Diamondback Energy, Inc. — Q3 2022 Form 10-Q
Business context and period. Diamondback is an independent oil and gas producer focused on the Permian Basin, with upstream operations as its sole reportable segment after acquiring the remaining publicly held Rattler units. This unaudited report covers the quarter and nine months ended September 30, 2022; comparisons below are to Q3 2021 unless otherwise noted.
Financial and operating performance
| Metric | Q3 2022 | Comparison / context |
|---|---|---|
| Total revenue | $2.437 billion | Up 28% from $1.910 billion a year earlier; down 12% from Q2 2022 production revenue of $2.752 billion, mainly due to lower realized oil and NGL prices. |
| Net income attributable to Diamondback | $1.184 billion; $6.72 per diluted share | Up from $649 million and $3.55 per diluted share in Q3 2021. |
| Income from operations | $1.614 billion | Compared with $1.164 billion in Q3 2021. |
| Derivative result | $24 million net loss | Compared with a $234 million net loss in Q3 2021. Derivative gains and losses include non-cash fair-value changes. |
| Production | 390.6 MBOE/d average; 224.3 MBO/d oil | Combined production was up about 3% from Q2; oil volumes were broadly flat quarter over quarter. |
| Average realized prices | $67.25/BOE combined; $89.79/Bbl oil | Combined price was $79.49/BOE in Q2 2022. Hedged combined price was $64.67/BOE in Q3. |
| Cash flow, nine months | Operating cash flow $4.884 billion; investing outflow $1.952 billion; financing outflow $3.570 billion | Operating cash flow was $2.777 billion in the first nine months of 2021. Cash, cash equivalents and restricted cash ended at $34 million, down from $672 million at year-end 2021. |
| Debt and liquidity | Total debt, net, $5.357 billion; cash and cash equivalents $27 million | Debt was $6.687 billion at year-end 2021. Management reported approximately $1.4 billion of liquidity, principally about $1.4 billion available under Diamondback’s revolving credit facility. |
| Capital returns | $526 million of dividends paid and $472 million of share repurchases in Q3 | Board declared a Q3 dividend of $2.26/share: $0.75 base and $1.51 variable. About $2.8 billion remained under the expanded $4.0 billion buyback authorization at quarter-end. |
Material changes and notable items
- For the first nine months, revenue increased 60% to $7.613 billion, while Diamondback-attributable net income rose to $3.379 billion from $1.180 billion. Higher commodity prices drove most of the revenue increase; combined sales volumes rose 3%.
- Q3 production revenue fell $335 million from Q2 as lower average prices reduced revenue by $422 million, partly offset by $87 million from 4% higher production volumes.
- Inflation and higher utility and service costs lifted Q3 lease operating expense to $5.09/BOE from $4.59/BOE in Q2. Total cash operating costs were $11.97/BOE.
- The August Rattler merger exchanged approximately 4 million Diamondback shares for publicly held Rattler units and resulted in repayment of $269 million of Rattler credit-facility borrowings. It was accounted for as a non-cash equity transaction; Q3 included $11 million of merger and integration expense.
- Q3 income tax expense included a $50 million benefit from a partial reduction in Viper’s deferred-tax valuation allowance. Nine-month cash taxes paid were $560 million.
Outlook, risks and contingencies
- Management expected oil production to remain flat for the rest of 2022, prioritizing capital returns and debt repayment over expanding drilling. The company targeted returning at least 75% of free cash flow beginning in Q3; future dividends remain at board discretion.
- The 2022 capital budget was revised to approximately $1.94–$1.95 billion. Management raised the expected 2022 lease operating expense range to $632–$704 million and projected gathering and transportation expense of $253–$268 million. Expected 2022 cash tax rate was 10%–15% of pretax income.
- Commodity prices, inflation, service and labor availability, interest rates, geopolitical developments, transport access, regulation, water restrictions and potential impairment charges are key risks. Management warned that a significant decline in trailing 12-month commodity prices could lead to material oil and gas property write-downs. No impairment was recorded in the first nine months of 2022.
- Derivative contracts reduce exposure to commodity-price volatility but can affect reported earnings and cash settlements. At September 30, commodity derivatives were a net asset of $38 million; a 10% move in forward curves would change that position by an estimated $26 million in the opposite direction.
- Management said routine legal proceedings were not expected to have a material adverse effect, while noting outcomes could differ from its assessment. The company reported compliance with financial covenants and effective disclosure controls.
- After quarter-end, Diamondback agreed to acquire approximately 68,000 net Midland Basin acres for $775 million cash and 5.86 million shares, subject to closing conditions. It also sold non-core Delaware acreage for $155 million and issued $1.1 billion of 6.25% notes due 2033, using part of the proceeds to redeem Rattler’s $500 million 2025 notes. Moody’s upgraded its rating to Baa2 in October.
Important facts for investors to verify
- Commodity-price and production assumptions underlying the 2022 outlook, capital budget and cash-return plans.
- How derivative settlements and mark-to-market changes affect realized prices, cash flow and reported earnings.
- Debt and liquidity after the October notes issuance, Rattler note redemption, asset sale and any closing of the FireBird acquisition.
- The sustainability of the variable dividend and pace of share repurchases relative to free cash flow and debt reduction.
- Operating-cost inflation, future impairment-test sensitivity, and the legal, regulatory, water and environmental risks discussed in the filing.