“The time to buy is when there’s blood in the streets.” — Baron Rothschild

Every investor has heard this saying, but one thing I have learned over the years is that no matter how much blood is in the streets, there can always be more. Many times I have bought during a panic only to see the panic continue. So my version of this saying is something like “Buy when there’s blood in the streets, BUT there’s light at the end of the tunnel.” It’s also the Warren Buffett way, who has noted that “You pay a very high price in the stock market for a cheery consensus.”

Today’s recommendation comes as the oil market is panicking. Oil stocks were punished yesterday on revived fears that shale oil production is coming back too quickly, and that may soon nullify the impact of the cuts OPEC made last November. Thus, there are some fears that OPEC may abandon the cuts when they meet later this month. (I think this is highly unlikely).

The catalyst for the current drop — as it was for the March sell-off — was a bearish U.S. crude oil inventory report. This week’s report from the Energy Information Administration showed crude stocks fell 930,000 barrels, versus a 2.3 million barrel drop predicted by analysts. U.S. crude oil stocks remain just 7 million barrels off a record high.

That’s a gloomy backdrop. In fact, an article yesterday on CNBC put an exclamation point on the gloom: No end in sight as oil slide accelerates; ‘The bears are in control of this market’. But that article also highlights the light at the end of the tunnel, quoting a Citigroup analyst who reiterates a point I made during last month’s sell-off:

“We think the OPEC cuts are pretty substantial and they help rebalance the market by drawing down inventories. If markets are unconvinced the cuts can meaningfully tighten the market, part of it is because they’ve been looking at the first quarter. We think that we’ll see the overhang lifted. We continue to see that’s the case despite the sell-off today. We’re not thinking the market sell-off is telling us we should change our view.”

If he and I are right, then this is indeed the perfect time to buy.

At this year’s annual Wealth Summit, each analyst was asked to make a special stock pick. These are generally stocks that aren’t already in a portfolio, but that have real potential over the next year.

My pick this year plays on the theme of a recovering oil industry and the red hot Permian Basin. I chose pure Permian Basin oil producer Diamondback Energy (NASDAQ: FANG) for reasons I explain below. But leading up to the Wealth Summit, Diamondback shares rallied. Thus, when I made the recommendations, I advised that investors wait for a pullback to under $100, which I believed was likely in coming weeks.

That pullback has now happened, so I am putting Diamondback in The Energy Strategist portfolio for aggressive investors. Few companies have managed to grow oil production as quickly as Diamondback, and it is a pure play in what I believe is the hottest oil play in the world.

Over the past five years, Diamondback has grown annual crude oil revenues from $42 million to $470 million, annual crude oil production from 400,000 bbl to 11.6 million bbl, and crude oil reserves from under 20 million bbl to nearly 140 million bbl. Diamondback has a $9.3 billion market cap but owns a stake in Viper Energy Partners LP (NASDAQ: VNOM) worth $1.2 billion. VNOM is a master limited partnership (MLP) structured on royalty payments from mineral rights.

This week Diamondback released Q1 earnings. First quarter 2017 Adjusted EBITDA was $175 million, up 27% from $138 million in Q4 2016. First quarter 2017 revenues were $235 million, up 27% from Q4 2016. The company reported Q1 2017 production of 61.6 thousand barrels of oil equivalent per day (MBOE/d; 75% oil), up 19% over Q4 2016. The company reported Q1 2017 cash operating costs of $9.31/BOE, and estimated Q1 2017 Midland Basin drilling and completion costs were down 5% quarter over quarter. 

Diamondback expects full-year 2017 production to be between 69.0 MBOE/d and 76.0 MBOE/d from a total capital budget of between $800.0 million to $1.0 billion for drilling, completion and infrastructure. The midpoint of the production guidance would represent nearly a 70% increase over full-year 2016 production levels.

Diamondback is a high-flier that should do extremely well if oil prices settle into a $50-$60/bbl range for the rest of the year. Note that it’s not for conservative investors. I don’t expect oil prices to remain in the mid-$40s for long, but should they fall lower you could see Diamondback pull back into the $80s.

But there’s enough blood in the streets for me, and I see the light at the end of the tunnel. The current price of $95 represents a good entry price given Diamondback’s extraordinary and sustained ability to grow production. Buy Diamondback Energy below $100.