01—Abstract
Summary
Summary of the 10-K filed February 19, 2014. Cited figures are marked; the original filing is the authoritative source.
Diamondback Energy (FANG) closed 2013 as a fast-growing, oil-weighted independent producer focused entirely on the Permian Basin's Wolfberry play in West Texas.
Revenue rose 177% to $208.0 milliona, driven by average daily production of 7,321 BOE/d (up 149%), with the business roughly 76% oil. Net income swung to $54.6 million from a $36.5 million loss in 2012, though 2013 results included a $31.8 million income tax provision and the 2012 figure was distorted by a one-time $54.1 million deferred tax charge tied to the company's conversion to a C-corporation. Year-end proved reserves reached 63.6 MMBOE (about 67% oil), up roughly 58% from 40.2 MMBOE a year earlier, and the company holds 65,938 net acres, about 99% of which it operates.
The balance sheet expanded substantially. Total assets rose to $1.52 billion and stockholders' equity to $845.5 millionb, funded by two equity offerings in 2013 and a $450 million 7.625% senior notes issuance due 2021. Long-term debt stood at $460 million, with only $10 million drawn on a $225 million borrowing base, and the company's leverage and liquidity position remain comparatively conservative.
Management plans a 2014 capital budget of $425c–$475 million (a 48% increase) and expects a 2014 borrowing base of $375–$400 million after the pending Martin County acquisition. Key risks for investors include heavy commodity price exposure (hedging covers only part of output, and the company uses full cost accounting, which creates write-down risk if prices fall), concentration in a single basin and a few producing horizons, reliance on two purchasers for 74% of revenue, a large share of undeveloped reserves (about 53% PUD), and continued influence from Wexford (about 22.6% ownership), which is also tied to several related-party service arrangements. The February 2014 agreements to acquire Martin County leasehold for approximately $174 million, with an option to pursue further interests for up to roughly $397 million, would materially expand the acreage base if completed.
02—Key points
Key Highlights
- Revenue up 177% to $208.0M in 2013, with average production rising 149% to 7,321 BOE/d (about 76% oil)
- Net income of $54.6M ($1.29 diluted EPS) versus a net loss of $36.5M in 2012, which included a one-time $54.1M deferred tax charge from the company's conversion to a C-corporation
- Proved reserves grew to 63.6 MMBOE (about 67% oil), up about 58% year over year, with 47% classified as proved developed
- Pending $174.0M Martin County acquisition adds 6,450 gross acres and roughly 1,300 BOE/d of net production, with a further ~$397M offer for the remaining working interests
- Acquired 15,000 gross mineral acres in Midland County for $440M in September 2013, funded by $450M of 7.625% senior notes due 2021
- Total assets of $1.52B and stockholders' equity of $845.5M; long-term debt $460M with only $10M drawn on a $225M borrowing base
- 2014 capital budget of $425–$475M (up 48%), targeting 65–75 gross horizontal wells, with the company operating about 99% of its acreage
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 19, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| SG&A Expenses | $9.87M$9.18M | +7.5% |
| Operating Expenses | $112.81M$57.66M | +95.7% |
| Operating Income | $95.19M$17.31M | +450.0% |
| Interest Expense | $8.06M$3.61M | +123.2% |
| Net Income | $54.59M-$36.52M | +249.5% |
| EPS (Basic) | $1.30— | — |
| EPS (Diluted) | $1.29— | — |
| Shares Outstanding (Basic) | 42.02M— | — |
| Shares Outstanding (Diluted) | 42.26M— | — |
05—Questions
Frequently Asked Questions
How much of Diamondback's production and reserves are oil, and why does that matter?
Production in 2013 was about 76% oil, 13% natural gas liquids and 11% natural gas, and year-end proved reserves were about 67% oil. Oil accounted for roughly 91% of 2013 revenue. Because oil has commanded a substantially higher price than natural gas, this mix supports stronger per-BOE margins, but it also means revenue is most sensitive to crude oil prices.
What is the risk from the company's hedging program and full cost accounting?
Diamondback hedges with fixed-price oil swaps (targeting 40–70% of production) and does not designate them as accounting hedges, so mark-to-market changes flow through earnings. Under full cost accounting, a sustained drop in oil prices could trigger ceiling test write-downs. No impairment was recorded for 2011–2013, but the company acknowledges future write-downs are possible.
How concentrated is the business, and what are the main risks?
All producing properties are in the Permian Basin, and all proved reserves are attributed to the Wolfberry play. Two purchasers (Plains Marketing and Shell Trading, each 37% of 2013 revenue) account for most sales. About 53% of proved reserves are undeveloped, and leases must be drilled within three to five years to be held, creating a need for sustained capital spending and rig availability.
How will the pending Martin County acquisition and 2014 capex affect financing?
The company intends to fund the Martin County acquisition through a mix of revolver borrowings and new debt and equity. Management expects the borrowing base to rise to $375–$400M after the reserve report and acquisition close, versus $225M today. Management says 2014 operating cash flow plus revolver availability should cover planned spending through year-end 2014, but additional capital may be needed if spending or acquisitions exceed plans.
What is Wexford's role, and what governance concerns apply?
Wexford Capital, the equity sponsor, owned about 22.6% of common stock at year-end 2013, with Gulfport holding about 7.2%. Together they can exert significant influence over stockholder votes and board composition. The company also transacts with Wexford-affiliated entities for drilling services, sand, and administrative services, and the certificate of incorporation allows officers and directors to pursue corporate opportunities that may benefit affiliates.
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