01—Abstract
Summary
Summary of the 10-K filed February 25, 2019. Cited figures are marked; the original filing is the authoritative source.
Diamondback Energy's FY2018 10-K shows a transformational year driven by the all-stock merger with Energen (closed November 29, 2018) and the Ajax, ExL and Drop-down transactions.
Production averaged 130,439 BOE/d in 2018, up 65% from 79,224 BOE/d in 2017, and total revenues rose 81% to $2.18 billiona. Net income attributable to Diamondback was $845.7 million, or $8.06 diluted EPS, compared with $482.3 million in 2017. Consolidated Adjusted EBITDA (a non-GAAP measure) reached $1.54 billion, up from $928 million.
The balance sheet expanded sharply. Total assets rose to $21.6 billionb from $7.8 billion, and long-term debt increased to $4.46 billion from $1.48 billion. Management guides to a 2019 drilling and infrastructure capex budget of $2.7 to $3.0 billion, 290 to 320 gross horizontal wells, and 18 to 22 rigs, and says it expects production growth of more than 27% year over year within cash flow.
The company also initiated a $0.125c quarterly dividend in 2018 and plans a 50% increase starting in Q1 2019. Operating cash flow was $1.56 billion, and cash and equivalents ended the year at $215 million.
Key risks for investors include commodity price exposure (about 72% of 2018 production was oil, and realized oil prices were 84% of NYMEX), a large leverage increase, integration of Energen (Energen was excluded from the internal control assessment), concentration of production in the Permian Basin, and a sharp oil price decline in late 2018 (WTI fell to $45.15d at year-end, versus a 2018 high of $77.41). The company is hedged for a portion of 2019 production, and its revolving credit facility had a $2.65 billion borrowing base with $1.5 billion drawn at year-end.
02—Key points
Key Highlights
- Revenue grew 81% to $2.18 billion in 2018 from $1.21 billion, driven by a 65% increase in production to 130,439 BOE/d and higher realized prices ($44.73/BOE combined, versus $41.02 in 2017).
- Net income attributable to Diamondback rose to $845.7 million ($8.06 diluted EPS) from $482.3 million ($4.94 in 2017). Consolidated Adjusted EBITDA reached $1.54 billion, up 66%.
- The Energen merger (about $7.1 billion in stock, 62.8 million shares issued) added over 273,000 net Tier One Permian acres and about 7,200 net horizontal locations. Total proved reserves rose to 992 MMBOE from 335 MMBOE, 65% of them proved developed.
- Total assets reached $21.6 billion and long-term debt reached $4.46 billion (including $2.05 billion of senior notes, $1.49 billion drawn on the revolver, $411 million at Viper, and $530 million of assumed Energen notes).
- 2019 capex guidance of $2.7 to $3.0 billion (an 85% increase over 2018 drilling and infrastructure spend) targets 290 to 320 gross operated wells and 18 to 22 rigs, with an expected production increase of over 27% year over year.
- Shareholder returns: the annual dividend was set at $0.50 per share (paid quarterly from Q1 2018), with a planned 50% increase starting in Q1 2019. Viper Energy Partners (about 59% owned) is consolidated, and Rattler Midstream is building out gathering and water assets.
- Risk flags: oil prices fell sharply late in 2018 (WTI $45.15 on December 28, 2018, versus a $77.41 high). The company has $0.5 billion of unused borrowing capacity, and its covenants limit leverage (net debt to EBITDAX of 4.0x or less). Energen was excluded from the internal control assessment in the first year after the merger.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 25, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $2.18B$1.21B | +80.6% |
| SG&A Expenses | $65.00M$48.00M | +35.4% |
| Operating Expenses | $1.17B$600.00M | +94.2% |
| Operating Income | $1.01B$605.00M | +67.1% |
| Interest Expense | $87.00M$41.00M | +112.2% |
| Net Income | $846.00M$482.00M | +75.5% |
| EPS (Basic) | $8.09$4.95 | +63.4% |
| EPS (Diluted) | $8.06$4.94 | +63.2% |
| Shares Outstanding (Basic) | 104.62M97.46M | +7.4% |
| Shares Outstanding (Diluted) | 104.93M97.69M | +7.4% |
05—Questions
Frequently Asked Questions
How did the Energen merger change Diamondback's scale and financial profile?
The all-stock Energen merger closed November 29, 2018, and was accounted for as a business combination valued at about $7.1 billion. It added roughly 394,000 net acres across the Midland and Delaware Basins and increased Diamondback's estimated net Permian horizontal locations by more than 120%. Because it closed late in the year, 2018 results include only about one month of Energen operations ($101.7 million of revenue), so 2019 results should show a much larger step-up. The purchase price allocation is preliminary.
What is the outlook for production and capital spending in 2019?
Management expects to complete 290 to 320 gross operated horizontal wells in 2019 with total drilling, completion and infrastructure capex of $2.7 to $3.0 billion. This includes $2.3 to $2.55 billion for drilling and completions and $400 to $450 million for midstream. The company operates 21 rigs and plans to run 18 to 22 in 2019. It projects production growth of over 27% year over year within cash flow, though the budget excludes any leasehold or mineral acquisitions. Management also states that cash flow from operations should fund operations through year-end 2019 at current price expectations.
How exposed is Diamondback to commodity prices, and how is it hedging?
Oil made up about 72% of 2018 production and 88% of revenue, so results are most sensitive to WTI and Brent prices. Realized oil prices were $54.66 per barrel in 2018, but the differential to NYMEX widened to -$10.57 (84% of NYMEX), largely reflecting Midland basis. At year-end the company held a net derivative asset of $215.3 million, with 2019 crude swaps covering about 10.6 million barrels at WTI Cushing ($61.07), along with basis swaps and three-way collars. Hedges are not designated for hedge accounting, so mark-to-market changes flow through earnings. A 10% decline in forward curves would raise the net asset position by about $57.6 million.
How leveraged is the company after the acquisitions, and what are the key debt terms?
Long-term debt rose to $4.46 billion at December 31, 2018, from $1.48 billion. The main components are $2.05 billion of 4.750% 2024 and 5.375% 2025 senior notes, $530 million of assumed Energen notes, $1.49 billion drawn on Diamondback's revolver, and $411 million drawn on Viper's revolver. The borrowing base is $2.65 billion, with a $2.0 billion elected commitment. The revolver's covenants require net debt to EBITDAX of no more than 4.0x and current assets to liabilities of at least 1.0x, and the company was in compliance at year-end. Each 1% change in the revolver rate moves interest expense by about $14.9 million. Net interest expense rose to $87.3 million from $40.6 million.
06—Continue