Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED March 31, 2018
OR
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o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-35700
Diamondback Energy, Inc.
(Exact Name of Registrant As Specified in Its Charter)
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Delaware | | 45-4502447 |
(State or Other Jurisdiction of Incorporation or Organization) | | (IRS Employer Identification Number) |
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500 West Texas, Suite 1200 Midland, Texas | | 79701 |
(Address of Principal Executive Offices) | | (Zip Code) |
(432) 221-7400
(Registrant Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
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Large Accelerated Filer | | ý | | Accelerated Filer | | o |
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Non-Accelerated Filer | | o | | Smaller Reporting Company | | o |
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| | | | Emerging Growth Company | | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of May 4, 2018, 98,611,408 shares of the registrant’s common stock were outstanding.
DIAMONDBACK ENERGY, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2018
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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PART II. OTHER INFORMATION |
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GLOSSARY OF OIL AND NATURAL GAS TERMS
The following is a glossary of certain oil and gas terms that are used in this Quarterly Report on Form 10-Q (this “report”):
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Basin | A large depression on the earth’s surface in which sediments accumulate. |
Bbl | Stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons. |
BOE | Barrels of oil equivalent, with six thousand cubic feet of natural gas being equivalent to one barrel of oil. |
BOE/d | BOE per day. |
British Thermal Unit or Btu | The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit. |
Completion | The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency. |
Crude oil | Liquid hydrocarbons retrieved from geological structures underground to be refined into fuel sources. |
Finding and development costs | Capital costs incurred in the acquisition, exploitation and exploration of proved oil and natural gas reserves divided by proved reserve additions and revisions to proved reserves. |
Gross acres or gross wells | The total acres or wells, as the case may be, in which a working interest is owned. |
Horizontal drilling | A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at a right angle with a specified interval. |
Horizontal wells | Wells drilled directionally horizontal to allow for development of structures not reachable through traditional vertical drilling mechanisms. |
Mcf | Thousand cubic feet of natural gas. |
Mineral interests | The interests in ownership of the resource and mineral rights, giving an owner the right to profit from the extracted resources. |
MMBtu | Million British Thermal Units. |
Net acres or net wells | The sum of the fractional working interest owned in gross acres. |
Oil and natural gas properties | Tracts of land consisting of properties to be developed for oil and natural gas resource extraction. |
Plugging and abandonment | Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface. Regulations of all states require plugging of abandoned wells. |
Prospect | A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons. |
Proved reserves | The estimated quantities of oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions. |
Reserves | The estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to the market and all permits and financing required to implement the project. Reserves are not assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations). |
Reservoir | A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is separate from other reservoirs. |
Royalty interest | An interest that gives an owner the right to receive a portion of the resources or revenues without having to carry any costs of development. |
Spacing | The distance between wells producing from the same reservoir. Spacing is often expressed in terms of acres (e.g., 40-acre spacing) and is often established by regulatory agencies. |
Working interest | An operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production and requires the owner to pay a share of the costs of drilling and production operations. |
GLOSSARY OF CERTAIN OTHER TERMS
The following is a glossary of certain other terms that are used in this report.
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Company | Diamondback Energy, Inc., a Delaware corporation. |
Equity Plan | The Company’s Equity Incentive Plan. |
Exchange Act | The Securities Exchange Act of 1934, as amended. |
GAAP | Accounting principles generally accepted in the United States. |
General Partner | Viper Energy Partners GP LLC, a Delaware limited liability company and the General Partner of the Partnership. |
NYMEX | New York Mercantile Exchange. |
Partnership | Viper Energy Partners LP, a Delaware limited partnership. |
Partnership Agreement | The first amended and restated agreement of limited partnership, dated June 23, 2014, entered into by the General Partner and Diamondback in connection with the closing of the Viper Offering. |
SEC | United States Securities and Exchange Commission. |
Securities Act | The Securities Act of 1933, as amended. |
2024 Senior Notes | The Company’s 4.750% senior unsecured notes due 2024 in the aggregate principal amount of $500 million. |
2025 Senior Notes | The Company’s 5.375% senior unsecured notes due 2025 in the aggregate principal amount of $500 million. |
Senior Notes | The 2024 Senior Notes and the 2025 Senior Notes. |
Viper LTIP | Viper Energy Partners LP Long Term Incentive Plan. |
Viper Offering | The Partnerships’ initial public offering. |
Wells Fargo | Wells Fargo Bank, National Association. |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Various statements contained in this report that express a belief, expectation, or intention, or that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. In particular, the factors discussed in this report and detailed under Part II, Item 1A. Risk Factors in this report and our Annual Report on Form 10–K for the year ended December 31, 2017 could affect our actual results and cause our actual results to differ materially from expectations, estimates or assumptions expressed, forecasted or implied in such forward-looking statements.
Forward-looking statements may include statements about our:
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• | exploration and development drilling prospects, inventories, projects and programs; |
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• | oil and natural gas reserves; |
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• | identified drilling locations; |
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• | ability to obtain permits and governmental approvals; |
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• | realized oil and natural gas prices; |
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• | lease operating expenses, general and administrative costs and finding and development costs; |
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• | future operating results; and |
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• | plans, objectives, expectations and intentions. |
All forward-looking statements speak only as of the date of this report or, if earlier, as of the date they were made. We do not intend to, and disclaim any obligation to, update or revise any forward-looking statements unless required by securities laws. You should not place undue reliance on these forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Diamondback Energy, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
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| March 31, | December 31, |
| 2018 | 2017 |
| (In thousands, except par values and share data) |
Assets | | |
Current assets: | | |
Cash and cash equivalents | $ | 72,487 |
| $ | 112,446 |
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Accounts receivable: | | |
Joint interest and other | 71,017 |
| 73,038 |
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Oil and natural gas sales | 165,263 |
| 158,575 |
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Inventories | 8,963 |
| 9,108 |
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Derivative instruments | — |
| 531 |
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Prepaid expenses and other | 6,737 |
| 4,903 |
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Total current assets | 324,467 |
| 358,601 |
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Property and equipment: | | |
Oil and natural gas properties, full cost method of accounting ($4,204,745 and $4,105,865 excluded from amortization at March 31, 2018 and December 31, 2017, respectively) | 9,648,825 |
| 9,232,694 |
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Midstream assets | 295,161 |
| 191,519 |
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Other property, equipment and land | 82,095 |
| 80,776 |
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Accumulated depletion, depreciation, amortization and impairment | (2,274,909 | ) | (2,161,372 | ) |
Net property and equipment | 7,751,172 |
| 7,343,617 |
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Funds held in escrow | 10 |
| 6,304 |
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Investment in real estate, net | 109,103 |
| — |
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Other assets | 40,136 |
| 62,463 |
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Total assets | $ | 8,224,888 |
| $ | 7,770,985 |
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Liabilities and Stockholders’ Equity | | |
Current liabilities: | | |
Accounts payable-trade | $ | 63,129 |
| $ | 94,590 |
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Accrued capital expenditures | 262,242 |
| 221,256 |
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Other accrued liabilities | 100,557 |
| 92,512 |
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Revenues and royalties payable | 82,055 |
| 68,703 |
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Derivative instruments | 99,685 |
| 100,367 |
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Total current liabilities | 607,668 |
| 577,428 |
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Long-term debt | 1,701,912 |
| 1,477,347 |
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Derivative instruments | 6,492 |
| 6,303 |
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Asset retirement obligations | 21,258 |
| 20,122 |
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Deferred income taxes | 152,369 |
| 108,048 |
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Other long term liabilities | 7 |
| — |
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Total liabilities | 2,489,706 |
| 2,189,248 |
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Commitments and contingencies (Note 16) | | |
Stockholders’ equity: | | |
Common stock, $0.01 par value, 200,000,000 shares authorized, 98,610,608 issued and outstanding at March 31, 2018; 98,167,289 issued and outstanding at December 31, 2017 | 986 |
| 982 |
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Additional paid-in capital | 5,299,811 |
| 5,291,011 |
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Accumulated deficit | 116,286 |
| (37,133 | ) |
Total Diamondback Energy, Inc. stockholders’ equity | 5,417,083 |
| 5,254,860 |
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Non-controlling interest | 318,099 |
| 326,877 |
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Total equity | 5,735,182 |
| 5,581,737 |
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Total liabilities and equity | $ | 8,224,888 |
| $ | 7,770,985 |
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See accompanying notes to combined consolidated financial statements.
Diamondback Energy, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
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| Three Months Ended March 31, |
| 2018 | 2017 |
| (In thousands, except per share amounts) |
Revenues: | | |
Oil sales | $ | 419,268 |
| $ | 207,074 |
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Natural gas sales | 14,378 |
| 9,922 |
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Natural gas liquid sales | 33,113 |
| 15,502 |
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Lease bonus | — |
| 1,602 |
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Midstream services | 11,395 |
| 1,130 |
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Other operating income | 2,041 |
| — |
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Total revenues | 480,195 |
| 235,230 |
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Costs and expenses: | | |
Lease operating expenses | 37,345 |
| 26,626 |
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Production and ad valorem taxes | 27,304 |
| 15,725 |
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Gathering and transportation | 4,285 |
| 2,619 |
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Midstream services | 11,189 |
| 854 |
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Depreciation, depletion and amortization | 115,216 |
| 58,929 |
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General and administrative expenses (including non-cash equity-based compensation, net of capitalized amounts, of $7,451 and $7,063 for the three months ended March 31, 2018 and 2017, respectively) | 16,325 |
| 13,744 |
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Asset retirement obligation accretion | 355 |
| 323 |
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Other operating expense | 530 |
| — |
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Total costs and expenses | 212,549 |
| 118,820 |
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Income from operations | 267,646 |
| 116,410 |
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Other income (expense): | | |
Interest expense, net | (13,701 | ) | (12,225 | ) |
Other income, net | 2,736 |
| 1,145 |
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Gain (loss) on derivative instruments, net | (32,345 | ) | 37,701 |
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Gain on revaluation of investment | 899 |
| — |
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Total other income (expense), net | (42,411 | ) | 26,621 |
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Income before income taxes | 225,235 |
| 143,031 |
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Provision for income taxes | 47,081 |
| 1,957 |
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Net income | 178,154 |
| 141,074 |
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Net income attributable to non-controlling interest | 15,342 |
| 4,801 |
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Net income attributable to Diamondback Energy, Inc. | $ | 162,812 |
| $ | 136,273 |
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Earnings per common share: |
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Basic | $ | 1.65 |
| $ | 1.46 |
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Diluted | $ | 1.65 |
| $ | 1.46 |
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Weighted average common shares outstanding: | | |
Basic | 98,555 |
| 93,161 |
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Diluted | 98,769 |
| 93,364 |
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Dividends declared per share | $ | 0.125 |
| $ | — |
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See accompanying notes to combined consolidated financial statements.
Diamondback Energy, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Unaudited)
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| Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Non-Controlling Interest | Total |
| Shares | Amount |
| (In thousands) |
Balance December 31, 2016 | 90,144 | $ | 901 |
| $ | 4,215,955 |
| $ | (519,394 | ) | $ | 320,830 |
| $ | 4,018,292 |
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Net proceeds from issuance of common units - Viper Energy Partners LP |
| — |
| — |
| — |
| 147,523 |
| 147,523 |
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Unit-based compensation |
| — |
| — |
| — |
| 819 |
| 819 |
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Stock-based compensation |
| — |
| 8,587 |
| — |
| — |
| 8,587 |
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Distribution to non-controlling interest |
| — |
| — |
| — |
| (6,482 | ) | (6,482 | ) |
Common shares issued in public offering, net of offering costs |
| — |
| 14 |
| — |
| — |
| 14 |
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Common shares issued for acquisition | 7,686 | 77 |
| 809,096 |
| — |
| — |
| 809,173 |
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Exercise of stock options and vesting of restricted stock units | 298 | 3 |
| 355 |
| — |
| — |
| 358 |
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Net income |
| — |
| — |
| 136,273 |
| 4,801 |
| 141,074 |
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Balance March 31, 2017 | 98,128 | $ | 981 |
| $ | 5,034,007 |
| $ | (383,121 | ) | $ | 467,491 |
| $ | 5,119,358 |
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Balance December 31, 2017 | 98,167 | $ | 982 |
| $ | 5,291,011 |
| $ | (37,133 | ) | $ | 326,877 |
| $ | 5,581,737 |
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Impact of adoption of ASU 2016-01, net of tax | | — |
| — |
| (9,393 | ) | (6,671 | ) | (16,064 | ) |
Unit-based compensation |
| — |
| — |
| — |
| 1,288 |
| 1,288 |
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Stock-based compensation |
| — |
| 8,804 |
| — |
| — |
| 8,804 |
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Distribution to non-controlling interest |
| — |
| — |
| — |
| (18,737 | ) | (18,737 | ) |
Exercise of stock options and vesting of restricted stock units | 443 | 4 |
| (4 | ) | — |
| — |
| — |
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Net income |
| — |
| — |
| 162,812 |
| 15,342 |
| 178,154 |
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Balance March 31, 2018 | 98,610 | $ | 986 |
| $ | 5,299,811 |
| $ | 116,286 |
| $ | 318,099 |
| $ | 5,735,182 |
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See accompanying notes to combined consolidated financial statements.
Diamondback Energy, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
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| Three Months Ended March 31, |
| 2018 | 2017 |
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| (In thousands) |
Cash flows from operating activities: | | |
Net income | $ | 178,154 |
| $ | 141,074 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | |
Provision for deferred income taxes | 46,908 |
| 1,425 |
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Asset retirement obligation accretion | 355 |
| 323 |
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Depreciation, depletion and amortization | 115,216 |
| 58,929 |
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Amortization of debt issuance costs | 748 |
| 852 |
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Change in fair value of derivative instruments | 38 |
| (39,375 | ) |
Income from equity investment | (2,167 | ) | (3 | ) |
Gain on revaluation of investment | (899 | ) | — |
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Equity-based compensation expense | 7,451 |
| 7,063 |
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Gain on sale of assets, net | — |
| (12 | ) |
Changes in operating assets and liabilities: | | |
Accounts receivable | 6,322 |
| (20,104 | ) |
Accounts receivable-related party | — |
| 199 |
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Restricted cash | — |
| 500 |
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Inventories | (12,778 | ) | (1,044 | ) |
Prepaid expenses and other | (6,765 | ) | (19,894 | ) |
Accounts payable and accrued liabilities | (18,280 | ) | 10,281 |
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Accounts payable and accrued liabilities-related party | — |
| (2 | ) |
Accrued interest | 11,413 |
| 10,313 |
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Income tax payable | 359 |
| — |
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Revenues and royalties payable | 13,352 |
| 25,402 |
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Net cash provided by operating activities | 339,427 |
| 175,927 |
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Cash flows from investing activities: | | |
Additions to oil and natural gas properties | (280,015 | ) | (116,174 | ) |
Additions to midstream assets | (38,395 | ) | (59 | ) |
Purchase of other property, equipment and land | (1,947 | ) | (11,918 | ) |
Acquisition of leasehold interests | (16,011 | ) | (1,760,810 | ) |
Acquisition of mineral interests | (150,013 | ) | (8,579 | ) |
Acquisition of midstream assets | — |
| (48,329 | ) |
Proceeds from sale of assets | 125 |
| 1,238 |
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Investment in real estate | (109,664 | ) | — |
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Funds held in escrow | 10,989 |
| 119,340 |
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Equity investments | — |
| (188 | ) |
Net cash used in investing activities | (584,931 | ) | (1,825,479 | ) |
Cash flows from financing activities: | | |
Proceeds from borrowings under credit facility | 224,000 |
| — |
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Repayment under credit facility | (308,000 | ) | (120,500 | ) |
Proceeds from senior notes | 312,000 |
| — |
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Debt issuance costs | (3,718 | ) | (418 | ) |
Public offering costs | — |
| (265 | ) |
Proceeds from public offerings | — |
| 147,725 |
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Proceeds from exercise of stock options | — |
| 358 |
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Distributions to non-controlling interest | (18,737 | ) | (6,482 | ) |
Net cash provided by financing activities | 205,545 |
| 20,418 |
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Diamondback Energy, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Continued
(Unaudited)
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| Three Months Ended March 31, |
| 2018 | 2017 |
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Net decrease in cash and cash equivalents | (39,959 | ) | (1,629,134 | ) |
Cash and cash equivalents at beginning of period | 112,446 |
| 1,666,574 |
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Cash and cash equivalents at end of period | $ | 72,487 |
| $ | 37,440 |
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Supplemental disclosure of cash flow information: | | |
Interest paid, net of capitalized interest | $ | 4,305 |
| $ | 1,118 |
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Supplemental disclosure of non-cash transactions: | | |
Change in accrued capital expenditures | $ | 40,986 |
| $ | 34,460 |
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Capitalized stock-based compensation | $ | 2,641 |
| $ | 2,343 |
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Common stock issued for oil and natural gas properties | $ | — |
| $ | 809,173 |
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Asset retirement obligations acquired | $ | 12 |
| $ | 2,129 |
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See accompanying notes to combined consolidated financial statements.
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Organization and Description of the Business
Diamondback Energy, Inc. (“Diamondback” or the “Company”), together with its subsidiaries, is an independent oil and gas company currently focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas. Diamondback was incorporated in Delaware on December 30, 2011.
The wholly-owned subsidiaries of Diamondback, as of March 31, 2018, include Diamondback E&P LLC, a Delaware limited liability company, Diamondback O&G LLC, a Delaware limited liability company, Viper Energy Partners GP LLC, a Delaware limited liability company, Rattler Midstream LLC (formerly known as White Fang Energy LLC), a Delaware limited liability company, and Tall City Towers LLC, a Delaware limited liability company. The consolidated subsidiaries include these wholly-owned subsidiaries as well as Viper Energy Partners LP, a Delaware limited partnership (the “Partnership”), and the Partnership’s wholly-owned subsidiary Viper Energy Partners LLC, a Delaware limited liability company.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries after all significant intercompany balances and transactions have been eliminated upon consolidation.
The Partnership is consolidated in the financial statements of the Company. As of March 31, 2018, the Company owned approximately 64% of the common units of the Partnership. The Company’s wholly-owned subsidiary, Viper Energy Partners GP LLC, is the General Partner of the Partnership.
These financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC. They reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10–Q should be read in conjunction with the Company’s most recent Annual Report on Form 10–K for the fiscal year ended December 31, 2017, which contains a summary of the Company’s significant accounting policies and other disclosures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Certain amounts included in or affecting the Company’s consolidated financial statements and related disclosures must be estimated by management, requiring certain assumptions to be made with respect to values or conditions that cannot be known with certainty at the time the consolidated financial statements are prepared. These estimates and assumptions affect the amounts the Company reports for assets and liabilities and the Company’s disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.
The Company evaluates these estimates on an ongoing basis, using historical experience, consultation with experts and other methods the Company considers reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from the Company’s estimates. Any effects on the Company’s business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Significant items subject to such estimates and assumptions include estimates of proved oil and natural gas reserves and related present value estimates of future net cash flows therefrom, the carrying value of oil and natural gas properties, asset retirement obligations, the fair value determination of acquired assets and liabilities assumed, equity-based compensation, fair value estimates of commodity derivatives and estimates of income taxes.
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Investments
The Partnership has an equity interest in a limited partnership that is so minor that the Partnership has no influence over the limited partnership’s operating and financial policies. This interest was acquired during the year ended December 31, 2014 and is accounted for under the cost method. Effective January 1, 2018, the Partnership adopted Accounting Standards Update 2016-01 which requires the Partnership to measure this investment at fair value which resulted in a downward adjustment of $18.7 million to record the impact of this adoption. For the three months ended March 31, 2018, the Partnership recorded a gain of $0.9 million which then increased the Partnership’s investment balance to $16.0 million, which is included in other assets in the accompanying consolidated balance sheets.
New Accounting Pronouncements
Recently Adopted Pronouncements
In January 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-01, “Financial Instruments–Overall”. This update applies to any entity that holds financial assets or owes financial liabilities. This update requires equity investments (except for those accounted for under the equity method or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The Partnership adopted this standard effective January 1, 2018 by means of a negative cumulative-effect adjustment totaling $18.7 million.
In August 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments”. This update apples to all entities that are required to present a statement of cash flows. This update provides guidance on eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The Company adopted this update effective January 1, 2018 using the retrospective transition method. Adoption of this standard did not have an effect on the presentation on the Statement of Cash Flows.
In November 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-18, “Statement of Cash Flows - Restricted Cash”. This update affects entities that have restricted cash or restricted cash equivalents. The Company adopted this update effective January 1, 2018. The adoption of this update did not have an effect on the presentation on the Statement of Cash Flows.
In January 2017, the Financial Accounting Standards Board issued Accounting Standards Update 2017-01, “Business Combinations - Clarifying the Definition of a Business”. This update apples to all entities that must determine whether they acquired or sold a business. This update provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Company adopted this update prospectively effective January 1, 2018. The adoption of this update did not have an impact on its financial position, results of operations or liquidity.
Accounting Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-02, “Leases”. This update applies to any entity that enters into a lease, with some specified scope exemptions. Under this update, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. While there were no major changes to the lessor accounting, changes were made to align key aspects with the revenue recognition guidance. This update will be effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Entities will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company
Diamondback Energy, Inc. and Subsidiaries
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believes the primary impact of adopting this standard will be the recognition of assets and liabilities on the balance sheet for current operating leases. The Company is still evaluating the impact of this standard.
In January 2018, the Financial Accounting Standards Board issued Accounting Standards Update 2018-01, “Leases - Land Easement Practical Expedient for Transition to Topic 842”. This update applies to any entity that holds land easements. The update allows entities to adopt a practical expedient to not evaluate existing or expired land easements under Topic 842 that were not previously accounted for as leases under the current leases guidance. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. The Company believes the adoption of this update will not have an impact on its financial position, results of operations or liquidity.
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-13, “Financial Instruments - Credit Losses”. This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This update will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company does not believe the adoption of this standard will have a material impact on the Company’s consolidated financial statements since the Company does not have a history of credit losses.
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Impact of Accounting Standards Codification Topic 606 Adoption
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers”. This standard included a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Among other things, the standard also eliminated industry-specific revenue guidance, required enhanced disclosures about revenue, provided guidance for transactions that were not previously addressed comprehensively and improved guidance for multiple-element arrangements. The Company adopted this Accounting Standards Update effective January 1, 2018 using the modified retrospective approach. The Company utilized a bottom-up approach to analyze the impact of the new standard by reviewing its current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to its revenue contracts and the impact of adopting this standards update on its total revenues, operating income and its consolidated balance sheet. The adoption of this standard did not result in a cumulative-effect adjustment.
Revenue from Contracts with Customers
Sales of oil, natural gas and natural gas liquids are recognized at the point control of the product is transferred to the customer. Virtually all of the pricing provisions in the Company’s contracts are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, the quality of the oil or natural gas and the prevailing supply and demand conditions. As a result, the price of the oil, natural gas and natural gas liquids fluctuates to remain competitive with other available oil, natural gas and natural gas liquids supplies.
Oil sales
The Company’s oil sales contracts are generally structured where it delivers oil to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title and risk of loss of the product. Under this arrangement, the Company or a third party transports the product to the delivery point and receives a specified index price from the purchaser with no deduction. In this scenario, the Company recognizes revenue when control transfers to the purchaser at the delivery point based on the price received from the purchaser. Oil revenues are recorded net of any third-party transportation fees and other applicable differentials in the Company’s consolidated statements of operations.
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Natural gas and natural gas liquids sales
Under the Company’s natural gas processing contracts, it delivers natural gas to a midstream processing entity at the wellhead, battery facilities or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and remits proceeds to the Company for the resulting sales of natural gas liquids and residue gas. In these scenarios, the Company evaluates whether it is the principal or the agent in the transaction. For those contracts where the Company has concluded it is the principal and the ultimate third party is its customer, the Company recognizes revenue on a gross basis, with transportation, gathering, processing, treating and compression fees presented as an expense in its consolidated statements of operations.
In certain natural gas processing agreements, the Company may elect to take its residue gas and/or natural gas liquids in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the product. Through the marketing process, the Company delivers product to the ultimate third-party purchaser at a contractually agreed-upon delivery point and receives a specified index price from the purchaser. In this scenario, the Company recognizes revenue when control transfers to the purchaser at the delivery point based on the index price received from the purchaser. The gathering, processing, treating and compression fees attributable to the gas processing contract, as well as any transportation fees incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing, treating and compression expense in its consolidated statements of operations.
Midstream Revenue
Substantially all revenues from gathering, compression, water handling, disposal and treatment operations are derived from intersegment transactions for services Rattler Midstream LLC (“Rattler”) provides to exploration and production operations. The portion of such fees shown in the Company’s consolidated financial statements represent amounts charged to interest owners in the Company’s operated wells, as well as fees charged to other third parties for water handling and treatment services provided by Rattler or usage of Rattler’s gathering and compression systems. For gathering and compression revenue, Rattler satisfies its performance obligations and recognizes revenue when low pressure volumes are delivered to a specified delivery point. Revenue is recognized based on the per MMbtu gathering fee or a per barrel gathering fee charged by Rattler in accordance with the gathering and compression agreement. For water handling and treatment revenue, Rattler satisfies its performance obligations and recognizes revenue when the fresh water volumes have been delivered to the fracwater meter for a specified well pad and the wastewater volumes have been metered downstream of the Company’s facilities. For services contracted through third party providers, Rattler’s performance obligation is satisfied when the service performed by the third party provider has been completed. Revenue is recognized based on the per barrel fresh water delivery or a wastewater gathering and disposal fee charged by Rattler in accordance with the water services agreement.
Transaction price allocated to remaining performance obligations
The Company’s product sales contracts do not originate until production occurs and, therefore, are not considered to exist beyond each days’ production. Therefore, there are no remaining performance obligation under any of our product sales contracts.
Contract balances
Under the Company’s product sales contracts, it has the right to invoice its customers once the performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s product sales contracts do not give rise to contract assets or liabilities under Accounting Standards Codification 606.
Prior-period performance obligations
The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain natural gas and natural gas liquids sales may not be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. The Company records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. The Company has existing internal controls for its revenue estimation process and related accruals, and any identified differences between its revenue estimates and actual revenue received historically have not been significant. For the
Diamondback Energy, Inc. and Subsidiaries
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three months ended March 31, 2018, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. The Company believes that the pricing provisions of its oil, natural gas and natural gas liquids contracts are customary in the industry. To the extent actual volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the revenue related to expected sales volumes and prices for those properties are estimated and recorded.
4. ACQUISITIONS
On January 31, 2018, Tall City Towers LLC, a subsidiary of the Company, completed its acquisition of the Fasken Center office buildings in Midland, TX where the Company’s corporate offices are located for a net purchase price of $109.7 million.
On February 28, 2017, the Company completed its acquisition of certain oil and natural gas properties, midstream assets and other related assets in the Delaware Basin for an aggregate purchase price consisting of $1.74 billion in cash and 7.69 million shares of the Company’s common stock, of which approximately 1.15 million shares were placed in an indemnity escrow. This transaction includes the acquisition of (i) approximately 100,306 gross (80,339 net) acres primarily in Pecos and Reeves counties for approximately $2.5 billion and (ii) midstream assets for approximately $47.6 million. The Company used the net proceeds from its December 2016 equity offering, net proceeds from its December 2016 debt offering, cash on hand and other financing sources to fund the cash portion of the purchase price for this acquisition.
The following represents the fair value of the assets and liabilities assumed on the acquisition date. The aggregate consideration transferred was $2.5 billion, resulting in no goodwill or bargain purchase gain.
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| | | |
| (in thousands) |
Proved oil and natural gas properties | $ | 386,308 |
|
Unevaluated oil and natural gas properties | 2,122,597 |
|
Midstream assets | 47,432 |
|
Prepaid capital costs | 3,460 |
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Oil inventory | 839 |
|
Equipment | 163 |
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Revenues and royalties payable | (9,650 | ) |
Asset retirement obligations | (1,550 | ) |
Total fair value of net assets | $ | 2,549,599 |
|
The Company included in its consolidated statements of operations revenues of $12.2 million and direct operating expenses of $2.7 million for the period from February 28, 2017 to March 31, 2017 due to the acquisition.
Pro Forma Financial Information
The following unaudited summary pro forma consolidated statement of operations data of Diamondback for the three months ended March 31, 2017 have been prepared to give effect to the February 28, 2017 acquisition as if it had occurred on January 1, 2016. The pro forma data are not necessarily indicative of financial results that would have been attained had the acquisitions occurred on January 1, 2016.
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The pro forma data also necessarily exclude various operation expenses related to the properties and the financial statements should not be viewed as indicative of operations in future periods.
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| | | |
| Three Months Ended March 31, 2017 |
| (in thousands, except per share amounts) |
Revenues | $ | 258,159 |
|
Income from operations | 133,162 |
|
Net income | 150,615 |
|
Basic earnings per common share | 1.62 |
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Diluted earnings per common share | 1.61 |
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5. VIPER ENERGY PARTNERS LP
The Partnership is a publicly traded Delaware limited partnership, the common units of which are listed on the NASDAQ Global Market under the symbol “VNOM”. The Partnership was formed by Diamondback on February 27, 2014, to, among other things, own, acquire and exploit oil and natural gas properties in North America. The Partnership is currently focused on oil and natural gas properties in the Permian Basin and the Eagle Ford Shale. Viper Energy Partners GP LLC, a fully-consolidated subsidiary of Diamondback, serves as the general partner of, and holds a non-economic general partner interest in, the Partnership. As of March 31, 2018, the Company owned approximately 64% of the common units of the Partnership.
Partnership Agreement
In connection with the closing of the Viper Offering, the General Partner and Diamondback entered into the first amended and restated agreement of limited partnership, dated June 23, 2014 (the “Partnership Agreement”). The Partnership Agreement requires the Partnership to reimburse the General Partner for all direct and indirect expenses incurred or paid on the Partnership’s behalf and all other expenses allocable to the Partnership or otherwise incurred by the General Partner in connection with operating the Partnership’s business. The Partnership Agreement does not set a limit on the amount of expenses for which the General Partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for the Partnership or on its behalf and expenses allocated to the General Partner by its affiliates. The General Partner is entitled to determine the expenses that are allocable to the Partnership. For both the three months ended March 31, 2018 and 2017, the General Partner allocated $0.6 million to the Partnership.
Tax Sharing
In connection with the closing of the Viper Offering, the Partnership entered into a tax sharing agreement with Diamondback, dated June 23, 2014, pursuant to which the Partnership agreed to reimburse Diamondback for its share of state and local income and other taxes for which the Partnership’s results are included in a combined or consolidated tax return filed by Diamondback with respect to taxable periods including or beginning on June 23, 2014. The amount of any such reimbursement is limited to the tax the Partnership would have paid had it not been included in a combined group with Diamondback. Diamondback may use its tax attributes to cause its combined or consolidated group, of which the Partnership may be a member for this purpose, to owe less or no tax. In such a situation, the Partnership agreed to reimburse Diamondback for the tax the Partnership would have owed had the tax attributes not been available or used for the Partnership’s benefit, even though Diamondback had no cash tax expense for that period.
Other Agreements
See Note 12—Related Party Transactions for information regarding the advisory services agreement the Partnership and the General Partner entered into with Wexford Capital LP (“Wexford”).
The Partnership has entered into a secured revolving credit facility with Wells Fargo, as administrative agent sole book runner and lead arranger. See Note 9—Debt for a description of this credit facility.
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6. PROPERTY AND EQUIPMENT
Property and equipment includes the following:
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| | | | | | |
| March 31, | December 31, |
| 2018 | 2017 |
| | |
| (in thousands) |
Oil and natural gas properties: | | |
Subject to depletion | $ | 5,444,080 |
| $ | 5,126,829 |
|
Not subject to depletion | 4,204,745 |
| 4,105,865 |
|
Gross oil and natural gas properties | 9,648,825 |
| 9,232,694 |
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Accumulated depletion | (1,114,399 | ) | (1,009,893 | ) |
Accumulated impairment | (1,143,498 | ) | (1,143,498 | ) |
Oil and natural gas properties, net | 7,390,928 |
| 7,079,303 |
|
Midstream assets | 295,161 |
| 191,519 |
|
Other property, equipment and land | 82,095 |
| 80,776 |
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Accumulated depreciation | (17,012 | ) | (7,981 | ) |
Property and equipment, net of accumulated depreciation, depletion, amortization and impairment | $ | 7,751,172 |
| $ | 7,343,617 |
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| | |
Balance of costs not subject to depletion: | | |
Incurred in 2018 | $ | 159,352 |
| |
Incurred in 2017 | 2,746,718 |
| |
Incurred in 2016 | 721,400 |
| |
Incurred in 2015 | 283,673 |
| |
Incurred in 2014 | 293,602 |
| |
Total not subject to depletion | $ | 4,204,745 |
| |
The Company uses the full cost method of accounting for its oil and natural gas properties. Under this method, all acquisition, exploration and development costs, including certain internal costs, are capitalized and amortized on a composite unit of production method based on proved oil, natural gas liquids and natural gas reserves. Internal costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. Costs, including related employee costs, associated with production and operation of the properties are charged to expense as incurred. All other internal costs not directly associated with exploration and development activities are charged to expense as they are incurred. Capitalized internal costs were approximately $7.0 million and $5.1 million for the three months ended March 31, 2018 and 2017, respectively. Costs associated with unevaluated properties are excluded from the full cost pool until the Company has made a determination as to the existence of proved reserves. The inclusion of the Company’s unevaluated costs into the amortization base is expected to be completed within three to five years. Acquisition costs not currently being amortized are primarily related to unproved acreage that the Company plans to prove up through drilling. The Company has no plans to let any acreage expire. Sales of oil and natural gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil, natural gas liquids and natural gas.
Under this method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the proved oil and natural gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes, or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the trailing 12-month unweighted average of the first-day-of-the-month price, adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of
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properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or non-cash writedown is required.
At March 31, 2018, there was $48.5 million in exploration costs and development costs and $28.8 million in capitalized interest that was not subject to depletion. At December 31, 2017, there were $26.0 million in exploration costs and development costs and $22.1 million in capitalized interest that was not subject to depletion.
7. ASSET RETIREMENT OBLIGATIONS
The following table describes the changes to the Company’s asset retirement obligation liability for the following periods:
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| | | | | | |
| Three Months Ended March 31, |
| 2018 | 2017 |
| | |
| (in thousands) |
Asset retirement obligations, beginning of period | $ | 21,285 |
| $ | 17,422 |
|
Additional liabilities incurred | 765 |
| 741 |
|
Liabilities acquired | 12 |
| 2,129 |
|
Liabilities settled | (775 | ) | (102 | ) |
Accretion expense | 355 |
| 323 |
|
Revisions in estimated liabilities | 10 |
| (2 | ) |
Asset retirement obligations, end of period | 21,652 |
| 20,511 |
|
Less current portion | 394 |
| 1,572 |
|
Asset retirement obligations - long-term | $ | 21,258 |
| $ | 18,939 |
|
The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. The Company estimates the future plugging and abandonment costs of wells, the ultimate productive life of the properties, a risk-adjusted discount rate and an inflation factor in order to determine the current present value of this obligation. To the extent future revisions to these assumptions impact the present value of the existing asset retirement obligation liability, a corresponding adjustment is made to the oil and natural gas property balance. The current portion of the asset retirement obligation liability is included in other accrued liabilities in the Company’s consolidated balance sheets.
8. EQUITY METHOD INVESTMENTS
In October 2014, the Company obtained a 25% interest in HMW Fluid Management LLC, which was formed to develop, own and operate an integrated water management system to gather, store, process, treat, distribute and dispose of water to exploration and production companies operating in Midland, Martin and Andrews Counties, Texas. The board of this entity may also authorize the entity to offer these services to other counties in the Permian Basin and to pursue other business opportunities. During the three months ended March 31, 2018, the Company recorded $2.2 million, which is the Company’s share of HMW Fluid Management LLC’s net income, bringing its total investment to $9.4 million at March 31, 2018. During the three months ended March 31, 2017, the Company invested $0.2 million in this entity and recorded $3,000, which is the Company’s share of HMW Fluid Management LLC’s net income, bringing its total investment to $6.5 million at March 31, 2017. The Company will retain a minority interest after all commitments are received. The entity was formed as a limited liability company and maintains a specific ownership account for each investor, similar to a partnership capital account structure. Therefore, the Company accounts for this investment under the equity method of accounting.
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Notes to Consolidated Financial Statements-(Continued)
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9. DEBT
Long-term debt consisted of the following as of the dates indicated:
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| | | | | | |
| March 31, | December 31, |
| 2018 | 2017 |
| | |
| (in thousands) |
4.750 % Senior Notes due 2024 | $ | 500,000 |
| $ | 500,000 |
|
5.375 % Senior Notes due 2025 | 800,000 |
| 500,000 |
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Unamortized debt issuance costs | (16,312 | ) | (13,153 | ) |
Unamortized premium costs | 11,724 |
| — |
|
Revolving credit facility | 166,000 |
| 397,000 |
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Partnership revolving credit facility | 240,500 |
| 93,500 |
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Total long-term debt | $ | 1,701,912 |
| $ | 1,477,347 |
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2024 Senior Notes
On October 28, 2016, the Company issued $500.0 million in aggregate principal amount of 4.750% Senior Notes due 2024 (the “2024 Senior Notes”). The 2024 Senior Notes bear interest at a rate of 4.750% per annum, payable semi-annually, in arrears on May 1 and November 1 of each year, commencing on May 1, 2017 and will mature on November 1, 2024. All of the Company’s existing and future restricted subsidiaries that guarantee its revolving credit facility or certain other debt guarantee the 2024 Senior Notes; provided, however, that the 2024 Senior Notes are not guaranteed by the Partnership, the General Partner, Viper Energy Partners LLC or Rattler Midstream LLC, and will not be guaranteed by any of the Company’s future unrestricted subsidiaries.
The 2024 Senior Notes were issued under, and are governed by, an indenture among the Company, the subsidiary guarantors party thereto and Wells Fargo, as the trustee, as supplemented (the “2024 Indenture”). The 2024 Indenture contains certain covenants that, subject to certain exceptions and qualifications, among other things, limit the Company’s ability and the ability of the restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make other distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting the Company’s restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and natural gas business and designate certain of the Company’s subsidiaries as unrestricted subsidiaries.
The Company may on any one or more occasions redeem some or all of the 2024 Senior Notes at any time on or after November 1, 2019 at the redemption prices (expressed as percentages of principal amount) of 103.563% for the 12-month period beginning on November 1, 2019, 102.375% for the 12-month period beginning on November 1, 2020, 101.188% for the 12-month period beginning on November 1, 2021 and 100.000% beginning on November 1, 2022 and at any time thereafter with any accrued and unpaid interest to, but not including, the date of redemption. Prior to November 1, 2019, the Company may on any one or more occasions redeem all or a portion of the 2024 Senior Notes at a price equal to 100% of the principal amount of the 2024 Senior Notes plus a “make-whole” premium and accrued and unpaid interest to the redemption date. In addition, any time prior to November 1, 2019, the Company may on any one or more occasions redeem the 2024 Senior Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the 2024 Senior Notes issued prior to such date at a redemption price of 104.750%, plus accrued and unpaid interest to the redemption date, with an amount equal to the net cash proceeds from certain equity offerings.
2025 Senior Notes
On December 20, 2016, the Company issued $500.0 million in aggregate principal amount of 5.375% Senior Notes due 2025 (the “2025 Senior Notes”). The 2025 Senior Notes bear interest at a rate of 5.375% per annum, payable semi-annually, in arrears on May 31 and November 30 of each year, commencing on May 31, 2017 and will mature on May 31, 2025. All of the Company’s existing and future restricted subsidiaries that guarantee its revolving credit
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facility or certain other debt guarantee the 2025 Senior Notes, provided, however, that the 2025 Senior Notes are not guaranteed by the Partnership, the General Partner, Viper Energy Partners LLC or Rattler Midstream LLC, and will not be guaranteed by any of the Company’s future unrestricted subsidiaries.
On January 29, 2018, the Company issued $300.0 million aggregate principal amount of new 5.375% Senior Notes due 2025 (the “New 2025 Notes”) as additional notes under, and subject to the terms of, the 2025 Indenture. The New 2025 Notes were issued in a transaction exempt from the registration requirements under the Securities Act. The Company received approximately $308.4 million in net proceeds, after deducting the initial purchaser’s discount and its estimated offering expenses, but disregarding accrued interest, from the issuance of the New 2025 Notes. The Company used the net proceeds from the issuance of the New 2025 Notes to repay a portion of the outstanding borrowings under its revolving credit facility.
The 2025 Indenture contains certain covenants that, subject to certain exceptions and qualifications, among other things, limit the Company’s ability and the ability of the restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make other distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting the Company’s restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and natural gas business and designate certain of the Company’s subsidiaries as unrestricted subsidiaries.
The Company may on any one or more occasions redeem some or all of the 2025 Senior Notes (including the New 2025 Notes) at any time on or after May 31, 2020 at the redemption prices (expressed as percentages of principal amount) of 104.031% for the 12-month period beginning on May 31, 2020, 102.688% for the 12-month period beginning on May 31, 2021, 101.344% for the 12-month period beginning on May 31, 2022 and 100.000% beginning on May 31, 2023 and at any time thereafter with any accrued and unpaid interest to, but not including, the date of redemption. Prior to May 31, 2020, the Company may on any one or more occasions redeem all or a portion of the 2025 Senior Notes (including the New 2025 Notes) at a price equal to 100% of the principal amount of the 2025 Senior Notes (including the New 2025 Notes) plus a “make-whole” premium and accrued and unpaid interest to the redemption date. In addition, any time prior to May 31, 2020, the Company may on any one or more occasions redeem the 2025 Senior Notes (including the New 2025 Notes) in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the 2025 Senior Notes (including the New 2025 Notes) issued prior to such date at a redemption price of 105.375%, plus accrued and unpaid interest to the redemption date, with an amount equal to the net cash proceeds from certain equity offerings.
The Company’s Credit Facility
The Company and Diamondback O&G LLC, as borrower, entered into the second amended and restated credit agreement, dated November 1, 2013, as amended on June 9, 2014, November 13, 2014, June 21, 2016, December 15, 2016 and November 28, 2017, with a syndicate of banks, including Wells Fargo, as administrative agent, and its affiliate Wells Fargo Securities, LLC, as sole book runner and lead arranger. The credit agreement provides for a revolving credit facility in the maximum credit amount of $5.0 billion, subject to a borrowing base based on the Company’s oil and natural gas reserves and other factors (the “borrowing base”). The borrowing base is scheduled to be redetermined, under certain circumstances, annually with an effective date of May 1st, and, under certain circumstances, semi-annually with effective dates of May 1st and November 1st. In addition, the Company may request up to two additional redeterminations of the borrowing base during any 12-month period. As of March 31, 2018, the borrowing base was set at $1.8 billion, the Company had elected a commitment amount of $1.0 billion and the Company had $166.0 million of outstanding borrowings under the revolving credit facility and $834.0 million available for future borrowings under its revolving credit facility.
Diamondback O&G LLC is the borrower under the credit agreement. As of December 31, 2017, the credit agreement is guaranteed by the Company, Diamondback E&P LLC and Rattler Midstream LLC (formerly known as White Fang Energy LLC) and will also be guaranteed by any of the Company’s future subsidiaries that are classified as restricted subsidiaries under the credit agreement. The credit agreement is also secured by substantially all of the assets of the Company, Diamondback O&G LLC and the guarantors.
The outstanding borrowings under the credit agreement bear interest at a per annum rate elected by the Company that is equal to an alternate base rate (which is equal to the greatest of the prime rate, the Federal Funds effective rate
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
plus 0.5%, and 3-month LIBOR plus 1.0%) or LIBOR, in each case plus the applicable margin. The applicable margin ranges from 0.25% to 1.25% in the case of the alternate base rate and from 1.25% to 2.25% in the case of LIBOR, each of which applicable margin rates is increased by 0.25% per annum if the total debt to EBITDAX ratio is greater than 3.0 to 1.0. The applicable margin depends on the amount of loans and letters of credit outstanding in relation to the commitment, which is defined as the least of the maximum credit amount, the borrowing base and the elected commitment amount. The Company is obligated to pay a quarterly commitment fee ranging from 0.375% to 0.500% per year on the unused portion of the commitment, which fee is also dependent on the amount of loans and letters of credit outstanding in relation to the commitment. Loan principal may be optionally repaid from time to time without premium or penalty (other than customary LIBOR breakage), and is required to be repaid (a) to the extent the loan amount exceeds the commitment or the borrowing base, whether due to a borrowing base redetermination or otherwise (in some cases subject to a cure period), (b) in an amount equal to the net cash proceeds from the sale of property when a borrowing base deficiency or event of default exists under the credit agreement and (c) at the maturity date of November 1, 2022.
The credit agreement contains various affirmative, negative and financial maintenance covenants. These covenants, among other things, limit additional indebtedness, additional liens, sales of assets, mergers and consolidations, dividends and distributions, transactions with affiliates and entering into certain swap agreements and require the maintenance of the financial ratios described below.
|
| | |
Financial Covenant | | Required Ratio |
Ratio of total debt to EBITDAX | Not greater than 4.0 to 1.0 |
Ratio of current assets to liabilities, as defined in the credit agreement | Not less than 1.0 to 1.0 |
The covenant prohibiting additional indebtedness, as amended in November 2017, allows for the issuance of unsecured debt in the form of senior or senior subordinated notes if no default would result from the incurrence of such debt after giving effect thereto and if, in connection with any such issuance, the borrowing base is reduced by 25% of the stated principal amount of each such issuance.
As of March 31, 2018 and December 31, 2017, the Company was in compliance with all financial covenants under its revolving credit facility, as then in effect. The lenders may accelerate all of the indebtedness under the Company’s revolving credit facility upon the occurrence and during the continuance of any event of default. The credit agreement contains customary events of default, including non-payment, breach of covenants, materially incorrect representations, cross-default, bankruptcy and change of control. There are no cure periods for events of default due to non-payment of principal and breaches of negative and financial covenants, but non-payment of interest and breaches of certain affirmative covenants are subject to customary cure periods.
The Partnership’s Credit Agreement
On July 8, 2014, the Partnership entered into a secured revolving credit agreement with Wells Fargo, as administrative agent, and Wells Fargo Securities, as sole book runner and lead arranger. The credit agreement, as amended, provides for a revolving credit facility in the maximum credit amount of $2.0 billion and a borrowing base based on the Partnership’s oil and natural gas reserves and other factors (the “borrowing base”) of $400.0 million, subject to scheduled semi-annual and other elective borrowing base redeterminations. The borrowing base is scheduled to be re-determined semi-annually with effective dates of May 1st and November 1st. In addition, the Partnership may request up to three additional redeterminations of the borrowing base during any 12-month period. As of March 31, 2018, the borrowing base was set at $400.0 million, and the Partnership had $240.5 million of outstanding borrowings and $159.5 million available for future borrowings under its revolving credit facility.
The outstanding borrowings under the credit agreement bear interest at a per annum rate elected by the Partnership that is equal to an alternate base rate (which is equal to the greatest of the prime rate, the Federal Funds effective rate plus 0.5% and 3-month LIBOR plus 1.0%) or LIBOR, in each case plus the applicable margin. The applicable margin ranges from 0.75% to 1.75% per annum in the case of the alternate base rate and from 1.75% to 2.75% per annum in the case of LIBOR, in each case depending on the amount of loans and letters of credit outstanding in relation to the commitment, which is defined as the lesser of the maximum credit amount and the borrowing base. The Partnership is obligated to pay a quarterly commitment fee ranging from 0.375% to 0.500% per year on the unused portion of the commitment, which fee is also dependent on the amount of loans and letters of credit outstanding in relation to the commitment. Loan principal may be optionally repaid from time to time without premium or penalty
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
(other than customary LIBOR breakage), and is required to be repaid (i) to the extent the loan amount exceeds the commitment or the borrowing base, whether due to a borrowing base redetermination or otherwise (in some cases subject to a cure period), (ii) in an amount equal to the net cash proceeds from the sale of property when a borrowing base deficiency or event of default exists under the credit agreement and (iii) at the maturity date of November 1, 2022. The loan is secured by substantially all of the Partnership and its subsidiary’s assets.
The credit agreement contains various affirmative, negative and financial maintenance covenants. These covenants, among other things, limit additional indebtedness, purchases of margin stock, additional liens, sales of assets, mergers and consolidations, dividends and distributions, transactions with affiliates and entering into certain swap agreements and require the maintenance of the financial ratios described below.
|
| | |
Financial Covenant | | Required Ratio |
Ratio of total debt to EBITDAX | Not greater than 4.0 to 1.0 |
Ratio of current assets to liabilities, as defined in the credit agreement | Not less than 1.0 to 1.0 |
The covenant prohibiting additional indebtedness allows for the issuance of unsecured debt of up to $400.0 million in the form of senior unsecured notes and, in connection with any such issuance, the reduction of the borrowing base by 25% of the stated principal amount of each such issuance. A borrowing base reduction in connection with such issuance may require a portion of the outstanding principal of the loan to be repaid.
The lenders may accelerate all of the indebtedness under the Partnership’s credit agreement upon the occurrence and during the continuance of any event of default. The Partnership’s credit agreement contains customary events of default, including non-payment, breach of covenants, materially incorrect representations, cross-default, bankruptcy and change of control. There are no cure periods for events of default due to non-payment of principal and breaches of negative and financial covenants, but non-payment of interest and breaches of certain affirmative covenants are subject to customary cure periods.
10. CAPITAL STOCK AND EARNINGS PER SHARE
Diamondback completed no equity offerings during the three months ended March 31, 2018 and March 31, 2017.
Partnership Equity Offerings
In January 2017, the Partnership completed an underwritten public offering of 9,775,000 common units, which included 1,275,000 common units issued pursuant to an option to purchase additional common units granted to the underwriters. The Partnership received net proceeds from this offering of approximately $147.5 million, after deducting underwriting discounts and commissions and estimated offering expenses, of which the Partnership used $120.5 million to repay the outstanding borrowings under its revolving credit agreement and the balance was used for general partnership purposes, which included additional acquisitions.
Earnings Per Share
The Company’s basic earnings per share amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share include the effect of potentially dilutive shares outstanding for the period. Additionally, for the diluted earnings per share computation, the per share earnings of the Partnership are included in the consolidated earnings per share computation based on the consolidated group’s holdings of the subsidiary.
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
A reconciliation of the components of basic and diluted earnings per common share is presented in the table below:
|
| | | | | | |
| Three Months Ended March 31, |
| 2018 | 2017 |
| (in thousands, except per share amounts) |
Net income attributable to common stock | $ | 162,812 |
| $ | 136,273 |
|
Weighted average common shares outstanding | | |
Basic weighted average common units outstanding | 98,555 |
| 93,161 |
|
Effect of dilutive securities: | | |
Potential common shares issuable | 214 |
| 203 |
|
Diluted weighted average common shares outstanding | 98,769 |
| 93,364 |
|
Basic net income attributable to common stock | $ | 1.65 |
| $ | 1.46 |
|
Diluted net income attributable to common stock | $ | 1.65 |
| $ | 1.46 |
|
For the three months ended March 31, 2018 and 2017, there were zero shares and 14 shares, respectively, that were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive for the periods presented. These shares could dilute basic earnings per share in future periods.
11. EQUITY-BASED COMPENSATION
The following table presents the effects of the equity compensation plans and related costs:
|
| | | | | | |
| Three Months Ended March 31, |
| 2018 | 2017 |
| (in thousands) |
General and administrative expenses | $ | 7,451 |
| $ | 7,063 |
|
Equity-based compensation capitalized pursuant to full cost method of accounting for oil and natural gas properties | 2,641 |
| 2,343 |
|
Restricted Stock Units
The following table presents the Company’s restricted stock units activity under the Equity Plan during the three months ended March 31, 2018.
|
| | | | | |
| Restricted Stock Awards & Units | Weighted Average Grant-Date Fair Value |
Unvested at December 31, 2017 | 243,577 |
| $ | 90.88 |
|
Granted | 73,763 |
| $ | 113.78 |
|
Vested | (106,691 | ) | $ | 86.30 |
|
Forfeited | (1,427 | ) | $ | 94.43 |
|
Unvested at March 31, 2018 | 209,222 |
| $ | 101.26 |
|
The aggregate fair value of restricted stock units that vested during the three months ended March 31, 2018 and 2017 was $9.2 million and $11.3 million, respectively. As of March 31, 2018, the Company’s unrecognized compensation cost related to unvested restricted stock awards and units was $17.3 million. Such cost is expected to be recognized over a weighted-average period of 1.8 years.
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Performance Based Restricted Stock Units
To provide long-term incentives for the executive officers to deliver competitive returns to the Company’s stockholders, the Company has granted performance-based restricted stock units to eligible employees. The ultimate number of shares awarded from these conditional restricted stock units is based upon measurement of total stockholder return of the Company’s common stock (“TSR”) as compared to a designated peer group during a two-year or three-year performance period.
In February 2018, eligible employees received performance restricted stock unit awards totaling 117,423 units from which a minimum of 0% and a maximum of 200% units could be awarded. The awards have a performance period of January 1, 2018 to December 31, 2020 and cliff vest at December 31, 2020.
The fair value of each performance restricted stock unit is estimated at the date of grant using a Monte Carlo simulation, which results in an expected percentage of units to be earned during the performance period.
The following table presents a summary of the grant-date fair values of performance restricted stock units granted and the related assumptions for the February 2018 awards.
|
| | | |
| 2018 |
| Three-Year Performance Period |
Grant-date fair value | $ | 170.45 |
|
Risk-free rate | 1.99 | % |
Company volatility | 35.90 | % |
The following table presents the Company’s performance restricted stock units activity under the Equity Plan for the three months ended March 31, 2018.
|
| | | | | |
| Performance Restricted Stock Units | Weighted Average Grant-Date Fair Value |
Unvested at December 31, 2017 | 202,326 |
| $ | 139.83 |
|
Granted | 285,737 |
| $ | 130.96 |
|
Vested | (168,314 | ) | $ | 103.41 |
|
Unvested at March 31, 2018(1) | 319,749 |
| $ | 151.08 |
|
| |
(1) | A maximum of 639,498 units could be awarded based upon the Company’s final TSR ranking. |
As of March 31, 2018, the Company’s unrecognized compensation cost related to unvested performance based restricted stock awards and units was $34.8 million. Such cost is expected to be recognized over a weighted-average period of 2.8 years.
Phantom Units
Under the Viper LTIP, the Board of Directors of the General Partner is authorized to issue phantom units to eligible employees. The Partnership estimates the fair value of phantom units as the closing price of the Partnership’s common units on the grant date of the award, which is expensed over the applicable vesting period. Upon vesting the phantom units entitle the recipient one common unit of the Partnership for each phantom unit.
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
The following table presents the phantom unit activity under the Viper LTIP for the three months ended March 31, 2018.
|
| | | | | | |
| Phantom Units | | Weighted Average Grant-Date Fair Value |
Unvested at December 31, 2017 | 105,439 |
| | $ | 17.10 |
|
Granted | 101,403 |
| | $ | 23.18 |
|
Vested | (39,147 | ) | | $ | 22.30 |
|
Unvested at March 31, 2018 | 167,695 |
| | $ | 19.56 |
|
The aggregate fair value of phantom units that vested during the three months ended March 31, 2018 was $0.9 million. As of March 31, 2018, the unrecognized compensation cost related to unvested phantom units was $2.4 million. Such cost is expected to be recognized over a weighted-average period of 1.6 years.
12. RELATED PARTY TRANSACTIONS
Advisory Services Agreement - The Partnership
In connection with the closing of the Viper Offering, the Partnership and the General Partner entered into an advisory services agreement (the “Viper Advisory Services Agreement”) with Wexford, dated as of June 23, 2014, under which Wexford provides the Partnership and the General Partner with general financial and strategic advisory services related to the business in return for an annual fee of $0.5 million, plus reasonable out-of-pocket expenses. The Viper Advisory Services Agreement had an initial term of two years commencing on June 23, 2014, and will continue for additional one-year periods unless terminated in writing by either party at least ten days prior to the expiration of the then current term. The Partnership did not incur any costs during the three months ended March 31, 2018 or March 31, 2017 under the Viper Advisory Services Agreement.
Lease Bonus - The Partnership
During the three months ended March 31, 2018, the Company did not pay the Partnership any lease bonus payments. During the three months ended March 31, 2017, the Company paid the Partnership $1,500 in lease bonus payments to extend the term of one lease, reflecting an average bonus of $400 per acre.
13. INCOME TAXES
The Company’s effective income tax rates were 20.9% and 1.4% for the three months ended March 31, 2018 and 2017, respectively. Total income tax expense for the three months ended March 31, 2018 differed from amounts computed by applying the United States federal statutory tax rate to pre-tax income primarily due to current and deferred state income taxes, net income attributable to the non-controlling interest and the impact of permanent differences between book and taxable income. The Company recorded a discrete income tax benefit of approximately $0.2 million related to equity-based compensation for the three months ended March 31, 2018. Total income tax expense for the three months ended March 31, 2017 differed from amounts computed by applying the federal statutory rate to pre-tax income primarily due to state income taxes
The Tax Cuts and Jobs Act, a historic reform of the U.S. federal income tax statutes, was enacted on December 22, 2017. As of the completion of the Company’s financial statements for the year ended December 31, 2017, the Company had substantially completed its accounting for the effects of the enactment of the Tax Cuts and Jobs Act and, with respect to those items for which the Company’s accounting was not complete, the Company made reasonable estimates of the effects on its deferred tax balances. At March 31, 2018, the Company has not made an adjustment to the provisional estimates recorded for the year ended December 31, 2017. The Company has considered in its estimated annual effective tax rate for 2018 the impact of the statutory changes enacted by the Tax Cuts and Jobs Act, including reasonable estimates of those provisions effective for the 2018 tax year.
As discussed further in Note 17, on March 29, 2018, the Partnership announced that the Board of Directors of its General Partner had unanimously approved a change of the Partnership’s federal income tax status from that of a pass-through partnership to that of a taxable entity, which change became effective on May 10, 2018. The transactions
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
to be undertaken in connection with the change in the Partnership’s tax status are not expected to be taxable to the Company.
14. DERIVATIVES
All derivative financial instruments are recorded at fair value. The Company has not designated its derivative instruments as hedges for accounting purposes and, as a result, marks its derivative instruments to fair value and recognizes the cash and non-cash changes in fair value in the combined consolidated statements of operations under the caption “Gain (loss) on derivative instruments, net.”
The Company has used fixed price swap contracts, fixed price basis swap contracts and three-way costless collars with corresponding put, short put and call options to reduce price volatility associated with certain of its oil and natural gas sales. With respect to the Company’s fixed price swap contracts and fixed price basis swap contracts, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is less than the swap or basis price, and the Company is required to make a payment to the counterparty if the settlement price for any settlement period is greater than the swap or basis price. The Company has fixed price basis swaps for the spread between the WTI Midland price and the WTI Cushing price.
Under the Company’s costless collar contracts, a three-way collar is a combination of three options: a ceiling call, a floor put, and a short put. The counterparty is required to make a payment to the Company if the settlement price for any settlement period is less than the ceiling price to a maximum of the difference between the floor price and the short put price. The Company is required to make a payment to the counterparty if the settlement price for any settlement period is greater than the ceiling price. If the settlement price is between the floor and the ceiling price, there is no payment required.
The Company’s derivative contracts are based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on New York Mercantile Exchange West Texas Intermediate pricing and Crude Oil Brent, and with natural gas derivative settlements based on the New York Mercantile Exchange Henry Hub pricing.
By using derivative instruments to hedge exposure to changes in commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. The Company’s counterparties are participants in the secured second amended and restated credit agreement, which is secured by substantially all of the assets of the guarantor subsidiaries; therefore, the Company is not required to post any collateral. The Company does not require collateral from its counterparties. The Company has entered into derivative instruments only with counterparties that are also lenders in our credit facility and have been deemed an acceptable credit risk.
As of March 31, 2018, the Company had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted average contract price is disclosed.
|
| | | | | | | | | | | | |
| 2018 | | 2019 |
| Volume (Bbls/MMBtu) | | Fixed Price Swap (per Bbl/MMBtu) | | Volume (Bbls/MMBtu) | | Fixed Price Swap (per Bbl/MMBtu) |
Oil Swaps - WTI | 7,515,000 |
| | $ | 51.26 |
| | 1,638,000 | | $ | 52.78 |
|
Oil Swaps - BRENT | 1,650,000 |
| | $ | 54.99 |
| | 0 | | $ | — |
|
Oil Basis Swaps | 4,125,000 |
| | $ | (0.88 | ) | | 0 | | $ | — |
|
Natural Gas Swaps | 5,500,000 |
| | $ | 3.03 |
| | 0 | | $ | — |
|
Balance sheet offsetting of derivative assets and liabilities
The fair value of swaps is generally determined using established index prices and other sources which are based upon, among other things, futures prices and time to maturity. These fair values are recorded by netting asset and liability positions that are with the same counterparty and are subject to contractual terms which provide for net settlement.
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
The following tables present the gross amounts of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties and the resulting net amounts presented in the Company’s consolidated balance sheets as of March 31, 2018 and December 31, 2017.
|
| | | | | | |
| March 31, 2018 | December 31, 2017 |
| (in thousands) |
Gross amounts of assets presented in the Consolidated Balance Sheet | $ | — |
| $ | 531 |
|
Net amounts of assets presented in the Consolidated Balance Sheet | — |
| 531 |
|
| | |
Gross amounts of liabilities presented in the Consolidated Balance Sheet | 106,177 |
| 106,670 |
|
Net amounts of liabilities presented in the Consolidated Balance Sheet | $ | 106,177 |
| $ | 106,670 |
|
The net amounts are classified as current or noncurrent based on their anticipated settlement dates. The net fair value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:
|
| | | | | | |
| March 31, 2018 | December 31, 2017 |
| (in thousands) |
Current assets: derivative instruments | $ | — |
| $ | 531 |
|
Noncurrent assets: derivative instruments | — |
| — |
|
Total assets | $ | — |
| $ | 531 |
|
Current liabilities: derivative instruments | $ | 99,685 |
| $ | 100,367 |
|
Noncurrent liabilities: derivative instruments | 6,492 |
| 6,303 |
|
Total liabilities | $ | 106,177 |
| $ | 106,670 |
|
None of the Company’s derivatives have been designated as hedges. As such, all changes in fair value are immediately recognized in earnings. The following table summarizes the gains and losses on derivative instruments included in the consolidated statements of operations:
|
| | | | | | |
| Three Months Ended March 31, |
| 2018 | 2017 |
| (in thousands) |
Change in fair value of open non-hedge derivative instruments | $ | (38 | ) | $ | 39,375 |
|
Loss on settlement of non-hedge derivative instruments | (32,307 | ) | (1,674 | ) |
Gain (loss) on derivative instruments | $ | (32,345 | ) | $ | 37,701 |
|
15. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. The Company uses appropriate valuation techniques based on available inputs to measure the fair values of its assets and liabilities.
Level 1 - Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3 - Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Certain assets and liabilities are reported at fair value on a recurring basis, including the Company’s derivative instruments. The fair values of the Company’s fixed price swaps, fixed price basis swaps and costless collars are measured internally using established commodity futures price strips for the underlying commodity provided by a reputable third party, the contracted notional volumes, and time to maturity. These valuations are Level 2 inputs.
The following table provides fair value measurement information for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017.
|
| | | | | | |
| March 31, 2018 | December 31, 2017 |
| (in thousands) |
Fixed price swaps: | | |
Quoted prices in active markets level 1 | $ | — |
| $ | — |
|
Significant other observable inputs level 2 | (106,177 | ) | (106,139 | ) |
Significant unobservable inputs level 3 | — |
| — |
|
Total | $ | (106,177 | ) | $ | (106,139 | ) |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table provides the fair value of financial instruments that are not recorded at fair value in the consolidated balance sheets.
|
| | | | | | | | | | | | |
| March 31, 2018 | December 31, 2017 |
| Carrying | | Carrying | |
| Amount | Fair Value | Amount | Fair Value |
| (in thousands) |
Debt: | | | | |
Revolving credit facility | $ | 166,000 |
| $ | 166,000 |
| $ | 397,000 |
| $ | 397,000 |
|
4.750% Senior Notes due 2024 | 500,000 |
| 496,250 |
| 500,000 |
| 501,855 |
|
5.375% Senior Notes due 2025 | 800,000 |
| 813,200 |
| 500,000 |
| 515,000 |
|
Partnership revolving credit facility | 240,500 |
| 240,500 |
| 93,500 |
| 93,500 |
|
The fair value of the revolving credit facility and the Partnership’s revolving credit facility approximates their carrying value based on borrowing rates available to the Company for bank loans with similar terms and maturities and is classified as Level 2 in the fair value hierarchy. The fair value of the Senior Notes was determined using the March 31, 2018 quoted market price, a Level 1 classification in the fair value hierarchy.
16. COMMITMENTS AND CONTINGENCIES
The Company could be subject to various possible loss contingencies which arise primarily from interpretation of federal and state laws and regulations affecting the natural gas and crude oil industry. Such contingencies include differing interpretations as to the prices at which natural gas and crude oil sales may be made, the prices at which royalty
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
owners may be paid for production from their leases, environmental issues and other matters. Management believes it has complied with the various laws and regulations, administrative rulings and interpretations.
17. SUBSEQUENT EVENTS
Commodity Contracts
Subsequent to March 31, 2018, the Company entered into new fixed price swaps and three-way costless collars. The Company’s derivative contracts are based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on New York Mercantile Exchange West Texas Intermediate pricing and Crude Oil Brent.
The following tables present the derivative contracts entered into by the Company subsequent to March 31, 2018. When aggregating multiple contracts, the weighted average contract price is disclosed.
|
| | | | | |
| Volume (Bbls/MMBtu) | | Fixed Price Swap (per Bbl/MMBtu) |
January 2019 - December 2019 | | | |
Oil Swaps - WTI | 273,000 | | $ | 57.96 |
|
|
| | | | | | | |
| January 2019 - June 2019 |
Oil Three-Way Collars | WTI | | Brent |
Volume (Bbls) | 1,810,000 | | 724,000 |
Short put price (per Bbl) | $ | 45.00 |
| | $ | 55.00 |
|
Floor price (per Bbl) | $ | 55.00 |
| | $ | 65.00 |
|
Ceiling price (per Bbl) | $ | 70.31 |
| | $ | 77.85 |
|
Proposed Tax Status Election and Related Transactions of the Partnership
On March 29, 2018, the Partnership announced that the Board of Directors of its General Partner had unanimously approved a change of the Partnership’s federal income tax status from that of a pass-through partnership to that of a taxable entity via a “check the box” election (the “Tax Status Election”). In connection with making this election, on May 9, 2018, the Partnership (i) amended and restated its First Amended and Restated Partnership Agreement, (ii) amended and restated the First Amended and Restated Limited Liability Company Agreement of Viper Energy Partners LLC (the “Operating Company”), (iii) amended and restated its existing registration rights agreement with Diamondback and (iv) entered into an exchange agreement with Diamondback, the General Partner and the Operating Company. Simultaneously with the effectiveness of these agreements, Diamondback delivered and assigned to the Partnership the 73,150,000 common units it owned in exchange for (i) 73,150,000 newly-issued Class B Units of the Partnership and (ii) 73,150,000 newly-issued units of the Operating Company pursuant to the terms of a Recapitalization Agreement dated March 28, 2018, as amended as of May 9, 2018. The Tax Status Election was effective on May 10, 2018. On that date, pursuant to the terms of the Recapitalization Agreement, (i) the General Partner made a cash capital contribution of $1.0 million to the Partnership in respect of its general partner interest and (ii) the Company made a cash capital contribution of $1.0 million to the Partnership in respect of its Class B Units. The Company, as the holder of the Class B Units, and the General Partner, as the holder of the general partner interest, are entitled to receive an 8% annual distribution on the outstanding amount of these capital contributions, payable quarterly, as a return on their invested capital. None of the transactions undertaken as part of the change in the Partnership’s tax status are expected to be taxable to the Company. On May 10, 2018, the Company also exchanged 731,500 Class B Units and 731,500 units in the Operating Company for 731,500 common units of the Partnership and a cash amount of $10,000 representing a proportionate return of the $1.0 million invested capital made in respect of the Class B Units.
The Company’s Credit Facility
In connection with the Company’s spring 2018 redetermination, the agent lender under the credit agreement has recommended that the Company’s borrowing base be increased to $2.0 billion. This increase is subject to approval
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
of the required other lenders. Notwithstanding such adjustment, the Company intends to continue to limit the lenders’ aggregate commitment to $1.0 billion.
The Partnership’s Credit Facility
In connection with the Partnership’s spring 2018 redetermination, the agent lender under the credit agreement has recommended that the Partnership’s borrowing base be increased to $475.0 million. This increase is subject to approval of the required other lenders.
18. GUARANTOR FINANCIAL STATEMENTS
As of March 31, 2018, Diamondback E&P LLC and Diamondback O&G LLC (the “Guarantor Subsidiaries”) are guarantors under the indentures relating to the 2024 Senior Notes and the 2025 Senior Notes, as supplemented. In connection with the issuance of the 2024 Senior Notes and the 2025 Senior Notes (including the New 2025 Senior Notes), the Partnership, the General Partner, Viper Energy Partners LLC and Rattler Midstream LLC were designated as Non-Guarantor Subsidiaries. The following presents condensed consolidated financial information for the Company (which for purposes of this Note 18 is referred to as the “Parent”), the Guarantor Subsidiaries and the Non–Guarantor Subsidiaries on a consolidated basis. Elimination entries presented are necessary to combine the entities. The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the Guarantor Subsidiaries operated as independent entities. The Company has not presented separate financial and narrative information for each of the Guarantor Subsidiaries because it believes such financial and narrative information would not provide any additional information that would be material in evaluating the sufficiency of the Guarantor Subsidiaries.
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Balance Sheet |
March 31, 2018 |
(In thousands) |
| | | | | Non– | | | | |
| | | Guarantor | | Guarantor | | | | |
| Parent | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated |
Assets | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 28,247 |
| | $ | 26,089 |
| | $ | 18,151 |
| | $ | — |
| | $ | 72,487 |
|
Accounts receivable | — |
| | 207,407 |
| | 28,873 |
| | — |
| | 236,280 |
|
Accounts receivable - related party | — |
| | — |
| | 6,505 |
| | (6,505 | ) | | — |
|
Intercompany receivable | 2,869,030 |
| | 654,684 |
| | — |
| | (3,523,714 | ) | | — |
|
Inventories | — |
| | 8,963 |
| | — |
| | — |
| | 8,963 |
|
Other current assets | 538 |
| | 5,838 |
| | 361 |
| | — |
| | 6,737 |
|
Total current assets | 2,897,815 |
| | 902,981 |
| | 53,890 |
| | (3,530,219 | ) | | 324,467 |
|
Property and equipment: | | | | | | | | | |
Oil and natural gas properties, at cost, full cost method of accounting | — |
| | 8,390,912 |
| | 1,258,327 |
| | (414 | ) | | 9,648,825 |
|
Midstream assets | — |
| | 295,161 |
| | — |
| | — |
| | 295,161 |
|
Other property, equipment and land | — |
| | 82,095 |
| | — |
| | — |
| | 82,095 |
|
Accumulated depletion, depreciation, amortization and impairment | — |
| | (2,074,783 | ) | | (200,992 | ) | | 866 |
| | (2,274,909 | ) |
Net property and equipment | — |
| | 6,693,385 |
| | 1,057,335 |
| | 452 |
| | 7,751,172 |
|
Funds held in escrow | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
Investment in subsidiaries | 3,992,760 |
| | — |
| | — |
| | (3,992,760 | ) | | — |
|
Investment in real estate | — |
| | 109,103 |
| | — |
| | — |
| | 109,103 |
|
Other assets | — |
| | 21,312 |
| | 18,824 |
| | — |
| | 40,136 |
|
Total assets | $ | 6,890,575 |
| | $ | 7,726,791 |
| | $ | 1,130,049 |
| | $ | (7,522,527 | ) | | $ | 8,224,888 |
|
Liabilities and Stockholders’ Equity | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable-trade | $ | — |
| | $ | 62,553 |
| | $ | 576 |
| | $ | — |
| | $ | 63,129 |
|
Intercompany payable | — |
| | 3,530,219 |
| | — |
| | (3,530,219 | ) | | — |
|
Other current liabilities | 25,711 |
| | 516,910 |
| | 1,918 |
| | — |
| | 544,539 |
|
Total current liabilities | 25,711 |
| | 4,109,682 |
| | 2,494 |
| | (3,530,219 | ) | | 607,668 |
|
Long-term debt | 1,295,412 |
| | 166,000 |
| | 240,500 |
| | — |
| | 1,701,912 |
|
Derivative instruments | — |
| | 6,492 |
| | — |
| | — |
| | 6,492 |
|
Asset retirement obligations | — |
| | 21,258 |
| | — |
| | — |
| | 21,258 |
|
Deferred income taxes | 152,369 |
| | — |
| | — |
| | — |
| | 152,369 |
|
Other long term liabilities | — |
| | 7 |
| | — |
| | — |
| | 7 |
|
Total liabilities | 1,473,492 |
| | 4,303,439 |
| | 242,994 |
| | (3,530,219 | ) | | 2,489,706 |
|
Commitments and contingencies | | | | | | | | | |
Stockholders’ equity | 5,417,083 |
| | 3,423,352 |
| | 887,055 |
| | (4,310,407 | ) | | 5,417,083 |
|
Non-controlling interest | — |
| | — |
| | — |
| | 318,099 |
| | 318,099 |
|
Total equity | 5,417,083 |
| | 3,423,352 |
| | 887,055 |
| | (3,992,308 | ) | | 5,735,182 |
|
Total liabilities and equity | $ | 6,890,575 |
| | $ | 7,726,791 |
| | $ | 1,130,049 |
| | $ | (7,522,527 | ) | | $ | 8,224,888 |
|
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Balance Sheet |
December 31, 2017 |
(In thousands) |
| | | | | Non– | | | | |
| | | Guarantor | | Guarantor | | | | |
| Parent | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated |
Assets | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 54,074 |
| | $ | 34,175 |
| | $ | 24,197 |
| | $ | — |
| | $ | 112,446 |
|
Accounts receivable | — |
| | 205,859 |
| | 25,754 |
| | — |
| | 231,613 |
|
Accounts receivable - related party | — |
| | — |
| | 5,142 |
| | (5,142 | ) | | — |
|
Intercompany receivable | 2,624,810 |
| | 2,267,308 |
| | — |
| | (4,892,118 | ) | | — |
|
Inventories | — |
| | 9,108 |
| | — |
| | — |
| | 9,108 |
|
Other current assets | 618 |
| | 4,461 |
| | 355 |
| | — |
| | 5,434 |
|
Total current assets | 2,679,502 |
| | 2,520,911 |
| | 55,448 |
| | (4,897,260 | ) | | 358,601 |
|
Property and equipment: | | | | | | | | | |
Oil and natural gas properties, at cost, full cost method of accounting | — |
| | 8,129,211 |
| | 1,103,897 |
| | (414 | ) | | 9,232,694 |
|
Midstream assets | — |
| | 191,519 |
| | — |
| | — |
| | 191,519 |
|
Other property, equipment and land | — |
| | 80,776 |
| | — |
| | — |
| | 80,776 |
|
Accumulated depletion, depreciation, amortization and impairment | — |
| | (1,976,248 | ) | | (189,466 | ) | | 4,342 |
| | (2,161,372 | ) |
Net property and equipment | — |
| | 6,425,258 |
| | 914,431 |
| | 3,928 |
| | 7,343,617 |
|
Funds held in escrow | — |
| | — |
| | 6,304 |
| | — |
| | 6,304 |
|
Investment in subsidiaries | 3,809,557 |
| | — |
| | — |
| | (3,809,557 | ) | | — |
|
Other assets | — |
| | 25,609 |
| | 36,854 |
| | — |
| | 62,463 |
|
Total assets | $ | 6,489,059 |
| | $ | 8,971,778 |
| | $ | 1,013,037 |
| | $ | (8,702,889 | ) | | $ | 7,770,985 |
|
Liabilities and Stockholders’ Equity | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable-trade | $ | 1 |
| | $ | 91,629 |
| | $ | 2,960 |
| | $ | — |
| | $ | 94,590 |
|
Intercompany payable | 132,067 |
| | 4,765,193 |
| | — |
| | (4,897,260 | ) | | — |
|
Other current liabilities | 7,236 |
| | 472,933 |
| | 2,669 |
| | — |
| | 482,838 |
|
Total current liabilities | 139,304 |
| | 5,329,755 |
| | 5,629 |
| | (4,897,260 | ) | | 577,428 |
|
Long-term debt | 986,847 |
| | 397,000 |
| | 93,500 |
| | — |
| | 1,477,347 |
|
Derivative instruments | — |
| | 6,303 |
| | — |
| | — |
| | 6,303 |
|
Asset retirement obligations | — |
| | 20,122 |
| | — |
| | — |
| | 20,122 |
|
Deferred income taxes | 108,048 |
| | — |
| | — |
| | — |
| | 108,048 |
|
Total liabilities | 1,234,199 |
| | 5,753,180 |
| | 99,129 |
| | (4,897,260 | ) | | 2,189,248 |
|
Commitments and contingencies |
| |
| |
| |
| |
|
Stockholders’ equity | 5,254,860 |
| | 3,218,598 |
| | 913,908 |
| | (4,132,506 | ) | | 5,254,860 |
|
Non-controlling interest | — |
| | — |
| | — |
| | 326,877 |
| | 326,877 |
|
Total equity | 5,254,860 |
| | 3,218,598 |
| | 913,908 |
| | (3,805,629 | ) | | 5,581,737 |
|
Total liabilities and equity | $ | 6,489,059 |
| | $ | 8,971,778 |
| | $ | 1,013,037 |
| | $ | (8,702,889 | ) | | $ | 7,770,985 |
|
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Statement of Operations |
Three Months Ended March 31, 2018 |
(In thousands) |
| | | | | Non– | | | | |
| | | Guarantor | | Guarantor | | | | |
| Parent | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated |
Revenues: | | | | | | | | | |
Oil sales | $ | — |
| | $ | 363,581 |
| | $ | — |
| | $ | 55,687 |
| | $ | 419,268 |
|
Natural gas sales | — |
| | 11,800 |
| | — |
| | 2,578 |
| | 14,378 |
|
Natural gas liquid sales | — |
| | 28,985 |
| | — |
| | 4,128 |
| | 33,113 |
|
Royalty income | — |
| | — |
| | 62,393 |
| | (62,393 | ) | | — |
|
Midstream services | — |
| | 11,395 |
| | — |
| | — |
| | 11,395 |
|
Other operating income | — |
| | 1,991 |
| | 50 |
| | — |
| | 2,041 |
|
Total revenues | — |
| | 417,752 |
| | 62,443 |
| | — |
| | 480,195 |
|
Costs and expenses: | | | | | | | | | |
Lease operating expenses | — |
| | 37,345 |
| | — |
| | — |
| | 37,345 |
|
Production and ad valorem taxes | — |
| | 23,065 |
| | 4,239 |
| | — |
| | 27,304 |
|
Gathering and transportation | — |
| | 4,020 |
| | 265 |
| | — |
| | 4,285 |
|
Midstream services | — |
| | 11,189 |
| | — |
| | — |
| | 11,189 |
|
Depreciation, depletion and amortization | — |
| | 100,216 |
| | 11,525 |
| | 3,475 |
| | 115,216 |
|
General and administrative expenses | 7,490 |
| | 6,739 |
| | 2,711 |
| | (615 | ) | | 16,325 |
|
Asset retirement obligation accretion | — |
| | 355 |
| | — |
| | — |
| | 355 |
|
Other operating expense | — |
| | 530 |
| | — |
| | — |
| | 530 |
|
Total costs and expenses | 7,490 |
| | 183,459 |
| | 18,740 |
| | 2,860 |
| | 212,549 |
|
Income (loss) from operations | (7,490 | ) | | 234,293 |
| | 43,703 |
| | (2,860 | ) | | 267,646 |
|
Other income (expense) | | | | | | | | | |
Interest expense, net | (8,932 | ) | | (2,671 | ) | | (2,098 | ) | | — |
| | (13,701 | ) |
Other income, net | 123 |
| | 2,836 |
| | 392 |
| | (615 | ) | | 2,736 |
|
Loss on derivative instruments, net | — |
| | (32,345 | ) | | — |
| | — |
| | (32,345 | ) |
Gain on revaluation of investment | — |
| | — |
| | 899 |
| | — |
| | 899 |
|
Total other expense, net | (8,809 | ) | | (32,180 | ) | | (807 | ) | | (615 | ) | | (42,411 | ) |
Income (loss) before income taxes | (16,299 | ) | | 202,113 |
| | 42,896 |
| | (3,475 | ) | | 225,235 |
|
Provision for income taxes | 47,081 |
| | — |
| | — |
| | — |
| | 47,081 |
|
Net income (loss) | (63,380 | ) | | 202,113 |
| | 42,896 |
| | (3,475 | ) | | 178,154 |
|
Net income attributable to non-controlling interest | — |
| | — |
| | — |
| | 15,342 |
| | 15,342 |
|
Net income (loss) attributable to Diamondback Energy, Inc. | $ | (63,380 | ) | | $ | 202,113 |
| | $ | 42,896 |
| | $ | (18,817 | ) | | $ | 162,812 |
|
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Statement of Operations |
Three Months Ended March 31, 2017 |
(In thousands) |
| | | | | Non– | | | | |
| | | Guarantor | | Guarantor | | | | |
| Parent | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated |
Revenues: | | | | | | | | | |
Oil sales | |