Diamondback Energy Inc (FANG)

[Wildbilly]

Bakken Update: Diamondback's Production Ramp Provides Opportunity In Q3
Aug 25 2013, 18:01  |  about: FANG, includes: APA, AREX, LPI, PXD, SYRG BOOKMARK / READ LATER
Disclosure: I am long FANG, SYRG. (More...)

Diamondback Energy (FANG) has been one of the best small cap oil and gas performers this year. It is one of the few ways to get pure small cap Permian exposure other than Approach (AREX) and Laredo (LPI). This has created some scarcity value, making these names a little expensive.

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The Permian is one of my favorite areas in 2013. The reason is simple, asset valuation. If you look at individual well results in the Midland Basin, NPV-10 is not as high as the Eagle Ford's average of $9.0MM/well. The above picture shows there is greater value due to the Midland's stacked resource potential and well spacing. This combination will create a higher acreage value as there are more locations per 640 acres.

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Undiscounted acreage values are slightly better in the Midland Basin, followed by Wattenberg Field and then the super rich Marcellus, by my estimates. This should provide a continued upside for Diamondback and other players in the Midland Basin. Keep in mind that Diamondback fits a specific type of investment that should be a focus with respect to small cap oil and gas. It offers a significant uptick in production. Like Synergy (SYRG) it is a vertical producer that is beginning a horizontal program. Well costs increase considerably, but production numbers increase exponentially.

Diamondback had a great second quarter. It reported EPS of $.30 versus the Street's estimate of $.26. It beat on the bottom line by $2.06 million, with revenues of $45.4 million. It also had a 6 cent unrealized gain on commodity derivatives for the quarter. Production increased 38% over Q1 of 2013. Oil volumes increased 49% over the same period. Lease operating expenses decreased by 20% sequentially. Short lateral well costs improved 12% quarter over quarter to $5.3 million. Its most recent short lateral had costs of just $4.8 million. Its long laterals (7,500 feet) had an average cost of $7.6 million, but its most recent completion was done for $7.2 million. Diamondback has had a very good result spreading out the frac stages. It is now using 250 foot stages and 300,000 pounds of proppant/stage. This was done while still using the same amount of water and proppant. This saves about three hundred thousand to four hundred thousand per well. Vertical well costs averaged $1.9 million, this is below Diamondback's estimated guidance of $2.2 to $2.0 million. Vertical well costs have improved due to shorter drill times. Q2 of 2013 EBITDA was $35.1 million versus $20.3 million in Q1. DD&A increased from $10.738 million in Q1 of 2013 to $14.815 million in Q2. Realized crude prices improved to $91.76/bbl from $83.89 in Q1. Over the same time frame, natural gas pricing improved to $4.08/Mcf from $3.28/Mcf. Realized NGL pricing decreased to $31.91/bbl from $35.12. Keep watching NGL prices. Ethane prices are probably heading lower.

Diamondback had some very good well results in Midland and Upton counties. All but one of its wells completed have been slickwater fracs. The table below lists those wells, all of which targeted the Wolfcamp B.

Well Lateral (Ft.) Stages
Peak IP 30 (Boe/d)

%Oil County
Kemmer 4209H 3,733 15 712 85 Midland
ST NW 2501H 4,451 19 655 90 Midland
ST NW 2502H 4351 16 500 88 Midland
Sarah Ann 3812H 4830 18 711 88 Midland
ST W 4301H 7141 29 916 85 Midland
Janey 16H 3842 16 486 86 Upton
Neal A Unit 8 1H 7441 32 697 87 Upton
Janey 3H 4411 19 488 82 Upton
Neal B Unit 8 2H 6501 26 617 73 Upton
Kendra A Unit 1H 7411 30 677 82 Upton
Jacee A Unit 1H 7541 30 632 83 Upton
The above table shows the progression FANG has made from short to medium length laterals. Diamondback is using tight stages and seems to be getting good source rock stimulation. ST W 4301H may be the most important test to date. This well had a very good peak 30-Day IP rate. This was done with a longer lateral and seems to show the pump trucks aren't too stressed pumping a stage 3,000 feet longer than its other average wells. Going forward pay close attention to Charlotte A Unit #1H. This well is over ten thousand feet long and a 39 stage frac. I think if wells can produce peak 30-Day rates close to 900 Boe/d, it will be a victory for Diamondback. There is no doubt production per foot will suffer some, but EURs will improve at a lower cost per foot. Longer laterals also provide a smaller foot print as there are fewer verticals to be drilled. To provide an idea of how other wells are producing in the same general area, I have provided the table below.

Operator Well Lateral IP 30 % Oil County
SUGG-C-27-1HM 982 77 Reagan
LPI SUGG-A-183-1HM 910 80 Reagan
(PXD) Mabee K #1H 6671 1040 76 Martin
PXD 2 Giddings Well Avg. 5300 669 76 Upton
PXD DL Hutt C #1H 7380 1402 75 Midland
PXD DL Hutt C #2H 7380 1107 74 Midland
While Diamondback concentrates on the Wolfcamp B, Laredo has been more aggressively developing the Wolfcamp A. It has completed two Wolfcamp B wells. These wells have produced well above Laredo's EUR 700 MBoe model. Laredo's average middle Wolfcamp well cost is $7.8 million. Pioneer has been developing several different payzones. The majority of its wells are Wolfcamp B, but it is targeting the other Wolfcamp layers. It is also drilling the vertical Spraberry, and continuing to work additional vertical intervals. Pioneer is outperforming, but has more experience in the Permian than Diamondback and Laredo. It is good to see Pioneer producing this well as other operators will soon be getting those types of results.

Diamondback's acreage is prospective several other payzones. Several operators have had very good results in the other Wolfcamp targets and the Cline. Apache (APA) has been testing further. It has had a significant number of horizontal and vertical results in the Midland Basin. The table below covers some of that data.

Well Target Lateral IP 30 Boe/d
Augusta Barrow 2301 Wolfberry NA 248
ED Books 35 #9 Fusselman NA 362
Eagle 36 #1 Fusselman NA 336
Woodpecker 36 #2 Wolfwood NA 310
Heidi 37 #3 Wolfwood NA 223
Hammerhead 33 #4 Lower Cline 4445 286
Sugg 1110 H31U Upper Wolfcamp 7800 422
Sugg 1110 H51U Upper Wolfcamp 7800 454
The above table shows additional targets in the general area of Diamondback's acreage. Below is a list of Apache's wells targeting the Cline.

Well EUR Lateral Stages
Mack 8-2H 372 4400 10
Squire 9-2H 389 4600 12
Bell 18-1H 356 3800 10
Barracuda 45 #2H 528 3800 11
Mac 6-Carter 43 380 6705 12
Marlin 47 2H 420 4255 12
The Barracuda well was the most impressive. It had a 30-Day IP rate of 623 Boe/d. Laredo has also targeted other zones. In the table below is a list of its completions in the upper and lower Wolfcamp, plus the Cline.

Well Target %Oil IP 30 Boe/d
Lane Trust-C/E-421HU Upper Wolfcamp 76 1183
Sugg-A-143-2HU Upper Wolfcamp 78 1160
Sugg-D-106-2HL Lower Wolfcamp 66 969
Sugg-A-157-1H Upper Wolfcamp 73 909
Sugg-E/A197-1HU Upper Wolfcamp 71 865
Sugg-A-143-1HU Upper Wolfcamp 76 846
Sugg-A/A208-1HU Upper Wolfcamp 66 843
Bearkat-150-5H Cline 74 835
Laredo's acreage is to the east of Diamondback's, but gives an idea of how the area produces. Very good upper Wolfcamp wells, and it seems to be the main target. The lower Wolfcamp had a very good number, but a lower crude percentage. The Cline was the worst producer, but it is still early and this deeper payzone should produce as well as the upper Wolfcamp.

In summary, Diamondback is doing all the right things. It is ramping production while decreasing LOEs. In Q2 it added 11,000 acres. Pioneer continues to develop to the north. Early completions point to its acreage in Andrews County being as good as in Midland. A recent completion by a private company had a very good horizontal Spraberry result, near its Midland County acreage. It has two rigs in Midland and one in Upton county. Diamondback will be receiving its fourth operated rig. Drilling times continue to decrease and it is now using long laterals. Its first 10,000 foot lateral should be producing soon. Well costs continue to decrease. Diamondback believes these costs will soon be to the low end of guidance. It is beginning its pad program which should decrease well costs by a half million. The first results should be in by the end of Q3. There are a significant number of reasons to be bullish Diamondback. Small companies in the process of a large production ramp can provide significant growth. My only worry with this specific stock is valuation. The Permian names are a little expensive when compared to those in the Niobrara. Its recent offering caused a pullback in shares, and this may provide an opportunity to get into this name.

Additional disclosure: This is not a buy recommendation. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results, do not take in consideration commissions, margin interest and other costs, and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market or financial product does not guarantee future results or returns. For more articles like this check out our website at shaleexperts.com. Fracwater Solutions L.L.C. engages in industrial water solutions for oil and gas companies in North Dakota. This includes constructing water depots, pipelines and disposal wells. It also provides contracting services for all types of construction at well sites. Other services include soil remediation. Please contact me via email if you are interested in working with us. More of my articles and other pertinent information on the oil and gas sector, go to shaleexperts.com.

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