01—Abstract
Summary
Summary of the 10-K filed February 15, 2017. Cited figures are marked; the original filing is the authoritative source.
Diamondback Energy's FY2016 10-K shows a company transitioning from the 2015-2016 commodity downturn into a growth phase, financed by record equity raises and a large acquisition.
Revenue rose 18% to $527.1 milliona on 30% higher production (43,031 BOE/d), but the company still posted a net loss attributable to common stockholders of $165.0 million, driven by a $245.5 million full-cost ceiling impairment and a $33.1 million loss on debt extinguishment. Adjusted EBITDA was $387.5 million, versus $449.2 million in 2015. The balance sheet changed materially.
December 2016 and other 2016 equity offerings raised roughly $2.1 billionb, and cash reached $1.67 billion at year-end, largely earmarked for the pending $1.62 billion cash Brigham Resources acquisition expected to close in February 2017. Long-term debt rose to $1.1 billion after issuing $500 million each of 4.750% 2024 and 5.375% 2025 senior notes.
Proved reserves grew 31% to 205.5 MMBOE, about 68% oil, and the company guided to a 2017 drilling and infrastructure budget of $800 million to $1.0 billionc (a 132% increase) with 6 to 10 rigs. Investors should weigh the upside from a large, oil-weighted inventory of 2,722 gross identified locations and a conservative leverage profile against risks from concentration in the Permian Basin, 98% operatorship (a positive control factor), reliance on a few purchasers (Shell 45% of revenue), a full-cost ceiling exposed to price declines, and the integration risk of the Brigham deal, whose reserve and production data were not yet verified by the company.
02—Key points
Key Highlights
- Revenue increased 18% to $527.1 million, driven by a 30% rise in average daily production to 43,031 BOE/d, partly offset by lower realized prices ($33.47 per BOE versus $36.98 in 2015).
- Net loss attributable to Diamondback of $165.0 million (-$2.20 per share), improved from a $550.6 million loss in 2015, but still reflecting a $245.5 million impairment and a $33.1 million loss on debt extinguishment.
- Consolidated Adjusted EBITDA of $387.5 million, down from $449.2 million in 2015, with lease operating expense cut to $5.23 per BOE from $6.84.
- Proved reserves rose to 205.5 MMBOE (about 68% oil) at year-end 2016, up from 156.9 MMBOE, with 58% proved developed.
- Raised roughly $2.1 billion in 2016 equity offerings and $1.0 billion in senior notes, leaving $1.67 billion of cash at year-end to fund the $1.62 billion cash portion of the pending Brigham acquisition (about 9,500 BOE/d and 93,761 gross acres).
- 2017 capital budget of $800 million to $1.0 billion for 130 to 165 gross horizontal wells, a 132% increase over 2016, with six rigs now and the option to scale between six and ten.
- Concentrated customer base: Shell Trading accounted for 45% of 2016 revenue, Koch 15%, and Enterprise 13%, and all proved reserves sit in the Permian Basin.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 15, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $527.11M— | — |
| SG&A Expenses | $42.62M$31.97M | +33.3% |
| Operating Expenses | $595.72M$1.19B | −49.8% |
| Operating Income | -$68.62M-$740.27M | +90.7% |
| Interest Expense | $41.07M$41.51M | −1.1% |
| Net Income | -$165.03M-$550.63M | +70.0% |
| EPS (Basic) | $-2.20$-8.74 | +74.8% |
| EPS (Diluted) | $-2.20$-8.74 | +74.8% |
| Shares Outstanding (Basic) | 75.08M63.02M | +19.1% |
| Shares Outstanding (Diluted) | 75.08M63.02M | +19.1% |
05—Questions
Frequently Asked Questions
Why did Diamondback record a net loss in 2016 despite revenue growth?
The loss was driven mainly by a $245.5 million non-cash full-cost ceiling impairment, as low oil prices reduced the discounted value of proved reserves, plus a $33.1 million loss on early extinguishment of the 2021 senior notes and $25.3 million in net derivative losses. Depreciation, depletion and amortization was $178.0 million. Impairments are non-cash, but they signal that asset values are sensitive to commodity prices.
How will the pending Brigham acquisition change Diamondback's profile?
The Brigham assets add over 93,761 gross (76,319 net) acres in Pecos and Reeves counties, about 9,500 BOE/d of net production (77% oil, per seller data not verified by Diamondback), and an estimated 1,213 net identified horizontal locations. Total leasehold would rise to roughly 182,000 net acres. The deal is funded with $1.62 billion of cash plus 7.69 million shares, and the company expects closing by February 2017. Risks include unverified seller data, integration, and potential fraudulent-conveyance challenges.
How well is the company positioned financially and in terms of debt?
Year-end cash was $1.67 billion and the revolver had $500 million of available commitment, with no borrowings outstanding at the parent. Total long-term debt was $1.1 billion, including $1.0 billion of senior notes and $120.5 million at the Viper partnership (repaid in January 2017 from a common unit offering). The revolver's total debt to EBITDAX covenant is capped at 4.0x, and the company said it expects cash flow plus revolver borrowings to fund operations through 2017.
What drove production growth and what is the 2017 outlook?
Production growth came from horizontal drilling in the Midland Basin and acquisitions in the Southern Delaware Basin, including 27,182 gross acres bought during 2016. For 2017, the company plans 130 to 165 gross horizontal wells, with rigs flexible between six and ten depending on commodity prices. It has the option to release up to three rigs if prices weaken, and it had hedged part of 2017 and 2018 oil production.
What are the key risks an investor should monitor?
Key risks include oil price volatility (WTI ranged from $26.19 to $54.01 in 2016), full-cost ceiling impairments if prices fall, concentration in the Permian Basin and a few purchasers, and the need for capital to convert 86 MMBOE of proved undeveloped reserves within five years. Lease expirations (15,439 net acres expiring in 2017) could force drilling. Service cost inflation and a 2017 budget that excludes new leasehold acquisitions are also relevant, as is the company's history of recent net losses.
06—Continue