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This Oil Stock Is Creating a Behemoth in the Permian Basin

By Matthew DiLallo - Aug 26, 2018 at 9:34AM

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Diamondback Energy’s continued wheeling and dealing will make it a force in the fast-growing region.

Diamondback Energy (FANG 4.02%) CEO Travis Stice stated earlier this year that "M&A activity is as fundamental to Diamondback Energy as the air that we breathe." Because of that, the company has been one of the most active acquirers in the oil sector since coming public in October 2012. Those transactions not only created significant value for investors but provided the company with the fuel to keep growing.

That ability to create value through mergers and acquisitions is worth noting given that the company recently took its biggest gulp of air by sealing a deal to acquire Energen (EGN) for $9.2 billion in a transaction that will transform it into one of the largest pure-play producers in the fast-growing Permian Basin. That sets it up to continue delivering high-octane growth in the coming years, which is something investors won't want to miss.

A drilling rig near some oil pumps with a nice sunset in the background.

Image source: Getty Images.

Taking a deep breath in 2018

Heading into this year, Diamondback Energy had spent more than $5 billion on six acquisitions, which significantly increased the company's size and growth potential. More importantly, these additions created meaningful value for shareholders. Overall, they helped boost the company's cash flow per share at a 30% compound annual growth rate, which enabled it to generate 65% annualized total shareholder returns in its first five years as a public company even though the price of oil is down about $20 a barrel over that time frame.

That past success in creating meaningful value through M&A is what makes the company's most recent deals so intriguing. While the headliner was the transformational transaction to buy Energen, the company also announced the acquisition of Ajax Resources for $1.25 billion. The deals will nearly double the size of its asset base -- making Diamondback the third-largest pure-play producer in the Permian and eighth-largest U.S. oil stock overall -- while at the same time significantly increasing its growth prospects. Those factors should help give it the fuel to continue delivering peer-leading total shareholder returns in the coming years.

Building a big-time oil producer

Once Diamondback Energy closes its acquisitions of Ajax and Energen, it will produce about 215,000 barrels of oil equivalent per day (BOE/D) in the Permian, which is up from roughly 113,000 BOE/D on a stand-alone basis. That puts it just behind fellow Permian-focused companies Concho Resources (CXO) and Pioneer Natural Resources (PXD 2.29%), which produce roughly 260,000 BOE/D and 280,000 BOE/D, respectively.

In addition to the significant increase in its current production rate, Ajax and Energen added a substantial number of high-return future drilling locations. Overall, Diamondback estimates that it has added more than 4,250 net drilling locations, which will boost its inventory to more than 7,000. While Diamondback hasn't announced how quickly it intends to develop those wells, the company aims to deliver significant growth while living within cash flow. That suggests production could increase at a more than 20% compound annual growth rate since that would match the pace of Pioneer and Concho.

Besides delivering high-octane production growth, Diamondback also expects to increase and accelerate the amount of cash it returns to shareholders next year. Its options could include increasing the dividend as well as potentially repurchasing shares. Either option has the potential to boost shareholder value in the coming years given what similar programs have done for its peers in the past.

The fuel to continue outperforming

Diamondback Energy has quickly and efficiently built a top-notch oil company focused on the fast-growing Permian Basin. Those efforts have already paid significant dividends for investors considering that the stock has vastly outperformed the market and most other oil producers over the last five years, which is even more impressive considering that it was a rough time for the oil sector. With two more needle-moving deals in the works, and oil prices on the upswing, Diamondback Energy appears poised to continue producing strong returns, which is why investors won't want to overlook its potential.

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Stocks Mentioned

Diamondback Energy, Inc. Stock Quote
Diamondback Energy, Inc.
FANG
$141.24 (4.02%) $5.46
Pioneer Natural Resources Company Stock Quote
Pioneer Natural Resources Company
PXD
$277.46 (2.29%) $6.21
Concho Resources Inc. Stock Quote
Concho Resources Inc.
CXO
Energen Corporation Stock Quote
Energen Corporation
EGN

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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