Diamondback Energy, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Diamondback is a Permian Basin-focused oil and gas producer with midstream operations through Rattler. The results consolidate subsidiaries including Viper and Rattler. Year-over-year comparisons are materially affected by the November 2018 Energen acquisition and are not like-for-like.
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $975 million | $537 million | $2.860 billion | $1.543 billion |
| Operating income | $349 million | $268 million | $1.079 billion | $816 million |
| Net income attributable to Diamondback | $368 million | $157 million | $727 million | $539 million |
| Diluted EPS | $2.26 | $1.59 | $4.42 | $5.45 |
| Daily combined production | 287,138 BOE | 122,975 BOE | 276,802 BOE | 112,799 BOE |
Margins: Q3 operating margin was approximately 35.8% versus 49.9% a year earlier; attributable net income margin was approximately 37.7% versus 29.2%. For the nine-month periods, operating margin was approximately 37.7% versus 52.9%, and attributable net income margin was approximately 25.4% versus 34.9%. These are calculated from reported figures; acquisition effects and volatile derivative results affect comparability.
- Q3 oil and gas revenue rose 82% to $956 million, primarily on higher volumes from drilling and acquisitions, partly offset by lower realized prices. Nine-month oil and gas revenue rose 86% to approximately $2.8 billion.
- Q3 realized oil price was $51.71/Bbl versus $55.96; natural gas was $0.62/Mcf versus $1.86; and NGLs were $11.61/Bbl versus $30.26. Nine-month realized prices were also lower year over year.
- Q3 results included a $177 million derivative gain, compared with a $48 million loss in Q3 2018. Nine-month derivative results were a $3 million gain versus a $139 million loss. Derivatives are not designated as accounting hedges, so fair-value changes flow through earnings.
- Cash from operations for the first nine months was $1.852 billion, up from $1.153 billion. Investing cash outflow was $2.744 billion, including $1.883 billion for drilling and completions, $311 million for leasehold acquisitions, $320 million for mineral interests, and $225 million of equity investments. Financing cash inflow was $777 million; cash declined $115 million to $100 million.
- At September 30, cash was $100 million, current assets $845 million, and current liabilities $1.181 billion (current ratio approximately 0.72). Long-term debt was $4.761 billion, versus $4.464 billion at year-end 2018. Diamondback’s revolver had $1.629 billion drawn and approximately $900 million available; the company reported covenant compliance.
Material changes and capital allocation
- Production increased substantially, reflecting the Energen merger, drilling activity, and acquired assets. The company reported 379,897 net acres and operated 21 drilling rigs and eight completion crews.
- Operating costs rose with the expanded business. Lease operating expense was $4.85/BOE in Q3 versus $4.34/BOE; management attributed the increase primarily to power-generation costs amid reduced electrical availability and said it was working to mitigate them.
- Net interest expense increased to $38 million in Q3 from $19 million and to $133 million for nine months from $49 million, mainly due to higher average revolver borrowings and interest rates; nine-month expense also included $9 million related to the DrillCo Agreement.
- The company repurchased $400 million of its shares in the first nine months under a $2 billion program authorized through December 2020; $1.6 billion remained available. Dividends paid were $82 million. The board declared a Q3 dividend of $0.1875/share, payable November 22, 2019.
- In May and July, Diamondback sold non-core Energen assets for $37 million and $285 million, respectively. On October 1, 2019, it completed a $740 million mineral-interest drop-down to Viper, receiving units and $190 million cash; this is a subsequent event, not a September 30 balance-sheet transaction.
Outlook, risks, and contingencies
- 2019 plan: Capital budget narrowed to approximately $2.85–$2.9 billion, including $2.45–$2.5 billion for drilling and completions, targeting 310–315 gross horizontal wells. The company spent $2.0 billion on its development program through September, in addition to acquisition spending.
- 2020 outlook: Management projected capital spending of $2.8–$3.0 billion and oil production growth of 10%–15% year over year, with free cash flow after dividends under its stated price assumptions: $45/Bbl WTI, $13/Bbl NGLs, and $1.50/Mcf natural gas. It said spending could be reduced if prices decline; stronger prices could support buybacks or debt reduction.
- Management expected to realize approximately 88%–92% or more of WTI for the remainder of 2019 and approximately 100% or more in 2020, citing improved differentials and long-haul pipeline access.
- Commodity-price volatility is a central risk: lower prices can reduce revenue, economic drilling, liquidity, and borrowing bases. Midstream agreements do not contain minimum volume commitments. Four purchasers each represented more than 10% of nine-month revenue, including Shell Trading (28%) and Plains Marketing (23%).
- Legal proceedings arise in the ordinary course; management did not expect them to have a material adverse effect, while noting outcomes could differ. No off-balance-sheet arrangements were reported. Management stated disclosure controls were effective.
Important facts for investors to verify
- Separate acquisition-driven volume growth from underlying production growth and compare results on a pro forma basis where appropriate.
- Assess earnings and cash generation excluding non-cash derivative fair-value movements; review hedge volumes, prices, and realized differentials.
- Compare capital spending and acquisition outlays with operating cash flow, and test the 2020 free-cash-flow outlook against the stated commodity-price assumptions.
- Track total debt, subsidiary-level borrowings, revolver availability, covenant headroom, and the effects of the Viper drop-down and subsequent Viper notes offering.
- Monitor power costs, purchaser concentration, pipeline takeaway and realized pricing, as well as whether announced production-growth and capital-return plans are achieved.