Diamondback Energy, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated results include Viper Energy Partners LP, in which Diamondback held approximately 64% at quarter-end.
Business context and financial performance
Diamondback is a Permian Basin-focused oil and gas producer, with midstream and mineral-interest businesses. Q2 production averaged 112,592 BOE/d, up 46.3% year over year; oil was 73% of production.
| Metric | Q2 2018 | Q2 2017 | Change |
|---|---|---|---|
| Total revenue | $526.3 million | $269.4 million | +95.3% |
| Operating income | $281.3 million | $132.3 million | +112.6% |
| Net income attributable to Diamondback | $219.1 million | $158.4 million | +38.3% |
| Diluted earnings per share | $2.22 | $1.61 | +37.9% |
| Operating margin | 53.5% | 49.1% | Higher |
For the first six months, revenue was $1.006 billion versus $504.7 million; operating income was $548.9 million versus $248.7 million; and Diamondback-attributable net income was $382.0 million versus $294.7 million. Six-month diluted EPS was $3.87 versus $3.07.
- Q2 oil, gas and NGL revenue rose 93%, reflecting both higher volumes and prices. Average realized oil price was $61.57/bbl versus $45.43; average realized combined price was $50.26/BOE versus $38.18.
- Cash operating expense was $8.83/BOE versus $7.66, while lease operating expense was $4.16/BOE versus $4.14. Management reported cash operating margins above 80% per BOE.
- Six-month operating cash flow was $764.4 million versus $394.4 million. Investing cash outflow was $1.199 billion, and financing cash inflow was $435.7 million. Cash increased $1.5 million to $113.9 million.
Debt, liquidity and capital allocation
Long-term debt was $1.967 billion at June 30, 2018, up from $1.477 billion at year-end 2017. Debt included $1.3 billion of 5.375% notes due 2025, $500 million of 4.750% notes due 2024, $321.5 million drawn on Diamondback’s revolver and $350 million drawn on Viper’s revolver. Diamondback reported $678.5 million available on its revolver; Viper reported $125 million available. The company reported compliance with its financial covenants. Consolidated current assets were $393.3 million and current liabilities $727.1 million.
Six-month development spending was $650.1 million. The 2018 drilling and infrastructure capital budget was approximately $1.4–$1.5 billion, excluding leasehold and mineral acquisitions. Diamondback declared a Q2 dividend of $0.125 per share, payable August 27, 2018.
Material changes, outlook and risks
- Revenue and production growth reflected increased drilling and acquisitions; DD&A rose 73% in Q2, primarily with higher production and reserve-related book value. Net interest expense more than doubled, to $17.1 million, reflecting higher rates and borrowings.
- Q2 derivative loss was $58.6 million, including $44.9 million of cash settlement losses; six-month derivative loss was $90.9 million. Derivatives are not designated as accounting hedges, so fair-value movements flow through earnings. The June 30 net derivative liability was $119.8 million.
- Other income, net was unusually high at $84.5 million in Q2 versus $8.3 million a year earlier. The provided filing text does not clearly explain the principal source of this increase. Viper’s tax-status election also generated a discrete deferred tax benefit; the company recorded a $6.6 million Q2 tax benefit.
- Management planned to add two rigs in Q3, bringing the operating rig count to 12–13, and expected six to seven rigs in the Midland Basin and five to six in the Delaware Basin for the remainder of 2018. Management said current-price cash flow, cash on hand and revolver capacity were expected to fund operations through year-end, while noting sensitivity to commodity prices and capital availability.
- After quarter-end, Diamondback agreed to acquire Ajax Resources assets for $900 million cash and approximately 2.6 million shares, subject to adjustments, with closing expected at October-end. The assets included approximately 25,493 net acres and production of approximately 12,100 BOE/d as of August 8. Diamondback also agreed to sell mineral interests to Viper for $175 million, with closing anticipated in August. The Ajax cash consideration may require cash on hand, drop-down proceeds, revolver borrowings and/or capital-markets financing.
- Other key risks include commodity-price and basis-differential volatility, rising oilfield service costs, concentrated purchasers and potential borrowing-base reductions. Two purchasers accounted for 51% of six-month revenue. Management said no material changes had occurred in the risk factors from the 2017 Form 10-K; it also reported no material adverse expected effect from pending routine litigation.
Important facts for investors to verify
- Reconcile the unusually large Q2 other-income amount and assess how much of reported earnings is recurring versus affected by derivatives and tax items.
- Track the Ajax acquisition’s closing, final consideration and funding mix, alongside the expected Viper mineral-interest sale proceeds.
- Compare the $1.4–$1.5 billion drilling and infrastructure budget with operating cash flow, acquisition spending and available borrowing capacity.
- Monitor realized oil and gas pricing, regional differentials, hedge settlements and customer concentration.
- Review debt levels, revolver availability and covenant headroom after transactions and subsequent financing activity.