Diamondback Energy, Inc. quarterly report, Q3 FY2023

Diamondback Energy, Inc. — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results. Diamondback is a Permian Basin-focused oil and natural gas producer; Viper Energy is consolidated, with Diamondback owning approximately 57% of its units at quarter-end.

Financial and operating results

Metric	Q3 2023	Q3 2022	Nine months 2023	Nine months 2022
Total revenue	$2.34 billion	$2.44 billion	$6.18 billion	$7.61 billion
Operating income	$1.34 billion	$1.61 billion	$3.37 billion	$5.25 billion
Net income attributable to Diamondback	$915 million	$1.18 billion	$2.18 billion	$3.38 billion
Diluted EPS	$5.07	$6.72	$12.01	$18.99
Average production	452.8 MBOE/d	—	442.7 MBOE/d	384.2 MBOE/d

Q3 operating margin was approximately 57% and net income attributable to Diamondback was approximately 39% of revenue (calculated from reported figures). Q3 oil and gas production revenue was $2.27 billion; sales of purchased oil added $59 million of revenue and an equal amount of expense, with no net contribution. The company reported Q3 cash operating costs of $10.51 per BOE.

For the first nine months, oil, natural gas and NGL revenue fell about 20% year over year as lower realized prices more than offset 15% growth in combined volumes. Average realized combined price declined to $50.17/BOE from $72.06/BOE; average daily production increased to 442.7 MBOE/d from 384.2 MBOE/d. Q3 combined realized price rose sequentially to $54.37/BOE from $46.31/BOE in Q2, while production rose about 2%.

Cash flow, balance sheet and capital allocation

Nine-month cash flow: Operating cash flow was $4.30 billion, versus $4.88 billion in 2022. Investing cash outflow was $1.86 billion; financing cash outflow was $1.77 billion. Cash increased by $666 million over the period.
Capital spending: Cash capital expenditures, excluding acquisitions and equity method investments, were $2.05 billion for the first nine months, versus $1.40 billion in 2022. Q3 capital expenditures excluding acquisitions were $684 million.
Cash and liquidity: The balance sheet reports $827 million cash and cash equivalents at September 30, 2023. MD&A separately describes approximately $2.3 billion of liquidity as $680 million of standalone cash plus $1.6 billion available under Diamondback’s credit facility; the filing text does not explain the difference between the cash figures. Diamondback had no borrowings on its $1.6 billion facility.
Debt: Reported net debt was $6.23 billion, including $250 million drawn on Viper’s credit facility; aggregate senior-note principal was approximately $6.1 billion. No debt maturities were due until 2026. Diamondback’s facility maturity was extended to June 2028; Viper’s facility maturity was extended to September 2028. Both were in covenant compliance.
Shareholder returns: Diamondback paid $149 million of dividends in Q3 and repurchased $56 million of common stock. Approximately $1.8 billion remained under the $4.0 billion repurchase authorization. The board declared a $3.37-per-share Q3 dividend, comprising $0.84 base and $2.53 variable, payable in November.

Material developments and outlook

The January 2023 Lario acquisition added approximately 16,000 net Midland Basin acres for $814 million cash and 4.33 million Diamondback shares. Acquired assets contributed $134 million of Q3 revenue and $53 million of Q3 net income.
In September, Diamondback contributed water assets with a $681 million carrying value to Deep Blue, receiving approximately $516 million cash, a 30% interest and contingent consideration. A further approximately $47 million is expected upon transfer of operations, anticipated in 2024; $43 million was recorded as a receivable. Diamondback and Five Point anticipate $500 million of combined follow-on capital for Deep Blue projects and acquisitions.
2023 asset sales included non-core acreage and equity investments. Management said announced or completed non-core asset sale transactions totaled approximately $1.7 billion of gross proceeds, exceeding its stated target of at least $1.0 billion by year-end.
Management projected Q4 2023 production of 455–460 MBOE/d, including 269–273 MBO/d of oil; low-single-digit organic production growth in 2024; and Q4 capital expenditures 5%–10% below Q3. The revised 2023 capital budget was $2.66–$2.70 billion. Management expected 2023 lease operating expenses of $832–$881 million, gathering and transportation costs of $269–$294 million, interest expense of $180–$204 million, and a cash tax rate of 15%–17%.
The board’s stated capital-return commitment is at least 75% of free cash flow through repurchases and dividends, with the remainder primarily directed to debt reduction. Dividends and repurchases remain discretionary and subject to board action.
After quarter-end, Viper issued $400 million of 7.375% notes and completed a mineral and royalty interest acquisition on November 1 for approximately 9.02 million Viper units and $750 million cash. Diamondback’s ownership of Viper was approximately 56% after related unit issuance and the acquisition.

Risks, contingencies and unusual items

Commodity-price exposure remains central. Diamondback uses derivatives to reduce price volatility; nine-month derivative losses were $358 million, compared with $677 million in 2022. At quarter-end, commodity derivatives were a net liability of $105 million. Derivatives can create counterparty exposure and may not fully offset realized-price changes.
Management cited uncertainty from commodity markets, geopolitical conflicts, interest rates, inflation, potential economic weakness, service and labor costs, and water availability/regulation, including Texas restrictions on new produced-water well permits. Lower future commodity prices could trigger full-cost ceiling-test impairments; no impairment was recorded in the periods presented.
Costs increased in some areas: nine-month lease operating expense rose to $5.11/BOE from $4.68/BOE, reflecting acquired wells, inflation and water-service costs. Management also noted higher costs for third-party water and oil-gathering services following asset divestitures.
Routine litigation was not expected by management to have a material financial effect. Diamondback is a defendant in three Louisiana coastal erosion lawsuits involving predecessor operations; it disputes the claims and says outcomes and potential damages remain uncertain.
Controls and procedures were assessed as effective, with no material change in internal control over financial reporting during the quarter. The company reported no material changes to its previously disclosed risk factors.

Important facts for investors to verify

Reconcile MD&A’s $680 million “standalone cash” liquidity figure with the $827 million consolidated balance-sheet cash balance.
Track realized commodity prices, hedge settlements and derivative positions, and assess how much production is protected by the disclosed hedge contracts.
Compare production, capital spending and operating costs with management’s Q4 and 2024 outlook; monitor whether lower completion costs materialize.
Assess acquisition and divestiture effects, including Deep Blue’s contingent payment and follow-on capital needs, and Viper’s post-quarter acquisition financing and debt service.
Monitor debt, variable dividends, repurchases and the stated 75% free-cash-flow return commitment under changing commodity-price conditions.
Follow developments in the Louisiana litigation and water-related regulatory restrictions, as well as the risk of future ceiling-test impairment if commodity prices decline.