Energy Prospectus

Another solid quarter of growth.

SECOND QUARTER HIGHLIGHTS
•Q2 2018 net income of $219 million, or $2.22 per diluted share; adjusted net income of $158 million, or $1.59 per diluted share < Compares to my forecast of $174.5 million or $1.77 EPS.
•Q2 2018 production of 112.6 Mboe/d (73% oil), up 10% over Q1 2018 and 46% year over year < Compares to my forecast of 110,000 Boepd.
•Increasing pro forma full year 2018 production guidance range to 115.0 – 119.0 Mboe/d, up 4% from prior guidance midpoint; implies over 45% annualized growth at the midpoint from full year 2017 average daily production
•Q2 2018 cash dividend of $0.125 per share payable on August 27, 2018; implies a 0.4% annualized yield based on August 6, 2018 share closing price of $133.62 < They did this because some hedge funds can only buy stocks that pay dividends.
•Executed agreements to secure firm oil transportation out of the basin at fixed discounts to Gulf Coast pricing beginning Q3 2018; term sales agreements cover the remainder of expected production
•Executed agreement for option to acquire up to 10% equity interest in the EPIC Crude Oil Pipeline project; increases previously announced volume commitment from 50,000 bo/d to 100,000 bo/d (50% take or pay)
•Announced drop down sale of 1,696 net royalty acres to Viper for $175 million, subject to post-closing adjustments; expected to close in August 2018

I have updated my forecast/valuation for FANG. It will be posted to the EPG website this evening.

My valuation increases by $5.00 to $170.00.

In the last 3 months, 11 ranked analysts set 12-month price targets for FANG. The average price target among the analysts is $166.64. < Their valuations range from $140 to $181.

FANG close at $131.50 on August 9th.

Flash Note from John White at Roth Capital. He rates FANG a BUY with a $145 price target.

FANG: The Snake Swallows Another One; Beats Again: Positive

FANG adds a meaningful acquisition with its agreement to acquire privately held Ajax Resources for about $1.2 billion ($900 million cash and $345 million in FANG shares). Acreage is a good fit, near or generally adjacent to FANG existing positions in the northern Midland Basin, including 21,000 net acres in northwest Martin and northeast Andrews counties.

FANG is increasing pro forma full year 2018 production guidance range to 115,000 BOE per day – 119,000 BOE per day, up 4% from prior guidance midpoint, and exceeds our current 114,265 BOE per day.

The deal:

Producing approximately 12,100 BOE per day (88% oil)
362 net identified potential horizontal drilling locations with an average lateral length of over 9,500 feet; FANG advises about 220 net potential locations in its top quartile of current inventory,
99% of acreage operated, average 99% working interest, favorable 23% average royalty burden and a favorable 89% held by production (HBP)
Acreage HBP percentage allows for 12+ well multi-zone pad development in the Middle Spraberry, Lower Spraberry and Wolfcamp A
Attractive infrastructure: Ajax midstream infrastructure includes 40,000 b/d in saltwater gathering and disposal, 45 Mb/d of existing fresh water production and ownership of over 700 surface acres

FANG reported actual 2Q production of 112,592 BOE per day, beating our estimate of 109,677 BOE per day and exceeding the consensus estimate of 110,380 BOE per day. FANG reported CFPS/EBITDA of $3.99/$370.2 million, beating our $3.49/$356.7 million and beating the consensus estimate of $3.49/$365.6 million.

We will further review this update and revise our estimates consequently.