filings.toolsItem 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Diamondback Energy, Inc. and Subsidiaries | |||||||||||
| Condensed Consolidated Balance Sheets | |||||||||||
| (Unaudited) | |||||||||||
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| (In millions, except par values and share data) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 149 | $ | 654 | |||||||
| Restricted cash | 18 | 18 | |||||||||
| Accounts receivable: | |||||||||||
| Joint interest and other, net | 113 | 72 | |||||||||
| Oil and natural gas sales, net | 966 | 598 | |||||||||
| Inventories | 62 | 62 | |||||||||
| Derivative instruments | 6 | 13 | |||||||||
| Income tax receivable | — | 1 | |||||||||
| Prepaid expenses and other current assets | 33 | 28 | |||||||||
| Total current assets | 1,347 | 1,446 | |||||||||
| Property and equipment: | |||||||||||
| Oil and natural gas properties, full cost method of accounting ($8,512 million and $8,496 million excluded from amortization at March 31, 2022 and December 31, 2021, respectively) | 33,645 | 32,914 | |||||||||
| Midstream assets | 1,118 | 1,076 | |||||||||
| Other property, equipment and land | 185 | 174 | |||||||||
| Accumulated depletion, depreciation, amortization and impairment | (13,840) | (13,545) | |||||||||
| Property and equipment, net | 21,108 | 20,619 | |||||||||
| Funds held in escrow | — | 12 | |||||||||
| Equity method investments | 643 | 613 | |||||||||
| Derivative instruments | 37 | 4 | |||||||||
| Deferred income taxes, net | 37 | 40 | |||||||||
| Investment in real estate, net | 88 | 88 | |||||||||
| Other assets | 71 | 76 | |||||||||
| Total assets | $ | 23,331 | $ | 22,898 | |||||||
See accompanying notes to condensed consolidated financial statements.
Diamondback Energy, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets - (Continued)
(Unaudited)
| March 31, | December 31, | |||||||||||||
| 2022 | 2021 | |||||||||||||
| Liabilities and Stockholders’ Equity | (In millions, except par values and share data) | |||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable - trade | $ | 49 | $ | 36 | ||||||||||
| Accrued capital expenditures | 301 | 295 | ||||||||||||
| Current maturities of long-term debt | 45 | 45 | ||||||||||||
| Other accrued liabilities | 411 | 419 | ||||||||||||
| Revenues and royalties payable | 578 | 452 | ||||||||||||
| Derivative instruments | 339 | 174 | ||||||||||||
| Deferred income taxes | 149 | 17 | ||||||||||||
| Total current liabilities | 1,872 | 1,438 | ||||||||||||
| Long-term debt | 5,803 | 6,642 | ||||||||||||
| Derivative instruments | 94 | 29 | ||||||||||||
| Asset retirement obligations | 254 | 166 | ||||||||||||
| Deferred income taxes | 1,421 | 1,338 | ||||||||||||
| Other long-term liabilities | 35 | 40 | ||||||||||||
| Total liabilities | 9,479 | 9,653 | ||||||||||||
| Commitments and contingencies (Note 14) | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||
| Common stock, $0.01 par value; 400,000,000 shares authorized; 177,550,589 and 177,551,347 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 2 | 2 | ||||||||||||
| Additional paid-in capital | 14,067 | 14,084 | ||||||||||||
| Retained earnings (accumulated deficit) | (1,326) | (1,998) | ||||||||||||
| Total Diamondback Energy, Inc. stockholders’ equity | 12,743 | 12,088 | ||||||||||||
| Non-controlling interest | 1,109 | 1,157 | ||||||||||||
| Total equity | 13,852 | 13,245 | ||||||||||||
| Total liabilities and equity | $ | 23,331 | $ | 22,898 |
See accompanying notes to condensed consolidated financial statements.
Diamondback Energy, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions, except per share amounts, shares in thousands) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Oil sales | $ | 1,946 | $ | 944 | |||||||||||||||||||
| Natural gas sales | 154 | 104 | |||||||||||||||||||||
| Natural gas liquid sales | 289 | 124 | |||||||||||||||||||||
| Midstream services | 17 | 11 | |||||||||||||||||||||
| Other operating income | 2 | 1 | |||||||||||||||||||||
| Total revenues | 2,408 | 1,184 | |||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Lease operating expenses | 149 | 102 | |||||||||||||||||||||
| Production and ad valorem taxes | 161 | 75 | |||||||||||||||||||||
| Gathering and transportation | 59 | 31 | |||||||||||||||||||||
| Midstream services expense | 22 | 28 | |||||||||||||||||||||
| Depreciation, depletion, amortization and accretion | 313 | 273 | |||||||||||||||||||||
| General and administrative expenses | 36 | 25 | |||||||||||||||||||||
| Merger and integration expense | — | 75 | |||||||||||||||||||||
| Other operating expense | 8 | 4 | |||||||||||||||||||||
| Total costs and expenses | 748 | 613 | |||||||||||||||||||||
| Income (loss) from operations | 1,660 | 571 | |||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense, net | (40) | (56) | |||||||||||||||||||||
| Other income (expense), net | 1 | 1 | |||||||||||||||||||||
| Gain (loss) on derivative instruments, net | (552) | (164) | |||||||||||||||||||||
| Gain (loss) on extinguishment of debt | (54) | (61) | |||||||||||||||||||||
| Income (loss) from equity investments | 9 | (3) | |||||||||||||||||||||
| Total other income (expense), net | (636) | (283) | |||||||||||||||||||||
| Income (loss) before income taxes | 1,024 | 288 | |||||||||||||||||||||
| Provision for (benefit from) income taxes | 221 | 65 | |||||||||||||||||||||
| Net income (loss) | 803 | 223 | |||||||||||||||||||||
| Net income (loss) attributable to non-controlling interest | 24 | 3 | |||||||||||||||||||||
| Net income (loss) attributable to Diamondback Energy, Inc. | $ | 779 | $ | 220 | |||||||||||||||||||
| Earnings (loss) per common share: | |||||||||||||||||||||||
| Basic | $ | 4.39 | $ | 1.34 | |||||||||||||||||||
| Diluted | $ | 4.36 | $ | 1.33 | |||||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | 177,565 | 164,169 | |||||||||||||||||||||
| Diluted | 178,555 | 164,926 | |||||||||||||||||||||
| Dividends declared per share | $ | 3.05 | $ | 0.40 |
See accompanying notes to condensed consolidated financial statements.
Diamondback Energy, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Non-Controlling Interest | Total | ||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||
| ($ in millions, shares in thousands) | ||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 | 177,551 | $ | 2 | $ | 14,084 | $ | (1,998) | $ | 1,157 | $ | 13,245 | |||||||||||||||||||||||||||
| Unit-based compensation | — | — | — | — | 3 | 3 | ||||||||||||||||||||||||||||||||
| Distribution equivalent rights payments | — | — | — | — | (1) | (1) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 16 | — | — | 16 | ||||||||||||||||||||||||||||||||
| Cash paid for tax withholding on vested equity awards | — | — | (15) | — | — | (15) | ||||||||||||||||||||||||||||||||
| Repurchased shares under buyback program | (58) | — | (7) | — | — | (7) | ||||||||||||||||||||||||||||||||
| Repurchased units under buyback programs | — | — | — | — | (42) | (42) | ||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | (47) | (47) | ||||||||||||||||||||||||||||||||
| Dividend paid | — | — | — | (107) | — | (107) | ||||||||||||||||||||||||||||||||
| Exercise of stock options and issuance of restricted stock units and awards | 58 | — | 1 | — | — | 1 | ||||||||||||||||||||||||||||||||
| Change in ownership of consolidated subsidiaries, net | — | — | (12) | — | 15 | 3 | ||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 779 | 24 | 803 | ||||||||||||||||||||||||||||||||
| Balance March 31, 2022 | 177,551 | $ | 2 | $ | 14,067 | $ | (1,326) | $ | 1,109 | $ | 13,852 | |||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Non-Controlling Interest | Total | ||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||
| ($ in millions, shares in thousands) | ||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2020 | 158,088 | $ | 2 | $ | 12,656 | $ | (3,864) | $ | 1,010 | $ | 9,804 | |||||||||||||||||||||||||||
| Unit-based compensation | — | — | — | — | 3 | 3 | ||||||||||||||||||||||||||||||||
| Distribution equivalent rights payments | — | — | — | (1) | — | (1) | ||||||||||||||||||||||||||||||||
| Common units issued for acquisitions | 22,795 | — | 1,727 | — | — | 1,727 | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 11 | — | — | 11 | ||||||||||||||||||||||||||||||||
| Cash paid for tax withholding on vested equity awards | — | — | (6) | — | — | (6) | ||||||||||||||||||||||||||||||||
| Repurchased units under buyback programs | — | — | — | — | (24) | (24) | ||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | (17) | (17) | ||||||||||||||||||||||||||||||||
| Dividend paid | — | — | — | (68) | — | (68) | ||||||||||||||||||||||||||||||||
| Exercise of stock options and issuance of restricted stock units and awards | 101 | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Change in ownership of consolidated subsidiaries, net | — | — | (4) | — | 4 | — | ||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 220 | 3 | 223 | ||||||||||||||||||||||||||||||||
| Balance March 31, 2021 | 180,984 | $ | 2 | $ | 14,384 | $ | (3,713) | $ | 979 | $ | 11,652 | |||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
Diamondback Energy, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 803 | $ | 223 | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Provision for (benefit from) deferred income taxes | 89 | 64 | |||||||||
| Depreciation, depletion, amortization and accretion | 313 | 273 | |||||||||
| (Gain) loss on extinguishment of debt | 54 | 61 | |||||||||
| (Gain) loss on derivative instruments, net | 552 | 164 | |||||||||
| Cash received (paid) on settlement of derivative instruments | (420) | (178) | |||||||||
| Equity-based compensation expense | 15 | 10 | |||||||||
| Other | 5 | 10 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (403) | (137) | |||||||||
| Income tax receivable | 1 | 100 | |||||||||
| Prepaid expenses and other | 2 | 22 | |||||||||
| Accounts payable and accrued liabilities | (13) | (26) | |||||||||
| Income tax payable | 132 | — | |||||||||
| Revenues and royalties payable | 125 | 50 | |||||||||
| Other | (3) | (12) | |||||||||
| Net cash provided by (used in) operating activities | 1,252 | 624 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Drilling, completions and infrastructure additions to oil and natural gas properties | (418) | (289) | |||||||||
| Additions to midstream assets | (19) | (7) | |||||||||
| Property acquisitions | (296) | (346) | |||||||||
| Proceeds from sale of assets | 35 | — | |||||||||
| Contributions to equity method investments | (29) | (4) | |||||||||
| Distributions from equity method investments | — | 9 | |||||||||
| Other | 11 | 50 | |||||||||
| Net cash provided by (used in) investing activities | (716) | (587) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowings under credit facilities | 79 | 432 | |||||||||
| Repayments under credit facilities | (100) | (455) | |||||||||
| Proceeds from senior notes | 750 | 2,200 | |||||||||
| Repayment of senior notes | (1,500) | (1,916) | |||||||||
| Proceeds from (repayments to) joint venture | 5 | (4) | |||||||||
| Premium on extinguishment of debt | (47) | (166) | |||||||||
| Repurchased shares under buyback program | (7) | — | |||||||||
| Repurchased units under buyback program | (42) | (24) | |||||||||
| Dividends to stockholders | (107) | (68) | |||||||||
| Distributions to non-controlling interest | (47) | (17) | |||||||||
| Financing portion of net cash received (paid) for derivative instruments | — | 76 | |||||||||
| Other | (25) | (29) | |||||||||
| Net cash provided by (used in) financing activities | (1,041) | 29 | |||||||||
| Net increase (decrease) in cash and cash equivalents | (505) | 66 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 672 | 108 | |||||||||
| Cash, cash equivalents and restricted cash at end of period(1) | $ | 167 | $ | 174 | |||||||
(1) See Note 2—Summary of Significant Accounting Policies
See accompanying notes to condensed consolidated financial statements.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Organization and Description of the Business
Diamondback Energy, Inc., together with its subsidiaries (collectively referred to as “Diamondback” or the “Company” unless the context otherwise requires), is an independent oil and natural gas company currently focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas.
As of March 31, 2022, the wholly owned subsidiaries of Diamondback include Diamondback E&P LLC (“Diamondback E&P”), a Delaware limited liability company, Viper Energy Partners GP LLC, a Delaware limited liability company, Rattler Midstream GP LLC, a Delaware limited liability company, and QEP Resources, Inc. (“QEP”), a Delaware corporation.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries after all significant intercompany balances and transactions have been eliminated upon consolidation.
Diamondback’s publicly traded subsidiaries Viper Energy Partners LP (“Viper”) and Rattler Midstream LP (“Rattler”) are consolidated in the Company’s financial statements. As of March 31, 2022, the Company owned approximately 55% of Viper’s total units outstanding. The Company’s wholly owned subsidiary, Viper Energy Partners GP LLC, is the general partner of Viper. As of March 31, 2022, the Company owned approximately 74% of Rattler’s total units outstanding. The Company’s wholly owned subsidiary, Rattler Midstream GP LLC, is the general partner of Rattler. The results of operations attributable to the non-controlling interest in Viper and Rattler are presented within equity and net income and are shown separately from the Company’s equity and net income attributable to the Company.
These condensed consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC. They reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to SEC rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10–Q should be read in conjunction with the Company’s most recent Annual Report on Form 10–K for the fiscal year ended December 31, 2021, which contains a summary of the Company’s significant accounting policies and other disclosures.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications had an immaterial effect on the previously reported total assets, total liabilities, stockholders’ equity, results of operations or cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Certain amounts included in or affecting the Company’s consolidated financial statements and related disclosures must be estimated by management, requiring certain assumptions to be made with respect to values or conditions that cannot be known with certainty at the time the consolidated financial statements are prepared. These estimates and assumptions affect the amounts the Company reports for assets and liabilities and the Company’s disclosure of contingent assets and liabilities as of the date of the consolidated financial statements. Actual results could differ from those estimates.
Making accurate estimates and assumptions is particularly difficult in the oil and natural gas industry, given the challenges resulting from volatility in oil and natural gas prices and the effects of the COVID-19 pandemic. Such circumstances generally increase the uncertainty in the Company’s accounting estimates, particularly those involving financial forecasts.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
The Company evaluates these estimates on an ongoing basis, using historical experience, consultation with experts and other methods the Company considers reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from the Company’s estimates. Any effects on the Company’s business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Significant items subject to such estimates and assumptions include estimates of proved oil and natural gas reserves and related present value estimates of future net cash flows therefrom, the carrying value of oil and natural gas properties, the fair value determination of acquired assets and liabilities assumed, fair value estimates of derivative instruments and estimates of income taxes.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash as reported at the end of the period in the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 to the line items within the condensed consolidated balance sheets:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Cash and cash equivalents | $ | 149 | $ | 121 | |||||||
| Restricted cash | 18 | 19 | |||||||||
| Restricted cash included in funds held in escrow | — | 34 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 167 | $ | 174 |
Recent Accounting Pronouncements
Recently Adopted Pronouncements
There are no recently adopted pronouncements.
Accounting Pronouncements Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” This update requires the acquirer in a business combination to record contract asset and liabilities following Topic 606 – “Revenue from Contracts with Customers” at acquisition as if it had originated the contract, rather than at fair value. This update is effective for public business entities beginning after December 15, 2022 with early adoption permitted. The Company continues to evaluate the provisions of this update, but does not believe the adoption will have a material impact on its financial position, results of operations or liquidity.
The Company considers the applicability and impact of all ASUs. ASUs not discussed above were assessed and determined to be either not applicable, the effects of adoption are not expected to be material or are clarifications of ASUs previously disclosed.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from Contracts with Customers
Sales of oil, natural gas and natural gas liquids are recognized at the point control of the product is transferred to the customer. Virtually all of the pricing provisions in the Company’s contracts are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, the quality of the oil or natural gas and the prevailing supply and demand conditions. As a result, the price of the oil, natural gas and natural gas liquids fluctuates to remain competitive with other available oil, natural gas and natural gas liquids supplies. The following tables present the Company’s revenue from contracts with customers disaggregated by product type and basin:
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||
| Midland Basin | Delaware Basin | Other | Total | Midland Basin | Delaware Basin | Other | Total | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
| Oil sales | $ | 1,398 | $ | 545 | $ | 3 | $ | 1,946 | $ | 569 | $ | 358 | $ | 17 | $ | 944 | |||||||||||||
| Natural gas sales | 98 | 56 | — | 154 | 41 | 61 | 2 | 104 | |||||||||||||||||||||
| Natural gas liquid sales | 191 | 97 | 1 | 289 | 75 | 47 | 2 | 124 | |||||||||||||||||||||
| Total | $ | 1,687 | $ | 698 | $ | 4 | $ | 2,389 | $ | 685 | $ | 466 | $ | 21 | $ | 1,172 |
4. ACQUISITIONS AND DIVESTITURES
First Quarter 2022 Acquisition
On January 18, 2022, the Company acquired, from an unrelated third-party seller, approximately 6,200 net acres in the Delaware Basin for $232 million in cash, including customary post-closing adjustments. The acquisition was funded through cash on hand.
Guidon Operating LLC
On February 26, 2021, the Company completed its acquisition of all leasehold interests and related assets of Guidon Operating LLC (the “Guidon Acquisition”) which include approximately 32,500 net acres in the Northern Midland Basin in exchange for 10.68 million shares of the Company’s common stock and $375 million of cash. The cash portion of this transaction was funded through a combination of cash on hand and borrowings under the Company’s credit facility. As a result of the Guidon Acquisition, the Company added approximately 210 gross producing wells.
The following table presents the acquisition consideration paid in the Guidon Acquisition (in millions, except per share data, shares in thousands):
| Consideration: | |||||
| Shares of Diamondback common stock issued at closing | 10,676 | ||||
| Closing price per share of Diamondback common stock on the closing date | $ | 69.28 | |||
| Fair value of Diamondback common stock issued | $ | 740 | |||
| Cash consideration | 375 | ||||
| Total consideration (including fair value of Diamondback common stock issued) | $ | 1,115 |
Purchase Price Allocation
The Guidon Acquisition has been accounted for as a business combination using the acquisition method. The following table represents the allocation of the total purchase price paid in the Guidon Acquisition to the identifiable assets acquired based on the fair values at the acquisition date. The purchase price allocation was complete as of the first quarter of 2022.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
The following table sets forth the Company’s purchase price allocation (in millions):
| Total consideration | $ | 1,115 | |||
| Fair value of liabilities assumed: | |||||
| Asset retirement obligations | 9 | ||||
| Fair value of assets acquired: | |||||
| Oil and gas properties | 1,110 | ||||
| Midstream assets | 14 | ||||
| Amount attributable to assets acquired | 1,124 | ||||
| Net assets acquired and liabilities assumed | $ | 1,115 |
Oil and natural gas properties were valued using an income approach utilizing the discounted cash flow method, which takes into account production forecasts, projected commodity prices and pricing differentials, and estimates of future capital and operating costs which were then discounted utilizing an estimated weighted-average cost of capital for industry market participants. The fair value of acquired midstream assets was based on the cost approach, which utilized asset listings and cost records with consideration for the reported age, condition, utilization and economic support of the assets. The majority of the measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and are therefore considered Level 3 inputs.
With the completion of the Guidon Acquisition, the Company acquired proved properties of $537 million and unproved properties of $573 million. The results of operations attributable to the Guidon Acquisition since the acquisition date have been included in the condensed consolidated statements of operations and include $28 million of total revenue and $16 million of net income for the three months ended March 31, 2021.
QEP Resources, Inc.
On March 17, 2021, the Company completed its acquisition of QEP in an all-stock transaction (the “QEP Merger”). The addition of QEP’s assets increased the Company’s net acreage in the Midland Basin by approximately 49,000 net acres. Under the terms of the QEP Merger, each eligible share of QEP common stock issued and outstanding immediately prior to the effective time converted into the right to receive 0.050 of a share of Diamondback common stock, with cash being paid in lieu of any fractional shares (the “merger consideration”).
The following table presents the acquisition consideration paid to QEP stockholders in the QEP Merger (in millions, except per share data, shares in thousands):
| Consideration: | |||||
| Eligible shares of QEP common stock converted into shares of Diamondback common stock | 238,153 | ||||
| Shares of QEP equity awards included in precombination consideration | 4,221 | ||||
| Total shares of QEP common stock eligible for merger consideration | 242,374 | ||||
| Exchange ratio | 0.050 | ||||
| Shares of Diamondback common stock issued as merger consideration | 12,119 | ||||
| Closing price per share of Diamondback common stock | $ | 81.41 | |||
| Total consideration (fair value of the Company's common stock issued) | $ | 987 | |||
Purchase Price Allocation
The QEP Merger has been accounted for as a business combination using the acquisition method. The following table represents the preliminary allocation of the total purchase price for the acquisition of QEP to the identifiable assets acquired and the liabilities assumed based on the fair values at the acquisition date. The purchase price allocation was complete as of the first quarter of 2022.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
The following table sets forth the Company’s purchase price allocation (in millions):
| Total consideration | $ | 987 | |||
| Fair value of liabilities assumed: | |||||
| Accounts payable - trade | $ | 26 | |||
| Accrued capital expenditures | 38 | ||||
| Other accrued liabilities | 107 | ||||
| Revenues and royalties payable | 67 | ||||
| Derivative instruments | 242 | ||||
| Long-term debt | 1,710 | ||||
| Asset retirement obligations | 54 | ||||
| Other long-term liabilities | 63 | ||||
| Amount attributable to liabilities assumed | $ | 2,307 | |||
| Fair value of assets acquired: | |||||
| Cash, cash equivalents and restricted cash | $ | 22 | |||
| Accounts receivable - joint interest and other, net | 87 | ||||
| Accounts receivable - oil and natural gas sales, net | 44 | ||||
| Inventories | 18 | ||||
| Income tax receivable | 33 | ||||
| Prepaid expenses and other current assets | 7 | ||||
| Oil and natural gas properties | 2,922 | ||||
| Other property, equipment and land | 16 | ||||
| Deferred income taxes | 39 | ||||
| Other assets | 106 | ||||
| Amount attributable to assets acquired | 3,294 | ||||
| Net assets acquired and liabilities assumed | $ | 987 |
The purchase price allocation above is based on the fair values of the assets and liabilities of QEP as of the closing date of the QEP Merger. The majority of the measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and are therefore considered Level 3 inputs. The fair value of acquired property and equipment, including midstream assets classified in oil and natural gas properties, is based on the cost approach, which utilized asset listings and cost records with consideration for the reported age, condition, utilization and economic support of the assets. Oil and natural gas properties were valued using an income approach utilizing the discounted cash flow method, which takes into account production forecasts, projected commodity prices and pricing differentials, and estimates of future capital and operating costs which were then discounted utilizing an estimated weighted-average cost of capital for industry market participants. The fair value of QEP’s outstanding senior unsecured notes was based on unadjusted quoted prices in an active market, which are considered Level 1 inputs. The value of derivative instruments was based on observable inputs including forward commodity-price curves which are considered Level 2 inputs. Deferred income taxes represent the tax effects of differences in the tax basis and merger-date fair values of assets acquired and liabilities assumed.
With the completion of the QEP Merger, the Company acquired proved properties of $2.0 billion and unproved properties of $733 million, primarily in the Midland Basin and the Williston Basin. In October 2021, the Company completed the divestiture of the Williston Basin properties, acquired as part of the QEP Merger and consisting of approximately 95,000 net acres, to Oasis Petroleum Inc. for net cash proceeds of approximately $586 million, after customary closing adjustments. See “—Williston Basin Divestiture” below.
The results of operations attributable to the QEP Merger since the acquisition date have been included in the condensed consolidated statements of operations and include $54 million of total revenue and $23 million of net income for the three months ended March 31, 2021.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
Pro Forma Financial Information
The following unaudited summary pro forma financial information for the three months ended March 31, 2021 has been prepared to give effect to the QEP Merger and the Guidon Acquisition as if they had occurred on January 1, 2020. The unaudited pro forma financial information does not purport to be indicative of what the combined company’s results of operations would have been if these transactions had occurred on the dates indicated, nor is it indicative of the future financial position or results of operations of the combined company.
The below information reflects pro forma adjustments for the issuance of the Company’s common stock in exchange for QEP’s outstanding shares of common stock, as well as pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including adjustments to depreciation, depletion and amortization based on the full cost method of accounting and the purchase price allocated to property, plant, and equipment as well as adjustments to interest expense and the provision for (benefit from) income taxes.
Additionally, pro forma earnings were adjusted to exclude acquisition-related costs incurred by the Company for the QEP Merger and the Guidon Acquisition of approximately $75 million for the three months ended March 31, 2021 and acquisition-related costs incurred by QEP of $31 million through the closing date of the QEP Merger. These acquisition-related costs primarily consist of one-time severance costs and the accelerated or change-in-control vesting of certain QEP share-based awards for former QEP employees based on the terms of the merger agreement relating to the QEP Merger and other bank, legal and advisory fees. The pro forma results of operations do not include any cost savings or other synergies that may result from the QEP Merger and the Guidon Acquisition or any estimated costs that have been or will be incurred by the Company to integrate the acquired assets. The pro forma financial data does not include the results of operations for any other acquisitions made during the periods presented, as they were primarily acreage acquisitions and their results were not deemed material.
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||
| Revenues | $ | 1,481 | |||||||||||||||||||||
| Income (loss) from operations | $ | 684 | |||||||||||||||||||||
| Net income (loss) | $ | 146 | |||||||||||||||||||||
| Basic earnings (loss) per common share | $ | 0.81 | |||||||||||||||||||||
| Diluted earnings (loss) per common share | $ | 0.80 |
Williston Basin Divestiture
On October 21, 2021, the Company completed the divestiture of its Williston Basin oil and natural gas assets, consisting of approximately 95,000 net acres, to Oasis Petroleum Inc., for net cash proceeds of approximately $586 million, after customary closing adjustments. This transaction did not result in a significant alteration of the relationship between the Company’s capitalized costs and proved reserves and, accordingly, the Company recorded the proceeds as a reduction of its full cost pool with no gain or loss recognized on the sale. The Company used its net proceeds from this transaction toward debt reduction.
2021 Drop Down Transaction
On December 1, 2021, Diamondback completed the sale of certain water midstream assets to Rattler in exchange for cash proceeds of approximately $164 million, including post-closing adjustments, in a drop down transaction (the “Drop Down”). The midstream assets consist primarily of produced water gathering and disposal systems, produced water recycling facilities, and sourced water gathering and storage assets acquired by the Company through the Guidon Acquisition and the QEP Merger with a carrying value of approximately $164 million. The Company and Rattler have also mutually agreed to amend their commercial agreements covering produced water gathering and disposal and sourced water gathering services to add certain Diamondback leasehold acreage to Rattler’s dedication. The Drop Down transaction was accounted for as a transaction between entities under common control.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
Viper’s Swallowtail Acquisition
On October 1, 2021, Viper acquired certain mineral and royalty interests from the Swallowtail entities pursuant to a definitive purchase and sale agreement for 15.25 million of Viper’s common units and approximately $225 million in cash (the “Swallowtail Acquisition”). The mineral and royalty interests acquired in the Swallowtail Acquisition represent approximately 2,313 net royalty acres primarily in the Northern Midland Basin, of which approximately 62% are operated by Diamondback. The Swallowtail Acquisition had an effective date of August 1, 2021. The cash portion of this transaction was funded through a combination of Viper’s cash on hand and approximately $190 million of borrowings under Viper LLC’s revolving credit facility.
5. PROPERTY AND EQUIPMENT
Property and equipment includes the following as of the dates indicated:
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Oil and natural gas properties: | |||||||||||
| Subject to depletion | $ | 25,133 | $ | 24,418 | |||||||
| Not subject to depletion | 8,512 | 8,496 | |||||||||
| Gross oil and natural gas properties | 33,645 | 32,914 | |||||||||
| Accumulated depletion | (5,716) | (5,434) | |||||||||
| Accumulated impairment | (7,954) | (7,954) | |||||||||
| Oil and natural gas properties, net | 19,975 | 19,526 | |||||||||
| Midstream assets | 1,118 | 1,076 | |||||||||
| Other property, equipment and land | 185 | 174 | |||||||||
| Accumulated depreciation and impairment | (170) | (157) | |||||||||
| Total property and equipment, net | $ | 21,108 | $ | 20,619 | |||||||
Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter which determines a limit, or ceiling, on the book value of proved oil and natural gas properties. No impairment expense was recorded for the three months ended March 31, 2022 or 2021 based on the results of the respective quarterly ceiling tests.
In connection with the QEP Merger and the Guidon Acquisition, the Company recorded the oil and natural gas properties acquired at fair value, based on forward strip oil and natural gas pricing existing at the closing date of the respective transactions, in accordance with ASC 820 Fair Value Measurement. Pursuant to SEC guidance, the Company determined that the fair value of the properties acquired in the QEP Merger and the Guidon Acquisition clearly exceeded the related full cost ceiling limitation beyond a reasonable doubt. As such, the Company requested and received a waiver from the SEC to exclude the properties acquired from the ceiling test calculation for the quarter ended March 31, 2021. As a result, no impairment expense related to the QEP Merger and the Guidon Acquisition was recorded for the three months ended March 31, 2021. Had the Company not received a waiver from the SEC, an impairment charge of approximately $1.1 billion would have been recorded for such period. Management affirmed there has not been a decline in the fair value of these acquired assets. The properties acquired in the QEP Merger and the Guidon Acquisition had total unamortized costs at March 31, 2021 of $3.0 billion and $1.1 billion, respectively.
In addition to commodity prices, the Company’s production rates, levels of proved reserves, future development costs, transfers of unevaluated properties and other factors will determine its actual ceiling test calculation and impairment analysis in future periods. If the future trailing 12-month commodity prices decline as compared to the commodity prices used in prior quarters, the Company may have material write downs in subsequent quarters. It is possible that circumstances requiring additional impairment testing will occur in future interim periods, which could result in potentially material impairment charges being recorded.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
6. ASSET RETIREMENT OBLIGATIONS
The following table describes the changes to the Company’s asset retirement obligations liability for the following periods:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Asset retirement obligations, beginning of period | $ | 171 | $ | 109 | |||||||
| Additional liabilities incurred | 21 | 2 | |||||||||
| Liabilities acquired | 2 | 63 | |||||||||
| Liabilities settled and divested | (5) | (1) | |||||||||
| Accretion expense | 3 | 2 | |||||||||
| Revisions in estimated liabilities | 75 | 20 | |||||||||
| Asset retirement obligations, end of period | 267 | 195 | |||||||||
| Less current portion(1) | 13 | 5 | |||||||||
| Asset retirement obligations - long-term | $ | 254 | $ | 190 |
(1) The current portion of the asset retirement obligation is included in other accrued liabilities in the Company’s condensed consolidated balance sheets.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
7. DEBT
Long-term debt consisted of the following as of the dates indicated:
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| 5.375% Senior Notes due 2022(1) | $ | 25 | $ | 25 | |||||||
| 7.320% Medium-term Notes, Series A, due 2022(2) | 20 | 20 | |||||||||
| 5.250% Senior Notes due 2023(1) | 10 | 10 | |||||||||
| 2.875% Senior Notes due 2024 | — | 1,000 | |||||||||
| 4.750% Senior Notes due 2025 | — | 500 | |||||||||
| 3.250% Senior Notes due 2026 | 800 | 800 | |||||||||
| 5.625% Senior Notes due 2026(1) | 14 | 14 | |||||||||
| 7.125% Medium-term Notes, Series B, due 2028(2) | 100 | 100 | |||||||||
| 3.500% Senior Notes due 2029 | 1,200 | 1,200 | |||||||||
| 3.125% Senior Notes due 2031 | 900 | 900 | |||||||||
| 4.400% Senior Notes due 2051 | 650 | 650 | |||||||||
| 4.750% Senior Notes due 2052 | 750 | — | |||||||||
| DrillCo Agreement(3) | 64 | 58 | |||||||||
| Unamortized debt issuance costs | (30) | (31) | |||||||||
| Unamortized discount costs | (30) | (28) | |||||||||
| Unamortized premium costs | 7 | 8 | |||||||||
| Fair value of interest rate swap agreements(4) | (90) | (18) | |||||||||
| Revolving credit facility | — | — | |||||||||
| Viper revolving credit facility | 248 | 304 | |||||||||
| Viper 5.375% Senior Notes due 2027 | 480 | 480 | |||||||||
| Rattler revolving credit facility | 230 | 195 | |||||||||
| Rattler 5.625% Senior Notes due 2025 | 500 | 500 | |||||||||
| Total debt, net | 5,848 | 6,687 | |||||||||
| Less: current maturities of long-term debt | (45) | (45) | |||||||||
| Total long-term debt | $ | 5,803 | $ | 6,642 |
(1) At the effective time of the QEP Merger, QEP became a wholly owned subsidiary of the Company and remained the issuer of these senior notes.
(2) In November 2018, Energen became the Company’s wholly owned subsidiary and remained the issuer of these senior notes. In connection with the E&P Merger, Diamondback E&P became the successor issuer under the indenture.
(3) The Company entered into a participation and development agreement (the “DrillCo Agreement”), dated September 10, 2018, with Obsidian Resources, L.L.C. (“CEMOF”) to fund oil and natural gas development. As of March 31, 2022, the amount due to CEMOF related to this alliance was $64 million. As of March 31, 2022, 20 joint wells under this agreement have been drilled and completed.
(4) The Company has two interest rate swap agreements in place on the Company’s $1.2 billion 3.500% fixed rate senior notes due 2029. See Note 11—Derivatives for additional information on the Company’s interest rate swaps designated as fair value hedges.
References in this section to the Company shall mean Diamondback Energy, Inc. and Diamondback E&P, collectively, unless otherwise specified.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
Second Amended and Restated Credit Facility
As of March 31, 2022, Diamondback E&P, as borrower, and Diamondback Energy, Inc., as parent guarantor, have a credit agreement, as amended, which provides for a maximum credit amount available of $1.6 billion which was fully available for future borrowings, except for an aggregate of $3 million in outstanding letters of credit, which reduce available borrowings under the credit agreement on a dollar for dollar basis. There were no borrowings under the credit agreement during the three months ended March 31, 2022. During the three months ended March 31, 2021, the weighted average interest rate on borrowings under the credit agreement was 1.65%.
As of March 31, 2022, the Company was in compliance with all financial maintenance covenants under the credit agreement.
March 2022 Notes Offering
On March 17, 2022, Diamondback Energy, Inc. issued $750 million aggregate principal amount of 4.250% Senior Notes due March 15, 2052 (the “March 2022 Notes”) and received net proceeds of $739 million, after deducting debt issuance costs and discounts of $11 million and underwriting discounts and offering expenses. Interest on the March 2022 Notes is payable semi-annually on March 15 and September 15 of each year, beginning on September 15, 2022.
The March 2022 Notes are the Company’s senior unsecured obligations and are fully and unconditionally guaranteed by Diamondback E&P. The March 2022 Notes are senior in right of payment to any of the Company’s future subordinated indebtedness and rank equal in right of payment with all of the Company’s existing and future senior indebtedness.
The Company may redeem the March 2022 Notes in whole or in part at any time prior to September 15, 2051 at the redemption price set forth in the fifth supplemental indenture to the IG Indenture.
Redemptions of Notes
On March 18, 2022, the Company redeemed the aggregate $500 million principal amount of its outstanding 4.750% 2025 Senior Notes for total cash consideration of $540 million, including a make-whole premium of $33 million, which resulted in a loss on extinguishment of debt during the three months ended March 31, 2022 of $35 million. The Company funded the redemption with a portion of the net proceeds from the March 2022 Notes offering.
On March 23, 2022, the Company redeemed the aggregate $1.0 billion principal amount of its outstanding 2.875% 2024 Senior Notes for total cash consideration of $1.0 billion, including a make-whole premium of $14 million, which resulted in a loss on extinguishment of debt during the three months ended March 31, 2022 of $19 million. The Company funded the redemption with the remaining proceeds from the March 2022 Notes offering and cash on hand.
Viper’s Credit Agreement
Viper LLC’s credit agreement, as amended, provides for a revolving credit facility in the maximum credit amount of $2.0 billion with a borrowing base of $580 million based on Viper LLC’s oil and natural gas reserves and other factors. The borrowing base is scheduled to be redetermined semi-annually in May and November. As of March 31, 2022, the elected commitment amount was $500 million with $248 million of outstanding borrowings and $252 million available for future borrowings. During the three months ended March 31, 2022 and 2021, the weighted average interest rate on borrowings under the Viper credit agreement was 2.58% and 1.88%, respectively. The Viper credit agreement will mature on June 2, 2025. As of March 31, 2022, Viper LLC was in compliance with all financial maintenance covenants under the Viper credit agreement.
Rattler’s Credit Agreement
Rattler LLC’s credit agreement, as amended, provides for a revolving credit facility in the maximum credit amount of $600 million, which is expandable to $1.0 billion upon Rattler’s election, subject to obtaining additional lender commitments and satisfaction of customary conditions. As of March 31, 2022, Rattler LLC had $230 million of outstanding borrowings and $370 million available for future borrowings under the Rattler credit agreement. During the three months ended March 31, 2022 and 2021, the weighted average interest rate on borrowings under the Rattler credit agreement was, in each case, 1.40%. The revolving credit facility will mature on May 28, 2024. As of March 31, 2022, Rattler LLC was in compliance with all financial maintenance covenants under the Rattler credit agreement.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
8. STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE
Stock Repurchase Program
In September 2021, the Company’s board of directors approved a stock repurchase program to acquire up to $2 billion of the Company’s outstanding common stock. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions, and are subject to market conditions, applicable legal requirements, contractual obligations and other factors. The repurchase program does not require the Company to acquire any specific number of shares. This repurchase program may be suspended from time to time, modified, extended or discontinued by the board of directors at any time. During the three months ended March 31, 2022, the Company repurchased approximately $7 million of common stock under this repurchase program. As of March 31, 2022, approximately $1.6 billion remained available for use to repurchase shares under the Company’s common stock repurchase program.
Change in Ownership of Consolidated Subsidiaries
Non-controlling interests in the accompanying condensed consolidated financial statements represent minority interest ownership in Viper and Rattler and are presented as a component of equity. When the Company’s relative ownership interests in Viper and Rattler change, adjustments to non-controlling interest and additional paid-in-capital, tax effected, will occur. The following table summarizes changes in the ownership interest in consolidated subsidiaries during the periods presented:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Net income (loss) attributable to the Company | $ | 779 | $ | 220 | |||||||||||||||||||
| Change in ownership of consolidated subsidiaries | (12) | (4) | |||||||||||||||||||||
| Change from net income (loss) attributable to the Company's stockholders and transfers to non-controlling interest | $ | 767 | $ | 216 |
Earnings (Loss) Per Share
The Company’s basic earnings (loss) per share amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share include the effect of potentially dilutive shares outstanding for the period. Additionally, the per share earnings of Viper and Rattler are included in the consolidated earnings per share computation based on the consolidated group’s holdings of the subsidiaries.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
A reconciliation of the components of basic and diluted earnings per common share is presented in the table below:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| ($ in millions, except per share amounts, shares in thousands) | |||||||||||||||||||||||
| Net income (loss) attributable to common stock | $ | 779 | $ | 220 | |||||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic weighted average common shares outstanding | 177,565 | 164,169 | |||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Potential common shares issuable (1) | 990 | 757 | |||||||||||||||||||||
| Diluted weighted average common shares outstanding | 178,555 | 164,926 | |||||||||||||||||||||
| Basic net income (loss) attributable to common stock | $ | 4.39 | $ | 1.34 | |||||||||||||||||||
| Diluted net income (loss) attributable to common stock | $ | 4.36 | $ | 1.33 |
(1) For the three months ended March 31, 2022, there were no potential common shares excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive under the treasury stock method. For the three months ended March 31, 2021, 241,091 potential common shares were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive under the treasury stock method.
9. EQUITY-BASED COMPENSATION
On June 3, 2021, the Company’s stockholders approved and adopted the Company’s 2021 amended and restated equity incentive plan (the “Equity Plan”), which, among other things, increased total shares authorized for issuance from 8.3 million to 11.8 million. At March 31, 2022, the Company had 5.1 million shares of common stock available for future grants.
Under the Equity Plan, approved by the Board of Directors, the Company is authorized to issue incentive and non-statutory stock options, restricted stock awards and restricted stock units, performance awards and stock appreciation rights to eligible employees. At March 31, 2022, the Company had outstanding restricted stock units and performance-based restricted stock units under the Equity Plan. The Company also has immaterial amounts of restricted share awards, stock options and stock appreciation rights outstanding which were issued under plans assumed in connection with previously completed mergers. The Company classifies these as equity-based awards and estimates the fair values of restricted stock awards and units as the closing price of the Company’s common stock on the grant date of the award, which is expensed over the applicable vesting period. The Company values its stock options using a Black-Scholes option valuation model.
In addition to the Equity Plan, Viper and Rattler maintain their own long-term incentive plans which are not significant to the Company.
The following table presents the financial statement impacts of the equity compensation plans and related costs:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| General and administrative expenses | $ | 15 | $ | 10 | |||||||||||||||||||
| Equity-based compensation capitalized pursuant to full cost method of accounting for oil and natural gas properties | $ | 4 | $ | 4 | |||||||||||||||||||
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
Restricted Stock Units
The following table presents the Company’s restricted stock unit activity during the three months ended March 31, 2022 under the Equity Plan:
| Restricted Stock Units | Weighted Average Grant-Date Fair Value | ||||||||||
| Unvested at December 31, 2021 | 1,079,589 | $ | 62.09 | ||||||||
| Granted | 309,535 | $ | 131.72 | ||||||||
| Vested | (157,534) | $ | 87.10 | ||||||||
| Forfeited | (15,041) | $ | 62.98 | ||||||||
| Unvested at March 31, 2022 | 1,216,549 | $ | 75.71 |
The aggregate fair value of restricted stock units that vested during the three months ended March 31, 2022 was $14 million. As of March 31, 2022, the Company’s unrecognized compensation cost related to unvested restricted stock units was $81 million, which is expected to be recognized over a weighted-average period of 2.2 years.
Performance Based Restricted Stock Units
The following table presents the Company’s performance restricted stock units activity under the Equity Plan for the three months ended March 31, 2022:
| Performance Restricted Stock Units | Weighted Average Grant-Date Fair Value | ||||||||||
| Unvested at December 31, 2021 | 456,459 | $ | 100.17 | ||||||||
| Granted | 126,905 | $ | 237.13 | ||||||||
| Unvested at March 31, 2022(1) | 583,364 | $ | 129.96 |
(1)A maximum of 1,408,973 units could be awarded based upon the Company’s final TSR ranking.
As of March 31, 2022, the Company’s unrecognized compensation cost related to unvested performance based restricted stock awards and units was $52 million, which is expected to be recognized over a weighted-average period of 1.9 years.
In March 2022, eligible employees received performance restricted stock unit awards totaling 126,905 units from which a minimum of 0% and a maximum of 200% of the units could be awarded based upon the measurement of total stockholder return of the Company’s common stock as compared to a designated peer group during the 3-year performance period of January 1, 2022 to December 31, 2024 and cliff vest at December 31, 2024 subject to continued employment. The initial payout of the March 2022 awards will be further adjusted by a TSR modifier that may reduce the payout or increase the payout up to a maximum of 250%.
The fair value of each performance restricted stock unit issuance is estimated at the date of grant using a Monte Carlo simulation, which results in an expected percentage of units to be earned during the performance period.
The following table presents a summary of the grant-date fair values of performance restricted stock units granted and the related assumptions for the awards granted during the period presented:
| 2022 | |||||||||||||||||
| Grant-date fair value | $ | 237.13 | |||||||||||||||
| Risk-free rate | 1.44 | % | |||||||||||||||
| Company volatility | 72.10 | % |
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
10. INCOME TAXES
The Company’s effective income tax rates were 21.6% and 22.6% for the three months ended March 31, 2022 and 2021, respectively. Total income tax expense from continuing operations for the three months ended March 31, 2022 and 2021 differed from amounts computed by applying the United States federal statutory tax rate to pre-tax income primarily due to (i) state income taxes, net of federal benefit, and (ii) the impact of permanent differences between book and taxable income, partially offset by (iii) tax benefit resulting from a reduction in the valuation allowance on Viper’s deferred tax assets due to pre-tax income for the period. As of March 31, 2022 and 2021, Viper maintained a valuation allowance against its deferred tax assets, based on its assessment of all available evidence, both positive and negative, supporting realizability of Viper’s deferred tax assets.
For the three months ended March 31, 2022 and 2021, the Company’s items of discrete income tax expense or benefit were not material.
On March 17, 2021, the Company completed its acquisition of QEP. For federal income tax purposes, the transaction qualified as a nontaxable merger whereby the Company acquired carryover tax basis in QEP’s assets and liabilities. As of March 31, 2022, the Company’s opening balance sheet net deferred tax asset was $39 million, primarily consisting of deferred tax assets related to tax attributes acquired from QEP, partially offset by a valuation allowance, and deferred tax liabilities resulting from the excess of financial reporting carrying value over tax basis of oil and natural gas properties and other assets acquired from QEP. The acquired income tax attributes, including federal net operating loss and credit carryforwards, are subject to an annual limitation under Internal Revenue Code Section 382. The Company has considered the positive and negative evidence regarding realizability of these federal tax attributes including taxable income in prior carryback years, the annual limitation imposed by Section 382, and the anticipated timing of reversal of its deferred tax liabilities, resulting in a valuation allowance on the portion of QEP’s federal tax attributes estimated not more likely than not to be realized prior to expiration. In addition, acquired tax attributes include state net operating loss carryforwards for which a valuation allowance has been provided, since the Company does not believe the state net operating losses are more likely than not to be realized based on its assessment of anticipated future operations in those states.
11. DERIVATIVES
At March 31, 2022, the Company has commodity derivative contracts and receive-fixed, pay-variable interest rate hedges outstanding. All derivative financial instruments are recorded at fair value.
Commodity Contracts
The Company has entered into multiple crude oil and natural gas derivatives, indexed to the respective indices as noted in the table below, to reduce price volatility associated with certain of its oil and natural gas sales. The Company has not designated its commodity derivative instruments as hedges for accounting purposes and, as a result, marks its commodity derivative instruments to fair value and recognizes the cash and non-cash changes in fair value in the condensed consolidated statements of operations under the caption “Gain (loss) on derivative instruments, net.”
By using derivative instruments to economically hedge exposure to changes in commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. The Company’s counterparties are participants in the secured second amended and restated credit agreement, which is secured by substantially all of the assets of the guarantor subsidiaries; therefore, the Company is not required to post any collateral. The Company has entered into commodity derivative instruments only with counterparties that are also lenders under its credit facility and have been deemed an acceptable credit risk. As such, the Company does not require collateral from its counterparties.
The Company had certain commodity derivative contracts that contained an other-than-insignificant financing element at inception during 2021 and, therefore, the cash receipts were classified as cash flows from financing activities in the condensed consolidated statements of cash flow for the three months ended March 31, 2021.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
As of March 31, 2022, the Company had the following outstanding commodity derivative contracts. When aggregating multiple contracts, the weighted average contract price is disclosed.
| Swaps | Collars | ||||||||||||||||||||||||||||
| Settlement Month | Settlement Year | Type of Contract | Bbls/MMBtu Per Day | Index | Weighted Average Differential | Weighted Average Fixed Price | Weighted Average Floor Price | Weighted Average Ceiling Price | |||||||||||||||||||||
| OIL | |||||||||||||||||||||||||||||
| Apr. - June | 2022 | Swap | 1,000 | WTI | $— | $45.00 | $— | $— | |||||||||||||||||||||
| Apr. - June | 2022 | Swap | 13,900 | Brent | $— | $67.54 | $— | $— | |||||||||||||||||||||
| Apr. - June | 2022 | Basis Swap(1) | 17,000 | Argus WTI Midland | $0.66 | $— | $— | $— | |||||||||||||||||||||
| July - Dec. | 2022 | Basis Swap(1) | 10,000 | Argus WTI Midland | $0.84 | $— | $— | $— | |||||||||||||||||||||
| Apr. - Dec. | 2022 | Roll Swap | 55,000 | WTI | $0.89 | $— | $— | $— | |||||||||||||||||||||
| Apr. - June | 2022 | Costless Collar | 5,000 | WTI | $— | $— | $50.00 | $80.44 | |||||||||||||||||||||
| Apr. - June | 2022 | Costless Collar | 24,000 | Brent | $— | $— | $46.67 | $77.49 | |||||||||||||||||||||
| Apr. - June | 2022 | Costless Collar | 20,000 | Argus WTI Houston | $— | $— | $47.50 | $75.25 | |||||||||||||||||||||
| July - Sep. | 2022 | Costless Collar | 4,000 | WTI | $— | $— | $45.00 | $92.65 | |||||||||||||||||||||
| July - Sep. | 2022 | Costless Collar | 19,000 | Brent | $— | $— | $53.95 | $98.59 | |||||||||||||||||||||
| July - Sep. | 2022 | Costless Collar | 11,000 | Argus WTI Houston | $— | $— | $50.00 | $89.28 | |||||||||||||||||||||
| Oct. - Dec. | 2022 | Costless Collar | 4,000 | WTI | $— | $— | $50.00 | $128.01 | |||||||||||||||||||||
| Oct. - Dec. | 2022 | Costless Collar | 15,000 | Brent | $— | $— | $55.00 | $103.06 | |||||||||||||||||||||
| Oct. - Dec. | 2022 | Costless Collar | 7,000 | Argus WTI Houston | $— | $— | $50.00 | $95.55 | |||||||||||||||||||||
| Jan. - June | 2023 | Costless Collar | 6,000 | Brent | $— | $— | $60.00 | $114.57 | |||||||||||||||||||||
| NATURAL GAS | |||||||||||||||||||||||||||||
| Apr. - June | 2022 | Basis Swap(1) | 230,000 | Waha Hub | $(0.36) | $— | $— | $— | |||||||||||||||||||||
| Apr. - June | 2022 | Costless Collar | 390,000 | Henry Hub | $— | $— | $2.65 | $5.20 | |||||||||||||||||||||
| July - Dec. | 2022 | Basis Swap(1) | 330,000 | Waha Hub | $(0.68) | $— | $— | $— | |||||||||||||||||||||
| July - Dec. | 2022 | Costless Collar | 380,000 | Henry Hub | $— | $— | $2.79 | $6.24 | |||||||||||||||||||||
| Jan. - June | 2023 | Basis Swap(1) | 270,000 | Waha Hub | $(1.12) | $— | $— | $— | |||||||||||||||||||||
| Jan. - Mar. | 2023 | Costless Collar | 270,000 | Henry Hub | $— | $— | $2.95 | $7.59 | |||||||||||||||||||||
| Apr. - June | 2023 | Costless Collar | 230,000 | Henry Hub | $— | $— | $2.96 | $7.07 | |||||||||||||||||||||
| July - Dec. | 2023 | Basis Swap(1) | 250,000 | Waha Hub | $(1.17) | $— | $— | $— | |||||||||||||||||||||
| July - Dec. | 2023 | Costless Collar | 210,000 | Henry Hub | $— | $— | $2.96 | $7.01 | |||||||||||||||||||||
(1) The Company has fixed price basis swaps for the spread between the Cushing crude oil price and the Midland WTI crude oil price as well as the spread between the Henry Hub natural gas price and the Waha Hub natural gas price. The weighted average differential represents the amount of reduction to the Cushing, Oklahoma oil price and the Waha Hub natural gas price for the notional volumes covered by the basis swap contracts.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
| Settlement Month | Settlement Year | Type of Contract | Bbls Per Day | Index | Strike Price | Weighted Average Differential | Deferred Premium | ||||||||||||||||
| OIL | |||||||||||||||||||||||
| Apr. - June | 2022 | Put | 10,000 | WTI | $47.50 | $— | $1.49 | ||||||||||||||||
| Apr. - June | 2022 | Put | 24,000 | Brent | $50.00 | $— | $1.80 | ||||||||||||||||
| Apr. - June | 2022 | Put | 8,000 | Argus WTI Houston | $50.00 | $— | $1.87 | ||||||||||||||||
| July - Sep. | 2022 | Put | 8,000 | WTI | $47.50 | $— | $1.52 | ||||||||||||||||
| July - Sep. | 2022 | Put | 36,000 | Brent | $50.00 | $— | $1.83 | ||||||||||||||||
| July - Sep. | 2022 | Put | 12,000 | Argus WTI Houston | $50.00 | $— | $1.89 | ||||||||||||||||
| Oct. - Dec. | 2022 | Put | 32,000 | Brent | $50.00 | $— | $1.83 | ||||||||||||||||
| Oct. - Dec. | 2022 | Put | 10,000 | Argus WTI Houston | $50.00 | $— | $1.85 | ||||||||||||||||
| Apr. - Dec. | 2022 | Basis Put(1) | 50,000 | Brent | $— | $(10.40) | $0.78 | ||||||||||||||||
(1) The Company has basis puts for the spread between the Brent crude oil price and NYMEX WTI crude oil price.
During the three months ended March 31, 2022, the Company completed certain hedge restructurings by terminating certain commodity derivative contracts prior to their contractual maturities which resulted in net cash settlements of $135 million. The following table presents the commodity derivatives that were terminated:
| Swaps | Collars | ||||||||||||||||||||||||||||
| Settlement Month | Settlement Year | Type of Contract | Bbls Per Day | Index | Weighted Average Fixed Price | Weighted Average Floor Price | Weighted Average Ceiling Price | ||||||||||||||||||||||
| OIL | |||||||||||||||||||||||||||||
| Apr. - June | 2022 | Costless Collar | 8,000 | WTI | $— | $45.00 | $71.60 | ||||||||||||||||||||||
| Apr. - June | 2022 | Costless Collar | 8,000 | Brent | $— | $45.00 | $74.78 | ||||||||||||||||||||||
| Apr. - June | 2022 | Costless Collar | 6,000 | Argus WTI Houston | $— | $45.00 | $69.53 | ||||||||||||||||||||||
| Apr. - Sep. | 2022 | Costless Collar | 2,000 | Brent | $— | $50.00 | $80.00 | ||||||||||||||||||||||
| Apr. - Sep. | 2022 | Costless Collar | 2,000 | Argus WTI Houston | $— | $50.00 | $76.70 | ||||||||||||||||||||||
| July - Sep. | 2022 | Costless Collar | 4,000 | Argus WTI Houston | $— | $50.00 | $75.00 | ||||||||||||||||||||||
| July - Dec. | 2022 | Swaption | 8,250 | Brent | $68.62 | $— | $— |
Interest Rate Swaps
In the second quarter of 2021, the Company entered into two interest rate swap agreements for notional amounts of $600 million each to limit the Company’s exposure to changes in the fair value of debt due to movements in LIBOR interest rates. These interest rate swaps have been designated as fair value hedges of the Company’s $1.2 billion 3.50% fixed rate senior notes due 2029 (the “2029 Notes”) whereby the Company will receive the fixed rate of interest and will pay an average variable rate of interest based on three month LIBOR plus 2.1865%. Gains and losses due to changes in the fair value of the interest rate swaps completely offset changes in the fair value of the hedged portion of the underlying debt and totaled $90 million for the three months ended March 31, 2022, as discussed further in Note 7—Debt.
During the first quarter of 2021, the Company used interest rate swaps to reduce its exposure to variable rate interest payments associated with the Company’s revolving credit facility. These interest rate swaps were not designated as hedging instruments and as a result, the Company recognized all changes in fair value immediately in earnings. During the first quarter of 2021, the Company terminated all of its previously outstanding interest rate swaps which resulted in cash received upon settlement of $80 million, net of fees, during the three months ended March 31, 2021. The interest swaps contained an other-than-insignificant financing element at inception, and therefore, the cash receipts were classified as cash flows from financing activities in the condensed consolidated statements of cash flow for the three months ended March 31, 2022.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
Balance Sheet Offsetting of Derivative Assets and Liabilities
The fair value of derivative instruments is generally determined using established index prices and other sources which are based upon, among other things, futures prices and time to maturity. These fair values are recorded by netting asset and liability positions, including any deferred premiums that are with the same counterparty and are subject to contractual terms which provide for net settlement. See Note 12—Fair Value Measurements for further details.
Gains and Losses on Derivative Instruments
The following table summarizes the gains and losses on derivative instruments not designated as hedging instruments included in the condensed consolidated statements of operations:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Gain (loss) on derivative instruments, net: | |||||||||||||||||||||||
| Commodity contracts | $ | (552) | $ | (294) | |||||||||||||||||||
| Interest rate swaps | — | 130 | |||||||||||||||||||||
| Total | $ | (552) | $ | (164) | |||||||||||||||||||
| Net cash received (paid) on settlements: | |||||||||||||||||||||||
| Commodity contracts(1) | $ | (420) | $ | (182) | |||||||||||||||||||
| Interest rate swaps(2) | — | 80 | |||||||||||||||||||||
| Total | $ | (420) | $ | (102) |
(1)The three months ended March 31, 2022 includes cash paid on commodity contracts terminated prior to their contractual maturity of $135 million.
(2)The three months ended March 31, 2021 includes cash received on interest rate swap contracts terminated prior to their contractual maturity of $80 million.
12. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. The Company uses appropriate valuation techniques based on available inputs to measure the fair values of its assets and liabilities.
Level 1 - Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.
Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3 - Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
The Company estimates the fair values of proved oil and natural gas properties assumed in business combinations using discounted cash flow techniques and based on market assumptions as to the future commodity prices, internal estimates of future quantities of oil and natural gas reserves, future estimated rates of production, expected recovery rates and risk-adjustment discounts. The estimated fair values of unevaluated oil and natural gas properties were based on the location, engineering and geological studies, historical well performance, and applicable mineral lease terms. Given the unobservable nature of the inputs, the estimated fair values of oil and natural gas properties assumed is deemed to use Level 3 inputs.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Certain assets and liabilities are reported at fair value on a recurring basis, including the Company’s commodity derivative instruments and interest rate swaps. The fair values of the Company’s commodity derivative contracts are measured internally using established commodity futures price strips for the underlying commodity provided by a reputable third party, the contracted notional volumes, and time to maturity. Interest rate swaps designated as fair value hedges and those that are not designated as hedges are determined based on inputs that are readily available in public markets, can be derived from information available in publicly quoted markets, or are provided by financial institutions that trade these contracts. These valuations are Level 2 inputs. The fair value of interest rate swaps is recorded as an asset or liability on the condensed consolidated balance sheet and the net change in fair value of the Company’s interest rate swaps designated as hedges are offset by change in value of the hedged item, long-term debt, within the condensed consolidated balance sheet..
The following table provides (i) fair value measurement information for financial assets and liabilities measured at fair value on a recurring basis, (ii) the gross amounts of recognized derivative assets and liabilities, (iii) the amounts offset under master netting arrangements with counterparties, and (iv) the resulting net amounts presented in the Company’s condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021. The net amounts of derivative instruments are classified as current or noncurrent based on their anticipated settlement dates.
| As of March 31, 2022 | ||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total Gross Fair Value | Gross Amounts Offset in Balance Sheet | Net Fair Value Presented in Balance Sheet | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Current: | ||||||||||||||||||||
| Derivative instruments | $ | — | $ | 83 | $ | — | $ | 83 | $ | (80) | $ | 3 | ||||||||
| Interest rate swaps designated as hedges | $ | — | $ | 6 | $ | — | $ | 6 | $ | (3) | $ | 3 | ||||||||
| Non-current: | ||||||||||||||||||||
| Derivative instruments | $ | — | $ | 56 | $ | — | $ | 56 | $ | (19) | $ | 37 | ||||||||
| Interest rate swaps designated as hedges | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
| Liabilities: | ||||||||||||||||||||
| Current: | ||||||||||||||||||||
| Derivative instruments | $ | — | $ | 419 | $ | — | $ | 419 | $ | (80) | $ | 339 | ||||||||
| Interest rate swaps designated as hedges | $ | — | $ | 3 | $ | — | $ | 3 | $ | (3) | $ | — | ||||||||
| Non-current: | ||||||||||||||||||||
| Derivative instruments | $ | — | $ | 20 | $ | — | $ | 20 | $ | (19) | $ | 1 | ||||||||
| Interest rate swaps designated as hedges | $ | — | $ | 93 | $ | — | $ | 93 | $ | — | $ | 93 |
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
| As of December 31, 2021 | ||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total Gross Fair Value | Gross Amounts Offset in Balance Sheet | Net Fair Value Presented in Balance Sheet | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Current: | ||||||||||||||||||||
| Derivative instruments | $ | — | $ | 60 | $ | — | $ | 60 | $ | (57) | $ | 3 | ||||||||
| Interest rate swaps designated as hedges | $ | — | $ | 10 | $ | — | $ | 10 | $ | — | $ | 10 | ||||||||
| Non-current: | ||||||||||||||||||||
| Derivative instruments | $ | — | $ | 12 | $ | — | $ | 12 | $ | (8) | $ | 4 | ||||||||
| Interest rate swaps designated as hedges | $ | — | $ | 1 | $ | — | $ | 1 | $ | (1) | $ | — | ||||||||
| Liabilities: | ||||||||||||||||||||
| Current: | ||||||||||||||||||||
| Derivative instruments | $ | — | $ | 231 | $ | — | $ | 231 | $ | (57) | $ | 174 | ||||||||
| Non-current: | ||||||||||||||||||||
| Derivative instruments | $ | — | $ | 9 | $ | — | $ | 9 | $ | (8) | $ | 1 | ||||||||
| Interest rate swaps designated as hedges | $ | — | $ | 29 | $ | — | $ | 29 | $ | (1) | $ | 28 |
Assets and Liabilities Not Recorded at Fair Value
The following table provides the fair value of financial instruments that are not recorded at fair value in the condensed consolidated balance sheets:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Carrying | Carrying | ||||||||||||||||||||||
| Value | Fair Value | Value | Fair Value | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Debt | $ | 5,848 | $ | 5,966 | $ | 6,687 | $ | 7,148 |
The fair values of the Company’s credit agreement, the Viper credit agreement and the Rattler credit agreement approximate their carrying values based on borrowing rates available to the Company for bank loans with similar terms and maturities and is classified as Level 2 in the fair value hierarchy. The fair values of the outstanding notes were determined using the quoted market price at each period end, a Level 1 classification in the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis in certain circumstances. These assets and liabilities can include those acquired in a business combination, inventory, proved and unproved oil and gas properties and other long-lived assets that are written down to fair value when they are impaired or held for sale. Refer to Note 4—Acquisitions and Divestitures and Note 5—Property and Equipment for additional discussion of nonrecurring fair value adjustments.
Fair Value of Financial Assets
The carrying amount of cash and cash equivalents, receivables, funds held in escrow, prepaid expenses and other current assets, payables and other accrued liabilities approximate their fair value because of the short-term nature of the instruments.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
13. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Supplemental disclosure of non-cash transactions: | |||||||||||||||||||||||
| Accrued capital expenditures included in accounts payable and accrued expenses | $ | 293 | $ | 252 | |||||||||||||||||||
| Common stock issued for business combinations | $ | — | $ | 1,727 | |||||||||||||||||||
14. COMMITMENTS AND CONTINGENCIES
The Company is a party to various routine legal proceedings, disputes and claims arising in the ordinary course of its business, including those that arise from interpretation of federal and state laws and regulations affecting the crude oil and natural gas industry, personal injury claims, title disputes, royalty disputes, contract claims, contamination claims relating to oil and natural gas exploration and development and environmental claims, including claims involving assets previously sold to third parties and no longer part of the Company’s current operations. While the ultimate outcome of the pending proceedings, disputes or claims, and any resulting impact on the Company, cannot be predicted with certainty, the Company’s management believes that none of these matters, if ultimately decided adversely, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s assessment is based on information known about the pending matters and its experience in contesting, litigating and settling similar matters. Actual outcomes could differ materially from the Company’s assessment. The Company records reserves for contingencies related to outstanding legal proceedings, disputes or claims when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.
15. SUBSEQUENT EVENTS
First Quarter 2022 Dividend Declaration
On April 27, 2022, the Board of Directors of the Company declared a cash dividend for the first quarter of 2022 of $3.05 per share of common stock, payable on May 23, 2022 to its stockholders of record at the close of business on May 12, 2022. The dividend consists of a base quarterly dividend of $0.70 per share of common stock and a variable quarterly dividend of $2.35 per share of common stock. Future base and variable dividends are at the discretion of the Board of Directors of the Company.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements - (Continued)
(Unaudited)
16. SEGMENT INFORMATION
The Company reports its operations in two operating segments: (i) the upstream segment, which is engaged in the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves primarily in the Permian Basin in West Texas and (ii) the midstream operations segment, which is focused on owning, operating, developing and acquiring midstream infrastructure assets in the Midland and Delaware Basins of the Permian Basin. All of the Company’s equity method investments are included in the midstream operations segment.
The following tables summarize the results of the Company’s operating segments during the periods presented:
| Upstream | Midstream Operations | Eliminations | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Three Months Ended March 31, 2022: | |||||||||||||||||||||||
| Third-party revenues | $ | 2,391 | $ | 17 | $ | — | $ | 2,408 | |||||||||||||||
| Intersegment revenues | — | 87 | (87) | — | |||||||||||||||||||
| Total revenues | 2,391 | 104 | (87) | 2,408 | |||||||||||||||||||
| Depreciation, depletion, amortization and accretion | 292 | 21 | — | 313 | |||||||||||||||||||
| Income (loss) from operations | 1,637 | 39 | (16) | 1,660 | |||||||||||||||||||
| Interest expense, net | (31) | (9) | — | (40) | |||||||||||||||||||
| Other income (expense) | (600) | 9 | (5) | (596) | |||||||||||||||||||
| Provision for (benefit from) income taxes | 219 | 2 | — | 221 | |||||||||||||||||||
| Net income (loss) attributable to non-controlling interest | 16 | 8 | — | 24 | |||||||||||||||||||
| Net income (loss) attributable to Diamondback Energy, Inc. | 771 | 29 | (21) | 779 | |||||||||||||||||||
| As of March 31, 2022: | |||||||||||||||||||||||
| Total assets | $ | 21,727 | $ | 1,996 | $ | (392) | $ | 23,331 |
| Upstream | Midstream Operations | Eliminations | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Three Months Ended March 31, 2021: | |||||||||||||||||||||||
| Third-party revenues | $ | 1,172 | $ | 12 | $ | — | $ | 1,184 | |||||||||||||||
| Intersegment revenues | — | 87 | (87) | — | |||||||||||||||||||
| Total revenues | 1,172 | 99 | (87) | 1,184 | |||||||||||||||||||
| Depreciation, depletion, amortization and accretion | 262 | 11 | — | 273 | |||||||||||||||||||
| Income (loss) from operations | 552 | 38 | (19) | 571 | |||||||||||||||||||
| Interest expense, net | (49) | (7) | — | (56) | |||||||||||||||||||
| Other income (expense) | (222) | (3) | (2) | (227) | |||||||||||||||||||
| Provision for (benefit from) income taxes | 63 | 2 | — | 65 | |||||||||||||||||||
| Net income (loss) attributable to non-controlling interest | (3) | 6 | — | 3 | |||||||||||||||||||
| Net income (loss) attributable to Diamondback Energy, Inc. | 221 | 20 | (21) | 220 | |||||||||||||||||||
| As of December 31, 2021: | |||||||||||||||||||||||
| Total assets | $ | 21,329 | $ | 1,942 | $ | (373) | $ | 22,898 |
Previous: Cover and table of contents · Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS