01—Abstract
Summary
Summary of the 10-K filed March 1, 2013. Cited figures are marked; the original filing is the authoritative source.
Diamondback Energy (NASDAQ: FANG) filed its first annual report as a newly public company, covering fiscal 2012, following its October 2012 IPO of 14.4 million shares at $17.50a that raised about $234.1 million net.
The company is an independent oil and gas producer focused entirely on the Wolfberry play in the Permian Basin of West Texas, holding 51,603 net acres at year-end 2012 and operating about 99%b of that acreage. Production averaged 2,946 BOE/d in 2012, up 78% from 2011, and is roughly 70% oil. Estimated net proved reserves were 40.2 MMBOE at year-end, about 65% oil, with 30.7% proved developed.
Revenue rose to $75.0 millionc from $49.4 million, but the company posted a net loss of $36.5 million, driven by a one-time $54.1 million deferred tax charge tied to the conversion from a pass-through LLC structure at the merger. Operating performance improved meaningfully: income from operations was $17.3 million, Adjusted EBITDA reached $48.2 million (up from $31.9 million), and operating cash flow rose to $49.7 million. Lease operating expense per BOE fell to $15.57 from $17.51.
Liquidity looks sound, with $26.4 milliond of cash, no drawn balance on a $250 million facility with a $135 million borrowing base, and a debt-free position after the IPO proceeds repaid all revolver and subordinated borrowings. The 2013 capital budget of $270 to $300 million, with 37 vertical and 25 horizontal wells planned, will be the key driver of growth. Investors should weigh the company's limited operating history, heavy concentration in a single basin and a few purchasers, reliance on Wexford as its controlling sponsor, and exposure to future hedging and regulatory changes.
The filing also highlights a large inventory of potential drilling locations (881 vertical on 40-acre spacing, 1,118 on 20-acre downspacing, and 731 horizontal) and early horizontal results from the Wolfcamp B interval, including the Janey 16H and Kemmer 4209H wells. Management's view is that horizontal drilling could materially raise recovery per section, though these results are still limited and the company has said longer laterals are needed to prove economics.
02—Key points
Key Highlights
- IPO completed October 2012: 14.375 million shares at $17.50, netting about $234.1 million; common stock trades on NASDAQ under FANG.
- Production rose 78% to 2,946 BOE/d in 2012 (about 70% oil), and revenue grew 52% to $75.0 million.
- Year-end 2012 estimated net proved reserves of 40.2 MMBOE, about 65% oil, with 30.7% classified as proved developed.
- Reported net loss of $36.5 million, mainly from a one-time $54.1 million deferred tax charge at the merger; pre-tax income was $18.4 million.
- Adjusted EBITDA increased to $48.2 million from $31.9 million, and operating cash flow rose to $49.7 million.
- Balance sheet is largely debt-free: no revolver borrowings at year-end, $135 million borrowing base available, and $26.4 million in cash.
- 2013 capital budget of $270 to $300 million targets horizontal Wolfcamp B development, with 25 horizontal and 37 vertical wells planned.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed March 1, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| SG&A Expenses | $9.18M$495K | +1754.1% |
| Operating Expenses | $57.66M$34.22M | +68.5% |
| Operating Income | $17.31M$15.15M | +14.3% |
| Interest Expense | $3.61M$2.53M | +42.8% |
| Net Income | -$36.52M-$386K | −9361.4% |
05—Questions
Frequently Asked Questions
Why did Diamondback report a net loss in 2012 despite positive operating income?
The net loss of $36.5 million was driven by a $54.1 million one-time deferred tax charge recorded at the October 2012 merger, when the predecessor LLCs became taxable C-corp entities. Before that charge, the company had pre-tax income of $18.4 million, so the loss reflects a non-recurring accounting item rather than weak operations.
How concentrated is the company's business and customer base?
All proved reserves and production are in the Permian Basin's Wolfberry play in West Texas, so the company is exposed to single-basin risk. Three purchasers accounted for 79% of 2012 revenue (Plains Marketing 53%, Occidental 16%, Andrews Oil Buyers 10%), and the company does not require customer collateral.
What growth is management planning for 2013?
The company plans a $270 to $300 million capital budget, including about $190 million for operated horizontal wells, $66 million for vertical wells and $17 million for infrastructure. It expects to drill roughly 37 gross vertical and 25 gross horizontal wells and has no acquisition budget, with growth driven by its inventory of about 2,700 identified drilling locations.
What is the role of Wexford, and what risks does its ownership create for investors?
Wexford Capital, the equity sponsor, owned about 44.4% of common stock after the IPO, and Gulfport owned about 21.4%. Together they can control stockholder votes, and Wexford is not obligated to keep its stake. Related-party transactions with Wexford affiliates, including drilling, leasing and administrative services, may not always be on terms that favor public shareholders.
What are the main risks tied to the company's proved undeveloped reserves and drilling plans?
About 69% of proved reserves are undeveloped, and PUD bookings must be developed within five years under SEC rules, so delays could force write-downs. Lease expirations also require sustained drilling: the company must run about four rigs to hold certain 2014 and 2015 acreage. Full-cost accounting means lower oil prices could trigger ceiling-test write-downs.
06—Continue