Diamondback Energy, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 7, 2013. Diamondback is an independent oil and gas company focused on acquiring, developing and exploring onshore Permian Basin properties in West Texas. Results reflect substantial production growth, including the acquired Gulfport properties. The company reported approximately 54,035 net acres at quarter-end.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $45.4 million | $16.0 million | $74.3 million | $32.4 million |
| Operating income | $19.4 million | $4.3 million | $28.0 million | $11.0 million |
| Net income | $14.5 million | $13.6 million | $19.9 million | $15.1 million |
| Operating cash flow | Not separately presented for the quarter | $49.8 million | $22.7 million | |
| Investing cash flow | Not separately presented for the quarter | $(138.7) million | $(59.6) million | |
| Financing cash flow | Not separately presented for the quarter | $144.4 million | $32.3 million |
- Q2 production averaged 6,590 BOE/d, up 163% year over year; first-half production averaged 5,694 BOE/d, up 140%. Oil accounted for about 75% of Q2 production.
- Q2 average realized prices before derivatives were $91.76/bbl oil, $31.91/bbl NGL and $4.08/Mcf natural gas; combined price was $75.70/BOE. After derivatives, combined price was $74.27/BOE.
- Q2 operating margin was approximately 42.7% and net margin approximately 31.9%. First-half operating and net margins were approximately 37.7% and 26.7%, respectively.
- Lease operating expense was $10.15/BOE in Q2, compared with $15.45/BOE a year earlier. DD&A was $14.8 million in Q2 and $25.6 million for the first half.
- Cash was $81.9 million at June 30, versus $26.4 million at year-end 2012. Current assets were $116.5 million and current liabilities $97.5 million, representing approximately $19.0 million of working capital.
- No revolving-credit borrowings were outstanding at quarter-end; the borrowing base was $180 million. The company had $266,000 outstanding on an equipment note. It reported compliance with credit-facility covenants.
- First-half cash increased $55.5 million. The $144.4 million of financing cash flow principally reflects net proceeds from the May primary stock offering; $49 million borrowed under the revolver during the period was repaid.
Changes versus prior comparable periods
- Revenue rose 183% in Q2 and 129% for the first half, mainly due to higher production volumes from drilling and the Gulfport properties. First-half price declines partially offset volume growth; Q2 price changes increased revenue overall.
- Operating income increased substantially alongside production growth. Q2 net income rose less, to $14.5 million from $13.6 million, partly because 2013 included $7.8 million of deferred tax expense. The predecessor entities were not subject to federal income taxes before the 2012 IPO; reported 2012 results are therefore not directly comparable. Pro forma 2012 net income including an estimated tax provision was $8.8 million for Q2 and $9.7 million for the first half.
- Operating cash flow more than doubled year over year, while investing outflows increased with drilling, infrastructure spending and the $18.6 million Gulfport post-closing cash adjustment.
- The May 2013 primary offering added 5.175 million shares and approximately $144.4 million net to the company. A June secondary offering, with an additional option exercised in July, generated proceeds for selling stockholders, not Diamondback.
Outlook, risks and unusual items
- Management expected 2013 drilling and infrastructure capital spending of approximately $290 million to $320 million, including about $267.6 million for operated wells, $9 million for non-operated wells and $25 million for infrastructure. It said operating cash flow, offering proceeds and revolver availability were expected to fund operations through year-end, subject to commodity prices and production.
- After quarter-end, the company agreed to buy approximately 13,900 gross (11,150 net) operated Midland Basin acres for about $165 million, subject to adjustments, with closing expected by the end of September 2013. Funding was expected from some combination of cash, revolver borrowings and securities offerings.
- Oil swaps cover specified future production through 2014. Derivatives are not designated as accounting hedges, so fair-value changes affect reported earnings. First-half 2013 included a $3.0 million net derivative gain.
- Commodity prices and production, concentrated purchasers, and access to capital are material risks. Three purchasers represented 82% of first-half revenue; Plains Marketing alone accounted for 53%. Management also cited potential funding constraints that could require reduced drilling or prevent acquisitions.
- A Minnesota sand-property lawsuit resulted in a jury finding of intentional interference with contract, but no finding that it prevented the plaintiff from obtaining permits before a county moratorium. A damages phase remained pending. Management assessed loss as remote but could not estimate any amount.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material changes to the risk factors in the 2012 Form 10-K.
Important facts for investors to verify
- Whether production growth and lower per-BOE operating costs can be sustained as drilling expands.
- How the proposed $165 million acreage acquisitions will be financed, and their effect on liquidity, leverage and planned capital spending.
- The sensitivity of future results to oil and gas prices, including swap volumes, pricing terms and earnings volatility from non-hedge accounting.
- Customer concentration and any changes in purchaser credit quality or joint-interest receivables.
- The outcome and possible damages in the Minnesota litigation, along with any other material contingencies.
- Comparability of reported earnings and per-share results, given the 2012 predecessor tax status, pro forma tax presentation and large change in shares outstanding.