Item 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 are 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 September 30, 2022, we have one reportable segment, the upstream segment. See Note 1—Description of the Business and Basis of Presentation and Note 16—Segment Information.

Despite the recovery in commodity prices and rising demand in recent quarters, we expect to hold our oil production levels flat for the remainder of 2022. During the second quarter of 2022, we announced an increase to our quarterly return of capital commitment to at least 75% of our free cash flow beginning in the third quarter of 2022. Accordingly, we are utilizing our free cash flow to meet our quarterly return of capital commitment and for debt repayment rather than expanding our drilling program. During and subsequent to the third quarter of 2022, we continued to pay down debt and believe we have a strong balance sheet that can withstand another down cycle. We are focused on maintaining high cash margins and a low-cost structure to drive an increasing return on capital and operational excellence, and to mitigate inflationary pressures through improvements and efficiencies in our drilling and completion programs. Going forward, we intend to continue to remain flexible and use a combination of our growing and sustainable base dividend, variable dividend and opportunistic share repurchase program to generate the highest value proposition for our stockholders.

Recent Developments

On October 11, 2022, we entered into a definitive purchase and sale agreement for the FireBird Acquisition to acquire approximately 75,000 gross (68,000 net) acres in the Midland Basin and certain related oil and gas assets. Consideration for the FireBird Acquisition consists of $775 million in cash and 5.86 million shares of our common stock, subject to customary adjustments. The FireBird Acquisition is expected to close late in the fourth quarter of 2022, subject to continued diligence and closing conditions, including completion of the waiting period under the Hart-Scott-Rodino Act.

On October 28, 2022, we issued $1.1 billion in principal amount of the October 2022 Notes and received gross proceeds of $1.1 billion, before any adjustments for debt issuance costs and discounts. We used a portion of the net proceeds from the October 2022 Notes offering to fund, in full, the redemption of all of the outstanding Rattler 5.625% Senior Notes due 2025 in the aggregate principal amount of $500 million including a premium and accrued and unpaid interest thereon, and intend to use the remaining net proceeds for general corporate purposes, including the funding of a portion of the cash consideration for the FireBird Acquisition at closing, if it occurs.

In October 2022, we announced our target to sell at least $500 million of non-core assets by year-end 2023, ensuring that we maintain our investment grade balance sheet and improve our overall financial position. The announced target includes the $155 million of non-core assets sold in October 2022, which are discussed further in Note 15 — Subsequent Events.

Third Quarter 2022 Highlights

We recorded net income of $1.2 billion for the third quarter of 2022.
Paid dividends to stockholders of $526 million during the third quarter of 2022 and declared a cash dividend payable in the fourth quarter of 2022 of $2.26 per share of common stock, consisting of a base quarterly dividend of $0.75 per share of common stock and a variable quarterly dividend of $1.51 per share of common stock.
Repurchased $472 million of our common stock, leaving approximately $2.8 billion available for future purchases under our common stock repurchase program at September 30, 2022.
Completed the Rattler Merger on August 24, 2022, which resulted in the issuance of approximately 4 million additional common shares and the full repayment of $269 million of borrowings outstanding under the Rattler LLC credit agreement.
Our cash operating costs for the third quarter of 2022 were $11.97 per BOE, including lease operating expenses of $5.09 per BOE, cash general and administrative expenses of $0.56 per BOE and production and ad valorem taxes and gathering and transportation expenses of $6.32 per BOE.
Our average production was 390.6 MBOE/d during the third quarter of 2022.
Drilled 48 gross horizontal wells in the Midland Basin and 11 gross horizontal wells in the Delaware Basin, and turned 63 gross operated horizontal wells (42 in the Midland Basin and 21 in the Delaware Basin) to production.
Incurred capital expenditures, excluding acquisitions, of $491 million during the third quarter of 2022.

Commodity Prices and Inflation

Prices for oil, natural gas and natural gas liquids are determined primarily by prevailing market conditions. Regional and worldwide economic activity, including any economic downturn or recession that has occurred or may occur in the future, extreme weather conditions and other substantially variable factors, influence market conditions for these products. These factors are beyond our control and are difficult to predict. During 2022 and 2021, 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 $9.68 per MMBtu, with seven-year highs reached in 2022. The war in Ukraine, the COVID-19 pandemic, rising interest rates, global supply chain disruptions, concerns about a potential economic downturn or recession and recent measures to combat persistent inflation have continued to contribute to economic and pricing volatility during 2022. Although the impact of inflation on our business has been insignificant in prior periods, inflation in the U.S. has been rising at its fastest rate in over 40 years, creating inflationary pressure on the cost of services, equipment and other goods in the energy industry and other sectors, which is contributing to labor and materials shortages across the supply-chain. Additionally, OPEC and its non-OPEC allies, known collectively as OPEC+, continues to meet regularly to evaluate the state of global oil supply, demand and inventory levels, and has planned production decreases in order to stabilize oil prices during the third quarter of 2022. As such, pricing may remain volatile during the remainder of 2022.

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 September 30, 2022, we had approximately 450,045 net acres, which primarily consisted of approximately 268,782 net acres in the Midland Basin and 153,203 net acres in the Delaware Basin.

The following table sets forth the total number of operated horizontal wells drilled and completed during the third quarter of 2022:


	Three Months Ended September 30, 2022				Nine Months Ended September 30, 2022
	Drilled		Completed(1)		Drilled		Completed(2)
Area:	Gross	Net	Gross	Net	Gross	Net	Gross	Net
Midland Basin	48	44	42	40	138	129	152	142
Delaware Basin	11	10	21	20	34	32	42	39

Total	59	54	63	60	172	161	194	181

(1)The average lateral length for the wells completed during the third quarter of 2022 was 11,289 feet. Operated completions during the third quarter of 2022 consisted of 26 Wolfcamp A wells, 16 Lower Spraberry wells, 13 Wolfcamp B wells, three Second Bone Spring wells, two Third Bone Spring wells, two Jo Mill wells and one Middle Spraberry well.

(2)The average lateral length for the wells completed during the first nine months of 2022 was 10,439 feet. Operated completions during the first nine months of 2022 consisted of 61 Wolfcamp A wells, 50 Lower Spraberry wells, 32 Wolfcamp B wells, 21 Jo Mill wells, 15 Middle Spraberry wells, 11 Second Bone Spring wells, three Third Bone Spring wells and one Barnett well.

As of September 30, 2022, we operated the following wells:


	As of September 30, 2022
	Vertical Wells		Horizontal Wells		Total
Area:	Gross	Net	Gross	Net	Gross	Net
Midland Basin	2,142	2,008	1,895	1,769	4,037	3,777
Delaware Basin	44	40	728	686	772	726

Total	2,186	2,048	2,623	2,455	4,809	4,503

As of September 30, 2022, we held interests in 11,627 gross (4,616 net) wells, including wells that we do not operate.

Comparison of the Three Months Ended September 30, 2022 and June 30, 2022

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. Accordingly, our results of operations discussion focuses on a comparison of the current quarter’s results of operations with those of the immediately preceding quarter. We believe our discussion provides 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 September 30, 2022 and June 30, 2022:


	Three Months Ended
	September 30, 2022		June 30, 2022
Revenues (In millions):
Oil sales	$	1,853	$	2,189
Natural gas sales	296		264
Natural gas liquid sales	268		299
Total oil, natural gas and natural gas liquid revenues	$	2,417	$	2,752

Production Data:
Oil (MBbls)	20,638		20,120
Natural gas (MMcf)	45,799		42,912
Natural gas liquids (MBbls)	7,667		7,349
Combined volumes (MBOE)(1)	35,938		34,621

Daily oil volumes (BO/d)	224,326		221,099
Daily combined volumes (BOE/d)	390,630		380,451

Average Prices:
Oil ($ per Bbl)	$	89.79	$	108.80
Natural gas ($ per Mcf)	$	6.46	$	6.15
Natural gas liquids ($ per Bbl)	$	34.96	$	40.69
Combined ($ per BOE)	$	67.25	$	79.49

Oil, hedged ($ per Bbl)(2)	$	87.41	$	97.32
Natural gas, hedged ($ per Mcf)(2)	$	5.50	$	4.40
Natural gas liquids, hedged ($ per Bbl)(2)	$	34.96	$	40.69
Average price, hedged ($ per BOE)(2)	$	64.67	$	70.65

(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 provide information on the mix of our production for the three months ended September 30, 2022 and June 30, 2022:


	Three Months Ended
	September 30, 2022		June 30, 2022
Oil (MBbls)	58	%	58	%
Natural gas (MMcf)	21	%	21	%
Natural gas liquids (MBbls)	21	%	21	%
	100	%	100	%


	Three Months Ended September 30, 2022				Three Months Ended June 30, 2022
	Midland Basin	Delaware Basin	Other(1)	Total	Midland Basin	Delaware Basin	Other(2)	Total
Production Data:
Oil (MBbls)	14,710	5,891	37	20,638	14,713	5,378	29	20,120
Natural gas (MMcf)	30,786	14,879	134	45,799	28,539	14,257	116	42,912
Natural gas liquids (MBbls)	5,450	2,202	15	7,667	5,123	2,213	13	7,349
Total (MBOE)	25,291	10,573	74	35,938	24,593	9,967	61	34,621

(1)Includes the Eagle Ford Shale and Rockies.

(2)Includes the Eagle Ford Shale and Rockies.

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 third quarter of 2022 decreased by $335 million, or 12%, to $2.4 billion from $2.8 billion during the second quarter of 2022. Lower average combined prices primarily for oil, and to a lesser extent natural gas liquids, contributed $422 million of the total decrease, which was partially offset by an increase of $87 million due to a 4% growth in production volumes in the third quarter of 2022 compared to the second quarter of 2022.

Other Revenues. The following table shows other insignificant revenue for the three months ended September 30, 2022 and June 30, 2022:


	Three Months Ended
(In millions)	September 30, 2022		June 30, 2022

Other operating income	$	20	$	16

Lease Operating Expenses. The following table shows lease operating expenses for the three months ended September 30, 2022 and June 30, 2022:


	Three Months Ended
	September 30, 2022				June 30, 2022
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
Lease operating expenses	$	183	$	5.09	$	159	$	4.59

Lease operating expenses increased by $24 million, or $0.50 on a per BOE basis for the third quarter of 2022 compared to the second quarter of 2022, primarily due increased utility charges of approximately $13 million and continued service cost inflation in other categories.

Production and Ad Valorem Tax Expense. The following table shows production and ad valorem tax expense for the three months ended September 30, 2022 and June 30, 2022:


	Three Months Ended
	September 30, 2022					June 30, 2022
(In millions, except per BOE amounts)	Amount			Per BOE		Amount			Per BOE
Production taxes	$	125		$	3.48	$	139		$	4.01
Ad valorem taxes	31			0.86		39			1.13
Total production and ad valorem expense	$	156		$	4.34	$	178		$	5.14

Production taxes as a % of oil, natural gas, and natural gas liquids revenue	5.2		%			5.0		%

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 third quarter of 2022 remained consistent with the second quarter of 2022.

Ad valorem taxes are based, among other factors, on property values driven by prior year commodity prices. During the third quarter of 2022, we reduced our 2022 ad valorem tax estimates to correlate with rates published during the quarter.

Gathering and Transportation Expense. The following table shows gathering and transportation expense for the three months ended September 30, 2022 and June 30, 2022:


	Three Months Ended
	September 30, 2022				June 30, 2022
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
Gathering and transportation	$	71	$	1.98	$	61	$	1.76

The increase in gathering and transportation expenses for the third quarter of 2022 compared to the second quarter of 2022 is primarily attributable to $6 million in additional charges incurred to transport production to pipelines where we have minimum volume commitments. The remainder of the increase is primarily due to 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 September 30, 2022 and June 30, 2022:


	Three Months Ended
(In millions, except BOE amounts)	September 30, 2022		June 30, 2022
Depletion of proved oil and natural gas properties	$	316	$	306

Depreciation of other property and equipment	16		18
Other amortization	—		3
Asset retirement obligation accretion	4		3
Depreciation, depletion, amortization and accretion expense	$	336	$	330
Oil and natural gas properties depletion rate per BOE	$	8.79	$	8.84

Depletion of proved oil and natural gas properties increased for the third quarter of 2022 as compared to the second quarter of 2022 due primarily to the increase in production volumes in third quarter of 2022.

General and Administrative Expenses. The following table shows general and administrative expenses for the three months ended September 30, 2022 and June 30, 2022:


	Three Months Ended
	September 30, 2022				June 30, 2022
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
General and administrative expenses	$	20	$	0.56	$	26	$	0.75
Non-cash stock-based compensation	14		0.39		13		0.38
Total general and administrative expenses	$	34	$	0.95	$	39	$	1.13

The decrease in general and administrative expenses for the third quarter of 2022 compared to the second quarter of 2022 was primarily due to a reduction in net compensation and benefits costs and legal fees.

Other Operating Costs and Expenses. The following table shows other insignificant operating costs and expenses for the three months ended September 30, 2022 and June 30, 2022:


	Three Months Ended
(In millions)	September 30, 2022		June 30, 2022


Merger and integration expenses	$	11	$	—
Other operating expenses	$	32	$	23

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 September 30, 2022 and June 30, 2022:


	Three Months Ended
(In millions)	September 30, 2022		June 30, 2022
Gain (loss) on derivative instruments, net	$	(24)	$	(101)
Net cash received (paid) on settlements	$	(96)	$	(300)

We have not designated our commodity derivative instruments as hedges for accounting purposes. As a result, we mark our commodity derivative instruments to fair value and recognize the cash and non-cash changes in fair value on derivative instruments in earnings.

Certain of our interest rate swaps were designated as fair value hedges for accounting purposes, but were fully dedesignated at management’s election in the second quarter of 2022. After dedesignation, gains and losses due to settlements and changes in the fair value of the interest rate swaps are recognized in earnings in the caption “Gain (loss) on derivative instruments, net” on the condensed consolidated statements of operations. See Note 11—Derivatives of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding our derivative instruments

Other Income (Expense). The following table shows other insignificant income and expenses for the three months ended September 30, 2022 and June 30, 2022:


	Three Months Ended
(In millions)	September 30, 2022		June 30, 2022
Interest expense, net	$	(43)	$	(39)
Other income (expense), net	$	(5)	$	1
Gain (loss) on extinguishment of debt	$	(1)	$	(4)
Income (loss) from equity investments	$	19	$	28

Provision for (Benefit from) Income Taxes. The following table shows the provision for (benefit from) income taxes for the three months ended September 30, 2022 and June 30, 2022:


	Three Months Ended
(In millions)	September 30, 2022		June 30, 2022
Provision for (benefit from) income taxes	$	290	$	402

The change in our income tax provision for the third quarter of 2022 compared to the second quarter of 2022 was primarily due to the decrease in pre-tax income between the periods which resulted largely from the changes in gain (loss) on derivatives and revenues from oil, natural gas and natural gas liquids discussed above. In addition, a discrete tax benefit of $50 million was recorded in the third quarter of 2022 related to a partial reduction in Viper’s valuation allowance against its deferred tax assets. See Note 10—Income Taxes for further discussion of our income tax expense.

Comparison of the Nine Months Ended September 30, 2022 and 2021

The following table sets forth selected operating data for the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
	2022		2021
Revenues (In millions):
Oil sales	$	5,988	$	3,845
Natural gas sales	714		363
Natural gas liquid sales	856		528
Total oil, natural gas and natural gas liquid revenues	$	7,558	$	4,736

Production Data:
Oil (MBbls)	60,813		60,703
Natural gas (MMcf)	131,356		124,186
Natural gas liquids (MBbls)	22,177		19,992
Combined volumes (MBOE)(1)	104,883		101,393

Daily oil volumes (BO/d)	222,758		222,355
Daily combined volumes (BOE/d)	384,187		371,402

Average Prices:
Oil ($ per Bbl)	$	98.47	$	63.34
Natural gas ($ per Mcf)	$	5.44	$	2.92
Natural gas liquids ($ per Bbl)	$	38.60	$	26.41
Combined ($ per BOE)	$	72.06	$	46.71

Oil, hedged ($ per Bbl)(2)	$	89.39	$	50.46
Natural gas, hedged ($ per Mcf)(2)	$	4.43	$	2.13
Natural gas liquids, hedged ($ per Bbl)(2)	$	38.60	$	26.16
Average price, hedged ($ per BOE)(2)	$	65.54	$	37.97

(1)Bbl equivalents are calculated using a conversion rate of six Mcf per Bbl.

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 nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
	2022		2021
Oil (MBbls)	58	%	60	%
Natural gas (MMcf)	21	%	20	%
Natural gas liquids (MBbls)	21	%	20	%
	100	%	100	%


	Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
	Midland Basin	Delaware Basin	Other(1)	Total	Midland Basin	Delaware Basin	Other(2)	Total
Production Data:
Oil (MBbls)	43,344	17,370	99	60,813	38,065	19,074	3,564	60,703
Natural gas (MMcf)	86,198	44,817	341	131,356	69,822	47,503	6,861	124,186
Natural gas liquids (MBbls)	15,323	6,805	49	22,177	12,146	6,438	1,408	19,992
Total (MBOE)	73,033	31,645	205	104,883	61,848	33,429	6,116	101,393

(1)Includes the Eagle Ford Shale and Rockies.

(2)Includes the Eagle Ford Shale, Rockies and High Plains.

Our oil, natural gas and natural gas liquids revenues for the nine months ended September 30, 2022 increased by $2.8 billion, or 60%, to $7.6 billion from $4.7 billion during the nine months ended September 30, 2021. Higher average oil prices, and to a lesser extent natural gas and natural gas liquids prices, contributed $2.7 billion of the total increase. The remainder of the overall change is due to a 3% increase in combined volumes sold.

Higher commodity prices during the nine months ended September 30, 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 war in Ukraine as discussed in “—**Recent Developments” above. The increase in production for the nine months ended September 30, 2022 compared to the same period in 2021 resulted primarily from recognizing nine months of production in the current period associated with production from the Guidon Acquisition and QEP Merger, which occurred late in the first quarter 2021, and new well additions between periods.

Other Revenues. The following table shows the other insignificant revenues for the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
(In millions)	2022		2021

Other operating income	$	55	$	39

Lease Operating Expenses. The following table shows lease operating expenses for the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
	2022				2021
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
Lease operating expenses	$	491	$	4.68	$	415	$	4.09

Lease operating expenses increased by $76 million, or $0.59 per BOE for the nine months ended September 30, 2022 compared to the same period in 2021, primarily driven by an overall increase in utility and service costs driven by continued inflation. As a result of inflationary pressures, we have increased the expected range for our total lease operating expenses in 2022 to between $632 million and $704 million.

Production and Ad Valorem Tax Expense. The following table shows production and ad valorem tax expense for the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
	2022					2021
(In millions, except per BOE amounts)	Amount			Per BOE		Amount			Per BOE
Production taxes	$	384		$	3.66	$	245		$	2.42
Ad valorem taxes	111			1.06		59			0.58
Total production and ad valorem expense	$	495		$	4.72	$	304		$	3.00

Production taxes as a % of oil, natural gas, and natural gas liquids revenue	5.1		%			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 remained consistent for the nine months ended September 30, 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 nine months ended September 30, 2022 as compared to the same period in 2021 increased by $52 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 nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
	2022				2021
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
Gathering and transportation	$	191	$	1.82	$	154	$	1.52

The increase in gathering and transportation expenses for the nine months ended September 30, 2022 compared to the same period in 2021 is primarily attributable to the increase in production between periods, as well as an overall increase in the cost per BOE. On a per BOE basis, several individually insignificant factors contributed to the overall increase including higher third-party gas gathering expenses incurred after 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.

We expect gathering and transportation expenses to range from approximately $253 million to $268 million in 2022.


	Nine Months Ended September 30,
(In millions, except BOE amounts)	2022		2021
Depletion of proved oil and natural gas properties	$	908	$	899

Depreciation of other property and equipment	58		49
Other amortization	3		—
Asset retirement obligation accretion	10		7
Depreciation, depletion, amortization and accretion expense	$	979	$	955
Oil and natural gas properties depletion rate per BOE	$	8.66	$	8.87

The increase in depletion of proved oil and natural gas properties of $9 million for the nine months ended September 30, 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 nine months ended September 30, 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 during the nine months ended September 30, 2021.

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 nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
	2022				2021
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
General and administrative expenses	$	67	$	0.64	$	62	$	0.61
Non-cash stock-based compensation	42		0.40		37		0.37
Total general and administrative expenses	$	109	$	1.04	$	99	$	0.98

The increase in general and administrative expenses for the nine months ended September 30, 2022 compared to the same period in 2021 was due primarily to higher compensation and benefits costs of $8 million primarily resulting largely from growth in our headcount, an increase in charitable donations of $4 million, and an increase in office costs of $1 million related to an office lease acquired in the QEP Merger. These increases were partially offset by $8 million in additional overhead charges billed to our wells, which reduced general and administrative expenses as a result of an increase in average rig count and the number of wells drilled in during the nine months ended September 30, 2022 compared to the same period in 2021.

Non-cash stock-based compensation increased by $5 million for the nine months ended September 30, 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 nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
(In millions)	2022		2021
Merger and integration expenses	$	11	$	77

Merger and integration expenses for the nine months ended September 30, 2022 relate to banking, legal and advisory fees incurred for the Rattler Merger. Merger and integration expense for the nine months ended September 30, 2021 includes $68 million in costs incurred for the QEP Merger and $9 million in costs incurred for the Guidon Acquisition. The QEP Merger related expenses primarily consisted of $38 million in severance costs and $30 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 nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
(In millions)	2022		2021

Other operating expenses	$	85	$	81


	Nine Months Ended September 30,
(In millions)	2022		2021
Gain (loss) on derivative instruments, net(1)	$	(677)	$	(895)
Net cash received (paid) on settlements(2)	$	(816)	$	(822)

(1)The nine months ended September 30, 2022 includes $6 million in losses related to interest rate swaps.

(2)The nine months ended September 30, 2022 includes cash paid on commodity contracts terminated prior to their contractual maturity of $138 million. The nine months ended September 30, 2021 includes cash received on interest rate swap contracts terminated prior to their contractual maturity of $80 million.

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.” See Note 11—Derivatives of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding our derivative instruments.

Other Income (Expense). The following table shows other income and expenses for the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
(In millions)	2022		2021
Interest expense, net	$	(122)	$	(170)
Other income (expense), net	$	(3)	$	(4)
Gain (loss) on sale of equity method investments	$	—	$	23
Gain (loss) on extinguishment of debt	$	(59)	$	(73)
Income (loss) from equity investments	$	56	$	6

The decrease in net interest expense for the nine months ended September 30, 2022 compared to the same period in 2021, primarily reflects (i) a $31 million decrease in interest expense on our senior notes due largely to redemptions and repurchases of principal between the periods, and (ii) a $37 million increase in capitalized interest costs, which reduce interest expense. These reductions were partially offset by a $14 million increase in interest expense on our revolving credit facility. See Note 7—Debt of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding outstanding borrowings.

Gain (loss) on extinguishment of debt reflects the difference between the carrying value and reacquisition price for the repurchases and redemptions of various senior notes during the 2022 and 2021 periods. 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.

The increase in income from our equity investments primarily reflects higher capacity utilization and price realizations for our midstream investees in 2022 compared to 2021, as well as $33 million in income from Rattler’s investment in an interconnected gas gathering system in the Midland Basin, which was acquired in the fourth quarter of 2021.

Provision for (Benefit from) Income Taxes. The following table shows the provision for (benefit from) income taxes for the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
(In millions)	2022		2021
Provision for (benefit from) income taxes	$	913	$	352

The change in our income tax provision for the nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to the increase in pre-tax income which resulted largely 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.

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 September 30, 2022, we had approximately $1.4 billion of liquidity consisting of $15 million in standalone cash and cash equivalents and $1.4 billion available under our credit facility. As discussed below, our capital budget for 2022 is $1.94 billion to $1.95 billion. We have approximately $10 million of senior notes maturing 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, 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 war in Ukraine, 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 the needed capital will be available on acceptable terms or at all.

Cash Flow

Our cash flows for the nine months ended September 30, 2022 and 2021 are presented below:


	Nine Months Ended September 30,
	2022		2021
	(In millions)
Net cash provided by (used in) operating activities	$	4,884	$	2,777
Net cash provided by (used in) investing activities	(1,952)		(1,323)
Net cash provided by (used in) financing activities	(3,570)		(1,021)
Net increase (decrease) in cash	$	(638)	$	433

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 nine months ended September 30, 2022 compared to the same period in 2021 primarily resulted from (i) an additional $2.8 billion in total revenue, (ii) a decrease of $31 million in net cash paid on settlements of derivative contracts, and (iii) fluctuations in other working capital balances due primarily to the timing of when collections are made on accounts receivable and payments are made on accounts payable and accrued liabilities. These cash inflows were partially offset by (i) a change of $711 million in cash paid for taxes due to making payments of $560 million in 2022 compared to receiving net refunds of $151 million in federal taxes under the 2020 CARES act in 2021, and (ii) an increase in our cash operating expenses of approximately $247 million, See “—**Results of Operations” for discussion of significant changes in our revenues and expenses.

Investing Activities

The majority of our net cash used for investing activities during the nine months ended September 30, 2022 and 2021 was for drilling and completion costs in conjunction with our development program as well as the purchase of oil and gas properties which are discussed further in Note 4—Acquisitions and Divestitures of the condensed notes to the consolidated financial statements included elsewhere in this report.

Capital Expenditure Activities

Our capital expenditures excluding acquisitions and equity method investments (on a cash basis) were as follows for the specified period:


	Nine Months Ended September 30,
	2022		2021
	(In millions)
Drilling, completions and non-operated additions to oil and natural gas properties(1)	$	1,203	$	987
Infrastructure additions to oil and natural gas properties	124		43
Additions to midstream assets	69		23
Total	$	1,396	$	1,053

(1) See “—Recent Developments - Upstream Segment” above for additional detail on wells drilled and turned to production during the three and nine months ended September 30, 2022 and 2021.

Financing Activities

During the nine months ended September 30, 2022, net cash used in financing activities was primarily attributable to (i) $1.9 billion paid for the repurchase, repayment and redemption of principal outstanding on certain senior notes as discussed in “—2022 Debt Transactions” below, as well as $49 million of additional premiums paid in connection with the redemptions, (ii) $1.2 billion of dividends paid to stockholders, (iii) $904 million of repurchases as part of the share and unit repurchase programs, and (iv) $181 million in distributions to non-controlling interest. These cash outflows were partially offset by $750 million in proceeds from the March 2022 Notes.

Net cash used in financing activities for the nine months ended September 30, 2021 was primarily attributable to (i) $2.5 billion paid for the repurchase of principal outstanding on certain senior notes, as well as $178 million of additional premiums paid in connection with the repurchases, (ii) $221 million of dividends paid to stockholders, (iii) $94 million of repayments under our credit facilities, net of borrowings, (iv) $72 million in distributions to non-controlling interest, and (v) $85 million of repurchases as part of the share and unit repurchase programs. These cash outflows were partially offset by $2.2 billion in proceeds from the March 2021 Notes.

Capital Resources

Revolving Credit Facilities and Other Debt Instruments

As of September 30, 2022, our debt, including the debt of Viper and the then-outstanding Rattler 5.625% Senior Notes due 2025, consisted of approximately $5.0 billion in aggregate outstanding principal amount of senior notes, $480 million in aggregate outstanding borrowings under revolving credit facilities and $18 million in outstanding amounts due under our DrillCo Agreement.

As of September 30, 2022, the maximum credit amount available under our credit agreement was $1.6 billion, with $235 million in outstanding borrowings and approximately $1.4 billion available for future borrowings. As of September 30, 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. During the second quarter of 2022, we extended the maturity date on our credit agreement by one year to June 2, 2027, and may further extend it by two one-year extensions pursuant to the terms set forth in the credit agreement.

Viper’s Credit Agreement

The Viper credit agreement, as amended to date, matures on June 2, 2025 and provides for a revolving credit facility in the maximum credit amount of $2.0 billion, with a borrowing base of $580 million as of September 30, 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. As of September 30, 2022, there were $245 million of outstanding borrowings and $255 million available for future borrowings under the Viper credit agreement.

2022 Debt Transactions

On March 17, 2022, we issued $750 million in aggregate principal amount of 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.

In the second quarter of 2022, we repurchased an aggregate of $337 million in various tranches of senior notes with cash on hand, and Viper repurchased $50 million of its 5.375% senior notes due 2027 with cash on hand and borrowings under the Viper credit agreement.

In connection with the Rattler Merger in August 2022, all outstanding obligations under Rattler LLC’s credit agreement in the amount of $269 million were fully repaid, all liens granted to secure such obligations were released and Rattler LLC’s credit agreement was terminated. See Note 7—Debt and “—Recent Developments.”

As discussed in “—Recent Developments,” in October 2022, we issued $1.1 billion in principal amount of 6.25% Senior Notes due in 2033 for net proceeds of approximately $1.1 billion and in November 2022, we fully redeemed the $500 million principal amount of Rattler’s outstanding 5.625% Senior Notes due 2025, including a premium and accrued and unpaid interest thereon, with a portion of the net proceeds from the October 2022 Notes offering.

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 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.

We are currently in compliance, and expect to continue to be in compliance, with all financial maintenance covenants in our debt instruments.

For additional discussion of our outstanding debt as of September 30, 2022, see Note 7—Debt of the condensed notes to the consolidated financial statements included elsewhere in this report.

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. As of September 30, 2022, our credit rating from Moody’s Investor Services was Baa3, which was further upgraded to Baa2 in October 2022. 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 has approved a revised 2022 capital budget for drilling, midstream and infrastructure of approximately $1.94 billion to $1.95 billion. We estimate that, of these expenditures, approximately:

$1.70 billion to $1.72 billion will be spent primarily on drilling approximately 260 gross (approximately 240 net) horizontal wells and completing approximately 275 gross (approximately 253 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;
Approximately $85 million will be spent on midstream infrastructure, excluding joint venture investments; and
Approximately $150 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.

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 15 drilling rigs and 3 completion crews. 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

In addition to our base dividend program, in the first quarter of 2022 we initiated a variable dividend strategy whereby we may pay a quarterly variable dividend based on the prior quarter’s free cash flow remaining after the payment of the base dividend. Beginning in the third quarter of 2022, our board of directors approved an increase to this return of capital commitment to at least 75% of free cash flow, up from the previous commitment of at least 50% of free cash flow. We have declared a base plus variable cash dividend for the third quarter of 2022 of $2.26 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 the board of directors may change the dividend amount from time to time 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.

As of November 4, 2022, we have repurchased 10.5 million shares of our common stock for a total cost of $1.2 billion since the inception of the repurchase program. 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.

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 September 30, 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.


	September 30, 2022		December 31, 2021
Summarized Balance Sheets:	(In millions)
Assets:
Current assets	$	777	$	1,148

Property and equipment, net	$	16,220	$	14,778
Other noncurrent assets	$	42	$	55
Liabilities:
Current liabilities	$	1,513	$	1,221
Intercompany accounts payable, non-guarantor subsidiary	$	2,056	$	1,440
Long-term debt	$	4,151	$	5,093
Other noncurrent liabilities	$	2,214	$	1,549


	Nine Months Ended September 30, 2022
Summarized Statement of Operations:	(In millions)
Revenues	$	5,969
Income (loss) from operations	$	4,032
Net income (loss)	$	2,328

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 not yet adopted, if any.

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