Diamondback Energy, Inc. annual report, FY2023

Diamondback Energy, Inc. — FY 2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023; filed February 22, 2024. This is an annual filing, not a standalone fourth-quarter report. Diamondback is a Permian Basin-focused oil and natural gas producer and reports one reportable segment, upstream. Its subsidiary Viper is consolidated; Diamondback owned approximately 56% of Viper at year-end.

Financial and operating performance

Metric20232022
Total revenue$8.412 billion$9.643 billion
Oil, natural gas and NGL sales$8.228 billion$9.566 billion
Operating income$4.570 billion$6.508 billion
Net income attributable to Diamondback$3.143 billion$4.386 billion
Diluted earnings per share$17.34$24.61
Cash from operating activities$5.920 billion$6.325 billion
Cash capital expenditures, excluding acquisitions and equity-method investments$2.701 billion$1.938 billion
  • Combined production increased 16% to 447,707 BOE/d; oil production rose to 263,496 Bbl/d. Oil, gas and NGL sales declined 14%, chiefly because lower realized commodity prices more than offset volume growth.
  • Average realized prices fell: oil to $75.68/Bbl from $93.85; natural gas to $1.32/Mcf from $4.86; and NGLs to $20.08/Bbl from $35.07. Combined realized price declined to $50.35/BOE from $67.90.
  • Cash operating costs were $10.90/BOE, versus $11.43/BOE. Lease operating expense increased to $5.34/BOE from $4.63/BOE, reflecting acquired production, water-service costs after the Deep Blue transaction, and inflation.
  • Net cash used in investing activities was $3.323 billion; net cash used in financing was $2.176 billion. Cash and cash equivalents were $582 million at year-end. Diamondback’s standalone cash was $556 million, with $1.6 billion available under its revolving facility and no borrowings outstanding. Viper had $263 million drawn and $587 million available under its facility.
  • Consolidated debt was $6.641 billion, versus $6.248 billion a year earlier. No debt maturities were due in 2024 or 2025; scheduled principal maturities include $764 million in 2026 and $430 million in 2027. Diamondback reported compliance with its credit-facility covenants.
  • Proved reserves were 2.178 billion BOE, up from 2.033 billion; approximately 69% were proved developed producing. The standardized measure of discounted future net cash flows fell to $27.1 billion from $35.7 billion, primarily reflecting lower prices.

Material changes and transactions

  • Production growth reflected acquisitions, including the January 2023 Lario acquisition, as well as development on existing acreage. The Lario deal added approximately 16,000 net Midland Basin acres for $814 million cash and 4.33 million Diamondback shares.
  • Viper acquired GRP mineral and royalty interests in November for approximately $760 million cash and 9.02 million Viper units. Diamondback also formed Deep Blue with Five Point, contributing water assets and receiving $516 million cash, a 30% interest and contingent consideration.
  • Asset sales included non-core acreage and equity interests in Gray Oak and OMOG. Gains on Gray Oak and OMOG totaled approximately $88 million and contributed to 2023 other income.
  • Net income attributable to Diamondback fell to $3.143 billion from $4.386 billion. Lower product prices drove the revenue decline; higher depletion, lease operating costs and interest expense also weighed on results. Derivative losses were $259 million, compared with $586 million in 2022.
  • Cash returned to stockholders included $1.4 billion of dividends and $838 million of Diamondback share repurchases. The board reduced the quarterly free-cash-flow return commitment from 75% to at least 50% beginning in 2024; the balance is intended primarily for debt reduction.

Outlook, risks and unusual items

  • 2024 plan: Management expects to maintain flat production through the year with lower capital spending and activity. Budgeted capital expenditures are $2.30–$2.55 billion; guidance is 458,000–466,000 BOE/d of net production and 270,000–275,000 Bbl/d of oil production. The company expects to drill 265–285 gross operated horizontal wells and complete 300–320.
  • Endeavor transaction: Announced February 11, 2024, after year-end. Consideration is $8.0 billion cash, subject to adjustments, plus approximately 117.27 million Diamondback shares; closing is expected in fourth-quarter 2024, subject to conditions and approvals. Endeavor owners are expected to hold about 39.5% of the combined company. Diamondback obtained an $8.0 billion bridge-financing commitment and expects to replace it with permanent financing. Management’s near-term goal is pro forma net debt below $10 billion.
  • The merger could increase leverage, require integration spending and dilute existing shareholders; closing is not assured. Under specified circumstances, termination could trigger a $1.4 billion fee or expense reimbursement capped at $260 million.
  • Key business risks include commodity-price volatility, hedge and counterparty risk, concentration in the Permian, transportation and purchaser concentration, water availability and produced-water disposal restrictions linked to seismicity, operating hazards, and evolving environmental, methane and climate rules. Four purchasers each represented more than 10% of 2023 revenue; the largest accounted for 22%.
  • Contractual commitments at year-end included $768 million for transportation, $407 million for electrical power, $93 million for fracturing fleet services and $70 million for sand, plus $245 million of asset-retirement obligations. Routine legal matters were not expected by management to have a material adverse effect; the filing also describes Louisiana coastal erosion litigation that the company intends to defend.
  • No proved-property impairment was recorded in 2023. Reserve estimates and the full-cost ceiling test are sensitive to commodity prices, costs and development assumptions. The independent auditor issued unqualified opinions on the financial statements and internal controls; the reserve estimation was identified as a critical audit matter.

Important facts for investors to verify

  • Whether production, realized pricing, costs and cash generation support the 2024 flat-production plan and capital budget.
  • The timing, financing terms, approvals, final consideration and expected leverage for the Endeavor acquisition, including post-close integration and shareholder governance arrangements.
  • Liquidity and debt-reduction progress after the transaction, including maturity needs and floating-rate exposure at Viper.
  • Commodity hedge volumes, settlement effects and counterparty exposure, alongside the sensitivity of reserves and cash flows to oil and gas prices.
  • Progress on the 50% free-cash-flow capital-return commitment, dividends and repurchases, which remain subject to board discretion.
  • Reserve revisions, proved-undeveloped-reserve conversion, development spending and the assumptions underlying the reported standardized measure.
  • Exposure to produced-water disposal limits, customer concentration, contractual delivery and transportation commitments, and environmental or litigation developments.