Diamondback Energy, Inc. annual report, FY2022

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Diamondback Energy, Inc. — FY2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. Although the request identifies 2022 Q4, this filing reports full-year results, not stand-alone fourth-quarter results.

Business context

Diamondback is an independent oil and gas producer focused on unconventional resources in the Permian Basin. After acquiring Rattler in August 2022, the company reported one reportable segment: upstream. At year-end, it held approximately 508,767 net leasehold acres and estimated 2.03 billion BOE of proved reserves, including Viper mineral-interest reserves; 69% were proved developed.

Financial and operating metrics

  • Revenue: Total revenue was $9.64 billion, up 42% from $6.80 billion in 2021. Oil, gas and NGL sales were $9.57 billion. Higher commodity prices drove most of the increase; combined volumes rose 3% to 140.9 million BOE.
  • Prices and production: Average realized oil price was $93.85/bbl versus $66.19; natural gas was $4.86/Mcf versus $3.36; NGLs were $35.07/bbl versus $28.70. Average production was 386,005 BOE/d, including 223,605 bbl/d of oil.
  • Profit: Net income attributable to Diamondback was $4.39 billion, versus $2.18 billion in 2021; diluted EPS was $24.61 versus $12.24. Operating income was $6.51 billion. Operating margin was approximately 67.5% and attributable net margin approximately 45.5% of total revenue.
  • Costs: Cash operating expense was $11.43/BOE versus $9.46, reflecting inflation and higher production-related costs. Lease operating expense increased to $4.63/BOE from $4.12.
  • Cash flow and investment: Operating cash flow was $6.33 billion versus $3.94 billion. Cash capital expenditures excluding acquisitions and equity-method investments were $1.94 billion. Operating cash flow less this capex was approximately $4.39 billion; this is a simple calculation, not necessarily the company’s defined free cash flow.
  • Debt and liquidity: Total debt, net, was $6.25 billion versus $6.69 billion. Cash and cash equivalents were $157 million. Diamondback had no borrowings under its $1.6 billion revolving facility and $1.6 billion available; Viper had $152 million drawn and $348 million available. Total reported liquidity was approximately $1.8 billion.
  • Shareholder returns: The company paid $1.57 billion in dividends and repurchased $1.10 billion of shares in 2022. It reported $2.5 billion remaining under its $4.0 billion repurchase authorization at year-end.

Material changes versus 2021

  • Revenue, operating cash flow and attributable net income rose substantially, primarily on higher commodity prices; production growth was modest.
  • Net derivative loss improved to $586 million from $848 million, but 2022 cash settlements were still a net $850 million paid. Derivative accounting and settlements affected earnings and cash flow differently.
  • Capital spending excluding acquisitions and equity-method investments increased to $1.94 billion from $1.49 billion.
  • Debt declined by about $439 million net, alongside issuance of $2.5 billion of senior notes and retirement of $2.4 billion principal. Debt-extinguishment loss was $99 million.
  • No oil and gas property impairment was recorded in 2022 or 2021; 2020 included a $6.0 billion non-cash impairment.
  • Proved reserves increased to 2.03 billion BOE from 1.79 billion BOE. The standardized measure of discounted future net cash flows rose to $35.7 billion from $18.7 billion, substantially reflecting higher SEC reference prices; it is not a measure of current market value.

Outlook, commentary and risks

  • 2023 plan: Budgeted capital spending of $2.50–$2.70 billion, with pro forma oil production expected to remain essentially flat after the FireBird and Lario acquisitions. Planned activity includes drilling 325–345 gross operated horizontal wells and completing 330–350.
  • Capital returns: Management intends to distribute at least 75% of quarterly free cash flow to shareholders, subject to board discretion, through the base dividend, variable dividends and repurchases. The board raised the annual base dividend to $3.20/share; the declared fourth-quarter 2022 combined dividend was $2.95/share.
  • Transactions: FireBird closed in November 2022 for $787 million cash and 5.92 million shares. Lario closed January 31, 2023 for $814 million cash and 4.33 million shares. In February 2023, the company agreed to sell non-core acreage for $439 million, subject to adjustments and closing conditions. It also sold its Gray Oak investment for $172 million in January 2023.
  • Costs and commodity uncertainty: Management cited inflation in services, equipment and labor. Commodity prices may remain volatile amid geopolitical events, supply and demand shifts, interest rates and recession concerns. Management said it may reduce capital spending if prices weaken.
  • Other key risks: Exposure to oil and gas price volatility and derivative counterparties; concentrated operations in the Permian; two customers represented 43% of 2022 revenue; transportation capacity and water availability; produced-water disposal restrictions and induced seismicity; environmental, methane and climate regulation; acquisition integration and reserve-estimation uncertainty; and debt, interest-rate and refinancing risks.
  • Contingencies and unusual items: Management said routine legal matters were not expected to have a material adverse effect, while noting uncertainty in Louisiana coastal erosion lawsuits tied to predecessor operations. Asset retirement obligations were $347 million at year-end. The filing reports no material weakness in internal controls and an unqualified audit opinion.
  • Environmental goals: Diamondback targets at least a 50% reduction in Scope 1 and 2 GHG intensity from 2020 levels by 2030 and continuous emissions monitoring covering at least 90% of operated oil production by end-2023; monitoring covered about 85% at year-end 2022. It reported flaring 2.3% of gross gas production and sourcing 41% of drilling and completion water from recycled sources in 2022.

Important facts for investors to verify

  1. How commodity prices, realized differentials and hedge settlements affect cash generation, especially given substantial 2022 derivative cash payments.
  2. Debt obligations and financing costs, including the reported $6.25 billion net debt and significant maturities in 2026–2027 and thereafter.
  3. Whether planned 2023 spending, flat production and the 75% capital-return commitment remain achievable after acquisitions, divestitures and inflation.
  4. Reserve quality and development execution: 31% of proved reserves were undeveloped, with future development spending required; estimates depend on prices, costs and drilling results.
  5. Customer concentration, water-disposal constraints, and the status and potential exposure of environmental and Louisiana coastal claims.