Business context and reporting period
Diamondback Energy, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2020. The company is focused on oil and gas exploration and production in the Permian Basin, with midstream operations conducted through its consolidated subsidiary Rattler. Results include Viper and Rattler, with non-controlling interests presented separately.
Financial and operating performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $720 million | $975 million | $2.044 billion | $2.860 billion |
| Net income (loss) attributable to Diamondback | ($1.113 billion) | $368 million | ($3.778 billion) | $727 million |
| Diluted EPS | ($7.05) | $2.26 | ($23.91) | $4.42 |
| Operating cash flow | Quarterly value not separately stated | — | $1.715 billion | $1.852 billion |
| Cash capital expenditures for drilling, infrastructure and midstream | $281 million | — | $1.633 billion | $2.173 billion |
| Production | 287,315 BOE/d; 169,989 oil Bbl/d | 287,138 BOE/d; 185,478 oil Bbl/d | 300,785 BOE/d | 276,802 BOE/d |
Q3 production revenue (oil, gas and NGL) fell 26% year over year to $707 million; total revenue fell 26%. For the first nine months, production revenue declined 28% to $2.002 billion. Q3 average realized oil price was $38.75/Bbl versus $51.71; average realized price across products was $26.75/BOE versus $36.20. Q3 oil volumes declined, while gas and NGL volumes increased; total BOE/d was essentially flat.
The reported losses were dominated by non-cash oil and gas property ceiling-test impairment charges: $1.451 billion in Q3 and $4.999 billion year to date. Q3 operating loss was $1.256 billion; net interest expense was $53 million. The filing does not provide a directly stated net or operating margin measure.
Balance sheet, liquidity and debt
At September 30, 2020, cash and cash equivalents were $92 million (plus $7 million restricted cash). Total debt, net of issuance costs and discounts, was $5.847 billion, including $191 million current maturities. Total assets were $18.760 billion and total equity $10.669 billion. The company had no borrowings on its $2.0 billion revolving credit facility, with $2.0 billion available, subject to $3 million of letters of credit. Viper had $127 million drawn and $453 million available; Rattler had $85 million drawn and $515 million available. The company and subsidiaries reported compliance with applicable financial maintenance covenants.
Nine-month operating cash flow of $1.715 billion was below the $1.855 billion net cash used in investing activities. Cash and restricted cash ended the period at $99 million, down from $128 million at year-end 2019. Management stated that operating cash flow, cash on hand and revolver availability were expected to fund operations for the 12 months following filing, while noting dependence on production and commodity prices.
Material changes and management outlook
- Compared with Q3 2019, oil revenue fell primarily because of lower prices and lower oil volumes. Q3 oil price averaged $38.75/Bbl versus $51.71/Bbl; combined production was nearly unchanged.
- Lease operating expense declined to $3.86/BOE from $4.85/BOE. Cash operating costs were $7.61/BOE. Gathering and transportation costs increased, including minimum-volume commitment fees.
- Year-to-date operating cash flow declined from $1.852 billion to $1.715 billion, while investing cash use decreased from $2.744 billion to $1.855 billion. The company issued $500 million of 4.750% notes due 2025; Rattler issued $500 million of 5.625% notes due 2025, using proceeds to reduce revolving borrowings.
- Management targeted Q4 2020 average oil production of 170,000–175,000 Bbl/d, described as the baseline for its 2021 development plan. It expected to hold production flat in a maintenance plan using 25%–35% less capital than in 2020, and estimated a roughly 70% reinvestment ratio at $40/Bbl WTI.
- The updated 2020 capital budget was approximately $1.8–$1.9 billion, down from the original $2.8–$3.0 billion range. Management reported hedging approximately 100% of expected remaining 2020 oil production and approximately 50% of expected 2021 oil production.
- The quarterly dividend was $0.375 per share, declared October 29, 2020 for payment November 19. The company suspended its share repurchase program to preserve liquidity; $1.3 billion remained authorized. Management said excess free cash flow would be directed toward debt reduction, after protecting the common dividend and funding maintenance capital.
Risks, contingencies and unusual items
- COVID-19, global supply and demand, OPEC actions and commodity-price volatility materially affected results. Management could not estimate the duration or full impact of these conditions.
- Management warned that continued declines in trailing 12-month commodity prices could trigger further material ceiling-test write-downs. Such impairments reduce reported earnings and property carrying values but are non-cash when recorded.
- Other risks include production constraints, pipeline and storage capacity, customer and counterparty credit risk, capital-market access, reserve replacement, and possible impairment of midstream equity investments. Rattler agreements do not include minimum-volume commitments.
- The company reported routine legal proceedings and claims, but management did not expect them, individually or collectively, to have a material adverse effect. No material off-balance-sheet arrangements were reported; the filing states no material changes to contractual obligations apart from disclosed debt changes.
- The company recorded tax benefits alongside a $143 million discrete tax expense associated with a valuation allowance on Viper deferred tax assets; it also recorded a $25 million discrete benefit related to federal net operating loss carrybacks.
- After quarter-end, Rattler amended its credit agreement to permit a unit-repurchase program of up to $100 million. Diamondback also reported subsequent derivative transactions and a dividend declaration.
Most important facts for investors to verify
- Whether commodity prices and the full-cost ceiling test lead to additional impairments, and how those affect asset values and reported equity.
- Whether Q4 oil production meets the 170,000–175,000 Bbl/d target and whether the proposed 2021 maintenance plan can hold production flat at the stated lower capital level.
- Actual cash generation after capital spending, and whether management’s liquidity assessment remains supportable under lower-price scenarios.
- Debt maturities, subsidiary-level borrowing availability and borrowing-base redeterminations, particularly Viper’s expected November 2020 reaffirmation.
- Hedge coverage, realized prices and settlement cash flows; reported derivative gains or losses include non-cash fair-value changes and are not equivalent to cash settlements.
- Dividend sustainability and whether either Diamondback or Rattler resumes repurchases while preserving balance-sheet flexibility.