Is Diamondback Energy Stock a Buy on the Dip?

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 +3.02%) 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.

These properties play out in adjusted free cash flow (FCF) guidance, which calls for the following.

Data source: Diamondback Energy presentations; author’s analysis. *Based on a current stock price of $143.65 and market cap of $14.16 billion

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.