1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Organization and Description of the Business
Diamondback Energy, Inc., together with its subsidiaries (collectively referred to as “Diamondback” or the “Company” unless the context otherwise requires), is an independent oil and gas company currently focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas. Diamondback was incorporated in Delaware on December 30, 2011.
The wholly-owned subsidiaries of Diamondback, as of June 30, 2020, include Diamondback E&P LLC, a Delaware limited liability company, Diamondback O&G LLC, a Delaware limited liability company, Viper Energy Partners GP LLC, a Delaware limited liability company, Rattler Midstream GP LLC, a Delaware limited liability company, and Energen Corporation, an Alabama corporation (“Energen”). The consolidated subsidiaries include these wholly-owned subsidiaries as well as Viper Energy Partners LP, a Delaware limited partnership, Viper’s subsidiary Viper Energy Partners LLC, a Delaware limited liability company, Rattler Midstream LP, a Delaware limited partnership, Rattler Midstream Operating LLC, a Delaware limited liability company, Rattler LLC’s wholly-owned subsidiaries Tall City Towers LLC, a Delaware limited liability company (“Tall City”), Rattler Ajax Processing LLC, a Delaware limited liability company, Rattler OMOG LLC, a Delaware limited liability company, and Energen’s wholly-owned subsidiaries Energen Resources Corporation, an Alabama corporation, and EGN Services, Inc., an Alabama corporation.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries after all significant intercompany balances and transactions have been eliminated upon consolidation.
Viper and Rattler are consolidated in the financial statements of the Company. As of June 30, 2020, the Company owned approximately 58% of Viper’s total units outstanding. The Company’s wholly-owned subsidiary, Viper Energy Partners GP LLC, is the general partner of Viper. As of June 30, 2020, the Company owned approximately 71% of Rattler’s total units outstanding. The Company’s wholly-owned subsidiary, Rattler Midstream GP LLC, is the general partner of Rattler. The results of operations attributable to the non-controlling interest in Viper and Rattler are presented within equity and net income and are shown separate from the Company’s equity and net income attributable to the Company.
These consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC. They reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to SEC rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10–Q should be read in conjunction with the Company’s most recent Annual Report on Form 10–K for the fiscal year ended December 31, 2019, which contains a summary of the Company’s significant accounting policies and other disclosures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Certain amounts included in or affecting the Company’s consolidated financial statements and related disclosures must be estimated by management, requiring certain assumptions to be made with respect to values or conditions that cannot be known with certainty at the time the consolidated financial statements are prepared. These estimates and assumptions affect the amounts the Company reports for assets and liabilities and the Company’s disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.
Making accurate estimates and assumptions is particularly difficult as the oil and natural gas industry experiences challenges resulting from negative pricing pressure from the effects of COVID-19 and actions by OPEC members and other exporting nations on the supply and demand in global oil and gas markets. Companies in the oil and gas industry have changed near term business plans in response to changing market conditions. The aforementioned circumstances generally increase the
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
estimation uncertainty in the Company’s accounting estimates, particularly the accounting estimates involving financial forecasts.
The Company evaluates these estimates on an ongoing basis, using historical experience, consultation with experts and other methods the Company considers reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from the Company’s estimates. Any effects on the Company’s business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Significant items subject to such estimates and assumptions include estimates of proved oil and natural gas reserves and related present value estimates of future net cash flows therefrom, the carrying value of oil and natural gas properties, asset retirement obligations, the fair value determination of acquired assets and liabilities assumed, equity-based compensation, fair value estimates of derivative instruments and estimates of income taxes.
Accounts Receivable
Accounts receivable consist of receivables from joint interest owners on properties the Company operates and from sales of oil and natural gas production delivered to purchasers. The purchasers remit payment for production directly to the Company. Most payments for production are received within three months after the production date.
The Company adopted Accounting Standards Update (“ASU”) 2016-13 and the subsequent applicable modifications to the rule on January 1, 2020. Accounts receivable are stated at amounts due from joint interest owners or purchasers, net of an allowance for expected losses as estimated by the Company when collection is deemed doubtful. For receivables from joint interest owners, the Company typically has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings. Accounts receivable from joint interest owners or purchasers outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for each type of receivable by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the debtor’s current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for expected losses. The adoption of ASU 2016-13 did not result in a material change to the Company’s allowance. At June 30, 2020 and December 31, 2019, the Company recorded an immaterial allowance for expected losses.
Non-controlling Interest
Non-controlling interest in the accompanying consolidated financial statements represents minority interest ownership in Viper and Rattler. When the Company’s relative ownership interests in Viper and Rattler change, adjustments to non-controlling interest and additional paid-in-capital, tax effected, will occur. Because these changes in the ownership interests in Viper and Rattler do not result in a change of control, the transactions were accounted for as equity transactions under ASC Topic 810, Consolidation, which requires that any differences between the carrying value of the Company’s basis in Viper and Rattler and the fair value of the consideration received are recognized directly in equity and attributed to the controlling interest.
In the second quarter of 2020, the Company recorded an adjustment to non-controlling interest for Rattler of $(329) million and to additional paid-in-capital of $329 million to reflect the ownership structure that was effective at June 30, 2020. The adjustment had no impact on earnings. See Note 11—Capital Stock and Earnings Per Share for a presentation of the change in ownership.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Recent Accounting Pronouncements
The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or clarifications of ASUs previously disclosed. The following table provides a brief description of recent accounting pronouncements and the Company’s analysis of the effects on its financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
Standard
|
Description
|
Date of Adoption
|
Effect on Financial Statements or Other Significant Matters
|
Recently Adopted Pronouncements
|
|
|
|
ASU 2016-13, “Financial Instruments - Credit Losses”
|
This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.
|
Q1 2020
|
The Company adopted this update effective January 1, 2020. The adoption of this update did not have a material impact on its financial position, results of operations or liquidity since it does not have a history of credit losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pronouncements Not Yet Adopted
|
|
|
|
ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes”
|
This update is intended to simplify the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance.
|
Q1 2021
|
This update is effective for public business entities beginning after December 15, 2020 with early adoption permitted. The Company does not believe that the adoption of this update will have an impact on its financial position, results of operations or liquidity.
|
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from Contracts with Customers
Sales of oil, natural gas and natural gas liquids are recognized at the point control of the product is transferred to the customer. Virtually all of the pricing provisions in the Company’s contracts are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, the quality of the oil or natural gas and the prevailing supply and demand conditions. As a result, the price of the oil, natural gas and natural gas liquids fluctuates to remain competitive with other available oil, natural gas and natural gas liquids supplies. The following tables present the Company’s revenue from contracts with customers disaggregated by product type and basin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
Midland Basin
|
Delaware Basin
|
Other
|
Total
|
|
Midland Basin
|
Delaware Basin
|
Other
|
Total
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Oil sales
|
$
|
211
|
|
$
|
141
|
|
$
|
—
|
|
$
|
352
|
|
|
$
|
567
|
|
$
|
350
|
|
$
|
30
|
|
$
|
947
|
|
Natural gas sales
|
11
|
|
9
|
|
1
|
|
21
|
|
|
(5)
|
|
(4)
|
|
—
|
|
(9)
|
|
Natural gas liquid sales
|
23
|
|
16
|
|
—
|
|
39
|
|
|
36
|
|
25
|
|
1
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
245
|
|
$
|
166
|
|
$
|
1
|
|
$
|
412
|
|
|
$
|
598
|
|
$
|
371
|
|
$
|
31
|
|
$
|
1,000
|
|
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
Midland Basin
|
Delaware Basin
|
Other
|
Total
|
|
Midland Basin
|
Delaware Basin
|
Other
|
Total
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Oil sales
|
$
|
682
|
|
$
|
493
|
|
$
|
4
|
|
$
|
1,179
|
|
|
$
|
1,032
|
|
$
|
601
|
|
$
|
57
|
|
$
|
1,690
|
|
Natural gas sales
|
13
|
|
12
|
|
—
|
|
25
|
|
|
10
|
|
10
|
|
—
|
|
20
|
|
Natural gas liquid sales
|
52
|
|
39
|
|
—
|
|
91
|
|
|
77
|
|
53
|
|
2
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
747
|
|
$
|
544
|
|
$
|
4
|
|
$
|
1,295
|
|
|
$
|
1,119
|
|
$
|
664
|
|
$
|
59
|
|
$
|
1,842
|
|
4. DIVESTITURE
Divestiture of Certain Conventional and Non-Core Assets Acquired from Energen
On May 23, 2019, the Company completed its divestiture of 6,589 net acres of certain conventional and non-core Permian assets, which were acquired by the Company in its merger with Energen, for an aggregate sale price of $37 million. This divestiture did not result in a gain or loss because it did not have a significant effect on the Company’s reserve base or depreciation, depletion and amortization rate.
5. RATTLER MIDSTREAM LP
Rattler is a publicly traded Delaware limited partnership, the common units of which are listed on the Nasdaq Global Select Market under the symbol “RTLR.” Rattler was formed by Diamondback in July 2018 to own, operate, develop and acquire midstream infrastructure assets in the Midland and Delaware Basins of the Permian Basin. Rattler Midstream GP LLC (“Rattler’s General Partner”), a wholly-owned subsidiary of Diamondback, serves as the general partner of Rattler. As of June 30, 2020, Diamondback owned approximately 71% of Rattler’s total units outstanding.
Prior to the completion of Rattler’s initial public offering (the “Rattler Offering”) in May 2019, Diamondback owned all of the general and limited partner interests in Rattler. The Rattler Offering consisted of 43,700,000 common units representing approximately 29% of the limited partner interests in Rattler at a price to the public of $17.50 per common unit, which included 5,700,000 common units issued pursuant to an option to purchase additional common units granted to the underwriters on the same terms which closed on May 30, 2019. Rattler received net proceeds of approximately $720 million from the sale of these common units, after deducting offering expenses and underwriting discounts and commissions.
In connection with the completion of the Rattler Offering, Rattler (i) issued 107,815,152 Class B Units representing an aggregate 71% voting limited partner interest in Rattler in exchange for a $1 million cash contribution from Diamondback, (ii) issued a general partner interest in Rattler to Rattler’s General Partner, in exchange for a $1 million cash contribution from Rattler’s General Partner, and (iii) caused Rattler LLC to make a distribution of approximately $727 million to Diamondback. Diamondback, as the holder of the Class B units, and Rattler’s General Partner, as the holder of the general partner interest, are entitled to receive cash preferred distributions equal to 8% per annum on the outstanding amount of their respective $1 million capital contributions, payable quarterly.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
6. REAL ESTATE ASSETS
The following schedule presents the cost and related accumulated depreciation of the Company’s real estate assets. The Company’s intangible lease assets and related accumulated amortization were immaterial as of June 30, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Lives
|
|
June 30, 2020
|
|
December 31, 2019
|
|
(Years)
|
|
(in millions)
|
|
|
Buildings
|
20-30
|
|
$
|
102
|
|
|
$
|
102
|
|
Tenant improvements
|
15
|
|
5
|
|
|
5
|
|
Land
|
N/A
|
|
2
|
|
|
2
|
|
Land improvements
|
15
|
|
1
|
|
|
1
|
|
Total real estate assets
|
|
|
110
|
|
|
110
|
|
Less: accumulated depreciation
|
|
|
(11)
|
|
|
(9)
|
|
Total investment in land and buildings, net
|
|
|
$
|
99
|
|
|
$
|
101
|
|
7. PROPERTY AND EQUIPMENT
Property and equipment includes the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
June 30,
|
December 31,
|
|
2020
|
2019
|
|
|
|
|
(in millions)
|
|
Oil and natural gas properties:
|
|
|
Subject to depletion
|
$
|
19,196
|
|
$
|
16,575
|
|
Not subject to depletion
|
7,859
|
|
9,207
|
|
Gross oil and natural gas properties
|
27,055
|
|
25,782
|
|
Accumulated depletion
|
(3,717)
|
|
(2,995)
|
|
Accumulated impairment
|
(5,482)
|
|
(1,934)
|
|
Oil and natural gas properties, net
|
17,856
|
|
20,853
|
|
Midstream assets
|
1,037
|
|
931
|
|
Other property, equipment and land
|
132
|
|
125
|
|
Accumulated depreciation
|
(98)
|
|
(74)
|
|
Total property and equipment, net
|
$
|
18,927
|
|
$
|
21,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the proved oil and natural gas properties. As a result of the sharp decline in commodity prices which began during the first quarter of 2020 and continued for most of the second quarter of 2020, the Company recorded non-cash ceiling test impairments for the three months and six months ended June 30, 2020 of $2.5 billion and $3.5 billion, respectively, which was included in accumulated depletion. The impairment charge affected the Company’s results of operations but did not reduce its cash flow. In addition to commodity prices, the Company’s production rates, levels of proved reserves, future development costs, transfers of unevaluated properties and other factors will determine its actual ceiling test calculation and impairment analysis in future periods. If the trailing 12-month commodity prices continue to fall as compared to the commodity prices used in prior quarters, the Company may have material write downs in subsequent quarters. No impairment on proved oil and natural gas properties was recorded for the six months ended June 30, 2019. Given the rate of change impacting the oil and gas industry described above, it is possible that circumstances requiring additional impairment testing will occur in future interim periods, which could result in potentially material impairment charges being recorded.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Capitalized internal costs were approximately $14 million and $11 million for the three months ended June 30, 2020 and 2019, respectively, and $28 million and $24 million for the six months ended June 30, 2020 and 2019, respectively. Costs associated with unevaluated properties are excluded from the full cost pool until the Company has made a determination as to the existence of proved reserves. The inclusion of the Company’s unevaluated costs into the amortization base is expected to be completed within five years. Acquisition costs not currently being amortized are primarily related to unproved acreage that the Company plans to prove up through drilling. The Company has no plans to let any of the acreage, associated with acquisition costs not currently being amortized, expire based on current drilling plans.
8. ASSET RETIREMENT OBLIGATIONS
The following table describes the changes to the Company’s asset retirement obligations liability for the following periods:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2020
|
2019
|
|
|
|
|
(in millions)
|
|
Asset retirement obligations, beginning of period
|
$
|
94
|
|
$
|
136
|
|
Additional liabilities incurred
|
7
|
|
2
|
|
Liabilities acquired
|
1
|
|
3
|
|
Liabilities settled
|
—
|
|
(4)
|
|
Accretion expense
|
3
|
|
5
|
|
|
|
|
Asset retirement obligations, end of period
|
105
|
|
142
|
|
Less current portion(1)
|
1
|
|
—
|
|
Asset retirement obligations - long-term
|
$
|
104
|
|
$
|
142
|
|
(1) The current portion of the asset retirement obligation liability is included in other accrued liabilities in the Company’s consolidated balance sheets.
9. EQUITY METHOD INVESTMENTS
The following table presents the carrying values of Rattler’s equity method investments as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Interest
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
(in millions)
|
|
|
EPIC Crude Holdings, LP
|
10
|
%
|
|
$
|
117
|
|
|
$
|
110
|
|
Gray Oak Pipeline, LLC
|
10
|
%
|
|
135
|
|
|
115
|
|
Wink to Webster Pipeline LLC
|
4
|
%
|
|
60
|
|
|
34
|
|
OMOG JV LLC
|
60
|
%
|
|
198
|
|
|
219
|
|
Amarillo Rattler, LLC
|
50
|
%
|
|
4
|
|
|
1
|
|
Total
|
|
|
$
|
514
|
|
|
$
|
479
|
|
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
The following table presents income (loss) from Rattler’s equity method investees reflected in the Consolidated Statement of Operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
EPIC Crude Holdings, LP
|
$
|
(1)
|
|
|
$
|
—
|
|
|
$
|
(3)
|
|
|
$
|
—
|
|
|
|
Gray Oak Pipeline, LLC
|
1
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OMOG JV LLC
|
(13)
|
|
|
—
|
|
|
(12)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
(13)
|
|
|
$
|
—
|
|
|
$
|
(13)
|
|
|
$
|
—
|
|
|
|
On February 1, 2019, Rattler LLC acquired a 10% equity interest in EPIC Crude Holdings, LP (“EPIC”), which owns and operates a pipeline (the “EPIC pipeline”) that transports crude and natural gas liquids across Texas for delivery into the Corpus Christi market. The EPIC pipeline became fully operational in April 2020.
On February 15, 2019, Rattler LLC acquired a 10% equity interest in Gray Oak Pipeline, LLC (“Gray Oak”), which owns and operates a pipeline (the “Gray Oak pipeline”) that transports crude from the Permian to Corpus Christi on the Texas Gulf Coast. The Gray Oak pipeline became fully operational in April 2020.
On March 29, 2019, Rattler LLC executed a short-term promissory note to Gray Oak. The note allowed for borrowing by Gray Oak of up to $123 million at 2.52% interest rate with a maturity date of March 31, 2022. The short-term promissory note was repaid on May 31, 2019.
On June 4, 2019, Rattler entered into an equity contribution agreement with respect to Gray Oak. The equity contribution agreement requires Rattler to contribute equity or make loans to Gray Oak so that Gray Oak can, to the extent necessary, cure payment defaults under Gray Oak’s credit agreement and, in certain instances, repay Gray Oak’s credit agreement in full. Rattler’s obligations under the equity contribution agreement are limited to its proportionate ownership interest in Gray Oak, and such obligations are guaranteed by Rattler LLC, Tall City, Rattler OMOG LLC and Rattler Ajax Processing LLC.
On July 30, 2019, Rattler LLC joined Wink to Webster Pipeline LLC as a 4% member, together with affiliates of ExxonMobil, Plains All American Pipeline, Delek US, MPLX LP and Lotus Midstream. The joint venture is developing a crude oil pipeline with origin points at Wink and Midland in the Permian Basin for delivery to multiple Houston area locations (the “Wink to Webster pipeline”). The Wink to Webster pipeline is expected to begin service in the first half of 2021.
On October 1, 2019, Rattler LLC acquired a 60% equity interest in OMOG JV LLC (“OMOG”). On November 7, 2019, OMOG acquired 100% of Reliance Gathering, LLC which owns and operates a crude oil gathering system in the Permian Basin, and was renamed as Oryx Midland Oil Gathering LLC following the acquisition. Although Rattler’s equity interest is 60%, the investment is accounted for as an equity method investment as Rattler does not control operating activities and substantive participating rights exist with the controlling minority investor.
On December 20, 2019, Rattler LLC acquired a 50% equity interest in Amarillo Rattler, LLC (“Amarillo Rattler”), which currently owns and operates the Yellow Rose gas gathering and processing system with estimated total processing capacity of 40,000 Mcf/d and over 84 miles of gathering and regional transportation pipelines in Dawson, Martin and Andrews Counties, Texas. Amarillo Rattler also intends to construct and operate a new 60,000 Mcf/d cryogenic natural gas processing plant in Martin County, Texas, as well as incremental gas gathering and compression and regional transportation pipelines. However, development of the new processing plant has been postponed pending a recovery in commodity prices and activity levels. The Company has contracted for up to 30,000 Mcf/d of the capacity of the new processing plant pursuant to a gas gathering and processing agreement entered into with Amarillo Rattler in exchange for the Company’s dedication of certain leasehold interests to that agreement. Although Rattler’s equity interest is 50%, the investment is accounted for as an equity method investment as Rattler does not control operating activities and substantive participating rights exist with the controlling investor.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Rattler reviews its investments to determine if a loss in value which is other than temporary has occurred. If such a loss has occurred, Rattler recognizes an impairment provision. During the three and six months ended June 30, 2020, Rattler’s loss from equity method investments includes a proportional charge of $16 million representing impairment recorded by the investee associated with its goodwill. No other impairments were recorded for Rattler’s equity method investments for the three or six months ended June 30, 2020 or 2019. Rattler’s investees all serve customers in the oil and gas industry, which has begun to experience economic challenges as described above. It is possible that prolonged industry challenges could result in circumstances requiring impairment testing, which could result in potentially material impairment charges in future interim periods.
10. DEBT
Long-term debt consisted of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
June 30,
|
December 31,
|
|
2020
|
2019
|
|
|
|
|
(in millions)
|
|
4.625% Notes due 2021
|
$
|
191
|
|
$
|
399
|
|
7.320% Medium-term Notes, Series A, due 2022
|
20
|
|
21
|
|
2.875% Senior Notes due 2024
|
1,000
|
|
1,000
|
|
4.750% Senior Notes due 2025
|
500
|
|
—
|
|
5.375% Senior Notes due 2025
|
800
|
|
800
|
|
3.250% Senior Notes due 2026
|
800
|
|
800
|
|
7.350% Medium-term Notes, Series A, due 2027
|
10
|
|
11
|
|
7.125% Medium-term Notes, Series B, due 2028
|
100
|
|
108
|
|
3.500% Senior Notes due 2029
|
1,200
|
|
1,200
|
|
DrillCo Agreement
|
82
|
|
39
|
|
Unamortized debt issuance costs
|
(21)
|
|
(19)
|
|
Unamortized discount costs
|
(29)
|
|
(31)
|
|
Unamortized premium costs
|
17
|
|
9
|
|
Revolving credit facility(1)
|
119
|
|
13
|
|
Viper revolving credit facility(1)
|
154
|
|
97
|
|
Viper 5.375% Senior Notes due 2027
|
486
|
|
500
|
|
Rattler revolving credit facility(2)
|
523
|
|
424
|
|
Total long-term debt
|
$
|
5,952
|
|
$
|
5,371
|
|
(1) Each of these revolving credit facilities matures on November 1, 2022.
(2) The Rattler revolving credit facility matures on May 28, 2024.
References in this section to the Company shall mean Diamondback Energy, Inc. and Diamondback O&G LLC, collectively, unless otherwise specified.
May 2020 Senior Notes
On May 26, 2020, the Company completed a notes offering of $500 million in aggregate principal amount of its 4.750% Senior Notes due 2025 (the “May 2020 Notes”). Interest on the May 2020 Notes accrues from May 26, 2020, and is payable in cash semi-annually on May 31 and November 30 of each year, beginning November 30, 2020. The May 2020 Notes mature on May 31, 2025. The Company received net proceeds of approximately $496 million from the offering of the May 2020 Notes. The May 2020 Notes are the Company’s senior unsecured obligations, and are guaranteed by Diamondback O&G LLC (the “Guarantor”), but are not guaranteed by any of the Company’s other subsidiaries. The May 2020 Notes are senior in right or payment to any of the Company’s and the Guarantor’s future subordinated indebtedness and rank equal in right of payment with all of the Company’s and the Guarantor’s existing and future senior indebtedness. The May 2020 Notes are effectively subordinated to the Company’s and the Guarantor’s existing and future secured indebtedness, if any, to the extent of
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
the value of the collateral securing such indebtedness, and structurally subordinated to all of the existing and future indebtedness and other liabilities of the Company’s subsidiaries other than the Guarantor.
Second Amended and Restated Credit Facility
Diamondback O&G LLC, as borrower, and Diamondback Energy, Inc., as parent guarantor, entered into the second amended and restated credit agreement, dated November 1, 2013, as amended, with a syndicate of banks, including Wells Fargo, as administrative agent, and its affiliate Wells Fargo Securities, LLC, as sole book runner and lead arranger. On June 28, 2019, the credit agreement was amended pursuant to an eleventh amendment, which implemented certain changes to the credit facility for the period on and after the date on which the Company’s unsecured debt achieves an investment grade rating from two rating agencies and certain other conditions in the credit agreement are satisfied, which changes became effective on November 20, 2019. As of June 30, 2020, the maximum credit amount available under the credit agreement was $2 billion. As of June 30, 2020, the Company had approximately $119 million of outstanding borrowings under its revolving credit facility and $1.9 billion available for future borrowings under the revolving credit facility. As of June 30, 2020, there was an aggregate of $3 million in letters of credit outstanding under the credit agreement. The weighted average interest rate on the credit facility was 2.02% and 2.42% for the three months and six months ended June 30, 2020, respectively.
As of June 30, 2020, the Company was in compliance with all financial maintenance covenants under the revolving credit facility.
Energen’s Notes
Energen became a wholly owned subsidiary of the Company at the effective time of the merger and remained the issuer of an aggregate principal amount of $530 million in notes (the “Energen Notes”). As of June 30, 2020, the Energen Notes consist of: (1) $191 million aggregate principal amount of 4.625% senior notes due on September 1, 2021, (2) $100 million of 7.125% notes due on February 15, 2028, (3) $20 million of 7.32% notes due on July 28, 2022, and (4) $10 million of 7.35% notes due on July 28, 2027.
On May 26, 2020, the Company completed a registered offering of the May 2020 Notes in the aggregate principal amount of $500 million. The Company used the net proceeds from the offering of May 2020 Notes, among other things, to make an equity contribution to Energen to purchase $209 million in previously outstanding aggregate principal amount of Energen’s 4.625% senior notes pursuant to a tender offer.
Viper’s Credit Agreement
On July 20, 2018, Viper LLC, as borrower, entered into an amended and restated credit agreement with Viper, as guarantor, Wells Fargo, as administrative agent, and the other lenders. The credit agreement, as amended (the “Viper credit agreement”), provides for a revolving credit facility in the maximum credit amount of $2 billion and a borrowing base based on Viper LLC’s oil and natural gas reserves and other factors (the “borrowing base”). The borrowing base was reduced from $775 million to $580 million during the spring 2020 scheduled semi-annual redetermination. The borrowing base is schedule to be re-determined semi-annually with effective dates of May 1st and November 1st. In addition, Viper LLC and Wells Fargo each may request up to three interim redeterminations of the borrowing base during any 12-month period. As of June 30, 2020, Viper LLC had $154 million of outstanding borrowings and $426 million available for future borrowings under the Viper credit agreement. The weighted average interest rate on the credit facility was 2.41% and 2.82% for the three months and six months ended June 30, 2020, respectively.
As of June 30, 2020, Viper and Viper LLC were in compliance with all financial maintenance covenants under the Viper credit agreement.
Viper’s Notes
On October 16, 2019, Viper completed an offering in which it issued its 5.375% Senior Notes due 2027 in aggregate principal amount of $500 million (the “Viper Notes”). Viper received net proceeds of approximately $490 million from the offering of the Viper Notes. Viper loaned the gross proceeds to Viper LLC. Viper LLC used the proceeds from the notes offering to pay down borrowings under its revolving credit facility. During the second quarter of 2020, Viper repurchased $14 million of the outstanding Viper Notes in open market purchases at a cash price ranging from 97.5% to 98.5% of the aggregate
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
principal amount, which resulted in an immaterial gain on extinguishment of debt. The repurchase brought the total outstanding Viper Notes down to $486 million as of June 30, 2020.
Rattler’s Credit Agreement
In connection with the Rattler Offering, Rattler, as parent, and Rattler LLC, as borrower, entered into a credit agreement, dated May 28, 2019, with Wells Fargo, as administrative agent, and a syndicate of banks, as lenders party thereto (the “Rattler credit agreement”).
The Rattler credit agreement provides for a revolving credit facility in the maximum credit amount of $600 million, which is expandable to $1 billion upon Rattler’s election, subject to obtaining additional lender commitments and satisfaction of customary conditions. As of June 30, 2020, Rattler LLC had $523 million of outstanding borrowings and $77 million available for future borrowings under the Rattler credit agreement. The weighted average interest rate on the credit facility was 2.43% and 2.64% for the three months and six months ended June 30, 2020, respectively.
As of June 30, 2020 and December 31, 2019, Rattler and Rattler LLC were in compliance with all financial maintenance covenants under the Rattler credit agreement.
See Note 18—Subsequent Events for discussion of Rattler debt transactions which occurred subsequent to June 30, 2020.
Alliance with Obsidian Resources, L.L.C.
Diamondback O&G LLC entered into a participation and development agreement (the “DrillCo Agreement”), dated September 10, 2018, with Obsidian Resources, L.L.C. (“CEMOF”) to fund oil and natural gas development. Funds managed by CEMOF and its affiliates have agreed to commit to funding certain costs out of CEMOF’s net production revenue and, for a period of time, to the extent not funded by such revenue, up to an additional $300 million, to fund drilling programs on locations provided by the Company. Subject to adjustments depending on asset characteristics and return expectations of the selected drilling plan, CEMOF will fund up to 85% of the costs associated with new wells drilled under the DrillCo Agreement and is expected to receive an 80% working interest in these wells until it reaches certain payout thresholds equal to a cumulative 9% and then 13% internal rate of return. Upon reaching the final internal rate of return target, CEMOF’s interest will be reduced to 15%, while the Company’s interest will increase to 85%. As of June 30, 2020 and December 31, 2019, CEMOF’s return related to this alliance was $82 million and $39 million, respectively. As of June 30, 2020, 15 joint wells have been drilled and completed.
11. CAPITAL STOCK AND EARNINGS PER SHARE
Diamondback did not complete any equity offerings during the six months ended June 30, 2020 and June 30, 2019.
Rattler’s Initial Public Offering
Please see Note 5—Rattler Midstream LP for information regarding the Rattler Offering.
Stock Repurchase Program
In May 2019, the Company’s board of directors approved a stock repurchase program to acquire up to $2 billion of the Company’s outstanding common stock through December 31, 2020. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions, and are subject to market conditions, applicable legal requirements, contractual obligations and other factors. The repurchase program does not require the Company to acquire any specific number of shares. This repurchase program may be suspended from time to time, modified, extended or discontinued by the board of directors at any time. During the three months ended June 30, 2020, the Company repurchased no common stock under this repurchase program. During the six months ended June 30, 2020, the Company repurchased approximately $98 million of common stock under this repurchase program. As of June 30, 2020, $1.3 billion remained available for use to repurchase shares under the Company's common stock repurchase program, although the Company has suspended this program to preserve liquidity.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Earnings (Loss) Per Share
The Company’s basic earnings per share amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share include the effect of potentially dilutive shares outstanding for the period. Additionally, for the diluted earnings per share computation, the per share earnings of Viper are included in the consolidated earnings per share computation based on the consolidated group’s holdings of the subsidiary.
A reconciliation of the components of basic and diluted earnings per common share is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
2020
|
2019
|
|
2020
|
2019
|
|
($ in millions, except per share amounts, shares in thousands)
|
|
|
|
|
Net (loss) income attributable to common stock
|
$
|
(2,393)
|
|
$
|
349
|
|
|
$
|
(2,665)
|
|
$
|
359
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic weighted average common units outstanding
|
157,829
|
|
164,839
|
|
|
158,060
|
|
164,846
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Potential common shares issuable(1)
|
—
|
|
180
|
|
|
—
|
|
407
|
|
Diluted weighted average common shares outstanding
|
157,829
|
|
165,019
|
|
|
158,060
|
|
165,253
|
|
Basic net (loss) income attributable to common stock
|
$
|
(15.16)
|
|
$
|
2.12
|
|
|
$
|
(16.86)
|
|
$
|
2.18
|
|
Diluted net (loss) income attributable to common stock
|
$
|
(15.16)
|
|
$
|
2.11
|
|
|
$
|
(16.86)
|
|
$
|
2.17
|
|
(1) For the three and six months ended June 30, 2020, no potential common units were included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive. For the three months and six months ended June 30, 2019, there were 59,547 and 20,406 potential common units excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive under the treasury stock method.
Change in Ownership of Consolidated Subsidiaries
The following table summarizes changes in the ownership interest in consolidated subsidiaries during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in millions)
|
|
|
|
|
|
|
Net (loss) income attributable to the Company
|
$
|
(2,393)
|
|
|
$
|
349
|
|
|
$
|
(2,665)
|
|
|
$
|
359
|
|
Change in ownership of consolidated subsidiaries
|
329
|
|
|
—
|
|
|
329
|
|
|
77
|
|
Change from net (loss) income attributable to the Company's stockholders and transfers to non-controlling interest
|
$
|
(2,064)
|
|
|
$
|
349
|
|
|
$
|
(2,336)
|
|
|
$
|
436
|
|
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
12. EQUITY-BASED COMPENSATION
The following table presents the effects of the equity compensation plans and related costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
2020
|
2019
|
|
2020
|
2019
|
|
(in millions)
|
|
|
|
|
General and administrative expenses
|
$
|
9
|
|
$
|
9
|
|
|
$
|
18
|
|
$
|
23
|
|
Equity-based compensation capitalized pursuant to full cost method of accounting for oil and natural gas properties
|
2
|
|
4
|
|
|
8
|
|
10
|
|
|
|
|
|
|
|
Restricted Stock Units
The following table presents the Company’s restricted stock units activity under the Equity Plan during the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Awards & Units
|
Weighted Average Grant-Date
Fair Value
|
Unvested at December 31, 2019
|
505,867
|
|
$
|
96.01
|
|
Granted
|
182,547
|
|
$
|
60.78
|
|
Vested
|
(113,790)
|
|
$
|
81.42
|
|
Forfeited
|
(15,493)
|
|
$
|
100.37
|
|
Unvested at June 30, 2020
|
559,131
|
|
$
|
87.36
|
|
The aggregate fair value of restricted stock units that vested during the six months ended June 30, 2020 and 2019 was $9 million and $19 million, respectively. As of June 30, 2020, the Company’s unrecognized compensation cost related to unvested restricted stock awards and units was $33 million, which is expected to be recognized over a weighted-average period of 1.9 years.
During the six months ended June 30, 2020, the Company modified an insignificant amount of restricted stock units to include dividend equivalent rights during the vesting period which resulted in no incremental compensation costs to be recognized.
Performance Based Restricted Stock Units
In March 2020, eligible employees received performance restricted stock unit awards totaling 225,047 units from which a minimum of 0% and a maximum of 200% units could be awarded based upon measurement of total stockholder return of the Company’s common stock (“TSR”) as compared to a designated peer group during the three-year performance period of January 1, 2020 to December 31, 2022 and cliff vest at December 31, 2022.
The fair value of each performance restricted stock unit is estimated at the date of grant using a Monte Carlo simulation, which results in an expected percentage of units to be earned during the performance period.
The following table presents a summary of the grant-date fair values of performance restricted stock units granted and the related assumptions for the March 2020 awards.
|
|
|
|
|
|
|
|
2020
|
|
Grant-date fair value
|
$
|
70.17
|
|
|
|
|
|
Risk-free rate
|
0.86
|
%
|
|
Company volatility
|
36.70
|
%
|
|
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
The following table presents the Company’s performance restricted stock units activity under the Equity Plan for the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
Performance Restricted Stock Units
|
Weighted Average Grant-Date Fair Value
|
Unvested at December 31, 2019
|
271,819
|
|
$
|
147.07
|
|
Granted
|
272,601
|
|
$
|
85.73
|
|
Vested
|
(47,554)
|
|
$
|
89.27
|
|
Forfeited
|
(8,396)
|
|
$
|
170.45
|
|
Unvested at June 30, 2020(1)
|
488,470
|
|
$
|
110.33
|
|
(1)A maximum of 976,940 units could be awarded based upon the Company’s final TSR ranking.
As of June 30, 2020, the Company’s unrecognized compensation cost related to unvested performance based restricted stock awards and units was $31 million, which is expected to be recognized over a weighted-average period of 2.3 years.
Rattler Long-Term Incentive Plan
On May 22, 2019, the board of directors of Rattler’s General Partner adopted the Rattler Midstream LP Long Term Incentive Plan (“Rattler LTIP”), for employees, consultants and directors of Rattler’s General Partner and any of its affiliates, including Diamondback, who perform services for Rattler. The Rattler LTIP provides for the grant of unit options, unit appreciation rights, restricted units, unit awards, phantom units, distribution equivalent rights, cash awards, performance awards, other unit-based awards and substitute awards.
Under the Rattler LTIP, the board of directors of Rattler’s General Partner is authorized to issue phantom units to eligible employees and non-employee directors. Rattler estimates the fair value of phantom units as the closing price of Rattler’s common units on the grant date of the award, which is expensed over the applicable vesting period. Upon vesting, the phantom units entitle the recipient to one common unit of Rattler for each phantom unit. The recipients are also entitled to distribution equivalent rights, which represent the right to receive a cash payment equal to the value of the distributions paid on one phantom unit between the grant date and the vesting date.
The following table presents the phantom unit activity under the Rattler LTIP for the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Phantom
Units
|
|
Weighted Average
Grant-Date
Fair Value
|
Unvested at December 31, 2019
|
2,226,895
|
|
|
$
|
19.14
|
|
Granted
|
20,910
|
|
|
$
|
13.85
|
|
Vested
|
(449,633)
|
|
|
$
|
19.14
|
|
Forfeited
|
(23,442)
|
|
|
$
|
18.23
|
|
Unvested at June 30, 2020
|
1,774,730
|
|
|
$
|
19.09
|
|
The aggregate fair value of phantom units that vested during the six months ended June 30, 2020 was $9 million. As of June 30, 2020, the unrecognized compensation cost related to unvested phantom units was $33 million. Such cost is expected to be recognized over a weighted-average period of 3.9 years.
13. INCOME TAXES
The Company’s effective income tax rates were 22.0% and 22.3% for the three months ended June 30, 2020 and 2019, respectively, and 17.5% and 14.8% for the six months ended June 30, 2020 and 2019, respectively. Total income tax benefit from continuing operations for the three and six months ended June 30, 2020 differed from amounts computed by applying the United States federal statutory tax rate to pre-tax loss primarily due to (i) the impact of recording a valuation allowance on Viper’s deferred tax assets, (ii) state income taxes and (iii) the impact of permanent differences between book and taxable income, partially offset by tax benefit in the first quarter resulting from the carryback of federal net operating losses.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
For the six months ended June 30, 2020, the Company recorded a discrete income tax expense of $143 million related to application in the first quarter of a valuation allowance on Viper’s beginning-of-year deferred tax assets, which consist primarily of its investment in Viper LLC and federal net operating loss carryforwards. A valuation allowance was also applied against the year-to-date tax benefit resulting from Viper’s projected pre-tax loss for 2020. The determination to record a valuation allowance was based on assessment of all available evidence, both positive and negative, supporting realizability of Viper’s deferred tax assets. In light of those criteria for recognizing the tax benefit of deferred tax assets, Viper’s assessment resulted in recording a valuation allowance against Viper’s deferred tax assets as of March 31, 2020 and June 30, 2020. In addition, for the six months ended June 30, 2020, the Company recorded a discrete income tax benefit of $25 million related to the available carryback of certain federal net operating losses to tax year(s) in which the corporate income tax rate was 35%. Prior to the enactment of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in the first quarter of 2020, there was no tax refund available to the Company with respect to its losses, resulting in deferred tax benefit associated with federal net operating loss carryforwards at the statutory 21% corporate income tax rate.
Total income tax expense for the three and six months ended June 30, 2019 differed from amounts computed by applying the federal statutory rate to pre-tax income primarily due to (i) state income taxes, (ii) the impact of permanent differences between book and taxable income and (iii) for the six months ended June 30, 2019, the revision of estimated deferred taxes recognized by Viper as a result of its change in tax status. Based on information available as of March 31, 2019 regarding unitholders’ tax basis, Viper revised its estimate of deferred taxes on Viper’s investment in Viper LLC on the date of the tax status change, resulting in discrete deferred tax benefit of $35 million for the three months ended March 31, 2019.
For the three and six months ended June 30, 2020, the Company recorded an increase through stockholders’ equity to the carrying value of its investment in Rattler LLC, resulting in an increase in the Company’s deferred tax liability related to its investment in Rattler LLC. A corresponding adjustment to the noncontrolling interest resulted in a decrease in Rattler’s deferred tax liability related to its investment in Rattler LLC and a total net deferred tax asset balance for Rattler at June 30, 2020. As a result of Rattler’s assessment, including consideration of all available positive and negative evidence, Rattler determined that it is more likely than not that Rattler will realize its deferred tax assets at June 30, 2020.
The CARES Act was enacted on March 27, 2020. This legislation included a number of provisions applicable to U.S. income taxes for corporations, including providing for carryback of certain net operating losses, accelerated refund of minimum tax credits, and modifications to the rules limiting the deductibility of business interest expense. The Company has considered the impact of this legislation in the period of enactment, resulting in discrete income tax benefit for the three months ended March 31, 2020 related to the anticipated carryback of approximately $179 million of the Company’s federal net operating losses as noted above. As a result of the refund associated with such carryback as well as the accelerated refund available for minimum tax credits, the Company’s current federal taxes receivable total approximately $101 million as of March 31, 2020 and June 30, 2020.
As discussed further in Note 5, on May 28, 2019, Rattler completed its initial public offering. Even though Rattler is organized as a limited partnership under state law, Rattler is subject to U.S. federal and state income tax at corporate rates, subsequent to the effective date of Rattler’s election to be treated as a corporation for U.S. federal income tax purposes. As such, Rattler’s provision for income taxes is included in the Company’s consolidated financial statements and to the extent applicable, in net income attributable to the non-controlling interest.
14. DERIVATIVES
All derivative financial instruments are recorded at fair value. The Company has not designated its derivative instruments as hedges for accounting purposes and, as a result, marks its derivative instruments to fair value and recognizes the cash and non-cash changes in fair value in the combined consolidated statements of operations under the caption “Gain (loss) on derivative instruments, net.” See Note 15—Fair Value Measurements for further discussion of the Company’s fair value measurements.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Diamondback Commodity Contracts
The Company has used fixed price swap contracts, fixed price basis swap contracts, double-up swap contracts, NYMEX roll basis swaps and three-way costless collars with corresponding put, short put and call options to reduce price volatility associated with certain of its oil and natural gas sales.
The Company’s derivative contracts are based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on New York Mercantile Exchange West Texas Intermediate (Cushing and Magellan East Houston), West Texas Light (Cushing), and ICE Brent pricing, natural gas derivative settlements based on the New York Mercantile Exchange Henry Hub and Waha Hub pricing, liquids derivative settlements based on Mont Belvieu pricing and diesel fuel settlements based on Gulf Coast ultra low sulfur diesel pricing.
By using derivative instruments to economically hedge exposure to changes in commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. The Company’s counterparties are participants in the secured second amended and restated credit agreement, which is secured by substantially all of the assets of the guarantor subsidiaries; therefore, the Company is not required to post any collateral. The Company does not require collateral from its counterparties. The Company has entered into derivative instruments only with counterparties that are also lenders under its credit facility and have been deemed an acceptable credit risk.
As of June 30, 2020, the Company had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted average contract price is disclosed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
2021
|
|
|
|
|
|
|
|
|
Volume (Bbls/MMBtu/Gallons)
|
|
Fixed Price Swap (per Bbl/MMBtu/Gallon)
|
|
Volume (Bbls/MMBtu/Gallons)
|
|
Fixed Price Swap (per Bbl/MMBtu/Gallon)
|
|
|
|
|
Oil Swaps - WTI Cushing
|
|
1,840,000
|
|
|
$
|
45.07
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Oil Swaps - WTI Magellan East Houston
|
|
736,000
|
|
|
$
|
61.95
|
|
|
1,825,000
|
|
|
$
|
37.78
|
|
|
|
|
|
Oil Swaps - BRENT
|
|
4,452,800
|
|
|
$
|
47.62
|
|
|
2,730,000
|
|
|
$
|
41.58
|
|
|
|
|
|
Oil Swaption - BRENT
|
|
—
|
|
|
$
|
—
|
|
|
920,000
|
|
|
$
|
41.50
|
|
|
|
|
|
Oil Basis Swaps - WTI Cushing
|
|
7,424,000
|
|
|
$
|
(1.21)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Oil Basis Swaps - WTL Cushing
|
|
1,472,000
|
|
$
|
(1.31)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Oil Rolling Hedge - WTI Cushing
|
|
22,080,000
|
|
|
$
|
(1.05)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Swaps - Henry Hub
|
|
11,040,000
|
|
|
$
|
2.48
|
|
|
43,800,000
|
|
|
$
|
2.57
|
|
|
|
|
|
Natural Gas Swaps - Waha Hub
|
|
11,040,000
|
|
|
$
|
1.51
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Natural Gas Basis Swaps - Waha Hub
|
|
22,080,000
|
|
|
$
|
(1.46)
|
|
|
83,950,000
|
|
|
$
|
(0.69)
|
|
|
|
|
|
Natural Gas Liquid Swaps - Mont Belvieu Ethane
|
|
1,288,000
|
|
|
$
|
8.43
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Natural Gas Liquid Swaps - Mont Belvieu Propane
|
|
920,000
|
|
$
|
21.76
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Diesel Price Swaps
|
|
184,000,000
|
|
|
$
|
1.60
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Oil Swaption - WTI Magellan East Houston
|
2020
|
Volume (Bbl)
|
602,600
|
Swap price (per Bbl)
|
$
|
55.00
|
|
Put price (per Bbl)
|
$
|
40.00
|
|
|
|
|
|
|
|
Oil Options - WTI Cushing
|
2020
|
Volume (Bbl)
|
864,800
|
Long put price (per Bbl)
|
$
|
46.51
|
|
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
|
|
|
|
|
|
Oil Put Spread - WTI Magellan East Houston
|
2020
|
Volume (Bbl)
|
699,200
|
Floor price (per Bbl)
|
$
|
50.00
|
|
Short put price (per Bbl)
|
$
|
25.00
|
|
|
|
|
|
|
|
Gas Swap Double-Up - Waha Hub
|
2020
|
Volume (Mcf)
|
5,520,000
|
Swap price (per Mcf)
|
$
|
1.70
|
|
Option price (per Mcf)
|
$
|
1.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
2021
|
|
|
Oil Costless Collars
|
WTI Cushing
|
|
Brent
|
|
WTI Magellan East Houston
|
|
|
|
Brent
|
|
|
Volume (Bbls)
|
6,330,336
|
|
11,906,640
|
|
736,000
|
|
|
|
22,986,000
|
|
|
Floor price (per Bbl)
|
$
|
38.53
|
|
|
$
|
37.59
|
|
|
$
|
39.00
|
|
|
|
|
$
|
39.22
|
|
|
|
Ceiling price (per Bbl)
|
$
|
45.79
|
|
|
$
|
45.63
|
|
|
$
|
49.00
|
|
|
|
|
$
|
48.21
|
|
|
|
Interest Rate Swaps and Treasury Locks
The Company has used interest rate swaps and treasury locks to reduce the Company’s exposure to variable rate interest payments associated with the Company’s revolving credit facility. The interest rate swaps and treasury locks have not been designated as hedging instruments and as a result, the Company recognizes all changes in fair value immediately in earnings.
The following table summarizes the Company’s interest rate swaps and treasury locks as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Effective Date
|
Termination Date
|
Notional Amount (in millions)
|
Interest Rate
|
Interest Rate Swap
|
December 31, 2020
|
December 31, 2030
|
$
|
250
|
|
1.551
|
%
|
Interest Rate Swap
|
December 31, 2020
|
December 31, 2030
|
$
|
250
|
|
1.5575
|
%
|
Interest Rate Swap
|
December 31, 2020
|
December 31, 2030
|
$
|
250
|
|
1.297
|
%
|
Interest Rate Swap
|
December 31, 2020
|
December 31, 2030
|
$
|
250
|
|
1.195
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Viper Commodity Contracts
Viper uses fixed price swap contracts, fixed price basis swap contracts and costless collars with corresponding put and call options to reduce price volatility associated with certain of its royalty income. With respect to Viper’s fixed price swap contracts and fixed price basis swap contracts, the counterparty is required to make a payment to Viper if the settlement price for any settlement period is less than the swap or basis price, and Viper is required to make a payment to the counterparty if the settlement price for any settlement period is greater than the swap or basis price. Viper has fixed price basis swaps for the spread between the Cushing crude oil price and the Midland crude oil price as well as the spread between the Henry Hub natural gas price and the Waha Hub natural gas price.
Under Viper’s costless collar contracts, each collar has an established floor price and ceiling price. When the settlement price is below the floor price, the counterparty is required to make a payment to Viper and when the settlement price is above the ceiling price, Viper is required to make a payment to the counterparty. When the settlement price is between the floor and the ceiling, there is no payment required.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Viper’s derivative contracts are based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on New York Mercantile Exchange West Texas Intermediate pricing (Cushing and Midland-Cushing) and with natural gas derivative settlements based on the New York Mercantile Exchange Henry Hub and Waha Hub pricing.
By using derivative instruments to economically hedge exposure to changes in commodity prices, Viper exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes Viper, which creates credit risk. Viper’s counterparties are participants in the Viper credit agreement, which is secured by substantially all of the assets of the guarantor subsidiaries; therefore, Viper is not required to post any collateral. Viper’s counterparties are determined to have an acceptable credit risk, therefore, Viper does not require collateral from its counterparties.
As of June 30, 2020, Viper had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted average contract price is disclosed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
Volume
|
|
Fixed Price Swap (per Bbl/MMBtu)
|
|
|
|
|
|
|
|
|
Oil swaps - WTI Cushing (Bbls)
|
184,000
|
|
|
$
|
27.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil basis swaps - WTI Midland-Cushing (Bbls)
|
736,000
|
|
|
$
|
(2.60)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas basis swaps - Waha Hub (MMBtu)
|
4,600,000
|
|
|
$
|
(2.07)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collars - WTI Cushing
|
2020
|
|
|
|
|
|
2021
|
|
|
|
|
Volume (Bbls)
|
2,576,000
|
|
|
|
|
|
3,650,000
|
|
|
|
|
Floor price (per Bbl)
|
$
|
28.86
|
|
|
|
|
|
|
$
|
30.00
|
|
|
|
|
|
Ceiling price (per Bbl)
|
$
|
32.33
|
|
|
|
|
|
|
$
|
43.05
|
|
|
|
|
|
|
|
|
|
|
|
Deferred premium call options - WTI Cushing
|
2020
|
Volume (Bbls)
|
736,000
|
Premium
|
$
|
1.89
|
|
Strike price (per Bbl)
|
$
|
45.00
|
|
Balance sheet offsetting of derivative assets and liabilities
The fair value of swaps is generally determined using established index prices and other sources which are based upon, among other things, futures prices and time to maturity. These fair values are recorded by netting asset and liability positions, including any deferred premiums that are with the same counterparty and are subject to contractual terms which provide for net settlement.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
The following tables present the gross amounts of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties and the resulting net amounts presented in the Company’s consolidated balance sheets as of June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
December 31, 2019
|
|
(in millions)
|
|
Gross derivative assets
|
$
|
284
|
|
$
|
71
|
|
Amounts netted
|
(198)
|
|
(18)
|
|
Net derivative assets
|
$
|
86
|
|
$
|
53
|
|
|
|
|
Gross derivative liabilities
|
$
|
373
|
|
$
|
45
|
|
Amounts netted
|
(198)
|
|
(18)
|
|
Net derivative liabilities
|
$
|
175
|
|
$
|
27
|
|
The net amounts are classified as current or noncurrent based on their anticipated settlement dates. The net fair value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
December 31, 2019
|
|
(in millions)
|
|
Current assets: derivative instruments
|
$
|
86
|
|
$
|
46
|
|
Noncurrent assets: derivative instruments
|
—
|
|
7
|
|
Total assets
|
$
|
86
|
|
$
|
53
|
|
Current liabilities: derivative instruments
|
$
|
85
|
|
$
|
27
|
|
Noncurrent liabilities: derivative instruments
|
90
|
|
—
|
|
Total liabilities
|
$
|
175
|
|
$
|
27
|
|
The following table summarizes the gains and losses on derivative instruments included in the consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
2020
|
2019
|
|
2020
|
2019
|
|
(in millions)
|
|
|
|
|
(Loss) gain on derivative instruments, net
|
|
|
|
|
|
Commodity contracts
|
$
|
(353)
|
|
$
|
94
|
|
|
$
|
251
|
|
$
|
(174)
|
|
Interest rate swaps
|
(8)
|
|
—
|
|
|
(70)
|
|
—
|
|
Total
|
$
|
(361)
|
|
$
|
94
|
|
|
$
|
181
|
|
$
|
(174)
|
|
|
|
|
|
|
|
Net cash received on settlements
|
|
|
|
|
|
Commodity contracts
|
210
|
|
5
|
|
|
297
|
|
22
|
|
|
|
|
|
|
|
Total
|
$
|
210
|
|
$
|
5
|
|
|
$
|
297
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. The Company uses appropriate valuation techniques based on available inputs to measure the fair values of its assets and liabilities.
Level 1 - Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.
Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3 - Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.
The Company estimates the fair values of proved oil and natural gas properties assumed in business combinations using discounted cash flow techniques and based on market assumptions as to the future commodity prices, internal estimates of future quantities of oil and natural gas reserves, future estimated rates of production, expected recovery rates and risk-adjustment discounts. The estimated fair values of unevaluated oil and natural gas properties were based on the location, engineering and geological studies, historical well performance, and applicable mineral lease terms. Given the unobservable nature of the inputs, the estimated fair values of oil and natural gas properties assumed is deemed to use Level 3 inputs. The asset retirement obligations assumed as part of business combinations are estimated using the same assumptions and methodology as described below.
The Company estimates asset retirement obligations pursuant to the provisions of the FASB issued ASC Topic 410, “Asset Retirement and Environmental Obligations.” The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with the future plugging and abandonment of wells and related facilities. Given the unobservable nature of the inputs, including plugging costs and useful lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 8—Asset Retirement Obligations for further discussion of the Company’s asset retirement obligations.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Certain assets and liabilities are reported at fair value on a recurring basis, including the Company’s derivative instruments and Viper’s investment. Viper measures its investment utilizing the fair value option, and as such the investment is classified as Level 1 in the fair value hierarchy. The fair values of the Company’s fixed price swaps, fixed price basis swaps and costless collars are measured internally using established commodity futures price strips for the underlying commodity provided by a reputable third party, the contracted notional volumes, and time to maturity. These valuations are Level 2 inputs.
The following table provides fair value measurement information for financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
|
Level 1
|
Level 2
|
Level 3
|
|
(in millions)
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Investment
|
$
|
13
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
19
|
|
$
|
—
|
|
$
|
—
|
|
Derivative Instruments
|
—
|
|
86
|
|
—
|
|
|
—
|
|
53
|
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative Instruments
|
$
|
—
|
|
$
|
175
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
27
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table provides the fair value of financial instruments that are not recorded at fair value in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
Carrying
|
|
Carrying
|
|
|
Value
|
Fair Value
|
Value
|
Fair Value
|
|
(in millions)
|
|
|
|
Debt:
|
|
|
|
|
Revolving credit facility
|
$
|
119
|
|
$
|
119
|
|
$
|
13
|
|
$
|
13
|
|
4.625% Notes due 2021
|
$
|
191
|
|
$
|
195
|
|
$
|
399
|
|
$
|
411
|
|
7.320% Medium-term Notes, Series A, due 2022
|
$
|
21
|
|
$
|
22
|
|
$
|
21
|
|
$
|
22
|
|
2.875% Senior Notes due 2024(1)
|
$
|
992
|
|
$
|
1,002
|
|
$
|
992
|
|
$
|
1,012
|
|
4.750% Senior Notes due 2025
|
$
|
496
|
|
$
|
536
|
|
$
|
—
|
|
$
|
—
|
|
5.375% Senior Notes due 2025(1)
|
$
|
799
|
|
$
|
826
|
|
$
|
799
|
|
$
|
840
|
|
3.250% Senior Notes due 2026(1)
|
$
|
793
|
|
$
|
805
|
|
$
|
792
|
|
$
|
812
|
|
7.350% Medium-term Notes, Series A, due 2027
|
$
|
11
|
|
$
|
11
|
|
$
|
11
|
|
$
|
12
|
|
7.125% Medium-term Notes, Series B, due 2028
|
$
|
107
|
|
$
|
116
|
|
$
|
108
|
|
$
|
116
|
|
3.500% Senior Notes due 2029(1)
|
$
|
1,187
|
|
$
|
1,163
|
|
$
|
1,186
|
|
$
|
1,226
|
|
Viper revolving credit facility
|
$
|
154
|
|
$
|
154
|
|
$
|
97
|
|
$
|
97
|
|
Viper's 5.375% Senior Notes due 2027
|
$
|
477
|
|
$
|
476
|
|
$
|
490
|
|
$
|
521
|
|
Rattler revolving credit facility
|
$
|
523
|
|
$
|
523
|
|
$
|
424
|
|
$
|
424
|
|
DrillCo Agreement
|
$
|
82
|
|
$
|
82
|
|
$
|
39
|
|
$
|
39
|
|
(1)The carrying value includes associated deferred loan costs and any remaining discount or premium.
The fair values of the revolving credit facility, the Viper credit agreement and the Rattler credit agreement approximate their carrying values based on borrowing rates available to the Company for bank loans with similar terms and maturities and is classified as Level 2 in the fair value hierarchy. The fair values of the outstanding notes were determined using the June 30, 2020 quoted market price, a Level 1 classification in the fair value hierarchy.
Fair Value of Financial Assets
The carrying amount of cash and cash equivalents, receivables, prepaids and other current assets, payables and other accrued liabilities approximate their fair value because of the short-term nature of the instruments.
16. LEASES
The Company leases certain drilling rigs, facilities, compression and other equipment.
The following table summarizes operating lease costs for the three months and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in millions)
|
|
|
|
|
|
|
Operating lease costs
|
$
|
4
|
|
|
$
|
8
|
|
|
$
|
9
|
|
|
$
|
12
|
|
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
For the six months ended June 30, 2020 and 2019, cash paid for operating lease liabilities, and reported in cash flows provided by operating activities on the Company’s Statements of Consolidated Cash Flows, was $9 million and $12 million, respectively. During the six months ended June 30, 2020 and 2019, the Company recorded an additional $10 million and $13 million of right-of-use assets in exchange for new lease liabilities, respectively.
The operating lease right-of-use assets were reported in other assets and the current and noncurrent portions of the operating lease liabilities were reported in other accrued liabilities and other long-term liabilities, respectively, on the Consolidated Balance Sheets. As of June 30, 2020, the operating right-of-use assets were $16 million and operating lease liabilities were $16 million, of which $11 million was classified as current. As of June 30, 2020, the weighted average remaining lease term was 1.6 years and the weighted average discount rate was 9.4%.
Schedule of Operating Lease Liability Maturities. The following table summarizes undiscounted cash flows owed by the Company to lessors pursuant to contractual agreements in effect as of June 30, 2020:
|
|
|
|
|
|
|
As of June 30, 2020
|
|
(in millions)
|
2020 (July - December)
|
$
|
8
|
|
2021
|
6
|
|
2022
|
4
|
|
2023
|
—
|
|
2024
|
—
|
|
Thereafter
|
—
|
|
Total lease payments
|
18
|
|
Less: interest
|
2
|
|
Present value of lease liabilities
|
$
|
16
|
|
17. COMMITMENTS AND CONTINGENCIES
The Company is a party to various routine legal proceedings, disputes and claims arising in the ordinary course of its business, including those that arise from interpretation of federal and state laws and regulations affecting the natural gas and crude oil industry. While the ultimate outcome of the pending proceedings, disputes or claims, and any resulting impact on the Company, cannot be predicted with certainty, the Company’s management believes that none of these matters, if ultimately decided adversely, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment is based on information known about the pending matters and its experience in contesting, litigating and settling similar matters. Actual outcomes could differ materially from the Company’s assessment. The Company records reserves for contingencies related to outstanding legal proceedings, disputes or claims when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.
18. SUBSEQUENT EVENTS
Second Quarter 2020 Dividend Declaration
On July 31 2020, the Board of Directors of the Company declared a cash dividend for the second quarter of 2020 of $0.375 per share of common stock, payable on August 20, 2020 to its stockholders of record at the close of business on August 13, 2020.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Commodity Contracts
Subsequent to June 30, 2020, the Company entered into new fixed price swaps and basis swaps. The Company’s derivative contracts are based upon reported settlement prices on commodity exchanges noted in the table below.
The following tables present the derivative contracts entered into by the Company subsequent to June 30, 2020. When aggregating multiple contracts, the weighted average contract price is disclosed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2021 - December 2021
|
|
|
|
|
|
Volume (MMBtu)
|
|
Fixed Price Swap
(per MMBtu)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Swaps - Henry Hub
|
18,250,000
|
|
$
|
2.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2022 - December 2022
|
|
|
|
|
|
Volume (MMBtu)
|
|
Fixed Price Swap
(per MMBtu)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Basis Swaps - Waha Hub
|
21,900,000
|
|
$
|
(0.46)
|
|
|
|
Rattler’s Notes Offering and Repayment of Borrowings under the Rattler Credit Agreement
On July 14, 2020, Rattler completed an offering (the “Notes Offering”) of $500 million in aggregate principal amount of its 5.625% Senior Notes due 2025 (the “Rattler Notes”). Interest on the Rattler Notes is payable on January 15 and July 15 of each year, beginning on January 15, 2021. The Rattler Notes mature on July 15, 2025. Rattler received net proceeds of approximately $490 million from the Notes Offering. Rattler loaned the gross proceeds to Rattler LLC, which Rattler LLC used to repay outstanding borrowings under the Rattler credit agreement.
The Rattler Notes are senior unsecured obligations of Rattler, rank equally in right of payment with all of Rattler’s existing and future senior indebtedness it may incur and initially are guaranteed on a senior unsecured basis by Rattler LLC, Tall City, Rattler OMOG LLC and Rattler Ajax Processing LLC. Neither the Company nor Rattler’s General Partner guarantee the Rattler Notes. In the future, each of Rattler’s restricted subsidiaries that either (1) guarantees any of its or a guarantor’s other indebtedness or (2) is classified as a domestic restricted subsidiary under the indenture governing the Rattler Notes and is an obligor with respect to any indebtedness under any credit facility will be required to guarantee the Rattler Notes.
Intercompany Promissory Note
In connection with and upon closing of the Notes Offering, Rattler loaned the gross proceeds from the Notes Offering to Rattler LLC under the terms of a subordinated promissory note, dated as of July 14, 2020, by Rattler LLC in favor of Rattler (the “Intercompany Promissory Note”). The Intercompany Promissory Note requires Rattler LLC to repay the intercompany loan to Rattler on the same terms and in the same amounts as the Rattler Notes and has the same maturity date, interest rate, change of control repurchase and redemption provisions. Rattler’s right to receive payment under the Intercompany Promissory Note is contractually subordinated to Rattler LLC’s guarantee of the Rattler Notes and its other obligations under the Rattler credit agreement.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Repurchases of Viper Notes
After the second quarter of 2020, Viper repurchased $6 million of the outstanding principal amount of the Viper Notes at a cash price of 98.5% of the aggregate principal amount, which resulted in an immaterial gain on extinguishment of debt. As of July 31, 2020, the remaining outstanding principal amount of the Viper Notes totaled $480 million.
Current Commodity Environment
Oil prices dropped sharply in early March 2020, and then continued to decline reaching negative levels. This was a result of multiple factors affecting the supply and demand in global oil and natural gas markets, including actions taken by OPEC members and other oil exporting nations impacting commodity price and production levels and a significant decrease in demand due to the ongoing COVID-19 pandemic. While OPEC members and certain other nations agreed in April of 2020 to cut production, which helped to reduce a portion of the excess supply in the market and improve oil prices, there is no assurance that this agreement will continue or be observed by its parties, and downward pressure on commodity prices has continued and could continue for the foreseeable future. The Company cannot predict if or when commodity prices will stabilize and at what levels.
19. SEGMENT INFORMATION
The Company reports its operations in two operating segments: (i) the upstream segment, which is engaged in the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas and (ii) the midstream operations segment includes midstream services and real estate. All of Rattler’s equity method investments are included in the midstream segment.
The following tables summarize the results of the Company’s operating segments during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstream
|
|
Midstream Services
|
|
Eliminations
|
|
Total
|
Three Months Ended June 30, 2020:
|
(in millions)
|
|
|
|
|
|
|
Third-party revenues
|
$
|
412
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
425
|
|
Intersegment revenues
|
—
|
|
|
77
|
|
|
(77)
|
|
|
—
|
|
Total revenues
|
412
|
|
|
90
|
|
|
(77)
|
|
|
425
|
|
Depreciation, depletion and amortization
|
331
|
|
|
12
|
|
|
—
|
|
|
343
|
|
Impairment of oil and natural gas properties
|
2,539
|
|
|
—
|
|
|
—
|
|
|
2,539
|
|
(Loss) income from operations
|
(2,642)
|
|
|
29
|
|
|
(59)
|
|
|
(2,672)
|
|
Interest expense, net
|
(44)
|
|
|
(2)
|
|
|
—
|
|
|
(46)
|
|
Other expense
|
(402)
|
|
|
(15)
|
|
|
(3)
|
|
|
(420)
|
|
(Benefit from) provision for income taxes
|
(682)
|
|
|
1
|
|
|
—
|
|
|
(681)
|
|
Net (loss) income attributable to non-controlling interest
|
(18)
|
|
|
10
|
|
|
(10)
|
|
|
(18)
|
|
Net (loss) income attributable to Diamondback Energy
|
(2,344)
|
|
|
3
|
|
|
(52)
|
|
|
(2,393)
|
|
As of June 30, 2020:
|
|
|
|
|
|
|
|
Total assets
|
$
|
18,846
|
|
|
$
|
1,779
|
|
|
$
|
(288)
|
|
|
$
|
20,337
|
|
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstream
|
|
Midstream Services
|
|
Eliminations
|
|
Total
|
Three Months Ended June 30, 2019:
|
(in millions)
|
|
|
|
|
|
|
Third-party revenues
|
$
|
1,002
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
1,021
|
|
Intersegment revenues
|
—
|
|
|
93
|
|
|
(93)
|
|
|
—
|
|
Total revenues
|
1,002
|
|
|
112
|
|
|
(93)
|
|
|
1,021
|
|
Depreciation, depletion and amortization
|
349
|
|
|
10
|
|
|
—
|
|
|
359
|
|
Income from operations
|
419
|
|
|
56
|
|
|
(64)
|
|
|
411
|
|
Interest expense, net
|
(49)
|
|
|
—
|
|
|
—
|
|
|
(49)
|
|
Other income
|
50
|
|
|
—
|
|
|
(3)
|
|
|
47
|
|
Provision for income taxes
|
93
|
|
|
9
|
|
|
—
|
|
|
102
|
|
Net income attributable to non-controlling interest
|
7
|
|
|
15
|
|
|
(15)
|
|
|
7
|
|
Net income attributable to Diamondback Energy
|
369
|
|
|
32
|
|
|
(52)
|
|
|
349
|
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
Total assets
|
$
|
22,125
|
|
|
$
|
1,636
|
|
|
$
|
(230)
|
|
|
$
|
23,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstream
|
|
Midstream Services
|
|
Eliminations
|
|
Total
|
Six Months Ended June 30, 2020:
|
(in millions)
|
|
|
|
|
|
|
Third-party revenues
|
$
|
1,295
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
1,324
|
|
Intersegment revenues
|
—
|
|
|
189
|
|
|
(189)
|
|
|
—
|
|
Total revenues
|
1,295
|
|
|
218
|
|
|
(189)
|
|
|
1,324
|
|
Depreciation, depletion and amortization
|
725
|
|
|
25
|
|
|
—
|
|
|
750
|
|
Impairment of oil and natural gas properties
|
3,548
|
|
|
—
|
|
|
—
|
|
|
3,548
|
|
(Loss) income from operations
|
(3,424)
|
|
|
90
|
|
|
(140)
|
|
|
(3,474)
|
|
Interest expense, net
|
(89)
|
|
|
(5)
|
|
|
—
|
|
|
(94)
|
|
Other income (expense)
|
88
|
|
|
(18)
|
|
|
(5)
|
|
|
65
|
|
(Benefit from) provision for income taxes
|
(603)
|
|
|
5
|
|
|
—
|
|
|
(598)
|
|
Net (loss) income attributable to non-controlling interest
|
(146)
|
|
|
51
|
|
|
(51)
|
|
|
(146)
|
|
Net (loss) income attributable to Diamondback Energy
|
(2,587)
|
|
|
16
|
|
|
(94)
|
|
|
(2,665)
|
|
As of June 30, 2020:
|
|
|
|
|
|
|
|
Total assets
|
$
|
18,846
|
|
|
$
|
1,779
|
|
|
$
|
(288)
|
|
|
$
|
20,337
|
|
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstream
|
|
Midstream Services
|
|
Eliminations
|
|
Total
|
Six Months Ended June 30, 2019:
|
(in millions)
|
|
|
|
|
|
|
Third-party revenues
|
$
|
1,845
|
|
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
1,885
|
|
Intersegment revenues
|
—
|
|
|
167
|
|
|
(167)
|
|
|
—
|
|
Total revenues
|
1,845
|
|
|
207
|
|
|
(167)
|
|
|
1,885
|
|
Depreciation, depletion and amortization
|
661
|
|
|
20
|
|
|
—
|
|
|
681
|
|
Income from operations
|
744
|
|
|
106
|
|
|
(120)
|
|
|
730
|
|
Interest expense, net
|
(95)
|
|
|
—
|
|
|
—
|
|
|
(95)
|
|
Other expense
|
(259)
|
|
|
—
|
|
|
(3)
|
|
|
(262)
|
|
Provision for income taxes
|
49
|
|
|
20
|
|
|
—
|
|
|
69
|
|
Net income attributable to non-controlling interest
|
40
|
|
|
15
|
|
|
(15)
|
|
|
40
|
|
Net income attributable to Diamondback Energy
|
$
|
396
|
|
|
$
|
71
|
|
|
$
|
(108)
|
|
|
359
|
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
Total assets
|
$
|
22,125
|
|
|
$
|
1,636
|
|
|
$
|
(230)
|
|
|
$
|
23,531
|
|