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Permian's Diamondback Seen as 'Top Pick' in Tough Price Environment

Among the independents active in the Permian Basin, Diamondback Energy Inc. is particularly well positioned to deal with weak commodity prices, analysts following the company said in response to its latest guidance.

Diamondback has been adept at targeting the Lower Spraberry, and analysts said they are expecting more success in that interval this year. Diamondback also targets the Wolfcamp, Clearfork and Cline formations. They praised the company for dialing back capital spending while still projecting significant production growth.

The company "...remains well positioned in our view to weather commodity price headwinds with a solid asset base, management track record of execution and conservative balance sheet..." Wells Fargo Securities analysts said in a note Wednesday. Topeka Capital Markets said Diamondback "...remains a top pick in this challenged commodity price environment." Wunderlich Securities Inc. said, "...Diamondback remains in one of the most economic regions of the U.S. in the Midland Basin..."

Diamondback's 2015 production is forecast to average 26,000-28,000 boe/d, of which 4,200-4,500 boe/d is attributable to subsidiary Viper Energy Partners LP, the company said. The midpoint of current guidance represents about 40% growth compared with 2014 production. As previously announced, Diamondback plans to release two of its horizontal rigs and its remaining vertical rig, leaving it with three horizontal rigs beginning in February.

The Midland, TX-based company plans to drill and complete 50-60 gross horizontal wells this year, which represents a more than 30% reduction from 80 gross wells drilled in 2014 at the midpoint. The company said it expects service costs to recalibrate to the current commodity price environment and expect a 7,500-foot lateral horizontal well to range from $6.2 million to $6.7 million.

Capital spending this year is slated to be $400-450 million for drilling, completion and infrastructure, a more than 40% reduction from its initial plan. Last year, acquisitions grew Diamondback's acreage by nearly 30%, and the company planned to be running eight rigs. However, things have changed, CEO Travis Stice said Wednesday.

"Given the current commodity situation, we now intend to operate less than half of that in 2015, consistent with our commitment to capital discipline and prudent allocation of resources," he said. "Oil prices are now less than half of what they were at the peak this past summer, and we believe service costs should also decline from those highs. We are aggressively pursuing cost reductions and anticipate an overall reduction of at least 20%. Currently, we have seen approximately 10% in reductions but [hydraulic fracture] frack spreads have been slow to respond due to the backlog of completions.

"Assuming that WTI [West Texas intermediate crude] stays flat at $50 this year, we continue to expect to become cash flow positive in the second half of 2015 with total outstanding borrowings under our credit facility of under $300 million."

About 10,700 b/d of Diamondback's 2015 production is hedged with a combination of Brent, WTI, and Louisiana Light Sweet fixed-price swaps at an average of $88.14/bbl.

Diamondback shares gained more than 6% Wednesday to close at $65.30.

Stice said the company would be looking to grow through accretive deals and through the drillbit. "However, we will not do a dilutive deal simply to get larger. I believe that Diamondback remains an attractive investment as a low cost producer in the highest return basin."

Production in 4Q2014 increased 25% to 25,700 boe/d, from 20,600 boe/d in 3Q2014. Full-year 2014 production increased 166% over full-year 2013 to 19,500 boe/d, above the 2014 guidance range of 17,000-19,000 boe/d. Production attributable to Viper's interests during 4Q2014 was 4,200 boe/d, an increase of 24% from 3,400 boe/d in 3Q2014. Full-year 2014 production was 3,040 boe/d, which was above the high end of 2014 guidance of 2,500-3,000 boe/d.

Severe winter weather in late December and early January caused "substantial" production interruptions throughout the Permian Basin for area operators, including Diamondback, the company said, adding that it is still quantifying the first quarter volumes that were shut in due to a lack of oil marketing or electric power.

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