Too much FANG? Or just too much of Diamondback Energy. Today Diamondback (FANG) sold 10.5 million shares of its red-hot stock for $97 to help pay for a gigantic acquisition of Permian acreage. It's yet one more stock-for-oil deal, of which all have worked so far, after an initial hiccup.
Still, you have to wonder whether this is a FANG too far. Sure it is buying into the most fecund acreage in the U.S. Yes, Diamondback is shrewdly pricing the deal down 13 from where it's high and off four from yesterday's close.
But this is $2.4 billion all-in deal, to buy 76,000 acres from Brigham Resources, comes after an OPEC deal that people are already beginning to see chinks in.
What' s the worry here? Let me give you a bunch of them. First, while oil spiked like a demon -- running almost to $55 after we got the second agreement limiting non-OPEC, chiefly Russian, energy production -- the price of energy out two years didn't budge. Neither has the price out five years had much movement. They are both in the mid-$50s price range.
To me, that says that as much as you might want to believe that OPEC has discipline, the longer-term, and in many ways more important, markets are signaling that what you see is what you will get -- and no more than that.
Second, we know that the Permian is fabulous acreage, where you can get oil out of the ground for as little as $35 -- that's right potentially making $15 a barrel, as we have heard from Pioneer Natural Resources (PXD) and Cimarex Energy (XEC) of late -- at a certain point all of this drilling could be sowing the seeds of the market's own destruction.
Think about it like this. One of the main reasons why oil is stuck at these levels and no higher is that outfits like Pioneer are selling as much oil forward as they can, meaning that they are drilling and locking in gains right now. If really smart people like Scott Sheffield, the outgoing CEO of Pioneer, are selling into these futures markets, should you be buying?
Third, have you seen the U.S. rig count lately? It's almost back to where it started this year. That's right, after falling from 664 down to 404 last May, it's now up to 624.
The spigot's turned back on. While this country can't make up for the 1.8 million estimated barrels that we think OPEC and non-OPEC countries will be cutting, at this pace, we will be a factor in balancing supply and demand.
Finally, our new president hates OPEC. He's putting into place a cabinet that truly does favor drilling pretty much everywhere, and while no place is as cheap as the Permian in this country, with the way technology is lowering the price of exploration and production, who knows how much we can pull out of the ground. Again, if you recall at the beginning of the week, Rusty Braziel, my go-to energy source from RBNenergy.com speculated on Mad Money that we could overproduce here to the point that we could tip the balance into oversupply.
So, just be careful here. This FANG is up 50% for the year. It's buying into terrific acreage. But be aware that the stuff it is pulling out of the ground has to keep climbing before you get too excited about participating in still one more equity deal.