Diamondback Energy, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Diamondback is an independent oil and gas company focused on the Permian Basin in West Texas. Comparisons with Q1 2012 require caution: results reflect predecessor operations and predate the October 2012 Gulfport acquisition and IPO; the company also began incurring corporate income taxes after the IPO.
Financial and operating performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $28.9 million | $16.4 million |
| Income from operations | $8.7 million | $6.7 million |
| Net income | $5.4 million | $1.5 million |
| Operating cash flow | $16.9 million | $19.6 million |
| Cash used in investing activities | $74.1 million | $33.5 million |
| Cash provided by financing activities | $36.4 million | $16.3 million |
| Cash and cash equivalents, quarter-end | $5.5 million | $9.2 million |
- Revenue rose 77%, primarily as average daily production increased 115% to 4,788 BOE/d. Production growth reflected drilling and the Gulfport properties; lower average commodity prices partly offset volume gains.
- Oil represented about 70% of production. Average realized prices before derivatives were $83.89/bbl for oil and $67.09/BOE combined, versus $96.66/bbl and $80.51/BOE in Q1 2012. After derivatives, the combined price was $63.51/BOE versus $73.79.
- Operating income margin was approximately 30% of revenue, compared with approximately 41% in Q1 2012. Net income included a $3.2 million deferred tax provision; the reported Q1 2012 comparison had no tax provision. Q1 2013 diluted EPS was $0.15; Q1 2012 pro forma EPS, reflecting a different share basis and pro forma taxes, was $0.06.
- Operating costs increased with production and activity. Lease operating expense rose to $5.4 million, but declined to $12.61/BOE from $13.73/BOE. DD&A increased to $10.7 million, or $24.92/BOE, from $4.8 million, or $23.42/BOE.
- Cash used in investing included $54.0 million for drilling and completion and an $18.6 million Gulfport post-closing cash adjustment. Operating cash flow was below investing outlays, and cash declined by $20.8 million during the quarter.
- At March 31, total assets were $648.5 million and total liabilities were $180.4 million. Current assets of $34.5 million compared with current liabilities of $76.3 million. Credit-facility borrowings were $36.5 million at a weighted-average rate of 3.71%; the borrowing base was $135 million at quarter-end. The company reported compliance with its financial covenants.
Material changes and management commentary
- Average production increased from 2,232 to 4,788 BOE/d; the company drilled 19 gross (17 net) wells in Q1 2013, versus 11 gross (7 net) in Q1 2012.
- Management attributed lower per-BOE lease operating costs partly to completed gas-gathering infrastructure and beginning to move produced water through pipeline rather than by truck. It expected further migration of water disposal and oil transportation to pipelines during 2013.
- The company anticipated a 2013 drilling and infrastructure capital budget of approximately $270–$300 million, including $262 million for operated wells, $9 million for non-operated wells and $20 million for infrastructure. Q1 drilling, infrastructure and leasehold expenditures totaled $73.5 million.
- Management believed operating cash flow and credit-facility borrowings would fund operations through year-end 2013 based on its current price expectations. It cautioned that funding needs depend on production, commodity prices and other factors; additional capital might not be available on acceptable terms, potentially requiring reduced drilling or risking acreage loss through lease expirations.
- Subsequent events: Diamondback filed a registration statement for a follow-on equity offering on April 10, 2013. The credit-facility borrowing base increased to $180 million in May 2013.
Risks, contingencies and unusual items
- Commodity prices are volatile. The company used fixed-price oil swaps but did not designate them as accounting hedges, so fair-value movements affect reported earnings. Q1 2013 derivative loss was only $8,000 net, comprising a $1.5 million unrealized gain and a $1.5 million settlement loss. Open swap positions covered specified oil volumes through 2014.
- Revenue was concentrated among three purchasers: Plains Marketing (53%), Occidental Energy Marketing (15%) and Andrews Oil Buyers (10%). One customer represented approximately 96% of joint-operations receivables.
- Credit-facility borrowings carry floating interest rates and are secured by substantially all company assets. A 1 percentage-point rate change was estimated to affect annualized net income by approximately $365,000 based on quarter-end borrowings.
- Related-party dealings included drilling services, gas purchasing, sand supply, office leases and advisory services with Wexford-affiliated entities. The filing describes these arrangements but investors should assess their terms and governance oversight.
- The company disclosed routine litigation and potential regulatory, royalty, environmental and other industry-related contingencies; management did not expect pending matters to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of production and revenue growth is attributable to the Gulfport acquisition versus organic drilling, and how comparable the predecessor-period figures are.
- Whether the 2013 capital budget, production growth and expected year-end funding remain achievable under changing oil prices and operating costs.
- Liquidity headroom under the borrowing base and covenants, particularly given low quarter-end cash, ongoing capital spending and floating-rate debt.
- The effect of oil swaps on realized prices, cash flows and earnings, including the specified volumes and settlement periods.
- Customer concentration, joint-interest receivable exposure and the pricing and oversight of related-party arrangements.