Energy Prospectus

Wall Street loves this company. They are doing a great job, but it does trade a very multiple already. - Dan

Diamondback Energy, Inc. (FANG) today announced financial and operating results for the third quarter ended September 30, 2016.

HIGHLIGHTS
•As previously announced, Q3 2016 production of 44.9 Mboe/d (73% oil), up 22% quarter over quarter and 32% year over year

•Cash operating costs of $9.15 per boe, including cash G&A of $0.88 per boe

•Previously increased full year 2016 production guidance to 41.0 to 42.0 Mboe/d, up from 38.0 to 40.0 Mboe/d

•Borrowing base increased to $1 billion, up 43% from Spring redetermination, with elected commitment remaining at $500 million

•Currently operating five horizontal rigs with plans to add a sixth rig in early 2017 targeting the Southern Delaware Basin

•2017 production guidance of 52.0 to 58.0 Mboe/d from completion of 90 to 120 gross wells with an average lateral length of approximately 8,500 feet

“Our strong financial performance during the third quarter reflects our ability to execute and achieve accretive growth for our shareholders. Our disciplined strategy during the first half of 2016 allowed us to maintain our financial flexibility and maximize the value of our world class resource. In doing so, we were able to respond quickly when commodity prices improved and are now just beginning to bear the fruit of our activity ramp. We recently added a fifth rig to the Midland Basin and plan to add a sixth rig to begin developing our Southern Delaware Basin acreage in the coming months," stated Travis Stice, Chief Executive Officer of Diamondback.

Mr. Stice continued, “As we continue to prove ourselves as a leader in efficient, low-cost operations in the Midland Basin, we look to extend this track record into the Southern Delaware Basin. Our focus at Diamondback is converting high quality resource into cash flow in the most efficient manner possible. At current strip prices, we expect to deliver annual production growth of over 30% in 2017 at or near breakeven cash flow. Our Glasscock and Howard county positions continue to outperform our acquisition assumptions, and, in what may be an underappreciated story, Lower Spraberry performance in Andrews and Martin counties is comparable to Spanish Trail in Midland County. Diamondback continues to drive down costs on a per completed lateral foot basis, has under $10 cash operating costs per boe, and has built a robust inventory focused on long-lateral development to grow within cash flow for multiple years at current strip prices.”

Diamondback's third quarter 2016 net loss was $2 million, or ($0.03) per diluted share. Adjusted net income (a non-GAAP financial measure as defined and reconciled below) was $42 million, or $0.54 per share. < Compares to First Calls EPS estimate of $0.32 for Q3.

I have updated my forecast model for FANG and it will be posted to the EPG website this evening.

My valuation increases by $1.25/share to $114.00. This compares to First Call's price target of $118.34.

Diamondback is doing it right and Wall Street loves this company, which means a lot. Morgan Stanley issued a report on October 10th, rating FANG a BUY with a $135.00 price target. The Wall Street "love affair" gives them access to all the capital they will need, but their six rig program in 2017 should be fully funded by cash flow from operations.

Other "pure plays" on the Permian basin are: CXO (which reports Q3 results on 11/8), PE, PXD, RSPP, CPE and LPI. All of these companies are doing quite well and can make money even if oil stays around $45.

I remain bullish on the frac sand companies because ALL OF THE COMPANIES are getting better results by pumping more sand into their horizontal wells.

Here are John White's comments about FANG's Q3 results:

The recently introduced 2017 guidance provided an uplift to our valuation and as such we are increasing our price target from $114 to $117 and maintaining our Buy rating.

FANG’s 3Q Adjusted EPS of $0.54 beat the consensus estimate of $0.34 and our projection of $0.27. EBITDA of $102.2 million also exceeded our estimate of $93.0 million and consensus of $96.3 million. The out-performance was due to lower than expected DD&A, lease operating expense and production taxes. Actual CFPS $1.14 was in line with our estimate of $1.14 and consensus of $1.16.

FANG previously increased its 2016 production guidance to a range of 41,000 to 42,000 BOE per day, up 6% from the midpoint of the previous guidance range, with the increase primarily due to continued strong well performance.

In its 3Q 2016 press release of 11/7/2016, FANG introduced 2017 production guidance in a range of 52,000 BOE per day to 58,000 BOE per day. Comparing mid-points of the ranges indicates FANG is guiding to a materially higher level of production for 2017, an increase of 33%.

FANG had previously reported actual 3Q oil and gas production of 44,923 BOE per day.