It has been a challenging year for oil exploration and production stocks, with many of them tracking the decline in oil prices over the period. Diamondback Energy (FANG +3.31%) is no exception, and its 21% fall isn't surprising. Still, it's incredibly tough to predict where the price of oil will go, and on a risk-reward basis, the stock looks like a good value.
Diamondback Energy is well positioned for any recovery in energy prices
Management of the company focused on the Permian Basin spent considerable time highlighting its low-cost investment structure during its recent third-quarter earnings call, and for good reason. A low-cost structure enables the company to generate a relatively good cash flow even when the price of oil isn't high, and it also allows the company to have a relatively low reinvestment rate, thereby preserving more cash flow to return to investors.
NASDAQ: FANG
Key Data Points
These properties play out in adjusted free cash flow (FCF) guidance, which calls for the following.
|
Metric |
Assuming $50 per Barrel of Oil |
Assuming $60 per Barrel of Oil |
Assuming $70 per Barrel of Oil |
|---|---|---|---|
|
Adjusted Free Cash Flow in 2025 |
$5.5 billion |
$5.8 billion |
$6.1 billion |
|
Free Cash Flow Yield* |
13.4% |
14.1% |
14.8% |
Data source: Diamondback Energy presentations; author's analysis. *Based on a current stock price of $143.65 and market cap of $14.16 billion
Image source: Getty Images.
Based on the current price, Diamondback can generate significant cash flow in 2025, and its commitment to returning 50% of FCF to investors means it could, in theory, pay 6.7% of its market cap in dividends in 2025 at an average price of $50 per barrel of oil. In reality, management tends to prefer a mix of dividend payments and share buybacks. Still, its current annual dividend of $4 per share (yielding 2.8%) has a breakeven price of oil as low as $37 per barrel.
All told, Diamondback offers a compelling option with limited downside and significant upside if the price of oil moves higher, making it an attractive stock on a risk-reward basis.
