Diamondback Energy, Inc. quarterly report, Q2 FY2022

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Diamondback Energy, Inc. — Q2 2022 Form 10-Q

Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2022. Diamondback is a Permian Basin-focused oil and natural gas producer, with midstream operations through Rattler and mineral interests through Viper. Results consolidate both subsidiaries, including their non-controlling interests.

Financial and operating highlights

  • Q2 revenue: $2.768 billion, up 65% from $1.681 billion in Q2 2021. Oil sales were $2.189 billion, natural gas sales $264 million, and NGL sales $299 million.
  • Q2 earnings: Operating income was $1.978 billion and net income attributable to Diamondback was $1.416 billion, versus $955 million and $311 million, respectively, a year earlier. Diluted EPS was $7.93 versus $1.70. Calculated operating and attributable net margins were approximately 71% and 51% of revenue.
  • Production and pricing: Average production was 380.5 MBOE/d, nearly flat sequentially. Q2 average realized prices were $108.80/Bbl for oil, $6.15/Mcf for gas, and $40.69/Bbl for NGLs; the combined price was $79.49/BOE before derivative settlements and $70.65/BOE hedged.
  • Costs: Cash operating costs were $12.24/BOE: lease operating expense $4.59, cash G&A $0.75, and production/ad valorem taxes plus gathering and transportation $6.90. Management cited service-cost inflation; lease operating expense rose to $4.59/BOE from $4.34 in Q1.
  • Six-month results: Revenue was $5.176 billion versus $2.865 billion in 2021; net income attributable to Diamondback was $2.195 billion versus $531 million. Average production increased 7% to 380.9 MBOE/d. Management attributed most production-revenue growth to higher commodity prices, with additional contribution from higher volumes.
  • Cash flow and investment: First-half operating cash flow was $2.959 billion, versus $1.578 billion. Cash capital expenditures excluding acquisitions and equity-method investments were $905 million. Investing cash outflow was $1.232 billion; financing cash outflow was $2.340 billion, including dividends, debt repayments and repurchases. Cash and cash equivalents were $43 million at quarter-end ($59 million including restricted cash).
  • Debt and liquidity: Debt, net, was $5.456 billion, down from $6.687 billion at December 31, 2021; total equity was $14.390 billion. The company reported approximately $1.6 billion of liquidity, primarily availability under its revolving credit facility. Management said it was in covenant compliance.
  • Capital returns: Diamondback paid $541 million of dividends during Q2 and repurchased approximately $303 million of its common stock during the quarter. The board declared a Q2 dividend of $3.05/share ($0.75 base and $2.30 variable), payable in August.

Material changes and notable items

  • Q2 production revenue rose $363 million from Q1, mainly due to higher oil prices; combined production volumes were slightly higher. Oil and gas prices remained volatile, and commodity derivatives reduced realized prices.
  • First-half commodity-derivative cash settlements were net payments of $720 million, and the reported derivative loss was $653 million. These accounting and cash effects materially affected results and cash flow.
  • Diamondback issued $750 million of 4.250% notes due 2052 and redeemed $1.5 billion principal of notes due 2024 and 2025 in Q1. In Q2, it repurchased $337 million principal of its notes; Viper repurchased $50 million principal. Net debt fell despite the new issuance.
  • In May, Diamondback agreed to acquire the publicly held Rattler units in exchange for 0.113 Diamondback shares per eligible Rattler unit, subject to closing conditions. At filing, the transaction was expected to close after Rattler’s Q2 distribution.
  • Asset-retirement obligations rose to $273 million from $171 million at year-end, including $75 million of revisions to estimated liabilities during the first half. No oil and gas impairment was recorded in the first half; management warned lower trailing commodity prices could lead to future material write-downs.

Outlook, risks and contingencies

  • Management expected to hold oil production approximately flat for 2022, directing excess cash toward debt reduction and shareholder returns rather than production growth. The 2022 capital budget was revised to $1.82–$1.90 billion, excluding acquisitions.
  • Beginning in Q3 2022, the board’s stated capital-return commitment increased to at least 75% of free cash flow, from at least 50%; future variable dividends remain discretionary and depend on cash generation and other factors.
  • Management forecast 2022 lease operating expense of $614–$694 million, gathering and transportation expense of $232–$250 million, and a cash tax rate of 10%–15% of pretax income. It said expected cash flow, cash and credit availability should fund requirements, while noting dependence on production, prices and capital access.
  • Key exposures include oil and gas price volatility, inflation and labor or equipment constraints, Permian Basin concentration, transport and processing availability, water-use restrictions and induced-seismicity regulation, climate-transition and litigation risks, customer and counterparty credit risk, and potential impairment if commodity prices decline.
  • Routine legal matters were not expected by management to have a material adverse effect, though outcomes remain uncertain. The Rattler merger could be delayed or fail to close; related litigation and transaction costs could affect the companies.
  • Subsequent to quarter-end, Diamondback repurchased about $200 million of shares through July 29, increased its authorization from $2 billion to $4 billion, and redeemed $45 million principal of notes due in 2022.

Important facts for investors to verify

  • Whether reported earnings and cash generation remain robust after separating commodity-price effects, derivative settlements and noncash derivative marks.
  • How the 2022 capital budget, inflation-driven cost forecasts and flat-production plan evolve, and whether the stated capital-return commitment is sustainable across commodity-price scenarios.
  • Reconciliation of reported quarter-end cash and the liquidity figures, including the filing’s stated $21 million of standalone cash in its liquidity discussion versus $43 million of balance-sheet cash and cash equivalents.
  • Progress, closing conditions, dilution and integration implications of the Rattler merger, and any related litigation.
  • Debt reduction, interest-rate exposure and available borrowing capacity at Diamondback, Viper and Rattler, as well as the effect of commodity hedges on realized prices.