Diamondback Energy, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Comparisons are with the corresponding 2013 periods. Diamondback is an independent oil and gas company focused on the Permian Basin. Following Viper Energy Partners LP’s June IPO, Diamondback retained approximately 92% ownership and continued to consolidate Viper.
Financial and operating performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $127.0 million | $45.4 million | $225.0 million | $74.3 million |
| Operating income | $63.2 million | $19.4 million | $111.3 million | $28.0 million |
| Net income attributable to Diamondback | $27.8 million | $14.5 million | $51.3 million | $19.9 million |
| Diluted EPS | $0.54 | $0.36 | $1.02 | $0.52 |
| Average daily production | 17,836 BOE/d | 6,590 BOE/d | 15,706 BOE/d | 5,694 BOE/d |
Q2 revenue grew 180%; first-half revenue grew 203%. Management attributed most of the increase to higher production from drilling and acquisitions, with a smaller contribution from prices. Oil was approximately 75% of production in Q2 and accounted for 91% of revenue in both reported periods.
Operating margin, calculated as operating income divided by revenue, was approximately 49.8% in Q2 2014 versus 42.7% in Q2 2013, and 49.4% for the first half versus 37.7%. Net margin was approximately 21.9% versus 31.9% in Q2, and 22.8% versus 26.7% for the first half, reflecting, among other items, increased interest expense and derivative losses. These calculated margins are not company-reported non-GAAP measures.
- Prices and unit costs: Q2 average realized prices before derivatives were $95.19 per oil barrel and $78.25 per BOE; first-half figures were $94.46 per barrel and $79.15 per BOE. After derivatives, average oil prices were $92.20 per barrel in Q2 and $92.30 for the first half. Lease operating expense fell to $6.47/BOE in Q2 from $9.16, and to $6.48/BOE for the first half from $10.09. DD&A was $24.66/BOE in Q2 and $24.97/BOE for the first half.
- Cash flow: First-half operating cash flow was $159.7 million, investing cash outflow was $523.6 million, and financing cash inflow was $385.4 million. Cash increased $21.4 million to $37.0 million. Investing included $210.5 million for drilling and infrastructure and $312.2 million for leasehold interests.
- Liquidity: At June 30, cash was $37.0 million, current assets were $114.7 million, and current liabilities were $168.9 million—an approximately $54.2 million working-capital deficit. The company reported $46.0 million drawn under its revolving facility, a $350 million borrowing base, and $304 million available. It was in compliance with financial covenants.
- Debt: Total debt was $496.0 million: $450.0 million of 7.625% senior notes due 2021 and $46.0 million under the revolving facility. Interest expense was $7.7 million in Q2 and $14.2 million for the first half, versus $0.5 million and $1.0 million, respectively, in 2013; the increase mainly reflected the notes issued in September 2013.
Material changes and notable transactions
- Diamondback acquired approximately 4,785 net Permian acres in February for approximately $292.2 million. The acquired properties contributed $19.2 million of revenue and $4.6 million of direct operating expenses from February 28 through June 30.
- Viper completed its IPO in June, selling 5.75 million units at $26 each and receiving approximately $137.2 million net. Diamondback contributed Viper Energy Partners LLC in exchange for units and held approximately 92% of Viper’s common units at quarter-end. Third-party interests are reported as noncontrolling interest.
- Diamondback issued 3.45 million common shares in February for approximately $208.4 million net. Shares issued and outstanding rose to 50.8 million at June 30 from 47.1 million at year-end 2013.
- First-half derivative results were a $15.5 million net loss, versus a $3.0 million gain in 2013. The loss included $10.8 million of noncash losses on open contracts and $4.7 million of settlement losses. At June 30, open oil swaps covered 1.288 million barrels for July–December 2014 at a weighted average $98.64 and 331,000 barrels for January–April 2015 at $99.71; the recorded derivative liability was $10.4 million.
Outlook, risks, and contingencies
- The board-approved 2014 drilling and infrastructure budget was $425 million–$475 million, up 48% from 2013; $210.5 million had been spent through June. The budget did not include acquisitions. Management expected operating cash flow and revolver borrowings to fund operations through year-end 2014, based on then-current commodity-price expectations, but noted that results and capital availability are uncertain.
- On July 18, Diamondback agreed to acquire approximately 13,136 net acres for about $538 million, subject to adjustments, due diligence, and other closing conditions; closing was expected in early September. On July 25, it raised approximately $484.9 million net through a 5.75 million-share offering at $87 per share, intended to partially fund the acquisition. It also repaid the $46 million revolver balance on July 25, pending possible reborrowing.
- Commodity prices, production levels, access to capital, drilling and acquisition costs, permits, and equipment availability are key uncertainties. Two buyers accounted for 82% of first-half revenue: Shell Trading (65%) and Enterprise Crude Oil (17%). A 10% move in forward commodity curves was estimated to change the derivative liability by approximately $17.0 million, with corresponding changes in the value of covered production expected to substantially offset cash derivative effects.
- The company reported no material changes to the risk factors in its 2013 Form 10-K, no off-balance-sheet arrangements, and no material changes in contractual obligations. Management said disclosure controls were effective and that no material adverse outcome was expected from routine litigation. A previously disclosed Minnesota dispute was effectively concluded in March 2014 after summary judgment, with the parties waiving appeal.
Most important facts for investors to verify
- Whether production growth and lower unit operating costs persist, and how much growth reflects acquisitions versus ongoing drilling performance.
- Completion, final purchase price, and funding of the approximately $538 million acquisition; reconcile this with the July equity proceeds and subsequent revolver activity.
- Viper’s contribution to consolidated results, Diamondback’s continuing ownership, and related-party expense allocation and reimbursement terms.
- Commodity-price exposure, hedge coverage and fair-value volatility, especially given the reported derivative losses and concentrated customer base.
- Liquidity and covenant headroom after planned development spending and acquisitions, including the impact of borrowing-base redeterminations and debt costs.