Canaccord Gives An Enthusiastic Buy On Diamondback Energy

Canaccord Genuity has upgraded Diamondback Energy Inc FANG to Buy from Hold and sees 30 percent production growth next year while spending within cash flow.

"Increased activity should yield top-tier growth while compressing the valuation multiple down towards the peer average. Delaware acquisition deepens the inventory and adds upside potential," Sam Burwell wrote in a note.

Burwell, who expects relative outperformance in shares, said FANG's valuation is rather compelling as it trades essentially in line with the group on 2017 and 2018 EV/EBITDA. Moreover, the Delaware acquisition adds meaningful inventory depth in what "we argue could become a core area of the basin."

The company plans to run at least four rigs through the rest of the year resulting in a steeper production and cash flow growth trajectory. The analyst expects the company to beat the top end of its new 38-40 MBoe/d guidance in 2016 and forecast 2017 total Production of 52.3 MBoe/d.

"In terms of cash flow, a 52% CF/DAS growth CAGR through 2018E ranks third in our Permian coverage universe. At $55 WTI, we project ~$100M of free cash flow next year," Burwell noted.

In addition, the analyst acknowledged the company's strong balance sheet and sees the company exiting 2018 with no net debt under his base-case commodity assumptions.

"Even with WTI held flat as low as $35, FANG's net debt/EBITDA should remain under 2.0x through 2018," Burwell added.

The analyst raised his price target to $100 from $83, while shares closed Tuesday's trading at $89.42.