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These Oil Stocks Are Just Scratching the Surface of Their Potential

By Matthew DiLallo - Oct 15, 2017 at 7:19AM

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Devon Energy, Concho Resources, and Diamondback Energy have enviable positions in America’s best shale plays, which could fuel steady growth for years to come.

While many oil producers struggled to survive the oil market downturn, stronger drillers had the good fortune of focusing their attention on repositioning so they could thrive when conditions normalized. One of the initiatives they undertook was gobbling up as much land in the top-tier shale plays as they could. These drillers are just beginning to tap into their enviable positions now that oil appears to be stabilizing.

Three of those oil stocks just starting to scratch the surface of their resource potential are Devon Energy (DVN 0.00%), Concho Resources (CXO), and Diamondback Energy (FANG 0.05%). Here's a look at what's up ahead for this trio.

An oil pumping unit with a brightly colored sunset in the background.

Image source: Getty Images.

A bit early but a bold move nonetheless

In December 2015, Devon Energy unveiled a daring set of transactions to sharpen its focus on its core plays. The company agreed to pay $1.9 billion for a privately held driller in the STACK play of Oklahoma, which brought with it 80,000 net acres filled with high-return drilling locations. In addition, the company spent another $600 million for more than 250,000 net acres in the Powder River Basin in the Rockies. While investors didn't like the moves initially, and Devon had to work hard to shore up its financial situation by selling non-core assets in 2016 because of the continued plunge in oil prices, these deals bolstered the company's already massive resource position.

The STACK has now emerged as a world-class resource play, and a franchise-defining growth asset for Devon, where it controls an industry-leading position. The company believes it can drill as many as 11,000 future wells in the play, the bulk of which are highly profitable at current oil prices. Add to that its legacy acreage position in the Delaware Basin side of the Permian, and Devon holds 30,000 potential drilling locations in those two plays, which is a multi-decade growth platform. Meanwhile, it also controls extensive positions in the Eagle Ford Shale and Powder River Basin that it can drill when prices rise or monetize to accelerate activities in its two core plays. Add everything together, and Devon has stunning resource potential that it's just starting to realize, expecting U.S. oil output to rise 18% to 23% by year's end and another 20% next year.

A top-tier position in America's prized oil play

Concho Resources spent most of the last year bulking up its land holdings in the Permian Basin. In January, it sold 14,000 net acres for $290 million, exchanged 21,000 net acres into a concentrated position, and bought 12,000 net acres for $360 million to enhance its holdings in the southern Delaware. Then in August, it purchased 40,000 net acres in the Midland Basin for $1.625 billion to strengthen its core position in that region. Finally, in November it bought 16,400 net acres in the northern Delaware Basin for $430 million, to complement its existing land so it could add scale and drill longer wells, which will improve returns. As a result, the company now controls 610,000 net acres across the Permian, which hold more than 19,000 future drilling locations and an estimated 8 billion barrels of oil equivalent resource potential.

Concho's focus on the Permian is worth noting because it holds a treasure trove of oil riches, with one estimate suggesting that it's a $3.3 trillion prize. The company already has plans in place to tap into these riches, anticipating that it can expand its output by more than 20% annually through 2019. Further, thanks to its low-cost structure and high-return drilling locations, it can deliver that growth within cash flow at current oil prices.

A drilling rig with the sun just over the horizon in the background.

Image source: Getty Images.

An "unprecedented runway" of future growth

Last July, Diamondback Energy announced a $560 million deal to join Devon and Concho in the oil-rich Delaware Basin side of the Permian. That acreage, when combined with its legacy land in the Midland, positioned the company to deliver more than 30% production growth in 2017 and "the ability to drive multi-year organic growth, within cash flow on our existing asset base." However, the company supercharged that assessment in December after spending $2.4 billion to buy rival Brigham Resources for its large Delaware Basin land holdings.

As a result of that deal, the company positioned itself to deliver 60% production growth in 2017. Further, CEO Travis Stice stated that "we also believe our balanced acreage position between the Midland and Delaware Basins provides a runway for unprecedented growth for years to come while we remain focused on shareholder returns and balance sheet integrity." For a perspective of its growth potential, the company estimates that it has the resources to operate 15 to 20 drilling rigs on its land when oil prices improve, up from the nine it's running this year. The company can therefore grow at a rapid rate at current crude prices, with the potential to accelerate as they improve.

We're still in the early innings of shale boom 2.0

While rivals were desperately trying to stay afloat during the oil market downturn, leading drillers Devon Energy, Concho Resources, and Diamondback Energy were taking advantage of opportunities to bolster their positions in America's best shale plays. As a result, this trio holds a treasure trove of oil that they're just starting to unleash. Growth-focused investors still have an opportunity to get in early on the next shale boom.

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Stocks Mentioned

Devon Energy Corporation Stock Quote
Devon Energy Corporation
$55.11 (0.00%) $0.00
Diamondback Energy, Inc. Stock Quote
Diamondback Energy, Inc.
$121.21 (0.05%) $0.06
Concho Resources Inc. Stock Quote
Concho Resources Inc.

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