Diamondback Energy, Inc. (FANG - Free Report) is well poised to grow on the back of strength in the Permian, a ‘super basin’. However, lack of takeaway capacity remains a concern for now.
The Midland, TX-based oil and gas exploration & production company — with a market cap of more than $17 billion — has an expected earnings growth rate of 20.6% for the next five years. For second-quarter 2019, its earnings per share projection has increased from $1.80 to $1.99 in the past 60 days, indicating a 25.2% rise from the year-ago reported figure of $1.59. The stock has witnessed positive estimate revisions from 13 firms in the said period.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
A Look at the Positives
Diamondback is primarily focused on the Permian Basin, wherein it has around 394,000 net acres. Its activities are concentrated in Wolfcamp, Spraberry, Clearfork, Bone Spring and Cline formations. Experts say that it is cheaper to drill and complete oil wells in the Permian Basin than most other major fields. Moreover, there are certain parts of the shale play wherein well returns are the best in the United States.
The purchases of Energen and Ajax Resources have transformed Diamondback into one of the leading Permian Basin oil producers. The company now owns acreages in Delaware and Midland regions, having more than 7,000 drilling locations and the capacity to produce 215,000 barrels of oil equivalent per day. The combined entity is expected to generate synergies in the range of $2-$3 billion, primarily driven by lower drilling and completion costs.
A majority of Diamondback’s products have access to the lucrative Gulf Coast markets. The company has secured another 100,000 barrels per day of capacity each from the upcoming Gray Oak and EPIC pipelines, in order to expose more of its output to attractive international oil prices.
Bringing in more good news for investors, the energy explorer unveiled a new $2-billion share repurchase scheme through year-end 2020. Further, following up on its earlier announcement, the company raised the quarterly dividend by 50% to 18.75 cents (or 75 cents per share annualized).
Clearly, investors are noticing the company’s true potential. This is evident from Diamondback’s increase of 16.1% year to date compared with 0.6% collective gain of the industry it belongs to and 15.6% rise of the S&P 500 Index.
What’s Deterring the Stock?
There are a few factors that are holding back the stock from reaching its true potential.
Pipeline takeaway constraints in the Permian Basin might not allow Diamondback to fully benefit from higher oil prices for some of its production is exposed to softness in regional prices.
The spending spree and subsequent land grab in the unconventional Permian Basin signify that most of the region's attractive acreage has been acquired. This might have an impact on Diamondback’s continued reserve growth.
Apart from exploration and exploitation of top-tier properties, it has been focused on acquisitions to achieve growth. While any immediate acquisition plans appear unlikely, management may make a dilutive transaction or may not be able to optimally integrate the acquired assets of Energen and Ajax Resources.
To Sum Up
Despite riding on significant growth prospects, pipeline takeaway constraints and basin-specific competition in the Permian are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Some better-ranked players in the energy space are Montage Resources Corporation (MR - Free Report) , Approach Resources Inc. (AREX - Free Report) and Earthstone Energy, Inc. (ESTE - Free Report) . While Montage Resources sports a Zacks Rank #1 (Strong Buy), Approach Resources and Earthstone Energy hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Montage Resources’ sales growth is projected at 27.6% through 2019.
Approach Resources surpassed earnings estimates in three of the trailing four quarters, with the average positive surprise being 12.7%.
Earthstone Energy’ sales growth is projected at 15% through 2019.
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