Diamondback Energy, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Diamondback is a Permian Basin-focused oil and natural gas producer, with upstream and midstream operations. Financial statements are unaudited and consolidated, including Viper and Rattler.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $2.408 billion | $1.184 billion |
| Operating income | $1.660 billion | $571 million |
| Net income attributable to Diamondback | $779 million | $220 million |
| Diluted EPS | $4.36 | $1.33 |
| Cash from operating activities | $1.252 billion | $624 million |
| Cash used in investing activities | $716 million | $587 million |
| Cash used in financing activities | $1.041 billion | Cash provided: $29 million |
- Production averaged 381,378 BOE/d, up 24% year over year; oil averaged 222,833 barrels per day. Combined realized price was $69.60/BOE, versus $42.36.
- Oil, natural gas and NGL revenue rose 104% year over year, reflecting higher prices and increased volumes. Operating income margin was approximately 69% of revenue; net income attributable to Diamondback was approximately 32% of revenue.
- Cash and cash equivalents were $149 million at quarter-end, down from $654 million at December 31, 2021. Total debt, net, was $5.848 billion, versus $6.687 billion; total liquidity was approximately $1.7 billion, including $1.6 billion available under Diamondback’s credit facility.
- Capital expenditures excluding acquisitions and equity-method investments were $437 million. The company acquired approximately 6,200 net Delaware Basin acres for $232 million, funded with cash on hand.
Changes, financing and shareholder returns
- Compared with Q1 2021, higher commodity prices and a full quarter of production following the 2021 Guidon and QEP transactions drove revenue and earnings growth. Q1 2021 included $75 million of merger and integration expense; Q1 2022 had none.
- Commodity derivatives produced a $552 million net loss in earnings and $420 million of net cash payments, including $135 million for early contract terminations. These results materially affected reported earnings and cash flow.
- In March, Diamondback issued $750 million of 4.25% senior notes due 2052 and redeemed $1.5 billion of 2024 and 2025 notes, paying premiums and recording a $54 million loss on extinguishment of debt.
- The board declared a Q1 dividend of $3.05 per share after quarter-end: $0.70 base and $2.35 variable, payable May 23, 2022. Future dividends are discretionary. Diamondback repurchased approximately $7 million of stock during the quarter; $1.6 billion remained available under its authorization.
Outlook, risks and contingencies
- Management expects to keep oil production flat in 2022 and direct excess cash flow toward debt reduction and/or shareholder returns. The 2022 capital budget is $1.75–$1.90 billion. The company expects a 2022 cash tax rate of 10%–15% of pretax income.
- Management stated that cash, operating cash flow and available credit should fund liquidity needs, including the capital program and debt service. This outlook depends on commodity prices, production and access to capital.
- Key risks include oil and gas price volatility, the Russia-Ukraine conflict and broader market uncertainty, inflation and service-cost increases, supply-chain and labor constraints, regulatory and environmental requirements, water and induced-seismicity restrictions, and customer and derivative-counterparty credit risk. A significant commodity-price decline could trigger material impairment charges; none were recorded in Q1.
- Routine legal, royalty, title, contract and environmental matters are disclosed; management does not expect them, individually or collectively, to have a material adverse effect, while noting outcomes are uncertain. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported earnings and cash flow reflected commodity prices versus derivative marks and settlements, and how current hedge positions affect future realized prices.
- The composition and availability of the stated $1.7 billion liquidity, including debt held at Viper and Rattler, facility terms and upcoming maturities.
- Execution of the flat-production strategy and $1.75–$1.90 billion capital plan, including inflation, production costs and acquisition spending.
- The sustainability of the $3.05 dividend and any future variable dividends, given their dependence on board approval, free cash flow and commodity prices.
- Potential effects of commodity-price changes on full-cost ceiling tests and impairment risk, as well as developments in regulatory, environmental and legal matters.