Current FANG Stock Info

One added rig makes nine

Diamondback Energy (ticker: FANG) has announced second quarter results, showing net income of $158 million, or $1.61 per share. This is slightly higher than the $136 million the company earned in Q1, and significantly higher than the $155 million loss Diamondback took in Q2 2016.

Production averaged 77 MBOEPD, which is 25% higher than Q1 levels. This has led Diamondback to increase its full year production guidance to 74-78 MBOEPD, up 5% from the guidance released at the beginning of the year.

Diamondback drilled 34 wells in Q2, and turned 35 to production. The company recently added a ninth rig, and plans to maintain eight or nine rigs in the current commodity price environment.

Diamondback: Buy Local – Texas Sand Helps Decrease Well Costs

Source: FANG Investor Presentation

Local sand to cut costs by 5%

Diamondback is taking advantage of growth in Texas frac sand production, and has signed a long-term proppant supply agreement with a local provider. First sand is expected in early 2018, and should reduce Midland basin well costs by about 5%. The massive growth in the Permian has created a surge in demand for frac sand, with wells using more sand than ever before. Sand suppliers have responded more quickly than expected, and are expected to bring 32 million tons per year of additional capacity online by the end of 2018.

Diamondback is having success with their cost reduction program, based on announced changes to guidance. In last quarter’s conference call, Diamondback CEO Travis Stice emphasized the company’s focus on cost reduction, even as it digested its $2.4 billion acquisition of Brigham resources. In its Q2 release, Diamondback reduced its per unit LOE and cash G&A costs by 19% and 33% respectively, indicating it has managed to further reduce costs of production.

First Upper Wolfcamp A, Lower Second Bone Spring wells show promise

The company’s first wells in the Upper Wolfcamp A and Lower Second Bone Spring in Pecos county each performed strongly, with 30-day IPs of 219 BOE/1000’ and 190 BOE/1000’, respectively. Diamondback will certainly drill follow-up wells targeting these zones, as it assesses which of its plays should receive capital.

Stice commented on these wells in the release, remarking “We are impressed with the initial operated results out of the Wolfcamp A in the Southern Delaware Basin, and are extremely excited about our initial Second Bone Spring result on our Pecos acreage, providing us another zone that can compete for capital in our current portfolio. We will continue to lower well costs in the Delaware Basin with our organization’s relentless focus on capital efficiency and full cycle economics.”

Q&A from FANG Q2 conference call

Q: As you continue to kind of mature as a company, is there a certain inflection point when you think it might make sense for Diamondback to start paying a dividend or buying back shares, or is it just something that’s always contemplated?

Travis D. Stice: We look at the way that we can grow within cash flow and we look at what the future years look like. And those type conversations, while we might have them internally, are still premature. We’ve got a lot of really outstanding wells to convert into cash flow, and we look forward to doing that for many years to come and to the extent we have those opportunities in the future, we’ll have the conversations at that time.

Q: One of your peers highlighted the need for a fourth string of casing on the Midland Basin, particularly in Midland and Martin County is an area where there’s more vertical depletion. I was wondering if you can just speak to, if that’s something that you’re seeing or what kind of the standard design is for some of your Midland Basin horizontal wells?

Michael L. Hollis: Hey, John, across the Midland Basin, we run a three-string design, but again, as we drill through several of these counties in different zones, we encounter similar issues with losses and pressure. Again, it’s just what we do each day, it’s blocking and tackling. So again, we have our plan, and we execute the plan in each one of the areas and each one of the areas are slightly different as to where we set casing and whatnot. But currently, the three-string design is what we run across the entire Midland Basin side, as well as the Delaware Basin side at this time.

Travis D. Stice: Yeah. John, all of our plans are three strings design. All the wells we’ve done historically have been three strings and as we plan the future going forward, there’s three-string designs as well.

Q: The long-term agreements you guys signed and talked about here on the proppant supply looks very positive to save about 5%, could you talk about the potential for what percentage of just overall Midland production will this particular contract encompass, and is there prospects for more of these?

Kaes Van’t Hof: I don’t want to give specific contract details, but I will say that we have the ability to flex up and down with the amount of spreads that we’re running in the Midland Basin today as well as our projected use over the next couple of years. So, I think, one, this grants us a secure supply for almost as much as we need on the Midland Basin side. And two, it locks us in at a price that we’re very happy with compared to current well cost today.

Analyst Commentary

From Wells Fargo:
Summary: Positive. FANG delivers again as production beat on oil volumes (no gas-oil ratio [GOR] issues for this horse) while capex below. Production guidance raised 5% and capex lowered 3%, and expenses down. Together with another solid ops update highlighted promising 2nd Bone Spring test in Pecos and downspaced wells holding up in Midland, stock should post strong relative performance. Post update, stock now 0.6x cheaper on 2018E EBITDA. While Permian names could be under pressure from competitor release (higher GORs, drilling delays) FANG reported no such issues and remains top pick.
Production--4% Beat on Oil. 2Q volumes came in at 77 MBoe/d, 4% above our 74.1 MBoe/d and 6% above Street's 72.5 MBoe/d. Oil volumes drove beat at 57.5 MBoe/d, 5%/6% above our/street’s 54.7/54.5.
Production Guidance Increased 5%, Capex Lowered 3%. FANG raised 2017 guidance 5% to 74-78 MBoe/d up from 69.0-76.0 MBoe/d. Drilling and completion (D&C) capex lowered to $650-775MM from $650-$825MM ($150-175MM infrastructure reiterated), operating 8-9 horizontal rigs for rest of year at current prices. Completed well count reduced 15-30 gross (12-25 net), though not attributable to unforeseen drilling delays (cited by others) according to our conversation with management. Expenses down across the board, excluding DD&A.  


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