Diamondback Energy, Inc. quarterly report, Q2 FY2021

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Diamondback Energy, Inc. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement figures are generally in millions unless noted. Diamondback is an independent oil and natural gas producer focused primarily on the Permian Basin, with a midstream segment through Rattler.

Financial and operating performance

  • Q2 revenue: $1.681 billion, versus $425 million in Q2 2020. Oil, natural gas and NGL revenue was $1.667 billion; total production revenue rose 305%, reflecting stronger commodity prices and 36% higher combined volumes.
  • Q2 earnings: Operating income was $955 million, compared with an operating loss of $2.672 billion a year earlier. Net income attributable to Diamondback was $311 million, or $1.71 diluted per share, versus a $2.393 billion loss, or $15.16 per share. The Q2 2020 loss included $2.539 billion of oil and gas property impairment.
  • Margins: Q2 operating income was approximately 57% of revenue and net income attributable to Diamondback approximately 19%. These measures are affected by non-cash derivative valuation changes and are not directly comparable with the impairment-driven 2020 loss.
  • Production and prices: Average Q2 production was 401.5 thousand BOE/d, including full-quarter contributions from Guidon and QEP. Average realized oil price was $63.22/Bbl; combined realized price was $45.63/BOE, or $36.82/BOE including cash-settled hedges.
  • Cash flow, first half: Operating cash flow was $1.578 billion, investing cash outflow $898 million, and financing cash outflow $392 million. Cash, cash equivalents and restricted cash ended at $396 million, including $344 million of cash and equivalents. Cash flow from operations was up from $1.173 billion in H1 2020.
  • Capital spending: H1 capital expenditures excluding acquisitions and equity-method investments were $662 million, versus $1.352 billion in H1 2020. Q2 capital expenditures excluding acquisitions were $366 million.
  • Debt and liquidity: Total debt, net, was $7.360 billion at June 30, versus $5.815 billion at year-end 2020; this includes Viper and Rattler debt. Diamondback’s main revolving facility had no borrowings and $1.6 billion available, subject to $3 million of letters of credit. Viper had $438 million available and Rattler $595 million. The company and these subsidiaries reported compliance with financial covenants.
  • Dividends and shares: The board declared a Q2 dividend of $0.45 per share, payable August 19, 2021. Shares outstanding increased to 181.0 million from 158.1 million at year-end, mainly due to shares issued for the QEP and Guidon acquisitions.

Material changes versus the prior comparable period

  • Commodity prices recovered from the exceptionally weak Q2 2020 market: Q2 average oil price increased to $63.22/Bbl from $21.99/Bbl, while combined production increased 36% to 401.5 thousand BOE/d.
  • Q2 2021 included QEP, acquired March 17, and Guidon, acquired February 26. The transactions expanded Midland Basin acreage and added production; reported comparisons therefore also reflect changes in the consolidated business.
  • H1 2021 had no oil and gas property impairment, compared with $3.548 billion in H1 2020. Q2 2021 also included $2 million of merger and integration expense; H1 included $77 million.
  • Q2 2021 recorded a $497 million net derivative loss, versus a $361 million loss in Q2 2020. H1 derivative loss was $661 million, compared with a $181 million gain in H1 2020; these amounts include non-cash fair-value movements.
  • Debt rose following the acquisitions and financing transactions. The March 2021 notes offering generated $2.18 billion net proceeds, primarily used to repurchase acquired QEP notes and a portion of Diamondback’s 2025 notes. Management estimated approximately $40 million in annual interest savings from the refinancing.

Outlook, risks and unusual items

  • Operating outlook: Management said it intends to maintain relatively flat oil production, emphasizing capital discipline, cost control, debt reduction and shareholder returns. It said it expects to reduce the 2021 capital budget by about 6% at the midpoint of previously disclosed guidance, but the filing does not provide a revised budget range. The previously updated budget was approximately $1.5–$1.6 billion.
  • Capital returns: Management plans, beginning in 2022, to return 50% of free cash flow to stockholders; the form of return will be determined by the board. Management also cited expected annual QEP cost synergies of $60–$80 million.
  • Divestitures: The company agreed to sell QEP-acquired Williston Basin assets for approximately $745 million, subject to adjustments and closing conditions, and expected closing late in Q3 2021. It intended to use net proceeds for debt reduction. It completed non-core Permian asset sales for $82 million and also intended those proceeds for debt reduction.
  • Liquidity outlook: Based on then-current prices and production expectations, management believed cash from operations, cash on hand and revolving credit availability would fund operations for at least the 12 months following filing. Results remain sensitive to commodity prices, volumes, capital needs and access to financing.
  • Hedges and market risk: At June 30, commodity derivatives represented a net liability of $783 million. A 10% move in forward commodity curves in either direction would change that liability by approximately $77 million, based on the filing’s sensitivity analysis. Hedging can reduce price exposure but also limits participation in price movements.
  • Impairment and unusual accounting: The company received an SEC waiver to exclude QEP- and Guidon-acquired properties from the Q1 2021 full-cost ceiling test; it said an approximately $1.1 billion impairment would otherwise have been recorded. Management warned that lower trailing-12-month commodity prices or other factors could lead to material future impairments.
  • Subsequent event: After quarter-end, Diamondback elected to redeem the remaining $432 million principal amount of its 5.375% notes due 2025 on August 24, 2021, at 102.688% of principal plus accrued interest, funded with cash and revolving borrowings.
  • Other risks and contingencies: The filing cites commodity-price volatility, COVID-19 and demand uncertainty, supply-chain and pipeline constraints, regulation, counterparty/customer credit risk, and acquisition integration. Management did not expect routine legal proceedings to have a material adverse effect. QEP brought approximately $68 million of transportation, gathering and purchase commitments. No material off-balance-sheet arrangements were reported.

Important facts for investors to verify

  1. Whether the Williston Basin sale closed, its final proceeds after adjustments, and the amount applied to debt.
  2. Actual 2021 capital spending and production versus management’s flat-oil-production plan and stated budget reduction.
  3. Progress toward the expected QEP synergies and the estimated $40 million annual refinancing savings.
  4. How commodity prices, production, hedge settlements and derivative fair values affect future earnings, cash flow and the $783 million net derivative liability.
  5. Debt reduction, liquidity and the funding impact of the 2025 note redemption and planned shareholder returns.
  6. Whether future ceiling tests result in impairment charges, particularly for acquired properties previously excluded under the SEC waiver.