Diamondback Subsidiary Prices IPO

Zacks

Midland, TX-based energy explorer Diamondback Eenergy Inc. (FANG) and its subsidiary Viper Energy Partners L.P. announced the pricing of the latter’s initial public offering of 5,000,000 common units at $26.00 a piece, with a 30-day over-allotment option for an additional 750,000 units.

The offering is pursuant to a registration statement previously filed with the Securities and Exchange Commission (SEC.TO). The units have been approved for listing on the NASDAQ Global Select Market and are expected to trade under the symbol “VNOM” on June 18. Diamondback will get the proceeds from the offering, which is likely to close on June 23.   

The common units offered to the public represents an aggregate 7% limited partner interest in Viper, or approximately 8% if the underwriters exercise in full their over-allotment option. Diamondback will own the general partner of Viper, apart from holding the remaining 93% limited partner interest in Viper (or 92% if the underwriters fully exercise their option to purchase additional common units).

Diamondback, which went public in October 2012, is an independent exploration and production company engaged in the acquisition, finding and development of unconventional onshore oil and gas properties. The company’s operations are concentrated primarily in the Permian Basin of West Texas.

Having done a stellar job at raising production and reserves from its assets, analysts are predicting strong earnings growth for Diamondback over the next couple of years. The 2014 Zacks Consensus Estimate is $2.81, representing 125% earnings per share growth over 2013. Next year’s average forecast is $3.80, corresponding with 35% growth.    

However, shares of Diamondback – currently trading at $90.26 – have already climbed more than 75% since the beginning of the year. Therefore, any upside from here may be limited.

As a result, Diamondback currently retains a Zacks Rank #3 (Hold), implying that it is expected perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can look at WPX Energy Inc. (WPX), Encana Corp. (ECA) and Ultra Petroleum Corp. (UPL) as good buying opportunities. These domestic upstream energy operators – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.

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