filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto presented in this report as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs, and expected performance. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors. See “Part II. Item 1A. Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”
Overview
We operate 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) through our subsidiary, Rattler, the midstream operations segment, which is focused on ownership, operation, development and acquisition of midstream infrastructure assets in the Midland and Delaware Basins of the Permian Basin.
Recent Developments
March 2022 Notes Offering
On March 17, 2022, we issued the March 2022 Notes for an aggregate principal amount of $750 million and received net proceeds of $739 million, after deducting debt issuance costs and discounts of $11 million and underwriting discounts and offering expenses.
Redemption of Notes
On March 18, 2022, we redeemed the aggregate $500 million principal amount of our outstanding 4.750% 2025 Senior Notes with a portion of the net proceeds from the March 2022 Notes offering.
On March 23, 2022, we redeemed the aggregate $1.0 billion principal amount of our outstanding 2.875% 2024 Senior Notes with the remaining net proceeds from the March 2022 Notes offering and cash on hand.
For additional discussion of our debt transactions during the first quarter of 2022, see Note 7—Debt of the condensed notes to the consolidated financial statements included elsewhere in this report.
Stock and Unit Repurchase Programs
During the three months ended March 31, 2022, we repurchased approximately $7 million of Diamondback common stock, and as of March 31, 2022, $1.6 billion remained available for future purchases of common stock under our common stock repurchase program.
During the three months ended March 31, 2022, Viper repurchased approximately $39 million of common units under its repurchase program. As of March 31, 2022, $41 million remained available for future purchases of common units under Viper’s common unit repurchase program. On April 27, 2022, Viper increased the authorization of its common unit repurchase program from $150 million to $250 million.
During the three months ended March 31, 2022, Rattler repurchased approximately $3 million of common units under its repurchase program. As of March 31, 2022, $85 million remained available for future purchases of common units under Rattler’s common unit repurchase program.
See “—Liquidity and Capital Resources” below for additional discussion.
Commodity Prices
During 2021 and the first quarter of 2022, the posted NYMEX WTI price for crude oil ranged from $47.62 to $123.70 per Bbl, and the NYMEX Henry Hub price of natural gas ranged from $2.45 to $6.31 per MMBtu. On April 13, 2022, the NYMEX WTI price for crude oil was $104.25 per Bbl and the NYMEX Henry Hub price of natural gas was $7.00 per MMBtu. The Russian-Ukrainian military conflict and the COVID-19 pandemic have contributed to economic and pricing volatility in the first quarter of 2022 as industry and market participants evaluate global demand and production outlooks. On March 31, 2022,
OPEC and its non-OPEC allies, known collectively as OPEC+, agreed to continue their program (commenced in August 2021) of gradual monthly output increases, raising its output target by 432,000 Bbl per day for May 2022, which is expected to further boost oil supply in response to rising demand. In its report issued on April 12, 2022 OPEC noted its expectation that world oil demand will rise by 3.7 million Bbls per day in 2022, down 480,000 Bbls per day from its previous forecast due to the impact of the Russian-Ukrainian military conflict, rising inflation and the resurgence of the Omicron coronavirus variant in China. Although this demand outlook is expected to underpin oil prices, already seen at a seven-year high in February 2022, we cannot predict any future volatility in or levels of commodity prices or demand for crude oil.
Despite the recovery in commodity prices and rising demand, we expect to hold our oil production levels flat during 2022, using excess cash flow for debt repayment and/or return to our stockholders rather than expanding our drilling program.
First Quarter 2022 and Recent Operating and Environmental and Social Responsibility (ESG) Highlights
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We recorded net income of $779 million for the first quarter of 2022.
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Our average production was 381.4 MBOE/d during the first quarter of 2022.
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During the first quarter of 2022, we drilled 47 gross horizontal wells in the Midland Basin and 14 gross horizontal wells in the Delaware Basin.
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We turned 69 gross operated horizontal wells (54 in the Midland Basin and 15 in the Delaware Basin) to production and had capital expenditures, excluding acquisitions, of $437 million during the first quarter of 2022.
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The average lateral length for the wells completed during the first quarter of 2022 was 9,658 feet.
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Our cash operating costs for the first quarter of 2022 were $11.36 per BOE, including lease operating expenses of $4.34 per BOE, cash general and administrative expenses of $0.61 per BOE and production and ad valorem taxes and gathering and transportation expenses of $6.41 per BOE.
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On April 27, 2022, our board of directors declared a cash dividend for the first quarter of 2022 of $3.05 per share of common stock, payable on May 23, 2022 to our 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 our board of directors.
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In January 2022, we acquired approximately 6,200 net acres from a third-party seller in Ward County, Texas for a purchase price of $232 million, net of customary post-closing adjustments, with average production of 1.3 MBO/d (2.3 MBOE/d) during the first quarter of 2022. The acquisition was funded with cash on hand and included 58 estimated gross (43 net) horizontal locations with an average lateral length of over 10,300 feet. The acquired acreage is 100% operated by us, with an average 74% working interest and 66% net revenue interest (85% effective net revenue interest).
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During the first quarter of 2022, we flared approximately 1.5% of our gross natural gas production.
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As of April 30, 2022, we have installed Continuous Emissions Monitoring Systems that cover approximately 70% of our operated oil volume production and monitor methane emissions, carbon monoxide and hydrogen sulfide (H2S) in real time. We intend to increase this monitoring effect to cover over 90% of our operated oil production by year-end 2023.
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By investing in infrastructure in our high activity areas, we now have the ability to run a dedicated e-frac fleet for the foreseeable future. We have partnered with Halliburton to secure our first e-fleet frac-core, which will run on our Martin County acreage off power generated from a central location and delivered via existing lines, reducing our Scope 1 emissions profile. This partnership is expected to lower our cost per foot primarily due to fuel savings, decrease our footprint on location and increase our operational efficiency as a result of lower maintenance and non-productive time. We expect this fleet to be operational in the fourth quarter of 2022.
Upstream Segment
In our upstream segment, our activities are primarily directed at the horizontal development of the Wolfcamp and Spraberry formations in the Midland Basin and the Wolfcamp and Bone Spring formations in the Delaware Basin within the Permian Basin. We intend to continue to develop our reserves and increase production through development drilling and
exploitation and exploration activities on our multi-year inventory of identified potential drilling locations and through acquisitions that meet our strategic and financial objectives, targeting oil-weighted reserves. Additionally, our publicly-traded subsidiary, Viper, is focused on owning and acquiring mineral interests and royalty interests in oil and natural gas properties primarily in the Permian Basin and derives royalty income and lease bonus income from such interests.
As of March 31, 2022, we had approximately 451,295 net acres, which primarily consisted of approximately 268,850 net acres in the Midland Basin and 153,782 net acres in the Delaware Basin.
The following table sets forth the total number of operated horizontal wells drilled and completed during the first quarter of 2022:
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Drilled | Completed**(1)** | ||||||||||||||||||||||||||||||||||||||||||||||
| Area | Gross | Net | Gross | Net | |||||||||||||||||||||||||||||||||||||||||||
| Midland Basin | 47 | 46 | 54 | 50 | |||||||||||||||||||||||||||||||||||||||||||
| Delaware Basin | 14 | 13 | 15 | 13 | |||||||||||||||||||||||||||||||||||||||||||
| Total | 61 | 59 | 69 | 63 |
(1)The average lateral length for the wells completed during the first quarter of 2022 was 9,658 feet. Operated completions during the first quarter of 2022 consisted of 19 Lower Spraberry wells, 15 Wolfcamp A wells, 11 Jo Mill wells, 10 Middle Spraberry wells, six Wolfcamp B wells, six Second Bone Spring wells, one Third Bone Spring well and one Barnett well.
As of March 31, 2022, we operated the following wells:
| As of March 31, 2022 | |||||||||||||||||||||||||||||||||||
| Vertical Wells | Horizontal Wells | Total | |||||||||||||||||||||||||||||||||
| Area | Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||||||||||||
| Midland Basin | 2,278 | 2,114 | 1,803 | 1,674 | 4,081 | 3,788 | |||||||||||||||||||||||||||||
| Delaware Basin | 48 | 44 | 703 | 655 | 751 | 699 | |||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total | 2,326 | 2,158 | 2,506 | 2,329 | 4,832 | 4,487 |
As of March 31, 2022, we held interests in 11,289 gross (4,601 net) wells, including wells that we do not operate.
Midstream Operations
In our midstream operations segment, Rattler’s crude oil infrastructure assets consist of gathering pipelines and metering facilities, which collectively gather crude oil for its customers. Rattler’s facilities gather crude oil from horizontal and vertical wells in our ReWard, Spanish Trail, Pecos and Fivestones areas within the Permian Basin. Rattler’s water sourcing and distribution assets consist of water wells, hydraulic fracturing pits, pipelines and water treatment and recycling facilities, which collectively gather and distribute water from Permian Basin aquifers to the drilling and completion sites through buried pipelines and temporary surface pipelines. Rattler’s gathering and disposal system spans approximately 600 miles and consists of gathering pipelines along with produced water disposal wells and facilities which collectively gather and dispose of produced water from operations throughout our Permian Basin acreage.
We have entered into multiple fee-based commercial agreements with Rattler, each with an initial term ending in 2034, utilizing Rattler’s infrastructure assets or its planned infrastructure assets to provide an array of essential services critical to our upstream operations in the Delaware and Midland Basins. Our agreements with Rattler include substantial acreage dedications.
The midstream operations segment’s revenues and operating expenses were not significant to our condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021. See Note 16—Segment Information of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding acquisitions.
Results of Operations
The following table sets forth selected operating data for the first quarter of 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Revenues (In millions): | |||||||||||||||||||||||
| Oil sales | $ | 1,946 | $ | 944 | |||||||||||||||||||
| Natural gas sales | 154 | 104 | |||||||||||||||||||||
| Natural gas liquid sales | 289 | 124 | |||||||||||||||||||||
| Total oil, natural gas and natural gas liquid revenues | $ | 2,389 | $ | 1,172 | |||||||||||||||||||
| Production Data: | |||||||||||||||||||||||
| Oil (MBbls) | 20,055 | 16,578 | |||||||||||||||||||||
| Natural gas (MMcf) | 42,645 | 34,109 | |||||||||||||||||||||
| Natural gas liquids (MBbls) | 7,161 | 5,405 | |||||||||||||||||||||
| Combined volumes (MBOE)(1) | 34,324 | 27,668 | |||||||||||||||||||||
| Daily oil volumes (BO/d) | 222,833 | 184,200 | |||||||||||||||||||||
| Daily combined volumes (BOE/d) | 381,378 | 307,422 | |||||||||||||||||||||
| Average Prices: | |||||||||||||||||||||||
| Oil ($ per Bbl) | $ | 97.03 | $ | 56.94 | |||||||||||||||||||
| Natural gas ($ per Mcf) | $ | 3.61 | $ | 3.05 | |||||||||||||||||||
| Natural gas liquids ($ per Bbl) | $ | 40.36 | $ | 22.94 | |||||||||||||||||||
| Combined ($ per BOE) | $ | 69.60 | $ | 42.36 | |||||||||||||||||||
| Oil, hedged ($ per Bbl)(2) | $ | 83.47 | $ | 46.81 | |||||||||||||||||||
| Natural gas, hedged ($ per Mcf)(2) | $ | 3.31 | $ | 2.64 | |||||||||||||||||||
| Natural gas liquids, hedged ($ per Bbl)(2) | $ | 40.36 | $ | 22.76 | |||||||||||||||||||
| Average price, hedged ($ per BOE)(2) | $ | 61.30 | $ | 35.75 |
(1)Bbl equivalents are calculated using a conversion rate of six Mcf per one Bbl.
(2)Hedged prices reflect the effect of our commodity derivative transactions on our average sales prices and include gains and losses on cash settlements for matured commodity derivatives, which we do not designate for hedge accounting. Hedged prices exclude gains or losses resulting from the early settlement of commodity derivative contracts.
Production Data
Substantially all of our revenues are generated through the sale of oil, natural gas and natural gas liquids production. The following tables set forth the mix of our production data by product and basin for the first quarter of 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Oil (MBbls) | 58 | % | 60 | % | |||||||||||||||||||
| Natural gas (MMcf) | 21 | % | 21 | % | |||||||||||||||||||
| Natural gas liquids (MBbls) | 21 | % | 19 | % | |||||||||||||||||||
| 100 | % | 100 | % |
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||
| Midland Basin | Delaware Basin | Other**(1)** | Total | Midland Basin | Delaware Basin | Other**(2)** | Total | ||||||||||||||||||||||
| Production Data: | |||||||||||||||||||||||||||||
| Oil (MBbls) | 13,921 | 6,101 | 33 | 20,055 | 9,840 | 6,436 | 302 | 16,578 | |||||||||||||||||||||
| Natural gas (MMcf) | 26,873 | 15,681 | 91 | 42,645 | 18,457 | 15,055 | 597 | 34,109 | |||||||||||||||||||||
| Natural gas liquids (MBbls) | 4,750 | 2,390 | 21 | 7,161 | 3,236 | 2,069 | 100 | 5,405 | |||||||||||||||||||||
| Total (MBoe) | 23,150 | 11,105 | 69 | 34,324 | 16,152 | 11,014 | 502 | 27,668 |
(1)Includes the Eagle Ford Shale and Rockies.
(2)Includes the Eagle Ford Shale, Rockies and High Plains.
Comparison of the Three Months Ended March 31, 2022 and 2021
Oil, Natural Gas and Natural Gas Liquids Revenues. Our revenues are a function of oil, natural gas and natural gas liquids production volumes sold and average sales prices received for those volumes.
Our oil, natural gas and natural gas liquids revenues for the first quarter of 2022 increased by $1.2 billion, or 104%, to $2.4 billion from $1.2 billion during the same period in 2021. Higher average oil prices, and to a lesser extent natural gas and natural gas liquids prices, contributed $1.0 billion of the total increase. The remainder of the overall change is due to a 24% increase in combined volumes sold.
Higher commodity prices in the first quarter of 2022 compared to the same period in 2021 primarily reflect the increase in demand for oil due to economic recovery from the COVID-19 pandemic and other macroeconomic factors such as the Russian-Ukrainian military conflict as discussed in “—**Recent Developments” above. The increase in production for the first quarter of 2022 compared to the same period in 2021 resulted primarily from recognizing a full quarter’s production in the first quarter of 2022 related to the Guidon Acquisition and QEP Merger, which occurred late in the first quarter of 2021.
Other Revenues. The following table shows the other insignificant revenues for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Midstream services | $ | 17 | $ | 11 | |||||||||||||||||||
| Other operating income | $ | 2 | $ | 1 |
Lease Operating Expenses. The following table shows lease operating expenses for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Per BOE | Amount | Per BOE | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except per BOE amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
| Lease operating expenses | $ | 149 | $ | 4.34 | $ | 102 | $ | 3.69 | |||||||||||||||||||||||||||||||||||||||
Lease operating expenses increased by $47 million, or $0.65 per BOE for the first quarter of 2022 compared to the first quarter of 2021. This increase is primarily due to recording a full quarter of production and operating expenses from the Guidon Acquisition and the QEP Merger in the first quarter of 2022. The increase on a per BOE basis is primarily due to the impact of production acquired from the Guidon Acquisition and the QEP Merger, which on average have higher lease operating expenses per BOE than our historical properties and, to a lesser extent, an increase in well workover activity.
Production and Ad Valorem Tax Expense. The following table shows production and ad valorem tax expense for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Per BOE | Amount | Per BOE | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except per BOE amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
| Production taxes | $ | 120 | $ | 3.50 | $ | 60 | $ | 2.17 | |||||||||||||||||||||||||||||||||||||||
| Ad valorem taxes | 41 | 1.19 | 15 | 0.54 | |||||||||||||||||||||||||||||||||||||||||||
| Total production and ad valorem expense | $ | 161 | $ | 4.69 | $ | 75 | $ | 2.71 | |||||||||||||||||||||||||||||||||||||||
| Production taxes as a % of oil, natural gas, and natural gas liquids revenue | 5.0 | % | 5.1 | % |
In general, production taxes are directly related to production revenues and are based upon current year commodity prices. Production taxes as a percentage of production revenues remained consistent for the first quarter of 2022 compared to the same period in 2021.
Ad valorem taxes are based, among other factors, on property values driven by prior year commodity prices. Ad valorem taxes for the first quarter of 2022 as compared to the same period in 2021 increased by $26 million primarily due to higher overall valuations resulting from an increase in commodity prices between valuation periods.
Gathering and Transportation Expense. The following table shows gathering and transportation expense for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Per BOE | Amount | Per BOE | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except per BOE amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
| Gathering and transportation expense | $ | 59 | $ | 1.72 | $ | 31 | $ | 1.12 |
The increase in gathering and transportation expenses for the first quarter of 2022, compared to the same period in 2021 is primarily attributable to the increase in production between periods. The increase on a per BOE basis is primarily attributable to several individually insignificant factors including an increase in third-party gas gathering expenses related to the sale of certain gas gathering assets during the fourth quarter of 2021, production added from the QEP Merger which has higher average gathering and transportation costs per BOE than our historical properties and annual contractual rate escalations.
Depreciation, Depletion, Amortization and Accretion. The following table provides the components of our depreciation, depletion, amortization and accretion expense for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions, except BOE amounts) | |||||||||||||||||||||||
| Depletion of proved oil and natural gas properties | $ | 286 | $ | 257 | |||||||||||||||||||
| Depreciation of midstream assets | 20 | 11 | |||||||||||||||||||||
| Depreciation of other property and equipment | 4 | 3 | |||||||||||||||||||||
| Asset retirement obligation accretion | 3 | 2 | |||||||||||||||||||||
| Depreciation, depletion, amortization and accretion expense | $ | 313 | $ | 273 | |||||||||||||||||||
| Oil and natural gas properties depletion rate per BOE | $ | 8.33 | $ | 9.29 |
The increase in depletion of proved oil and natural gas properties of $29 million for the first quarter of 2022 as compared to the same period in 2021 resulted largely from higher production volumes partially offset by a lower average depletion rate. The decline in rate resulted primarily from higher SEC prices utilized in the reserve calculations in the 2022 period, lengthening the economic life of the reserve base and resulting in higher projected remaining reserve volumes on our wells.
Impairment of Oil and Natural Gas Properties. No impairment expense was recorded for the first quarter of 2022. In connection with the QEP Merger and the Guidon Acquisition in the first quarter of 2021, we recorded the oil and natural gas properties acquired at fair value. Pursuant to SEC guidance, we determined 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, we requested and received a waiver from the SEC to exclude the acquired properties from the first quarter 2021 ceiling test calculation. 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 we not received the waiver from the SEC, an impairment charge of approximately $1.1 billion would have been recorded in the first quarter of 2021. 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.
Impairment charges affect our results of operations but do not reduce our cash flow. In addition to commodity prices, our production rates, levels of proved reserves, future development costs, transfers of unevaluated properties and other factors will determine our actual ceiling test calculation and impairment analysis in future periods. If the trailing 12-month commodity prices fall significantly as compared to the commodity prices used in prior quarters, we may have material write-downs in subsequent quarters. See Note 5—Property and Equipment of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding factors that impact the impairment of oil and natural gas properties.
General and Administrative Expenses. The following table shows general and administrative expenses for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Per BOE | Amount | Per BOE | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except per BOE amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative expenses | $ | 21 | $ | 0.61 | $ | 15 | $ | 0.54 | |||||||||||||||||||||||||||||||||||||||
| Non-cash stock-based compensation | 15 | 0.44 | 10 | 0.36 | |||||||||||||||||||||||||||||||||||||||||||
| Total general and administrative expenses | $ | 36 | $ | 1.05 | $ | 25 | $ | 0.90 |
The increase in general and administrative expenses for the first quarter of 2022 compared to the same period in 2021 was due primarily to higher compensation costs resulting from growth in our headcount and an increase in salary and bonus costs in the current year. Additionally, equity compensation increased by $5 million for the first quarter of 2022 compared to the same period in 2021, primarily due to a higher grant-date fair value for performance stock units issued in the first quarter of 2022 and the accelerated vesting of restricted stock held by transitional employees related to the QEP Merger.
Merger and Integration Expense. The following tables shows merger and integration expense for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Merger and integration expense | $ | — | $ | 75 |
Total merger and integration expense for the first quarter of 2021 includes $67 million in costs incurred for the QEP Merger and $8 million in costs incurred for the Guidon Acquisition. The QEP Merger related expenses primarily consisted of $38 million in severance costs and $23 million in banking, legal and advisory fees, and the Guidon Acquisition related expenses consisted primarily of advisory and legal fees. See Note 4—Acquisitions and Divestitures of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding the QEP Merger and the Guidon Acquisition.
Other Operating Costs and Expenses. The following table shows the other insignificant operating costs and expenses for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Midstream services expense | $ | 22 | $ | 28 | |||||||||||||||||||
| Other operating expense | 8 | 4 |
Net Interest Expense. The following table shows the components of net interest expense for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Revolving credit agreements | $ | 4 | $ | 3 | |||||||||||||||||||
| Senior notes | 61 | 61 | |||||||||||||||||||||
| Amortization of debt issuance costs and discounts | 5 | 4 | |||||||||||||||||||||
| Other | 1 | 4 | |||||||||||||||||||||
| Capitalized interest | (31) | (14) | |||||||||||||||||||||
| Total | 40 | 58 | |||||||||||||||||||||
| Less: interest income | — | 2 | |||||||||||||||||||||
| Interest expense, net | $ | 40 | $ | 56 |
Net interest expense decreased by $16 million for the first quarter of 2022 compared to the same period in 2021, primarily due to an increase in capitalized interest costs. See Note 7—Debt of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding outstanding borrowings.
Derivative Instruments. The following table shows the net gain (loss) on derivative instruments and the net cash receipts (payments) on settlements of derivative instruments for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Gain (loss) on derivative instruments, net | $ | (552) | $ | (164) | |||||||||||||||||||
| Net cash received (paid) on settlements(1)(2) | $ | (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.
We are required to recognize all derivative instruments on the balance sheet as either assets or liabilities measured at fair value. We have not designated our commodity derivative instruments as hedges for accounting purposes. As a result, we mark our derivative instruments to fair value and recognize the cash and non-cash changes in fair value on derivative instruments in our condensed consolidated statements of operations under the line item captioned “Gain (loss) on derivative instruments, net.”
We have designated certain of our interest rate swaps as fair value hedges for accounting purposes. As a result, 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 no gain or loss is recognized due to hedge effectiveness. Changes in fair value are recorded as an adjustment to the carrying value of the 2029 Notes in the condensed consolidated balance sheet. Beginning on December 1, 2021, semi-annual cash settlements of these interest rate swaps will be recorded in interest expense in the condensed consolidated statements of operations.
Other Income (Expense). The following table shows other insignificant income and expenses for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Other income (expense), net | $ | 1 | $ | 1 | |||||||||||||||||||
| Gain (loss) on extinguishment of debt | $ | (54) | $ | (61) | |||||||||||||||||||
| Income (loss) from equity investments | $ | 9 | $ | (3) |
See Note 7—Debt of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding gain (loss) on extinguishment of debt in the first quarter of 2022.
Provision for (Benefit from) Income Taxes. The following table shows the provision for (benefit from) income taxes for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | 221 | $ | 65 |
The change in our income tax provision for the first quarter of 2022 compared to the same period in 2021 was primarily due to the increase in pre-tax income which resulted primarily from the changes in revenues from oil, natural gas and natural gas liquids, gain (loss) on derivatives and other expenses discussed above. See Note 10—Income Taxes of the condensed notes to the consolidated financial statements included elsewhere in this report for further discussion of our income tax expense.
Comparison of the Three Months Ended March 31, 2022 and December 31, 2021
As noted in “—Recent Developments,” the markets for oil and natural gas are highly volatile and are influenced by a number of factors which can lead to significant changes in our results of operations and management’s operational strategy on a quarterly basis. As a result, beginning with the first quarter of 2022, we have elected to change our results of operations discussion to focus on a comparison of the current quarter’s results of operations with those of the immediately preceding quarter. We believe the change in our discussion will provide investors with a more meaningful analysis of material operational and financial changes which occurred during the quarter based on current market and operational trends.
Results of Operations
The following table sets forth selected operating data for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Revenues (In millions): | |||||||||||||||||||||||
| Oil sales | $ | 1,946 | $ | 1,551 | |||||||||||||||||||
| Natural gas sales | 154 | 206 | |||||||||||||||||||||
| Natural gas liquid sales | 289 | 254 | |||||||||||||||||||||
| Total oil, natural gas and natural gas liquid revenues | $ | 2,389 | $ | 2,011 | |||||||||||||||||||
| Production Data: | |||||||||||||||||||||||
| Oil (MBbls) | 20,055 | 20,819 | |||||||||||||||||||||
| Natural gas (MMcf) | 42,645 | 45,220 | |||||||||||||||||||||
| Natural gas liquids (MBbls) | 7,161 | 7,254 | |||||||||||||||||||||
| Combined volumes (MBOE)(1) | 34,324 | 35,610 | |||||||||||||||||||||
| Daily oil volumes (BO/d) | 222,833 | 226,293 | |||||||||||||||||||||
| Daily combined volumes (BOE/d) | 381,378 | 387,065 | |||||||||||||||||||||
| Average Prices: | |||||||||||||||||||||||
| Oil ($ per Bbl) | $ | 97.03 | $ | 74.50 | |||||||||||||||||||
| Natural gas ($ per Mcf) | $ | 3.61 | $ | 4.56 | |||||||||||||||||||
| Natural gas liquids ($ per Bbl) | $ | 40.36 | $ | 35.02 | |||||||||||||||||||
| Combined ($ per BOE) | $ | 69.60 | $ | 56.47 | |||||||||||||||||||
| Oil, hedged ($ per Bbl)(2) | $ | 83.47 | $ | 58.70 | |||||||||||||||||||
| Natural gas, hedged ($ per Mcf)(2) | $ | 3.31 | $ | 3.12 | |||||||||||||||||||
| Natural gas liquids, hedged ($ per Bbl)(2) | $ | 40.36 | $ | 34.46 | |||||||||||||||||||
| Average price, hedged ($ per BOE)(2) | $ | 61.30 | $ | 45.30 |
(1)Bbl equivalents are calculated using a conversion rate of six Mcf per Bbl.
(2)Hedged prices reflect the effect of our commodity derivative transactions on our average sales prices and include gains and losses on cash settlements for matured commodity derivatives, which we do not designate for hedge accounting. Hedged prices exclude gains or losses resulting from the early settlement of commodity derivative contracts.
Production Data
Substantially all of our revenues are generated through the sale of oil, natural gas and natural gas liquids production. The following tables provides information on the mix of our production for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2022 | December 21, 2021 | ||||||||||||||||||||||
| Oil (MBbls) | 58 | % | 59 | % | |||||||||||||||||||
| Natural gas (MMcf) | 21 | % | 21 | % | |||||||||||||||||||
| Natural gas liquids (MBbls) | 21 | % | 20 | % | |||||||||||||||||||
| 100 | % | 100 | % |
| Three Months Ended March 31, 2022 | Three Months Ended December 31, 2021 | ||||||||||||||||||||||||||||
| Midland Basin | Delaware Basin | Other**(1)** | Total | Midland Basin | Delaware Basin | Other**(2)** | Total | ||||||||||||||||||||||
| Production Data: | |||||||||||||||||||||||||||||
| Oil (MBbls) | 13,921 | 6,101 | 33 | 20,055 | 14,047 | 6,598 | 174 | 20,819 | |||||||||||||||||||||
| Natural gas (MMcf) | 26,873 | 15,681 | 91 | 42,645 | 26,261 | 18,531 | 428 | 45,220 | |||||||||||||||||||||
| Natural gas liquids (MBbls) | 4,750 | 2,390 | 21 | 7,161 | 4,864 | 2,311 | 79 | 7,254 | |||||||||||||||||||||
| Total (MBoe) | 23,150 | 11,105 | 69 | 34,324 | 23,288 | 11,998 | 324 | 35,610 |
(1)Includes the Eagle Ford Shale and Rockies.
(2)Includes the Eagle Ford Shale, Rockies and High Plains.
Oil, Natural Gas and Natural Gas Liquids Revenues. Our revenues are a function of oil, natural gas and natural gas liquids production volumes sold and average sales prices received for those volumes.
Our oil, natural gas and natural gas liquids revenues for the first quarter of 2022 increased by $378 million, or 19%, to $2.4 billion from $2.0 billion during the fourth quarter of 2021. Higher average oil prices, and to a lesser extent natural gas liquids prices, contributed $450 million of the total increase. The remainder of the overall change is due to a 4% decrease in combined volumes sold.
Higher commodity prices in the 2022 period compared to the 2021 period primarily reflect the increase in demand for oil due to economic recovery from the COVID-19 pandemic and other macroeconomic factors such as the Russian-Ukrainian military conflict as discussed in “—**Recent Developments” above. The decrease in production resulted primarily from having two fewer days of production in the first quarter of 2022 compared to the fourth quarter of 2021.
Other Revenues. The following table shows other insignificant revenues for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Midstream services | $ | 17 | $ | 10 | |||||||||||||||||||
| Other operating income | $ | 2 | $ | 1 |
Lease Operating Expenses. The following table shows lease operating expenses for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Per BOE | Amount | Per BOE | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except per BOE amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
| Lease operating expenses | $ | 149 | $ | 4.34 | $ | 150 | $ | 4.21 | |||||||||||||||||||||||||||||||||||||||
Lease operating expenses remained consistent in total and increased by $0.13 on a per BOE basis for the first quarter of 2022 compared to the fourth quarter of 2021. The increase on a per BOE basis is primarily related to service cost inflation, as well as the impact of having two fewer operating days over which to allocate fixed lease operating expenses.
Production and Ad Valorem Tax Expense. The following table shows production and ad valorem tax expense for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Amount | Per BOE | Amount | Per BOE | ||||||||||||||||||||
| (In millions, except per BOE amounts) | |||||||||||||||||||||||
| Production taxes | $ | 120 | $ | 3.50 | $ | 104 | $ | 2.92 | |||||||||||||||
| Ad valorem taxes | 41 | 1.19 | 17 | 0.48 | |||||||||||||||||||
| Total production and ad valorem expense | $ | 161 | $ | 4.69 | $ | 121 | $ | 3.40 | |||||||||||||||
| Production taxes as a % of oil, natural gas, and natural gas liquids revenue | 5.0 | % | 5.2 | % |
In general, production taxes are directly related to production revenues and are based upon current year commodity prices. Production taxes as a percentage of production revenues for the first quarter of 2022 remained consistent with the fourth quarter of 2021.
Ad valorem taxes are based, among other factors, on property values driven by prior year commodity prices, which were adjusted upward during the first quarter of 2022 based on the recovery in commodity prices during 2021 as compared to 2020. Additionally, the fourth quarter of 2021 also included a downward revision to our full 2021 ad valorem accrual based on actual tax assessments received, which caused ad valorem taxes on a per BOE rate to be lower in that period. These adjustment resulted in an overall increase in ad valorem tax expense of $24 million for the first quarter of 2022 compared to the fourth quarter of 2021.
Gathering and Transportation Expense. The following table shows gathering and transportation expense for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Per BOE | Amount | Per BOE | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except per BOE amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
| Gathering and transportation expense | $ | 59 | $ | 1.72 | $ | 58 | $ | 1.63 |
Gathering and transportation expenses remained relatively consistent in total and increased by $0.09 on a per BOE basis for the first quarter of 2022 compared to the fourth quarter of 2021. The increase is primarily related to additional third-party gas gathering charges incurred following the divestiture of certain gas gathering assets during the fourth quarter of 2021.
Depreciation, Depletion, Amortization and Accretion. The following table provides the components of our depreciation, depletion, amortization and accretion expense for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (In millions, except BOE amounts) | |||||||||||||||||||||||
| Depletion of proved oil and natural gas properties | $ | 286 | $ | 303 | |||||||||||||||||||
| Depreciation of midstream assets | 20 | 11 | |||||||||||||||||||||
| Depreciation of other property and equipment | 4 | 4 | |||||||||||||||||||||
| Asset retirement obligation accretion | 3 | 2 | |||||||||||||||||||||
| Depreciation, depletion, amortization and accretion expense | $ | 313 | $ | 320 | |||||||||||||||||||
| Oil and natural gas properties depletion rate per BOE | $ | 8.33 | $ | 8.51 |
The decrease in depletion of proved oil and natural gas properties of $17 million for the first quarter of 2022 as compared to the fourth quarter of 2021 resulted largely from lower production in the first quarter of 2022 coupled with a decline in the average depletion rate. The decline in rate resulted primarily from higher SEC prices utilized in the reserve calculations in the 2021 period, which lengthened the economic life of the reserve base and resulted in higher projected remaining reserve volumes on our wells.
General and Administrative Expenses. The following table shows general and administrative expenses for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Amount | Per BOE | Amount | Per BOE | ||||||||||||||||||||
| (In millions, except per BOE amounts) | |||||||||||||||||||||||
| General and administrative expenses | $ | 21 | $ | 0.61 | $ | 33 | $ | 0.93 | |||||||||||||||
| Non-cash stock-based compensation | 15 | 0.44 | 14 | 0.39 | |||||||||||||||||||
| Total general and administrative expenses | $ | 36 | $ | 1.05 | $ | 47 | $ | 1.32 |
The decrease in general and administrative expenses for the first quarter of 2022 compared to the fourth quarter of 2021 was due largely to compensation related accrual adjustments made during the fourth quarter of 2021 for annual bonuses. Equity compensation for the first quarter of 2022 remained consistent with the fourth quarter of 2021.
Other Operating Costs and Expenses. The following table shows other insignificant operating costs and expenses for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Midstream services expense | $ | 22 | $ | 19 | |||||||||||||||||||
| Merger and integration expense | $ | — | $ | 1 | |||||||||||||||||||
| Other operating expense | $ | 8 | $ | (5) |
Net Interest Expense. The following table shows the components of net interest expense for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| (In millions) | |||||||||||
| Revolving credit agreements | $ | 4 | $ | 4 | |||||||
| Senior notes | 61 | 55 | |||||||||
| Amortization of debt issuance costs and discounts | 5 | 5 | |||||||||
| Other | 1 | 2 | |||||||||
| Capitalized interest | (31) | (37) | |||||||||
| Total | 40 | 29 | |||||||||
| Less: interest income | — | — | |||||||||
| Interest expense, net | $ | 40 | $ | 29 |
Net interest expense increased by $11 million for the first quarter of 2022 compared to the fourth quarter of 2021. The increase was primarily due to (i) interest expense in the fourth quarter of 2021 reflecting the receipt of a $7 million cash settlement on our fair value interest rate swaps which offset a portion of the interest expense on our 2029 Notes, and (ii) a decrease in capitalized interest costs. Our fair value interest rate swaps settle semi-annually in December and June. See Note 7—Debt of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding outstanding borrowings and interest expense.
Derivative Instruments. The following table shows the net gain (loss) on derivative instruments and the net cash receipts (payments) on settlements of derivative instruments for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| (In millions) | |||||||||||
| Gain (loss) on derivative instruments, net | $ | (552) | $ | 47 | |||||||
| Net cash received (paid) on settlements(1) | $ | (420) | $ | (403) |
(1)The first quarter of 2022 includes cash paid on commodity contracts terminated prior to their contractual maturity of $135 million.
We are required to recognize all derivative instruments on the balance sheet as either assets or liabilities measured at fair value. We have not designated our commodity derivative instruments as hedges for accounting purposes. As a result, we mark our derivative instruments to fair value and recognize the cash and non-cash changes in fair value on derivative instruments in our condensed consolidated statements of operations under the line item captioned “Gain (loss) on derivative instruments, net.”
We have designated certain of our interest rate swaps as fair value hedges for accounting purposes. As a result, 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 no gain or loss is recognized due to hedge ineffectiveness. Changes in fair value are recorded as an adjustment to the carrying value of the 2029 Notes in the condensed consolidated balance sheet. Beginning on December 1, 2021, semi-annual cash settlements of these interest rate swaps will be recorded in interest expense in the condensed consolidated statements of operations.
Other Income (Expense). The following table shows other income and expenses for the three months ended March 31, 2022 and December 31, 2021:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Other income (expense), net | $ | 1 | $ | (6) | |||||||||||||||||||
| Gain (loss) on extinguishment of debt | $ | (54) | $ | (2) | |||||||||||||||||||
| Income (loss) from equity investments | $ | 9 | $ | 9 |
See Note 7—Debt of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding gain (loss) on extinguishment of debt.
Provision for (Benefit from) Income Taxes. The following table shows the provision for (benefit from) income taxes for the first quarter of 2022 and fourth quarter of 2021:
| Three Months Ended | |||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| (In millions) | |||||||||||
| Provision for (benefit from) income taxes | $ | 221 | $ | 279 |
The change in our income tax provision for the first quarter of 2022 compared to the fourth quarter of 2021 was primarily due to the decrease in pre-tax income between the periods which resulted primarily from the changes in gain (loss) on derivatives and revenues from oil, natural gas and natural gas liquids discussed above. See Note 10—Income Taxes for further discussion of our income tax expense.
Liquidity and Capital Resources
Overview of Sources and Uses of Cash
Historically, our primary sources of liquidity include cash flows from operations, proceeds from our public equity offerings, borrowings under our revolving credit facility, proceeds from the issuance of senior notes and sales of non-core assets. Our primary uses of capital have been for the acquisition, development and exploration of oil and natural gas properties. At March 31, 2022, we had approximately $1.7 billion of liquidity consisting of $0.1 billion in cash and cash equivalents and $1.6 billion available under our credit facility. As discussed below, our capital budget for 2022 is $1.75 billion to $1.90 billion. Further, we have $45 million of senior notes maturities in the next 12 months.
Our working capital requirements are supported by our cash and cash equivalents and our credit facility. We may draw on our revolving credit facility to meet short-term cash requirements, or issue debt or equity securities as part of our longer-term liquidity and capital management program. Because of the alternatives available to us as discussed above, we believe that our short-term and long-term liquidity are adequate to fund not only our current operations, but also our near-term and long-term funding requirements including our capital spending programs, dividend payments, debt service obligations and repayment of debt maturities, repurchases of equity or debt securities and other amounts that may ultimately be paid in connection with contingencies.
Future cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, and significant additional capital expenditures will be required to more fully develop our properties. In order to mitigate this volatility, we entered into derivative contracts with a number of financial institutions, all of which are participants in our credit facility, hedging a portion of our estimated future crude oil and natural gas production through the end of 2023 as discussed further in Note 11—Derivatives and Item 3. Quantitative and Qualitative Disclosures About Market Risk—Commodity Price Risk. The level of our hedging activity and duration of the financial instruments employed depend on our desired cash flow protection, available hedge prices, the magnitude of our capital program and our operating strategy.
As we pursue our business and financial strategy, we regularly consider which capital resources, including cash flow and equity and debt financings, are available to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. Our future ability to grow proved reserves and production will be highly dependent on the capital resources available to us. Continued prolonged volatility in the capital, financial and/or credit markets due to the Russian-Ukrainian military conflict, the COVID-19 pandemic, and/or other adverse macroeconomic conditions may limit our access to, or increase our cost of, capital or make capital unavailable on terms acceptable to us or at all. Although the Company expects that its sources of funding will be adequate to fund its short-term and long-term liquidity requirements, we cannot assure you that the needed capital will be available on acceptable terms or at all.
Cash Flow
Our cash flows for the three months ended March 31, 2022 and 2021 are presented below:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Net cash provided by (used in) operating activities | $ | 1,252 | $ | 624 | |||||||
| Net cash provided by (used in) investing activities | (716) | (587) | |||||||||
| Net cash provided by (used in) financing activities | (1,041) | 29 | |||||||||
| Net increase (decrease) in cash | $ | (505) | $ | 66 |
Operating Activities
Our operating cash flow is sensitive to many variables, the most significant of which is the volatility of prices for the oil and natural gas we produce. Prices for these commodities are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather and other substantially variable factors influence market conditions for these products. These factors are beyond our control and are difficult to predict.
The increase in operating cash flows for the three months ended March 31, 2022 compared to the same period in 2021 primarily resulted from an increase of $1.2 billion in our total revenues, which was partially offset by cash outflows of (i) $242 million due to making net cash payments of $420 million on our derivative contracts in the first quarter of 2022 compared to net cash payments of $178 million on our derivative contracts in the first quarter of 2021, (ii) an increase in our cash operating expenses of approximately $90 million primarily due to the QEP Merger and the Guidon Acquisition, (iii) an increase of $31 million in our cash paid for interest primarily due to interest payments on senior notes which were issued in 2021 and (iv) other working capital changes including an increase in accounts receivable for oil and natural gas sales and revenues and a partially offsetting increase in revenues and royalties payable, which stem from higher commodity prices in 2022, as well as recording a payable for income taxes expected to be paid in 2022 compared to an income tax receivable related to the carryback of federal net operating losses and the accelerated refund of minimum tax credits allowed under the 2020 CARES Act in the prior year. See “—**Results of Operations” for discussion of significant changes in our revenues and expenses.
Investing Activities
Net cash used in investing activities was $716 million compared to $587 million during the three months ended March 31, 2022 and 2021, respectively. The majority of our net cash used for investing activities during the three months ended March 31, 2022 was for drilling and completion costs in conjunction with our development program and as well as the purchase of oil and gas properties, which is discussed further in Note 4—Acquisitions and Divestitures.
The majority of our net cash used in investing activities during the three months ended March 31, 2021 was for the purchase and development of oil and natural gas properties and related assets including the acquisition of certain leasehold interests as part of the Guidon Acquisition. Our capital expenditures for each period are discussed further below.
Capital Expenditure Activities
Our capital expenditures excluding acquisitions and equity method investments (on a cash basis) were as follows for the specified period:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Drilling, completions and non-operated additions to oil and natural gas properties(1)(2) | $ | 374 | $ | 281 | |||||||
| Infrastructure additions to oil and natural gas properties | 44 | 8 | |||||||||
| Additions to midstream assets | 19 | 7 | |||||||||
| Total | $ | 437 | $ | 296 |
(1)During the three months ended March 31, 2022, in conjunction with our development program, we drilled 61 gross (59 net) operated horizontal wells, of which 47 gross (46 net) wells were in the Midland Basin and 14 gross (13 net) wells were in the Delaware Basin, and turned 69 gross (63 net) operated horizontal wells to production, of which 54 gross (50 net) wells were in the Midland Basin and 15 gross (13 net) wells were in the Delaware Basin.
(2)During the three months ended March 31, 2021, in conjunction with our development program, we drilled 49 gross (47 net) operated horizontal wells, of which 41 gross (40 net) wells were in the Midland Basin and eight gross (seven net) wells were in the Delaware Basin, and turned 67 gross (60 net) operated horizontal wells to production, of which 42 gross (37 net) wells were in the Midland Basin and 25 gross (23 net) wells were in the Delaware Basin .
Financing Activities
Net cash used in financing activities for the three months ended March 31, 2022 was $1.0 billion compared to net cash provided by financing activities for the three months ended March 31, 2021 of $29 million. During the three months ended March 31, 2022, the amount used in financing activities was primarily attributable to (i) $1.5 billion paid for the repurchase of principal outstanding on certain senior notes as discussed in “—2022 Debt Transactions” below, as well as $47 million of additional premiums paid in connection with the repurchases, (ii) $107 million of dividends paid to stockholders, (iii) $47 million in distributions to non-controlling interests, and (iv) $49 million of repurchases as part of the share and unit repurchase programs, and (v) $21 million of repayments under credit facilities, net of borrowings. These cash outflows were partially offset by $750 million in proceeds from the March 2022 Notes.
Net cash provided by financing activities for the three months ended March 31, 2021 was primarily attributable to $2.2 billion in proceeds from the March 2021 Notes and $76 million in proceeds that relate primarily to the early settlement of interest rate swaps that contained an other-than-insignificant financing element. These net increases in cash flows from financing activities were partially offset by $1.9 billion paid for the repurchase of a portion of the QEP Notes and 2025 Senior Notes, as well as $166 million of additional premiums paid in connection with the repurchases, $68 million of dividends paid to stockholders, $24 million of unit repurchases as part of the Viper and Rattler unit repurchase programs and $23 million of repayments under our credit facilities, net of borrowings.
Capital Resources
Revolving Credit Facilities and Other Debt Instruments
As of March 31, 2022, our debt, including the debt of Viper and Rattler, consists of approximately $5.4 billion in aggregate outstanding principal amount of senior notes, $478 million in aggregate outstanding borrowings under revolving credit facilities and $64 million in outstanding amounts due under our DrillCo Agreement.
As of March 31, 2022, the maximum credit amount available under our credit agreement was $1.6 billion, with no outstanding borrowings and $1.6 billion available for future borrowings. As of March 31, 2022, there was an aggregate of $3 million in outstanding letters of credit, which reduce available borrowings under our credit agreement on a dollar for dollar basis. There were no borrowings under our credit agreement during the three months ended March 31, 2022.
Viper’s Credit Agreement
The Viper credit agreement, as amended to date, provides for a revolving credit facility in the maximum credit amount of $2.0 billion, with a borrowing base of $580 million as of March 31, 2022, although Viper LLC had elected a commitment amount of $500 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, and is expected to be reaffirmed at $580 million by the lenders during the redetermination in May 2022. As of March 31, 2022, there were $248 million of outstanding borrowings and $252 million available for future borrowings under the Viper credit agreement. During the three months ended March 31, 2022, the weighted average interest rate on borrowings under the Viper credit agreement was 2.58%. The Viper credit agreement will mature on June 2, 2025.
Rattler’s Credit Agreement
The Rattler credit agreement, as amended to date, 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, there were $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, the weighted average interest rate on borrowings under the Rattler credit agreement was 1.40%. The Rattler credit agreement matures on May 28, 2024.
2022 Debt Transactions
On March 17, 2022, Diamondback Energy, Inc. issued the $750 million March 2022 Notes for net proceeds of $739 million, which were used to fund, together with cash on hand, the redemption of all of our outstanding 4.750% Senior Notes due 2025 and 2.875% Senior Notes due 2024 in the aggregate principal amount of $1.5 billion. Interest on the March 2022 Notes is payable semi-annually on March 15 and September 15 of each year, beginning on September 15, 2022.
For additional discussion of our outstanding debt as of March 31, 2022, see Note 7—Debt of the condensed notes to the consolidated financial statements included elsewhere in this report.
Subject to market conditions and other factors, we expect to continue to issue debt securities from time to time in the future to refinance our maturing debt. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned by credit rating agencies, among other factors.
We are currently in compliance, and expect to continue to be, with all financial maintenance covenants in our debt instruments.
Debt Ratings
We receive debt ratings from the major ratings agencies in the U.S. In determining our debt ratings, the agencies consider a number of qualitative and quantitative items including, but not limited to, commodity pricing levels, our liquidity, asset quality, reserve mix, debt levels, cost structure, planned asset sales and production growth opportunities. Our credit rating from Standard and Poor’s Global Ratings Services is BBB-. Our credit rating from Fitch Investor Services is BBB. Our credit rating from Moody’s Investor Services is Baa3. Any rating downgrades may result in additional letters of credit or cash collateral being posted under certain contractual arrangements.
Capital Requirements
In addition to future operating expenses and working capital commitments discussed in —Results of Operations**, our primary short and long-term liquidity requirements consist primarily of (i) capital expenditures, (ii) payments of other contractual obligations and (iii) cash used to pay for dividends and repurchases of securities as discussed below.
Based upon current oil and natural gas prices and production expectations for 2022, we believe that our cash flow from operations, cash on hand and borrowings under our revolving credit facility will be sufficient to fund our operations through the 12-month period following the filing of this report and thereafter. However, future cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, and significant additional capital expenditures will be required to more fully develop our properties. We cannot assure you that the needed capital will be available on acceptable terms or at all. Further, our 2022 capital expenditure budget does not allocate any funds for leasehold interest and property acquisitions.
2022 Capital Spending Plan
Our board of directors approved a 2022 capital budget for drilling, midstream and infrastructure of approximately $1.75 billion to $1.90 billion, maintaining our annualized fourth quarter 2021 cash capital expenditure guidance presented in November of 2021. We estimate that, of these expenditures, approximately:
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$1.56 billion to $1.67 billion will be spent primarily on drilling 270 to 290 gross (248 to 267 net) horizontal wells and completing 260 to 280 gross (240 to 258 net) horizontal wells across our operated and non-operated leasehold acreage in the Northern Midland and Southern Delaware Basins, with an average lateral length of approximately 10,200 feet;
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$80 million to $100 million will be spent on midstream infrastructure, excluding joint venture investments; and
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$110 million to $130 million will be spent on infrastructure and environmental expenditures, excluding the cost of any leasehold and mineral interest acquisitions.
We do not have a specific acquisition budget since the timing and size of acquisitions cannot be accurately forecasted.
During the three months ended March 31, 2022, we spent $374 million on drilling and completion, $19 million on midstream and $44 million on infrastructure, for total capital expenditures, excluding acquisitions, of $437 million.
The amount and timing of our capital expenditures are largely discretionary and within our control. We could choose to defer a portion of these planned capital expenditures depending on a variety of factors, including but not limited to the success of our drilling activities, prevailing and anticipated prices for oil and natural gas, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners. We are currently operating 10 drilling rigs and four completion crews. We continue to execute on our strategy to hold oil production flat while using cash flow from operations to reduce debt, strengthen our balance sheet and return capital to our stockholders. We will continue monitoring commodity prices and overall market conditions and can adjust our rig cadence and our capital expenditure budget in response to changes in commodity prices and overall market conditions.
Dividends and Repurchases of Securities
We paid common stock dividends of $107 million and $68 million during three months ended March 31, 2022 and 2021, respectively. In addition to our base dividend program, we have initiated a variable dividend strategy whereby we may pay a quarterly variable dividend of up to 50 percent of the prior quarter’s free cash flow remaining after the payment of the base dividend. On April 27, 2022, our board of directors declared a cash dividend for the first quarter of 2022 of $3.05 per share of common stock, payable on May 23, 2022 to our stockholders of record at the close of business on May 12, 2022. The decision to pay any future dividends is solely within the discretion of, and subject to approval by, our board of directors. 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.
Free cash flow is a non-GAAP financial measure. As used by the Company, free cash flow is defined as cash flow from operating activities before changes in working capital in excess of cash capital expenditures. The Company believes that free cash flow is useful to investors as it provides a measure to compare both cash flow from operating activities and additions to oil and natural gas properties across periods on a consistent basis.
Future base and variable dividends are at the discretion of our board of directors, and, if declared, the board of directors may change the dividend amount based on the Company's outlook for commodity prices, liquidity, debt levels, capital resources, free cash flow and other factors. The Company can provide no assurance that dividends will be authorized or declared in the future or as to the amount of any future dividends. Any future variable dividends, if declared and paid, will by their nature fluctuate based on the Company's free cash flow, which will depend on a number of factors beyond the Company's control, including commodity prices.
In September 2021, our board of directors approved a stock repurchase program to acquire up to $2 billion of our outstanding common stock. We repurchased approximately $7 million of our common stock under this program during the three months ended March 31, 2022, and have $1.6 billion remaining for future repurchases under the repurchase program at March 31, 2022. We intend to continue to purchase shares under this repurchase program opportunistically with available funds primarily from cash flow from operations and liquidity events such as the sale of assets while maintaining sufficient liquidity to fund our capital expenditure programs. See Note 8—Stockholders' Equity and Earnings Per Share of the condensed notes to the consolidated financial statements included elsewhere in this report for further discussion of the repurchase program.
We may also from time to time opportunistically repurchase some of our outstanding Senior Notes of one or more tranches or series, in open market purchases or in privately negotiated transactions.
Income Taxes
We expect our cash tax rate to be 10% to 15% of pre-tax income for the year ended December 31, 2022. See Note 10—Income Taxes of the condensed notes to the consolidated financial statements included elsewhere in this report for further discussion of our income taxes.
Guarantor Financial Information
As of March 31, 2022, Diamondback E&P is the sole guarantor under the indentures governing the outstanding December 2019 Notes, the March 2021 Notes and the March 2022 Notes.
Guarantees are “full and unconditional,” as that term is used in Regulation S-X, Rule 3-10(b)(3), except that such guarantees will be released or terminated in certain circumstances set forth in the IG Indenture, such as, with certain exceptions, (1) in the event Diamondback E&P (or all or substantially all of its assets) is sold or disposed of, (2) in the event Diamondback E&P ceases to be a guarantor of or otherwise be an obligor under certain other indebtedness, and (3) in connection with any covenant defeasance, legal defeasance or satisfaction and discharge of the relevant indenture.
Diamondback E&P’s guarantees of the outstanding December 2019 Notes, the March 2021 Notes and the March 2022 Notes are senior unsecured obligations and rank senior in right of payment to any of its future subordinated indebtedness, equal in right of payment with all of its existing and future senior indebtedness, including its obligations under its revolving credit facility, and effectively subordinated to any of its existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness.
The rights of holders of the Senior Notes against Diamondback E&P may be limited under the U.S. Bankruptcy Code or state fraudulent transfer or conveyance law. Each guarantee contains a provision intended to limit Diamondback E&P’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent conveyance. However, there can be no assurance as to what standard a court will apply in making a determination of the maximum liability of Diamondback E&P. Moreover, this provision may not be effective to protect the guarantee from being voided under fraudulent conveyance laws. There is a possibility that the entire guarantee may be set aside, in which case the entire liability may be extinguished.
The following tables present summarized financial information for Diamondback Energy, Inc., as the parent, and Diamondback E&P, as the guarantor subsidiary, on a combined basis after elimination of (i) intercompany transactions and balances between the parent and the guarantor subsidiary and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor. The information is presented in accordance with the requirements of Rule 13-01 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations or financial position had the guarantor subsidiary operated as an independent entity.
| March 31, 2022 | December 31, 2021 | ||||||||||
| Summarized Balance Sheets: | (In millions) | ||||||||||
| Assets: | |||||||||||
| Current assets | $ | 967 | $ | 1,148 | |||||||
| Property and equipment, net | $ | 15,339 | $ | 14,778 | |||||||
| Other noncurrent assets | $ | 67 | $ | 55 | |||||||
| Liabilities: | |||||||||||
| Current liabilities | $ | 1,629 | $ | 1,221 | |||||||
| Intercompany accounts payable, non-guarantor subsidiary | $ | 1,637 | $ | 1,440 | |||||||
| Long-term debt | $ | 4,270 | $ | 5,093 | |||||||
| Other noncurrent liabilities | $ | 1,758 | $ | 1,549 |
| Three Months Ended March 31, 2022 | |||||
| Summarized Statement of Operations: | (In millions) | ||||
| Revenues | $ | 1,855 | |||
| Income (loss) from operations | $ | 1,253 | |||
| Net income (loss) | $ | 436 |
Critical Accounting Estimates
There have been no changes in our critical accounting estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements
See Note 2—Summary of Significant Accounting Policies included in the condensed notes to the consolidated financial statements included elsewhere in this Quarterly Report for recent accounting pronouncements and accounting policies not yet adopted, if any.
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