3 Months Later: Update on Diamondback Energy

Diamondback Energy Inc. (NASDAQ:FANG) is back on my radar today after the stock made a new record high to $92.24 in today’s trading session. You will remember that I wrote a piece on the company titled “Diamondback Energy: Another Potential Energy Winner” about 3 months ago, on March 13.  In that piece, I mentioned Diamondback Energy’s proved reserves, contingent resources, growth story and strong financials. I completed that piece with the paragraph below as the conclusion.

“You will be hard pressed to find a reason for not going bullish on Diamondback Energy and barring any serious catastrophic occurrence, the stock will continue its bullish climb in the coming quarters. Considering the fact that the stock has a record of surging after impressive earnings (and vice-versa), I consider the 52-week high of $68.00 realistic if the company impresses in the next quarter as the expectations and guidance suggests. June options are attractive and the FANG Jun 2014 65.000 call (FANG140621C00065000is a great contract to consider”

3 Months Later

When I wrote that piece in March, shares of Diamondback were trading around $64 apiece and the call options that I recommended were trading at $6.65 per contract. The chart below shows how the FANG June options have traded in the last 3 months.

As at the time of writing this, shares of Diamondback has gained 44.12% and the contract has gained 240.3%. If you have gotten into the position in line with my recommendation, I am sure that telling you to sell-to-close the contract now will be belated since you would probably have sold the contract when the company’s recent bullish run started on May 29.

New Upside Potential for Diamondback

I am excited about the new upside potential for energy companies as the insurgency in Iraq sends oil prices up. Other oil-producing countries such as Libya and Nigeria have “crisis” of their own while the cat and mouse game between Russia, Ukraine, the West and China continues. All of this will have an adverse affect the global production of crude oil. A reduction in global production levels will cause the prices of oil to increase and I can see the price of oil rising in the next 3 months before OPEC is able to restore a sense of balance in the market.

The specifics of the Q1 2014 earnings results shows that Diamondback is poised to deliver growth as oil prices continue to rise. The company’s production volume increased by 30% from the prior quarter and it expects a 125% increase production by the end this year. More interesting is the fact that the company is driving its operating metrics lower despite the fact that it is increasing the production levels. For instance, Diamondback met its guidance of LOE at $6.50 barrel and cash margins stood at $67 a BOE from $64 in the previous quarter.

How to Trade FANG Options

I am bullish on Diamondback and my optimist nature is setting a $100 price target for the stock. I recommend the FANG Jan 2015 100.000 call (FANG150117C00100000) in line with my bullish thesis. Nonetheless, you may want to exercise patience until the volume of open interest increases before moving into position with this contract.

 

— Daily Option Alerts

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