The Permian Basin is reported to be the second largest oil field in the world, second only to a massive field in Saudi Arabia. Years ago, many in the energy space didn’t think that the United States would ever be able to become energy independent because there wasn’t an economical solution to get the pools of oil out from the Permian Basin (or the Bakken or Eagle Ford shales either). Modern technology has changed that and now it’s not a matter of “if” the oil can be extracted from the ground, but how fast can you get it out.
Diamondback Energy (FANG), a pure West Texas play with about 65,000 net acres, is coming up with new ways to head towards terminal velocity with its oil production ways in the Permian Basin…and investors have been applauding. Take a look at the one-year, weekly chart for Diamondback since it went public in October 2012. The company raised $218.8 million with shares priced at $17.50 each.
Shares have climbed about 200 percent from the IPO price and have barely taken a breather on an incredible upward march.
In the third quarter of 2012, Diamondback was producing about 3,800 barrels of oil equivalent each day. In the third quarter this year, the company has nearly doubled that to about 7,400 barrels. On Thursday, Diamondback provided its guidance for 2014, predicting the production will rise steadily again to 15,000 to 16,000 barrels of oil equivalent each day.
The target seems aggressive, but reasonable as the company recently passed 10,000 barrels of oil equivalent per day, with the vast majority (about 80%) being oil. It expects to end 2013 with four horizontal rigs running with a fifth projected to begin drilling in the second quarter.
Break even production costs in the Permian Basin are low at about $55 per barrel, leaving considerable headroom for profits should West Texas Intermediate Crude prices continue to slide lower in the future after falling under $100 per barrel this week for the first time in nearly four months. With stockpiles in the U.S. mounting, economic uncertainty still looming and unrest in the Middle East at bay for the moment, there doesn’t seem to be many catalysts to drive oil back upward currently.
For those looking at things from a technical perspective, keep an eye on the pink line (the 10 day moving average). Essentially, FANG hasn’t closed below the 10 dma on a weekly basis since it began trading and if it breaks below that level, it may be signaling its time for some profit-taking to set in, but that doesn’t look like it’s happening today.