Diamondback Energy, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Diamondback is a Permian Basin oil and gas producer, with operations focused on the Midland and Delaware Basins. The figures below are unaudited.
Financial and operating performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $301.3 million | $142.1 million | $805.9 million | $342.1 million |
| Operating income (loss) | $142.6 million | $6.7 million | $391.4 million | $(155.7) million |
| Net income (loss) attributable to Diamondback | $73.0 million | $(2.2) million | $367.7 million | $(190.6) million |
| Diluted earnings (loss) per share | $0.74 | $(0.03) | $3.80 | $(2.60) |
| Average production | 85,029 BOE/day | 44,923 BOE/day | 74,624 BOE/day | 40,042 BOE/day |
- Revenue increased 112% in Q3 and 136% for the nine-month period. Management attributed the growth to higher production—up 89% in Q3—and improved realized prices, as well as acquisitions.
- Operating margin, calculated as operating income divided by revenue, was approximately 47% in Q3 2017 versus 5% in Q3 2016, and approximately 49% for the first nine months of 2017 versus a loss in the comparable 2016 period. The 2016 comparison includes a $245.5 million non-cash property impairment.
- Q3 realized prices were $45.62/bbl for oil, $2.51/Mcf for natural gas and $21.87/bbl for natural gas liquids. Q3 cash operating costs were $7.67/BOE; lease operating expense was $4.15/BOE, down from $5.37/BOE a year earlier.
- Cash flow: Nine-month operating cash flow was $638.0 million, compared with $226.3 million in 2016. Investing cash outflow was $2.765 billion, including $1.893 billion for leasehold acquisitions, $370.9 million for mineral interests and $531.5 million for development capital. Financing cash inflow was $490.3 million. Cash declined by $1.636 billion to $30.2 million.
- Liquidity and debt: At September 30, cash was $30.2 million and current assets were $193.9 million versus current liabilities of $417.6 million. Long-term debt was $1.256 billion, including $1.0 billion of senior notes and $270.0 million drawn across the Company’s and Viper’s revolving facilities. Reported availability was $515.5 million on Diamondback’s facility and $279.5 million on Viper’s. The Company reported compliance with its financial covenants.
Material changes versus the prior comparable period
- The February 2017 Delaware Basin acquisition added approximately 80,339 net acres, associated midstream assets and production. Consideration was approximately $1.74 billion cash plus 7.69 million Diamondback shares; the filing reports aggregate acquisition consideration of approximately $2.55 billion.
- Q3 production nearly doubled year over year, while oil, natural gas and NGL prices also improved. Q3 oil and gas revenue rose to $299.2 million from $142.1 million.
- The Company recorded no property impairment in 2017, compared with $245.5 million for the first nine months of 2016. Q3 2017 derivative results were a $50.6 million loss, primarily reflecting a $58.6 million negative change in fair value of open contracts; nine-month derivative results were a $20.4 million gain.
- Debt increased from $1.106 billion at year-end 2016 to $1.256 billion. Cash fell substantially, primarily reflecting the acquisition and other investment spending. Viper completed two unit offerings, raising approximately $380 million net in total.
Outlook, risks and unusual items
- Management narrowed its 2017 drilling and infrastructure capital budget to approximately $850–$900 million, excluding acquisitions. It expected to drill and complete 120–125 gross operated horizontal wells, operate nine to ten rigs for the rest of 2017 and bring 35–40 gross operated wells online in Q4.
- Management expected operating cash flow, cash on hand and revolver borrowings to fund operations through year-end 2017, based on its current price and production expectations. The filing gives no quantified earnings or production guidance beyond the operational plans noted above.
- For the November 2017 borrowing-base redeterminations, lenders had proposed increasing Diamondback’s borrowing base from $1.5 billion to $1.8 billion, and Viper’s from $315 million to $400 million. These proposals were subject to syndicate-lender approval; Diamondback intended to raise its elected commitment from $750 million to $1.0 billion.
- Key risks include volatile oil and gas prices, possible borrowing-base reductions, rising oilfield service costs, high acquisition and development funding needs, and concentration among customers. Three purchasers represented 64% of nine-month 2017 revenue. Derivatives reduce price exposure but are not designated as accounting hedges, so fair-value changes can materially affect reported earnings.
- The filing describes routine industry-related legal claims and disputes; management did not expect pending matters to have a material adverse effect. It reports no material change in previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the proposed borrowing-base increases were approved and how much committed, undrawn liquidity was ultimately available.
- Whether production growth and the stated well-completion plans were achieved, and how much growth came from the acquisition versus drilling.
- Cash generation relative to development spending and acquisition outlays, given the sharp decline in cash and current-liability position.
- Commodity-price sensitivity, hedge volumes and mark-to-market effects; confirm the distinction between cash settlements and non-cash derivative fair-value changes.
- Acquisition economics, including integration, development costs and the future conversion of unevaluated properties into producing reserves.