Today’s recommendation is one-year-old, $1.9-billion market cap energy company with robust growth prospects.
The company is currently on track to have its revenue increase by almost double between 2012 and 2013, and its recent decision to move toward horizontal drilling could increase Diamondback Energy’s profitability significantly.
Diamondback Energy (FANG)
from The 100% Letter
Diamondback Energy (FANG) is a relatively new small cap pure play on the Permian Basin given that the company just went public in October of 2012. I would have loved to get into the stock earlier given its outstanding performance since its IPO, but that still won’t stop me from recommending it now. Diamondback is really just getting started and has a lot of growth to enjoy before the story peters out.
The company is smallish — market cap is $1.8 billion and the stock trades at $43.15 right now. It has a nice acreage position approaching 65,000 acres (including recent acquisitions which I’ll soon discuss), almost all of which it operates.
It’s a pure play Permian oil stock. That’s important to recognize — we’re not spreading out here across the country. ... The Permian is one of the best oil plays in the country, if not the world, and FANG is aggressively buying property to expand its exposure.
It’s also a fairly pure oil investment. The company’s production split is 75% oil, 14% natural gas liquids (NGLs) and 11% natural gas. On a revenue basis, 90% of revenues come from oil, while 6% and 4% come from NGLs and natural gas, respectively. ...
FANG is aggressively transitioning away from vertical drilling and toward horizontal drilling, a move which is paying off in spades. ...Why horizontal? It’s simple really - horizontal wells are far more profitable. While they cost several times more than a vertical well (~$7.5 million versus ~$2.1 million), a horizontal well generates a much higher return, around 40% versus just 25% for a vertical well, according to FANG’s reports. ... Diamondback is increasing its rig count to drill more horizontal wells. It currently has four rigs going (one vertical, three horizontal) and expects to close out 2013 with four horizontal rigs. It also expects to add a fifth horizontal rig in 2014. Pretty straightforward implications here; more rigs = more wells = more oil = more revenue. ...
The combination of successful wells and incremental rig additions has led to steady production growth and I expect this to continue. As the chart below shows, FANG is currently producing around 7.2 MBOEPD (Million Barrels of Oil Equivalent Per Day). The 9.6 MBOEPD figure (red bar) takes into account acquisitions [that recently boosted its net acreage 23%.]
FANG is on target to more than double its well count in 2013, it’s moving more rigs in for 2014 and it has acquired a lot of very attractive acreage to drill out in the coming years.
In 2012, revenues were $75 million. It’s on pace to hit ~$210 million in 2013 — that represents a 180% increase. And I see 2014 revenues growing by another 120% to 140% considering the catalysts discussed above. ...
Diamondback Energy is an exciting small exploration and production company with great real estate and an ability to smell oil. Operations are great, rig and well count is rising, production is growing and the company has shown an ability to complete really attractive deals.
The Permian is one of the best places to be for U.S. oil, and FANG is 100% levered to it. The stock has been a strong performer but I don’t see that as a reason to stay away. Provided that the price of oil stays around $100.00 and the company continues to execute, the stock should continue on its upward trajectory with just minor corrections along the way. I’m looking for a steady grind higher from FANG.
The stock trades at around $43.15 right now after a slight pullback and that’s where we should enter a first tranche.
Action to take: Buy Diamondback Energy (NASDAQ:FANG) around $43.15.
Tyler Laundon, The 100% Letter, www.100percentletter.wyattresearch.com, 866-447-8625, October 2, 2013