In a report published Wednesday, Stephens analyst Ben Wyatt initiated coverage of Diamondback Energy Inc (NASDAQ: FANG) with an Overweight rating and $98 price target. The analyst believes that the company is well positioned to become a "top-tier Permian producer."
The company's acquisition-related and organic growth have given it possession of multiple drilling locations, while the management's constant focus on costs, both open and D&C, have led to "impressive" F&D and cash margins.
"Ample liquidity and a strong balance sheet provide FANG with the flexibility to accelerate the development of its high quality rock, and ongoing Lower and Middle Spraberry tests could continue to add to the Company's inventory," Wyatt stated.
Diamondback Energy has close to 89,000 acres in the Midland Basin, which offers significant potential across multiple zones, including Lower Spraberry, Wolfcamp A and B, and Cline. In addition, there is further potential in Middle Spraberry, which is still being assessed by various operators, including Diamondback Energy.
According to the Stephens report, "FANG's management team has remained vigilant with respect to cost reductions and efficient allocation of capital. These moves have resulted in a "Best in Class" recycle ratio, providing FANG with ample liquidity to reinvest into its high quality rock."
Given the company's strong balance sheet and high cash margins, along with lower outspend than its peers, the analyst believes that Diamondback Energy is well positioned to cope with a commodity downturn.
Moreover, the almost 88 percent ownership of Viper Energy Partners LP (NASDAQ: VNOM) offers optionality for liquidity events in future.
The analyst also expressed optimism regarding the potential for value creation from the Spaberry, saying, "Tests of the Lower Spraberry continue to be positive across FANG's entire asset base. The best results have come from Midland County, which is posting strong EURs greater than ~1 Mmboe."
Latest Ratings for FANG
| Jun 2015 | Stephens & Co. | Initiates Coverage on | Overweight | |
| Jun 2015 | SunTrust Robinson Humphrey | Maintains | Buy | |
| Jun 2015 | Oppenheimer | Initiates Coverage on | Perform |
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