Was Diamondback Energy Inc's Fantastic Run in 2016 Too Much?

By Matthew DiLallo Markets Fool.com

Image source: Getty Images.

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Last year was a transformational one for many oil companies, and Diamondback Energy (NASDAQ: FANG) was no exception. Fueling its transformation was a decision to spend heavily to lock up more land in the red-hot Permian Basin, providing a springboard for future growth. Those deals, along with higher oil prices, sent the stock on a fantastic run last year:

FANG data by YCharts.

A walk down memory lane

Due to weaker oil prices earlier in the year, Diamondback Energy took a cautious approach at thestart of the year. It initially planned to spend between $280 million to $340 million on capex, but it cut that range down to $250 million to $375 million a few months later because of continued commodity price volatility. That capital would enable the company to drill enough new wells to produce between 32,000 to 38,000 barrels of oil equivalent per day (BOE/D), up 5.7% at the midpoint from 2015's average.

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However, as oil prices improved, it ignited a wave of optimism in the industry, leading drillers to ramp up spending, especially on acreage acquisitions in the Permian. Diamondback joined the fray in mid-July, buying more than 19,000 net acres in the Delaware Basin for $560 million. The newly acquire acreage would boost production by 1,000 BOE/D while providing the company with 290 future drilling locations. That deal, along with higher oil prices, led Diamondback to ratchet up its capex budget to a range of $350 million to $425 million, which would push production up to 38,000-40,000 BOE/D, or 11% higher than the midpoint of its prior guidance.

Diamondback Energy had also been in discussions on an even larger acquisition during the fall. However, it lost out to RSP Permian (NYSE: RSPP), which paid a whopping $2.4 billion to buy 41,000 net acres in the Permian. In confirming that it was no longer involved in that deal, Diamondback proclaimed that it could grow just fine on its own, with plans to organically increase output by more than 30% in 2017while living within cash flow at current commodity prices.

However, it turned out that Diamondback had a better deal in mind, announcing a $2.43 billion transaction in mid-December to acquire more than 76,000 net acres in the Delaware Basin. That deal sets the company up for explosive growth in 2017 and beyond.

Image source: Getty Images.

What could keep the stock running higher this year?

Diamondback Energy's latest transaction was transformational in several ways. It will not only add nearly 9,500 BOE/d of production, but it provides the company with more than 1,200 future drilling locations to drive growth going forward. As a result, Diamondback Energy sees its 2017 production rising to a range of 64,000 to 73,000 BOE/D, which, at the midpoint, is 60% higher than last year and more than double the company's production in 2015.

However, Diamondback believes it has even more room to run as oil pricesimprove. It estimates that its acreage can support 15 to 20 drilling rigs per year, which is a huge step up from the six it plans to run this year. As it ramps up to full capacity, the company will deliver "unprecedented growth for years to come" according to CEOTravis Stice.

That said, Diamondback is already growing at an impressive rate for a company of its size. For perspective, RSP Permian sees its game-changing Permian deal fueling 86% production growth in 2017, though that's off of a much smaller base and will only push its full-year average up to a range of 52,000 to 56,000 BOE/D. Meanwhile, the slightly larger Parsley Energy (NYSE: PE) sees its 2017 output rising 58%. That will push Parsley Energy's average daily rate to between 57,000 to 63,000 BOE/D. It is worth noting, though, that Parsley Energy is pulling growth forward by investing beyond cash flow in 2017.

Compared to these peers, Diamondback Energy is already growing at an unprecedented rate. That could be all the fuel its stock needs to continue running higher in 2017. Meanwhile, if oil prices increase, it could allow the company to add more rigs and accelerate its growth rate, which could do the same for its stock price.

Investor takeaway

Diamondback Energy completed a game-changing acquisition at the end of last year, which will ignite top-tier production growth this year. What's even more remarkable is that the company can deliver that growth while living within cash flow at current commodity prices, which is something few peers can rival. Meanwhile, it has a put together an enormous low-cost resource base, which it can use to ramp growth even further if commodity prices continue rising. These factors suggest that the company's stock price could continue running wild in 2017 as long as oil cooperates.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.