Diamondback Energy, Inc. annual report, FY2021

Diamondback Energy, Inc. — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. Diamondback is a Permian Basin-focused oil and gas producer with upstream and midstream operations; it also consolidates publicly traded subsidiaries Viper and Rattler.

Financial and operating performance

Metric	FY2021	FY2020
Total revenue	$6.797 billion	$2.813 billion
Net income attributable to Diamondback	$2.182 billion	Loss of $4.517 billion
Net cash from operating activities	$3.944 billion	$2.118 billion
Net cash used in investing activities	$1.539 billion	$2.101 billion
Net cash used in financing activities	$1.841 billion	$37 million
Production	375,348 BOE/d	300,331 BOE/d

• Revenue and prices: Oil, natural gas and NGL sales totaled $6.747 billion, up about 145%. Management attributed approximately $3.3 billion of the increase to higher commodity prices and the remainder primarily to a 25% increase in combined sales volumes. Average realized prices were $66.19/bbl for oil, $3.36/Mcf for gas and $28.70/bbl for NGLs; the combined average was $49.25/BOE before derivative settlements and $39.87/BOE on a hedged basis.
• Profit and margins: Operating income was $4.001 billion; net income was $2.276 billion including non-controlling interests. Operating margin was approximately 59% of revenue and net income attributable to Diamondback was approximately 32% of revenue. These figures include a net $848 million loss on derivatives and $78 million of merger and integration expense.
• Costs: Cash operating costs were $9.46/BOE, compared with $7.37/BOE in 2020. Lease operating expense was $4.12/BOE; production and ad valorem taxes were $3.10/BOE; gathering and transportation was $1.55/BOE. Depletion fell to $8.77/BOE from $11.30/BOE.
• Cash and liquidity: Year-end cash and cash equivalents were $654 million, with approximately $1.6 billion available under Diamondback’s revolving credit facility; management reported approximately $2.2 billion of liquidity. Consolidated current assets were $1.446 billion and current liabilities were $1.438 billion.
• Debt: Balance-sheet debt, net, was $6.687 billion, including $499 million of borrowings under subsidiary revolving facilities and $58 million due under a DrillCo agreement. Senior-note principal maturities were $45 million in 2022, $1.2 billion cumulatively in 2023–2024, $2.1 billion in 2025–2026 and $3.4 billion thereafter. Diamondback reported compliance with financial maintenance covenants.
• Capital returns: Diamondback paid $312 million in dividends and repurchased $431 million of its shares during 2021. The board declared a fourth-quarter dividend of $0.60 per share in February 2022.

Material changes versus the prior comparable period

• Revenue and operating cash flow rose substantially as commodity prices recovered from 2020 lows and production increased following the Guidon and QEP acquisitions. Production averaged 375,348 BOE/d versus 300,331 BOE/d.
• Diamondback reported attributable net income of $2.182 billion, compared with a $4.517 billion loss in 2020. The prior-year loss included $6.021 billion of non-cash property impairment; no impairment was recorded in 2021.
• Proved reserves increased approximately 36% to 1.789 billion BOE, with 67% classified as proved developed. However, the filing reports substantial negative PUD revisions associated with changes to the development plan after the acquisitions.
• Major transactions included the Guidon acquisition for $375 million in cash and 10.68 million Diamondback shares, the all-stock QEP merger, and the $586 million net-proceeds sale of acquired Williston Basin assets. The company also issued $2.2 billion of notes and redeemed approximately $3.2 billion of senior-note principal.
• Commodity derivative settlements were a significant cash use: Diamondback paid $1.225 billion net on derivatives in 2021, compared with receiving $250 million in 2020. The company also recorded a $848 million net derivative loss for 2021.

Outlook, management commentary and risks

• For 2022, management planned to keep oil production flat at the fourth-quarter 2021 level and budgeted $1.75–$1.90 billion of capital spending. The plan included drilling 270–290 gross operated horizontal wells and completing 260–280; management said spending could be adjusted if commodity prices or market conditions change.
• Management intended to distribute at least 50% of quarterly free cash flow to stockholders through a combination of the base dividend, variable dividends and share repurchases. The board retains discretion over dividends and repurchases.
• Management cited efficiency gains and capital discipline, while warning of inflationary pressures on costs. It expected 2022 lease operating expense of approximately $539–$618 million, production taxes of 7%–8% of production revenue, and net interest expense of $148–$178 million.
• Key exposures include oil and gas price volatility, COVID-19 and labor or supply constraints, concentration in the Permian Basin, dependence on a few significant purchasers, and potential interruptions to gathering and transportation. Three purchasers each represented more than 10% of 2021 revenue.
• Produced-water disposal restrictions and seismicity-related permit actions in the Permian could raise costs or constrain operations. Climate and methane regulation, water availability, severe weather, cyber incidents, reserve-estimation uncertainty and the risk of future impairment are also discussed.
• Diamondback reported Scope 1 and methane intensity reduction targets for 2024, a goal to end routine flaring by 2025, and a target to source over 65% of drilling and completion water from recycled sources by 2025. It reported flaring 1.45% of gross gas production in 2021.
• Routine legal proceedings were not expected by management to have a material adverse effect. The filing identifies no unresolved SEC staff comments. The financial statement and internal-control audits received unqualified opinions; the auditor identified reserve estimation and acquired-property valuation as a critical audit matter.

Important facts for investors to verify

• How much of the increase in earnings and cash generation is sustainable at future commodity prices, considering the large 2021 derivative cash payments and accounting loss?
• Whether the acquired QEP and Guidon assets deliver expected production, cost synergies and returns, and how changes to the development plan affect reserve estimates and PUD conversion.
• The company’s ability to fund its 2022 capital plan and capital returns while addressing debt maturities, subsidiary borrowings and contractual commitments.
• The potential operational and cost impact of produced-water disposal limits, water sourcing needs, pipeline capacity and inflation in oilfield services.
• Whether reserve assumptions, commodity-price inputs and acquisition valuations remain reasonable; the filing notes estimates are uncertain and may change materially.