Business Context and Reporting Period
This Form 8-K filing by Diamondback Energy, Inc. covers events occurring on or around September 6, 2013. The company, a Delaware corporation operating in the Permian Basin, reported on material amendments to its credit facilities, the launch of a proposed senior notes offering, and significant asset acquisitions in Midland, Martin, and Dawson Counties, Texas.
Key Financial Metrics and Operational Data
- Reserves: As of September 1, 2013, estimated net proved reserves were 47,135 MBOE (historical) and 57,876 MBOE (pro forma for recent acquisitions). Approximately 64% of historical reserves were oil.
- Production: Average daily production was 7,189 BOE/d in July 2013. The recently acquired Midland County mineral interests contributed approximately 1,600 net BOE/d in June 2013.
- Capital Expenditures: The 2013 budgeted Capex range is $290.0 million to $320.0 million.
- Debt and Liquidity: The company entered into a Fourth Amendment to its Credit Agreement, increasing the permitted issuance of unsecured senior notes from $250 million to $500 million. The borrowing base under the Credit Agreement is preliminarily expected to increase to a range of $275.0 million to $300.0 million following a redetermination.
- Valuation Metrics: The PV-10 value of reserves was $952.3 million (pro forma) and $647.2 million (historical). The standardized measure of discounted future net cash flows was $750.2 million (pro forma) and $496.1 million (historical).
Material Changes and Recent Developments
- Acquisitions:
- Midland County Mineral Interests: Agreed to purchase mineral interests underlying ~15,000 gross acres for $440.0 million. Expected to close by end of September 2013. Includes an average 20% royalty interest with no future capital expense required.
- Martin County Leasehold: Completed acquisition on September 4, 2013, for a portion of the aggregate $165.0 million deal. Includes 4,506 gross acres, 17 producing wells, and 1,199 MBOE of proved developed reserves.
- Dawson County Leasehold: Pending acquisition of 9,390 gross acres with 30 producing wells and 907 MBOE of proved developed reserves. Expected to close by end of September 2013.
- Financing: Proposed a $450.0 million offering of senior notes to fund acquisitions and operations. Proceeds from an August 2013 common stock offering (4.6 million shares) are also being utilized.
- Horizontal Drilling: The company has drilled or is drilling 17 horizontal wells as operator and participated in one as a non-operator. Initial production rates for recent wells in the Wolfcamp B interval range from 618 to 1,136 BOE/d (24-hour peak).
Outlook, Risks, and Management Commentary
- Outlook: Management believes acreage in Midland and Upton Counties is prospective in the Wolfcamp B interval. The company has identified 862 potential horizontal drilling locations and 1,995 potential vertical drilling locations (including downspacing) on existing acreage, with an additional 252 horizontal locations from recent acquisitions.
- Risks and Contingencies:
- The Midland County and Dawson County acquisitions remain subject to due diligence and closing conditions and may not be completed.
- Production and reserve data for the Midland County mineral interests are based on third-party information and have not yet been verified by the company.
- The proposed $450 million notes offering is subject to market conditions.
- The final borrowing base increase is subject to credit approval and due diligence by lenders.
- Unusual Items: The filing notes that Wells Fargo Bank, N.A., the administrative agent, also provides financial advisory services and is a counterparty to price swap derivatives used to reduce oil price volatility.
Investor Verification Checklist
- Verify the closing status of the $440.0 million Midland County mineral interest acquisition and the $165.0 million Martin/Dawson County leasehold acquisitions.
- Confirm the final borrowing base amount following the lender's due diligence and the successful issuance of the proposed $450.0 million senior notes.
- Review the independent reserve report (Exhibit 99.1) to validate the pro forma reserve estimates of 57,876 MBOE and the associated PV-10 value.
- Monitor the actual production performance of the newly acquired assets against the estimated 1,600 BOE/d (Midland) and combined leasehold production figures.
- Assess the impact of the increased unsecured senior note capacity ($500 million limit) on the company's leverage ratios and financial flexibility.