01—Abstract
Summary
Summary of the 10-K filed February 15, 2018. Cited figures are marked; the original filing is the authoritative source.
Diamondback Energy's FY2017 10-K shows a transformational year driven by the February 2017 Delaware Basin acquisition (~$2.5Ba total consideration, adding roughly 100,000 gross acres) and a sharp production ramp.
Total revenue rose 129% to $1.205 billionb from $527 million, and average daily production grew 84% to 79,224 BOE/d, with oil at roughly 74% of volumes. Consolidated Adjusted EBITDA reached $928 million (vs. $388 million in 2016), and operating cash flow nearly tripled to $889 million. Net income attributable to Diamondback was $482 million, or $4.94 diluted EPS, helped by a $127.5 million tax benefit from releasing the valuation allowance and a $67.9 million benefit from the Tax Act's rate cut.
The balance sheet expanded substantially. Total assets grew to $7.77 billion and stockholders' equity to $5.25 billionc, while long-term debt rose to $1.48 billion. Proved reserves increased 63% to 335 MMBOE (about 70% oil), with 62% proved developed.
Liquidity is solid: the revolver had $397 milliond drawn against a $1.8 billion borrowing base (elected commitment $1.0 billion), and in January 2018 the company issued $300 million of add-on 2025 notes and paid down $308.5 million of revolver debt. Management plans 2018 capex of $1.3–1.5 billion (up 60%) and 10–12 rigs, with 170–190 gross horizontal wells planned. The company also announced its first annual dividend ($0.50/share, paid quarterly starting Q1 2018).
Key investor considerations include the concentration of production in the Permian Basin and a small number of purchasers (Shell 31%, Koch 19%, Enterprise 11%), commodity price sensitivity (WTI ranged $42–$60 in 2017), a large undeveloped inventory (about 3,800 gross locations, of which only 168 are booked as proved), and the need to keep rig activity sufficient to hold leases expiring in 2018. Viper Energy Partners, consolidated with about a 64% ownership stake, adds complexity through non-controlling interests.
02—Key points
Key Highlights
- Revenue up 129% to $1.205B (from $527M) and Adjusted EBITDA up 139% to $928M, driven by the Delaware Basin acquisition and production growth
- Average daily production rose 84% to 79,224 BOE/d; oil comprised ~74% of volumes
- Net income attributable to Diamondback of $482M ($4.94 diluted EPS), including a $127.5M deferred tax valuation allowance release and a $67.9M benefit from the Tax Act
- Proved reserves grew 63% to 335.4 MMBOE (70% oil), with 62.2% proved developed; PUDs are scheduled for development within five years
- 2018 capital budget of $1.3–1.5B (up ~60%) with 10–12 rigs and 170–190 gross horizontal wells planned
- Long-term debt of $1.48B against a $1.8B borrowing base ($1.0B elected commitment); $308.5M of revolver debt repaid in January 2018 after the $300M add-on notes issuance
- Company initiating a $0.50/share annual dividend, payable quarterly beginning Q1 2018
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 15, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $1.21B$527.11M | +128.6% |
| SG&A Expenses | $48.00M$42.62M | +12.6% |
| Operating Expenses | $600.00M$595.72M | +0.7% |
| Operating Income | $605.00M-$68.62M | +981.7% |
| Interest Expense | $41.00M$41.07M | −0.2% |
| Net Income | $482.00M-$165.03M | +392.1% |
| EPS (Basic) | $4.95$-2.20 | +325.0% |
| EPS (Diluted) | $4.94$-2.20 | +324.5% |
| Shares Outstanding (Basic) | 97.46M75.08M | +29.8% |
| Shares Outstanding (Diluted) | 97.69M75.08M | +30.1% |
05—Questions
Frequently Asked Questions
What drove the large increase in revenue and production in 2017?
The February 2017 Delaware Basin acquisition (about $2.5B of consideration, adding roughly 100,000 gross acres in Pecos and Reeves counties) plus continued Midland Basin drilling. Production rose from 43,031 to 79,224 BOE/d, and oil sales increased from $471M to $1.04B.
Is the 2017 net income a sustainable earnings base?
Not entirely. Net income was boosted by non-recurring-type tax items: a $127.5M benefit from releasing the valuation allowance and a $67.9M benefit from the lower federal rate. Derivative losses of $77.5M reduced results. Investors should focus on Adjusted EBITDA ($928M) and operating cash flow ($889M) for run-rate economics.
How much leverage and liquidity does Diamondback have?
Long-term debt was $1.48B at year-end 2017 (including $1.0B of senior notes and $397M drawn on the revolver), with $603M available at year-end. After the January 2018 notes offering and revolver paydown, availability rose to $911.4M. Viper had $93.5M drawn on its own facility. Covenants require total debt to EBITDAX of no more than 3.0x for Diamondback and 4.0x for Viper.
What are the main risks to the investment thesis?
Commodity price volatility is the primary risk, since revenue is roughly 88% oil. Other risks include concentration in one basin and a handful of purchasers, the need to sustain drilling to hold leases expiring in 2018, the reliance on undeveloped locations (only 168 of ~3,800 are booked as proved), rising oilfield service costs, and the risk that a shift toward a lower rig count could curtail production growth.
What does the new dividend signal?
The company is initiating an annual dividend of $0.50 per share, paid quarterly from Q1 2018. Management frames it as a return of capital alongside a continued growth program. The dividend is discretionary and subject to board approval, and existing revolver covenants restrict dividend payments.
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