Diamondback Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. Diamondback is an independent oil and gas company focused on the Permian Basin; it consolidates Viper Energy Partners LP and owned approximately 88% of Viper at quarter-end. Financial statements are unaudited.
Key financial and operating metrics
| Metric | Q2 2015 | Prior comparable period |
|---|---|---|
| Revenue | $119.1 million | $127.0 million in Q2 2014 |
| Net income (loss) attributable to Diamondback | ($212.3 million); diluted loss per share of $3.45 | $27.8 million income; diluted EPS of $0.54 in Q2 2014 |
| Average daily production | 29,972 BOE/d | 17,836 BOE/d in Q2 2014 |
| Average realized prices before derivatives | Oil $53.49/Bbl; combined $43.65/BOE | Oil $95.19/Bbl; combined $78.25/BOE in Q2 2014 |
- For the six months, revenue was $220.5 million versus $225.0 million; Diamondback-attributable net loss was $206.4 million versus income of $51.3 million in the first half of 2014. Average production rose 68% to 30,302 BOE/d.
- Q2 operating loss was $299.1 million, including a $323.5 million non-cash oil and gas property impairment. The impairment reflected the decline in oil prices from more than $105/Bbl in June 2014 to a range of $45–$60/Bbl during the first half of 2015. The company recorded a $116.7 million income tax benefit in Q2.
- Operating cash flow for the first half was $199.8 million, compared with $159.7 million in 2014. Investing cash use was $680.0 million and financing cash provided was $494.7 million; cash increased by $14.5 million to $44.7 million.
- At June 30, cash was $44.7 million, current assets were $170.4 million and current liabilities were $142.6 million. Debt totaled $718.0 million: $268.0 million drawn on the revolving facility and $450.0 million of 7.625% senior notes due 2021. The company reported $232.0 million available under its elected $500 million revolver commitment and compliance with financial covenants.
- For the six months, Diamondback issued shares in January and May, receiving aggregate net proceeds of approximately $453.1 million. The offerings funded acquisitions and helped support capital spending.
Material changes versus prior periods
- Revenue was nearly flat year over year for the first half despite a 68% increase in daily production: lower realized commodity prices largely offset volume growth. Q2 revenue decreased 6% year over year; management attributed the change to an estimated $92.8 million adverse price effect, partly offset by an $84.8 million benefit from higher volumes.
- Q2 production grew 68% year over year, supported by drilling and acquisitions. However, Q2 oil price before derivatives fell to $53.49/Bbl from $95.19/Bbl.
- Lease operating expense rose to $7.51/BOE in Q2 from $6.47/BOE. DD&A increased in total with higher production, though DD&A per BOE declined to $20.93 from $24.66.
- First-half interest expense increased to $20.8 million from $14.2 million, primarily because average revolver borrowings were higher.
- During the first half, the company acquired approximately 11,864 net acres in the Midland Basin for approximately $435.4 million. It reported 85,229 net Permian Basin acres at June 30.
Outlook, risks and unusual items
- Management planned 2015 drilling and infrastructure spending of $400–$450 million, expected 60–70 gross operated horizontal wells, and said it could complete the additional wells without raising that budget, although spending was expected near the upper end. It expected to add a fourth horizontal rig in July and a fifth in Q3.
- Management believed operating cash flow and revolver borrowings would be sufficient to fund operations through year-end 2015 based on its current price and production expectations. It cautioned that cash flows depend on commodity prices and production, and that additional capital may be needed; financing may not be available on acceptable terms.
- At June 30, open oil swaps covered 1.84 million barrels for July–December 2015, at weighted average fixed prices of $84.10–$90.99/Bbl depending on benchmark, and 91,000 barrels for January–February 2016 at $88.72/Bbl. Derivatives were not designated as accounting hedges, so fair-value changes affected reported earnings. The net derivative asset was $47.9 million.
- Oil and gas price volatility is a key exposure. Shell Trading and Enterprise Crude Oil accounted for 60% and 14%, respectively, of first-half revenue; one customer represented approximately 66% of joint-operation receivables at quarter-end. Receivables were not collateralized.
- On July 9, 2015, Viper purchased an average 1.5% overriding royalty interest in certain Diamondback acreage for $31.1 million; Viper borrowed $24.0 million for part of the purchase. The filing also reports routine litigation and regulatory contingencies; management did not expect pending matters to have a material adverse effect.
Important facts for investors to verify
- Whether commodity prices and production support management’s year-end liquidity and capital-spending assumptions, and how future borrowing-base redeterminations affect revolver capacity.
- The impairment’s implications for reserve valuation and future depletion; the charge was non-cash, but reflected lower commodity-price assumptions.
- Actual well performance, completion pace, and cost savings compared with the announced 60–70-well plan and $400–$450 million budget.
- Hedge volumes, benchmark exposure, settlement results, and the effect of non-hedge fair-value accounting on reported earnings.
- Acquisition economics and financing, share-count dilution from the 2015 offerings, and Viper’s funding and related-party arrangements.
- Customer and joint-operation receivable concentration, along with any material developments in legal, environmental, or regulatory contingencies.