Diamondback Energy, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing also presents fourth-quarter results. Amounts are in U.S. dollars. The financial statements combine predecessor businesses for comparative periods, while Gulfport properties are included only from October 11, 2012, limiting comparability.
Business context
Diamondback is an independent oil and gas producer focused on the Permian Basin’s Wolfberry play. It completed its IPO in October 2012 and acquired Gulfport’s Permian Basin interests the same month. At year-end it held approximately 51,603 net acres and operated about 99% of its acreage. The company’s 2012 production mix was approximately 70% oil, 17% natural gas liquids and 13% natural gas.
Key financial and operating metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $75.0 million | $49.4 million |
| Income from operations | $17.3 million | $15.1 million |
| Pre-tax income (loss) | $18.4 million | $(0.4) million |
| Net income (loss) | $(36.5) million | $(0.4) million |
| Net cash from operating activities | $49.7 million | $31.0 million |
| Net cash used in investing activities | $(183.1) million | $(81.1) million |
| Net cash from financing activities | $152.8 million | $53.0 million |
| Cash and cash equivalents at year-end | $26.4 million | $7.0 million |
- Revenue increased 57%, primarily because production volumes rose 78% to an average 2,946 BOE/d; Gulfport assets contributed $7.4 million of 2012 revenue after acquisition. Lower realized commodity prices partly offset volume growth.
- Average realized prices before hedging were $86.88/bbl for oil and $69.52/BOE overall. After hedging, the average was $79.68/bbl for oil and $64.47/BOE.
- Operating margin was approximately 23% of revenue, compared with approximately 31% in 2011. Lease operating expense declined to $15.57/BOE from $17.51/BOE, while G&A rose to $10.4 million from $3.7 million.
- The annual net loss mainly reflects a $54.9 million deferred income tax provision, including a $54.1 million one-time charge associated with the predecessor businesses’ change to taxable corporate status. The filing’s unaudited pro forma presentation, assuming corporate taxes for the full year, reports net income of $11.8 million, or $0.60 per share.
- Adjusted EBITDA, a non-GAAP measure, was $48.2 million, versus $31.9 million. It should not be treated as a substitute for GAAP earnings or cash flow.
- Year-end total assets were $606.7 million and stockholders’ equity was $462.1 million. The revolving credit facility had no borrowings outstanding and $135.0 million of borrowing-base availability. The balance sheet also included $338,000 of equipment-note debt. Current assets of $50.3 million were below current liabilities of $79.2 million.
- Proved reserves were 40.2 million BOE, up from 26.6 million BOE, with additions including 8.1 million BOE acquired in place. The reserve table reports 30.7% proved developed; another filing passage describes PDP as approximately 29.5%. Approximately 69% of proved reserves were undeveloped.
Changes, outlook and notable items
- Fourth-quarter revenue was $25.8 million and operating income was $2.2 million. The quarter recorded a net loss of $52.1 million, driven by the full-year deferred tax provision; the filing does not provide a clear standalone fourth-quarter cash-flow figure.
- The IPO generated approximately $234.1 million in net proceeds. The company used proceeds to repay revolving-credit and affiliate-note borrowings and to pay the Gulfport promissory note and closing adjustment. The borrowing base increased from $100 million at year-end 2011 to $135 million at year-end 2012.
- Management expected 2013 capital expenditures of $270–$300 million, excluding acquisitions, including approximately $190 million for operated horizontal wells, $66 million for operated vertical wells, $12 million for non-operated wells and $17 million for infrastructure. It expected operating cash flow and revolver borrowings to fund operations through year-end 2013 under current price expectations, but noted that funding is dependent on production and commodity prices.
- The company expected to drill 37 gross vertical and 25 gross horizontal wells in 2013. Horizontal drilling was still in an early testing phase; management cited estimated EURs of 400,000–500,000 BOE for its first two horizontal wells, based on early production data, and said additional testing was needed to establish economic potential.
- Management reported cost and efficiency improvements, including shorter vertical-well drilling times, and expected new gathering and water-disposal connections to reduce certain operating costs. No specific production-growth guidance was provided.
- Risks include oil and gas price volatility, reliance on one geographic area and a small set of formations, customer concentration, capital needs, lease expirations, water availability, drilling and completion uncertainty, and environmental and hydraulic-fracturing regulation. About 17,286 net undeveloped acres were scheduled to expire in 2015 unless held, renewed or extended.
- At year-end, three customers represented 53%, 16% and 10% of revenue. Oil price swaps had a net liability of $5.2 million; a 10% upward move in forward curves would increase that liability by an estimated $3.7 million. The company reported routine litigation and disputes that management did not expect to have a material adverse effect.
Investor facts to verify
- Assess the sustainability and economics of the planned $270–$300 million 2013 capital program against operating cash flow, borrowing availability and oil-price assumptions.
- Check subsequent production, decline rates, costs and realized returns from horizontal wells; early EUR estimates are uncertain.
- Reconcile the filing’s differing proved-developed reserve percentages and track PUD conversion, development spending and reserve revisions.
- Review lease retention and drilling requirements, particularly the substantial acreage expiration exposure in 2015.
- Monitor customer concentration, derivative positions and related-party arrangements with Wexford-affiliated entities.
- Distinguish the GAAP net loss from the one-time deferred tax charge and the company’s pro forma and non-GAAP measures when assessing profitability and cash generation.