Why Diamondback Energy Is One of the Best Upstream Stocks
Diamondback Energy’s capex
Diamondback Energy’s (FANG) quarterly capex has been volatile in the past 12 quarters. Interestingly, even though its net income slumped in 2Q15 as crude oil crashed, the company’s capex increased more than threefold to $525 million compared to 1Q15. The 2Q15 capex also represents a 320% increase over the year-ago quarter.
Diamondback Energy’s efficiency improvement initiatives
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During 2Q15, Diamondback Energy completed three 8,000-foot lateral wells with spud-to-total-depth time of ten days. Lower spud-to-total-depth time leads to higher production efficiency.
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The company increased proppant per stage in three horizontal completions. It also drilled its first operated triple stacked lateral wells in the Lower Spraberry, Wolfcamp A, and Wolfcamp B in the Permian Basin. All these efforts resulted in decreased cycle times. Compared to 4Q14, the company’s lease operating costs decreased 25% to $7.51 per barrel of oil equivalent in 2Q15. The company received “price concessions” from its suppliers, as low crude oil price reduced exploration and production activities and oilfield service providers came under pressure.
Diamondback Energy’s 2015 capex guidance
The company increased 2015 estimated production from its earlier guidance range of 29.0 thousand barrels of oil equivalent per day (or Mboe/d) to 31.0 Mboe/d to a range of 30.0 Mboe/d to 32.0 Mboe/d. In 2015, Diamondback Energy expects its drilling capex to fall ~15% compared to 2014. It expects 2015 drilling capex at the high end of the $400 million to $450 million range. This excludes the cost of any land acquisitions. In 2014, it spent ~$498 million in capex on drilling. Plus, it spent $903 million in 2014 on leasehold and mineral rights acquisitions.
Market conditions will affect Diamondback Energy’s drilling
Although Diamondback Energy has added a fourth rig in 2Q15, and may start a fifth rig in 3Q15, it may cut back on the number of rigs should the crude oil price fall below economical levels. According to its 2Q15 earnings press release, “we have the capital flexibility to decrease our rig count or pace of completions should market conditions warrant.”
Peer comparison
In comparison, Cimarex Energy’s (XEC) 2015 exploration and development capex is expected to be in the range of $0.9 billion to $1.1 billion. WPX Energy (WPX) expects its 2015 capex to be around $725 million. SM Energy (SM) projected its 2015 capex to be around $1.2 billion. Diamondback Energy makes up 0.26% of the iShares North American Natural Resources ETF (IGE).