the company set up for continued success in 2020, it could potentially deliver on their bullish expectations by skyrocketing this year.

Two oil pumps with a bright sun in the background.

Image source: Getty Images.

Drilling down into Diamondback Energy's fourth-quarter results

Diamondback Energy produced 195,000 barrels of oil per day (BPD) during the fourth quarter, which was up 5% from the third quarter and an eye-popping 50% year over year. That pushed the company's full-year average up to 187,700 BPD, which was above the high-end of its guidance range. Fueling that high-end result was the continued success of Diamondback's Permian Basin drilling program. 

That surge in oil output enabled Diamondback Energy to generate $1.93 per share of adjusted earnings during the quarter, which beat the analysts' consensus estimate by $0.11 per share. 

Diamondback also completed several strategic initiatives during the quarter, including refinancing some debt, trading acreage, and closing another drop-down transaction with its affiliate Viper Energy Partners (NASDAQ:VNOM). These moves further strengthened its balance sheet and resource position. That allowed the company to use its free cash to help fund the repurchase of $199 million in stock during the quarter. It has now repurchased nearly $600 million of stock since authorizing a $2 billion repurchase program, retiring 4% of its outstanding shares.

A look at what's ahead for Diamondback Energy

Diamondback plans to invest $2.8 billion to $3 billion on drilling new wells and building additional infrastructure this year. That spending level should enable the company to grow its oil production by 10% to 15% this year. The company believes it can generate enough cash to finance that capital program at $45 per barrel.

This plan sets Diamondback up to generate free cash flow above that oil price level. At $50 oil, for example, which is a bit below the current price, it could produce more than $450 million in free cash. That's more than enough money to cover its recently doubled dividend. As such, it would still have some money left over to keep repurchasing shares, with its excess rising with the price of oil. At $55 a barrel, it would produce $675 million in free cash and $950 million if crude averages $60 a barrel. Repurchasing shares would be a good use of this cash given that CEO Travis Stice believes Diamondback's shares trade at a "depressed value." Analysts seem to agree with that assessment, given the wide gap between the current stock price and their target for the stock.

An oil stock with lots of upside potential

Analysts love what they see ahead for Diamondback Energy. In particular, they like that the company can generate a big enough gusher of cash at $45 oil to support continued fast-paced growth while sending an increasing supply of money back to investors. Those cash returns, which will rise with the price of oil, could, in their view, fuel a big-time rally in the company's stock this year.