Diamondback Energy, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. Diamondback is a Permian Basin-focused oil and natural gas producer. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $87.5 million | $101.4 million; down 14% |
| Net income (loss), consolidated | $(35.6) million | $6.4 million |
| Net income (loss) attributable to Diamondback | $(32.9) million; $(0.46) per diluted share | $5.8 million; $0.10 per diluted share |
| Operating cash flow | $72.8 million | $99.1 million |
| Cash and cash equivalents, March 31 | $235.8 million | $20.1 million at December 31, 2015 |
| Total debt, March 31 | $485.6 million | $487.8 million at December 31, 2015 |
| Average daily production | 38,308 BOE/d | 30,636 BOE/d; up 25% |
Lower realized commodity prices more than offset production growth: total realized price fell 32% to $25.09 per BOE, while production volumes increased. Oil sales accounted for 90% of revenue. Operating loss was $27.6 million, including a $30.8 million non-cash full-cost ceiling-test impairment. The filing reports cash operating expense of $9.64 per BOE, versus $12.75; DD&A was $12.07 per BOE, versus $21.64. Net derivative gain was $1.4 million, compared with $18.4 million.
Operating cash flow was below investing cash outflows of $107.2 million, primarily property additions and leasehold acquisitions. Financing provided $250.1 million, mainly from a January equity offering that generated $254.5 million net proceeds. Current assets were $291.1 million and current liabilities $106.7 million at quarter-end.
Changes versus prior comparable period
- Revenue declined $13.9 million as lower prices (approximately $39.0 million adverse effect) outweighed higher production (approximately $25.1 million favorable effect).
- Production rose 25%, but net loss replaced prior-year net income. The impairment was absent in Q1 2015; lower DD&A partly reflected the impairment’s effect on the depletion base.
- Lease operating expense fell to $5.23 per BOE from $8.14, which management attributed to lower service costs. Gathering and transportation expense increased to $2.8 million from $1.0 million; G&A increased to $13.0 million from $8.2 million, primarily due to higher equity compensation and salaries and benefits.
- Operating cash flow declined by $26.4 million, principally reflecting lower realized sales prices. Investing outflows were lower than in Q1 2015, while financing inflows were higher due to the larger equity issuance.
Liquidity, debt, outlook and risks
- Diamondback had $450 million of 7.625% senior notes due 2021 and no borrowings under its own revolving credit facility at March 31. Its elected facility commitment was $500 million, with $500 million available; the borrowing base was $750 million at quarter-end.
- Viper Energy Partners, which Diamondback consolidated and owned approximately 88% of, had $43 million outstanding against a $200 million borrowing base. After quarter-end, lenders recommended reducing Diamondback’s borrowing base to $700 million and Viper’s to $175 million; both recommendations were subject to lender approval.
- Management’s 2016 drilling and infrastructure capital budget was $250–$375 million, including plans for 30–70 gross operated horizontal wells. Management said operating cash flow and revolver availability were expected to fund operations through year-end 2016, based on current price and production expectations. Spending and rig activity could be adjusted as conditions change.
- Diamondback retained a third horizontal rig and added a second completion crew as oil prices improved; it was prepared to add a fourth rig early in Q3 if prices strengthened, or reduce activity if prices weakened. The filing reports 16 gross operated horizontal wells drilled and eight horizontal wells completed in Q1.
- Management warned that continued low prices could trigger another non-cash impairment in Q2 and adversely affect results. Lower prices could also reduce revenue, cash flow, liquidity, reserves and borrowing bases. Commodity prices are volatile; oil accounted for most revenue.
- Existing oil swaps covered 550,000 barrels for April–December 2016 at $42.68 per barrel and 730,000 barrels for 2017 at $45.45. Subsequent to quarter-end, additional swaps covered 184,000 barrels for the second half of 2016 at $45.22 and 365,000 barrels for 2017 at $46.68. Derivatives were not designated as accounting hedges, so fair-value changes affected earnings.
- Customer concentration was significant: Shell Trading represented 57% and Enterprise Crude Oil 14% of Q1 revenue. Management also cited risks from customer credit exposure, reserve-based borrowing availability, financing access, operating costs, regulation and estimates used in reserve and impairment accounting. Management said it was in compliance with credit-facility financial covenants; routine legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether lender approval resulted in the recommended borrowing-base reductions, and the effect on Diamondback’s and Viper’s borrowing capacity and covenants.
- Subsequent oil prices, realized prices and hedge settlements, including how much production the swaps cover and the effect of any further price changes.
- Whether the anticipated Q2 ceiling-test impairment occurred and its effect on reported earnings, property values and reserve economics.
- Actual 2016 capital spending, drilling and completion cadence, production, and progress against the 30–70-well budget range.
- Whether management’s year-end liquidity expectation remained supportable as commodity prices and operating cash flow changed.