Examining the contrast between an exclusive driller and producer in the Permian Basin, Diamondback Energy (FANG), and a comprehensive energy company, Chevron (CVX), offers valuable insights into the choices that oil and gas-centric investors may encounter in the forthcoming years. Let’s explore which firm could be a more suitable match for different types of investors.
The role of oil prices
When considering energy stock investments, it’s crucial to address this question, even though the solutions may not be instantly obvious. It’s worth mentioning that these companies are exceptionally managed and have a lower “break-even” oil price for operations as a point of pride. This break-even oil price is the minimum cost at which oil is required to cover the company’s operational costs, maintenance capital spending on existing wells, and base dividend payments.
According to a survey by Wood Mackenzie, Chevron requires around $30 per barrel to break even on oil production. Meanwhile, Diamondback Energy’s leadership estimates their own break-even point at approximately $37 per barrel.
It seems that Chevron might have a competitive edge in this situation. Remember, Chevron is a significant player across multiple sectors, including downstream and chemicals. These areas typically thrive when oil prices are low. This aspect has been factored into their break-even calculations.
In another perspective, Diamondback solely focuses on oil exploration and production. Additionally, Diamondback employs a strategy called hedging to lessen the impact of falling oil prices. Currently, these hedges are effective down to around $55 per barrel of oil, which means they benefit from oil prices above that amount.
In simpler terms, the dividends from Chevron (yielding 4.8%) can be considered secure even if oil prices drop to $30 per barrel, while Diamondback’s base dividend (yielding 2.9%) remains secure down to $37 per barrel. If you are an investor who prioritizes yield and seeks peace of mind, Chevron might be a better investment choice for you.
Don’t forget the upside
A counterpoint to consider is that Diamondback, being an oil exploration and production firm, stands to benefit from increased oil prices due to its greater involvement in these markets.
To clarify how this operates, let’s examine Diamondback’s management’s projected adjusted 2025 free cash flow (FCF) across various oil prices. For your understanding, Diamondback plans to distribute approximately half of the FCF back to shareholders in the form of both dividends (both base and variable) and stock repurchases. Currently, they have $1.845 billion left as part of a $6 billion authorized program for share buybacks.
In its initial quarter, Diamondback earned approximately $2.80 per share through share buybacks, amounting to a total of $829 million. If the management chooses not to conduct any further buybacks and instead distributes the remaining 50% of their Full-Year Free Cash Flow (FCF) as dividends (with a base of $4, along with a variable component), they could potentially offer a total of $5.20 in dividends. This would equate to a yield of 3.8%, assuming oil prices remain at $60 per barrel.
The hypothetical increase in dividends amounts to $8.70, equating to a 6.4% return, given an oil price of $80 per barrel. Does this indicate that Diamondback Energy has greater potential for profitability due to oil price fluctuations?
| Price of Oil per Barrel | Free Cash Flow | Free Cash Flow Per Share | Free Cash Flow Yield (based on the current market price of Diamondback Energy of $136.5 a share) |
|---|---|---|---|
| $50 per barrel | $4.15 billion | $14 | 10.3% |
| $60 per barrel | $4.85 billion | $16 | 11.7% |
| $70 per barrel | $5.85 billion | $20 | 14.7% |
| $80 per barrel | $6.85 billion | $23 | 16.8% |
If you’re curious, under these conditions, the price of oil would need to be around $67 per barrel for Diamondback’s dividend yield to match Chevron’s present yield – interestingly, this is almost the same as the current oil price.
Diamondback or Chevron?
In essence, investors prioritizing dividends and those aiming to minimize oil price sensitivity will likely prefer Chevron. This preference is bolstered by Chevron’s diversified business portfolio. While its Permian production is commensurate with Diamondback’s, it also boasts extensive global assets, along with midstream and downstream operations. This diversity allows Chevron to channel its investments effectively, even during prolonged oil price declines.
Apart from cutting down on capital investments due to price drops (which Diamondback has already done this year), it is challenging to conceive of any substantial action that a company like Diamondback could take.
Investors often purchase oil stocks for the potential gains they offer. Diamondback Energy, being a top-tier operator, has implemented strategies to minimize risks. This means you can consider investing in both stocks since they are suitable choices for those looking for passive income.
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2025-07-20 08:56