Diamondback Energy, Inc. — Q1 2014 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Diamondback is an oil-focused Permian Basin producer; oil represented approximately 79% of production in Q1 2014. The company reported approximately 72,000 net acres at quarter-end.
Financial and operating results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $98.0 million | $28.9 million |
| Operating income | $48.1 million | $8.7 million |
| Net income | $23.6 million | $5.4 million |
| Diluted EPS | $0.48 | $0.15 |
| Operating cash flow | $71.5 million | $16.9 million |
| Capital spending on drilling and infrastructure | $86.4 million | $54.0 million |
| Cash at period-end | $25.3 million | $5.5 million |
Revenue increased 239%; average production rose 183% to 13,552 BOE/d. Management attributed most revenue growth to increased volumes from drilling and acquisitions, with higher prices also contributing. Average realized oil price was $93.53/bbl and combined realized price was $80.35/BOE before derivatives. Operating and net margins were approximately 49% and 24%, respectively.
Total assets were $1.94 billion and total liabilities $854.0 million at March 31, 2014. Debt was $587.0 million: $137.0 million drawn on the revolving facility and $450.0 million of 7.625% senior notes due 2021. The revolver borrowing base was $225 million at quarter-end; the administrative agent subsequently approved an increase to $450 million in April. The company said it was in compliance with its financial covenants.
Material changes and notable items
- Q1 acquisitions cost approximately $292.2 million and added 4,785 net acres in Martin County. The acquired properties contributed $4.9 million of revenue after closing; the company estimated 7.086 million BOE of proved reserves based on internal estimates.
- The February equity offering generated approximately $208.4 million net proceeds. The company also borrowed $127.0 million under its revolver. Shares outstanding increased to approximately 50.7 million from 47.1 million at year-end 2013.
- Investing cash outflow was $399.2 million, including $312.2 million for leasehold interests. Financing inflow was $337.5 million; cash increased by $9.8 million.
- Derivative instruments produced a $4.4 million net loss, including a $3.3 million non-cash loss. The company does not designate these contracts as accounting hedges; quarter-end net derivative liability was $2.9 million.
Outlook, risks, and contingencies
Management projected a 2014 drilling and infrastructure budget of $425 million to $475 million, excluding acquisitions, and expected to direct most of it to operated horizontal wells. Based on its then-current commodity-price expectations, management believed operating cash flow and revolver availability would fund operations through year-end 2014. It cautioned that production, prices, capital needs, financing availability, permitting, equipment access, and drilling results could affect that assessment; additional capital might not be available on acceptable terms.
Key risks include volatile oil and gas prices, dependence on a small number of purchasers, and reliance on joint-interest counterparties. Shell Trading accounted for 66% and Plains Marketing for 16% of Q1 revenue. A 1% change in floating borrowing rates was estimated to change net income by approximately $1.37 million, based on quarter-end revolver borrowings.
After quarter-end, Diamondback entered additional oil swaps covering 365,000 barrels at $100/bbl for May 2014–April 2015. Its subsidiary Viper filed to pursue an IPO; proceeds were intended to be distributed to Diamondback, but the registration statement was not yet effective. A Minnesota lawsuit was effectively concluded in March 2014 after summary judgment for defendants and waiver of appeal. Management reported no material change in previously disclosed risk factors and no material off-balance-sheet arrangements.
Investor facts to verify
- How much of the sharp production and revenue growth reflects acquired assets versus organic drilling, and how acquired reserve estimates develop.
- Whether the approved $450 million borrowing base and anticipated cash flow support the stated 2014 capital program without further financing.
- Actual drilling and infrastructure spending versus the $425–$475 million budget, and any acquisition spending not included in that budget.
- Commodity-price exposure, derivative settlements and marks, and the effect of customer concentration on collections and revenue.
- Status and terms of the proposed Viper IPO, including proceeds to Diamondback, and the economics and governance of related-party arrangements disclosed in the filing.