Diamondback Energy, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Diamondback is an independent oil and gas company focused on the Permian Basin. Financial statements are unaudited and consolidate Viper Energy Partners, in which Diamondback held approximately 74%.
Financial and operating performance
- Revenue: $235.2 million, versus $87.5 million in Q1 2016. Oil, natural gas and NGL revenue was $232.5 million; the remainder included $1.6 million of lease bonus revenue and $1.1 million of midstream services revenue.
- Profit: Operating income was $116.4 million, compared with an operating loss of $27.6 million. Net income was $141.1 million, including $136.3 million attributable to Diamondback; diluted EPS was $1.46 versus a loss of $0.46 per share. Results included a $37.7 million derivative gain, mostly a $39.4 million favorable change in fair value of open contracts.
- Production and prices: Average production rose 60.8% to 61,610 BOE/day. Average realized prices increased to $49.80/bbl for oil, $2.69/Mcf for natural gas and $20.05/bbl for NGLs. Management attributed the revenue increase to both higher prices and production, including acquisition growth.
- Costs: Lease operating expense declined to $4.80/BOE from $5.23; total cash operating expense was $9.31/BOE versus $9.64. DD&A was $58.9 million, or $10.63/BOE. No oil and gas impairment was recorded, compared with $30.8 million in Q1 2016.
- Cash flow: Operating cash flow was $175.9 million, up from $72.8 million. Investing cash outflow was $1.825 billion, principally reflecting the Delaware Basin acquisition; financing provided $20.4 million. Cash ended at $37.4 million, down from $1.667 billion at year-end 2016.
- Debt and liquidity: Long-term debt was $985.8 million, comprising $1.0 billion principal of senior notes net of issuance costs; the prior-year balance included $120.5 million drawn on Viper’s revolver, repaid in Q1. Diamondback had no borrowings on its own revolver and $500 million of elected commitments available at quarter-end. The company reported compliance with financial covenants.
Material changes and transactions
- On February 28, Diamondback completed a Delaware Basin acquisition for approximately $2.55 billion, subject to adjustments: $1.74 billion cash and 7.69 million shares, including approximately 1.15 million shares in indemnity escrow. Assets included approximately 80,339 net acres and midstream assets. Purchase accounting was preliminary; acquired properties contributed $12.2 million revenue and $2.7 million direct operating expense from closing through quarter-end.
- Oil, natural gas and NGL revenue increased about $145.0 million year over year: management attributed approximately $94.0 million to higher prices and $51.0 million to higher production. Average daily production increased by 23,302 BOE.
- Viper raised approximately $147.6 million net in a January unit offering and used $120.5 million to repay its revolving-credit borrowings.
Outlook, risks and other matters
- Capital and activity plans: The 2017 drilling and infrastructure budget was approximately $800 million–$1.0 billion, including stated estimates of $650 million–$825 million for drilling/completions, $150 million–$175 million for infrastructure and other expenditures, and $75 million for midstream assets. Diamondback planned to operate 6–10 rigs during 2017; it had eight rigs and three completion crews at the time of filing.
- Management expected operating cash flow, cash on hand and revolver availability to fund operations through year-end 2017 under its current price and production expectations. It may adjust activity to market conditions and stated that planned capital expenditures exclude leasehold and property acquisitions.
- After quarter-end, the agent lender recommended increasing Diamondback’s borrowing base to $1.5 billion, subject to lender approval; Diamondback elected to increase commitments to $750 million. Viper’s recommended borrowing-base increase to $315 million was also subject to approval.
- Commodity-price volatility is a principal risk and could adversely affect revenue, cash flow, reserves and borrowing bases. Other disclosed exposures include rising oilfield service costs, customer concentration (three buyers represented 74% of Q1 revenue), joint-interest receivable concentration, and counterparty risk on derivatives. Derivative fair-value changes flow through earnings rather than hedge accounting.
- Management reported no material change in previously disclosed risk factors, no material off-balance-sheet arrangements, and no pending litigation expected to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of Q1 earnings and EPS reflects noncash derivative mark-to-market gains, and what are expected cash settlements under the hedge portfolio?
- Final purchase-price adjustments, asset and liability fair values, and operating contribution from the Delaware Basin acquisition.
- Approval and final terms of the announced borrowing-base and commitment increases, alongside liquidity needs for the acquisition and 2017 capital program.
- Whether production growth, realized prices, drilling costs and service-cost inflation support management’s year-end funding and activity assumptions.
- Exposure to major purchasers and the potential effect of lower commodity prices on cash flow, reserves, covenant headroom and borrowing capacity.