Oil prices have always been unpredictable, so anyone investing in oil and gas stocks must consider the associated risks. Much of the world's oil comes from politically unstable regions, which adds to the uncertainty.
Given these factors, Diamondback Energy (FANG +2.25%) stands out as a strong investment option. Here's why.
A dividend-paying energy stock to buy
Diamondback Energy has less downside risk than many other oil companies, and there's a real chance its stock price could increase with a higher oil price. The main reason is that Diamondback produces oil at a lower cost in the U.S., mainly in the Permian Basin. This means it avoids the geopolitical risks that affect many other producers. In fact, if global oil supplies are threatened, oil prices could rise, which would help Diamondback.
NASDAQ: FANG
Key Data Points
Management states that the company's base dividend and break-even oil price are both $37 per barrel. This break-even price is what's needed to maintain steady oil production year over year and pay the $4 annual dividend per share, which currently yields 2.7%.
Unless there's another major event like the COVID-19 pandemic, it would probably take a severe recession for oil prices to fall back to $37 a barrel. Additionally, rising costs have increased the break-even price for oil producers worldwide.
WTI Crude Oil Spot Price data by YCharts
Diamondback's relatively low cost of production and reinvestment rate means management believes it can generate 12.9% of its current market capitalization in free cash flow (FCF) at a $50-per-barrel oil price in 2025. With the current price just shy of $60 per barrel and management committed to returning 50% of FCF to stockholders, there's a range of scenarios from $37 per barrel to $50 per barrel on the downside, and plenty of upside potential should oil start rising again.
