01—Abstract
Summary
Summary of the 10-K filed February 27, 2020. Cited figures are marked; the original filing is the authoritative source.
Diamondback Energy's FY2019 10-K shows a Permian-focused pure-play upstream business that grew sharply through the Energen merger and asset drop-downs, but finished the year with a weaker earnings profile.
Total revenues rose 82% to $3.96 billiona, and production averaged 282,972 BOE/d, up from 130,439 BOE/d in 2018. However, net income attributable to Diamondback fell to $240 million ($1.47 diluted EPS) from $846 million, largely because of an $790 million full-cost ceiling impairment in 2019, higher depletion ($1.45 billion DD&A), and $333 million of total other expense including a $108 million derivative loss and $172 million of net interest expense. The balance sheet expanded materially.
Total long-term debt reached $5.4 billionb, up from $4.5 billion, after the December 2019 issuance of $3.0 billion of senior notes that refinanced the $1.25 billion 4.750% notes. Liquidity remained solid, with $1.99 billion available under the $2.0 billion revolver and cash of $123 million. Operating cash flow was $2.7 billion versus $1.6 billion in 2018, against roughly $3.9 billion of investing outflows, which were funded largely by equity raised at Viper and Rattler and by debt.
Management guided to a 2020 capital budget of $2.8 to $3.0 billionc for 320 to 360 gross horizontal wells, and it expects full-year 2020 commodity sensitivity to remain high, given WTI prices that were already falling into early 2020. For shareholders, the company increased its quarterly dividend to $0.375 per share (announced February 14, 2020) and had repurchased about $598 million of stock under a $2 billion program, leaving $1.4 billion authorized.
Key structural features include a consolidated but partly owned structure: Diamondback owns about 58%d of Viper and 71% of Rattler, so a significant share of consolidated net income and cash flow is attributable to non-controlling interests. Investors should weigh the strong operating scale and cash generation against the 2019 impairment, the rising leverage, and concentration risk in the Permian Basin and a small set of oil purchasers.
02—Key points
Key Highlights
- Revenue grew 82% to $3.96 billion in 2019, driven by production growth to 282,972 BOE/d (up from 130,439 BOE/d) and partly offset by lower realized prices ($37.63/BOE vs. $44.73).
- Net income attributable to Diamondback fell to $240 million ($1.47 diluted EPS) from $846 million, due to an $790 million full-cost ceiling impairment and higher DD&A of $1.45 billion.
- Operating cash flow rose to $2.73 billion from $1.57 billion, while Adjusted EBITDA attributable to Diamondback reached $2.95 billion, up from $1.54 billion.
- Total long-term debt increased to $5.37 billion, with $1.99 billion of revolver availability, following $3.0 billion of December 2019 senior notes issued to refinance the 4.750% notes.
- The 2020 capital budget is $2.8 to $3.0 billion for 320 to 360 gross horizontal wells, and the company has committed to reducing capital spending if commodity prices stay weak.
- Shareholder returns include a quarterly dividend increased to $0.375 per share and $598 million of 2019 buybacks, with $1.4 billion remaining under the $2 billion program.
- Customer and asset concentration is material: Shell, Plains, and Vitol each accounted for more than 10% of revenue, and all proved reserves are in the Permian Basin.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 27, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $3.96B$2.18B | +82.1% |
| SG&A Expenses | $104.00M$65.00M | +60.0% |
| Operating Expenses | $3.27B$1.17B | +180.6% |
| Operating Income | $695.00M$1.01B | −31.3% |
| Interest Expense | $172.00M$87.00M | +97.7% |
| Net Income | $240.00M$846.00M | −71.6% |
| EPS (Basic) | $1.47$8.09 | −81.8% |
| EPS (Diluted) | $1.47$8.06 | −81.8% |
| Shares Outstanding (Basic) | 163.49M104.62M | +56.3% |
| Shares Outstanding (Diluted) | 163.84M104.93M | +56.1% |
05—Questions
Frequently Asked Questions
Why did net income fall sharply in 2019 even though revenue grew substantially?
Diamondback recorded a non-cash ceiling test impairment of $790 million on its oil and gas properties after oil prices declined during 2019. Depreciation, depletion and amortization also rose to $1.45 billion from $623 million, reflecting the Energen merger and higher production. Other expense of $333 million, including a $108 million derivative loss, a $172 million interest expense and a $56 million debt extinguishment loss, further reduced earnings.
How much debt does Diamondback carry and how is it structured?
Long-term debt totaled $5.37 billion at December 31, 2019. This included senior notes of roughly $4.3 billion at the parent level, $500 million of Viper senior notes, $97 million of Viper revolver borrowings and $424 million of Rattler revolver borrowings. Viper and Rattler debt is non-recourse to the parent, so the parent's exposure is primarily its senior notes and its $13 million of drawn revolver balance.
What is the company's 2020 outlook and capital plan?
The 2020 capital budget is $2.8 to $3.0 billion, including $2.45 to $2.6 billion for drilling and completions, $200 to $225 million for midstream, and $150 to $175 million for infrastructure. The plan calls for 320 to 360 gross operated horizontal wells, and management stated it will reduce spending if commodity prices weaken further. The budget excludes any leasehold or mineral acquisitions.
Are the dividend and buyback programs sustainable?
The quarterly dividend was raised to $0.375 per share, with the fourth-quarter 2019 payment declared February 14, 2020. Buybacks are funded primarily from free cash flow and asset sales, and the $2 billion program runs through December 31, 2020, with $1.4 billion remaining. Operating cash flow of $2.7 billion covered 2019 capital spending of roughly $2.7 billion in drilling plus distributions, but the filing notes that dividends and repurchases are discretionary and depend on prices and financial condition.
How much of the consolidated earnings and cash flow belongs to outside shareholders?
Diamondback owns about 58% of Viper Energy Partners and about 71% of Rattler Midstream. In 2019, net income attributable to non-controlling interests was $75 million, and non-controlling interest on the balance sheet was $1.66 billion. Distributions to non-controlling interests totaled $122 million. Investors should therefore distinguish consolidated results from the portion attributable to Diamondback shareholders.
06—Continue