Diamondback Energy, Inc. [FANG] Filings

10-Q 1 fang-20220331.htm 10-Q fang-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-35700

Diamondback Energy, Inc.

(Exact Name of Registrant As Specified in Its Charter)


DE		45-4502447
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

500 West Texas
Suite 1200
Midland,	TX	79701
(Address of principal executive offices)		(Zip code)

(432) 221-7400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	FANG	The Nasdaq Stock Market LLC
		(NASDAQ Global Select Market)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 29, 2022, the registrant had 177,492,631 shares of common stock outstanding.

DIAMONDBACK ENERGY, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2022

TABLE OF CONTENTS


			Page
Glossary of Oil and Natural Gas Terms			ii
Glossary of Certain Other Terms			iii
Cautionary Statement Regarding Forward-Looking Statements			iv

PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)			1
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations			3

Condensed Consolidated Statements of Stockholders’ Equity			4
Condensed Consolidated Statements of Cash Flows			5
Condensed Notes to Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27

Item 3. Quantitative and Qualitative Disclosures About Market Risk			47

Item 4. Controls and Procedures			48

PART II. OTHER INFORMATION
Item 1. Legal Proceedings			49

Item 1A. Risk Factors			49

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			50

Item 6. Exhibits			51

Signatures			52

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GLOSSARY OF OIL AND NATURAL GAS TERMS

The following is a glossary of certain oil and natural gas industry terms that are used in this Quarterly Report on Form 10-Q (this “report”):



Basin			A large depression on the earth’s surface in which sediments accumulate.
Bbl or barrel			One stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons.

BO			One barrel of crude oil.
BOE			One barrel of oil equivalent, with six thousand cubic feet of natural gas being equivalent to one barrel of oil.
BOE/d			BOE per day.
British Thermal Unit or Btu			The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
Completion			The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency.











Finding and development costs			Capital costs incurred in the acquisition, exploitation and exploration of proved oil and natural gas reserves divided by proved reserve additions and revisions to proved reserves.

Gross acres or gross wells			The total acres or wells, as the case may be, in which a working interest is owned.

Horizontal wells			Wells drilled directionally horizontal to allow for development of structures not reachable through traditional vertical drilling mechanisms.



MBbl			One thousand barrels of crude oil and other liquid hydrocarbons.
MBO/d			One thousand BO per day.
MBOE/d			One thousand BOE per day.
Mcf			One thousand cubic feet of natural gas.

Mineral interests			The interests in ownership of the resource and mineral rights, giving an owner the right to profit from the extracted resources.
MMBtu			One million British Thermal Units.

Net acres or net wells			The sum of the fractional working interest owned in gross acres.


Oil and natural gas properties			Tracts of land consisting of properties to be developed for oil and natural gas resource extraction.






Prospect			A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

Proved reserves			The estimated quantities of oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.


Reserves			The estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to the market and all permits and financing required to implement the project. Reserves are not assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).
Reservoir			A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or crude oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.

Royalty interest			An interest that gives an owner the right to receive a portion of the resources or revenues without having to carry any costs of development, which may be subject to expiration.




Working interest			An operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production and requires the owner to pay a share of the costs of drilling and production operations.
WTI			West Texas Intermediate.

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GLOSSARY OF CERTAIN OTHER TERMS

The following is a glossary of certain other terms that are used in this report:




ASC			Accounting Standards Codification.
ASU			Accounting Standards Update.
December 2019 Notes			The Company’s 3.250% senior unsecured notes due 2026 and the Company’s 3.500% senior unsecured notes due 2029 issued under the IG Indenture and the related first supplemental indenture.


Equity Plan			The Company’s Equity Incentive Plan.
Exchange Act			The Securities Exchange Act of 1934, as amended.
FASB			Financial Accounting Standards Board.
GAAP			Accounting principles generally accepted in the United States.


IG Indenture			The indenture, dated as of December 5, 2019, among the Company, the subsidiary guarantors party thereto and Wells Fargo, as the trustee, as supplemented by the supplemental indentures relating to the outstanding December 2019 Notes (defined above), the March 2021 Notes (defined below) and the March 2022 Notes (defined below).
LIBOR			The London interbank offered rate.
March 2021 Notes			The Company’s 0.900% Senior Notes due 2023, the Company’s 3.125% Senior Notes due 2031 and the Company’s 4.400% Senior Notes due 2051 issued under the IG Indenture and the related third supplemental indenture.
March 2022 Notes			The Company’s 4.250% Senior Notes due 2052, issued under the IG Indenture and the related third supplemental indenture.

NYMEX			New York Mercantile Exchange.
OPEC			Organization of the Petroleum Exporting Countries.
Rattler			Rattler Midstream LP, a Delaware limited partnership.

Rattler LLC			Rattler Midstream Operating LLC, a Delaware limited liability company and a subsidiary of Rattler.



SEC			United States Securities and Exchange Commission.


Senior Notes			The outstanding December 2019 Notes, the March 2021 Notes and the March 2022 Notes.
Viper			Viper Energy Partners LP, a Delaware limited partnership.

Viper LLC			Viper Energy Partners LLC, a Delaware limited liability company and a subsidiary of Viper.



Wells Fargo			Wells Fargo Bank, National Association.

iii

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Various statements contained in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, which involve risks, uncertainties, and assumptions. All statements, other than statements of historical fact, including statements regarding our: future performance; business strategy; future operations (including drilling plans and capital plans); estimates and projections of revenues, losses, costs, expenses, returns, cash flow, and financial position; reserve estimates and our ability to replace or increase reserves; anticipated benefits of strategic transactions (including acquisitions and divestitures); and plans and objectives of management (including plans for future cash flow from operations and for executing environmental strategies) are forward-looking statements. When used in this report, the words “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “guidance,” “intend,” “may,” “model,” “outlook,” “plan,” “positioned,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions (including the negative of such terms) as they relate to the Company are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. In particular, the factors discussed in this report and detailed under Part II, Item 1A. Risk Factors in this report and our Annual Report on Form 10–K for the year ended December 31, 2021 could affect our actual results and cause our actual results to differ materially from expectations, estimates or assumptions expressed, forecasted or implied in such forward-looking statements. Unless the context requires otherwise, references to “we,” “us,” “our” or the “Company” are intended to mean the business and operations of the Company and its consolidated subsidiaries.

Factors that could cause our outcomes to differ materially include (but are not limited to) the following:

•Changes in supply and demand levels for oil, natural gas, and natural gas liquids, and the resulting impact on the price for those commodities;

•the impact of public health crises, including epidemic or pandemic diseases such as the COVID-19 pandemic, and any related company or government policies or actions;

•actions taken by the members of OPEC and Russia affecting the production and pricing of oil, as well as other domestic and global political, economic, or diplomatic developments;

•changes in general economic, business or industry conditions, including changes in foreign currency exchange rates, interest rates, and inflation rates;

•regional supply and demand factors, including delays, curtailment delays or interruptions of production, or governmental orders, rules or regulations that impose production limits;

•federal and state legislative and regulatory initiatives relating to hydraulic fracturing, including the effect of existing and future laws and governmental regulations;

•restrictions on the use of water, including limits on the use of produced water and a moratorium on new produced water well permits recently imposed by the Texas Railroad Commission in an effort to control induced seismicity in the Permian Basin;

•significant declines in prices for oil, natural gas, or natural gas liquids, which could require recognition of significant impairment charges;

•changes in U.S. energy, environmental, monetary and trade policies;

•conditions in the capital, financial and credit markets, including the availability and pricing of capital for drilling and development operations and our environmental and social responsibility projects;

•challenges with employee retention and an increasingly competitive labor market due to a sustained labor shortage or increased turnover caused by the COVID-19 pandemic;

•changes in availability or cost of rigs, equipment, raw materials, supplies, oilfield services;

•changes in safety, health, environmental, tax, and other regulations or requirements (including those addressing air emissions, water management, or the impact of global climate change);

•security threats, including cybersecurity threats and disruptions to our business and operations from breaches of our information technology systems, or from breaches of information technology systems of third parties with whom we transact business;

•lack of, or disruption in, access to adequate and reliable transportation, processing, storage, and other facilities for our oil, natural gas, and natural gas liquids;

•failures or delays in achieving expected reserve or production levels from existing and future oil and natural gas developments, including due to operating hazards, drilling risks, or the inherent uncertainties in predicting reserve and reservoir performance;

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•difficulty in obtaining necessary approvals and permits;

•severe weather conditions;

•acts of war or terrorist acts and the governmental or military response thereto;

•changes in the financial strength of counterparties to our credit agreement and hedging contracts;

•changes in our credit rating; and

•other risks and factors disclosed in this report.

In light of these factors, the events anticipated by our forward-looking statements may not occur at the time anticipated or at all. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. We cannot predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those anticipated by any forward-looking statements we may make. Accordingly, you should not place undue reliance on any forward-looking statements made in this report. All forward-looking statements speak only as of the date of this report or, if earlier, as of the date they were made. We do not intend to, and disclaim any obligation to, update or revise any forward-looking statements unless required by applicable law.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Diamondback Energy, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

	March 31,		December 31,
	2022		2021
	(In millions, except par values and share data)
Assets
Current assets:
Cash and cash equivalents	$	149	$	654
Restricted cash	18		18
Accounts receivable:
Joint interest and other, net	113		72
Oil and natural gas sales, net	966		598

Inventories	62		62

Derivative instruments	6		13
Income tax receivable	—		1

Prepaid expenses and other current assets	33		28
Total current assets	1,347		1,446
Property and equipment:
Oil and natural gas properties, full cost method of accounting ($8,512 million and $8,496 million excluded from amortization at March 31, 2022 and December 31, 2021, respectively)	33,645		32,914
Midstream assets	1,118		1,076
Other property, equipment and land	185		174
Accumulated depletion, depreciation, amortization and impairment	(13,840)		(13,545)
Property and equipment, net	21,108		20,619
Funds held in escrow	—		12
Equity method investments	643		613
Derivative instruments	37		4
Deferred income taxes, net	37		40
Investment in real estate, net	88		88
Other assets	71		76
Total assets	$	23,331	$	22,898

See accompanying notes to condensed consolidated financial statements.

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Diamondback Energy, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets - (Continued)

(Unaudited)


	March 31,		December 31,
	2022		2021
Liabilities and Stockholders’ Equity	(In millions, except par values and share data)

Current liabilities:
Accounts payable - trade	$	49	$	36

Accrued capital expenditures	301		295
Current maturities of long-term debt	45		45
Other accrued liabilities	411		419
Revenues and royalties payable	578		452
Derivative instruments	339		174
Deferred income taxes	149		17

Total current liabilities	1,872		1,438
Long-term debt	5,803		6,642
Derivative instruments	94		29
Asset retirement obligations	254		166
Deferred income taxes	1,421		1,338
Other long-term liabilities	35		40
Total liabilities	9,479		9,653
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock, $0.01 par value; 400,000,000 shares authorized; 177,550,589 and 177,551,347 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively	2		2
Additional paid-in capital	14,067		14,084
Retained earnings (accumulated deficit)	(1,326)		(1,998)

Total Diamondback Energy, Inc. stockholders’ equity	12,743		12,088
Non-controlling interest	1,109		1,157
Total equity	13,852		13,245
Total liabilities and equity	$	23,331	$	22,898

See accompanying notes to condensed consolidated financial statements.

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Diamondback Energy, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended March 31,
	2022		2021
	(In millions, except per share amounts, shares in thousands)
Revenues:
Oil sales	$	1,946	$	944
Natural gas sales	154		104
Natural gas liquid sales	289		124

Midstream services	17		11
Other operating income	2		1
Total revenues	2,408		1,184
Costs and expenses:
Lease operating expenses	149		102
Production and ad valorem taxes	161		75
Gathering and transportation	59		31
Midstream services expense	22		28
Depreciation, depletion, amortization and accretion	313		273


General and administrative expenses	36		25

Merger and integration expense	—		75
Other operating expense	8		4
Total costs and expenses	748		613
Income (loss) from operations	1,660		571
Other income (expense):

Interest expense, net	(40)		(56)
Other income (expense), net	1		1

Gain (loss) on derivative instruments, net	(552)		(164)



Gain (loss) on extinguishment of debt	(54)		(61)
Income (loss) from equity investments	9		(3)
Total other income (expense), net	(636)		(283)
Income (loss) before income taxes	1,024		288
Provision for (benefit from) income taxes	221		65
Net income (loss)	803		223
Net income (loss) attributable to non-controlling interest	24		3
Net income (loss) attributable to Diamondback Energy, Inc.	$	779	$	220
Earnings (loss) per common share:
Basic	$	4.39	$	1.34
Diluted	$	4.36	$	1.33
Weighted average common shares outstanding:
Basic	177,565		164,169
Diluted	178,555		164,926
Dividends declared per share	$	3.05	$	0.40

See accompanying notes to condensed consolidated financial statements.

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Diamondback Energy, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Common Stock			Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Non-Controlling Interest		Total
	Shares	Amount
	($ in millions, shares in thousands)
Balance December 31, 2021	177,551	$	2	$	14,084	$	(1,998)	$	1,157	$	13,245
Unit-based compensation	—	—		—		—		3		3
Distribution equivalent rights payments	—	—		—		—		(1)		(1)

Stock-based compensation	—	—		16		—		—		16
Cash paid for tax withholding on vested equity awards	—	—		(15)		—		—		(15)
Repurchased shares under buyback program	(58)	—		(7)		—		—		(7)
Repurchased units under buyback programs	—	—		—		—		(42)		(42)
Distributions to non-controlling interest	—	—		—		—		(47)		(47)
Dividend paid	—	—		—		(107)		—		(107)
Exercise of stock options and issuance of restricted stock units and awards	58	—		1		—		—		1
Change in ownership of consolidated subsidiaries, net	—	—		(12)		—		15		3
Net income (loss)	—	—		—		779		24		803
Balance March 31, 2022	177,551	$	2	$	14,067	$	(1,326)	$	1,109	$	13,852


	Common Stock			Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Non-Controlling Interest		Total
	Shares	Amount
	($ in millions, shares in thousands)
Balance December 31, 2020	158,088	$	2	$	12,656	$	(3,864)	$	1,010	$	9,804
Unit-based compensation	—	—		—		—		3		3
Distribution equivalent rights payments	—	—		—		(1)		—		(1)
Common units issued for acquisitions	22,795	—		1,727		—		—		1,727
Stock-based compensation	—	—		11		—		—		11
Cash paid for tax withholding on vested equity awards	—	—		(6)		—		—		(6)
Repurchased units under buyback programs	—	—		—		—		(24)		(24)
Distributions to non-controlling interest	—	—		—		—		(17)		(17)
Dividend paid	—	—		—		(68)		—		(68)
Exercise of stock options and issuance of restricted stock units and awards	101	—		—		—		—		—
Change in ownership of consolidated subsidiaries, net	—	—		(4)		—		4		—
Net income (loss)	—	—		—		220		3		223
Balance March 31, 2021	180,984	$	2	$	14,384	$	(3,713)	$	979	$	11,652

See accompanying notes to condensed consolidated financial statements.

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Diamondback Energy, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended March 31,
	2022		2021
	(In millions)
Cash flows from operating activities:
Net income (loss)	$	803	$	223
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for (benefit from) deferred income taxes	89		64




Depreciation, depletion, amortization and accretion	313		273

(Gain) loss on extinguishment of debt	54		61

(Gain) loss on derivative instruments, net	552		164
Cash received (paid) on settlement of derivative instruments	(420)		(178)


Equity-based compensation expense	15		10



Other	5		10
Changes in operating assets and liabilities:
Accounts receivable	(403)		(137)

Income tax receivable	1		100

Prepaid expenses and other	2		22
Accounts payable and accrued liabilities	(13)		(26)


Income tax payable	132		—
Revenues and royalties payable	125		50

Other	(3)		(12)
Net cash provided by (used in) operating activities	1,252		624
Cash flows from investing activities:
Drilling, completions and infrastructure additions to oil and natural gas properties	(418)		(289)


Additions to midstream assets	(19)		(7)

Property acquisitions	(296)		(346)



Proceeds from sale of assets	35		—


Contributions to equity method investments	(29)		(4)
Distributions from equity method investments	—		9



Other	11		50
Net cash provided by (used in) investing activities	(716)		(587)
Cash flows from financing activities:
Proceeds from borrowings under credit facilities	79		432
Repayments under credit facilities	(100)		(455)
Proceeds from senior notes	750		2,200
Repayment of senior notes	(1,500)		(1,916)
Proceeds from (repayments to) joint venture	5		(4)
Premium on extinguishment of debt	(47)		(166)











Repurchased shares under buyback program	(7)		—
Repurchased units under buyback program	(42)		(24)

Dividends to stockholders	(107)		(68)

Distributions to non-controlling interest	(47)		(17)


Financing portion of net cash received (paid) for derivative instruments	—		76
Other	(25)		(29)
Net cash provided by (used in) financing activities	(1,041)		29
Net increase (decrease) in cash and cash equivalents	(505)		66
Cash, cash equivalents and restricted cash at beginning of period	672		108
Cash, cash equivalents and restricted cash at end of period(1)	$	167	$	174

(1) See Note 2—Summary of Significant Accounting Policies

See accompanying notes to condensed consolidated financial statements.

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Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

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 natural 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.

As of March 31, 2022, the wholly owned subsidiaries of Diamondback include Diamondback E&P LLC (“Diamondback E&P”), 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 QEP Resources, Inc. (“QEP”), a Delaware corporation.

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries after all significant intercompany balances and transactions have been eliminated upon consolidation.

Diamondback’s publicly traded subsidiaries Viper Energy Partners LP (“Viper”) and Rattler Midstream LP (“Rattler”) are consolidated in the Company’s financial statements. As of March 31, 2022, the Company owned approximately 55% 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 March 31, 2022, the Company owned approximately 74% 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 separately from the Company’s equity and net income attributable to the Company.

These condensed 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, 2021, which contains a summary of the Company’s significant accounting policies and other disclosures.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications had an immaterial effect on the previously reported total assets, total liabilities, stockholders’ equity, results of operations or cash flows.

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 as of the date of the consolidated financial statements. Actual results could differ from those estimates.

Making accurate estimates and assumptions is particularly difficult in the oil and natural gas industry, given the challenges resulting from volatility in oil and natural gas prices and the effects of the COVID-19 pandemic. Such circumstances generally increase the uncertainty in the Company’s accounting estimates, particularly those involving financial forecasts.

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Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

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, the fair value determination of acquired assets and liabilities assumed, fair value estimates of derivative instruments and estimates of income taxes.

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash as reported at the end of the period in the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 to the line items within the condensed consolidated balance sheets:


	Three Months Ended March 31,
	2022		2021
	(In millions)
Cash and cash equivalents	$	149	$	121
Restricted cash	18		19
Restricted cash included in funds held in escrow	—		34
Total cash, cash equivalents and restricted cash	$	167	$	174

Recent Accounting Pronouncements

Recently Adopted Pronouncements

There are no recently adopted pronouncements.

Accounting Pronouncements Not Yet Adopted

In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” This update requires the acquirer in a business combination to record contract asset and liabilities following Topic 606 – “Revenue from Contracts with Customers” at acquisition as if it had originated the contract, rather than at fair value. This update is effective for public business entities beginning after December 15, 2022 with early adoption permitted. The Company continues to evaluate the provisions of this update, but does not believe the adoption will have a material impact on its financial position, results of operations or liquidity.

The Company considers the applicability and impact of all ASUs. ASUs not discussed above were assessed and determined to be either not applicable, the effects of adoption are not expected to be material or are clarifications of ASUs previously disclosed.

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Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

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 March 31, 2022								Three Months Ended March 31, 2021
	Midland Basin		Delaware Basin		Other		Total		Midland Basin		Delaware Basin		Other		Total
	(In millions)
Oil sales	$	1,398	$	545	$	3	$	1,946	$	569	$	358	$	17	$	944
Natural gas sales	98		56		—		154		41		61		2		104
Natural gas liquid sales	191		97		1		289		75		47		2		124

Total	$	1,687	$	698	$	4	$	2,389	$	685	$	466	$	21	$	1,172

4. ACQUISITIONS AND DIVESTITURES

First Quarter 2022 Acquisition

On January 18, 2022, the Company acquired, from an unrelated third-party seller, approximately 6,200 net acres in the Delaware Basin for $232 million in cash, including customary post-closing adjustments. The acquisition was funded through cash on hand.

Guidon Operating LLC

On February 26, 2021, the Company completed its acquisition of all leasehold interests and related assets of Guidon Operating LLC (the “Guidon Acquisition”) which include approximately 32,500 net acres in the Northern Midland Basin in exchange for 10.68 million shares of the Company’s common stock and $375 million of cash. The cash portion of this transaction was funded through a combination of cash on hand and borrowings under the Company’s credit facility. As a result of the Guidon Acquisition, the Company added approximately 210 gross producing wells.

The following table presents the acquisition consideration paid in the Guidon Acquisition (in millions, except per share data, shares in thousands):


Consideration:
Shares of Diamondback common stock issued at closing	10,676
Closing price per share of Diamondback common stock on the closing date	$	69.28
Fair value of Diamondback common stock issued	$	740
Cash consideration	375
Total consideration (including fair value of Diamondback common stock issued)	$	1,115

Purchase Price Allocation

The Guidon Acquisition has been accounted for as a business combination using the acquisition method. The following table represents the allocation of the total purchase price paid in the Guidon Acquisition to the identifiable assets acquired based on the fair values at the acquisition date. The purchase price allocation was complete as of the first quarter of 2022.

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Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

The following table sets forth the Company’s purchase price allocation (in millions):








Total consideration	$	1,115

Fair value of liabilities assumed:
Asset retirement obligations	9

Fair value of assets acquired:
Oil and gas properties	1,110
Midstream assets	14
Amount attributable to assets acquired	1,124
Net assets acquired and liabilities assumed	$	1,115

Oil and natural gas properties were valued using an income approach utilizing the discounted cash flow method, which takes into account production forecasts, projected commodity prices and pricing differentials, and estimates of future capital and operating costs which were then discounted utilizing an estimated weighted-average cost of capital for industry market participants. The fair value of acquired midstream assets was based on the cost approach, which utilized asset listings and cost records with consideration for the reported age, condition, utilization and economic support of the assets. The majority of the measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and are therefore considered Level 3 inputs.

With the completion of the Guidon Acquisition, the Company acquired proved properties of $537 million and unproved properties of $573 million. The results of operations attributable to the Guidon Acquisition since the acquisition date have been included in the condensed consolidated statements of operations and include $28 million of total revenue and $16 million of net income for the three months ended March 31, 2021.

QEP Resources, Inc.

On March 17, 2021, the Company completed its acquisition of QEP in an all-stock transaction (the “QEP Merger”). The addition of QEP’s assets increased the Company’s net acreage in the Midland Basin by approximately 49,000 net acres. Under the terms of the QEP Merger, each eligible share of QEP common stock issued and outstanding immediately prior to the effective time converted into the right to receive 0.050 of a share of Diamondback common stock, with cash being paid in lieu of any fractional shares (the “merger consideration”).

The following table presents the acquisition consideration paid to QEP stockholders in the QEP Merger (in millions, except per share data, shares in thousands):


Consideration:
Eligible shares of QEP common stock converted into shares of Diamondback common stock	238,153
Shares of QEP equity awards included in precombination consideration	4,221
Total shares of QEP common stock eligible for merger consideration	242,374
Exchange ratio	0.050
Shares of Diamondback common stock issued as merger consideration	12,119
Closing price per share of Diamondback common stock	$	81.41
Total consideration (fair value of the Company's common stock issued)	$	987

Purchase Price Allocation

The QEP Merger has been accounted for as a business combination using the acquisition method. The following table represents the preliminary allocation of the total purchase price for the acquisition of QEP to the identifiable assets acquired and the liabilities assumed based on the fair values at the acquisition date. The purchase price allocation was complete as of the first quarter of 2022.

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Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

The following table sets forth the Company’s purchase price allocation (in millions):



Total consideration	$	987

Fair value of liabilities assumed:
Accounts payable - trade	$	26
Accrued capital expenditures	38
Other accrued liabilities	107
Revenues and royalties payable	67
Derivative instruments	242
Long-term debt	1,710
Asset retirement obligations	54

Other long-term liabilities	63
Amount attributable to liabilities assumed	$	2,307

Fair value of assets acquired:
Cash, cash equivalents and restricted cash	$	22
Accounts receivable - joint interest and other, net	87
Accounts receivable - oil and natural gas sales, net	44
Inventories	18
Income tax receivable	33
Prepaid expenses and other current assets	7
Oil and natural gas properties	2,922
Other property, equipment and land	16
Deferred income taxes	39
Other assets	106
Amount attributable to assets acquired	3,294
Net assets acquired and liabilities assumed	$	987

The purchase price allocation above is based on the fair values of the assets and liabilities of QEP as of the closing date of the QEP Merger. The majority of the measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and are therefore considered Level 3 inputs. The fair value of acquired property and equipment, including midstream assets classified in oil and natural gas properties, is based on the cost approach, which utilized asset listings and cost records with consideration for the reported age, condition, utilization and economic support of the assets. Oil and natural gas properties were valued using an income approach utilizing the discounted cash flow method, which takes into account production forecasts, projected commodity prices and pricing differentials, and estimates of future capital and operating costs which were then discounted utilizing an estimated weighted-average cost of capital for industry market participants. The fair value of QEP’s outstanding senior unsecured notes was based on unadjusted quoted prices in an active market, which are considered Level 1 inputs. The value of derivative instruments was based on observable inputs including forward commodity-price curves which are considered Level 2 inputs. Deferred income taxes represent the tax effects of differences in the tax basis and merger-date fair values of assets acquired and liabilities assumed.

With the completion of the QEP Merger, the Company acquired proved properties of $2.0 billion and unproved properties of $733 million, primarily in the Midland Basin and the Williston Basin. In October 2021, the Company completed the divestiture of the Williston Basin properties, acquired as part of the QEP Merger and consisting of approximately 95,000 net acres, to Oasis Petroleum Inc. for net cash proceeds of approximately $586 million, after customary closing adjustments. See “—Williston Basin Divestiture” below.

The results of operations attributable to the QEP Merger since the acquisition date have been included in the condensed consolidated statements of operations and include $54 million of total revenue and $23 million of net income for the three months ended March 31, 2021.

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Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

Pro Forma Financial Information

The following unaudited summary pro forma financial information for the three months ended March 31, 2021 has been prepared to give effect to the QEP Merger and the Guidon Acquisition as if they had occurred on January 1, 2020. The unaudited pro forma financial information does not purport to be indicative of what the combined company’s results of operations would have been if these transactions had occurred on the dates indicated, nor is it indicative of the future financial position or results of operations of the combined company.

The below information reflects pro forma adjustments for the issuance of the Company’s common stock in exchange for QEP’s outstanding shares of common stock, as well as pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including adjustments to depreciation, depletion and amortization based on the full cost method of accounting and the purchase price allocated to property, plant, and equipment as well as adjustments to interest expense and the provision for (benefit from) income taxes.

Additionally, pro forma earnings were adjusted to exclude acquisition-related costs incurred by the Company for the QEP Merger and the Guidon Acquisition of approximately $75 million for the three months ended March 31, 2021 and acquisition-related costs incurred by QEP of $31 million through the closing date of the QEP Merger. These acquisition-related costs primarily consist of one-time severance costs and the accelerated or change-in-control vesting of certain QEP share-based awards for former QEP employees based on the terms of the merger agreement relating to the QEP Merger and other bank, legal and advisory fees. The pro forma results of operations do not include any cost savings or other synergies that may result from the QEP Merger and the Guidon Acquisition or any estimated costs that have been or will be incurred by the Company to integrate the acquired assets. The pro forma financial data does not include the results of operations for any other acquisitions made during the periods presented, as they were primarily acreage acquisitions and their results were not deemed material.




	Three Months Ended March 31, 2021
	(In millions, except per share amounts)
Revenues	$	1,481
Income (loss) from operations	$	684
Net income (loss)	$	146
Basic earnings (loss) per common share	$	0.81
Diluted earnings (loss) per common share	$	0.80

Williston Basin Divestiture

On October 21, 2021, the Company completed the divestiture of its Williston Basin oil and natural gas assets, consisting of approximately 95,000 net acres, to Oasis Petroleum Inc., for net cash proceeds of approximately $586 million, after customary closing adjustments. This transaction did not result in a significant alteration of the relationship between the Company’s capitalized costs and proved reserves and, accordingly, the Company recorded the proceeds as a reduction of its full cost pool with no gain or loss recognized on the sale. The Company used its net proceeds from this transaction toward debt reduction.

2021 Drop Down Transaction

On December 1, 2021, Diamondback completed the sale of certain water midstream assets to Rattler in exchange for cash proceeds of approximately $164 million, including post-closing adjustments, in a drop down transaction (the “Drop Down”). The midstream assets consist primarily of produced water gathering and disposal systems, produced water recycling facilities, and sourced water gathering and storage assets acquired by the Company through the Guidon Acquisition and the QEP Merger with a carrying value of approximately $164 million. The Company and Rattler have also mutually agreed to amend their commercial agreements covering produced water gathering and disposal and sourced water gathering services to add certain Diamondback leasehold acreage to Rattler’s dedication. The Drop Down transaction was accounted for as a transaction between entities under common control.

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Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

Viper’s Swallowtail Acquisition

On October 1, 2021, Viper acquired certain mineral and royalty interests from the Swallowtail entities pursuant to a definitive purchase and sale agreement for 15.25 million of Viper’s common units and approximately $225 million in cash (the “Swallowtail Acquisition”). The mineral and royalty interests acquired in the Swallowtail Acquisition represent approximately 2,313 net royalty acres primarily in the Northern Midland Basin, of which approximately 62% are operated by Diamondback. The Swallowtail Acquisition had an effective date of August 1, 2021. The cash portion of this transaction was funded through a combination of Viper’s cash on hand and approximately $190 million of borrowings under Viper LLC’s revolving credit facility.

5. PROPERTY AND EQUIPMENT

Property and equipment includes the following as of the dates indicated:


	March 31,		December 31,
	2022		2021
	(In millions)
Oil and natural gas properties:
Subject to depletion	$	25,133	$	24,418
Not subject to depletion	8,512		8,496
Gross oil and natural gas properties	33,645		32,914
Accumulated depletion	(5,716)		(5,434)
Accumulated impairment	(7,954)		(7,954)
Oil and natural gas properties, net	19,975		19,526
Midstream assets	1,118		1,076
Other property, equipment and land	185		174
Accumulated depreciation and impairment	(170)		(157)
Total property and equipment, net	$	21,108	$	20,619

Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter which determines a limit, or ceiling, on the book value of proved oil and natural gas properties. No impairment expense was recorded for the three months ended March 31, 2022 or 2021 based on the results of the respective quarterly ceiling tests.

In connection with the QEP Merger and the Guidon Acquisition, the Company recorded the oil and natural gas properties acquired at fair value, based on forward strip oil and natural gas pricing existing at the closing date of the respective transactions, in accordance with ASC 820 Fair Value Measurement. Pursuant to SEC guidance, the Company determined that the fair value of the properties acquired in the QEP Merger and the Guidon Acquisition clearly exceeded the related full cost ceiling limitation beyond a reasonable doubt. As such, the Company requested and received a waiver from the SEC to exclude the properties acquired from the ceiling test calculation for the quarter ended March 31, 2021. As a result, no impairment expense related to the QEP Merger and the Guidon Acquisition was recorded for the three months ended March 31, 2021. Had the Company not received a waiver from the SEC, an impairment charge of approximately $1.1 billion would have been recorded for such period. Management affirmed there has not been a decline in the fair value of these acquired assets. The properties acquired in the QEP Merger and the Guidon Acquisition had total unamortized costs at March 31, 2021 of $3.0 billion and $1.1 billion, respectively.

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 future trailing 12-month commodity prices decline as compared to the commodity prices used in prior quarters, the Company may have material write downs in subsequent quarters. 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.

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Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

6. ASSET RETIREMENT OBLIGATIONS

The following table describes the changes to the Company’s asset retirement obligations liability for the following periods:


	Three Months Ended March 31,
	2022		2021
	(In millions)
Asset retirement obligations, beginning of period	$	171	$	109
Additional liabilities incurred	21		2
Liabilities acquired	2		63
Liabilities settled and divested	(5)		(1)
Accretion expense	3		2
Revisions in estimated liabilities	75		20
Asset retirement obligations, end of period	267		195
Less current portion(1)	13		5
Asset retirement obligations - long-term	$	254	$	190

(1) The current portion of the asset retirement obligation is included in other accrued liabilities in the Company’s condensed consolidated balance sheets.

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Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

7. DEBT

Long-term debt consisted of the following as of the dates indicated:


	March 31,		December 31,
	2022		2021
	(In millions)

5.375% Senior Notes due 2022(1)	$	25	$	25
7.320% Medium-term Notes, Series A, due 2022(2)	20		20

5.250% Senior Notes due 2023(1)	10		10
2.875% Senior Notes due 2024	—

Diamondback Energy, Inc. [FANG] Filings
10-Q	[2022-05-05]
10-K	[2022-02-24]
10-Q	[2021-11-04]
10-Q	[2021-08-05]
10-Q	[2021-05-07]
10-K	[2021-02-25]
10-Q	[2020-11-05]
10-Q	[2020-08-10]
10-Q	[2020-05-08]
10-K	[2020-02-27]
10-Q	[2019-11-06]
10-Q	[2019-08-09]
10-Q	[2019-05-10]
10-K	[2019-02-25]
10-Q	[2018-11-07]
10-Q	[2018-08-09]
10-Q	[2018-05-10]
10-K	[2018-02-15]
10-Q	[2017-11-07]
10-Q	[2017-08-02]
10-Q	[2017-05-04]
10-K	[2017-02-15]
10-Q	[2016-11-08]
10-Q	[2016-08-09]
10-Q	[2016-05-05]
10-K	[2016-02-19]
10-Q	[2015-11-06]
10-Q	[2015-08-10]
10-Q	[2015-05-07]
10-K	[2015-02-20]
10-Q	[2014-11-06]
10-Q	[2014-08-07]
10-Q	[2014-05-09]
10-K	[2014-02-19]
10-Q	[2013-11-05]
10-Q	[2013-08-08]
S-1	[2013-08-08]
S-1	[2013-06-07]
10-Q	[2013-05-09]
S-1	[2013-04-11]
10-K	[2013-03-01]
10-Q	[2012-11-16]
S-1	[2012-02-14]