Diamondback Energy, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited results. Diamondback is an independent oil and gas producer focused primarily on the Permian Basin, with midstream operations through Rattler.
Financial and operating performance
- Revenue: $1.184 billion, up 32% from $899 million. Oil, natural gas and NGL revenue was $1.172 billion, up 33%. Higher realized prices more than offset lower production volumes.
- Profit: Operating income was $571 million, versus an operating loss of $802 million in Q1 2020. Net income attributable to Diamondback was $220 million, or $1.34 basic and $1.33 diluted per share, compared with a $272 million attributable loss, or $1.72 per share, a year earlier. Results included $75 million of merger and integration expense, a $164 million net derivative loss and a $61 million loss on debt extinguishment.
- Margins: Operating income was approximately 48% of revenue; attributable net income was approximately 19%. These ratios are affected by derivative and acquisition-related items.
- Cash flow: Operating cash flow was $624 million, versus $849 million. Cash capital expenditures excluding acquisitions were $296 million, implying approximately $328 million of operating cash flow after that spending. Investing cash outflow was $587 million; financing cash inflow was $29 million. Cash, cash equivalents and restricted cash ended at $174 million.
- Production and costs: Average production was 307,422 BOE/d, down from 321,057 BOE/d. Average unhedged realized price was $42.36/BOE, up from $30.23/BOE; average hedged price was $35.75/BOE, versus $33.19/BOE. Cash operating costs were $8.06/BOE. Lease operating expense declined to $3.69/BOE from $4.35/BOE.
- Debt and liquidity: Total debt, net of issuance costs, discounts and premiums, was $7.656 billion; long-term debt was $7.465 billion and current maturities were $191 million. Cash and cash equivalents were $121 million. Diamondback reported $1.9 billion available under its revolving facility; Viper and Rattler reported $523 million and $546 million available, respectively. Diamondback and both subsidiaries were in compliance with financial maintenance covenants.
- Balance sheet: Total assets were $21.996 billion and total equity was $11.652 billion. Current assets of $851 million compared with current liabilities of $1.868 billion.
Material changes and significant transactions
- Diamondback completed the Guidon acquisition on February 26 for approximately $1.115 billion of consideration, including $375 million cash and 10.68 million shares; it added about 32,500 net acres.
- Diamondback completed its all-stock QEP merger on March 17, issuing about 12.12 million shares valued at approximately $987 million. QEP added about 49,000 net Midland Basin acres and brought approximately $1.6 billion of debt at closing. Acquisition contributions to reported results covered only the post-closing periods.
- March debt refinancing issued $2.2 billion of notes with maturities in 2023, 2031 and 2051. Proceeds principally funded repurchases of QEP notes and Diamondback’s 2025 notes. The transactions generated a $61 million extinguishment loss; management estimated approximately $40 million in annual interest savings.
- Q1 oil, gas and NGL production revenue rose by $289 million, primarily from a $368 million benefit from higher average prices. Combined volumes sold fell 5.3%; winter storms caused an estimated four to five days of lost production, partly offset by acquired production. Management expected to recover the weather-related loss during 2021.
- Derivative results swung from a $542 million net gain in Q1 2020 to a $164 million net loss in Q1 2021. The 2021 loss included a $294 million commodity-derivative loss and a $130 million interest-rate-swap gain.
Outlook, risks and unusual items
- Capital plan: The 2021 capital budget was increased to approximately $1.6–$1.75 billion following the QEP merger. Diamondback planned $1.5–$1.6 billion for drilling and completions, targeting 275–285 gross operated horizontal wells. Management said it was pursuing flat oil production, debt reduction and shareholder returns, and could adjust activity with market conditions.
- Liquidity outlook: Management believed operating cash flow, cash on hand and revolver availability would fund operations for at least the 12 months following the filing, subject to prices, production and other variables. It noted that capital availability could become more constrained or costly.
- Planned asset sales: Subsequent to quarter-end, Diamondback agreed to sell its Williston Basin assets for approximately $745 million and non-core Permian assets for $87 million, subject to adjustments and closing conditions. It intended to use net proceeds to reduce debt. These sales were expected to close in Q3 and Q2 2021, respectively.
- Dividend: The board declared a $0.40-per-share Q1 dividend, payable May 20, 2021.
- Ceiling-test impairment: No oil and gas property impairment was recorded in Q1 2021 after Diamondback received an SEC waiver for acquired QEP and Guidon properties. The filing estimates that absent the waiver, an approximately $1.1 billion impairment would have been recorded. The company recorded $1.009 billion of impairment in Q1 2020. Future commodity-price declines or other factors could cause material write-downs.
- Market and operational risks: Results remain sensitive to volatile oil and gas prices, COVID-19-related demand and supply disruptions, weather, pipeline capacity and storage constraints, production limits, capital-market access, and customer or counterparty credit. A 10% change in forward commodity curves would have changed the $608 million net commodity-derivative liability by approximately $62 million in either direction, based on the filing’s sensitivity analysis.
- Other matters: QEP added approximately $68 million of transportation, gathering and purchase commitments. Diamondback reported routine legal proceedings and did not expect them to have a material adverse effect, while noting outcomes cannot be predicted with certainty. No material off-balance-sheet arrangements or material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether the announced divestitures closed at expected prices and whether proceeds were applied to debt reduction.
- Post-acquisition production, realized prices, operating costs and delivery of the expected $60–$80 million in annual QEP-related cost synergies.
- Debt repayment progress, refinancing savings, upcoming maturities and liquidity after acquisitions and asset sales.
- Commodity prices, hedge settlements and derivative fair values, including the sensitivity of reported earnings and cash flow to market movements.
- The acquired-property ceiling-test treatment and the potential for future impairments if prices, reserves or cost assumptions change.
- Capital spending and production performance against the 2021 plan, including recovery of winter-storm-related production losses.