Diamondback Energy, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Diamondback is an independent oil and natural gas company focused on the Permian Basin; its sole reportable segment is upstream. Financial statements are unaudited.
Financial and operating performance
- Revenue: $1.925 billion, versus $2.408 billion in Q1 2022, down about 20%. Oil, natural gas and NGL revenue was $1.902 billion.
- Profit: Operating income was $1.025 billion, versus $1.660 billion. Net income was $746 million; $712 million was attributable to Diamondback, or $3.88 per diluted share, compared with $803 million, $779 million and $4.35, respectively, a year earlier.
- Cash flow: Operating cash flow was $1.425 billion, versus $1.252 billion. Investing cash outflow was $1.279 billion and financing cash outflow was $257 million. Cash, cash equivalents and restricted cash ended the quarter at $53 million, down $111 million.
- Capital spending: Cash capital expenditures excluding acquisitions and equity-method investments were $657 million, compared with $437 million. Property acquisitions used $880 million, principally reflecting the Lario acquisition.
- Margins and costs: Average realized price was $49.72 per BOE, down from $69.60; production averaged 425,022 BOE/d, up from 381,378. Cash operating costs were $11.61 per BOE. Lease operating expense rose to $5.02 per BOE from $4.34, partly due to inflation and acquired production. DD&A was $403 million, versus $313 million.
- Debt and liquidity: Total debt, net, was $6.960 billion, versus $6.248 billion at year-end 2022. This included $589 million outstanding on Diamondback’s revolver and $270 million on Viper’s facility. Management reported approximately $1.0 billion of liquidity, including $37 million of standalone cash and approximately $1.0 billion available under Diamondback’s credit facility. The company reported compliance with financial covenants.
- Shareholder returns: The company paid $542 million in dividends and repurchased $332 million of common stock during the quarter. It declared a Q1 dividend of $0.83 per share, comprising $0.80 base and $0.03 variable.
Material changes and transactions
- Compared with Q1 2022, lower commodity prices reduced oil, gas and NGL revenue by $776 million, partly offset by an 11% increase in combined sales volumes, primarily from the FireBird and Lario acquisitions.
- Commodity derivative losses were $93 million, versus $552 million in Q1 2022. Cash received on derivative settlements was $1 million, compared with $420 million paid in the prior-year quarter.
- On January 31, Diamondback completed the Lario acquisition for $814 million cash and 4.33 million shares, with total consideration valued at $1.447 billion. Lario contributed $90 million of revenue and $32 million of net income after closing.
- Diamondback sold its Gray Oak Pipeline investment for $172 million and recorded a $53 million gain. It also sold non-core acreage for $79 million on March 31. A further sale of approximately 19,000 net acres closed on April 28 for $275 million.
Outlook, management commentary and risks
- 2023 capital plan: $2.5 billion to $2.7 billion for drilling, midstream and infrastructure. Management expects production to increase in Q2 and through 2023, supported by Lario and organic development. It anticipated higher Q2 spending due to the timing of well costs, with lower well and completion costs thereafter as input costs ease and simulfrac operations expand.
- Capital returns and divestitures: The board’s stated capital-return commitment is at least 75% of free cash flow, subject to its dividend and repurchase decisions. Management reported $773 million of gross non-core asset sale transactions to date and expected to meet or exceed its target of at least $1.0 billion in 2023 divestitures.
- Tax and debt outlook: Management expected a 2023 cash tax rate of 10%–15% of pretax income. In April, Diamondback elected to extend its revolving facility maturity from June 2027 to June 2028, subject to customary conditions; the filing expected effectiveness on June 2, 2023.
- Key risks: Results remain sensitive to oil and gas prices, production and regional price differentials; inflation and service costs; access to transportation and infrastructure; regulatory and permitting changes; and counterparty, credit and interest-rate risks. The filing specifically notes water-use restrictions and Texas Railroad Commission actions concerning produced-water permits and induced seismicity. Lower commodity prices could also trigger future full-cost ceiling-test impairments; no impairment was recorded in Q1.
- Contingencies: The company reported routine legal matters that management did not believe would have a material adverse effect. It is defending three Louisiana coastal erosion lawsuits related to predecessor operations; the filing notes uncertainty about their scope and damages. Management stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How realized commodity prices, regional differentials and hedge settlements affect revenue and cash generation in subsequent quarters.
- Whether production growth, planned well-cost reductions and the $2.5–$2.7 billion capital program track management’s expectations.
- How the Lario acquisition performs relative to its purchase price and how acquisition-related debt affects leverage and interest expense.
- Whether announced and completed asset sales reach the 2023 divestiture target, and how proceeds are allocated among debt, capital spending and shareholder returns.
- Future borrowing availability, variable-rate exposure, and any developments in the Louisiana litigation, water regulation or impairment assessments.