Diamondback Energy, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a quarterly filing; selected fourth-quarter results are included. Diamondback is a Permian Basin-focused oil and gas producer and consolidates publicly traded subsidiaries Viper Energy Partners and Rattler Midstream.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $3.964 billion | $2.176 billion |
| Operating income | $695 million | $1.011 billion |
| Net income | $315 million | $945 million |
| Net income attributable to Diamondback | $240 million; diluted EPS $1.47 | $846 million; diluted EPS $8.06 |
| Cash from operations | $2.734 billion | $1.565 billion |
| Cash used in investing activities | $3.888 billion | $3.503 billion |
| Adjusted EBITDA attributable to Diamondback (non-GAAP) | $2.949 billion | $1.538 billion |
- Revenue rose 82%, principally from higher production following increased drilling and acquisitions, including the Energen merger. 2018 included Energen only from its November 29 acquisition closing, limiting year-over-year comparability.
- Average production more than doubled to 282,972 BOE/day from 130,439 BOE/day. Production was approximately 66% oil, 18% NGLs and 16% natural gas.
- Average realized price fell to $37.63/BOE from $44.73/BOE. Realized oil averaged $51.87/bbl, natural gas $0.68/Mcf and NGLs $14.42/bbl.
- Costs per BOE included $8.54 of cash operating expenses, compared with $8.44 in 2018; DD&A rose to $14.01 from $13.09.
- Year-end cash was $123 million. Current assets were $869 million versus current liabilities of $1.263 billion. Operating cash flow did not cover investing cash outflows; the net cash decrease was $92 million.
- Consolidated long-term debt was $5.371 billion, including subsidiary debt. Diamondback reported $13 million drawn and $1.99 billion available on its revolver; Viper had $97 million drawn and $678 million available, and Rattler had $424 million drawn and $176 million available. The company reported compliance with applicable financial covenants.
- Proved reserves totaled 1.128 billion BOE, up from 992 million BOE; 67% were proved developed and 33% proved undeveloped. The standardized measure of discounted future net cash flows was $10.184 billion, down from $11.676 billion.
Material changes and unusual items
- A $790 million non-cash full-cost ceiling impairment was recorded in 2019, attributed primarily to lower commodity prices. It reduced reported earnings but not cash flow. The impairment contributed to a fourth-quarter net loss of $472 million and a loss attributable to Diamondback of $487 million; fourth-quarter revenue was $1.104 billion.
- Other significant items included a $56 million loss on extinguishment of debt and a $108 million net loss on derivatives. Derivatives are not designated for hedge accounting, so fair-value changes flow through earnings.
- In December, Diamondback issued $3.0 billion of notes due 2024, 2026 and 2029 at coupons of 2.875%, 3.250% and 3.500%, respectively, and redeemed $1.25 billion of 4.750% notes.
- 2019 transactions included the Rattler IPO, divestitures of non-core assets for a combined $322 million, and a mineral-rights drop-down to Viper for cash and equity consideration. Diamondback repurchased approximately $598 million of its shares; $1.4 billion remained under the authorization at year-end.
- Annual dividends declared were $0.9375 per share. In February 2020, the board declared a fourth-quarter dividend of $0.375 per share, payable March 10, 2020.
Outlook, management commentary and risks
- For 2020, management budgeted $2.8–$3.0 billion in capital spending and expected to complete 320–360 gross operated horizontal wells, with 20–23 rigs on average. The budget included $2.45–$2.6 billion for drilling and completions, $200–$225 million for midstream investments and $150–$175 million for infrastructure and other spending; it excluded leasehold and mineral acquisitions.
- Management expected cash flow from operations, cash on hand and revolver availability to fund operations through year-end 2020, based on its then-current commodity-price and production expectations. It said spending could be reduced if prices weakened or stayed weak, and production grown within budget if prices strengthened.
- Management targeted conversion of an estimated 35% of year-end 2019 PUD reserves in 2020 and development of approximately 66% of those PUD reserves by the end of 2021.
- Key exposures include volatile oil and gas prices, very low realized natural gas prices, Permian concentration, reserve and impairment estimation, capital intensity, and reliance on a small number of purchasers. Shell, Plains and Vitol accounted for 27%, 23% and 15% of 2019 revenue, respectively.
- Long-term oil delivery and pipeline commitments can trigger deficiency payments if volumes are not delivered. Diamondback reported $11 million of 2019 deficiency payments under Gray Oak accelerated commissioning service after being unable to ship volumes due to API-gravity restrictions and lack of markets. Future obligations and credits depend on pipeline service and shipment volumes.
- Other material risks include water availability and disposal-well seismicity, environmental and hydraulic-fracturing regulation, pipeline capacity and safety, uninsured operational hazards, and access to capital. The filing also identified the coronavirus as a potential source of economic and commodity-market uncertainty; the 2020 outlook was prepared before subsequent events.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. The filing states pending legal matters were not expected to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- How production growth and realized prices—particularly gas pricing and regional differentials—translate into sustainable cash flow at current market conditions.
- Whether the $790 million impairment, reserve revisions and lower standardized reserve value signal further ceiling-test or reserve risk.
- Funding capacity for the 2020 capital program, capital returns and debt service, including the debt and liquidity of consolidated subsidiaries.
- Actual pipeline commissioning, shipment capacity and any deficiency payments under Gray Oak and other oil delivery agreements.
- Progress on PUD development, acreage expirations and the economics of the reported drilling inventory.