November 6, 2019 / 8:57 PM / 6 days ago

UPDATE 1-Diamondback Energy shares plunge on lower oil output

(Adds analyst comment; updates share price; adds detail)

HOUSTON, Nov 6 (Reuters) - Shares of Diamondback Energy Inc plummeted 13% on Wednesday after the company reported a dip in third-quarter oil output, raising fresh concerns about well spacing in the top U.S. shale basin.

Diamondback is not the first U.S. shale producer to see its stock drop on concerns on well interference. Shares of Concho Resources Inc in August plummeted more than 20% after the company disclosed disappointing output from wells drilled in close proximity.

Diamondback reported financial results on Tuesday after the market close that missed analyst expectations for profits and oil production, as some of its acreage saw production interrupted by neighbors fracking a large number of wells nearby. It also added wells that produced a higher amount of natural gas.

“You had those two issues happen at the same time, which were both unusual,” said Leo Mariani, analyst with KeyBanc Capital Markets. Because Diamondback is a widely held stock in a sector unpopular with investors, “a bad quarter gets magnified,” he said.

Shares traded at $77.36, down 14.2% Wednesday, and have fallen about 16% this year. Six brokerages trimmed price targets for the shares on Wednesday.

“These are operational challenges, not reservoir problems,” said Travis Stice, chief executive of Diamondback, who sought during a call Wednesday morning to reassure analysts that the wells that experience “frack hits” from neighbors do recover to full volumes.

The impact of the neighboring activity “abates” in the fourth quarter as Diamondback expects to return to oil growth, analysts with Cowen said in a client note.

Diamondback’s quarter-over-quarter oil output dipped slightly, and its percentage of oil production fell to 65% from 68% the prior quarter.

Diamondback is better modeling its production forecasts for such well downtime, but expects “frack impacts to continue to be significant, primarily in the Midland Basin with operators in full field, multi-well-pad development mode,” Stice said.

Oil output is soaring in the Permian Basin of Texas and New Mexico, helping push U.S. production to record highs.

But the CEO of Pioneer Natural Resources, Scott Sheffield, said in August that aggressive drilling in parts of the Permian Basin is resulting in top acreage “being exhausted at a very quick rate.”

Well spacing and interference will be an ongoing issue in the field, Mariani said. “You’re not going see fewer wells in the Permian next year,” he said. “It’s going to get more and more crowded.” (Reporting by Jennifer Hiller Editing by Marguerita Choy and Leslie Adler)

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