Diamondback Energy, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results include Viper Energy Partners and Rattler Midstream. Diamondback is an independent oil and gas producer focused primarily on the Permian Basin.
Financial and operating results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $1.910 billion | $720 million | $4.775 billion | $2.044 billion |
| Operating income (loss) | $1.164 billion | ($1.256 billion) | $2.690 billion | ($4.730 billion) |
| Net income (loss) attributable to Diamondback | $649 million | ($1.113 billion) | $1.180 billion | ($3.778 billion) |
| Diluted earnings (loss) per share | $3.56 | ($7.05) | $6.68 | ($23.91) |
| Operating cash flow | Not separately provided | Not separately provided | $2.777 billion | $1.715 billion |
| Investing cash flow | Not separately provided | Not separately provided | ($1.323 billion) | ($1.855 billion) |
| Financing cash flow | Not separately provided | Not separately provided | ($1.021 billion) | $111 million |
- Q3 oil, natural gas and NGL revenue was $1.897 billion. Higher commodity prices accounted for most of the year-over-year increase; production volumes also rose.
- Average production was 404.3 thousand BOE/day in Q3, up 41% from 287.3 thousand BOE/day. Average unhedged prices were $68.27/Bbl for oil, $3.34/Mcf for gas and $31.70/Bbl for NGLs. The filing reports a hedged combined price of $40.76/BOE.
- Q3 operating margin, calculated as operating income divided by revenue, was approximately 61%; net income attributable to Diamondback was approximately 34% of revenue. These ratios reflect reported derivative and other items, not adjusted margins.
- Cash, cash equivalents and restricted cash totaled $541 million at September 30. Total debt, net, was $6.945 billion, including $20 million current maturities; cash less reported debt implies approximate net debt of $6.4 billion. Diamondback’s $1.6 billion revolving facility had no borrowings and $3 million of letters of credit; Viper had $408 million available and Rattler $600 million.
- Q3 declared dividend was $0.50 per share, payable November 18, 2021. A $2 billion share repurchase authorization was approved in September; $22 million had been repurchased and $1.978 billion remained available at quarter-end.
Changes versus the prior comparable period
- Revenue and production rose sharply year over year, reflecting a commodity-price recovery from 2020 lows and the February Guidon Acquisition and March QEP merger. QEP and Guidon increased acreage and operating scale; Diamondback issued approximately 12.12 million and 10.68 million shares, respectively, as transaction consideration.
- Q3 2020 included a $1.451 billion oil-and-gas impairment; the first nine months of 2020 included $4.999 billion. No oil-and-gas impairment was recorded in 2021. This is a major reason 2021 earnings compare favorably with 2020.
- For the first nine months, cash from operations increased by $1.062 billion. Higher revenue and tax refunds were partly offset by $847 million of net cash payments on derivatives, higher operating costs and interest, and working-capital movements.
- Net debt increased from the prior year-end alongside the acquisitions and related financing. During 2021, the company issued $2.2 billion of notes and used proceeds primarily to repurchase or redeem other notes, including the remaining $432 million of 5.375% notes due 2025.
Outlook, risks and unusual items
- Management reduced its 2021 capital budget to approximately $1.49–$1.53 billion and said efficiency gains helped offset cost inflation. It planned to hold oil production relatively flat for the remainder of 2021 and expected to maintain flat oil production in 2022 with capital spending similar to Q4 2021 guidance.
- Management said it expected to distribute 50% of quarterly free cash flow to stockholders beginning with Q4 2021, through the sustainable dividend and a mix of repurchases and variable dividends. This is an expectation, not a guarantee.
- Subsequent to quarter-end, Diamondback sold Williston Basin assets for approximately $586 million net and redeemed $650 million of 2023 notes using those proceeds and cash. It also completed a gas-gathering asset sale for approximately $54 million. Viper completed the Swallowtail acquisition, partly funded with approximately $190 million of revolver borrowings.
- Commodity markets, COVID-19 and supply-chain conditions remain uncertain. At quarter-end, commodity derivatives had a net liability position of $618 million; management disclosed that a 10% increase in underlying forward curves would increase the liability by $256 million, while a 10% decrease would reduce it by $218 million. Derivatives can materially affect reported earnings and cash flow timing.
- Management warned that lower trailing commodity prices, production or reserves could trigger future full-cost ceiling-test impairments. It also cited potential pipeline, storage, regulatory and capital-market constraints. Routine legal claims were not expected by management to have a material adverse effect, though outcomes are uncertain.
- Management reported effective disclosure controls. An ERP system was implemented in July 2021; controls were modified or automated, and management said it would continue evaluating them. No material change in internal control over financial reporting was reported for the quarter.
Key facts for investors to verify
- Whether production, realized prices and operating costs support management’s flat-production and capital-discipline plans, particularly amid cost inflation.
- How derivative settlements and fair-value changes affect realized proceeds, reported earnings and liquidity; review hedge volumes, prices and maturities.
- Debt and liquidity after the post-quarter-end note redemption, asset sales, and Viper’s Swallowtail acquisition borrowing.
- Whether the announced 50% free-cash-flow capital-return target and $2 billion repurchase authorization are executed while preserving investment and balance-sheet capacity.
- Final purchase-price allocations for QEP and Guidon, and subsequent effects on depletion, taxes and asset carrying values.
- Future full-cost ceiling-test sensitivity to commodity prices and reserve estimates, as well as the status of acquired contractual commitments and routine legal matters.