Oil company's first well in formation delivers strong results

An August 1 research report indicated that Diamondback Energy Inc.'s (FANG:NASDAQ) Kelley State 2H well, the company's first in the Lower Second Bone Spring, recently achieved a 30-day, peak flow rate of 898 boe/day. "This is, in our view, very significant," ROTH Capital Partners analyst John White said. "If the initial wells in this formation perform on par with the Wolfcamp A formation, this will pose a meaningful potential for even more growth in FANG's reserves and production."

White reiterated that Diamondback's "operations are directed primarily at the large acreage areas of the Spraberry and Wolfcamp formations" and the company's "growth strategy is focused on the acquisition, development, exploration, and exploitation of unconventional, long-life, onshore oil and natural gas reserves."

With respect to the Q2/17 numbers, Diamondback reported production of 76,977 boe/day, ahead of ROTH's estimate of 71,291 boe/day and consensus of 72,346 boe/day, the report showed. The beat was "due to better than expected drilling and completion results," added White.

The production level Diamondback attained in Q2/17 led to it also exceeding ROTH and consensus estimates for earnings and cash flow, White reported. Adjusted earnings per share were $1.25, compared to $1.04 and $0.91, respectively.

Further, Diamondback raised 2017 production guidance by 4.8% and lowered CapEx for the year "due to better productivity and efficiency in the drilling and completion results," said White. The higher revised guidance range has a midpoint of 76 Mboe/day, which compares to the midpoint of the previous guidance range of $72.5 Mboe/day. "The positive cadence on the operations continues with lease operating expense per BOE guidance moving lower, to a range of $3.75–4.75, from the previous range of $4.75–5.75."

ROTH Capital rates Diamondback a Buy with a target price of $120 per share. The stock is currently trading at about $94 per share.