Diamondback Energy, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Consolidated results include Viper Energy Partners, in which Diamondback held approximately 64% at year-end.
Business context
Diamondback is an independent oil and gas producer focused on the Permian Basin. It ended 2017 with approximately 246,012 gross (206,660 net) leasehold acres and estimated proved reserves of 335.4 million BOE, including Viper’s mineral-interest reserves. Production was 74% oil, 14% natural gas liquids and 12% natural gas.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $1.205 billion | $527.1 million |
| Operating income (loss) | $605.0 million | $(68.6) million |
| Net income (loss) attributable to Diamondback | $482.3 million | $(165.0) million |
| Diluted EPS | $4.94 | $(2.20) |
| Net cash from operating activities | $888.6 million | $332.1 million |
| Net cash used in investing activities | $3.132 billion | $1.310 billion |
| Consolidated Adjusted EBITDA (non-GAAP) | $928.0 million | $387.5 million |
- Revenue increased 125%, reflecting 84% production growth to 79,224 BOE/d and higher average realized prices. Average realized price was $41.02/BOE before derivatives ($41.26/BOE hedged); average oil price was $48.75/bbl.
- Operating margin was approximately 50% of revenue; net income attributable to Diamondback was approximately 40% of revenue. The net result benefited from a $19.6 million income tax benefit, including valuation-allowance changes and the enacted federal tax-rate reduction.
- Cash operating expenses were $8.16/BOE, down from $9.19/BOE. DD&A was $326.8 million; no proved-property impairment was recorded in 2017, compared with $245.5 million in 2016.
- Cash and equivalents were $112.4 million at year-end, versus $1.667 billion a year earlier. Current assets of $358.6 million compared with current liabilities of $577.4 million. Operating cash flow less total investing cash flow was approximately negative $2.244 billion, with investing outflows driven largely by acquisitions.
- Reported long-term debt was $1.477 billion, including $1.0 billion of senior notes, $397.0 million drawn on Diamondback’s revolver and $93.5 million drawn by Viper, net of debt issuance costs. Diamondback had $603.0 million of revolver availability at year-end; Viper had $306.5 million. The company was in compliance with its financial covenants.
Material changes and unusual items
- On February 28, 2017, Diamondback completed its Delaware Basin acquisition for approximately $2.5 billion in total consideration, including $1.74 billion cash and 7.69 million Diamondback shares. It added approximately 100,306 gross (80,339 net) acres, primarily in Pecos and Reeves counties.
- Proved reserves grew from 205.5 million BOE to 335.4 million BOE. Production rose from 43,031 to 79,224 BOE/d; the acquisition and increased drilling both contributed.
- Derivative instruments generated a $77.5 million net loss in 2017, including an $84.2 million adverse change in fair value partly offset by $6.7 million of realized settlement gains. Derivatives were not designated for hedge accounting.
- In January 2018, Diamondback issued $300 million of additional 5.375% notes due 2025 and used net proceeds to repay $308.5 million of revolver borrowings. Reported post-transaction revolver availability was $911.4 million.
- On February 13, 2018, the company announced an annual $0.50-per-share cash dividend, payable quarterly beginning in Q1 2018, subject to board approval and contractual restrictions.
Outlook, commentary and risks
For 2018, management budgeted $1.3–$1.5 billion for drilling, completions, infrastructure and other expenditures, excluding leasehold and mineral acquisitions, and expected to complete 170–190 gross horizontal wells. It planned to operate 10–12 rigs, adjusting activity to commodity prices and market conditions. Management said operating cash flow and revolver borrowings were expected to fund operations through year-end 2018 based on its price and production assumptions.
- Management highlighted continued focus on low-cost execution, longer laterals, service-cost control and financial flexibility; it noted that rising oilfield-service costs could pressure capital spending.
- Key exposures include oil and gas price volatility, concentration in the Permian Basin, reliance on a few purchasers (three accounted for 61% of 2017 revenue), transportation and infrastructure constraints, water availability, lease expirations, and regulation of hydraulic fracturing, emissions and produced-water disposal.
- Approximately 37.8% of proved reserves were proved undeveloped, requiring substantial future development spending. Estimates and drilling-location economics depend on assumptions and may differ from actual results.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective controls and no material weaknesses. Management said routine legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether acquired Delaware Basin acreage and planned wells deliver expected production, reserve additions and returns.
- How much of 2018 capital spending can be funded from operations without increased borrowing or additional equity issuance.
- The sensitivity of cash flow, reserve values and borrowing capacity to commodity prices, differentials and derivative settlements.
- Customer concentration, pipeline and disposal capacity, and the timing and cost of infrastructure buildout.
- Whether PUD development schedules, lease extensions and the announced dividend remain compatible with liquidity, covenants and planned capital investment.