Diamondback Energy, Inc. (Windsor Permian LLC) 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2012. The financial statements presented are for Windsor Permian LLC, a wholly-owned subsidiary of Diamondback Energy LLC, prior to the company's Initial Public Offering (IPO) and subsequent merger into Diamondback Energy, Inc. on October 11, 2012. The company is an independent oil and natural gas explorer and producer focused on the Permian Basin in West Texas. As of September 30, 2012, the company held approximately 31,052 net acres. The reporting period precedes the closing of the IPO and the acquisition of Gulfport Energy Corporation's Permian assets, which occurred in October 2012.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2012 | Nine Months Ended Sep 30, 2012 |
|---|---|---|
| Total Revenues | $16.6 million | $48.4 million |
| Net Income | $0.4 million | $15.4 million |
| Operating Cash Flow | N/A | $31.8 million |
| Capital Expenditures (Investing) | N/A | ($85.3 million) |
| Total Debt (Short & Long Term) | $140.1 million | $140.1 million |
| Cash and Equivalents | $1.3 million | $1.3 million |
| Production (Daily Avg - 3mo) | 2,637 BOE/d | 2,436 BOE/d (9mo) |
Note: Debt includes $100 million in credit facility borrowings and $30 million in subordinated notes to a related party. Cash flow figures are for the nine-month period as quarterly cash flow is not explicitly broken out in the summary tables.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 51% for the three months ended September 30, 2012, compared to the same period in 2011, and 46% for the nine-month period. This growth was driven primarily by a significant increase in production volumes (up 1,116 BOE/d for the quarter) which offset a decline in average realized commodity prices.
- Production Volumes: Average daily production increased from 1,521 BOE/d in Q3 2011 to 2,637 BOE/d in Q3 2012. Oil production volumes increased by 55,892 barrels for the quarter.
- Expenses: Lease operating expenses increased 24% quarter-over-quarter due to increased drilling activity and the cost of processing non-hydrocarbon gases. General and administrative expenses rose significantly due to IPO-related legal and professional fees and equity-based compensation.
- Derivative Impact: The company recorded a loss of $3.1 million on derivative contracts for the three months ended September 30, 2012, compared to a negligible loss in the prior year. Conversely, the nine-month period showed a gain of $2.0 million on derivatives due to settlements.
Guidance, Outlook, and Risks
- Capital Budget: Management anticipates a 2012 capital budget of approximately $150 million to $160 million (pro forma for recent transactions), allocated primarily to drilling and completion of operated wells ($126 million) and infrastructure ($12 million).
- Liquidity: The company expects cash flow from operations, IPO proceeds ($235.3 million net), and credit facility borrowings to fund operations through year-end 2013. The IPO proceeds were used to repay the $100 million credit facility, the $63.6 million Gulfport note, and the $30 million subordinated note.
- Market Risk: The company faces significant commodity price risk. It utilizes price swap derivatives to hedge a portion of its oil production. As of September 30, 2012, the company had a net derivative liability of $7.7 million.
- Operational Risks: Risks include natural production declines, the need for continuous capital investment to replace reserves, and potential delays in obtaining drilling permits due to regulatory activism.
- Related Party Transactions: Significant transactions occurred with affiliates of Wexford Capital LP, including administrative services, drilling services, and financing. The company also entered into a gas purchase agreement with MidMar Gas LLC, an affiliate.
Investor Verification Checklist
- Pro Forma Adjustments: Verify the impact of the Gulfport acquisition and Windsor UT contribution on future production and acreage, as these are not reflected in the historical financials of this filing.
- Debt Covenants: Review the specific financial covenants (e.g., EBITDAX to interest expense ratio) in the amended credit agreement and confirm compliance post-IPO.
- Derivative Exposure: Assess the remaining volume and strike prices of open oil swaps and their potential impact on future earnings if commodity prices rise significantly.
- Related Party Dependencies: Evaluate the extent of reliance on Wexford affiliates for administrative, drilling, and marketing services and the terms of these agreements.
- Capital Expenditure Execution: Monitor the company's ability to execute its $150M+ capital budget and the timing of infrastructure projects intended to reduce lease operating expenses.