Diamondback Energy (FANG)

[dan_s]

I received this note from John White at Roth Capital on Monday, February 27:

Our price target remains $130 and our Buy rating is maintained. < My valuation of FANG is $137.

We are updating our 2017 estimates to reflect FANG’s recently provided 2017 production guidance and operations outlook. Our 2017 estimates employ production of 76,048 BOE per day, which is at the top of FANG’s guidance which is a range of 69,000 BOE per day to 76,000 BOE per day. We feel the top end should be used as: 1) 4Q 2016 production was 51,934 BOE per day, 2) in January 2017 FANG added a sixth operated horizontal rig to begin development on the previously acquired Southern Delaware Basin acreage, 3) the closing of the Brigham Resources acquisition in late February 2017 should add, by our estimates, about 9,000 BOE per day and then, assuming stable commodity prices, 4) FANG plans to add two additional drilling rigs after closing the Brigham deal.

Our EPS/CFPS/EBITDA estimates are $3.64/$9.02/$861 million versus consensus of $3.46/$8.45/$858 million. Using our figures, this equates to FANG trading at 10.5x on EV/EBITDA and 11.1x on Price/CFPS.

In our view, upcoming catalysts should be the 1Q 2017 operations update, which should provide updates on actual production from the Brigham assets, which will in turn give a better read on estimated 2Q 2017 production. Our thinking is, with Brigham scheduled to close in late February or early March,
that should set 2Q 2017 as the strongest quarter for FANG in 2017 in terms of quarter over quarter production growth.

During 4Q 2016, FANG averaged five operated rigs, drilled 25 gross horizontal wells and completed 23 operated horizontal wells with an average of two completion crews. Operated completions consisted of 14 Lower Spraberry wells, six Wolfcamp A wells, two Middle Spraberry wells and one Wolfcamp
B well.

FANG continues to decrease drilling times and lower costs. During 4Q 2016, FANG drilled an 8,200 foot lateral well in Glasscock County in less than nine days from spud to total depth, a new company record. FANG also drilled a 13,500 foot lateral in Midland County in 20.3 days, a new company record.

Our net asset value and target price are based on proved and probable reserves, financial position, and historical and expected drilling results.

[dan_s]

I just finished reviewing the updated profile for FANG that was prepared by one of our outstanding SMU MBA Student Interns. I could easily justify a much higher valuation for FANG. This is a classic "Aggressive Growth" company.

They are going to report outstanding quarter-after-quarter of production growth this year.