Diamondback Energy, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial statements are unaudited. Unless stated otherwise, amounts are in U.S. dollars. The company is a Permian Basin oil and natural gas producer; results consolidate Viper Energy Partners, in which Diamondback held approximately 54%. Comparisons are affected by the November 2018 Energen acquisition, whose operations are included in Q1 2019 but not Q1 2018.
Financial and operating results
- Revenue: $864 million, up 81% from $479 million. Oil, natural gas and NGL revenue was $842 million. Average production rose 156% to 262,633 BOE/d, primarily reflecting drilling growth and acquisitions; lower commodity prices partly offset the volume increase.
- Prices and mix: Oil was 68% of production. Average realized prices were $46.12/Bbl for oil, $1.32/Mcf for natural gas and $18.00/Bbl for NGLs, versus $61.64, $2.18 and $24.57, respectively, in Q1 2018. Hedged average realized price was $36.38/BOE versus $47.02.
- Profit and margins: Operating income was $319 million, compared with $267 million; operating margin was approximately 36.9% versus 55.7%. Consolidated net income was $43 million versus $178 million; net income attributable to Diamondback was $10 million versus $163 million, or $0.06 diluted EPS versus $1.65. The 2019 attributable net margin was approximately 1.2%.
- Key costs: DD&A was $322 million versus $115 million. Cash operating expense was $8.00/BOE versus $8.38; DD&A was $13.62/BOE versus $12.48. Net interest expense increased to $46 million from $14 million.
- Cash flow: Operating cash flow was $377 million versus $339 million. Investing cash outflow was $937 million, including $569 million for oil and gas property additions and $149 million for equity investments. Financing provided $471 million; cash declined $89 million to $126 million. Operating cash flow less oil and gas property additions was negative $192 million.
- Debt and liquidity: Long-term debt was $4.670 billion, up from $4.464 billion at year-end; cash was $126 million. The company’s revolving facility had $2 billion outstanding and $1 billion available; Viper’s facility had $157 million outstanding and $398 million available. The reported current ratio was approximately 0.62. Both entities reported compliance with financial covenants.
- Other balance-sheet items: Total assets were $22.268 billion and equity $14.514 billion. Derivative liabilities totaled $74 million, compared with derivative assets of $231 million at year-end.
Material changes and unusual items
- The $268 million net derivative loss included a $285 million non-cash loss from changes in fair value of open contracts, partly offset by $17 million of cash settlement gains. Derivatives are not designated for hedge accounting, so fair-value changes flow through earnings.
- Q1 2019 income-tax benefit was $33 million, including a discrete benefit of approximately $35 million from revising deferred taxes associated with Viper’s tax-status change. The reported effective tax rate was negative 301.7%; the filing attributes the rate primarily to this tax revision and other items.
- Energen’s acquisition added scale and debt. The preliminary purchase-price allocation remained subject to revision; acquisition consideration was approximately $7.136 billion in Diamondback shares.
- Viper raised approximately $341 million net in a March unit offering. Proceeds were used by its operating subsidiary to repay revolver borrowings and fund acquisitions, while Diamondback’s ownership fell to approximately 54%.
Outlook, capital allocation and risks
- 2019 program: Management budgeted $2.7–$3.0 billion for drilling and infrastructure, including $2.3–$2.55 billion for drilling and completion. The company expected to complete 290–320 gross horizontal wells, with an average lateral length of approximately 9,500 feet; it operated 23 rigs and eight completion crews at the time of the filing.
- Pricing outlook: Management expected realized pricing to improve as fixed-differential contracts roll off, forecasting approximately 88%–92% of WTI for the remainder of 2019 and approximately 100% in 2020, based on then-current market differentials and estimated gathering costs.
- Liquidity outlook: Management believed operating cash flow, cash on hand and revolver availability would fund operations through year-end 2019, based on its price and production assumptions. It cautioned that results depend on commodity prices, production, capital availability and other factors; lower prices could impair cash flow, liquidity, reserves and borrowing capacity.
- Subsequent capital actions: In May, the board declared a $0.1875/share quarterly dividend and authorized a buyback of up to $2 billion through December 31, 2020; repurchases are discretionary. The company also agreed to sell 103,423 net acres of acquired conventional and non-core assets for $322 million, with closings expected by July 1, subject to conditions. The assets’ estimated 2019 production was approximately 6,500 BOE/d.
- Market and operating risks: Commodity-price volatility, regional price differentials, customer concentration, floating-rate debt, borrowing-base redeterminations, capital needs and execution of the development program are material risks. Three purchasers accounted for 25%, 25% and 10% of Q1 revenue. Management reported no material expected adverse effect from routine litigation or disputes and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether production growth and the 2019 drilling plan are delivered within the stated capital budget, and how acquisition effects influence year-over-year comparisons.
- Whether realized oil pricing improves as forecast, including the effects of differentials, pipeline access and hedges.
- Whether the asset-sale agreements close on expected terms and timing, and how proceeds are allocated alongside the buyback, dividend and investment program.
- Debt, revolver availability and covenant headroom after capital spending and any borrowing-base redetermination; distinguish cash derivative settlements from non-cash fair-value earnings volatility.
- Final Energen purchase-price allocation and the effects of integration, deferred-tax estimates and non-controlling interests on reported results.