Diamondback Energy, Inc. annual report, FY2015

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Diamondback Energy, Inc. — FY 2015 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter filing. Diamondback is an independent oil and gas producer focused on the Permian Basin in West Texas, with operations primarily in the Wolfberry play. It reported 84,683 net leasehold acres and, through Viper Energy Partners, mineral interests underlying approximately 17,060 net acres. Diamondback owned approximately 88% of Viper at year-end.

Financial and operating performance

  • Revenue: $446.7 million in 2015, down 10% from $495.7 million in 2014. Oil, NGL and natural gas sales were 91%, 5% and 4% of revenue, respectively.
  • Production and pricing: Average production rose 70% to 33,098 BOE/d. Average unhedged realized price fell to $36.98/BOE from $69.74/BOE; average oil price fell to $44.68/bbl from $83.48/bbl. The hedged average was $48.97/BOE.
  • Profitability: Diamondback reported a net loss of $547.8 million, or $8.74 per diluted share, versus net income of $196.0 million, or $3.64 per diluted share, in 2014. The loss included an $814.8 million noncash oil and gas property impairment. Adjusted EBITDA, a non-GAAP measure, was $449.2 million versus $398.3 million.
  • Operating costs: Cash operating expense was $11.18/BOE, down from $14.45/BOE. Lease operating expense was $6.84/BOE versus $7.79/BOE, and DD&A was $18.02/BOE versus $23.92/BOE; the impairment affected the per-BOE comparison.
  • Fourth quarter: Revenue was $114.3 million; operating loss was $187.8 million; net loss was $186.8 million; and loss attributable to Diamondback was $187.4 million, or $2.80 per share.
  • Cash flow and investment: Operating cash flow was $416.5 million, up from $356.4 million. Investing cash outflow was $895.1 million, including $419.5 million for drilling/completion/infrastructure and $437.5 million for leasehold acquisitions. Financing provided $468.5 million, primarily reflecting $650.7 million of net proceeds from three 2015 equity offerings, partly offset by net credit-facility repayments.
  • Liquidity and debt: Cash was $20.1 million. Current assets of $108.7 million compared with current liabilities of $141.4 million. Consolidated long-term debt was $495.5 million: $450 million of 7.625% senior notes due 2021, $11 million drawn on Diamondback’s revolver, and $34.5 million drawn by Viper. Diamondback had $489 million available under its elected revolver commitment; Viper had $165.5 million available. Diamondback reported compliance with its credit-facility covenants.
  • Reserves: Year-end proved reserves were 156.9 million BOE, up from 112.8 million BOE; 58.7% were proved developed and 67% were oil. PUDs were 64.8 million BOE. The standardized measure of discounted future net cash flows fell to $1.42 billion from $2.05 billion, chiefly reflecting lower prices and reserve revisions.

Changes versus the prior comparable period

  • Production growth and acquisitions did not offset the sharp fall in realized prices: revenue declined despite production increasing 70%.
  • Diamondback moved from 2014 net income to a 2015 net loss, principally due to the $814.8 million impairment. No proved-property impairment was recorded in 2014.
  • Operating cash flow increased, while net investing outflow declined from $1.48 billion to $895.1 million. The company also reduced consolidated long-term debt from $673.5 million to $495.5 million, alongside substantial equity issuance.
  • Proved reserves increased, but lower prices led to downward revisions and reclassification of certain PUDs. The standardized reserve measure declined substantially.

Outlook, commentary, risks and unusual items

  • Management emphasized financial discipline over growth amid weak commodity prices. For 2016, it forecast $250–$375 million of capital spending, excluding acquisitions, and 30–70 gross (25–58 net) horizontal wells. It planned to release one of three drilling rigs in March 2016, with the option to release a second in the second quarter.
  • Management expected operating cash flow and revolver borrowings to fund operations through year-end 2016 based on its then-current price and production expectations, while cautioning that cash flow depends on production and commodity prices. The January 2016 equity offering raised approximately $254.5 million net.
  • At year-end, Diamondback had oil swaps covering 91,000 barrels for January–February 2016 at a weighted average $88.72/bbl; as of February 17, 2016, it had entered no significant additional 2016 hedges. Derivatives were not designated for hedge accounting, so fair-value changes affected earnings. 2015 settlement gains were $144.9 million, offset in part by a $112.9 million negative change in the fair value of open derivatives.
  • Principal risks include continued low oil and gas prices, further impairment or borrowing-base reductions, capital access, lease expirations, and execution and reserve-estimation uncertainty. Operations are concentrated in the Permian Basin, and two buyers accounted for 74% of 2015 revenue (Shell Trading 59%; Enterprise Crude Oil 15%). A Shell supply agreement carries deficiency-payment risk if specified delivery volumes are not met.
  • Other exposures include hydraulic-fracturing and environmental regulation, water availability, infrastructure constraints, counterparty and joint-interest-owner credit risk, floating-rate debt, and operating hazards that may not be fully insured. The filing reports routine litigation with no material adverse outcome expected by management.
  • The filing reports effective disclosure controls and internal control over financial reporting, with an unqualified auditor opinion. The $814.8 million impairment was a significant noncash item; the company also recorded a $61.1 million valuation allowance against deferred tax assets.

Important facts for investors to verify

  • Whether realized prices, production and hedging outcomes support the 2016 cash-flow and capital-budget assumptions.
  • How the $814.8 million impairment, future ceiling tests, reserve revisions and the lower standardized reserve measure affect asset values and borrowing capacity.
  • Available liquidity after the January 2016 equity offering, and the impact of borrowing-base redeterminations, covenants and current-liability needs.
  • Whether the 2016 well count, rig reductions and lease-expiration schedule can preserve acreage while maintaining development economics.
  • Exposure to concentrated purchasers, the Shell delivery commitment, and the costs or restrictions that could arise from regulatory or infrastructure changes.