Company Quick10K Filing
Rattler Midstream Partners
10-Q 2020-03-31 Filed 2020-05-08
10-K 2019-12-31 Filed 2020-02-26
10-Q 2019-09-30 Filed 2019-11-06
10-Q 2019-06-30 Filed 2019-08-09
8-K 2020-05-06
8-K 2020-02-18
8-K 2019-11-07
8-K 2019-11-05
8-K 2019-10-23
8-K 2019-10-03
8-K 2019-08-06
8-K 2019-05-22

RTLR 10Q Quarterly Report

Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 5. Other Information
Item 6. Exhibits
EX-10.2 rattlerex102-5x7x20.htm
EX-10.3 rattlerex103-5x7x20.htm
EX-10.4 rattlerex104-5x7x20.htm
EX-10.5 rattlerex105-5x7x20.htm
EX-31.1 q12020rattler10-qxex311.htm
EX-31.2 q12020rattler10-qxex312.htm
EX-32.1 q12020rattler10-qxex321.htm

Rattler Midstream Partners Earnings 2020-03-31

Balance SheetIncome StatementCash Flow

Document
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Table of Contents
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, 2020

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 class
Trading Symbol(s)
Name of each exchange on which registered
Common Units
RTLR
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 May 1, 2020, the registrant had outstanding 43,700,000 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, 2020
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”):
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 reference to crude oil, natural gas liquids or other liquid hydrocarbons.
Bbl/d
Bbl per day.
BOE
Barrels of crude 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.
Crude oil
Liquid hydrocarbons found in the earth, which may be refined into fuel sources.
Dry hole or dry well
A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
Field
The general area encompassed by one or more crude oil or natural gas reservoirs or pools that are located on a single geologic feature, or that are otherwise closely related to such geologic feature (either structural or stratigraphic).
Hydraulic fracturing
The process of creating and preserving a fracture or system of fractures in a reservoir rock, typically by injecting a fluid under pressure through a wellbore and into the targeted formation.
Hydrocarbon
An organic compound containing only carbon and hydrogen.
MBbl
One thousand barrels.
MBbl/d
One thousand barrels per day.
Mcf
One thousand cubic feet of natural gas.
Mcf/d
One thousand cubic feet of natural gas per day.
MMBbl
One million barrels.
MMBbl/d
One million barrels per day.
MMBtu
One million British Thermal Units.
MMBtu/d
One million British Thermal Units per day.
MMcf
One million cubic feet of natural gas.
Natural gas
Hydrocarbon gas found in the earth, composed of methane, ethane, butane, propane and other gases.
Operator
The individual or company responsible for the exploration and/or production of a crude oil or natural gas well or lease.
Plugging and abandonment
Refers 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.
Reserves
Estimated 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).
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.
Throughput
The 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:
Diamondback
Diamondback Energy, Inc., a Delaware corporation, and its subsidiaries other than the Partnership and its subsidiaries (including the Operating Company).
Exchange Act
The Securities Exchange Act of 1934, as amended.
FERC
Federal Energy Regulatory Commission.
GAAP
Accounting principles generally accepted in the United States.
General Partner
Rattler Midstream GP LLC, a Delaware limited liability company; the general partner of the Partnership and a wholly owned subsidiary of Diamondback.
IPO
The Partnership’s initial public offering.
Nasdaq
The Nasdaq Global Select Market.
Operating Company
Rattler Midstream Operating LLC, a Delaware limited liability company and a consolidated subsidiary of the Partnership.
Partnership
Rattler Midstream LP, a Delaware limited partnership.
Predecessor
The Operating Company, prior to May 28, 2019 for accounting purposes.
SEC
Securities and Exchange Commission.
Securities Act
The Securities Act of 1933, as amended.


iii


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Various statements contained in this report that express a belief, expectation, or intention, or that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project,” and similar expressions 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 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.

Forward-looking statements may include statements about:

Diamondback’s ability to meet its drilling and development plans on a timely basis or at all;

the volatility of oil, NGL and natural gas prices, including in Diamondback’s area of operation in the Permian Basin, and the extent and duration of price reductions and increased production by the Organization of the Petroleum Exporting Countries (“OPEC”) members and other oil exporting nations;

the threat, occurrence, potential duration or other implications of epidemic or pandemic diseases, including the recent outbreak of a highly transmissible and pathogenic strain of coronavirus (“COVID-19”), or any government response to such occurrence or threat;

changes in general economic, business or industry conditions;

competitive conditions in our industry and the effect of U.S. energy, monetary and trade policies;

U.S. and global economic conditions and political and economic developments, including the outcome of the U.S. presidential election and resulting energy and environmental policies;

actions taken by third party operators, gatherers, processors and transporters;

the demand for and costs of conducting midstream infrastructure services;

our ability to successfully implement our business plan;

our ability to complete internal growth projects on time and on budget;

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 impact of potential impairment charges;

the results of our investments in joint ventures;

the price and availability of debt and equity financing;

the availability and price of crude oil and natural gas to the consumer compared to the price of alternative and competing fuels;

competition from the same and alternative energy sources;

energy efficiency and technology trends;

operating hazards and other risks incidental to our midstream services;

iv



natural disasters, weather-related delays, casualty losses and other matters beyond our control;

interest rates;

labor relations;

defaults by Diamondback under our commercial agreements;

our lack of asset and geographic diversification;

changes in availability and cost of capital;

increases in our tax liability;

the effect of existing and future laws and government regulations;

terrorist attacks or cyber threats;

the effects of future litigation; and

certain factors discussed elsewhere 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 securities laws. You should not place undue reliance on these forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to 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 contained in any forward-looking statements we may make. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

v


PART I. FINANCIAL INFORMATION




ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Rattler Midstream LP
Consolidated Balance Sheets
(Unaudited)

 
March 31,
 
December 31,
 
2020
 
2019
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash
$
16,183

 
$
10,633

Accounts receivable—related party
18,244

 
50,270

Accounts receivable—third party, net
10,782

 
9,071

Sourced water inventory
13,265

 
14,325

Other current assets
1,051

 
1,428

Total current assets
59,525

 
85,727

Property, plant and equipment:
 
 
 
Land
88,309

 
88,509

Property, plant and equipment
987,336

 
930,768

Accumulated depreciation, amortization and accretion
(71,604
)
 
(61,132
)
Property, plant and equipment, net
1,004,041

 
958,145

Right of use assets
171

 
418

Equity method investments
502,040

 
479,558

Real estate assets, net
97,580

 
98,679

Intangible lease assets, net
7,274

 
8,070

Other assets
5,584

 
5,796

Total assets
$
1,676,215

 
$
1,636,393






















See accompanying notes to consolidated financial statements.

1

Rattler Midstream LP
Consolidated Balance Sheets - Continued
(Unaudited)


 
March 31,
 
December 31,
 
2020
 
2019
 
(In thousands, except unit amounts)
Liabilities and Unitholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
36

 
$
147

Accrued liabilities
72,906

 
76,625

Taxes payable
336

 
189

Short-term lease liability
171

 
418

Total current liabilities
73,449

 
77,379

Long-term debt
451,000

 
424,000

Asset retirement obligations
12,525

 
11,347

Deferred income taxes
11,483

 
7,827

Total liabilities
548,457

 
520,553

Commitments and contingencies (Note 17)

 

Unitholders' equity:
 
 
 
General partner—Diamondback
959

 
979

Common units—public (43,700,000 units issued and outstanding as of March 31, 2020 and as of December 31, 2019)
739,702

 
737,777

Class B units—Diamondback (107,815,152 units issued and outstanding as of March 31, 2020 and as of December 31, 2019)
959

 
979

Accumulated other comprehensive loss
(261
)
 
(198
)
Total Rattler Midstream LP unitholders’ equity
741,359

 
739,537

Non-controlling interest
387,219

 
376,928

Non-controlling interest in accumulated other comprehensive loss
(820
)
 
(625
)
Total equity
1,127,758

 
1,115,840

Total liabilities and unitholders’ equity
$
1,676,215

 
$
1,636,393





















See accompanying notes to consolidated financial statements.

2

Rattler Midstream LP
Consolidated Statements of Operations
(Unaudited)


 
Three Months Ended March 31,
 
2020
 
2019*
 
 
 
Predecessor
 
(In thousands, expect per unit amounts)
Revenues:
 
 
 
Revenues—related party
$
116,583

 
$
88,576

Revenues—third party
9,100

 
3,487

Rental income—related party
1,402

 
715

Rental income—third party
1,901

 
2,067

Other real estate income—related party
116

 
73

Other real estate income—third party
293

 
258

Total revenues
129,395

 
95,176

Costs and expenses:
 
 
 
Direct operating expenses
32,874

 
20,186

Cost of goods sold (exclusive of depreciation and amortization)
15,961

 
13,053

Real estate operating expenses
728

 
526

Depreciation, amortization and accretion
12,506

 
9,904

General and administrative expenses
4,514

 
1,369

Loss on disposal of property, plant and equipment
1,538

 

Total costs and expenses
68,121

 
45,038

Income from operations
61,274

 
50,138

Other income (expense):
 
 
 
Interest expense, net
(2,621
)
 

(Loss) income from equity method investments
(245
)
 
50

Total other income (expense), net
(2,866
)
 
50

Net income before income taxes
58,408

 
50,188

Provision for income taxes
3,820

 
10,832

Net income after taxes
$
54,588

 
$
39,356

Net income attributable to non-controlling interest
41,557

 
 
Net income attributable to Rattler Midstream LP
$
13,031

 
 
 
 
 
 
Net income attributable to limited partners per common unit:
 
 
 
Basic
$
0.28

 


Diluted
$
0.28

 


Weighted average number of limited partner common units outstanding:
 
 
 
Basic
43,700

 


Diluted
43,700

 










See accompanying notes to consolidated financial statements.
*See Note 1 for information regarding the basis of financial statement presentation.

3

Rattler Midstream LP
Consolidated Statements of Comprehensive Income
(Unaudited)


 
Three Months Ended March 31,
 
2020
 
2019*
 
 
 
Predecessor
 
(In thousands)
Net Income
$
54,588

 
$
39,356

Other comprehensive income:
 
 
 
Change in accumulated other comprehensive loss of equity method investees attributable to non-controlling interest
(195
)
 

Change in accumulated other comprehensive loss of equity method investees attributable to limited partner
(63
)
 

Total other comprehensive income
(258
)
 

Comprehensive income
$
54,330

 
$
39,356








































See accompanying notes to consolidated financial statements.
*See Note 1 for information regarding the basis of financial statement presentation.

4

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



 
Predecessor
 
Partnership
 
 
 
 
 
Limited Partners Member's Equity
 
Limited Partners
 
General Partner
 
Non-Controlling Interest
 
 
 
Amount
 
Common Units
 
Amount
 
Class B Units
 
Amount
 
Amount
 
Amount
 
Total
 
(In thousands)
Balance at December 31, 2018*
$
527,125

 

 
$

 

 
$
1

 
$

 
$

 
$
527,126

Contributions from Diamondback
458,674

 
 
 

 
 
 

 

 

 
458,674

Net income
39,356

 
 
 

 
 
 

 

 

 
39,356

Balance at March 31, 2019
$
1,025,155

 

 
$

 

 
$
1

 
$

 
$

 
$
1,025,156


 
Partnership
 
 
 
 
 
Limited Partners
General Partner
Non-Controlling Interest
Accumulated Other Comprehensive Income
Non-Controlling Interest-Accumulated Other Comprehensive Income
 
 
Common Units
Amount
Class B Units
Amount
Amount
Amount
Amount
Amount
Total
 
(In thousands)
Balance at December 31, 2019
43,700

$
737,777

107,815

$
979

$
979

$
376,928

$
(198
)
$
(625
)
$
1,115,840

Unit-based compensation
 
2,219

 





2,219

Distribution equivalent rights
payments
 
(652
)
 





(652
)
Other comprehensive income
 

 



(63
)
(195
)
(258
)
Distributions
 
(12,673
)
 
(20
)
(20
)
(31,266
)


(43,979
)
Net income
 
13,031

 


41,557



54,588

Balance at March 31, 2020
43,700

$
739,702

107,815

$
959

$
959

$
387,219

$
(261
)
$
(820
)
$
1,127,758














See accompanying notes to consolidated financial statements.
*See Note 1 for information regarding the basis of financial statement presentation.

5

Rattler Midstream LP
Consolidated Statements of Cash Flows
(Unaudited)


 
Three Months Ended March 31,
 
2020
 
2019*
 
 
 
Predecessor
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
54,588

 
$
39,356

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for deferred income taxes
3,820

 
2,867

Depreciation, amortization and accretion
12,506

 
9,904

Loss on disposal of property, plant and equipment
1,538

 

Unit-based compensation expense
2,219

 

Loss (income) from equity method investments
245

 
(50
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable—related party
31,674

 
(15,516
)
Accounts receivable—third party
(1,711
)
 
625

Accounts payable, accrued liabilities and taxes payable
(8,540
)
 
19,578

Other
1,648

 
(1,524
)
Net cash provided by operating activities
97,987

 
55,240

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(52,046
)
 
(51,743
)
Contributions to equity method investments
(32,563
)
 

Distributions from equity method investments
9,761

 

Proceeds from the sale of fixed assets
42

 

Net cash used in investing activities
(74,806
)
 
(51,743
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings from credit facility
27,000

 

Distribution equivalent rights
(652
)
 

Distribution to General Partner (Note 1)
(20
)
 

Distribution to public (Note 1)
(12,673
)
 

Distribution to Diamondback (Note 1)
(31,286
)
 

Net cash used in financing activities
(17,631
)
 

Net increase in cash
5,550

 
3,497

Cash at beginning of period
10,633

 
8,564

Cash at end of period
$
16,183

 
$
12,061

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
2,978

 
$

Supplemental disclosure of non-cash transactions:
 
 
 
Asset retirement obligations acquired
$
1,038

 
$
3,992

Supplemental disclosure of non-cash financing activity:
 
 
 
Contributions from Diamondback
$

 
$
458,674

Supplemental disclosure of non-cash investing activity:
 
 
 
Increase in long term assets and inventory due to contributions from Diamondback
$

 
$
449,441

Change in accrued liabilities related to property, plant and equipment
$
5,063

 
$
15,856

Decrease in current liabilities
$

 
$
9,233



See accompanying notes to consolidated financial statements.
*See Note 1 for information regarding the basis of financial statement presentation.


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



1.    ORGANIZATION AND BASIS OF PRESENTATION

Organization

Rattler Midstream LP (the “Partnership”) is a publicly traded Delaware limited partnership, the common units of which are listed on the Nasdaq Global Select Market under the symbol “RTLR”. The Partnership was formed on July 27, 2018 by Diamondback to, among other things, own, operate, develop and acquire midstream infrastructure assets in the Midland and Delaware Basins of the Permian Basin. 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 subsidiary, Rattler Midstream Partners LLC (the “Operating Company” and, prior to May 28, 2019 for accounting purposes, the “Predecessor”).

On January 31, 2018, Diamondback, through its wholly owned subsidiary Tall City Towers LLC (“Tall Towers”), acquired from Fasken Midland LLC (“Fasken Midland”) certain real property and related assets in Midland, Texas (the “Fasken Center”). Tall Towers was contributed to the Predecessor effective January 31, 2018.

The Predecessor’s assets, contributed from Diamondback, included (i) crude oil and natural gas gathering and transportation systems, (ii) produced water gathering and disposal systems and (iii) water sourcing and distribution systems. All of the Partnership’s businesses are located or operate in the Permian Basin in West Texas.

Prior to the closing on May 28, 2019 of the IPO of 38,000,000 common units representing limited partner interests, Diamondback owned all of the general and limited partner interests in the Partnership. On May 30, 2019, the underwriters purchased an additional 5,700,000 common units following the exercise in full of their over-allotment option on the same terms, at a price to the public of $17.50 per common unit. The Partnership received net proceeds of approximately $719.4 million from the sale of these common units after deducting offering expenses and underwriting discounts and commissions.

At the closing of the IPO, the Partnership (i) issued 107,815,152 Class B units representing an aggregate 71% voting limited partner interest in the Partnership in exchange for a $1.0 million cash contribution from Diamondback, (ii) issued a general partner interest in the Partnership to Rattler Midstream GP LLC (the “General Partner”) in exchange for a $1.0 million cash contribution from the General Partner, and (iii) caused the Operating Company to make a distribution of approximately $726.5 million to Diamondback. Diamondback, as the holder of the Class B units, and the General Partner, as the holder of the general partner interest, are entitled to receive cash preferred distributions equal to 8% per annum on the outstanding amount of their respective $1.0 million capital contributions, payable quarterly.

As of March 31, 2020, the General Partner held a 100% general partner interest in the Partnership. Diamondback owns all of the Partnership's 107,815,152 Class B units that provide a 71% voting interest. Diamondback owns and controls the General Partner.

As of March 31, 2020, the Partnership owned a 29% controlling membership interest in the Operating Company and Diamondback owned, through its ownership of the Operating Company units, a 71% economic, non-voting interest in the Operating Company. However, as required by GAAP, the Partnership consolidates 100% of the assets and operations of the Operating Company in its financial statements and reflects a non-controlling interest.

Basis of Presentation

Prior to May 28, 2019, the Partnership's services were performed by the Predecessor. The consolidated financial statements include the results of the Predecessor for the periods presented prior to the closing of the IPO on May 28, 2019. The Predecessor financial statements have been prepared from the separate records maintained by the Partnership and may not necessarily be indicative of the actual results of operations that might have occurred if the Predecessor had been operated separately during the periods reported.

The consolidated results of operations following the completion of the IPO are presented together with the results of operations pertaining to the Predecessor. The assets of the Predecessor consist of produced water disposal wells and related gathering systems, office buildings, surface land, an oil gathering system and asset retirement obligations related to these assets, which were contributed effective January 1, 2019. See Note 4Acquisitions. The capital contribution of the net proceeds from the IPO to the Operating Company in exchange for 29% of the limited liability company units of the Operating Company was accounted for as

7

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


a combination of entities under common control, with assets and liabilities transferred at their carrying amounts in a manner similar to a pooling of interests. The Partnership did not own any assets prior to May 28, 2019, the date of the equity contribution agreement by and between the Partnership and the Predecessor. Prior to the IPO, the Predecessor was a wholly owned subsidiary of Diamondback. For periods prior to May 28, 2019, the accompanying consolidated financial statements and related notes thereto represent the financial position, results of operations, cash flows and changes in members’ equity of the Predecessor and, for periods on and after May 28, 2019, the accompanying consolidated financial statements and related notes thereto represent the financial position, results of operations, cash flows and changes in partners’ equity of the Partnership and its partially owned subsidiary.

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

Prior to 2018, the Partnership's operations comprised a single operating business segment; however, with the contribution of Tall Towers, the Partnership's operations are now reported in two operating business segments: (i) midstream services and (ii) real estate operations. See Note 19Operating Business Segments.

These 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, 2019, which contains a summary of the Partnership’s significant accounting policies and other disclosures.

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 at the date of the financial statements.

Making accurate estimates and assumptions are particularly difficult as the oil and gas industry experiences challenges resulting from negative pricing pressure from the effects of COVID-19 and actions by OPEC members and other exporting nations on the supply and demand in global oil and gas markets. Companies in the oil and gas industry have begun to change near term business plans in response to changing market conditions. The aforementioned circumstances generally increases the estimation uncertainty in the Partnership's accounting estimates, particularly the accounting estimates involving financial forecasts.

The Partnership evaluates accounting 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 (iii) asset retirement obligations (“ARO”).

Accounts Receivable

Accounts receivable consist primarily of receivables from gathering, sourced water and rental agreements. The customers and lessees remit payment for services performed and/or goods received directly to the Partnership. Most payments for gathering services, sourced water and rental agreements are received within two months after the date of service performed or goods delivered.

The Partnership adopted Accounting Standards Update ("ASU") 2016-13 and the subsequent applicable modifications to the rule on January 1, 2020. Accounts receivable are stated at amounts due from customers and lessees, net of an allowance for expected losses as estimated by the Partnership. Accounts receivable outstanding longer than the contractual payment terms are

8

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


considered past due. The Partnership determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Partnership’s previous loss history, the debtor’s current ability to pay its obligation to the Partnership, the condition of the general economy and the industry as a whole. The Partnership writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for expected losses. As the adoption of ASU 2016-13 did not result in a material allowance, no cumulative-effect adjustment was made to beginning unitholders’ equity. At March 31, 2020, the Partnership recorded an allowance for doubtful accounts of $0.1 million related to receivables from gathering and sourced water agreements.

Accrued Liabilities

Accrued liabilities consist of the following as of the dates indicated:
 
As of
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Capital expenditures accrued
$
46,871

 
$
42,160

Direct operating expense accrued
18,343

 
22,119

Sourced water purchases accrued
4,709

 
9,531

Other
2,983

 
2,815

Total accrued liabilities
$
72,906

 
$
76,625



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, 2019
$
(823
)
Other comprehensive loss
(258
)
Balance as of March 31, 2020
$
(1,081
)


Income Taxes

The Partnership is treated as a corporation for U.S. federal income tax purposes as a result of its election to be treated as a corporation effective May 24, 2019. Subsequent to the effective date of the Partnership’s election, it is subject to U.S. federal and state income tax at corporate rates. The Partnership uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and (ii) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized.

The Partnership is subject to margin tax in the state of Texas pursuant to the Tax Sharing Agreement with Diamondback, as discussed further in Note 14Income Taxes. In addition to the Partnership's 2019 tax year, the Predecessor’s 2016 through 2018 tax years, the periods during which the Predecessor's sole owner, Diamondback, was responsible for federal income taxes on the Predecessor's taxable income, remain open to examination by tax authorities. As of March 31, 2020, the Partnership had no unrecognized tax benefits that would have a material impact on the effective tax rate. The Partnership is continuing its practice of recognizing interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. During the three months ended March 31, 2020, there was no interest or penalties associated with uncertain tax positions recognized in the Partnership’s consolidated financial statements.


9

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


Capital Contributions

A contribution of a set of assets and related liabilities (a “set”) to the Partnership from Diamondback is analyzed to determine whether the set meets the definition of a business in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations.” A contribution of a set of assets that does not constitute a business is recognized at the date of the transfer at its carrying amount in the accounts of Diamondback in accordance with the guidance regarding transactions between entities under common control in ASC 805-50. Management then evaluates whether the asset contribution results in a change in the reporting entity, as defined in ASC Topic 250, “Accounting Changes and Error Corrections." An asset contribution that does not constitute a change in the reporting entity is accounted for prospectively from the date of the transfer, while an asset contribution that constitutes a change in the reporting entity would result in retrospective application of the transaction.

For the three months ended March 31, 2019, the total capital contributions by Diamondback to the Predecessor were $458.7 million, of which $9.2 million related to an office building located in Midland Texas, $18.1 million related to land, $9.4 million related to sourced water assets, $228.0 million related to produced water disposal assets, $35.8 million related to crude oil assets, $149.0 million related to the equity method investments in the EPIC and Gray Oak pipelines and $9.2 million in additional assets and liabilities, net, related to operations.


10

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


Recent Accounting Pronouncements

The Partnership considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or clarifications of ASUs previously disclosed. The following table provides a brief description of recent accounting pronouncements and the Partnership’s analysis of the effects on its financial statements:
Standard
Description
Date of Adoption
Effect on Financial Statements or Other Significant Matters
Recently Adopted Pronouncements
ASU 2016-13, “Financial Instruments - Credit Losses”
This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.
Q1 2020
The Partnership adopted this update effective January 1, 2020. The adoption of this update did not have an impact on its financial position, results of operations or liquidity since it does not have a history of credit losses.

ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”
This update modifies the fair value measurement disclosure requirements specifically related to Level 3 fair value measurements and transfers between levels.
Q1 2020
The Partnership adopted this update effective January 1, 2020. The adoption of this update did not have an impact on its financial position, results of operations or liquidity since it does not have transfers between fair value levels.
ASU 2018-15, “Intangibles - Goodwill and Other - Internal - Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”
This update requires the capitalization of implementation costs incurred in a hosting arrangement that is a service contract for internal-use software. Training and certain data conversion costs cannot be capitalized. The entity is required to expense the capitalized implementation costs over the term of the hosting agreement.
Q1 2020
The Partnership adopted this update prospectively effective January 1, 2020. The adoption of this update did not have an impact on its financial position, results of operations or liquidity since it does not have any capitalized implementation costs.
ASU 2019-05, “Financial Instruments-Credit Losses (Topic 326)”
This update allows a fair value option to be elected for certain financial assets, other than held-to-maturity debt securities, that were previously required to be measured at amortized cost basis.
Q1 2020
The Partnership adopted this update effective January 1, 2020. The adoption of this update did not have an impact on its financial position, results of operations or liquidity since it does not have any cost method investments.
ASU 2020-04, “Rate Reform (Topic 848)”
This update provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR.
Q1 2020
The Partnership adopted this update upon issuance and elected to use the optional expedient for contracts that reference LIBOR. The amendments in this update expire on December 31, 2022. The adoption of this update did not have an impact on its financial position, results of operations or liquidity.
Pronouncements Not Yet Adopted
ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes”
This update is intended to simplify the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance.
Q1 2021
This update is effective for public business entities beginning after December 15, 2020 with early adoption permitted. The Partnership
does not believe the adoption of this standard
will have an impact on its financial position,
results of operations or liquidity.



11

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.

Performance Obligations: For gathering crude oil and natural gas, delivering sourced water, and collecting, recycling and disposing of produced water, the Partnership’s performance obligations are satisfied over time using volumes delivered to measure progress. The Partnership records revenue related to the volumes delivered at the contract price at the time of delivery.

For the Partnership's water sales, each unit sold is generally considered a distinct good and the related performance obligation is generally satisfied at a point in time (i.e. at the time control of the water is transferred to the customer). The Partnership recognizes revenue from the sale of water when its contracted performance obligation to deliver water is satisfied and control of the water is transferred to the customer. This usually occurs when the water is delivered to the location specified in the contract and the title and risks of rewards and ownership are transferred to the customer.

Transaction Price Allocated to Remaining Performance Obligations: The majority of the Partnership’s revenue agreements have a term greater than one year and, as such, the Partnership has utilized the practical expedient in ASC Topic 606, which states that the Partnership is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under its revenue agreements, each delivery generally represents a separate performance obligation; therefore, future volumes delivered are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

The remainder of the Partnership’s revenue agreements, which relate to agreements with third parties, are short-term in nature with a term of one year or less. The Partnership has utilized an additional practical expedient in ASC Topic 606 which exempts it from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of an agreement that has an original expected duration of one year or less.

Contract Balances: Under the Partnership’s revenue agreements, the Partnership invoices customers after the Partnership's performance obligations have been satisfied, at which point payment is unconditional. As such, the Partnership’s revenue agreements do not give rise to contract assets or liabilities under ASC Topic 606.

The following is a summary of the Partnership’s types of revenue agreements:

Crude Oil Gathering Agreement. Under the crude oil gathering agreements, the Partnership receives a volumetric fee per Bbl for gathering and delivering crude oil produced within the dedicated acreage.

Gas Gathering and Compression Agreement. Under the gas gathering and compression agreement, the Partnership receives a volumetric fee per MMBtu for gathering and processing all natural gas produced by Diamondback within the dedicated acreage.

Produced and Flowback Water Gathering and Disposal Agreements. Under the produced and flowback water gathering and disposal agreements, the Partnership receives a fee for gathering or disposing of water produced from operating crude oil and natural gas wells within the dedicated acreage. The fee is comprised of a volumetric fee per Bbl for the produced water services the Partnership provides. In addition, the Partnership retains the skim oil that is a part of the produced water. The skim oil is processed by a third party, which provides the Partnership a volumetric fee per Bbl.

Sourced Water Purchase and Services Agreements. Under the sourced water purchase and services agreements, the Partnership receives a fee for sourcing, transporting and delivering all raw sourced water and recycled sourced water required by Diamondback to carry out its oil and natural gas activities within the dedicated acreage. The fee is comprised of a volumetric fee per Bbl for the type of sourced water services the Partnership provides.

Real Estate Contracts: The Partnership recognizes rental revenue from tenants on a straight-line basis over the lease term when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased asset. Rental income—related party is comprised of revenues earned from lease agreements with Diamondback and its affiliates. Other real estate revenue is derived from tenants’ use of parking, telecommunications and miscellaneous services. Parking and other

12

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


miscellaneous service revenue is recognized when the related services are utilized by the tenants. Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance and other operating expenses are recognized as revenue in the period the applicable expenses are incurred. The reimbursements are recognized and presented gross, as the Partnership is generally the primary obligor with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk.

It is noted that surface revenue, rental and real estate income and amortization of out of market leases is outside the scope of ASC Topic 606.

Disaggregation of Revenue

In the following table, revenue is disaggregated by type of service and type of fee. The table also identifies the operating business segment to which the disaggregated revenues relate. For more information on operating business segments, see Note 19Operating Business Segments.

 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
Segment
 
(In thousands)
 
 
Type of Service:
 
 
 
 
 
Sourced water gathering
$
30,767

 
$
24,896

 
Midstream
Produced water gathering and disposal
81,348

 
58,802

 
Midstream
Crude oil gathering
7,777

 
5,912

 
Midstream
Natural gas gathering
4,930

 
2,452

 
Midstream
Surface revenue (non ASC 606 revenues)
861

 

 
Midstream
Real estate contracts (non ASC 606 revenues)
3,712

 
3,114

 
Real Estate
Total revenues
$
129,395

 
$
95,176

 
 


4.    ACQUISITIONS

Ajax and Energen Assets

Effective January 1, 2019, Diamondback contributed to the Predecessor certain midstream assets (the “Ajax Assets”) within the Permian Basin that it acquired from Ajax Resources LLC ("Ajax") as part of an upstream acquisition in the fourth quarter of 2018. These assets included 17 water wells, four produced water disposal wells and one related gathering system, a field office, surface land, five hydraulic fracturing pits and one related sourced water transportation system. Prior to their contribution, these assets were fully integrated into the upstream business acquired from Ajax. The carrying value of assets included in this contribution was $21.5 million. The contributed assets were recognized by the Predecessor at Diamondback’s historical basis due to the entities being under common control.

Effective January 1, 2019, Diamondback contributed to the Predecessor certain midstream assets ("the Energen Assets”) within the Permian Basin that it acquired from Energen Corporation ("Energen") as part of an upstream acquisition in the fourth quarter of 2018. These assets included 56 produced water disposal wells and related gathering systems, an office building located in Midland Texas, surface land and an oil gathering system and asset retirement obligations related to these assets. Prior to their contribution, these assets were fully integrated into the upstream business acquired from Energen. The carrying value of assets included in this contribution was $279.0 million, net of $3.0 million in associated asset retirement obligations. The contributed assets were recognized by the Predecessor at Diamondback’s historical basis due to the entities being under common control.

The contribution of the Ajax and Energen Assets was an asset contribution that did not result in a change in the reporting entity at the Predecessor. As a result, the Ajax and Energen Assets were initially recognized at the date of the transfer at their carrying amounts in the accounts of Diamondback, and presented prospectively from that date.


13

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


5.    REAL ESTATE ASSETS

In conjunction with Diamondback’s contribution of Tall Towers, the Predecessor allocated the $110.0 million purchase price between real estate assets and intangible lease assets related to in-place and above-market leases. During the three months ended March 31, 2019, as part of the Energen contribution, Diamondback contributed an office building located in Midland Texas with a value of $9.2 million. 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 Lives
 
March 31, 2020
 
December 31, 2019
 
(Years)
 
(In thousands)
Buildings
20-30
 
$
102,440

 
$
102,375

Tenant improvements
15
 
4,501

 
4,501

Land improvements
15
 
484

 
484

Total real estate assets
 
 
107,425

 
107,360

Less: accumulated depreciation
 
 
(9,845
)
 
(8,681
)
Total investment in real estate, net
 
 
$
97,580

 
$
98,679

 
 
 
As of
 
Weighted Average Useful Lives
 
March 31, 2020
 
December 31, 2019
 
(Months)
 
(In thousands)
In-place lease intangibles
45
 
$
11,344

 
$
11,389

Less: accumulated amortization
 
 
(6,527
)
 
(5,927
)
In-place lease intangibles, net
 
 
4,817

 
5,462

 
 
 
 
 
 
Above-market lease intangibles
45
 
3,623

 
3,623

Less: accumulated amortization
 
 
(1,166
)
 
(1,015
)
Above-market lease intangibles, net
 
 
2,457

 
2,608

Total intangible lease assets, net
 
 
$
7,274

 
$
8,070


Depreciation and amortization expense for real estate assets was $1.8 million and $1.9 million for the three months ended March 31, 2020 and March 31, 2019, respectively.

The following table presents the Partnership's estimated amortization expense related to lease intangibles for the periods indicated (in thousands):
Remainder of
 
 
 
 
 
 
 
 
2020
 
2021
 
2022
 
2023
 
2024
$
2,023

 
$
2,480

 
$
520

 
$
585

 
$
673




14

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
 
March 31,
 
December 31,
 
Useful Lives
 
2020
 
2019
 
(Years)
 
(In thousands)
Produced water disposal systems
10-30
 
$
634,739

 
$
600,797

Crude oil gathering systems(1)
30
 
131,692

 
129,658

Natural gas gathering and compression systems(1)
10-30
 
111,252

 
98,426

Sourced water gathering systems(1)
30
 
109,653

 
101,887

Total property, plant and equipment
 
 
987,336

 
930,768

Land
N/A
 
88,309

 
88,509

Less: accumulated depreciation, amortization and accretion
 
 
(71,604
)
 
(61,132
)
Total property, plant and equipment, net
 
 
$
1,004,041

 
$
958,145

 
 
 
 
 
 
(1)
Included in gathering systems are $116.7 million and $138.6 million of assets at March 31, 2020 and December 31, 2019, 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 $10.7 million and $8.0 million for the three months ended March 31, 2020 and March 31, 2019, respectively.

Internal costs capitalized to property, plant and equipment represent management's estimate of costs incurred directly related to construction activities. Capitalized internal costs were $1.1 million and $0.3 million for the three months ended March 31, 2020 and March 31, 2019, respectively.

During the three months ended March 31, 2020, capitalized interest related to property, plant and equipment was $0.4 million. There was no capitalized interest during the three months ended March 31, 2019.

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. During the three months ended March 31, 2020, the Partnership incurred impairment losses related to weather damage at certain produced water disposal facilities of $1.3 million. No other impairment charges were recorded during the three months ended March 31, 2020. Given the rate of change impacting the oil and gas industry described above, it is possible that circumstances requiring additional impairment testing will occur in future interim periods, which could result in potentially material impairment charges being recorded.


15

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,
 
2020
 
2019
 
(In thousands)
Asset retirement obligation, beginning of period
$
11,347

 
$
561

Liabilities incurred
1,038

 
3,992

Liabilities settled
(106
)
 

Accretion expense during period
246

 
77

Asset retirement obligation, end of period
$
12,525

 
$
4,630




8.    EQUITY METHOD INVESTMENTS

The following table presents the carrying values of the Partnership’s equity method investments as of the dates indicated:
 
 
Ownership Interest
 
March 31, 2020
 
December 31, 2019
 
 
 
 
(In thousands)
EPIC Crude Holdings, LP
 
10
%
 
$
117,348

 
$
109,806

Gray Oak Pipeline, LLC
 
10
%
 
121,462

 
115,840

Wink to Webster Pipeline LLC
 
4
%
 
45,450

 
34,124

OMOG JV LLC
 
60
%
 
215,668

 
219,098

Amarillo Rattler, LLC
 
50
%
 
2,112

 
690

Total
 
 
 
$
502,040

 
$
479,558


The following table summarizes the income (loss) of equity method investees reflected in the Consolidated Statement of Operations for the periods indicated:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(In thousands)
EPIC Crude Holdings, LP
 
$
(2,183
)
 
$

Gray Oak Pipeline, LLC
 
582

 
50

Wink to Webster Pipeline LLC
 
188

 

OMOG JV LLC
 
1,334

 

Amarillo Rattler, LLC
 
(166
)
 

Total
 
$
(245
)
 
$
50



On February 1, 2019, Diamondback funded and the Predecessor acquired a 10% equity interest in EPIC Crude Holdings, LP (“EPIC”), which owns and operates a pipeline (the “EPIC pipeline”) that transports crude and natural gas liquids across Texas for delivery into the Corpus Christi market. The EPIC pipeline became fully operational in April 2020.

On February 15, 2019, Diamondback funded and the Predecessor acquired a 10% equity interest in Gray Oak Pipeline, LLC (“Gray Oak”), which owns and operates a pipeline (the “Gray Oak pipeline”) that transports crude from the Permian to Corpus Christi on the Texas Gulf Coast. The Gray Oak pipeline became fully operational in April 2020.

16

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



On March 29, 2019, the Predecessor executed a short-term promissory note to Gray Oak. The note allows for borrowing by Gray Oak of up to $123.0 million at 2.52% interest rate with a maturity date of March 31, 2022. During the three months ended March 31, 2020, there were no borrowings or repayments under this note. There were no outstanding loans at March 31, 2020.

On June 4, 2019, the Partnership entered into an equity contribution agreement with respect to Gray Oak. The equity contribution agreement requires the Partnership to contribute equity or make loans to Gray Oak so that Gray Oak can, to the extent necessary, cure payment defaults under Gray Oak’s credit agreement and, in certain instances, repay Gray Oak’s credit agreement in full. The Partnership’s obligations under the equity contribution agreement are limited to its proportionate ownership interest in Gray Oak, and such obligations are guaranteed by the Operating Company, Tall Towers, Rattler OMOG LLC and Rattler Ajax Processing LLC.
On July 30, 2019, the Operating Company joined Wink to Webster Pipeline LLC as a 4% member, together with affiliates of ExxonMobil, Plains All American Pipeline, Delek US, MPLX LP, and Lotus Midstream. The joint venture is developing a crude oil pipeline with origin points at Wink and Midland in the Permian Basin for delivery to multiple Houston area locations (the "Wink to Webster pipeline"). The Wink to Webster pipeline is expected to begin service in the first half of 2021.

On October 1, 2019, the Partnership acquired a 60% equity interest in OMOG JV LLC (“OMOG”). On November 7, 2019, OMOG acquired 100% of Reliance Gathering, LLC which owns and operates a crude oil gathering system in the Permian Basin, and was renamed as Oryx Midland Oil Gathering LLC following the acquisition. Although the Partnership owns a 60% equity interest in the joint venture, the investment is accounted for as an equity method investment as the Partnership does not control operating activities and substantive participating rights exist with the controlling minority investor.

On December 20, 2019, the Partnership acquired a 50% equity interest in Amarillo Rattler, LLC, which currently owns and operates the Yellow Rose gas gathering and processing system with estimated total processing capacity of 40,000 Mcf/d and over 84 miles of gathering and regional transportation pipelines in Dawson, Martin and Andrews Counties, Texas. This joint venture also intends to construct and operate a new 60,000 Mcf/d cryogenic natural gas processing plant in Martin County, Texas, as well as incremental gas gathering and compression and regional transportation pipelines. Although the Partnership owns a 50% equity interest in the joint venture, the investment is accounted for as an equity method investment as the Partnership does not control operating activities and substantive participating rights exist with the controlling investor.

Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions, material intercompany transactions and extent of ownership by an investor in relation to the concentration of other shareholdings. Additionally, an investment in a limited liability company that maintains a specific ownership account for each investor shall be viewed as similar to an investment in a limited partnership for purposes of determining whether a noncontrolling investment shall be accounted for using the cost method or the equity method. Investments of greater than 3% to 5% are considered more than minor and, therefore, should be accounted for using the equity method. For investments where the Partnership has less than a 20% ownership interest, the investment is accounted for as an equity method investment as the Partnership has the ability to exercise significant influence.

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. No impairments were recorded for the Partnership’s or Predecessor's equity method investments for the three months ended March 31, 2020 or 2019. The entities in which the Partnership is invested all serve customers in the oil and gas industry, which has begun to experience economic challenges as described above. It is possible that prolonged industry challenges could result in circumstances requiring impairment testing, which could result in potentially material impairment charges in future interim periods.

During the three months ended March 31, 2020, capitalized interest related to equity method investments that have not yet begun operations was $0.3 million. There was no capitalized interest during the three months ended March 31, 2019.



17

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


9.    DEBT

Long-term debt consisted of the following as of the dates indicated:
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Operating Company revolving credit facility
$
451,000

 
$
424,000

Total long-term debt
$
451,000

 
$
424,000


Credit Agreement—Wells Fargo

The Partnership, as parent, and the Operating Company, as borrower, entered into a credit agreement, dated May 28, 2019, (as amended, the "Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent, and a syndicate of banks, including Wells Fargo Bank, National Association, as lenders party thereto.

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. Loan principal may be optionally repaid from time to time without premium or penalty (other than customary LIBOR breakage), and is required to be paid at the maturity date of May 28, 2024. The loan is guaranteed by the Partnership, Tall Towers, Rattler OMOG LLC and Rattler Ajax Processing LLC and is secured by substantially all of the Partnership, the Operating Company and the other guarantors' assets. As of March 31, 2020, the Operating Company had $451.0 million of outstanding borrowings and $149.0 million available for future borrowings under the Credit Agreement.

The outstanding borrowings under the Credit Agreement bear interest at a per annum rate elected by the Operating Company that is based on the prime rate or LIBOR, in each case plus an applicable margin. The applicable margin ranges from 0.250% to 1.250% per annum for prime-based loans and 1.250% to 2.250% per annum for LIBOR loans, in each case depending on the Consolidated Total Leverage Ratio (as defined in the Credit Agreement). The Operating Company is obligated to pay a quarterly commitment fee ranging from 0.250% to 0.375% per annum on the unused portion of the commitment, which fee is also dependent on the Consolidated Total Leverage Ratio.

The Credit Agreement contains various affirmative and negative covenants. These covenants, among other things, limit additional indebtedness, additional liens, sales of assets, mergers and consolidations, distributions and other restricted payments, transactions with affiliates, and entering into certain swap agreements, in each case of the Partnership, the Operating Company and their restricted subsidiaries. The covenants are subject to exceptions set forth in the Credit Agreement, including an exception allowing the Partnership or the Operating Company to issue unsecured debt securities and an exception allowing payment of distributions if no default exists. The Credit Agreement may be used to fund capital expenditures, to finance working capital, for general company purposes, to pay fees and expenses related to the Credit Agreement, and to make distributions permitted under the Credit Agreement.

The Credit Agreement also contains financial maintenance covenants that require the maintenance of the financial ratios described below:
Financial Covenant
 
Required Ratio
Consolidated Total Leverage Ratio
Not greater than 5.00 to 1.00 (or not greater than 5.50 to 1.00 for 3 fiscal quarters following certain acquisitions), but if the Consolidated Senior Secured Leverage Ratio (as defined in the Credit Agreement) is applicable, then not greater than 5.25 to 1.00)
Consolidated Senior Secured Leverage Ratio commencing with the last day of any fiscal quarter in which the Financial Covenant Election (as defined in the Credit Agreement) is made
Not greater than 3.50 to 1.00
Consolidated Interest Coverage Ratio (as defined in the Credit Agreement)
Not less than 2.50 to 1.00



18

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


For purposes of calculating the financial maintenance covenants prior to the fiscal quarter ending June 30, 2020, EBITDA (as defined in the Credit Agreement) will be annualized based on the actual EBITDA for the preceding fiscal quarters starting with the fiscal quarter ending September 30, 2019.

As of March 31, 2020, each of the Partnership and the Operating Company was in compliance with all financial maintenance covenants under the Credit Agreement. The lenders may accelerate all of the indebtedness under the Credit Agreement upon the occurrence and during the continuance of any event of default. The Credit Agreement contains customary events of default, including non-payment, breach of covenants, materially incorrect representations, cross-default, bankruptcy and change in control. There are no cure periods for events of default due to non-payment of principal and breaches of negative and financial maintenance covenants, but non-payment of interest and breaches of certain affirmative covenants are subject to customary cure periods. With certain specified exceptions, the terms and provisions of the Credit Agreement generally may be amended with the consent of the lenders holding a majority of the outstanding loans or commitments to lend.

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. As of March 31, 2020, a total of 15,151,515 common units had been reserved for issuance pursuant to the LTIP. 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, 2020, the Partnership incurred $2.2 million of unit–based compensation.

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 as the closing price of the Partnership’s common units on the grant date of the award, which is expensed over the applicable vesting period. Upon vesting, the phantom units entitle the recipient to one common unit of 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, 2020:
 
Phantom
Units
 
Weighted Average
Grant-Date
Fair Value
Unvested at December 31, 2019
2,226,895

 
$
19.14

Granted
20,910

 
$
13.85

Forfeited
(569
)
 
$
15.57

Unvested at March 31, 2020
2,247,236

 
$
19.09


As of March 31, 2020, the unrecognized compensation cost related to unvested phantom units was $35.5 million. Such cost is expected to be recognized over a weighted-average period of 4.1 years.

11.    UNITHOLDERS’ EQUITY AND PARTNERSHIP DISTRIBUTIONS

The Partnership has general partner and limited partner units. At March 31, 2020, the Partnership had a total of 43,700,000 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 were owned by Diamondback, representing approximately 71% of the Partnership’s total units outstanding. The Operating Company units and the Partnership’s Class B units 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).

The Partnership had a total of 43,700,000 common units outstanding as of March 31, 2020 and December 31, 2019, respectively. The Partnership had a total of 107,815,152 Class B units outstanding as of March 31, 2020 and December 31, 2019, respectively.

19

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



At the closing of the IPO, the board of directors of the General Partner adopted a policy pursuant to which the Partnership will pay, to the extent legally available, cash distributions of $0.25 per common unit to common unitholders of record on the applicable record date within 60 days after the end of each quarter beginning with the quarter ending September 30, 2019. On February 13, 2020, the board of directors of the General Partner revised the cash distribution policy to provide that the Partnership will pay, to the extent legally available, cash distributions of $0.29 per common unit to common unitholders of record on the applicable record date after the end of each quarter beginning the quarter ended December 31, 2019. The board of directors of the General Partner may change the Partnership's distribution policy at any time and from time to time. The partnership agreement (discussed below) does not require the Partnership to pay cash distributions on the Partnership's common units on a quarterly or other basis.

The following table presents cash distributions approved by the board of directors of the General Partner for the periods presented:
Declaration Date
 
Quarter
 
Amount per Common Unit
 
Payment Date
October 31, 2019
 
Q3 2019
 
$
0.34