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Will Pipeline Pinch Neutralize Diamondback's Permian Power?
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Diamondback Energy Inc.’s (FANG - Free Report) premium Permian acreage has been quite a boost to the company’s performance over the past couple of years. Notably, over the past two years, its shares have increased more than 25% against the stocks in the broader industry’s collectively decline of around 18%.
However, with pipeline capacity concerns aggravating in the prolific shale play, we see little in the way of catalysts that could justify a buy. Evidently, Diamondback’s stock has slumped 4.2% year to date, in line with the broader industry.
One of the largest Permian basin operators, Diamondback holds around 207,000 net acres in the region, including 188,000 net acres in Midland and Delaware Basins. Owing to its significant acreage, the company’s total output surged 46.3% year over year in the last reported quarter.
Diamondback has been strategically working to further boost its presence in the shale play. As such, alongside its second-quarter earnings release, it also announced to purchase private-equity backed Permian player Ajax Resources LLC for $900 million in cash and around $300 million in stock. The deal will add around 25,493 net leasehold acres to Diamondback’s portfolio.
Just about a week ago, it entered into a mega $9.2-billion deal to acquire Energen Corporation in a bid to further bolster its Permian presence. The agreement will add around 96,000 acres of tier-1 Permian acreage to Diamondback’s portfolio, expanding its position by 57% to a total of 266,000 acres in the region. Net Permian acreage of the combined company will stand at around 366,000 acres.
Though these acquisitions will push up the leverage a bit, it will not scale up to an unendurable level. As it is, Diamondback boasts an impressive financial health currently, which provides it with enough financial flexibility to tap strategic growth opportunities.
The major headwind concerning the company right now is the logistic constraints associated with the Permian region, which might impact Diamondback’s earnings gradually.
For the longest time, Permian has been the golden shale area of the United States. Even during oil slump, the Permian Basin continued to turn out as a moneymaker for many of the oil producers owing to its low cost-high margin operational structure. The shale play delivered unprecedented output for several years, with the current capacity of churning around 3 million barrels per day (Bpd), which is expected to rise another 2 million Bpd by 2025.
Notably, throughout the crude downturn, the energy producers in the region pumped so much oil, which exerted immense pressure on the pipelines of the region. Producers and drillers are still snapping up more land in the Permian Basin, which has certainly propelled output, overwhelming the pipelines.
While production in the Permian is soaring, takeaway capacity is not increasing in proportion. Reportedly, the supply glut has already pushed the prices in the region more than $10 per barrel below the benchmark. These deflated regional oil prices are bound to weigh on the prospects of the Permian producers. Due to pipeline capacity constraints, various Permian producers like Pioneer Natural Resources Company (PXD - Free Report) , EOG Resources (EOG - Free Report) and Diamondback, among various others, have to sell their products at a discounted rate.
Though the company is entering into agreements to improve pricing exposure, the impact of the same is unlikely to be immediate. While Diamondback inked a deal to secure 50 thousand barrels per day of capacity for the Gray Oak pipeline, the project is not expected to become operational till late 2019, providing no immediate respite from the concerns.
While efforts to ease out pipeline congestion in the region have started picking pace, it will still take much time to alleviate takeaway capacity concerns in the region. Further, whether the efforts will be in proportion to the surging production volumes or not, is another wait and watch story. So presently, it’s quite a dicey situation for the Permian-focused oil stocks.
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Will Pipeline Pinch Neutralize Diamondback's Permian Power?
Diamondback Energy Inc.’s (FANG - Free Report) premium Permian acreage has been quite a boost to the company’s performance over the past couple of years. Notably, over the past two years, its shares have increased more than 25% against the stocks in the broader industry’s collectively decline of around 18%.
However, with pipeline capacity concerns aggravating in the prolific shale play, we see little in the way of catalysts that could justify a buy. Evidently, Diamondback’s stock has slumped 4.2% year to date, in line with the broader industry.
Let’s take a closer look at this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Diamondback: A Permian Powerhouse
One of the largest Permian basin operators, Diamondback holds around 207,000 net acres in the region, including 188,000 net acres in Midland and Delaware Basins. Owing to its significant acreage, the company’s total output surged 46.3% year over year in the last reported quarter.
Diamondback has been strategically working to further boost its presence in the shale play. As such, alongside its second-quarter earnings release, it also announced to purchase private-equity backed Permian player Ajax Resources LLC for $900 million in cash and around $300 million in stock. The deal will add around 25,493 net leasehold acres to Diamondback’s portfolio.
Just about a week ago, it entered into a mega $9.2-billion deal to acquire Energen Corporation in a bid to further bolster its Permian presence. The agreement will add around 96,000 acres of tier-1 Permian acreage to Diamondback’s portfolio, expanding its position by 57% to a total of 266,000 acres in the region. Net Permian acreage of the combined company will stand at around 366,000 acres.
Though these acquisitions will push up the leverage a bit, it will not scale up to an unendurable level. As it is, Diamondback boasts an impressive financial health currently, which provides it with enough financial flexibility to tap strategic growth opportunities.
The major headwind concerning the company right now is the logistic constraints associated with the Permian region, which might impact Diamondback’s earnings gradually.
Permian Bottleneck Might Dampen Diamondback’s Growth
For the longest time, Permian has been the golden shale area of the United States. Even during oil slump, the Permian Basin continued to turn out as a moneymaker for many of the oil producers owing to its low cost-high margin operational structure. The shale play delivered unprecedented output for several years, with the current capacity of churning around 3 million barrels per day (Bpd), which is expected to rise another 2 million Bpd by 2025.
Notably, throughout the crude downturn, the energy producers in the region pumped so much oil, which exerted immense pressure on the pipelines of the region. Producers and drillers are still snapping up more land in the Permian Basin, which has certainly propelled output, overwhelming the pipelines.
While production in the Permian is soaring, takeaway capacity is not increasing in proportion. Reportedly, the supply glut has already pushed the prices in the region more than $10 per barrel below the benchmark. These deflated regional oil prices are bound to weigh on the prospects of the Permian producers. Due to pipeline capacity constraints, various Permian producers like Pioneer Natural Resources Company (PXD - Free Report) , EOG Resources (EOG - Free Report) and Diamondback, among various others, have to sell their products at a discounted rate.
Though the company is entering into agreements to improve pricing exposure, the impact of the same is unlikely to be immediate. While Diamondback inked a deal to secure 50 thousand barrels per day of capacity for the Gray Oak pipeline, the project is not expected to become operational till late 2019, providing no immediate respite from the concerns.
While efforts to ease out pipeline congestion in the region have started picking pace, it will still take much time to alleviate takeaway capacity concerns in the region. Further, whether the efforts will be in proportion to the surging production volumes or not, is another wait and watch story. So presently, it’s quite a dicey situation for the Permian-focused oil stocks.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>