What happened
Shares of Diamondback Energy (FANG 0.43%) soared 53.9% in November, according to data provided by S&P Global Market Intelligence. Two catalysts fueled the oil stock last month: oil prices and earnings.
So what
Diamondback Energy reported surprisingly strong third-quarter results. The oil producer recorded $0.62 per share of adjusted earnings in the period, which beat the analysts' consensus estimate by $0.26 per share. Fueling the better-than-expected earnings was the company's cost-reduction efforts, which pushed its lease-operating expenses and general and administrative costs to near all-time lows, while capital costs per foot hit a record low in the period.
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Diamondback also gave investors some guidance for what lies ahead. The company said that it would spend 25% to 35% less capital next year, which would keep its production flat with its anticipated fourth-quarter 2020 average. The plan would have the company reinvest 70% of the cash flows it generates at $40 a barrel. That's well below the current price point, which rallied from $35 a barrel to $45 a barrel during November. If oil holds its current level or continues moving higher, Diamondback will generate significant free cash flow in 2021.
Given that outlook, Diamondback said on its third-quarter conference call that it doesn't need to join the current mergers and acquisitions (M&A) wave in the industry to cut costs. That relieved some of the market's concerns that it might need to pay a premium to buy a rival and boost its scale. Instead, Diamondback plans to defend its dividend and reduce spending, if necessary, to support its operations during another oil price downturn.
Now what
Diamondback Energy's low-cost operations enabled it to deliver strong Q3 results. Further, they position the company to generate significant excess cash if oil prices cooperate. Unfortunately, crude prices have been quite volatile in recent years, which seems likely to continue. Because of that, Diamondback's stock could just as quickly give up last month's gains as it could continue rallying, making it an unappealing buy these days.
