Diamondback Energy, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2015, compared with the same periods in 2014. Diamondback is an oil and gas producer focused on the Permian Basin; it also consolidates Viper Energy Partners, in which it owned approximately 88% at quarter-end.
Financial and operating results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $111.9 million | $139.1 million | $332.4 million | $364.1 million |
| Net income (loss) attributable to Diamondback | $(156.8) million | $43.7 million | $(363.2) million | $95.1 million |
| Diluted earnings (loss) per share | $(2.40) | $0.79 | $(5.88) | $1.83 |
| Operating cash flow | Not presented separately | Not presented separately | $339.6 million | $252.0 million |
| Capital expenditures and acquisitions, net cash used in investing | Not presented separately | Not presented separately | $(787.9) million | $(1,289.1) million |
Q3 average daily production increased 65% to 34,082 BOE/d; nine-month production increased 81.8% to 31,576 BOE/d. Q3 realized unhedged prices averaged $44.12/bbl for oil, $10.22/bbl for NGLs and $2.67/Mcf for gas. For the nine months, respective prices were $46.87/bbl, $12.80/bbl and $2.61/Mcf.
Operating loss was $254.8 million in Q3 and $552.5 million for the nine months, including oil and gas property impairment charges of $273.7 million and $597.2 million, respectively. Calculated GAAP operating margins were approximately (228)% and (166)%; these were heavily affected by the impairment. DD&A was $52.4 million in Q3 and $169.1 million year to date. Q3 derivative gain was $27.6 million; the nine-month gain was $26.8 million.
At September 30, cash was $43.8 million, current assets $173.4 million and current liabilities $200.2 million. Total debt was $489.0 million, comprising $450.0 million of 7.625% senior notes due 2021, $10.0 million on Diamondback’s revolver and $29.0 million on Viper’s revolver. Diamondback reported $490.0 million available under its elected $500.0 million commitment; its borrowing base was $725.0 million. Viper’s borrowing base was $175.0 million. Diamondback said it was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Revenue declined 20% in Q3 and 9% for the nine months, as lower commodity prices more than offset production growth. Q3 oil price averaged $44.12/bbl versus $88.63; nine-month oil price averaged $46.87 versus $92.15.
- Production growth reflected drilling and acquisitions. The company acquired approximately 12,396 net Midland Basin acres for about $425.5 million in 2015; it reported approximately 85,229 net Permian acres at quarter-end.
- Net results shifted from profit to loss, primarily reflecting the non-cash ceiling-test impairments following the commodity-price decline. The filing states the impairment reduced reported earnings but not cash flow.
- Lease operating expense rose to $7.08/BOE in Q3 from $7.27 a year earlier, and to $7.55/BOE year to date from $6.79. DD&A per BOE fell, largely because of the impairment’s effect on the property basis.
- Debt fell to $489.0 million from $673.5 million at December 31, 2014, while three 2015 equity offerings generated approximately $650.7 million net proceeds and increased shares outstanding.
Outlook, risks and unusual items
- Management expected to operate four horizontal rigs in Q4 after releasing one of five rigs in October. It continued to target 60–70 gross horizontal wells in 2015 and estimated $400–$450 million of 2015 drilling and infrastructure capital expenditures. It cited service-cost concessions of 20%–30% from peak 2014 pricing.
- Management believed operating cash flow and revolver borrowings would fund operations through year-end 2015, based on its then-current price and production expectations. It cautioned that future cash flows depend on volatile commodity prices and production, and that further capital is needed to develop properties. The budget did not include acquisitions.
- Management warned that persistently low Q4 commodity prices could cause another non-cash full-cost impairment, adversely affecting results. Oil and gas prices are the company’s principal market risk.
- Open crude-oil swaps covered 920,000 barrels for October–December 2015 at weighted fixed prices ranging from $84.10 to $90.99/bbl across indices, plus 91,000 barrels for January–February 2016 at $88.72/bbl. Derivatives are not designated as accounting hedges, so fair-value changes affect earnings.
- Customer concentration is significant: Shell Trading accounted for 60% and Enterprise Crude Oil 14% of nine-month revenue. The filing identifies customer and joint-interest receivables as credit risks.
- A pipeline-damage lawsuit had estimated possible damages of $2–$4 million plus attorneys’ fees; management believed insurance would cover any loss and recorded no reserve. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Future commodity prices, borrowing-base redeterminations and their effect on impairment charges, liquidity and covenant headroom.
- Whether production growth, well performance and the 2015 drilling and capital-spending targets were achieved, and the returns on the Howard County acquisitions.
- Hedge volumes, settlement exposure and counterparties, alongside realized prices and customer concentration.
- Equity issuance and resulting dilution, and the company’s ability to finance development and acquisitions without materially increasing debt.
- Potential litigation developments and the adequacy of insurance coverage.