Diamondback Energy, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Diamondback is a Permian Basin-focused oil and gas producer; consolidated results include its majority-owned Viper and Rattler subsidiaries. Amounts below are in U.S. dollars unless noted.
Key financial and operating metrics
| Metric | Q2 2020 | Comparable period / context |
|---|---|---|
| Total revenue | $425 million | $1.021 billion in Q2 2019, down 58% |
| Oil, gas and NGL revenue | $412 million | $1.000 billion in Q2 2019; oil sales were $352 million versus $947 million |
| Net loss attributable to Diamondback | $2.393 billion; diluted loss per share $15.16 | Net income of $349 million and diluted EPS of $2.11 in Q2 2019 |
| Operating loss | $2.672 billion | Included a $2.539 billion non-cash oil and gas property impairment |
| Production | 294,126 BOE/day, including 176,323 barrels of oil/day | Total production was up from 280,365 BOE/day in Q2 2019; oil production was down from 191,229 barrels/day |
| Average realized prices | Oil $21.99/barrel; combined $15.39/BOE unhedged | Hedged average oil price was $35.21/barrel; combined hedged price was $22.95/BOE |
| Cash operating costs | $6.44/BOE | Down 24% from $8.52/BOE in Q1 2020 |
For the six months ended June 30, revenue was $1.324 billion versus $1.885 billion in 2019; Diamondback-attributable net loss was $2.665 billion versus income of $359 million. The six-month impairment charge was $3.548 billion. The filing does not provide a clear adjusted-profit or EBITDA figure in the supplied text.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $1.173 billion, compared with $1.043 billion in 2019. Investing cash use was $1.535 billion, versus $1.772 billion; financing provided $293 million. Cash and restricted cash declined by $69 million over the period.
- At June 30, cash was $51 million and restricted cash was $8 million. Current assets were $654 million and current liabilities $1.061 billion.
- Consolidated long-term debt was $5.952 billion, up from $5.371 billion at year-end 2019. Diamondback reported $119 million drawn and $1.9 billion available on its $2 billion revolving facility, and compliance with its financial maintenance covenants.
- Rattler had $523 million drawn and $77 million available on its revolving facility at quarter-end. Its July 2020 $500 million notes offering subsequently repaid borrowings; the filing reports $567 million of pro forma Rattler facility availability. These balances are within the consolidated group and should not be added to consolidated debt figures.
- The board declared a $0.375-per-share Q2 dividend on July 31, payable August 20, 2020. The share repurchase program was suspended to preserve liquidity.
Material changes and management outlook
- Oil prices and demand fell sharply amid COVID-19 and supply actions by OPEC and other producers. Q2 oil and gas revenue declined primarily because of lower realized prices; oil production was also temporarily curtailed by 5% during the quarter.
- Management reduced the 2020 capital budget from the originally approved $2.8–$3.0 billion to approximately $1.8–$1.9 billion, a 36% reduction from the 2019 budget. The company reported six operated rigs and three completion crews at the time of the filing and planned five to six rigs and three to four completion crews for the rest of 2020, assuming prevailing conditions.
- Management targeted Q4 2020 oil production of 170,000–175,000 barrels/day and said its 2020 oil production target was slightly below full-year 2019. It expected operating cash flow, cash and revolver capacity to fund operations through year-end under its price and production assumptions.
- Based on then-current forward prices, management expected significant free cash flow in the second half of 2020 and in 2021. Under a 2021 maintenance-capital scenario, it anticipated holding Q4 2020 oil production flat while spending 25%–35% less than the 2020 capital budget.
- Management said it had hedged approximately 100% of expected remaining 2020 oil production, including basis differentials, and approximately 50% of expected 2021 oil production. Derivative fair-value changes are recognized in earnings without hedge accounting; Q2 included a $361 million net derivative loss, while cash received on derivative settlements was $210 million.
Risks, contingencies and unusual items
- The $3.548 billion first-half ceiling-test impairment was non-cash but materially reduced reported earnings and asset carrying value. Management warned that further material write-downs could occur if trailing 12-month commodity prices fall further; reserve estimates, production, development costs and prices affect future tests.
- Management could not predict when commodity prices would stabilize or the duration and full impact of the pandemic and depressed markets. Risks include lower demand or prices, production restrictions, pipeline or storage constraints, customer credit exposure, reduced access to capital, and potential impairment of midstream investments.
- Viper’s borrowing base was reduced from $775 million to $580 million in the spring 2020 redetermination. Viper and Rattler were reported in compliance with their financial covenants at quarter-end.
- A $143 million discrete tax expense related to a valuation allowance on Viper deferred tax assets was recorded in the first half, partly offset by a $25 million tax benefit from federal net operating loss carrybacks. Diamondback also reported a $100 million income tax receivable on its balance sheet.
- The company disclosed routine legal proceedings and claims, which management did not expect to have a material adverse effect, while noting actual outcomes could differ. It reported no material off-balance-sheet arrangements and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether commodity prices and reserve assumptions lead to additional ceiling-test impairments, and the effect on carrying values and future depletion.
- Actual production, realized prices and cash flows versus the stated 2020 targets, and whether planned capital reductions can sustain production.
- Hedge volumes, pricing, basis exposure, settlement cash flows and potential counterparty risk.
- Consolidated debt and liquidity, including the distinction between parent, Viper and Rattler borrowings; subsequent Rattler refinancing; and upcoming debt maturities.
- Whether the dividend remains supportable under actual market conditions and capital needs.