Pure Play Permian Basin Player Hits the Market

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Diamondback Energy (NASDAQ: FANG) is the latest exploration and production company to access the capital markets, raising several hundred million dollars through an initial public offering (IPO) of common stock.  The company is a pure play on the Permian Basin and is targeting the development of various oil and liquids formations in this rejuvenated area.

Initial Public Offering

Diamondback Energy sold 12.5 million common shares at $17.50 per share, raising net proceeds of approximately $205 million.  The deal was priced within the expected range of $17 to $19 per share. The proceeds may be even higher for the company if the underwriters exercise the over-allotment option and sell an additional 1.875 million shares.

The exploration and production sector has seen several IPO’s over the last year as operators look for capital to accelerate growth and fund capital programs.  Midstates Petroleum Company ) went public in April at $13 per share, below the expected range of $16 to $18 per share.  The stock moved higher immediately after the offering but has performed poorly since then, trading down to $7.33 per share as of 10/19/2012.

MPO data by YCharts

Laredo Petroleum Holdings ) conducted an IPO in December 2011 at $17 per share, also below the expected range of $18 to $20 per share.  The stock has performed well since then, and has traded up to $21 per share as of 10/19/2012.

LPI data by YCharts

Large Shareholders

Gulfport Energy ) agreed in May 2012 to sell the company’s Permian Basin oil and gas properties to Diamondback Energy upon the conclusion of a successful IPOGulfport Energy received $63.6 million and 7.9 million shares of Diamondback Energy for these properties and will remain a large shareholder of the company.   

Another large shareholder of Diamondback Energy is Wexford Capital LP, a private equity firm that provided capital to sponsor the company when it began operations. Wexford Capital LP will own between 39% and 46% of Diamondback Energy on a post IPO basis.  The final ownership percentage will be based on whether Wexford Capital LP bought additional shares of Diamondback Energy during the IPO and if the underwriters exercised the overallotment option.

Overview

Diamondback Energy began operations in 2007 with the acquisition of a small leasehold position in the Permian Basin, with production of only 800 barrels of oil equivalent (BOE) of per day from 34 gross wells. The company made a follow up acquisition of additional Permian Basin acreage and after the IPO controls approximately 52,000 net acres in this rejuvenated basin.

Diamondback Energy properties contained proved reserves of 39.5 million BOE at the end of 2011, with approximately 78% categorized as proved undeveloped (PUD).  The company’s reserve base is oily, with crude oil and natural gas liquids composing 66% and 20% of proved reserves, respectively.

Diamondback Energy reported average production of 3,637 BOE per day in the second quarter of 2012, up 13% on a sequential basis from the 3,229 BOE per day reported in the previous quarter.

2012 Drilling Budget

Diamondback Energy is focused on the Wolfberry play in the Permian Basin, and the company includes the Wolfcamp, Cline, Clearfork, Spraberry, Strawn and Atoka formations as a part of this target.  These formations are notable for containing high levels of crude oil and natural gas liquids in the production stream.

Diamondback Energy will spend between $150 million and $160 million in 2012 to develop its Permian Basin assets.  The majority of this spending will be used to drill and complete 48 net wells, with smaller amounts allocated to leasehold acquisitions and infrastructure to support operations.

Pure Plays

While most exploration and production companies are diversified geographically with operations across various oil and gas producing basins, some are active in a single region or play.

Concho Resources ) is focused solely on the Permian Basin with a leasehold comprising 750,000 net acres and proved reserves of 385.5 million BOE at the end of 2011.  The company is targeting many of the same formations as Diamondback Energy and is also working on the Bone Spring, Avalon Shale and Yeso formations.  

Diamondback Energy represents a pure play on the Permian Basin, a storied oil and gas region that has produced for generations and is undergoing a boom as operators look for crude oil and liquid plays.  Investors also need to be comfortable with the concentrated shareholder base of Diamondback Energy and any influence they might exercise going forward.


shaleplays has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure