Diamondback Energy, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Diamondback is an independent oil and gas company focused on the Permian Basin. Results consolidate Viper Energy Partners, in which Diamondback held approximately 64% at quarter-end.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $480.2 million | $235.2 million |
| Income from operations | $267.6 million | $116.4 million |
| Net income attributable to Diamondback | $162.8 million | $136.3 million |
| Diluted EPS | $1.65 | $1.46 |
| Operating cash flow | $339.4 million | $175.9 million |
| Cash and equivalents at quarter-end | $72.5 million | $112.4 million at Dec. 31, 2017 |
| Total long-term debt | $1.702 billion | $1.477 billion at Dec. 31, 2017 |
| Current assets / current liabilities | $324.5 million / $607.7 million | $358.6 million / $577.4 million at Dec. 31, 2017 |
- Revenue increased about 104% year over year, reflecting higher production and realized prices. Average production rose 66.5% to 102,607 BOE/d; average realized oil price increased to $61.66/Bbl from $49.80/Bbl.
- Operating margin was approximately 55.7% of revenue, versus 49.5% in Q1 2017. Diamondback-attributable net income margin was approximately 33.9%, versus 58.0%; the prior-period comparison benefited from a derivative gain and lower tax expense.
- Production costs improved: cash operating expenses were $8.42/BOE versus $9.31/BOE. DD&A rose to $115.2 million from $58.9 million, principally due to increased production and reserve additions.
- Investing cash outflow was $584.9 million, including $280.0 million for development, $150.0 million for mineral interests, $38.4 million for midstream additions and $109.7 million for the office-building acquisition. Financing provided $205.5 million. Cash declined $40.0 million during the quarter. Operating cash flow less development spending alone was approximately $59.4 million; this excludes other investment outlays.
- Debt includes $500 million of 4.750% notes due 2024, $800 million of 5.375% notes due 2025, $166.0 million drawn on Diamondback’s revolver and $240.5 million drawn on Viper’s facility. Diamondback reported $834.0 million of availability under its elected $1.0 billion commitment; Viper reported $159.5 million available.
- Diamondback declared a $0.125/share dividend. Total equity was $5.735 billion at quarter-end.
Material changes versus the prior comparable period
- Oil, gas and NGL revenue increased $234.3 million: management attributed approximately $150.7 million to higher volumes and $83.6 million to higher prices. Production growth reflected drilling activity and acquisitions.
- Net income attributable to Diamondback increased 19%, but reported net income was affected by a $32.3 million cash settlement loss on derivatives, compared with a $1.7 million settlement loss in Q1 2017. The prior period also included a $39.4 million favorable change in the fair value of open derivatives; Q1 2018 had a $0.04 million unfavorable change.
- Income tax expense increased to $47.1 million from $2.0 million; the reported effective tax rate was 20.9% versus 1.4%.
- On January 29, Diamondback issued $300 million of additional 2025 notes, using net proceeds to repay revolver borrowings. Debt rose overall, while Diamondback’s revolver balance fell from $397 million to $166 million.
Outlook, risks and unusual items
- Management budgeted $1.3–$1.5 billion for 2018 drilling and infrastructure, including $1.175–$1.325 billion for drilling and completion of 170–190 gross horizontal wells. It planned to operate 10–12 rigs for the remainder of 2018; 11 rigs and five completion crews were operating at the time of the filing.
- Management expected operating cash flow, cash on hand and revolver availability to fund operations through year-end 2018, based on then-current prices and production expectations. The company said capital spending can be adjusted, and cautioned that lower commodity prices could materially harm revenue, cash flow, liquidity and reserves. Service-cost inflation and access to capital are additional risks.
- Subsequent to quarter-end, the agent lenders recommended increasing Diamondback’s borrowing base from $1.8 billion to $2.0 billion and Viper’s from $400 million to $475 million; both recommendations required lender approval. Diamondback intended to retain its $1.0 billion elected commitment.
- Viper’s tax-status election from pass-through partnership to taxable entity became effective May 10, 2018, after the reporting date. Diamondback said it would continue to control and consolidate Viper and did not expect the related transactions to be taxable to Diamondback.
- Commodity prices are volatile; derivatives can create earnings volatility and counterparty exposure. At March 31, derivative liabilities were $106.2 million. Two purchasers accounted for 30% and 20% of Q1 revenue, respectively. Management reported compliance with financial covenants. Routine litigation was not expected by management to have a material adverse effect; no material changes to reported risk factors were identified.
- Adoption of a new fair-value accounting standard led to an $18.7 million downward adjustment to Viper’s investment balance and a consolidated equity adjustment; the filing reported no material effect from adoption of the other newly adopted standards discussed.
Most important facts for investors to verify
- Whether production growth and 2018 well plans are achieved without exceeding the stated capital budget, particularly as service costs rise.
- Commodity-price assumptions behind management’s year-end funding expectation and the sensitivity of cash flow and borrowing bases to lower prices.
- Final lender approval and terms of the recommended borrowing-base increases, alongside revolver availability, covenant compliance and consolidated debt trends.
- Effects of derivative settlements and future hedge positions on realized prices, cash flows and reported earnings.
- Implications of Viper’s completed tax-status and recapitalization transactions for Diamondback’s ownership economics, distributions and consolidated results.
- Customer concentration and collection risk, including the significant purchasers and joint-interest receivables disclosed in the filing.