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Barclays pans Apache, sets aggressive price target for Diamondback

Investment bank Barclays initiated coverage of several Permian Basin-focused oil and gas producers, lauding Diamondback Energy Inc.'s finances and asset base while coming down hard on Apache Corp. and its Alpine High shale play.

Barclays initiated Apache — which has focused much of its operating capital for 2019 on the Permian Basin, including a nearly exclusive position in the Alpine High with an "underweight" rating and a $29 price target. Apache shares closed at $31.75 on Jan. 15.

The financial firm said Apache "screens below-average" in several critical metrics, including 2019 cash flow and leverage. Barclays also gave a fairly dour assessment of the Alpine High, which is already unpopular among analysts due to its large gas content.

"We also ran comparative single well economics on our Alpine High type curve vs. [Apache's] reported economics vs. the economics of our other Reeves County type curves in the Delaware Basin. We are on the low end of [management's] estimates," Barclays said in its research note on North American oil and gas producers, adding that Apache would see internal rates of return of just 32% to 42% at a $3/Mcf gas price at the Henry Hub and $50 per barrel for West Texas Intermediate crude.

In a debate over which pure-play Permian producer it likes better, Barclays came down on the side of Concho Resources Inc. over Pioneer Natural Resources Co. The firm said it had preferred Pioneer due to its superior pricing exposure and higher net asset value but is boosting Concho now due to the belief that the company will have greater free cash flow.

"We are upgrading [Concho] from equal weight to overweight based on its ability to generate multi-year free cash flow and mid-teens oil growth even in a $50 WTI flat price environment and now prefer [Concho] over [Pioneer]," Barclays said. "Under the same scenario, we see [Pioneer] also achieving mid-teens oil growth."

The firm still said both companies are "core Permian holdings," and Pioneer could benefit from its announced $2 billion share buyback program, which could force the company to exhibit more capital discipline.

Barclays had positive words in initiating coverage of Diamondback, calling the Permian-only producer a "category killer" for its superior returns and ability to rapidly adjust to changing conditions even after a rapid buildup. The firm gave Diamondback an "overweight" rating and a $189 target as it praised the company for dropping three rigs as oil prices dropped to stay within cash flow. Diamondback shares closed at $105.01 on Jan. 15.

"[Diamondback] checks the box in all the right places, including screening well on fundamental metrics such as having low cash operating costs, top-tier EBITDAX margins, a strong balance sheet and a high quality asset base," Barclays said.