Diamondback Energy Inc. (NASDAQ: FANG) took the plunge into the Delaware Basin July 13, saying it has a deal to add roughly 19,000 net acres to its Midland-centric portfolio.

Diamondback entered a definitive agreement to buy leasehold interests and related assets primarily in Reeves and Ward counties, Texas, from Luxe Energy LLC for $560 million. Luxe is backed by Natural Gas Partners.

At a price of $27,000 per acre, Diamondback has set a high point in the Delaware Basin. Recent acreage has sold at prices ranging from $10,000 to $20,000, analysts said. However, the land, near the Pecos River, is in a sweet spot that could rival the Midland Basin.

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The Delaware acreage’s potential oil in place might be greater than in the company’s Midland Basin acreage, Diamondback said. The acquisition puts the company on a path to 100,000 barrels of oil equivalent per day (boe/d) of production in coming years, said Travis Stice, Diamondback’s CEO.

“Diamondback’s accretive entrance into the Delaware Basin represents another strategic milestone for our company,” Stice said in a statement. “The acreage sits within the most coveted area of the Southern Delaware Basin and has significant multizone and long-lateral potential.”

Diamondback increased its 2016 production guidance to 39 Mboe/d at the midpoint, up 11% from its February estimate. The increased production is based on running four rigs in the second half of 2016 as well as continued strong well performance. Diamondback said it could add a fifth rig in the fourth quarter.

Diamondback Energy, Delaware Basin, deal, at a glance

Chris Stevens, an analyst at KeyBanc Capital Markets, said costs at the acreage location have fallen while additional delineation remains to be done, potentially driving upside value.

“We view the deal positively and would not be surprised to see FANG continue expanding its position in the Delaware,” he said.

Diamondback intends to finance the acquisitions through a combination of cash on hand and capital markets transactions, which might include debt or equity offerings. The company had about $231 million cash as of March.

Diamondback also said July 13 it is offering 5.5 million shares of common stock with total gross proceeds of about $491 million.

Core Money

Diamondback has shown interest in the Delaware Basin in the past, and might also have found buying additional locations in the Midland too rich as prices continue to rise.

The Delaware Basin transaction will be plenty expensive. But Diamondback’s operational efficiency and the quality of the acreage near the Pecos River won analysts’ approval.

The acquired acreage lies in the Delaware’s over-pressured oil window in Reeves and Ward counties, considered the basin’s core-of-the-core with prolific EURs and significant stacked pay potential, said Mike Kelly, analyst at Seaport Global Securities LLC.

The purchase price is also supported by the contiguous nature of the assets, which allow Diamondback to drill capital efficient laterals that are nearly two miles long, Kelly said.

“FANG sees two prospective zones on the acquired assets with EURs/lateral foot that are on par with its prolific Lower Spraberry assets in the Midland Basin,” Kelly said. “The deal also supports our theme that the Delaware Basin is getting considerably better from both a productivity and cost standpoint.”

Tudor, Pickering, Holt & Co. (TPH) estimated that the acreage will eventually be worth $40,000 per acre based on value for just the Wolfcamp A and B.

“We continue to see this area potentially approaching, or exceeding legacy Midland transactions in 2017 at about $30,000/acre,” TPH said.

Transaction, Expansion

Diamondback currently holds about 85,000 net acres in the Northern Midland Basin and an estimated 2,700 gross total locations, of which 2,200 are economic at $50 per barrel (bbl).

The company’s total leasehold in the Permian is expected to increase to about 105,000 net acres, assuming all acreage is acquired.

The Delaware assets include about 38,765 gross (19,180 net) acres and 30 gross producing wells. The acreage is mostly contiguous which supports average lateral lengths of about 9,500 feet.

The acreage’s current net production is about 1 Mboe/d based on data provided by the seller, available geologic data and other information. Net proved developed reserves were about 2.2 MMboe, based on the company's internal estimates as of July 1.

Diamondback said it might revise its estimates after it takes control of the properties.

Gordon Douthat, senior analyst at Wells Fargo Securities, said Diamondback’s “best-in-class operating track record” positions the company to extract upside potential as geology is de-risked and downspacing is tested and optimized.

“Diamondback is among the best positioned to ramp into a commodity price increase and we think it can grow at double-digit rates in 2017 at $55/bbl,” Douthat said.

Production is from 19 gross producing vertical wells and 11 gross producing horizontal wells.

Diamondback estimates the acreage includes 290 net horizontal locations primarily targeting the Wolfcamp A, B and Third Bone Spring formations. Locations are based on 880-foot inter-lateral spacing in the Wolfcamp A and B and 1,320-foot inter-lateral spacing in the Second and Third Bone Spring.

Additional development potential could exist in the Bone Spring and Wolfcamp as well as through additional downspacing, the release said.

The company plans to operate a dedicated rig on the Delaware acreage in 2017, Stice said.

The acquisition also includes saltwater disposal infrastructure and additional assets valued at $10 million to $15 million.

The acquisition is expected to close in September. The transaction remains subject to completion of due diligence and satisfaction of other closing conditions, and there can be no assurance that it will be completed as planned or at all, the release said.

Darren Barbee can be reached at dbarbee@hartenergy.com, and Emily Moser can be reached at emoser@hartenergy.com.

RELATED: Luxe Energy Enters Delaware Basin With 18,000 Net Acres