Diamondback Energy, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. The unaudited filing covers the quarter and six months ended June 30, 2019. Diamondback is a Permian Basin-focused oil and gas producer, with midstream operations conducted through Rattler. Results include Energen, acquired in November 2018, and consolidated subsidiaries Viper and Rattler; year-over-year comparisons are therefore affected by the larger asset base and share count.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1.021 billion | $527 million | $1.885 billion | $1.006 billion |
| Operating income | $411 million | $281 million | $730 million | $548 million |
| Net income attributable to Diamondback | $349 million | $219 million | $359 million | $382 million |
| Diluted EPS | $2.11 | $2.22 | $2.17 | $3.87 |
| Operating margin, calculated | 40.3% | 53.3% | 38.7% | 54.5% |
Revenue and production: Q2 combined production rose to 280,365 BOE/d from 112,592 BOE/d; six-month production averaged 271,548 BOE/d versus 107,627 BOE/d. Q2 realized oil price fell to $54.41/bbl from $61.56, and combined realized price declined to $39.19/BOE from $50.24. Management attributed revenue growth chiefly to higher volumes from drilling and acquisitions, partly offset by lower prices.
Cash flow and investment: For the six months, operating cash flow was $1.043 billion, investing cash outflow $1.772 billion, and financing cash inflow $840 million; cash increased $111 million to $326 million. Development drilling and completions accounted for $1.155 billion of investing cash outflow; total development-program capital expenditures were approximately $1.2 billion. The filing does not provide a defined free-cash-flow measure.
Debt and liquidity: Long-term debt was $4.472 billion at June 30, 2019, compared with $4.464 billion at year-end 2018. Cash was $326 million; current assets of $972 million were below current liabilities of $1.180 billion. The parent revolving facility had $1.639 billion drawn and approximately $861 million available, with a $3.4 billion borrowing base and $2.5 billion elected commitment. Viper had $213 million drawn and $387 million available; Rattler had $1 million drawn and $599 million available. The company and these subsidiaries reported covenant compliance.
Material changes versus prior comparable period
- Q2 revenue rose 94% and six-month revenue rose 88%, driven mainly by higher production volumes, including the effect of acquisitions. Production more than doubled year over year, while realized commodity prices were lower.
- Q2 net income attributable to Diamondback increased to $349 million from $219 million, but diluted EPS declined to $2.11 from $2.22 as weighted-average shares increased to about 165 million from about 99 million following the Energen all-stock merger.
- Six-month net income attributable to Diamondback fell to $359 million from $382 million. The period included a $174 million net derivative loss versus a $91 million loss in 2018, and higher interest and DD&A expense.
- Q2 lease operating expense increased to $4.98/BOE from $4.16/BOE, which management primarily attributed to conventional Central Basin Platform assets acquired with Energen.
- Rattler completed its IPO in May, raising approximately $720 million net; Diamondback retained approximately 71% ownership. Viper’s March offering raised approximately $341 million net; Diamondback retained approximately 54% ownership.
Outlook, commentary, risks and unusual items
- Capital plan: 2019 drilling and infrastructure budget is approximately $2.7–$3.0 billion. Management reported operating 23 drilling rigs and eight completion crews and said activity could be adjusted with prices and market conditions.
- Liquidity outlook: Based on then-current prices and production expectations, management believed operating cash flow, cash on hand and revolver capacity would fund operations through year-end 2019. This outlook is subject to commodity prices, production and capital needs.
- Pricing: Management expected to realize approximately 95% or more of WTI for the remainder of 2019 and approximately 100% or more in 2020, based on then-current differentials and estimated gathering costs. These are expectations, not guarantees.
- Capital returns: The board authorized up to $2 billion of share repurchases through December 31, 2020; approximately $104 million had been repurchased in Q2, with $1.9 billion remaining. A Q2 dividend of $0.1875 per share was declared for payment in August 2019.
- Asset transactions: The company sold 6,589 net acres for $37 million in May and, after quarter-end, sold 103,750 net acres for $285 million. Both sales were described as non-core Energen assets and did not result in a gain or loss. A pending Viper drop-down, valued at about $700 million based on the cited unit price, was expected to close in Q4 2019, subject to due diligence and other conditions.
- Commodity and other risks: Oil and gas prices are volatile; low prices may reduce revenue, liquidity, reserves and borrowing capacity. Midstream agreements do not have minimum-volume commitments, so lower drilling or shut-ins could reduce throughput. Three purchasers represented 60% of six-month 2019 revenue (Shell 25%, Plains 23%, Occidental 12%). Derivatives are not designated as accounting hedges, so fair-value changes affect reported earnings; six-month derivative results were a $174 million loss. A 1% interest-rate move was estimated to change annual interest expense by about $16 million on parent revolver borrowings at quarter-end.
- Contingencies and controls: Management stated pending legal matters were not expected to have a material adverse effect, while noting outcomes could differ. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of revenue and earnings growth reflects durable production and operating performance versus Energen acquisition effects, and how comparable the prior-year base is.
- Realized prices and differentials, particularly the unusually low Q2 realized natural gas price of negative $0.41/Mcf and the assumptions behind management’s future WTI realizations.
- Whether planned capital spending is funded by recurring operating cash flow without increasing debt, and how repurchases and dividends affect liquidity.
- Debt, borrowing-base availability, covenant headroom and the separate financial positions of Diamondback, Viper and Rattler.
- Completion and financing of the proposed Viper drop-down, including its final terms, closing conditions and effect on ownership and borrowing capacity.
- Derivative positions, their cash-settlement effects and the impact of commodity-price movements on both hedge results and unhedged production revenue.