imaginima/E+ via Getty Images Diamondback Energy, Inc. ( FANG ) is one of the largest independent exploration and production companies in the incredibly resource-rich Permian Basin in West Texas. The energy sector has been in the minds of many investors lately as it has shown considerable volatility over the past two years. The industry was in the midst of an unprecedented boom prior to the outbreak of the coronavirus pandemic, which then effectively crippled it for several months. Energy prices surged following the 2020 elections, however, and the industry has since returned to a state of prosperity. In fact, the Permian Basin is currently poised to deliver record production next month, which shows that the Biden Administration’s general hostility to shale oil drilling may not prove to be a handicap. Diamondback Energy may prove to be one of the best ways to play this trend due to the company’s strong finances and commanding position in the Permian Basin. About Diamondback Energy
As mentioned in the introduction, Diamondback Energy is one of the largest independent exploration and production companies in the Permian Basin of West Texas. The company owns a substantial 413,000 net acres across both the Delaware and Midland Basins (the two main geologic hubs of the Permian Basin): Diamondback Energy Investor Presentation The Permian Basin is likely to be familiar to anyone that has been following the American energy industry over the past few years. This is because this region has been the focal point of the oil production boom due to its incredible wealth in terms of resources. This region is considered to be one of the largest oil provinces in the world, with the U.S. Energy Information Administration estimating that it contains approximately five billion barrels of proven crude oil reserves remaining, despite the fact that it has been exploited since the 1920s. This positions Diamondback Energy quite well, with the firm producing an average of 239,800 barrels of crude oil per day in the third quarter of 2021. It also positions the company quite well in terms of reserves, with the company having PDP reserves of 443 million barrels of crude oil as of December 31, 2020.
An energy company’s reserves are often overlooked by investors but they are critically important. This is because the oil and gas industry is an extractive one since the companies in the industry literally obtain their products by pulling them out of reservoirs in the ground. These reservoirs only contain a finite quantity of resources, so energy companies need to consistently find new sources of resources or they will eventually run out of products to sell. A company’s reserves dictate how long it can continue to operate without discovering new resources, which is important because its success at discovering resources is not guaranteed. Diamondback Energy’s reserves are sufficient for the company to produce at its third-quarter level for 1,847 days, which is about five years. This is admittedly not nearly as long as I would like and it is less than any of the majors possess. With that said, this figure is only considering the company’s PDP oil reserves, which is that proportion of the company’s crude oil reserves that can be produced economically given today’s conditions. If we look at Diamondback Energy’s entire proven reserves of 759 million barrels of crude oil, then its production life increases to 3,165 days, which is about eight and a half years. That is much closer to what many of the major energy companies possess, but not all of that can be realistically produced given today’s economic environment.
As just mentioned, a company’s success at obtaining new resources is by no means guaranteed. Diamondback Energy does, fortunately, have a track record that inspires a great deal of confidence. Since its initial public offering in 2012, Diamondback Energy has grown its proven reserves at a 54% compound annual growth rate: Diamondback Energy Investor Presentation This has certainly not all been organic as Diamondback has acquired quite a few companies over the years. These acquisitions naturally increased its reserves since it would obtain all of the assets of the purchased companies. It ultimately does not matter much whether the company grows its reserves organically through successful exploration or through acquisitions as it has the same effect. It would likewise be reasonable to assume that the company could purchase more assets going forward in order to continue to grow its reserves given the enormous deposits in the Permian Basin. If it can ultimately continue this track record, […]
source Diamondback Energy: Lower Production But Rising FCF To Benefit Investors
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