Shares of Diamondback Energy (NASDAQ:FANG) tumbled 16.7% in February, according to data provided by S&P Global Market Intelligence. While the oil producer posted excellent fourth-quarter numbers, that wasn't enough to offset a sell-off in the oil market.
Diamondback Energy reported better-than-expected fourth-quarter results in mid-February. The oil and gas producer generated $1.93 per share of adjusted earnings, which beat the analysts' consensus estimate by $0.11 per share. On top of that, it doubled its dividend.
That report initially boosted the shares of the energy company. However, crude prices plunged during the last week of February. Overall, the U.S. oil benchmark, WTI, fell 13% for the month, closing below $50 a barrel. Weighing on the price of oil was concern that the COVID-19 coronavirus outbreak would negatively impact oil demand.
Diamondback Energy is in a better position than most drillers to handle lower oil prices. That's because it can fund its 2020 capital plan as well as its dividend on the cash flows it can produce if crude averages $47.50 a barrel, which is right around the current price. However, the company was banking on higher oil prices this year so that it could generate excess cash to repurchase shares. At $60 oil, which is around where it was to start the year, Diamondback can produce $600 million in excess cash. That's enough money to repurchase 6% of its outstanding shares at the current price.
As an oil producer, Diamondback Energy has direct exposure to commodity prices, and a fall in those prices has an impact on the company's cash flow. However, thanks to its lower operating costs, Diamondback is in a better position to handle lower oil prices, which should enable it to navigate through the market's current challenges. Meanwhile, it has lots of upside if oil bounces back, since it could produce a gusher of free cash to use on repurchasing its lower-priced shares.