Diamondback Energy, Inc. quarterly report, Q1 FY2015

Diamondback Energy, Inc. — Q1 2015 Form 10-Q

Reporting period: Three months ended March 31, 2015. Diamondback is an independent oil and gas producer focused on the Permian Basin; results consolidate Viper Energy Partners, in which Diamondback held approximately 88% of common units.

Financial and operating results

Metric	Q1 2015	Q1 2014
Revenue	$101.4 million	$98.0 million
Income from operations	$1.4 million	$48.1 million
Net income attributable to Diamondback	$5.8 million	$23.6 million
Diluted earnings per share	$0.10	$0.48
Operating cash flow	$99.1 million	$71.5 million
Cash used in investing activities	$153.6 million	$399.2 million

• Average production rose 126% to 30,636 BOE per day. Oil was approximately 77% of production.
• Revenue increased only 3% as higher volumes largely offset lower prices. Average realized prices fell to $43.59 per barrel of oil and $36.78 per BOE, from $93.53 and $80.35, respectively. Including derivative effects, average oil price was $64.01 per barrel and average price was $52.57 per BOE.
• Operating margin was approximately 1.4% of revenue, versus 49.0% a year earlier; net margin attributable to Diamondback was approximately 5.8%, versus 24.1%. Lower commodity prices and increased operating costs and depreciation weighed on results.
• Lease operating expense rose to $22.5 million from $7.9 million; expense per BOE increased to $8.14 from $6.49. DD&A increased to $59.7 million from $31.0 million, while DD&A per BOE declined to $21.64 from $25.39.
• Cash and equivalents were $31.6 million at quarter-end. Current assets were $215.4 million and current liabilities $184.0 million. Long-term debt was $611.6 million, comprising $161.6 million on the revolver and $450.0 million of 7.625% senior notes due 2021. Reported debt less cash was approximately $579.9 million.
• Operating cash flow less total investing cash flow was negative $54.4 million. Investing outlays included $151.4 million for drilling, completion and infrastructure. Financing cash flow was $55.9 million, including $119.4 million in net equity proceeds and net revolver repayments.

Changes and material developments

• Production growth and acquisitions helped lift revenue despite a sharp decline in realized commodity prices. The comparison also reflects a larger asset base; Q1 2014 included fewer months of operations from certain acquired properties.
• Net income fell to $6.4 million from $23.6 million, including noncontrolling interest; the amount attributable to Diamondback fell to $5.8 million. The 2015 result included an $18.4 million net derivative gain, compared with a $4.4 million net derivative loss in 2014. Q1 2015 included $43.6 million of cash gains on settlements, partly offset by a $25.2 million negative fair-value change on open derivatives.
• At March 31, the company reported $92.3 million of derivative assets and fixed-price oil swaps covering specified production through February 2016. These instruments reduce some price exposure but are not designated as accounting hedges, so fair-value changes affect reported earnings.
• In January, Diamondback issued 1.75 million shares and received approximately $119.4 million net. Shares outstanding were approximately 59.0 million at March 31, versus 57.9 million at year-end.
• Subsequent to quarter-end, Diamondback had acquired or agreed to acquire approximately 15,940 gross (11,948 net) acres for approximately $437.8 million, subject to adjustments and closing conditions. Management expected completion by the end of June and anticipated financing primarily through debt or equity capital-market transactions. The filing’s reserve and production estimates for these properties were based on seller information and had not been reviewed by independent reserve engineers.

Outlook, risks and contingencies

• Management expected 2015 drilling and infrastructure capital spending of $400–$450 million. After quarter-end, it raised its planned 2015 horizontal-well completions to 55–65 gross wells from 50–60, while expecting to remain within that capital budget. It cited improved commodity prices, service-cost concessions of up to 20–30% versus peak 2014 pricing, and operational efficiencies. It said it might add a completion crew and, if conditions held, increase rigs later in 2015 and in 2016.
• Management believed operating cash flow and revolver capacity would fund operations through year-end 2015 under its price and production expectations. It cautioned that cash flows depend on production and commodity prices, and that capital availability could constrain drilling, acquisitions and reserve replacement.
• The revolver had a $750 million borrowing base, a $500 million elected commitment, $161.6 million outstanding and $338.4 million available. The agent lender recommended a $725 million borrowing base in the spring redetermination, subject to other lenders’ approval. Diamondback reported compliance with financial covenants at quarter-end.
• Key exposures include volatile oil and gas prices, floating-rate debt, customer concentration and counterparty credit risk. Shell Trading represented 68% and Enterprise Crude Oil 11% of Q1 revenue. A 1 percentage-point interest-rate change was estimated to change annualized interest expense by approximately $1.6 million at quarter-end debt levels.
• The filing describes routine industry-related disputes and contingencies, including regulatory, royalty and environmental matters; management did not expect pending matters to materially affect financial condition, cash flows or results. Future drilling-rig commitments totaled $60.2 million, and office and equipment lease commitments totaled $15.4 million. No material changes to the previously disclosed risk factors were reported.

Important facts for investors to verify

• Whether the pending acreage acquisitions closed, at what final cost, and how they were financed; verify independent reserve and production assessments.
• Whether the proposed borrowing-base redetermination was approved and whether Diamondback maintained covenant compliance.
• Actual well-completion pace, capital spending, rig count and service-cost savings versus management’s plans.
• Realized commodity prices, production volumes and hedge settlements, including the effect of non-cash derivative revaluations on earnings.
• Customer concentration, liquidity and funding needs, particularly in light of acquisition spending and commodity-price volatility.