Analysts revamp Diamondback Energy's stock price target ahead of earnings
In 1859, Col. Edwin Drake, an American businessman, drilled the first successful oil well, at Titusville, Pa.
At the time, some people called the project “Drake's Folly,” but it actually marked the birth of the modern petroleum industry.
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Drake sold his "black gold" for $20 a barrel and people have been buying the stuff ever since.
Diamondback Energy (FANG) has been making its mark in the Permian Basin, which is located in the Southwest and has the distinction of being the highest producing oil field in the country.
On Feb. 12 Diamondback said it would buy a privately held rival, Endeavor Energy Partners, in a $26 billion cash-and-stock deal that would “create a premier Permian independent operator.”
“This is a combination of two strong, established companies merging to create a ‘must own’ North American independent oil company,” Travis Stice, Diamondback’s chairman and CEO, said in a statement. "With this combination, Diamondback not only gets bigger, it gets better.”
During a Feb. 21 call with analysts, Stice said that in his experience, "as companies get bigger, the more inwardly focused they become.
"So, they focus more on their own results and less on what others are doing around them," he said. "But it's been a hallmark of ours to really pay attention to what goes on around us."
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Diamondback CEO: 'Our culture will stay intact'
Stice said, "It's culturally ingrained not only to rigorously examine our own internal results but also spend intellectual capital on looking across the barbed wire fence at what others are doing."
"And as we move into a much larger position post-close, I promise you, that culture will stay intact," he said.
Fewer wells would be needed to keep production flat in 2025 and beyond, with both companies being able to run a full business on Diamondback's cost structure, President and Chief Financial Officer Kaes Van't Hof said.
The combined company would be the third-largest oil and gas producer in the Permian Basin of West Texas and New Mexico, behind Exxon Mobil (XOM) and Chevron (CVX) , both of which announced their own acquisition deals in October.
The new entity would also be the only pure-play Permian oil producer outside of Pioneer Natural Resources (PXD) , which is being acquired by Exxon Mobil. Meanwhile, Chevron said it was buying Hess (HES) for $53 billion.
Diamondback Energy is scheduled to report first-quarter results on April 30 after the market closes.
Analysts surveyed by FactSet expect the company to report profit of $4.38 a share on $2.09 billion of revenue. A year earlier Diamondback earned $4.10 a share on $1.92 billion in revenue.
In February, the company posted a fourth-quarter profit of $4.74 a share on $2.23 billion in revenue, beating Wall Street's call for $4.70 and $2.16 billion.
Analyst focuses on acquisition
Analysts recently have been reacting to Diamondback's plans.
Last week, Mizuho analyst Nitin Kumar raised his price target on Diamondback to $217 from $200 and affirmed a buy rating on the stock.
The price-target hike came amid expectations that Diamondback could finalize its acquisition of Endeavor Energy Resources sooner than initially anticipated.
Kumar noted that Diamondback Energy has risen about 35% this year. (The stock closed on April 17 at $201.15.)
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An April 8 regulatory filing by Diamondback outlined a possible timeline for the completion of the Endeavor transaction, he said. A shareholder vote is scheduled for April 26, Kumar said. According to Mizuho's analysis, the deal might close in the second quarter, but its base case is closing sometime this year.
ScotiaBank analyst Paul Cheng also raised his price target on Diamondback shares last week, boosting it to $255 from $210 while reiterating a buy rating on the stock.
The update came after the firm published a commodity price deck, where it raised its near- and long-term oil-price forecasts.
On April 17, Wells Fargo analyst Roger Read raised the firm's price target on Diamondback Energy to $227 from $203 and held to an overweight rating on the shares.
Based on robust operational momentum, the firm sees potential upside to 2024 U.S. onshore oil production estimates, translating to another year of higher-than-expected U.S. supply growth.
Continued drilling and completion efficiency improvements, incremental cost deflation, and a focus on high grading should combine to create positive momentum throughout 2024, Read added.
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