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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

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-38919
 
Rattler Midstream LP
(Exact Name of Registrant As Specified in Its Charter)
DE
83-1404608
(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 classTrading Symbol(s)Name of each exchange on which registered
Common UnitsRTLRThe 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 FilerAccelerated Filer
Non-Accelerated FilerSmaller 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 outstanding 38,146,047 common units representing limited partner interests and 107,815,152 Class B units representing limited partner interests.



RATTLER MIDSTREAM LP
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2022
TABLE OF CONTENTS
Page

i

GLOSSARY OF OIL AND NATURAL GAS TERMS
The following is a glossary of certain oil and natural gas industry terms used in this Quarterly Report on Form 10-Q (this “report”):
BasinA large depression on the earth’s surface in which sediments accumulate.
Bbl or barrelOne stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to crude oil, natural gas liquids or other liquid hydrocarbons.
Bbl/dBbl per day.
British Thermal Unit or BtuThe quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
Crude oilLiquid hydrocarbons found in the earth, which may be refined into fuel sources.
HydrocarbonAn organic compound containing only carbon and hydrogen.
MMcfOne million cubic feet of natural gas.
MMcf/dOne million cubic feet of natural gas per day.
MMBtuOne million British Thermal Units.
MMBtu/dOne million British Thermal Units per day.
Natural gasHydrocarbon gas found in the earth, composed of methane, ethane, butane, propane and other gases.
NGLNatural gas liquids; the combination of ethane, propane, butane and natural gasolines that, when removed from natural gas, becomes liquid under various levels of higher pressure and lower temperature.
Plugging and abandonmentRefers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface. Regulations of all states require plugging of abandoned wells.
ReservesEstimated remaining quantities of crude 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 crude oil and natural gas or related substances to the market and all permits and financing required to implement the project. Reserves should not be 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., potentially recoverable resources from undiscovered accumulations).
ReservoirA 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.
ThroughputThe volume of product transported or passing through a pipeline, plant, terminal or other facility.

ii

GLOSSARY OF CERTAIN OTHER TERMS
The following is a glossary of certain other terms used in this report:
ASUAccounting Standards Update.
ASCAccounting Standards Codification.
DiamondbackDiamondback Energy, Inc., a Delaware corporation, and its subsidiaries other than the Partnership and its subsidiaries (including the Operating Company).
Exchange ActThe Securities Exchange Act of 1934, as amended.
GAAPAccounting principles generally accepted in the United States.
General PartnerRattler Midstream GP LLC, a Delaware limited liability company; the General Partner of the Partnership and a wholly owned subsidiary of Diamondback.
Holding CompanyRattler Holdings LLC, a Delaware limited liability company and wholly owned subsidiary of Rattler.
LIBORThe London interbank offered rate.
LTIPRattler Midstream LP Long Term Incentive Plan.
NasdaqThe Nasdaq Global Select Market.
NotesThe 5.625% Senior Notes due 2025 issued on July 14, 2020.
OPECOrganization of the Petroleum Exporting Countries.
Operating CompanyRattler Midstream Operating LLC, a Delaware limited liability company and a consolidated subsidiary of the Partnership.
PartnershipRattler Midstream LP, a Delaware limited partnership.
Partnership agreementThe first amended and restated agreement of limited partnership, dated May 28, 2019.
RRCThe Railroad Commission of Texas.
SECSecurities and Exchange Commission.
Securities ActThe Securities Act of 1933, as amended.

iii

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; estimates and projections of revenues, losses, costs, expenses, returns, cash flow, and financial position; anticipated benefits of strategic transactions (including acquisitions and divestitures); and plans and objectives of management (including plans for future cash flow from operations) are forward-looking statements. When used in this document, 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 Partnership are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Although we believe that the expectations and assumptions reflected in our forward-looking statements are reasonable as and when made, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond our control. Accordingly, forward-looking statements are not guarantees of future performance and our actual outcomes could differ materially from what we have expressed in our forward-looking statements. Unless the context requires otherwise, references to “we,” “us,” “our” or the “Partnership” are intended to mean the business and operations of the Partnership and its consolidated subsidiaries.

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

Diamondback’s ability to meet its drilling and development plans on a timely basis or at all;
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 RRC 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 the demand for and costs of conducting midstream infrastructure 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;
our ability to identify, complete and effectively integrate acquisitions into our operations;
our ability to achieve anticipated synergies, system optionality and accretion associated with acquisitions;
the results of our investments in joint ventures;
the conditions impacting the timing and amount of common units repurchased under our common unit repurchase program;
severe weather conditions;
iv

acts of war or terrorist acts and the governmental or military response thereto;
defaults by Diamondback under our commercial agreements;
changes in the financial strength of counterparties to our credit agreement;
changes in our credit rating; and
the risk factors discussed in Part II, Item 1A Risk Factors in this report and Part I, Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021.

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 document. All forward-looking statements speak only as of the date of this document 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.

v


PART I. FINANCIAL INFORMATION



ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Rattler Midstream LP
Condensed Consolidated Balance Sheets
(Unaudited)
March 31,December 31,
 20222021
 (In thousands)
Assets  
Current assets:  
Cash$13,702 $19,897 
Accounts receivable—related-party49,885 58,154 
Accounts receivable—third-party, net14,107 9,415 
Sourced water inventory13,512 13,081 
Other current assets1,008 1,181 
Total current assets92,214 101,728 
Property, plant and equipment:  
Land98,646 98,645 
Property, plant and equipment1,119,113 1,075,405 
Accumulated depreciation, amortization and accretion(130,989)(121,507)
Property, plant and equipment, net1,086,770 1,052,543 
Equity method investments643,205 612,541 
Real estate assets, net84,563 84,609 
Intangible lease assets, net3,544 3,650 
Deferred tax asset59,548 62,356 
Other assets6,160 3,708 
Total assets$1,976,004 $1,921,135 
Liabilities and Unitholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities$58,480 $48,267 
Taxes payable603 603 
Asset retirement obligations 79 
Total current liabilities59,083 48,949 
Long-term debt723,460 687,956 
Asset retirement obligations33,932 16,911 
Total liabilities816,475 753,816 
Commitments and contingencies (Note 16)
Unitholders’ equity:
General Partner—Diamondback799 819 
Common units—public (38,146,047 units issued and outstanding as of March 31, 2022 and 38,356,771 units issued and outstanding as of December 31, 2021)
347,628 350,230 
Class B units—Diamondback (107,815,152 units issued and outstanding as of March 31, 2022 and as of December 31, 2021)
799 819 
Accumulated other comprehensive income (loss)11 10 
Total Rattler Midstream LP unitholders’ equity349,237 351,878 
Non-controlling interest810,292 815,441 
Total equity1,159,529 1,167,319 
Total liabilities and unitholders’ equity$1,976,004 $1,921,135 






See accompanying notes to condensed consolidated financial statements.
1

Rattler Midstream LP
Condensed Consolidated Statements of Operations
(Unaudited)

Three Months Ended March 31,
20222021
(In thousands, expect per unit amounts)
Revenues:  
Midstream revenues—related-party$90,302 $87,078 
Midstream revenues—third-party10,446 8,121 
Other revenues—related-party1,751 2,540 
Other revenues—third-party964 1,069 
Total revenues103,463 98,808 
Costs and expenses:  
Direct operating expenses21,628 32,511 
Cost of goods sold (exclusive of depreciation and amortization)15,180 8,811 
Real estate operating expenses533 517 
Depreciation, amortization and accretion20,687 11,246 
Impairment and abandonments1,082 3,371 
General and administrative expenses5,345 4,634 
(Gain) loss on disposal of assets(71)6 
Total costs and expenses64,384 61,096 
Income (loss) from operations39,079 37,712 
Other income (expense):  
Interest income (expense), net(8,684)(7,310)
Income (loss) from equity method investments9,080 (2,823)
Total other income (expense), net396 (10,133)
Net income (loss) before income taxes39,475 27,579 
Provision for (benefit from) income taxes2,384 1,671 
Net income (loss)37,091 25,908 
Less: Net income (loss) attributable to non-controlling interest 29,160 19,893 
Net income (loss) attributable to Rattler Midstream LP$7,931 $6,015 
Net income (loss) attributable to limited partners per common unit:
Basic$0.19 $0.13 
Diluted$0.19 $0.13 
Weighted average number of limited partner common units outstanding:
Basic38,159 41,742 
Diluted38,376 41,742 















See accompanying notes to condensed consolidated financial statements.
2

Rattler Midstream LP
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

Three Months Ended March 31,
20222021
(In thousands)
Net income (loss)$37,091 $25,908 
Other comprehensive income (loss):
Change in accumulated other comprehensive income (loss) of equity method investees attributable to non-controlling interest 299 
Change in accumulated other comprehensive income (loss) of equity method investees attributable to limited partner1 93 
Total other comprehensive income (loss)1 392 
Comprehensive income (loss)$37,092 $26,300 










































See accompanying notes to condensed consolidated financial statements.
3

Rattler Midstream LP
Condensed Consolidated Statements of Changes in Unitholders’ Equity
(Unaudited)

Limited PartnersGeneral PartnerNon-Controlling InterestAccumulated Other Comprehensive IncomeNon-Controlling Interest-Accumulated Other Comprehensive Income
Common UnitsAmountClass B UnitsAmountAmountAmountAmountAmountTotal
(In thousands)
Balance at December 31, 202138,357 $350,230 107,815 $819 $819 $815,441 $10 $ $1,167,319 
Repurchased units as part of unit buyback(217)(2,582)— — — — — — (2,582)
Unit-based compensation— 2,520 — — — — — — 2,520 
Issuance of common units6 — — — — — — — — 
Other comprehensive income (loss)— — — — — — 1 — 1 
Change in ownership of consolidated subsidiaries, net— 1,540 — — — (1,964)— — (424)
Cash paid for tax withholding on vested common units— (56)— — — — — — (56)
Distribution equivalent rights payments— (511)— — — — — — (511)
Distributions— (11,444)— (20)(20)(32,345)— — (43,829)
Net income (loss)— 7,931 — — — 29,160 — — 37,091 
Balance at March 31, 202238,146 $347,628 107,815 $799 $799 $810,292 $11 $ $1,159,529 

Limited PartnersGeneral PartnerNon-Controlling InterestAccumulated Other Comprehensive IncomeNon-Controlling Interest-Accumulated Other Comprehensive Income
Common UnitsAmountClass B UnitsAmountAmountAmountAmountAmountTotal
(In thousands)
Balance at December 31, 202042,357 $385,189 107,815 $899 $899 $793,638 $(123)$(402)$1,180,100 
Repurchased units as part of unit buyback(1,082)(11,114)— — — — — — (11,114)
Unit-based compensation— 2,332 — — — — — — 2,332 
Issuance of common units3 — — — — — — — — 
Other comprehensive income (loss)— — — — — — 93 299 392 
Change in ownership of consolidated subsidiaries, net— 712 — — — (908)— — (196)
Cash paid for tax withholding on vested common units— (21)— — — — — — (21)
Distribution equivalent rights payments— (418)— — — — — — (418)
Distributions— (8,263)— (20)(20)(21,563)— — (29,866)
Net income (loss)— 6,015 — — — 19,893 — — 25,908 
Balance at March 31, 202141,278 $374,432 107,815 $879 $879 $791,060 $(30)$(103)$1,167,117 






See accompanying notes to condensed consolidated financial statements.
4

Rattler Midstream LP
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 Three Months Ended March 31,
 20222021
 (In thousands)
Cash flows from operating activities: 
Net income (loss)$37,091 $25,908 
Adjustments to reconcile net income (loss) to net cash provided by operating activities: 
Provision for deferred income taxes2,387 1,671 
Depreciation, amortization and accretion20,687 11,246 
Unit-based compensation expense2,520 2,332 
Impairment and abandonments1,082 3,371 
(Income) loss from equity method investments(9,080)2,823 
Distributions from equity method investments7,550  
Other574 509 
Changes in operating assets and liabilities: 
Accounts receivable—related-party5,740 11,209 
Accounts receivable—third-party(4,660)(1,402)
Accounts payable and accrued liabilities(4,067)(6,092)
Other64 1,093 
Net cash provided by (used in) operating activities59,888 52,668 
Cash flows from investing activities: 
Additions to property, plant and equipment(17,888)(5,860)
Acquisitions of property, plant and equipment(4,334) 
Contributions to equity method investments(29,133)(3,663)
Distributions from equity method investments 9,107 
Other(2,750) 
Net cash provided by (used in) investing activities(54,105)(416)
Cash flows from financing activities: 
Proceeds from borrowings from Credit Agreement35,000 12,000 
Payments on Credit Agreement (37,000)
Repurchased units as part of unit buyback(2,582)(11,114)
Distribution to public(11,444)(8,263)
Distribution to Diamondback(32,365)(21,583)
Other(587)(459)
Net cash provided by (used in) financing activities(11,978)(66,419)
Net increase (decrease) in cash(6,195)(14,167)
Cash at beginning of period19,897 23,927 
Cash at end of period$13,702 $9,760 
Supplemental disclosure of non-cash investing activity: 
Accrued liabilities related to capital expenditures$23,180 $8,725 








See accompanying notes to condensed consolidated financial statements.
5

Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements
(Unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION

Organization

The Partnership is a publicly traded Delaware limited partnership focused on owning, operating, developing and acquiring midstream and energy-related infrastructure assets in the Midland and Delaware Basins of the Permian Basin.

As of March 31, 2022, the General Partner held a 100% general partner interest in the Partnership. Diamondback beneficially owned all of the Partnership’s 107,815,152 outstanding Class B units, representing approximately 74% of the Partnership’s total units outstanding. Diamondback owns and controls the General Partner.

As of March 31, 2022, the Holding Company owned a 26% membership interest and 100% of the sole managing membership interest in the Operating Company, and Diamondback owned, through its ownership of the Operating Company units, a 74% economic, non-voting interest in the Operating Company. As required by GAAP, the Partnership consolidates 100% of the assets and operations of the Holding Company and the Operating Company in its financial statements and reflects a non-controlling interest attributable to Diamondback. In addition to the Holding Company and the Operating Company, other consolidated subsidiaries of the Partnership include Tall City Towers LLC (“Tall Towers”), Rattler Ajax Processing LLC, Rattler BANGL LLC, Rattler WTG LLC and Rattler OMOG LLC.

As of March 31, 2022, the Partnership also owns indirect interests in OMOG JV LLC (“OMOG”), EPIC Crude Holdings, LP (“EPIC”), EPIC Crude Holdings GP, LLC, Wink to Webster Pipeline LLC (“Wink to Webster”), Gray Oak Pipeline, LLC (“Gray Oak”), Remuda Midstream Holdings LLC (the “WTG joint venture”) and BANGL LLC (“BANGL”), which are accounted for as equity method investments as discussed further in Note 8— Equity Method Investments.

Basis of Presentation

The accompanying condensed consolidated financial statements and related notes thereto were prepared in accordance with GAAP. All significant intercompany balances and transactions have been eliminated upon consolidation. The Partnership reports its operations in one reportable segment.

These condensed consolidated financial statements have been prepared by the Partnership 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 Partnership 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 Partnership’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which contains a summary of the Partnership’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 no effect on the previously reported total assets, total liabilities, unitholders’ equity, results of operations or cash flows.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Certain amounts included in or affecting the Partnership’s financial statements and related notes 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 financial statements are prepared. These estimates and assumptions affect the amounts the Partnership reports for assets and liabilities and the Partnership’s disclosure of contingent assets and liabilities as of the date of the financial statements.

6

Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
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. For instance, in response to the effects of COVID-19 and actions by OPEC members and other exporting nations on the supply and demand in global oil and natural gas markets, many companies in the oil and natural gas industry, including Diamondback, changed their business plans in response to changing market conditions. Such circumstances generally increase the uncertainty in the Partnership’s accounting estimates, particularly those involving financial forecasts.

The Partnership evaluates these estimates on an ongoing basis, using historical experience, consultation with experts and other methods it considers reasonable in each particular circumstance. Nevertheless, actual results may differ significantly from the Partnership’s estimates. Any effects on the Partnership’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, but are not limited to, (i) revenue accruals, (ii) the fair value of long-lived assets and equity method investments and (iii) income taxes.

Accrued Liabilities and Accounts Payable

Accrued liabilities and accounts payable consist of the following as of the dates indicated:
March 31, 2022December 31, 2021
(In thousands)
Direct operating expenses accrued$11,213 $12,978 
Interest expense accrued5,859 12,911 
Capital expenditures accrued16,079 5,509 
Sourced water purchases accrued7,759 7,040 
Accounts payable16,688 8,452 
Other882 1,377 
Accounts payable and accrued liabilities$58,480 $48,267 

Accumulated Other Comprehensive Income

The following table provides changes in the components of accumulated other comprehensive income, net of related income tax effects (in thousands):
Balance as of December 31, 2021
$10 
Other comprehensive income (loss) 1 
Balance as of March 31, 2022
$11 

Recent Accounting Pronouncements

Recently Adopted Pronouncements

There are no recently adopted pronouncements.

Accounting Pronouncements Not Yet Adopted

There are no recent accounting pronouncements not yet adopted.

The Partnership considers the applicability and impact of all ASUs. ASUs not discussed above were assessed and determined to be either not applicable or clarifications of ASUs previously disclosed.

7

Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
3.    REVENUE FROM CONTRACTS WITH CUSTOMERS

The Partnership generates revenues by charging fees on a per unit basis for gathering crude oil and natural gas, delivering and storing sourced water, and collecting, recycling and disposing of produced water.

Surface revenue, rental and real estate income and amortization of out of market leases are outside the scope of ASC Topic 606, “Revenue from Contracts with Customers.”

Disaggregation of Revenue

In the following table, revenue from contracts with customers is disaggregated by type of service and fee:
Three Months Ended March 31,
20222021
(In thousands)
Type of Service:
Produced water gathering and disposal$71,047 $66,328 
Sourced water gathering23,019 16,577 
Crude oil gathering6,209 6,791 
Natural gas gathering 5,400 
Caliche365  
Real estate contracts (non ASC 606 revenues)2,714 3,609 
Surface revenue (non ASC 606 revenues)109 103 
Total revenues$103,463 $98,808 

4.    ACQUISITIONS AND DIVESTITURES

2022 Activity

Acquisition

BANGL Joint Venture Acquisition

On January 19, 2022, a wholly owned subsidiary of the Operating Company invested approximately $22.2 million in cash to acquire a 10% interest in the BANGL joint venture. The BANGL pipeline, which began full commercial service in the fourth quarter of 2021, provides NGL takeaway capacity from the MPLX and WTG gas processing plants in the Permian Basin to the NGL fractionation hub in Sweeny, Texas and has expansion capacity of up to 300,000 Bbl/d.

2021 Activity

Acquisitions

WTG Joint Venture Acquisition

On October 5, 2021, the Partnership and a private affiliate of an investment fund formed the WTG joint venture. The Operating Company invested approximately $104.0 million in cash to acquire a 25% interest in the WTG joint venture, which then completed an acquisition of a majority interest in WTG Midstream LLC (“WTG Midstream”) from West Texas Gas, Inc. and its affiliates. WTG Midstream’s assets primarily consist of an interconnected gas gathering system and six major gas processing plants servicing the Midland Basin with 925 MMcf/d of total processing capacity with additional gas gathering and processing expansions planned.

8

Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
Drop Down Transaction

On December 1, 2021, the Partnership acquired certain water midstream assets (the “Drop Down assets”) from Diamondback and certain of its subsidiaries (the “Seller”) for $164.4 million, including post-closing adjustments, in cash in a drop down transaction (the “Drop Down”). The Partnership and the Seller also amended their commercial agreements covering produced water gathering and disposal and sourced water gathering services to add certain Diamondback leasehold acreage to the Partnership’s dedication. The Drop Down was accounted for as a transaction between entities under common control with assets recognized at Diamondback’s historical carrying value of $163.9 million in the consolidated balance sheet.

The Drop Down assets include nine active saltwater disposal injection wells with 330 MBbl/d of capacity, seven produced water recycling and storage facilities, 20 fresh water pits and approximately 4,000 acres of fee surface. Also included are 55 miles of produced water gathering pipeline and 18 miles of sourced water gathering pipeline. The Partnership funded the transaction with borrowings under the Credit Agreement (as defined below).

Divestitures

Amarillo Rattler Divestiture

On April 30, 2021, each of the Partnership and its joint venture partner, Amarillo Midstream, LLC, sold its 50% interest in Amarillo Rattler, LLC (“Amarillo Rattler”) to EnLink Midstream Operating, LP for aggregate total gross potential consideration of $75.0 million, consisting of $50.0 million at closing, $10.0 million upon the first anniversary of closing and up to $15.0 million in contingent earn-out payments over a three-year span based upon Diamondback's development activity. The earn-out payments are contingent on connected wells drilled in Diamondback’s leasehold acreage in the specified earn-out area during each year between 2023 and 2025. Net of transaction expenses and working capital adjustments, the Partnership received $23.5 million at closing, with an incremental $5.0 million due in April 2022, which resulted in a gain on sale of equity method investments of $23.0 million. The Partnership’s share of the contingent earn-out payments, which cannot exceed $7.5 million in total over the three-year span, will be recorded if and when the contingent payments become realizable.

In the first quarter of 2022, the Partnership acquired Amarillo Midstream, LLC’s share of the contingent consideration earn-out payments from the sale of Amarillo Rattler for $2.8 million. The Partnership will record the contingent earn-out payments if and when they become realizable.

Real Estate Divestiture

On June 28, 2021, the Partnership completed the sale of one of its real estate properties located in Midland, Texas for proceeds of $9.1 million, including closing adjustments. The sale resulted in a loss on disposal of assets of $0.4 million.

Pecos County Gas Gathering Divestiture

On November 1, 2021, the Partnership completed the sale of its gas gathering assets to Brazos Delaware Gas, LLC, an affiliate of Brazos Midstream, for aggregate total gross potential consideration of $93.0 million, consisting of (i) $83.0 million due at closing, subject to customary closing adjustments, (ii) a $5.0 million contingent payment due in 2023 if the aggregate actual deliveries of gas volumes into the gas gathering system by and/or on behalf of Diamondback and its affiliates exceed certain specified thresholds during 2022, and (iii) a $5.0 million contingent payment due in 2024 if the aggregate actual deliveries of gas volumes into the gas gathering system by and/or on behalf of Diamondback and its affiliates exceed certain specified thresholds during 2022 and 2023. The contingent payments will be recorded if and when they become realizable.

9

Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
5.    REAL ESTATE ASSETS

The following schedules present the cost and related accumulated depreciation or amortization (as applicable) of the Partnership’s real estate assets and intangible lease assets:
As of
Estimated Useful LivesMarch 31, 2022December 31, 2021
(Years)(In thousands)
Buildings
20-30
$95,611 $94,825 
Tenant improvements
5-15
4,527 4,506 
LandN/A964 964 
Land improvements
5-15
531 531 
Total real estate assets101,633 100,826 
Less: accumulated depreciation(17,070)(16,217)
Total investment in real estate, net$84,563 $84,609 

As of
Weighted Average Useful LivesMarch 31, 2022December 31, 2021
(Months)(In thousands)
In-place lease intangibles45$11,710 $11,645 
Less: accumulated amortization(9,603)(9,520)
In-place lease intangibles, net2,107 2,125 
Above-market lease intangibles453,623 3,623 
Less: accumulated amortization(2,186)(2,098)
Above-market lease intangibles, net1,437 1,525 
Total intangible lease assets, net$3,544 $3,650 

Depreciation and amortization expense for real estate assets was $0.9 million and $1.2 million for the three months ended March 31, 2022 and 2021, respectively.

The following table presents the Partnership’s estimated amortization expense related to lease intangibles for the periods indicated (in thousands):
Remainder of
20222023202420252026Thereafter
$621 $777 $952 $978 $206 $10 

10

Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
6.    PROPERTY, PLANT AND EQUIPMENT

The following table sets forth the Partnership’s property, plant and equipment:
As of
 Estimated Useful LivesMarch 31, 2022December 31, 2021
 (Years)(In thousands)
Produced water disposal systems
10-30
$788,269 $766,052 
Crude oil gathering systems(1)
30135,614 135,869 
Natural gas gathering and compression systems(1)
10-30
6,216 6,192 
Sourced water gathering systems(1)
30188,091 166,549 
Other3923 743 
Total property, plant and equipment1,119,113 1,075,405 
Less: accumulated depreciation, amortization and accretion(130,989)(121,507)
LandN/A98,646 98,645 
Total property, plant and equipment, net$1,086,770 $1,052,543 
(1)Included in gathering systems are $27.5 million and $13.1 million of assets at March 31, 2022 and December 31, 2021, respectively, that are not subject to depreciation, amortization and accretion as the systems were under construction and had not yet been put into service.

Depreciation expense related to property, plant and equipment was $19.1 million and $9.8 million for the three months ended March 31, 2022 and 2021, respectively. Depreciation expense included a write-off of $8.0 million related to early plugging and abandonment during the three months ended March 31, 2022. Depreciation expense in 2021 included a write-off of $3.4 million related to in-service projects that were abandoned during the three months ended March 31, 2021.

Capitalized internal costs and capitalized interest related to property, plant and equipment were immaterial for the three months ended March 31, 2022 and 2021.

The Partnership evaluates its long-lived assets for potential impairment whenever events or circumstances indicate it is more likely than not that the carrying amount of the asset, or set of assets, is greater than the fair value. An impairment involves comparing the estimated future undiscounted cash flows of an asset with the carrying amount. If the carrying amount of the asset exceeds the estimated future undiscounted cash flows, then an impairment charge is recorded for the difference between the estimated fair value of the asset and its carrying value. 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.

11

Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
7.    ASSET RETIREMENT OBLIGATIONS

Asset retirement obligations consist primarily of estimated costs of dismantlement, removal, site reclamation, plugging and abandonment and similar activities associated with the Partnership’s infrastructure assets. The following table reflects the changes in the Partnership’s asset retirement obligation for the following periods:

 Three Months Ended March 31,
 20222021
 (In thousands)
Asset retirement obligations, beginning of period$16,990 $15,128 
Liabilities incurred(1)
17,173 258 
Liabilities settled and divested(899)6 
Revisions109  
Accretion expense during period559 264 
Asset retirement obligations, end of period33,932 15,656 
Less current portion of asset retirement obligations 35 
Asset retirement obligations, long term$33,932 $15,621 
(1)Includes asset retirement obligations recorded for assets acquired in the Drop Down transaction and placed in service during the three months ended March 31, 2022.

8.    EQUITY METHOD INVESTMENTS

The following table presents the carrying values of the Partnership’s equity method investments as of the dates indicated:
Ownership InterestMarch 31, 2022December 31, 2021
(In thousands)
EPIC Crude Holdings, LP10 %$105,739 $107,210 
Gray Oak Pipeline, LLC10 %119,851 121,105 
Wink to Webster Pipeline LLC(1)
4 %86,145 86,207 
OMOG JV LLC60 %188,699 187,809 
WTG joint venture25 %117,490 110,143 
BANGL, LLC10 %25,281 67 
Total$643,205 $612,541 
(1)The Wink to Webster joint venture is developing a crude oil pipeline (the “Wink to Webster pipeline”). The Wink to Webster pipeline’s main segment began interim service operation in the fourth quarter of 2020, and the joint venture began full commercial operations in the first quarter of 2022.

Currently, the Partnership receives distributions from Gray Oak and OMOG, which are classified either within the operating or investing sections of the consolidated statements of cash flows by determining the nature of each distribution. The following table presents total distributions received from the Partnership’s equity method investments for the periods indicated:

Three Months Ended March 31,
20222021
(In thousands)
Gray Oak Pipeline, LLC$5,998 $5,758 
OMOG JV LLC1,552 3,349 
Total$7,550 $9,107 

12

Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
The following table summarizes the income (loss) of equity method investees reflected in the condensed consolidated statement of operations for the periods indicated:
Three Months Ended March 31,
20222021
(In thousands)
EPIC Crude Holdings, LP$(2,771)$(5,436)
Gray Oak Pipeline, LLC4,744 2,298 
Wink to Webster Pipeline LLC (663)(563)
OMOG JV LLC2,428 1,115 
Amarillo Rattler, LLC  (237)
WTG joint venture5,325  
BANGL, LLC17  
Total$9,080 $(2,823)

The Partnership reviews its equity method investments to determine if a loss in value which is other than temporary has occurred. If such a loss has occurred, the Partnership recognizes an impairment provision.

Based on indicators present at December 31, 2021 and March 31, 2022, the Partnership reviewed its equity method investment in EPIC and determined the carrying value of the investment was less than its estimated fair value due to a reduction in expected future cash flow. However, based on the Partnership’s review of various factors leading to the decline in the fair value of the investment, it was determined that the carrying value of the EPIC investment will recover in the near term and, therefore, an other than temporary impairment in the carrying value of the EPIC investment does not exist at March 31, 2022. However, should the conclusions on certain factors included in the Partnership’s analysis, including estimates of EPIC’s future cash flows change, the Partnership may recognize an impairment that could materially impact its consolidated financial statements.

The entities in which the Partnership is invested all serve customers in the oil and natural gas industry, which has recently experienced economic challenges due to the Russian-Ukrainian military conflict, COVID-19 pandemic and other macroeconomic factors. If similar economic challenges occur in future interim periods, it could result in circumstances requiring the Partnership to record potentially material impairment charges on its equity method investments.

9.    DEBT

Long-term debt consisted of the following as of the dates indicated:
March 31, 2022December 31, 2021
(In thousands)
5.625% unsecured Senior Notes due 2025(1)
$500,000 $500,000 
Credit Agreement230,000 195,000 
Unamortized debt issuance costs(6,540)(7,044)
Total long-term debt$723,460 $687,956 
(1)Interest on the Notes is payable on January 15 and July 15 of each year. The Notes mature on July 15, 2025.

The Operating Company’s Credit Agreement

The Operating Company’s credit agreement (the “Credit Agreement”) provides for a revolving credit facility in the maximum amount of $600.0 million, which is expandable to $1.0 billion upon the Partnership’s election, subject to obtaining additional lender commitments and satisfaction of customary conditions. The Credit Agreement will mature on May 28, 2024. As of March 31, 2022, the Operating Company had $230.0 million outstanding borrowings and $370.0 million available for future borrowings under the Credit Agreement. During the three months ended March 31, 2022 and 2021, the weighted average interest rate on borrowings under the Credit Agreement was 1.40%.

13

Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
As of March 31, 2022, the Operating Company was in compliance with all financial maintenance covenants under the Credit Agreement.

10.    UNIT-BASED COMPENSATION

On May 22, 2019, the board of directors of the General Partner adopted the Rattler Midstream LP Long Term Incentive Plan (“LTIP”) for employees, consultants and directors of the General Partner and any of its affiliates, including Diamondback, who perform services for the Partnership. The 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. Excluding unvested phantom units, as of March 31, 2022, the Partnership had 12,488,231 common units remaining for issuance under its LTIP of the 15,151,515 common units initially authorized. Common units that are cancelled, forfeited or withheld to satisfy exercise prices or tax withholding obligations will be available for delivery pursuant to other awards. The LTIP is administered by the board of directors of the General Partner or a committee thereof.

For the three months ended March 31, 2022 and 2021, the Partnership incurred $2.5 million and $2.3 million, respectively, of unit–based compensation expense.

Phantom Units

Under the LTIP, the board of directors of the General Partner is authorized to issue phantom units to eligible employees and non-employee directors. The Partnership estimates the fair value of phantom units based on the closing price of the Partnership’s common units on the grant date of the award, and expenses this value over the applicable vesting period. Upon vesting, the phantom units entitle the recipient to one common unit of the Partnership 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 LTIP for the three months ended March 31, 2022:
Phantom
Units
Weighted Average
Grant-Date
Fair Value
Unvested at December 31, 2021
1,737,525 $16.64 
Granted213,917 $13.08 
Vested(10,294)$11.87 
Forfeited(1,950)$8.34 
Unvested at March 31, 2022
1,939,198 $16.28 

The aggregate fair value of phantom units that vested during the three months ended March 31, 2022 was $0.1 million. As of March 31, 2022, the unrecognized compensation cost related to unvested phantom units was $23.3 million, and is expected to be recognized over a weighted-average period of 2.23 years.

11.    UNITHOLDERS’ EQUITY AND DISTRIBUTIONS

The Partnership has General Partner and limited partner units. At March 31, 2022, the Partnership had a total of 38,146,047 common units issued and outstanding and 107,815,152 Class B units issued and outstanding, of which no common units and 107,815,152 Class B units, representing approximately 74% of the Partnership’s total units outstanding, were beneficially owned by Diamondback. At March 31, 2022, Diamondback also beneficially owned 107,815,152 Operating Company units, representing an overall 74% economic, non-voting interest in the Operating Company. The Operating Company units and the Partnership’s Class B units beneficially owned by Diamondback are exchangeable from time to time for the Partnership’s common units (that is, one Operating Company unit and one Partnership Class B unit, together, will be exchangeable for one Partnership common unit).

14

Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
Common Unit Repurchase Program

The board of directors of the General Partner has approved a common unit repurchase program to acquire up to $150.0 million of the Partnership’s outstanding common units over an indefinite period of time. The Partnership may purchase common units under the repurchase program opportunistically with cash on hand, free cash flow from operations and proceeds from potential liquidity events such as the sale of assets. The repurchase program may be suspended from time to time, modified, extended or discontinued by the board of directors of the General Partner at any time. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, and will be subject to market conditions, applicable legal requirements, contractual obligations and other factors. Any common units purchased as part of this program will be retired. During the three months ended March 31, 2022, the Partnership repurchased approximately $2.6 million of common units under the repurchase program. As of March 31, 2022, $85.1 million remained available for future repurchases of common units under the Partnership’s common unit repurchase program.

Changes in Ownership of Consolidated Subsidiaries

Non-controlling interest in the accompanying condensed consolidated financial statements represents Diamondback’s ownership in the net assets of the Operating Company. Diamondback’s relative ownership interest in the Operating Company can change due to the Partnership’s public offerings, issuance of units for acquisitions, issuance of unit-based compensation, repurchases of common units and distribution equivalent rights paid on the Partnership’s units. These changes in ownership percentage and the disproportionate allocation of net income to Diamondback discussed below result in adjustments to non-controlling interest and common unitholder equity, tax effected.

The following table summarizes changes in the ownership interest in consolidated subsidiaries during the period:
Three Months Ended March 31,
20222021
(In thousands)
Net income (loss) attributable to the Partnership$7,931 $6,015 
Change in ownership of consolidated subsidiaries 1,540 712 
Change from net income (loss) attributable to the Partnership's unitholders and transfers to non-controlling interest$9,471 $6,727 

Cash Distributions on Common Units

The board of directors of the General Partner sets and administers the cash distribution policies for the Partnership and the Operating Company. Cash distributions paid by the Operating Company to Diamondback and the Partnership as the holders of the Operating Company’s common units are determined by the board of directors of the General Partner on a quarterly basis. The partnership agreement does not require the Partnership to pay minimum distributions to its common unitholders on a quarterly or other basis, and the Partnership does not employ structures intended to consistently maintain or increase distributions over time.

The following table presents information regarding cash distributions approved by the board of directors of the General Partner and paid during the three months ended March 31, 2022:
Distributions
(in thousands)
PeriodAmount per Unit
Operating Company Distributions to Diamondback
Common UnitholdersDeclaration DateUnitholder Record DatePayment Date
Q4 2021$0.30 $32,345 $11,444 February 16, 2022March 7, 2022March 14, 2022

15

Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
12.    EARNINGS PER COMMON UNIT

Earnings per common unit on the condensed consolidated statements of operations is based on the net income of the Partnership for the three months ended March 31, 2022 and 2021, which is the amount of net income that is attributable to the Partnership’s common units. The Partnership’s net income is allocated wholly to the common units, as the General Partner does not have an economic interest.

Basic and diluted earnings per common unit is calculated using the two-class method. The two-class method is an earnings allocation proportional to the respective ownership among holders of common units and participating securities. Basic earnings per common unit is calculated by dividing net income by the weighted-average number of common units outstanding during the period. Diluted earnings per common unit also considers the dilutive effect of unvested common units granted under the LTIP, calculated using the treasury stock method.

A reconciliation of the components of basic and diluted earnings per common unit is presented in the table below:

Three Months Ended March 31,
20222021
(In thousands, except per unit amounts)
Net income (loss) attributable to Rattler Midstream LP$7,931 $6,015 
Less: net (income) loss allocated to participating securities(1)
(511)(418)
Net income (loss) attributable to common unitholders$7,420 $5,597 
Weighted average common units outstanding:
Basic weighted average common units outstanding38,159 41,742 
Effect of dilutive securities:
Potential common units issuable(2)
217  
Diluted weighted average common units outstanding38,376 41,742 
Net income per common unit, basic$0.19 $0.13 
Net income per common unit, diluted$<