Diamondback Energy, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Dollar amounts below are U.S. dollars.
Business context
Diamondback is an independent oil and gas producer focused on unconventional resources in the Permian Basin of West Texas. It reported approximately 105,894 net leasehold acres and, through Viper Energy Partners, mineral interests totaling approximately 6,404 net royalty acres. Diamondback owned about 83% of Viper at year-end. Production was approximately 73% oil, 16% natural gas liquids and 11% natural gas.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $527.1 million | $446.7 million |
| Net income (loss) attributable to Diamondback | ($165.0 million) | ($550.6 million) |
| Adjusted EBITDA (non-GAAP) | $387.5 million | $449.2 million |
| Cash from operating activities | $332.1 million | $416.5 million |
| Cash used in investing activities | $1.310 billion | $895.1 million |
| Average production | 43,031 BOE/d | 33,098 BOE/d |
| Average realized oil price | $40.70/Bbl | $44.68/Bbl |
| Lease operating expense | $5.23/BOE | $6.84/BOE |
Fourth-quarter 2016 revenue was $185.0 million and net income attributable to Diamondback was $25.6 million, or $0.32 per diluted share. For comparison, fourth-quarter 2015 revenue was $114.3 million and the attributable net loss was $187.4 million.
The 2016 net loss included a $245.5 million non-cash impairment of oil and gas properties, a $33.1 million loss on extinguishment of debt and a $25.3 million net loss on derivatives. The 2015 loss included an $814.8 million property impairment. Operating cash flow declined year over year, primarily because derivative settlement gains were lower. Cash operating costs improved: lease operating expense per BOE fell, while gathering and transportation expense rose to $0.74/BOE from $0.50/BOE.
At December 31, 2016, cash and cash equivalents were $1.667 billion, current assets were $1.792 billion and current liabilities were $209.3 million. Reported long-term debt was $1.106 billion, including $1.0 billion principal of senior notes and $120.5 million borrowed by Viper. Diamondback had no borrowings under its revolver and $500 million available under its elected commitment; Viper repaid its borrowings in January 2017. The large year-end cash balance followed substantial equity and debt offerings and was intended in part to fund the pending acquisition.
Proved reserves increased 31% to 205.5 million BOE from 156.9 million BOE; approximately 58% were proved developed. The standardized measure of discounted future net cash flows was $1.711 billion, compared with $1.418 billion in 2015; it is an SEC-prescribed estimate, not a market valuation.
Material changes versus prior period
- Revenue rose 18%, as 30% production growth more than offset lower average realized prices. Average daily production increased by 9,933 BOE/d.
- Diamondback’s attributable net loss narrowed substantially, mainly reflecting the lower impairment charge, but the company remained loss-making for the year.
- Cash from operations decreased 20%, while investing outflows increased, including spending on drilling, acquisitions and a deposit for the pending transaction.
- The company issued $500 million of 4.75% notes due 2024 and $500 million of 5.375% notes due 2025, and used 2024-note proceeds to retire its $450 million of 7.625% notes due 2021. Debt carrying value rose from $487.8 million at year-end 2015 to $1.106 billion at year-end 2016.
- Common shares outstanding increased from 66.8 million to 90.1 million during 2016 following equity offerings.
Outlook, transactions and key risks
- 2017 plan: Management budgeted $800 million–$1.0 billion for drilling, completions, infrastructure and other expenditures, excluding leasehold and mineral acquisitions. It expected to drill 130–165 gross horizontal wells and operate six to ten rigs, adjusting activity to market conditions. Management stated that anticipated operating cash flow and revolver borrowings were expected to fund operations through year-end 2017, subject to commodity prices and production.
- Pending acquisition: The agreement with Brigham contemplated $1.62 billion cash plus 7.69 million Diamondback shares, subject to adjustments, for approximately 76,319 net acres in Pecos and Reeves counties. Seller-provided production, reserve and development estimates had not been verified by Diamondback; closing remained subject to conditions and was expected by the end of February 2017.
- Commodity exposure and hedging: Oil and gas prices remained volatile. 2017 contracts included oil swaps, basis swaps, collars and natural gas swaps; derivative fair-value changes were recognized in earnings rather than hedge accounting. Counterparty performance is also a risk.
- Capital and asset risks: The company uses full-cost accounting and recorded a $245.5 million ceiling-test impairment in 2016. Further price declines could reduce reserve values, borrowing capacity and earnings. Development depends on capital, drilling performance, infrastructure, water availability and lease retention.
- Concentration and execution: All proved reserves were in the Permian Basin. Three purchasers represented 73% of 2016 revenue, including Shell Trading at 45%. Integration and performance of acquisitions, service-cost increases, transportation constraints and customer concentration could affect results.
- Regulatory and environmental exposure: Hydraulic-fracturing, produced-water disposal, induced seismicity, emissions and other environmental rules could increase costs or restrict operations. Management said it believed the company was in substantial compliance with applicable environmental requirements. Routine litigation and claims were not expected by management to have a material adverse effect.
- Other disclosures: The company reported no off-balance-sheet arrangements, no material unresolved SEC staff comments and effective disclosure controls and internal control over financial reporting. It did not intend to pay common-stock dividends in the foreseeable future.
Most important facts for investors to verify
- Whether the Brigham acquisition closed on the expected terms and whether acquired production, reserves, costs and drilling inventory matched the seller-based estimates.
- Funding needs and liquidity after the acquisition, including actual cash use, incremental debt, revolver availability and effects of the 7.69 million-share issuance.
- Realized prices, hedge settlements and counterparty exposure, alongside production growth and the ability to sustain lower operating costs.
- Reserve revisions, PUD development timing and future full-cost ceiling-test impairments under changing commodity prices.
- Customer concentration, transportation and water-disposal capacity, and any regulatory or environmental developments affecting Permian operations.