Diamondback Energy, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Diamondback is a Permian Basin-focused oil and gas producer; consolidated results include its majority-owned Viper and Rattler subsidiaries.
Financial performance and liquidity
Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $899 | $864 |
| Operating income (loss) | $(802) | $319 |
| Net income (loss) attributable to Diamondback | $(272) | $10 |
| Basic and diluted EPS | $(1.72) | $0.06 |
| Cash provided by operating activities | $849 | $377 |
| Cash used in investing activities | $(923) | $(937) |
- Oil and gas sales were $883 million, up $41 million (5%) year over year: higher production more than offset lower realized prices. Total revenue also includes midstream and other revenue.
- Average production rose 22% to 321,057 BOE/d; oil production increased 12% to 201,369 barrels/d. Average realized prices were $45.10/Bbl for oil, $0.14/Mcf for natural gas and $9.45/Bbl for natural gas liquids, compared with $46.12, $1.32 and $18.00, respectively, in Q1 2019. Average realized price was $30.23/BOE, versus $35.63.
- The $1.009 billion non-cash oil and gas property impairment was the main driver of the operating loss. The company also recorded a $542 million net derivative gain, including non-cash fair-value changes; these gains materially affected reported results.
- Cash operating costs were $8.52/BOE. Lease operating expense was $4.35/BOE; cash G&A was $0.51/BOE.
- Operating cash flow exceeded investing outflows by $74 million. Reported development capital expenditures were approximately $790 million; investing cash outflows also included acquisitions, midstream spending and equity-method contributions.
- At March 31, cash and cash equivalents were $149 million ($155 million including restricted cash). Long-term debt was $5.677 billion, compared with $5.371 billion at year-end 2019. Current assets of $1.268 billion were below current liabilities of $1.330 billion.
- Diamondback’s revolving facility had $199 million drawn and $1.8 billion available. Viper had $174 million drawn and $601 million available under its then-current borrowing base; Rattler had $451 million drawn and $149 million available. Management reported compliance with applicable financial covenants at quarter-end.
Changes versus the prior comparable period
- Revenue increased 4%, while average daily production increased 22%; lower commodity prices reduced realized prices, particularly for gas and natural gas liquids.
- Operating results shifted from $319 million of income to an $802 million loss, chiefly reflecting the $1.009 billion impairment and higher DD&A. No comparable impairment was recorded in Q1 2019.
- Net derivative results shifted from a $268 million loss to a $542 million gain, largely due to the change in fair value of open contracts.
- Operating cash flow rose to $849 million from $377 million. Net cash from financing fell to $101 million from $471 million; Q1 2019 included $341 million of Viper offering proceeds.
- Declared dividends were $0.375 per share versus $0.1875. The company repurchased $98 million of shares during the quarter, then suspended the repurchase program to preserve liquidity.
Outlook, management actions and risks
- Management reduced its 2020 capital budget from approximately $2.8–$3.0 billion to $1.5–$1.9 billion, a reduction of about 41% versus the original plan. The revised plan included $1.31–$1.63 billion for drilling and completions and an estimated 170–200 gross operated wells.
- Management said it expected cash from operations, cash on hand and Diamondback’s revolving facility to fund operations through year-end 2020, based on its then-current price and production assumptions. It cautioned that lower prices or production could adversely affect liquidity and the plan.
- The company reported hedging approximately 100% of remaining expected 2020 oil production, including basis differentials, and approximately 50% of expected 2021 oil production. It planned to curtail 10%–15% of expected May oil production, run fewer rigs and completion crews, and consider further curtailments as conditions warranted.
- Management cited COVID-19, the oil supply-demand shock and extreme price volatility as major risks. Further price declines could trigger additional material ceiling-test impairments, reduce economic reserves and production, and constrain cash flow. Pipeline, storage or regulatory production limits could add pressure.
- Low prices could also reduce drilling by Diamondback or third-party customers and lower Rattler throughput; its commercial agreements do not contain minimum-volume commitments. A prolonged or expanded shut-in could potentially affect future well performance.
- Viper’s lender recommended reducing its borrowing base from $775 million to $580 million, subject to lender approval, effective around mid-May. Under that proposed base, Viper’s availability would have been $407 million as of March 31.
- Tax expense included a $143 million discrete charge for a valuation allowance on Viper deferred tax assets, partly offset by a $25 million benefit related to expected federal NOL carrybacks. The company reported approximately $101 million of current federal taxes receivable at quarter-end.
- On May 1, 2020, the board declared a $0.375-per-share Q1 dividend, payable May 21. Legal proceedings were described as not expected to have a material adverse effect, though outcomes remain uncertain.
Important facts for investors to verify
- Whether the proposed Viper borrowing-base reduction was approved and how subsequent redeterminations affected liquidity and repayment requirements.
- Actual 2020 capital spending, drilling and completion activity, production curtailments, and management’s ability to fund operations under realized commodity prices.
- Subsequent ceiling-test impairments, reserve revisions and the assumptions behind any future impairment estimates.
- Hedge volumes, settlements, counterparty exposure and the difference between derivative gains in earnings and cash proceeds.
- Compliance with debt covenants, borrowing availability across Diamondback, Viper and Rattler, and the implications of subsidiary-level debt and guarantees.
- Collection of receivables and the effect of customer concentration; four purchasers each represented more than 10% of Q1 revenue.