Diamondback Energy, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter ended September 30, 2016. Diamondback is a Permian Basin-focused oil and gas producer; figures below are consolidated and in U.S. dollars unless stated otherwise. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $142.1 million | $111.9 million | $342.1 million | $332.4 million |
| Net loss attributable to Diamondback | $2.2 million | $156.8 million | $190.6 million | $363.2 million |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $226.3 million | $339.6 million |
- Q3 average production was 44,923 BOE/d, up 31.8%; nine-month average was 40,042 BOE/d, up 26.8%. Higher volumes more than offset lower realized prices: Q3 revenue rose 27%, while nine-month revenue rose 3%.
- Q3 average realized price was $34.39/BOE, versus $35.70; nine-month price was $31.18/BOE, versus $38.56. Oil represented 89% of Q3 revenue.
- Q3 operating income was $6.7 million, compared with an operating loss of $254.8 million. Nine-month operating loss was $155.7 million, versus $552.5 million. Net losses narrowed substantially, principally as oil-and-gas impairment charges fell to $46.4 million in Q3 and $245.5 million for nine months, from $273.7 million and $597.2 million, respectively.
- Q3 lease operating expense was $5.37/BOE, down from $7.08; nine-month expense was $5.38/BOE, down from $7.55. Nine-month cash operating expense was $9.48/BOE, compared with $12.09. DD&A was $11.55/BOE for nine months, versus $19.62.
- For the nine months, operating cash flow was $226.3 million; investing cash outflow was $982.0 million, including $591.8 million for leasehold acquisitions and $137.8 million for royalty interests. Development-program expenditures were $243.4 million. Financing provided $902.8 million, largely from equity offerings.
- At September 30, cash and equivalents were $167.3 million; current assets were $258.3 million and current liabilities $175.0 million. Total debt was $497.8 million, including $450 million of 7.625% notes due 2021 and $54.5 million of Viper revolver borrowings. Diamondback had no borrowings on its own revolver and reported covenant compliance.
- Share count increased to 78.1 million from 66.8 million at year-end 2015 following equity issuances. The company reported a Q3 loss of $0.03 per share and a nine-month loss of $2.60 per share.
Material changes and transactions
- On September 1, Diamondback acquired Southern Delaware Basin leasehold and related assets for $560 million, subject to adjustments: approximately 19,180 net acres, producing wells and infrastructure. Management estimated 290 net potential horizontal drilling locations.
- Diamondback completed January and July common-stock offerings, generating approximately $254.5 million and $551.8 million net, respectively. Viper also raised capital through an August unit offering and made additional mineral-interest acquisitions. Diamondback owned approximately 83% of Viper at quarter-end.
- After quarter-end, Diamondback issued $500 million of 4.75% notes due 2024 and used part of the proceeds to tender for and redeem all $450 million principal amount of its 2021 notes. The 2021 indenture was discharged on October 28, 2016. The refinancing lowers the stated coupon but includes tender/redemption premiums and raises note principal by $50 million.
- After quarter-end, the agent lender recommended increasing Diamondback’s borrowing base to $1.0 billion; the company said it would keep its commitment capped at $500 million. Viper’s recommended borrowing-base increase was to $275 million from $175 million.
Outlook, risks and unusual items
- Management increased its 2016 drilling, completion and infrastructure budget in July to $350–$425 million. It expected to spend $305–$360 million on drilling and completions, targeting 65–70 gross operated horizontal wells. The company reported five operating rigs and two completion crews; it may add a rig in early 2017 depending on prices and conditions.
- Management stated that operating cash flow, cash on hand and revolver availability were expected to fund operations through year-end 2016, based on its then-current price and production expectations. It cautioned that lower commodity prices could materially harm revenue, cash flow, liquidity and reserves, and might require reduced drilling or other financing.
- Oil and gas prices remain volatile. The company warned that prices at or below then-current levels could result in another non-cash full-cost impairment in Q4. Nine-month impairment charges were $245.5 million; these reduced reported earnings but not cash flow.
- Commodity derivatives were not designated as accounting hedges, so fair-value changes flowed through earnings. The derivative position was a net liability of $8.2 million at quarter-end, versus a $4.6 million net asset at year-end 2015. The company reported a nine-month derivative loss of $8.7 million, versus a gain of $26.8 million in 2015.
- Customer concentration is significant: Shell Trading accounted for 50% of nine-month revenue, Enterprise Crude Oil 13%, and Koch Supply & Trading 12%. Receivables also expose the company to customer and joint-operator credit risk.
- Management recorded a $126.0 million total valuation allowance against federal net operating loss deferred tax assets, citing uncertainty that the affected portion would be realizable. The filing reports routine industry-related legal disputes and claims, with management not expecting pending matters to materially affect results.
Important facts for investors to verify
- Whether production growth and the Southern Delaware acquisition generate returns sufficient to justify acquisition and development spending.
- How realized commodity prices, basis differentials and derivative settlements affect revenue, cash flow and the possibility of further full-cost impairments.
- The final 2016 capital spend and any 2017 rig additions, in light of commodity prices, operating cash flow and financing needs.
- The completed 2024-note refinancing economics, including premiums and fees, and the resulting debt, interest expense and liquidity position.
- Whether the recommended borrowing-base increases were finalized and whether Diamondback and Viper remain within credit-agreement covenants.
- The effect of equity issuance and Viper’s non-controlling interests on per-share results, and the company’s exposure to concentrated purchasers and joint-interest receivables.