In 2013, the best advance in E&P equities was recorded by Midland, Texas-based Diamondback Energy Corp. (NYSE: FANG) as its stock rose 175%.

Credit that striking performance to a singular focus on the Midland Basin, coupled with some of the area's best-in-class margins, and an increase in horizontal drilling that keeps pushing the type curves up and to the right.The company is operating five rigs now (four horizontal). With another horizontal rig scheduled to arrive in the second quarter and capital spending of $425- to $475 million, the company estimates 2014 production will be at least 15,000 barrels of oil equivalent per day.That's up from just 3,200 BOE daily at the beginning of 2012. You don't have to be a math whiz to know that's a great compound annual growth rate.

It helps to be operating in the right neighborhood. According to a report from ITG Research last year, the horizontal Midland Wolfcamp and Midland vertical plays benefit from the lowest pretax PV-10 breakeven oil prices in the Lower 48, at $55 and $59 per barrel, respectively. Undiscounted acreage values in these plays outrank the Niobrara Wattenberg Field and the super-rich Marcellus shale plays.

President and chief executive officer Travis Stice is leading the charge, drawing on 15 years of Permian-focused experience. The Texas A&M engineering graduate has more than 28 years in the industry.He joined the company in 2011 as chief operating officer after stints at Laredo Petroleum Inc., Burlington Resources and Mobil Oil.

Recently, Stice says, he could see as many as 15 drilling rigs on the horizon from his home in Midland. He is a third-generation local whose father was general counsel for an oil company, so he's lived through the Tall City's famous booms and busts, and he assures us that he's learned never to predict commodity prices. As the New Year began, we talked with Stice about his vision for FANG during this, the biggest boom in 40 years.

Investor How does this boom compare to the one in 1980?

Stice [Laughs.] I can't say we are at the same stage of decadence and spending that we saw in the 1980s. This one really feels a lot different.It's been going up at a slower rate of increase, but the top seems to be moving up higher. Does it have legs? Oh, I've learned never to predict boom-and-bust cycles.

This industry's been drilling wells in the Permian Basin for 94 years and I can't tell you how many times it's been left for dead. We can all remember when the FDIC came in and put padlocks on the First National Bank of Midland in 1983. So you can see why we want to be low-cost operators.

Investor You really had a tremendous run last year.

Stice Our shareholders certainly had a nice year. A couple of things drove that: being in the best location, and having larger companies like Pioneer Natural Resources come out and espouse horizontal drilling here when we were already doing that and growing our production because of it. We've got 66,000 net acres in five different counties in the central and northern Midland Basin—nothing to the east or west. We're a pure play in the hottest basin in the country.

We had a good run, but in this industry, you're only as good as your most recent quarter. I think the best is yet to come.

“We're a pure play in the hottest basin in the country,” says Travis Stice, Diamondback Energy president and chief executive officer.

Investor How did you achieve such a stunning performance in 2013?

Stice When we put the company together, we put in place three key strategies, and when we sit and talk about strategy and tactics now, at least one of those comes up, if not all three: execution, maintaining low-cost operations and transparency. I've lived here all my life and in every bust, the first guys out the door are the ones with high costs.So we've made sure we have best-in-class low costs. Transparency is important to our shareholders and to our employees, so that everyone is pulling on the rope in the same direction.

We work extremely hard, but only on stuff that matters to our shareholders. One of our mantras is, hard work is commendable, but results are rewardable. I'm pretty intense when it comes to execution and focus.We keep our strategy simple, and our focus extreme.

Investor How do you achieve your low-cost structure? You've had four consecutive quarters of double-digit declines in LOE [lease operating expense] on a percentage basis.

Stice You can achieve that by working on the numerator, the costs, by having low per-barrel cost metrics, or you can work on the denominator, volumes, by putting more barrels in the tank. The best way is to do both.

Investor There's no secret sauce?

Stice No secret sauce.But there's a different focus that we have, perhaps.I believe you have to inspect what you expect.As an engineer, I watch these things.You've got to put a certain mindset in place and make sure it's important to everyone in the company, from the CEO level down to the person who decides if you are using paper towels or shop rags. We are blessed that we are 70% or 80% oil, but that wasn't my doing—that was what Mother Nature put in the ground on the acreage we were fortunate to have. I can't take credit for that.

Investor Your recent minerals deals make a big difference too.

Stice The minerals acquisitions we've done are unique, I think. You know, minerals don't typically change hands; they change generations, like going from the grandmother to the grandchildren … so for us to pick up 15,000 gross acres of minerals under Midland County, right in the center of where we operate, is probably a once-in-a-lifetime opportunity.

Now because of these minerals, the economics are significantly better.If you take a typical horizontal well here, it's going to have a 45% to 50% rate of return, if oil's around $90 a barrel.If you run the same economics with the minerals attached, your rate of return jumps up to 75% or 80%, so that's a significant impact for our shareholders.It also provides support if commodity prices decrease.

This year those minerals will pop out $70- to $80 million in cash flow, and that's probably an inclining number as we go forward.

Investor You've said that your horizontal well results are resetting expectations.How so?

Stice We've guided that our typical well, with a 7,500-foot lateral, from a reserves basis will do 550- to 650 MBOE [thousand barrels of oil equivalent] and that's with a drilling and completion cost of $6.9- to $7.4 million.As you see more industry results from horizontal wells recorded, you'll probably see that reserve number go up. Most of our results now are above our type curve.

In true conservative engineering fashion, we get the opinion of Ryder Scott each year. I don't think we'd revise our type curve more than once a year, but I go down the hall and ask my guys about it all the time. It's highly variable. You can drill one well right next to a good one and get a different result.

Investor What is the key question the industry is trying to solve in the Permian?

Stice It's twofold. One is the question of how far apart you can put your lateral well spacing, and two, are we getting unique reserves from each zone? If you frac the Wolfcamp B, are you getting reserves out of the B only, or did your frac push up into the A so you're getting reserves from both zones? The good news is, time will tell. The bad news is, it takes time to get the answer out. But we've got 3,500 feet of potential pay out here.

This horizontal revolution has been the surprise. People ask me, why would you drill horizontal when the vertical wells out here do so well? My question is, why not drill horizontal if you get a higher rate of return?

We don't spend a lot of money on science—

“We work extremely hard, but only on stuff that matters to our shareholders.One of our mantras is, hard work is commendable, but results are rewardable.”

We do think about all these things, but most of our dollars go right to the drillbit. And besides, the more we all drill, the more we learn. Information flows pretty freely out here.We do think a lot about how big, how fast and why? We want to do deals that are accretive, to grow our inventory and put better locations in the inventory. How big and how fast to grow is a financial question.

Investor At what lower oil price would you rethink your plans?

Stice It's complicated. If the oil price drops $10 or $15 but your service costs stay the same, I think you'd have to look at it. But with my mineral position, I think I'm insulated from a $10-to-$15 price drop, which protects my shareholders. There is usually a six- to nine-month lag on the downside before costs start declining after the price goes down.

What we've done is position ourselves to operate under different price scenarios.We think about what we'd do in a scorched-earth scenario; what could we do to keep volumes flat? And at the other end of the spectrum, what can we spend in an unconstrained world? I think $100- to $200 million of spend could keep our production volumes flat for a year or so. We also hedge in 1,000-barrel increments to lock in a floor, and that insulates our cash-flow generation for our shareholders.

Investor When will you be cash-flow positive?

Stice Probably sometime next year. Until then, we'll deficit-spend until we get to a certain production level. It depends also on how active we are in acquisitions—the more you acquire, the longer you push out the time that you become cash-flow positive.

Investor So even with all your current locations, you're still looking for deals?

Stice Absolutely.We look at what I call little A and big A. Little A is bolt-on deals that are contiguous to your current acreage, and that's a day-in and day-out thing. The big A is where you actually are out in the marketplace looking around at other things. You need to be in that game or you might miss an opportunity.

Investor How many locations do you have now?

Stice If you count only the Spraberry and Wolfcamp B, we've got more than 650 locations, and our total horizontal [gross] locations are about 1,300. Each horizontal rig is going to spend about $100 million a year, and you get about 15 wells with that a year. So we've got many years of inventory ahead of us. I'm spending $1- to $1.5 million a day right now on horizontal drilling.

Investor You're adding a rig in the second quarter.Any trouble getting crews or services?

Stice No. There was a flight from the gas basins in the service industry, and a lot of those companies came out to the Permian Basin. You could see a tightening out here in 2014 if everything takes off like we think it will.One of the bigger threats—subtly—is if natural gas prices rise and you see more gas drilling, you could see some rigs leave this basin.

Investor What about your take-away capacity?

Stice We have a firm transportation agreement with Shell on the Magellan Longhorn Pipeline for 8,000 barrels a day, and our excess volumes are shipped to Cushing, Oklahoma. The barrels on Magellan are priced at LLS [Louisiana Light Sweet], and the Cushing barrels are priced at WTI.

On a macro level, there have been some constraints, but as an industry we have a good track record of addressing those constraints.

At the end of the day, as long as our execution is good and our costs are low, I think our shareholders will be rewarded.

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