Additionally, Magellan is proceeding with the BridgeTex pipeline, which will transport almost 300,000 boepd of Permian Basin crude from Colorado City, CO. to Houston. It is expected to begin service mid- 2014.
Through this access to LLS pricing, Diamondback Energy Inc (NASDAQ:FANG) estimates a $15 million to $20 million annual cash flow enhancement, based on projected production, which is expected to commence H2 2013. Nevertheless, it’s clear that the existing cash together with the cash flow fall short of the total 2013 capex by approximately $120-$130 million. This shortage will be covered either by long-term debt or the issuance of new equity.
Even if the best production case scenario occurs and the company avoids the operational hiccups in 2013, Diamondback will have an estimated $130 million long-term debt by year end.
Assuming the stock doesn’t correct from the current levels, and the company hits its production targets, the EV will be $1.1 billion in December 2013. This translates into $150,000 per flowing barrel, which is woefully high despite the fact that this production is oil-weighted (85% oil and liquids). With such valuation, Diamondback Energy Inc (NASDAQ:FANG) will not be attractive as an acquisition target either. Why?
Check out SandRidge Energy Inc. (NYSE:SD), which struck a deal recently to sell its Permian Basin properties to privately-held oil and gas company Sheridan Production Partners for $2.6 billion. With the proceeds, SandRidge Energy Inc. (NYSE:SD) will reduce its worrisome debt load and fund development of its core Mississippian play.
SandRidge Energy Inc. (NYSE:SD) was producing 24,500 boepd from these oil-weighted assets (82% oil and liquids) that were purchased at $106,000 per flowing barrel, while the basin average is about $100,000 per flowing barrel. The transaction metrics were obviously rich, although they were not enough to calm SandRidge’s shareholders, who have been calling for a restructuring of the company’s board and for the CEO to resign.
Foolish round up
The investors who keep track of my articles, remember my bearish calls about several overvalued stocks, such as Forest Oil Corporation (NYSE:FST), Quicksilver Resources Inc (NYSE:KWK), W&T Offshore. For instance, I discouraged all to buy Forest Oil and W&T Offshore at $7 and $15.50, respectively, a few weeks ago. These two stocks hover at $5 and $13, respectively, today.
This time, I am warning all about Diamondback Energy Inc (NASDAQ:FANG) and its meaty metrics. To me, it is a good short-candidate at current levels. Those who are optimistic about Diamondback must reevaluate their position. I believe that the market will recognize the gross mismatch between valuation and fundamentals, adjusting the company’s valuation sooner or later.
The article This Energy Play Is Priced Like the Rarest Diamond of the Permian Basin originally appeared on Fool.com and is written by Nathan Kirykos.
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