Diamondback Energy, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Diamondback is a Permian Basin-focused oil and gas producer; its financial statements consolidate Viper and other subsidiaries.
Financial and operating results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1.919bn | $2.768bn | $3.844bn | $5.176bn |
| Operating income | $1.000bn | $1.978bn | $2.025bn | $3.638bn |
| Net income attributable to Diamondback | $556m | $1.416bn | $1.268bn | $2.195bn |
| Diluted EPS | $3.05 | $7.93 | $6.95 | $12.28 |
| Average production | 449.9 MBOE/d | Not stated here | 437.5 MBOE/d | 380.9 MBOE/d |
- Q2 operating margin was approximately 52% of revenue, compared with 71% in Q2 2022; net income attributable to Diamondback was approximately 29% of revenue versus 51% a year earlier. These percentages are calculated from reported figures.
- Q2 average realized prices were $71.33/Bbl for oil, $0.94/Mcf for natural gas and $16.42/Bbl for NGLs; combined realized price was $46.31/BOE. Cash operating costs were $10.66/BOE.
- For the first half, operating cash flow was $2.938bn versus $2.959bn. Investing cash outflow was $1.874bn and financing cash outflow was $1.207bn; cash and restricted cash ended at $21m.
- Cash capital expenditures, excluding acquisitions and equity-method investments, were $1.368bn for the first half. Q2 capital expenditures excluding acquisitions were $711m.
- At June 30, total debt, net, was $6.543bn. Diamondback’s revolving facility had $343m drawn and approximately $1.3bn available; Viper had $224m drawn and $526m available. Management reported approximately $1.3bn of liquidity, including $5m of standalone cash and availability under Diamondback’s facility.
- Current assets were $918m and current liabilities $2.123bn. Cash and cash equivalents were $18m, with $3m of restricted cash.
Changes and notable transactions
- First-half revenue fell 26% year over year, primarily because of lower commodity prices; higher production volumes, up 15%, partly offset the price declines. Average first-half WTI was $74.77/Bbl versus $101.77/Bbl in 2022; Henry Hub averaged $2.54/MMBtu versus $6.04/MMBtu.
- Q2 production revenue was roughly flat sequentially: lower realized prices reduced revenue by about $126m, largely offset by approximately $120m from 7% higher volumes.
- The January Lario acquisition cost $814m in cash plus 4.33m Diamondback shares, for total consideration of $1.447bn. The company also completed non-core asset sales, including Glasscock County acreage for $275m net proceeds, and sold its Gray Oak Pipeline investment for $172m, recognizing a $53m gain in Q1.
- Q2 included a $189m net derivative loss. First-half derivative losses were $282m; cash settlements were a $38m outflow. Interest expense was $51m in Q2 and $97m for the first half.
- Q2 repurchases included $321m of common stock and $130m principal amount of senior notes. About $1.8bn remained under the share repurchase authorization at quarter-end. The company increased its annual base dividend to $3.36/share and declared a Q2 dividend of $0.84/share.
Outlook, risks and contingencies
- Management projected Q3 oil production of 262–265 MBO/d and total production of 440–445 MBOE/d, with production expected to grow slightly in the second half of 2023. It anticipated low-single-digit organic production growth in 2024.
- The 2023 capital budget was $2.60bn–$2.68bn. Management expected capital expenditures to decline about 5% in Q3 and further in Q4, citing lower well costs and activity. The filing also gave 2023 estimates of $778m–$877m for lease operating expenses, $95m–$122m for cash G&A, $56m–$73m for stock-based compensation, $191m–$211m for interest expense and a 10%–15% cash tax rate.
- Commodity price volatility, inflation and service costs, permitting and regulation, water restrictions and induced-seismicity measures, operational and reserve uncertainty, credit/counterparty exposure, and climate-related requirements are identified risks. Lower future commodity prices could trigger material full-cost ceiling-test impairments; none was recorded in the first half.
- Management said routine legal matters were not expected to have a material adverse effect. Diamondback is a defendant in three Louisiana coastal erosion lawsuits concerning predecessor operations; it disputes the claims and intends to defend them. The filing reported no material changes to previously disclosed risk factors.
- After quarter-end, Diamondback sold its 43% OMOG investment for $225m gross cash proceeds and reported an initial estimated $27m gain; a potential $15m earn-out is contingent on 2024 production.
Important facts for investors to verify
- How much of year-over-year earnings pressure reflects commodity prices versus higher depletion, operating costs and acquisition-related effects.
- Whether projected production, capital spending and cost ranges are tracking management’s stated 2023 and 2024 plans.
- How derivative positions and settlements affect realized prices and cash flow; the filing reports a $93m net commodity-derivative liability at June 30.
- Debt and liquidity after acquisitions, asset-sale proceeds, dividends and repurchases; confirm availability and covenant compliance under both revolving facilities.
- Completion and proceeds of planned midstream asset sales, the final Lario purchase-price allocation, and developments in the Louisiana litigation and other contingencies.