Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Diamondback Energy, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
			June 30,						December 31,
			2022						2021
			(In millions, except par values and share data)
Assets
Current assets:
Cash and cash equivalents			$	43					$	654
Restricted cash			16						18
Accounts receivable:
Joint interest and other, net			76						72
Oil and natural gas sales, net			961						598
Inventories			65						62
Derivative instruments			17						13
Income tax receivable			—						1
Prepaid expenses and other current assets			23						28
Total current assets			1,201						1,446
Property and equipment:
Oil and natural gas properties, full cost method of accounting ($8,097 million and $8,496 million excluded from amortization at June 30, 2022 and December 31, 2021, respectively)			34,200						32,914
Midstream assets			1,139						1,076
Other property, equipment and land			190						174
Accumulated depletion, depreciation, amortization and impairment			(14,160)						(13,545)
Property and equipment, net			21,369						20,619
Funds held in escrow			—						12
Equity method investments			660						613
Derivative instruments			33						4
Deferred income taxes, net			33						40
Investment in real estate, net			87						88
Other assets			65						76
Total assets			$	23,448					$	22,898

See accompanying notes to condensed consolidated financial statements.

Diamondback Energy, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets - (Continued)

(Unaudited)

			June 30,						December 31,
			2022						2021
Liabilities and Stockholders’ Equity			(In millions, except par values and share data)
Current liabilities:
Accounts payable - trade			$	62					$	36
Accrued capital expenditures			323						295
Current maturities of long-term debt			55						45
Other accrued liabilities			420						419
Revenues and royalties payable			615						452
Derivative instruments			162						174
Deferred income taxes			3						17
Total current liabilities			1,640						1,438
Long-term debt			5,401						6,642
Derivative instruments			123						29
Asset retirement obligations			260						166
Deferred income taxes			1,600						1,338
Other long-term liabilities			34						40
Total liabilities			9,058						9,653
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock, $0.01 par value; 400,000,000 shares authorized; 175,201,453 and 177,551,347 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively			2						2
Additional paid-in capital			13,772						14,084
Retained earnings (accumulated deficit)			(458)						(1,998)
Total Diamondback Energy, Inc. stockholders’ equity			13,316						12,088
Non-controlling interest			1,074						1,157
Total equity			14,390						13,245
Total liabilities and equity			$	23,448					$	22,898

See accompanying notes to condensed consolidated financial statements.

Diamondback Energy, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

			Three Months Ended June 30,												Six Months Ended June 30,
			2022						2021						2022						2021
			(In millions, except per share amounts, shares in thousands)
Revenues:
Oil sales			$	2,189					$	1,395					$	4,135					$	2,339
Natural gas sales			264						107						418						211
Natural gas liquid sales			299						165						588						289
Midstream services			14						12						31						23
Other operating income			2						2						4						3
Total revenues			2,768						1,681						5,176						2,865
Costs and expenses:
Lease operating expenses			159						157						308						259
Production and ad valorem taxes			178						105						339						180
Gathering and transportation			61						56						120						87
Midstream services expenses			23						23						45						51
Depreciation, depletion, amortization and accretion			330						341						643						614
General and administrative expenses			39						36						75						61
Merger and integration expenses			—						2						—						77
Other operating expenses			—						6						8						10
Total costs and expenses			790						726						1,538						1,339
Income (loss) from operations			1,978						955						3,638						1,526
Other income (expense):
Interest expense, net			(39)						(57)						(79)						(113)
Other income (expense), net			1						(7)						2						(6)
Gain (loss) on derivative instruments, net			(101)						(497)						(653)						(661)
Gain (loss) on sale of equity method investments			—						23						—						23
Gain (loss) on extinguishment of debt			(4)						—						(58)						(61)
Income (loss) from equity investments			28						5						37						2
Total other income (expense), net			(115)						(533)						(751)						(816)
Income (loss) before income taxes			1,863						422						2,887						710
Provision for (benefit from) income taxes			402						94						623						159
Net income (loss)			1,461						328						2,264						551
Net income (loss) attributable to non-controlling interest			45						17						69						20
Net income (loss) attributable to Diamondback Energy, Inc.			$	1,416					$	311					$	2,195					$	531
Earnings (loss) per common share:
Basic			$	7.95					$	1.70					$	12.30					$	3.05
Diluted			$	7.93					$	1.70					$	12.28					$	3.04
Weighted average common shares outstanding:
Basic			176,570						181,009						177,064						172,636
Diluted			176,876						181,199						177,380						172,806
Dividends declared per share			$	3.05					$	0.45					$	6.10					$	0.85

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
Unit-based compensation			—						—						—						—									3						3
Distribution equivalent rights payments			—						—						—						(7)									—						(7)
Stock-based compensation			—						—						17						—									—						17
Cash paid for tax withholding on vested equity awards			—						—						—						—									(3)						(3)
Repurchased shares under buyback program			(2,369)						—						(303)						—									—						(303)
Repurchased units under buyback programs			—						—						—						—									(29)						(29)
Distributions to non-controlling interest			—						—						—						—									(63)						(63)
Dividend paid			—						—						—						(541)									—						(541)
Exercise of stock options and vesting of restricted stock units and awards			19						—						—						—									—						—
Change in ownership of consolidated subsidiaries, net			—						—						(9)						—									12						3
Net income (loss)			—						—						—						1,416									45						1,461
Balance June 30, 2022			175,201						$	2					$	13,772					$	(458)								$	1,074					$	14,390

See accompanying notes to condensed consolidated financial statements.

Diamondback Energy, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity - (Continued)

(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, 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
Unit-based compensation			—						—						—						—									3						3
Distribution equivalent rights payments			—						—						—						(1)									(1)						(2)
Stock-based compensation			—						—						15						—									—						15
Cash paid for tax withholding on vested equity awards			—						—						—						—									(2)						(2)
Repurchased units under buyback programs			—						—						—						—									(12)						(12)
Distributions to non-controlling interest			—						—						—						—									(24)						(24)
Dividend paid			—						—						—						(72)									—						(72)
Exercise of stock options and vesting of restricted stock units and awards			65						—						3						—									—						3
Change in ownership of consolidated subsidiaries, net			—						—						(3)						—									4						1
Net income (loss)			—						—						—						311									17						328
Balance June 30, 2021			181,049						$	2					$	14,399					$	(3,475)								$	964					$	11,890

See accompanying notes to condensed consolidated financial statements.

Diamondback Energy, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

			Six Months Ended June 30,
			2022						2021
			(In millions)
Cash flows from operating activities:
Net income (loss)			$	2,264					$	551
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for (benefit from) deferred income taxes			273						155
Depreciation, depletion, amortization and accretion			643						614
(Gain) loss on extinguishment of debt			58						61
(Gain) loss on derivative instruments, net			653						661
Cash received (paid) on settlement of derivative instruments			(720)						(484)
(Income) loss from equity investment			(37)						(2)
Equity-based compensation expense			28						23
(Gain) loss on sale of equity method investments			—						(23)
Other			36						15
Changes in operating assets and liabilities:
Accounts receivable			(380)						(172)
Income tax receivable			1						99
Prepaid expenses and other			15						18
Accounts payable and accrued liabilities			(21)						(26)
Income tax payable			(14)						—
Revenues and royalties payable			163						100
Other			(3)						(12)
Net cash provided by (used in) operating activities			2,959						1,578
Cash flows from investing activities:
Drilling, completions and infrastructure additions to oil and natural gas properties			(863)						(645)
Additions to midstream assets			(42)						(17)
Property acquisitions			(381)						(421)
Proceeds from sale of assets			72						100
Funds held in escrow			12						51
Other			(30)						34
Net cash provided by (used in) investing activities			(1,232)						(898)
Cash flows from financing activities:
Proceeds from borrowings under credit facilities			1,579						661
Repayments under credit facilities			(1,563)						(780)
Proceeds from senior notes			750						2,200
Repayment of senior notes			(1,865)						(2,107)
Proceeds from (repayments to) joint venture			(17)						(10)
Premium on extinguishment of debt			(49)						(166)
Repurchased shares under buyback program			(310)						—
Repurchased units under buyback program			(71)						(36)
Dividends to stockholders			(648)						(140)
Distributions to non-controlling interest			(110)						(41)
Financing portion of net cash received (paid) for derivative instruments			—						59
Other			(36)						(32)
Net cash provided by (used in) financing activities			(2,340)						(392)
Net increase (decrease) in cash and cash equivalents			(613)						288
Cash, cash equivalents and restricted cash at beginning of period			672						108
Cash, cash equivalents and restricted cash at end of period(1)			$	59					$	396

(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 June 30, 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.

Rattler Merger

On May 15, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Rattler, Rattler Midstream GP LLC, the general partner of the Partnership (the “General Partner”), and Bacchus Merger Sub Company, a wholly owned subsidiary of the Company (“Merger Sub”). The Merger Agreement provides that, among other things and subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, (i) Merger Sub will be merged with and into Rattler (the “Rattler Merger”), with Rattler surviving and continuing as the surviving entity in the merger and (ii) each issued and outstanding publicly held common unit representing a limited partner interest in Rattler (other than any common units owned by the Company and its subsidiaries) will be converted into the right to receive 0.113 of a share of common stock, par value $0.01 per share, of the Company. The Merger Agreement also specifies the treatment of outstanding Rattler equity awards in connection with the merger. The Company’s board of directors and the board of directors of the General Partner (acting upon the recommendation of its conflicts committee) unanimously approved the merger. The Company and Rattler expect that the Rattler Merger will close, subject to certain conditions, reasonably promptly following the distribution payment date for the second quarter 2022 distribution to Rattler’s unitholders reported by Rattler.

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 June 30, 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 June 30, 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 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.

Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

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.

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 six months ended June 30, 2022 and 2021 to the line items within the condensed consolidated balance sheets:

			Six Months Ended June 30,
			2022						2021
			(In millions)
Cash and cash equivalents			$	43					$	344
Restricted cash			16						18
Restricted cash included in funds held in escrow			—						34
Total cash, cash equivalents and restricted cash			$	59					$	396

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 June 30, 2022															Three Months Ended June 30, 2021
			Midland Basin			Delaware Basin			Other			Total						Midland Basin			Delaware Basin			Other			Total
			(In millions)
Oil sales			$	1,610		$	577		$	2		$	2,189					$	876		$	408		$	111		$	1,395
Natural gas sales			168			95			1			264						75			27			5			107
Natural gas liquid sales			207			91			1			299						102			52			11			165
Total			$	1,985		$	763		$	4		$	2,752					$	1,053		$	487		$	127		$	1,667

			Six Months Ended June 30, 2022															Six Months Ended June 30, 2021
			Midland Basin			Delaware Basin			Other			Total						Midland Basin			Delaware Basin			Other			Total
			(In millions)
Oil sales			$	3,008		$	1,122		$	5		$	4,135					$	1,445		$	766		$	128		$	2,339
Natural gas sales			266			151			1			418						116			88			7			211
Natural gas liquid sales			398			188			2			588						177			99			13			289
Total			$	3,672		$	1,461		$	8		$	5,141					$	1,738		$	953		$	148		$	2,839

4. ACQUISITIONS AND DIVESTITURES

2022 Activity

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.

Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

2021 Activity

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. 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 $103 million and $133 million of total revenue and $49 million and $65 million of net income for the three and six months ended June 30, 2021, respectively.

Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

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. 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

Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

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 $359 million and $413 million of total revenue and $116 million and $139 million of net income for the three and six months ended June 30, 2021.

Pro Forma Financial Information

The following unaudited summary pro forma financial information for the three and six months ended June 30, 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 $2 million and $77 million for the three and six months ended June 30, 2021, respectively, 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 June 30, 2021												Six Months Ended June 30, 2021
									(In millions, except per share amounts)
Revenues									$	1,656											$	3,137
Income (loss) from operations									$	1,022											$	1,706
Net income (loss)									$	388											$	534
Basic earnings (loss) per common share									$	2.14											$	2.95
Diluted earnings (loss) per common share									$	2.13											$	2.94

Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

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.

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 as of December 31, 2021. 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:

			June 30,						December 31,
			2022						2021
			(In millions)
Oil and natural gas properties:
Subject to depletion			$	26,103					$	24,418
Not subject to depletion			8,097						8,496
Gross oil and natural gas properties			34,200						32,914
Accumulated depletion			(6,019)						(5,434)
Accumulated impairment			(7,954)						(7,954)
Oil and natural gas properties, net			20,227						19,526
Midstream assets			1,139						1,076
Other property, equipment and land			190						174
Accumulated depreciation, amortization, accretion and impairment			(187)						(157)
Total property and equipment, net			$	21,369					$	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 and six months ended June 30, 2022 or 2021 based on the results of the respective quarterly ceiling tests.

Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

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.

6. ASSET RETIREMENT OBLIGATIONS

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

			Six Months Ended June 30,
			2022						2021
			(In millions)
Asset retirement obligations, beginning of period			$	171					$	109
Additional liabilities incurred			26						6
Liabilities acquired			3						63
Liabilities settled and divested			(8)						(4)
Accretion expense			6						5
Revisions in estimated liabilities			75						13
Asset retirement obligations, end of period			273						192
Less current portion(1)			13						7
Asset retirement obligations - long-term			$	260					$	185

(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:

			June 30,						December 31,
			2022						2021
			(In millions)
5.375% Senior Notes due 2022			$	25					$	25
7.320% Medium-term Notes, Series A, due 2022			20						20
5.250% Senior Notes due 2023			10						10
2.875% Senior Notes due 2024			—						1,000
4.750% Senior Notes due 2025			—						500
3.250% Senior Notes due 2026			780						800
5.625% Senior Notes due 2026			14						14
7.125% Medium-term Notes, Series B, due 2028			73						100
3.500% Senior Notes due 2029			1,021						1,200
3.125% Senior Notes due 2031			789						900
4.400% Senior Notes due 2051			650						650
4.250% Senior Notes due 2052			750						—
DrillCo Agreement(1)			41						58
Unamortized debt issuance costs			(32)						(31)
Unamortized discount costs			(22)						(28)
Unamortized premium costs			5						8
Unamortized basis adjustment of dedesignated interest rate swap agreements(2)			(113)						(18)
Revolving credit facility			33						—
Viper revolving credit facility			250						304
Viper 5.375% Senior Notes due 2027			430						480
Rattler revolving credit facility			232						195
Rattler 5.625% Senior Notes due 2025			500						500
Total debt, net			5,456						6,687
Less: current maturities of long-term debt			(55)						(45)
Total long-term debt			$	5,401					$	6,642

(1) Represents amounts due under a participation and development agreement (the “DrillCo Agreement”), dated September 10, 2018, with Obsidian Resources, L.L.C. to fund oil and natural gas development.

(2) Represents the unamortized basis adjustment related to two receive-fixed, pay variable interest rate swap agreements which were previously designated as fair value hedges of the Company’s $1.2 billion 3.500% fixed rate senior notes due 2029. These swaps were dedesignated in the second quarter of 2022 as discussed further in Note 11—Derivatives.

References in this section to the Company shall mean Diamondback Energy, Inc. and Diamondback E&P, collectively, unless otherwise specified.

Credit Agreement

As of June 30, 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 of $1.6 billion. As of June 30, 2022, the Company had $33 million in outstanding borrowings under the credit agreement and $3 million in outstanding letters of credit, which reduce available borrowings under the credit agreement on a dollar for dollar basis. During both the three and six months ended June 30, 2022 the weighted average interest rate on borrowings under the credit agreement was 2.69%. During the three and six months ended June 30, 2021, the weighted average interest rates on borrowings under the credit agreement were 1.68% and 1.67%, respectively.

Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

On June 2, 2022, the Company and Diamondback E&P entered into a thirteenth amendment to the Second Amended and Restated Credit Agreement, dated as of November 1, 2013, with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto.

This amendment, among other things, (i) extended the maturity date to June 2, 2027, which may be further extended by two one-year extensions pursuant to the terms set forth in the credit agreement, (ii) decreased the interest rate margin applicable to the loans and certain fees payable under the credit agreement and (iii) replaced the LIBOR interest rate benchmark with the secured overnight financing rate (“SOFR”). Outstanding borrowings under the credit agreement bear interest at a per annum rate elected by Diamondback E&P that is equal to (i) term SOFR plus 0.10% (“Adjusted Term SOFR”) or (ii) an alternate base rate (which is equal to the greatest of the prime rate, the Federal Funds effective rate plus 0.50%, and 1-month Adjusted Term SOFR plus 1.0%), in each case plus the applicable margin. After giving effect to the amendment, (i) the applicable margin ranges from 0.125% to 1.000% per annum in the case of the alternate base rate, and from 1.125% to 2.000% per annum in the case of Adjusted Term SOFR, in each case based on the pricing level, and (ii) the commitment fee ranges from 0.125% to 0.325% per annum on the average daily unused portion of the commitments, based on the pricing level. The pricing level depends on certain rating agencies’ rating of the Company’s long-term senior unsecured debt. The Company applied the optional expedient in ASU 2020-04, “Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting” for this contract modification, and as a result, the modification did not have an impact on its financial position, results of operations or liquidity.

As of June 30, 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 and Repurchases of Notes

In the first quarter of 2022, the Company fully redeemed the $500 million and $1.0 billion principal amounts of its outstanding 4.750% 2025 Senior Notes and 2.875% 2024 Senior Notes, respectively. Cash consideration for these redemptions totaled $1.6 billion, including make-whole premiums of $47 million, which resulted in a loss on extinguishment of debt of $54 million during the first quarter of 2022. The Company funded the redemptions with a portion of the net proceeds from the March 2022 Notes offering and cash on hand.

In the second quarter of 2022, the Company repurchased principal amounts of $27 million of its 7.125% Medium-term Notes due 2028, $111 million of its 3.125% Senior Notes due 2031, $179 million of its 3.500% Senior Notes due 2029 and $20 million of its 3.250% Senior Notes due 2026 for total cash consideration, including accrued interest paid, of $322 million. Additionally, Viper repurchased $50 million in principal amount of its 5.375% Senior Notes due 2027 for total cash consideration of $49 million. These repurchases resulted in an immaterial loss on extinguishment of debt during the second quarter of 2022. The Company funded its repurchases with cash on hand and Viper funded its repurchases with cash on hand and borrowings under the Viper credit agreement.

Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

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. As of June 30, 2022, the elected commitment amount was $500 million with $250 million of outstanding borrowings and $250 million available for future borrowings. During the three and six months ended June 30, 2022 and 2021, the weighted average interest rates on borrowings under the Viper credit agreement were 3.20%, 2.88%, 1.93% and 1.90%, respectively. The Viper credit agreement will mature on June 2, 2025. As of June 30, 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 June 30, 2022, Rattler LLC had $232 million of outstanding borrowings and $368 million available for future borrowings under the Rattler credit agreement. During the three and six months ended June 30, 2022 and 2021, the weighted average interest rates on borrowings under the Rattler credit agreement were, in each case, 2.03%, 1.73%, 1.36% and 1.39%, respectively. The revolving credit facility will mature on May 28, 2024. As of June 30, 2022, Rattler LLC was in compliance with all financial maintenance covenants under the Rattler credit agreement.

8. STOCKHOLDERS’ EQUITY AND EARNINGS (LOSS) PER SHARE

Stock Repurchase Program

In September 2021, the Company’s board of directors approved a stock repurchase program to acquire up to $2.0 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 and six months ended June 30, 2022, the Company repurchased approximately $303 million and $310 million of common stock under this repurchase program, respectively. As of June 30, 2022, approximately $1.3 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 June 30,												Six Months Ended June 30,
			2022						2021						2022						2021
			(In millions)
Net income (loss) attributable to the Company			$	1,416					$	311					$	2,195					$	531
Change in ownership of consolidated subsidiaries			(9)						(3)						(21)						(7)
Change from net income (loss) attributable to the Company's stockholders and transfers to non-controlling interest			$	1,407					$	308					$	2,174					$	524

Earnings (Loss) Per Share

The Company’s earnings (loss) per share amounts have been computed using the two-class method. The two-class method is an earnings allocation proportional to the respective ownership among holders of common stock and participating securities. 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 non-participating securities 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 June 30,												Six Months Ended June 30,
			2022						2021						2022						2021
			($ in millions, except per share amounts, shares in thousands)
Net income (loss) attributable to common stock			$	1,416					$	311					$	2,195					$	531
Less: distributed and undistributed earnings allocated to participating securities(1)			(13)						(3)						(17)						(5)
Net income (loss) attributable to common stockholders			$	1,403					$	308					$	2,178					$	526
Weighted average common shares outstanding:
Basic weighted average common shares outstanding			176,570						181,009						177,064						172,636
Effect of dilutive securities:
Weighted-average potential common shares issuable(2)			306						190						316						170
Diluted weighted average common shares outstanding			176,876						181,199						177,380						172,806
Basic net income (loss) attributable to common stock			$	7.95					$	1.70					$	12.30					$	3.05
Diluted net income (loss) attributable to common stock			$	7.93					$	1.70					$	12.28					$	3.04

(1) Unvested restricted stock awards that contain non-forfeitable distribution equivalent rights are considered participating securities and therefore are included in the earnings per share calculation pursuant to the two-class method.

(2) For the three months ended June 30, 2022, there were 76,473 potential common shares excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. For the three and six months ended June 30, 2021, there were 99,835 and 137,357 potential common shares, respectively, which were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

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 June 30, 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 June 30, 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 June 30,												Six Months Ended June 30,
			2022						2021						2022						2021
			(In millions)
General and administrative expenses			$	13					$	13					$	28					$	23
Equity-based compensation capitalized pursuant to full cost method of accounting for oil and natural gas properties			$	6					$	5					$	10					$	9

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 six months ended June 30, 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			319,035						$	132.84
Vested			(178,185)						$	92.82
Forfeited			(39,231)						$	68.58
Unvested at June 30, 2022			1,181,208						$	76.35

The aggregate fair value of restricted stock units that vested during the six months ended June 30, 2022 was $17 million. As of June 30, 2022, the Company’s unrecognized compensation cost related to unvested restricted stock units was $70 million, which is expected to be recognized over a weighted-average period of 1.9 years.

Performance Based Restricted Stock Units

The following table presents the Company’s performance restricted stock units activity under the Equity Plan for the six months ended June 30, 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 June 30, 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 June 30, 2022, the Company’s unrecognized compensation cost related to unvested performance based restricted stock awards and units was $45 million, which is expected to be recognized over a weighted-average period of 1.6 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 following table provides the Company’s provision for (benefit from) income taxes and the effective income tax rate for the periods indicated:

			Three Months Ended June 30,												Six Months Ended June 30,
			2022						2021						2022						2021
			(In millions, except for tax rate)
Provision for (benefit from) income taxes			$	402					$	94					$	623					$	159
Effective income tax rate			21.6		%				22.3		%				21.6		%				22.4		%

Total income tax expense from continuing operations for the three and six months ended June 30, 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 June 30, 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 and six months ended June 30, 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. The Company’s opening balance sheet net deferred tax asset was finalized during the first quarter of 2022 at $39 million, and primarily consisted of deferred tax assets related to tax attributes acquired from QEP, partially offset by a valuation allowance related to federal and state tax attributes estimated not more likely than to be realized prior to expiration 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.

11. DERIVATIVES

At June 30, 2022, the Company has commodity derivative contracts and interest rate swaps 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 six months ended June 30, 2021.

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Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

As of June 30, 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 Floor Price			Weighted Average Ceiling Price
OIL
July - Dec.			2022			Basis Swap(1)			10,000			Argus WTI Midland			$0.84									$—			$—
July - Dec.			2022			Roll Swap			55,000			WTI			$0.89									$—			$—
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
July - Sep.			2022			Costless Collar			4,000			WTI			$—									$45.00			$92.65
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
Oct. - Dec.			2022			Costless Collar			4,000			WTI			$—									$50.00			$128.01
Jan. - June			2023			Costless Collar			6,000			Brent			$—									$60.00			$114.57
Jan. - Dec.			2023			Basis Swap(1)			2,000			Argus WTI Midland			$0.60									$—			$—
NATURAL GAS
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)			320,000			Waha Hub			$(1.19)									$—			$—
Jan. - Mar.			2023			Costless Collar			330,000			Henry Hub			$—									$3.09			$8.52
Apr. - June			2023			Costless Collar			290,000			Henry Hub			$—									$3.12			$8.23
July - Dec.			2023			Costless Collar			270,000			Henry Hub			$—									$3.13			$8.27
July - Dec.			2023			Basis Swap(1)			300,000			Waha Hub			$(1.24)									$—			$—

(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.

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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
July - Sep.			2022			Put			69,000			Brent			$50.87			$—			$1.79
July - Sep.			2022			Put			20,000			Argus WTI Houston			$50.50			$—			$1.84
July - Sep.			2022			Put			8,000			WTI			$47.50			$—			$1.52
Oct. - Dec.			2022			Put			69,000			Brent			$51.01			$—			$1.78
Oct. - Dec.			2022			Put			20,000			Argus WTI Houston			$51.00			$—			$1.81
Oct. - Dec.			2022			Put			8,000			WTI			$55.00			$—			$1.54
July - Dec.			2022			Basis Put(1)			50,000			Brent			$—			$(10.40)			$0.78
Jan. - Mar.			2023			Put			37,000			Brent			$51.89			$—			$1.74
Jan. - Mar.			2023			Put			10,000			Argus WTI Houston			$52.00			$—			$1.77
Jan. - Mar.			2023			Put			6,000			WTI			$55.00			$—			$1.87
Apr. - June			2023			Put			29,000			Brent			$51.72			$—			$1.81
Apr. - June			2023			Put			8,000			Argus WTI Houston			$51.25			$—			$1.77
July - Sep.			2023			Put			9,000			Brent			$50.00			$—			$1.91
July - Sep.			2023			Put			2,000			Argus WTI Houston			$55.00			$—			$1.86

(1) The Company has basis puts for the spread between the Brent crude oil price and NYMEX WTI crude oil price.

During the six months ended June 30, 2022, the Company terminated certain commodity derivative contracts prior to their contractual maturities as shown in the table below:

																		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, which were designated as fair value hedges of the Company’s $1.2 billion 3.50% fixed rate senior notes due 2029 (the “2029 Notes”) at inception. The Company receives a fixed 3.50% rate of interest on these swaps and pays an average variable rate of interest based on three month LIBOR plus 2.1865%, thereby limiting its exposure to changes in the fair value of debt due to movements in LIBOR interest rates. Under hedge accounting, these interest rate swaps were considered perfectly effective and gains and losses due to changes in the fair value of the interest rate swaps were completely offset by changes in the fair value of the hedged portion of the 2029 Notes in the condensed consolidated statements of operations.

In the second quarter of 2022, the Company elected to fully dedesignate these interest rate swaps and hedge accounting was discontinued. The cumulative fair value basis adjustment recorded on the 2029 Notes at the time of dedesignation totaled $135 million. This basis adjustment is being amortized to interest expense over the remaining term of the 2029 Notes utilizing

Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

the effective interest method. The dedesignated interest rate swaps are considered economic hedges of the Company’s fixed-rate debt. As such, changes in the fair value of the interest rate swaps after the date of dedesignation have been recorded in earnings under the caption “Gain (loss) on derivative instruments, net” in the condensed consolidated statements of operations.

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 six months ended June 30, 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 six months ended June 30, 2021.

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 June 30,												Six Months Ended June 30,
			2022						2021						2022						2021
			(In millions)
Gain (loss) on derivative instruments, net:
Commodity contracts			$	(102)					$	(497)					$	(654)					$	(791)
Interest rate swaps			1						—						1						130
Total			$	(101)					$	(497)					$	(653)					$	(661)
Net cash received (paid) on settlements:
Commodity contracts(1)			$	(306)					$	(323)					$	(726)					$	(505)
Interest rate swaps(2)			6						—						6						80
Total			$	(300)					$	(323)					$	(720)					$	(425)

(1)The six months ended June 30, 2022 includes cash paid on commodity contracts terminated prior to their contractual maturity of $135 million.

(2)The six months ended June 30, 2021 includes cash received on interest rate swap contracts terminated prior to their contractual maturity of $80 million.

Diamondback Energy, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

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.

See Note 4—Acquisitions and Divestitures for discussion of the fair values of proved oil and natural gas properties assumed in business combinations.

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. At December 31, 2021, the net change in fair value of the Company’s interest rate swaps designated as hedges were offset by the change in value of the hedged item, long-term debt, within the condensed consolidated balance sheet.

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Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

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 under the captions “Derivative instruments” in the Company’s condensed consolidated balance sheets as of June 30, 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 June 30, 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 assets- Derivative instruments:
Commodity derivative instruments			$	—		$	106		$	—		$	106		$	(89)		$	17
Non-current assets- Derivative instruments:
Commodity derivative instruments			$	—		$	51		$	—		$	51		$	(18)		$	33
Liabilities:
Current liabilities- Derivative instruments:
Commodity derivative instruments			$	—		$	231		$	—		$	231		$	(89)		$	142
Interest rate swaps			$	—		$	20		$	—		$	20		$	—		$	20
Non-current liabilities- Derivative instruments:
Commodity derivative instruments			$	—		$	22		$	—		$	22		$	(18)		$	4
Interest rate swaps			$	—		$	119		$	—		$	119		$	—		$	119

			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 assets- Derivative instruments:
Commodity derivative instruments			$	—		$	60		$	—		$	60		$	(57)		$	3
Interest rate swaps designated as hedges			$	—		$	10		$	—		$	10		$	—		$	10
Non-current assets- Derivative instruments:
Commodity derivative instruments			$	—		$	12		$	—		$	12		$	(8)		$	4
Interest rate swaps designated as hedges			$	—		$	1		$	—		$	1		$	(1)		$	—
Liabilities:
Current liabilities- Derivative instruments:
Commodity derivative instruments			$	—		$	231		$	—		$	231		$	(57)		$	174
Non-current liabilities- Derivative instruments:
Commodity derivative instruments			$	—		$	9		$	—		$	9		$	(8)		$	1
Interest rate swaps designated as hedges			$	—		$	29		$	—		$	29		$	(1)		$	28

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Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

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:

			June 30, 2022												December 31, 2021
			Carrying												Carrying
			Value						Fair Value						Value						Fair Value
			(In millions)
Debt			$	5,456					$	5,183					$	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.

13. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS

									Six Months Ended June 30,
															2022						2021
															(In millions)
Supplemental disclosure of cash flow information:
Cash paid (received) for income taxes															$	362					$	(100)
Supplemental disclosure of non-cash transactions:
Accrued capital expenditures included in accounts payable and accrued expenses															$	340					$	296
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.

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Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

15. SUBSEQUENT EVENTS

Second Quarter 2022 Dividend Declaration

On July 29, 2022, the board of directors of the Company declared a cash dividend for the second quarter of 2022 of $3.05 per share of common stock, payable on August 23, 2022 to its stockholders of record at the close of business on August 16, 2022. The dividend consists of a base quarterly dividend of $0.75 per share of common stock and a variable quarterly dividend of $2.30 per share of common stock. Future base and variable dividends are at the discretion of the board of directors of the Company.

Stock Repurchase Program

Subsequent to the quarter, the Company repurchased approximately $200 million in shares of Diamondback’s common stock through July 29, 2022. On July 28, 2022, the Company’s board of directors approved an increase in the Company’s common stock repurchase program from $2.0 billion to $4.0 billion.

Redemptions of Notes

In July 2022, the Company fully redeemed principal amounts of $25 million and $20 million of its 5.375% Notes due 2022 and 7.320% Medium-term Notes due 2022, respectively.

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 June 30, 2022:
Third-party revenues			$	2,753					$	15					$	—					$	2,768
Intersegment revenues			—						90						(90)						—
Total revenues			2,753						105						(90)						2,768
Depreciation, depletion, amortization and accretion			314						16						—						330
Income (loss) from operations			1,962						39						(23)						1,978
Interest expense, net			(30)						(9)						—						(39)
Other income (expense)			(100)						28						(4)						(76)
Provision for (benefit from) income taxes			398						4						—						402
Net income (loss) attributable to non-controlling interest			33						12						—						45
Net income (loss) attributable to Diamondback Energy, Inc.			1,401						42						(27)						1,416
As of June 30, 2022:
Total assets			$	21,833					$	2,022					$	(407)					$	23,448

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Condensed Notes to Consolidated Financial Statements - (Continued)

(Unaudited)

			Upstream						Midstream Operations						Eliminations						Total
			(In millions)
Three Months Ended June 30, 2021:
Third-party revenues			$	1,669					$	12					$	—					$	1,681
Intersegment revenues			—						99						(99)						—
Total revenues			1,669						111						(99)						1,681
Depreciation, depletion, amortization and accretion			325						16						—						341
Income (loss) from operations			927						39						(11)						955
Interest expense, net			(48)						(9)						—						(57)
Other income (expense)			(502)						28						(2)						(476)
Provision for (benefit from) income taxes			91						3						—						94
Net income (loss) attributable to non-controlling interest			5						12						—						17
Net income (loss) attributable to Diamondback Energy, Inc.			281						43						(13)						311
As of December 31, 2021:
Total assets			$	21,329					$	1,942					$	(373)					$	22,898

			Upstream						Midstream Operations						Eliminations						Total
			(In millions)
Six Months Ended June 30, 2022:
Third-party revenues			$	5,144					$	32					$	—					$	5,176
Intersegment revenues			—						177						(177)						—
Total revenues			5,144						209						(177)						5,176
Depreciation, depletion, amortization and accretion			606						37						—						643
Income (loss) from operations			3,599						78						(39)						3,638
Interest expense, net			(61)						(18)						—						(79)
Other income (expense)			(700)						37						(9)						(672)
Provision for (benefit from) income taxes			617						6						—						623
Net income (loss) attributable to non-controlling interest			49						20						—						69
Net income (loss) attributable to Diamondback Energy, Inc.			2,172						71						(48)						2,195
As of June 30, 2022:
Total assets			$	21,833					$	2,022					$	(407)					$	23,448

			Upstream						Midstream Operations						Eliminations						Total
			(In millions)
Six Months Ended June 30, 2021:
Third-party revenues			$	2,841					$	24					$	—					$	2,865
Intersegment revenues			—						186						(186)						—
Total revenues			2,841						210						(186)						2,865
Depreciation, depletion, amortization and accretion			587						27						—						614
Income (loss) from operations			1,479						77						(30)						1,526
Interest expense, net			(97)						(16)						—						(113)
Other income (expense)			(724)						25						(4)						(703)
Provision for (benefit from) income taxes			154						5						—						159
Net income (loss) attributable to non-controlling interest			2						18						—						20
Net income (loss) attributable to Diamondback Energy, Inc.			502						63						(34)						531
As of December 31, 2021:
Total assets			$	21,329					$	1,942					$	(373)					$	22,898