Diamondback Energy, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; the filing also reports unaudited fourth-quarter results. This is an annual filing, not a standalone Q4 filing. Energen’s results were consolidated only from its November 29, 2018 acquisition, so annual comparisons are not fully like-for-like.
Business context
Diamondback is an independent oil and gas producer focused on the Permian Basin. It reported 461,218 net leasehold acres, 130,439 BOE/d average production, and 992.0 million BOE of proved reserves at year-end. Viper Energy Partners, in which Diamondback held approximately 59%, is consolidated in the results.
Key financial and operating metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $2.176 billion | $1.205 billion |
| Income from operations | $1.011 billion | $605.0 million |
| Net income attributable to Diamondback | $845.7 million | $482.3 million |
| Diluted EPS | $8.06 | $4.94 |
| Net cash from operating activities | $1.565 billion | $888.6 million |
| Consolidated Adjusted EBITDA (non-GAAP) | $1.539 billion | $928.0 million |
| Average daily production | 130,439 BOE/d | 79,224 BOE/d |
| Average realized price, hedged | $42.20/BOE | $41.26/BOE |
| Cash operating expense | $8.44/BOE | $8.16/BOE |
Revenue increased 80% and average daily production increased 65% year over year, reflecting drilling growth and acquisitions as well as higher average realized prices. Oil supplied 72% of production and 88% of revenue. Lease operating expense declined to $4.31/BOE from $4.38/BOE, while DD&A rose to $623.0 million from $326.8 million. No proved-property impairment was recorded in 2018 or 2017; a $245.5 million impairment was recorded in 2016.
Fourth-quarter 2018 revenue was $631.8 million, operating income was $195.0 million, net income was $306.2 million, and net income attributable to Diamondback was $306.7 million. Fourth-quarter diluted EPS was $2.50.
At December 31, cash was $214.5 million, total assets were $21.596 billion, current liabilities were $1.020 billion, and long-term debt was $4.464 billion. Debt included $1.490 billion drawn on Diamondback’s revolver, $2.050 billion of Diamondback senior notes, $530 million of Energen notes, and $411 million drawn by Viper. Diamondback reported approximately $0.5 billion of availability under its elected revolver commitment; Viper reported $144 million available. Investing cash outflow was $3.503 billion, leaving operating cash flow less investing cash flow at approximately negative $1.939 billion, largely reflecting acquisitions and development investment.
Material changes and unusual items
- Completed the all-stock Energen merger on November 29, 2018, issuing approximately 62.8 million shares valued at about $7.1 billion. The company also acquired Ajax for $900 million cash plus approximately 2.6 million shares and acquired ExL/EnergyQuest assets for $312.5 million cash.
- Year-end proved reserves rose to 992.0 million BOE from 335.4 million BOE. Reserve purchases, primarily Energen, contributed 487.0 million BOE; reported reserves also include Viper mineral interests.
- Merger and integration expense was $36.8 million. The year’s reported derivative gain was $101.3 million, despite $120.4 million of cash settlement losses, because of a $221.7 million positive change in fair value of open derivatives.
- Debt increased from $1.477 billion to $4.464 billion, while cash increased from $112.4 million to $214.5 million. The company issued additional 2024 and 2025 notes and assumed Energen debt.
- Energen’s preliminary purchase-price allocation remained subject to completion. The 2018 internal-control assessment excluded Energen’s controls during the first year after acquisition; management and the auditor reported effective controls for the assessed company.
Outlook, risks and contingencies
Management forecast 2019 production growth of more than 27% year over year within cash flow at then-current commodity prices, and proposed a 50% dividend increase beginning in Q1 2019. The 2019 budget was $2.7–$3.0 billion, including $2.3–$2.55 billion for drilling and completions and $400–$450 million for midstream and infrastructure; Diamondback planned 290–320 gross operated horizontal well completions and expected to operate 18–22 rigs. Management said it would adjust activity to market conditions and believed operating cash flow would fund operations through year-end 2019, subject to prices, production and capital needs.
Key risks include volatile oil and gas prices and regional price differentials; significant capital needs and leverage; borrowing-base redeterminations and floating-rate debt; successful integration of Energen and realization of expected benefits; dependence on Permian infrastructure, water, service providers and major purchasers; delivery commitments that may trigger deficiency payments; reserve-estimation and development uncertainty; and environmental, hydraulic-fracturing, wastewater-disposal and seismicity regulation. Three customers represented 52% of 2018 revenue. Management said routine legal matters were not expected to have a material adverse effect. The company reported compliance with credit-facility financial covenants at year-end.
Important facts for investors to verify
- How much of reported growth and reserve expansion reflects acquired assets versus organic performance, and how results compare on a pro forma basis.
- Post-merger leverage, liquidity, borrowing-base capacity and covenant headroom under lower commodity prices.
- Whether 2019 production, capital-spending, free-cash-flow and dividend expectations were achieved; the filing’s cash-flow outlook depends on commodity prices and production.
- Realized pricing differentials, hedge coverage and potential delivery shortfalls under long-term oil purchase agreements.
- Energen integration progress, final purchase-price allocation, and integration of acquired internal controls.