Diamondback Energy, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results include Viper Energy Partners; Diamondback owned approximately 74% of Viper at quarter-end.
Business context and operating results
Diamondback is a Permian Basin-focused oil and gas producer. The company reported approximately 191,000 net Permian acres at June 30, including 104,000 in the Southern Delaware Basin and 87,000 in the Northern Midland Basin. It estimated 4,300 gross horizontal locations economic at $50 per barrel WTI.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $269.4 million | $112.5 million | $504.7 million | $200.0 million |
| Net income (loss) | $164.1 million | ($157.1 million) | $305.2 million | ($192.7 million) |
| Net income (loss) attributable to Diamondback | $158.4 million | ($155.5 million) | $294.7 million | ($188.4 million) |
| Diluted EPS | $1.61 | ($2.17) | $3.07 | ($2.64) |
| Average daily production | 76,977 BOE/d | 36,841 BOE/d | 69,336 BOE/d | 37,575 BOE/d |
| Operating income (loss) | $132.3 million | ($134.8 million) | $248.7 million | ($162.4 million) |
Q2 production rose 108.9% year over year, driven by drilling and acquisitions; six-month production increased about 84.5%. Q2 realized prices were $45.43/bbl oil, $2.57/Mcf natural gas and $17.83/bbl NGL. Q2 cash operating expenses were $7.66/BOE versus $9.77/BOE a year earlier; DD&A was $10.73/BOE versus $11.89/BOE.
Cash flow, debt and liquidity
- Six-month operating cash flow was $394.4 million, compared with $121.8 million in 2016. Investing cash outflow was $2.22 billion, including $1.86 billion for leasehold acquisitions; financing cash inflow was $177.1 million. Cash declined from $1.67 billion at year-end to $16.6 million at June 30.
- Capital expenditures for development were $296.2 million in the first half. The February Delaware Basin acquisition was funded with $1.74 billion cash and 7.69 million common shares; the filing reports preliminary fair value of net assets acquired of approximately $2.55 billion, subject to post-closing adjustments.
- Long-term debt was $1.152 billion, including $1.0 billion of senior notes and $84.0 million on Diamondback’s revolver, plus $81.5 million on Viper’s revolver. Diamondback had $666.0 million available under its elected $750 million revolver commitment. The company reported compliance with financial covenants.
- After quarter-end, Viper raised approximately $232.6 million net in a July unit offering and used $152.8 million to repay its then-outstanding revolver borrowings. Diamondback’s Viper ownership fell to approximately 64% following the offering.
Material changes, outlook and risks
- Q2 total revenue increased about 139% year over year. The company attributed growth principally to higher production volumes and prices. Q2 hydrocarbon revenue benefited more from increased volume than from price; the six-month increase reflected both.
- Net income includes a $33.3 million Q2 derivative gain ($28.6 million from fair-value changes and $4.7 million from settlements). Six-month derivative gains were $71.0 million, primarily noncash fair-value changes. Derivatives are not designated as accounting hedges, so fair-value movements affect reported earnings.
- No oil and gas property impairment was recorded in 2017, versus $168.4 million in Q2 2016 and $199.2 million in the first half of 2016. The 2016 charges were noncash.
- Management’s 2017 drilling and infrastructure capital budget was approximately $800–$950 million, excluding leasehold and mineral acquisitions. It planned 130–165 gross operated horizontal wells, operated nine rigs and three completion crews, and expected to run eight to nine rigs through year-end. Management said current-price cash flow, cash on hand and revolver borrowings were expected to fund operations through year-end, while noting this depends on production and commodity prices.
- Management cited Midland well costs of $5.0–$5.5 million for a 7,500-foot lateral and said it was working to contain rising oilfield service costs. It may adjust rig activity as prices and market conditions change. The filing provides no specific earnings or production guidance.
- Key risks include volatile oil and gas prices, possible borrowing-base reductions, capital availability, rising service costs and customer concentration. Three purchasers accounted for 65% of first-half revenue: Shell Trading (37%), Koch Supply & Trading (17%) and Enterprise Crude Oil (11%). Routine litigation and other industry-related contingencies were disclosed; management did not expect pending matters to have a material adverse effect. No material risk-factor changes from the 2016 Form 10-K were reported.
Important facts for investors to verify
- How much of earnings and cash generation reflects recurring production economics versus derivative fair-value gains and acquisition effects.
- Whether production growth and well-level returns support the increased capital program, particularly in the recently acquired Delaware acreage.
- Liquidity after the acquisition-related cash use, planned capital spending and subsequent Viper offering; confirm revolver availability and covenant headroom.
- Exposure to commodity prices, customer concentration and potential service-cost inflation, including the sensitivity of the borrowing base to lower prices.
- The final purchase accounting and post-closing adjustments for the February acquisition, as the reported acquired-asset values were preliminary.