filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 discussed in Note 1—Description of the Business and Basis of Presentation and Note 16—Segment Information of the condensed notes to the consolidated financial statements included elsewhere in this report, as of March 31, 2023, we have one reportable segment, the upstream segment.
First Quarter 2023 Highlights
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We recorded net income of $0.7 billion for the first quarter of 2023.
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Increased our annual base dividend to $3.20 per share and paid dividends to stockholders of $542 million during the first quarter of 2023 and declared a combined base and variable cash dividend payable in the second quarter of 2023 of $0.83 per share of common stock.
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Repurchased $332 million of our common stock, leaving approximately $2.1 billion available for future purchases under our common stock repurchase program at March 31, 2023.
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Our cash operating costs for the first quarter of 2023 were $11.61 per BOE, including lease operating expenses of $5.02 per BOE, cash general and administrative expenses of $0.76 per BOE and production and ad valorem taxes and gathering and transportation expenses of $5.83 per BOE.
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Our average production was 425.0 MBOE/d during the first quarter of 2023.
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Drilled 70 gross horizontal wells in the Midland Basin and 12 gross horizontal wells in the Delaware Basin, and turned 88 gross operated horizontal wells (69 in the Midland Basin and 19 in the Delaware Basin) to production.
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Incurred capital expenditures, excluding acquisitions, of $657 million during the first quarter of 2023.
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To date, we have executed on non-core asset sale transactions, including those discussed below, involving gross proceeds of $773 million and, as a result, expect to meet or exceed our previously announced non-core asset divestiture target of at least $1.0 billion by year end 2023 through the sale of certain midstream or upstream non-core assets.
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As part of our ongoing commitment to sustainability and environmental and social responsibility, in March 2023, we joined the Oil & Gas Methane Partnership 2.0 (OGMP 2.0), the flagship oil and gas reporting and mitigation program of the United Nations Environment Programme.
Recent Developments
Divestiture Transaction
On April 28, 2023, the Company closed on a divestiture of non-core assets with an unrelated third-party buyer consisting of approximately 19,000 net acres in Glasscock County for total consideration of $275 million, including certain customary post-closing adjustments. The assets being sold in these pending transactions include approximately 2 MBO/d (7 MBOE/d) of 2023 production.
Lario Acquisition
On January 31, 2023, we closed on the Lario Acquisition, which included approximately 25,000 gross (16,000 net) acres in the Midland Basin and certain related oil and gas assets in exchange for 4.33 million shares of our common stock and $814 million, including certain customary post-closing adjustments.
Gray Oak Divestiture
On January 9, 2023, we divested our 10% non-operating equity investment in Gray Oak for $172 million in cash proceeds and recorded a gain on the sale of equity method investments of approximately $53 million in the first quarter of 2023 that was included in “Other income (expense), net” on the condensed consolidated statement of operations.
Other Divestitures of Certain Non-Core Assets
On March 31, 2023, the Company divested non-core assets consisting of approximately 4,900 net acres in Ward and Winkler counties to unrelated third-party buyers for $79 million in cash, including customary post-closing adjustments.
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 2023 and 2022, NYMEX WTI price for crude oil ranged from $66.74 to $123.70 per Bbl, and the NYMEX Henry Hub price of natural gas ranged from $1.99 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, recent measures to combat persistent inflation, and instability in the financial sector have contributed to recent economic and pricing volatility and may continue to impact pricing throughout 2023. 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.
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. Additionally, our publicly-traded subsidiary, Viper, is focused on owning and acquiring mineral interests and royalty interests in oil and natural gas properties primarily in the Permian Basin and derives royalty income and lease bonus income from such interests.
As of March 31, 2023, we had approximately 515,388 net acres, which primarily consisted of approximately 362,389 net acres in the Midland Basin and 152,678 net acres in the Delaware 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. Near-term production is expected to continue to increase in the second quarter of 2023 due to the impact of the Lario Acquisition and certain expected organic growth. This trend is expected to continue through 2023 as we bring on large pads with high net revenue interest in our core development areas in the Northern Midland Basin. We anticipate that capital expenditures will increase in the second quarter of 2023 as we will be paying in that quarter for peak activity and well costs, primarily attributable to the second half of the first quarter of 2023, and expect meaningful decreases in well costs thereafter due to decreasing raw material prices and well service costs. We also expect lower completion costs in the coming quarters through increased efficiencies with the start-up of our second simulfrac e-fleet. The majority of our wells will be completed with either a simulfrac or simulfrac e-fleet beginning in the second quarter of 2023, reducing our exposure to spot frac prices.
The following table sets forth the total number of operated horizontal wells drilled and completed during the first quarter of 2023:
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Drilled | Completed**(1)** | ||||||||||||||||||||||||||||||||||||||||||||||
| Area: | Gross | Net | Gross | Net | |||||||||||||||||||||||||||||||||||||||||||
| Midland Basin | 70 | 65 | 69 | 65 | |||||||||||||||||||||||||||||||||||||||||||
| Delaware Basin | 12 | 11 | 19 | 18 | |||||||||||||||||||||||||||||||||||||||||||
| Total | 82 | 76 | 88 | 83 |
(1)The average lateral length for the wells completed during the first quarter of 2023 was 10,829 feet. Operated completions during the first quarter of 2023 consisted of 23 Wolfcamp A wells, 20 Lower Spraberry wells, 15 Wolfcamp B wells, 11 Jo Mill wells, seven Third Bone Spring wells, six Second Bone Spring wells, five Middle Spraberry wells and one Barnett well.
As of March 31, 2023, we operated the following wells:
| As of March 31, 2023 | |||||||||||||||||||||||||||||||||||
| Vertical Wells | Horizontal Wells | Total | |||||||||||||||||||||||||||||||||
| Area: | Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||||||||||||
| Midland Basin | 3,010 | 2,855 | 2,245 | 2,076 | 5,255 | 4,931 | |||||||||||||||||||||||||||||
| Delaware Basin | 42 | 39 | 716 | 664 | 758 | 703 | |||||||||||||||||||||||||||||
| Total | 3,052 | 2,894 | 2,961 | 2,740 | 6,013 | 5,634 |
As of March 31, 2023, we held interests in 11,988 gross (5,734 net) wells, including 1,119 gross (100 net) wells in which we have non-operated working interest.
Comparison of the Three Months Ended March 31, 2023 and December 31, 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 March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| Revenues (In millions): | |||||||||||
| Oil sales | $ | 1,654 | $ | 1,672 | |||||||
| Natural gas sales | 69 | 144 | |||||||||
| Natural gas liquid sales | 179 | 192 | |||||||||
| Total oil, natural gas and natural gas liquid revenues | $ | 1,902 | $ | 2,008 | |||||||
| Production Data: | |||||||||||
| Oil (MBbls) | 22,624 | 20,803 | |||||||||
| Natural gas (MMcf) | 47,388 | 45,020 | |||||||||
| Natural gas liquids (MBbls) | 7,730 | 7,703 | |||||||||
| Combined volumes (MBOE)(1) | 38,252 | 36,009 | |||||||||
| Daily oil volumes (BO/d) | 251,378 | 226,120 | |||||||||
| Daily combined volumes (BOE/d) | 425,022 | 391,402 | |||||||||
| Average Prices: | |||||||||||
| Oil ($ per Bbl) | $ | 73.11 | $ | 80.37 | |||||||
| Natural gas ($ per Mcf) | $ | 1.46 | $ | 3.20 | |||||||
| Natural gas liquids ($ per Bbl) | $ | 23.16 | $ | 24.93 | |||||||
| Combined ($ per BOE) | $ | 49.72 | $ | 55.76 | |||||||
| Oil, hedged ($ per Bbl)(2) | $ | 72.05 | $ | 79.08 | |||||||
| Natural gas, hedged ($ per Mcf)(2) | $ | 1.96 | $ | 3.20 | |||||||
| Natural gas liquids, hedged ($ per Bbl)(2) | $ | 23.16 | $ | 24.93 | |||||||
| Average price, hedged ($ per BOE)(2) | $ | 49.72 | $ | 55.01 |
(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 March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| Oil (MBbls) | 59 | % | 58 | % | |||||||
| Natural gas (MMcf) | 21 | % | 21 | % | |||||||
| Natural gas liquids (MBbls) | 20 | % | 21 | % | |||||||
| 100 | % | 100 | % |
| Three Months Ended March 31, 2023 | Three Months Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Midland Basin | Delaware Basin | Other**(1)** | Total | Midland Basin | Delaware Basin | Other**(2)** | Total | ||||||||||||||||||||||||||||||||||||||||
| Production Data: | |||||||||||||||||||||||||||||||||||||||||||||||
| Oil (MBbls) | 17,720 | 4,892 | 12 | 22,624 | 15,459 | 5,311 | 33 | 20,803 | |||||||||||||||||||||||||||||||||||||||
| Natural gas (MMcf) | 33,548 | 13,786 | 54 | 47,388 | 30,381 | 14,521 | 118 | 45,020 | |||||||||||||||||||||||||||||||||||||||
| Natural gas liquids (MBbls) | 5,858 | 1,874 | (2) | 7,730 | 5,477 | 2,211 | 15 | 7,703 | |||||||||||||||||||||||||||||||||||||||
| Total (MBOE) | 29,169 | 9,064 | 19 | 38,252 | 25,999 | 9,942 | 68 | 36,009 |
(1)Includes the 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 first quarter of 2023 decreased by $106 million, or 5%, to $1.9 billion from $2.0 billion during the fourth quarter of 2022. The overall decrease was primarily due to a reduction of $261 million in average prices received for our oil production, and to a lesser extent our natural gas and natural gas liquids production, partially offset by an increase of $155 million due to a 6% growth in our combined volumes sold, which primarily resulted from additional production from the FireBird Acquisition and the Lario Acquisition.
Other Revenues. The following table shows other insignificant revenue for the three months ended March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||
| (In millions) | March 31, 2023 | December 31, 2022 | |||||||||
| Other operating income | $ | 23 | $ | 22 |
Lease Operating Expenses. The following table shows lease operating expenses for the three months ended March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except per BOE amounts) | Amount | Per BOE | Amount | Per BOE | |||||||||||||||||||||||||||||||||||||||||||
| Lease operating expenses | $ | 192 | $ | 5.02 | $ | 161 | $ | 4.47 |
Lease operating expenses increased by $31 million, or $0.55 on a per BOE basis for the first quarter of 2023 compared to the fourth quarter of 2022. The increase primarily consists of $15 million in production and operating expenses incurred on wells acquired in the FireBird Acquisition and the Lario Acquisition in the first quarter of 2023, as well as the fourth quarter of 2022 including a non-recurring reduction of $8 million for prior period utility credits. The remaining increase is due to other individually insignificant changes.
Production and Ad Valorem Tax Expense. The following table shows production and ad valorem tax expense for the three months ended March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (In millions, except per BOE amounts) | Amount | Per BOE | Amount | Per BOE | |||||||||||||||||||
| Production taxes | $ | 92 | $ | 2.40 | $ | 99 | $ | 2.75 | |||||||||||||||
| Ad valorem taxes | 63 | 1.65 | 17 | 0.47 | |||||||||||||||||||
| Total production and ad valorem expense | $ | 155 | $ | 4.05 | $ | 116 | $ | 3.22 | |||||||||||||||
| Production taxes as a % of oil, natural gas, and natural gas liquids revenue | 4.8 | % | 4.9 | % |
In general, production taxes are directly related to production revenues and are based upon current year commodity prices. Production taxes as a percentage of production revenues for the first quarter of 2023 remained consistent with the fourth quarter of 2022.
Ad valorem taxes are based, among other factors, on property values driven by prior year commodity prices. During the first quarter of 2023 compared to the fourth quarter of 2022, ad valorem taxes increased by $46 million due to the fourth quarter of 2022 including $24 million in reductions to the full year 2022 accrual for ad valorem taxes to reflect actual tax assessments received. The remaining increase in ad valorem taxes was due to an expected increase in ad valorem expense for 2023.
Gathering and Transportation Expense. The following table shows gathering and transportation expense for the three months ended March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except per BOE amounts) | Amount | Per BOE | Amount | Per BOE | |||||||||||||||||||||||||||||||||||||||||||
| Gathering and transportation | $ | 68 | $ | 1.78 | $ | 67 | $ | 1.86 |
Gathering and transportation expenses for the first quarter of 2023 compared to the fourth quarter of 2022 were relatively consistent.
Depreciation, Depletion, Amortization and Accretion. The following table provides the components of our depreciation, depletion, amortization and accretion expense for the three months ended March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||
| (In millions, except BOE amounts) | March 31, 2023 | December 31, 2022 | |||||||||
| Depletion of proved oil and natural gas properties | $ | 381 | $ | 342 | |||||||
| Depreciation of other property and equipment | 17 | 19 | |||||||||
| Other amortization | 1 | — | |||||||||
| Asset retirement obligation accretion | 4 | 4 | |||||||||
| Depreciation, depletion, amortization and accretion | $ | 403 | $ | 365 | |||||||
| Oil and natural gas properties depletion rate per BOE | $ | 9.96 | $ | 9.50 |
Depletion of proved oil and natural gas properties increased by $39.0 million for the first quarter of 2023 as compared to the fourth quarter of 2022 due primarily to an increase in the depletion rate and production volumes resulting from the addition of leasehold costs, reserves and production from the Lario Acquisition.
General and Administrative Expenses. The following table shows general and administrative expenses for the three months ended March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (In millions, except per BOE amounts) | Amount | Per BOE | Amount | Per BOE | |||||||||||||||||||
| General and administrative expenses | $ | 29 | $ | 0.76 | $ | 22 | $ | 0.61 | |||||||||||||||
| Non-cash stock-based compensation | 11 | 0.29 | 13 | 0.36 | |||||||||||||||||||
| Total general and administrative expenses | $ | 40 | $ | 1.05 | $ | 35 | $ | 0.97 |
The increase in general and administrative expenses for the first quarter of 2023 compared to the fourth quarter of 2022 was primarily due to compensation related accrual adjustments made during the first quarter of 2023 for 2022 annual bonuses and annual compensation adjustments.
Other Operating Costs and Expenses. The following table shows other insignificant operating costs and expenses for the three months ended March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||||||||||||||
| (In millions) | March 31, 2023 | December 31, 2022 | |||||||||||||||||||||
| Merger and integration expenses | $ | 8 | $ | 3 | |||||||||||||||||||
| Other operating expenses | $ | 34 | $ | 27 |
Derivative Instruments. The following table shows the net gain (loss) on derivative instruments and the net cash receipts (payments) on settlements of derivative instruments for the three months ended March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||
| (In millions) | March 31, 2023 | December 31, 2022 | |||||||||
| Gain (loss) on derivative instruments, net | $ | (93) | $ | 91 | |||||||
| Net cash received (paid) on settlements | $ | 1 | $ | (34) |
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 three months ended March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||||||||||||||
| (In millions) | March 31, 2023 | December 31, 2022 | |||||||||||||||||||||
| Interest expense, net | $ | (46) | $ | (37) | |||||||||||||||||||
| Other income (expense), net | $ | 53 | $ | (2) | |||||||||||||||||||
| Gain (loss) on extinguishment of debt | $ | — | $ | (40) | |||||||||||||||||||
| Income (loss) from equity investments | $ | 14 | $ | 21 |
The increase in net interest expense for the first quarter of 2023 compared to the fourth quarter of 2022 primarily reflects (i) an $11 million increase in interest expense on our senior notes due largely to incurring a full quarter of interest on the $1.1 billion of 6.250% Senior Notes due 2033 issued in October 2022 and the $650 million of 6.25% Senior Notes due 2053 issued in December 2022, (ii) a $2 million increase in interest expense on our and Viper’s revolving credit facilities due primarily to higher weighted average interest rates and an increase in borrowings to fund a portion of the cash for the Lario Acquisition. These increases were partially offset by a $4 million increase in capitalized interest costs, which reduced interest expense.
Gain (loss) on extinguishment of debt reflects the difference between the carrying value and reacquisition price for the repurchase and redemption of various senior notes during the 2022 period.
See Note 7—Debt of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding outstanding borrowings.
Provision for (Benefit from) Income Taxes. The following table shows the provision for (benefit from) income taxes for the three months ended March 31, 2023 and December 31, 2022:
| Three Months Ended | |||||||||||
| (In millions) | March 31, 2023 | December 31, 2022 | |||||||||
| Provision for (benefit from) income taxes | $ | 207 | $ | 261 |
The change in our income tax provision for the first quarter of 2023 compared to the fourth quarter of 2022 was primarily due to the decrease in pre-tax income between the periods which resulted largely from the changes in revenues from oil, natural gas and natural gas liquids discussed above. See Note 10—Income Taxes of the condensed notes to the consolidated financial statements for further discussion of our income tax expense.
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table sets forth selected operating data for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues (In millions): | |||||||||||
| Oil sales | $ | 1,654 | $ | 1,946 | |||||||
| Natural gas sales | 69 | 154 | |||||||||
| Natural gas liquid sales | 179 | 289 | |||||||||
| Total oil, natural gas and natural gas liquid revenues | $ | 1,902 | $ | 2,389 | |||||||
| Production Data: | |||||||||||
| Oil (MBbls) | 22,624 | 20,055 | |||||||||
| Natural gas (MMcf) | 47,388 | 42,645 | |||||||||
| Natural gas liquids (MBbls) | 7,730 | 7,161 | |||||||||
| Combined volumes (MBOE)(1) | 38,252 | 34,324 | |||||||||
| Daily oil volumes (BO/d) | 251,378 | 222,833 | |||||||||
| Daily combined volumes (BOE/d) | 425,022 | 381,378 | |||||||||
| Average Prices: | |||||||||||
| Oil ($ per Bbl) | $ | 73.11 | $ | 97.03 | |||||||
| Natural gas ($ per Mcf) | $ | 1.46 | $ | 3.61 | |||||||
| Natural gas liquids ($ per Bbl) | $ | 23.16 | $ | 40.36 | |||||||
| Combined ($ per BOE) | $ | 49.72 | $ | 69.60 | |||||||
| Oil, hedged ($ per Bbl)(2) | $ | 72.05 | $ | 83.47 | |||||||
| Natural gas, hedged ($ per Mcf)(2) | $ | 1.96 | $ | 3.31 | |||||||
| Natural gas liquids, hedged ($ per Bbl)(2) | $ | 23.16 | $ | 40.36 | |||||||
| Average price, hedged ($ per BOE)(2) | $ | 49.72 | $ | 61.30 |
(1)Bbl equivalents are calculated using a conversion rate of six Mcf per Bbl.
(2)Hedged prices reflect the effect of our commodity derivative transactions on our average sales prices and include gains and losses on cash settlements for matured commodity derivatives, which we do not designate for hedge accounting. Hedged prices exclude gains or losses resulting from the early settlement of commodity derivative contracts.
Production Data. Substantially all of our revenues are generated through the sale of oil, natural gas and natural gas liquids production. The following tables set forth the mix of our production data by product and basin for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Oil (MBbls) | 59 | % | 58 | % | |||||||
| Natural gas (MMcf) | 21 | % | 21 | % | |||||||
| Natural gas liquids (MBbls) | 20 | % | 21 | % | |||||||
| 100 | % | 100 | % |
| Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Midland Basin | Delaware Basin | Other**(1)** | Total | Midland Basin | Delaware Basin | Other**(2)** | Total | ||||||||||||||||||||||||||||||||||||||||
| Production Data: | |||||||||||||||||||||||||||||||||||||||||||||||
| Oil (MBbls) | 17,720 | 4,892 | 12 | 22,624 | 13,921 | 6,101 | 33 | 20,055 | |||||||||||||||||||||||||||||||||||||||
| Natural gas (MMcf) | 33,548 | 13,786 | 54 | 47,388 | 26,873 | 15,681 | 91 | 42,645 | |||||||||||||||||||||||||||||||||||||||
| Natural gas liquids (MBbls) | 5,858 | 1,874 | (2) | 7,730 | 4,750 | 2,390 | 21 | 7,161 | |||||||||||||||||||||||||||||||||||||||
| Total (MBOE) | 29,169 | 9,064 | 19 | 38,252 | 23,150 | 11,105 | 69 | 34,324 |
(1)Includes the Rockies.
(2)Includes the Eagle Ford Shale and High Plains.
Oil, Natural Gas and Natural Gas Liquids Revenues. Our revenues are a function of oil, natural gas and natural gas liquids production volumes sold and average sales prices received for those volumes.
Our oil, natural gas and natural gas liquids revenues for the three months ended March 31, 2023 decreased by $487 million, or 20%, to $1.9 billion from $2.4 billion during the three months ended March 31, 2022. The overall decrease was primarily due to a reduction of $776 million due to a decline in average prices received for our oil production, and to a lesser extent, our natural gas and natural gas liquids production, partially offset by an increase of $289 million due to an 11% growth in combined volumes sold, due to additional production from the FireBird Acquisition and the Lario Acquisition.
Other Revenues. The following table shows the other insignificant revenues for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| (In millions) | 2023 | 2022 | |||||||||
| Other operating income | $ | 23 | $ | 19 |
Lease Operating Expenses. The following table shows lease operating expenses for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (In millions, except per BOE amounts) | Amount | Per BOE | Amount | Per BOE | |||||||||||||||||||
| Lease operating expenses | $ | 192 | $ | 5.02 | $ | 149 | $ | 4.34 |
Lease operating expenses increased by $43 million, or $0.68 per BOE for the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a $24 million overall increase in utility and service costs driven by continued inflation and $19 million due to production and operating expenses incurred on wells acquired in the FireBird Acquisition and the Lario Acquisition.
Production and Ad Valorem Tax Expense. The following table shows production and ad valorem tax expense for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (In millions, except per BOE amounts) | Amount | Per BOE | Amount | Per BOE | |||||||||||||||||||
| Production taxes | $ | 92 | $ | 2.40 | $ | 120 | $ | 3.50 | |||||||||||||||
| Ad valorem taxes | 63 | 1.65 | 41 | 1.19 | |||||||||||||||||||
| Total production and ad valorem expense | $ | 155 | $ | 4.05 | $ | 161 | $ | 4.69 | |||||||||||||||
| Production taxes as a % of oil, natural gas, and natural gas liquids revenue | 4.8 | % | 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 remained relatively consistent for the three months ended March 31, 2023 compared to the same period in 2022.
Ad valorem taxes are based, among other factors, on property values driven by prior year commodity prices. Ad valorem taxes for the three months ended March 31, 2023 as compared to the same period in 2022 increased by $22 million, partially due to recording $7 million in ad valorem taxes for new well additions during 2022 and $5 million in ad valorem taxes for properties acquired in the FireBird Acquisition and the Lario Acquisition. The remaining increase is due to higher overall valuations resulting from an increase in commodity prices between valuation periods.
Gathering and Transportation Expense. The following table shows gathering and transportation expense for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (In millions, except per BOE amounts) | Amount | Per BOE | Amount | Per BOE | |||||||||||||||||||
| Gathering and transportation | $ | 68 | $ | 1.78 | $ | 59 | $ | 1.72 |
The increase in gathering and transportation expenses for the three months ended March 31, 2023 compared to the same period in 2022 is primarily attributable to an increase in production as discussed above and $4 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 March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| (In millions, except BOE amounts) | 2023 | 2022 | |||||||||
| Depletion of proved oil and natural gas properties | $ | 381 | $ | 286 | |||||||
| Depreciation of other property and equipment | 17 | 20 | |||||||||
| Other amortization | 1 | 4 | |||||||||
| Asset retirement obligation accretion | 4 | 3 | |||||||||
| Depreciation, depletion, amortization and accretion | $ | 403 | $ | 313 | |||||||
| Oil and natural gas properties depletion rate per BOE | $ | 9.96 | $ | 8.33 |
The increase in depletion of proved oil and natural gas properties of $95 million for the three months ended March 31, 2023 as compared to the same period in 2022 resulted largely from an increase in the depletion rate and production volumes resulting from the addition of leasehold costs, reserves and production from the FireBird Acquisition and the Lario Acquisition.
General and Administrative Expenses. The following table shows general and administrative expenses for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (In millions, except per BOE amounts) | Amount | Per BOE | Amount | Per BOE | |||||||||||||||||||
| General and administrative expenses | $ | 29 | $ | 0.76 | $ | 21 | $ | 0.61 | |||||||||||||||
| Non-cash stock-based compensation | 11 | 0.29 | 15 | 0.44 | |||||||||||||||||||
| Total general and administrative expenses | $ | 40 | $ | 1.05 | $ | 36 | $ | 1.05 |
The increase in general and administrative expenses for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to additional compensation and benefits costs related to annual compensation and bonus adjustments and an increase in employee headcount from acquisitions.
Other Operating Costs and Expenses. The following table shows the other insignificant operating costs and expenses for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| (In millions) | 2023 | 2022 | |||||||||
| Other operating expenses | $ | 34 | $ | 30 |
Derivative Instruments. The following table shows the net gain (loss) on derivative instruments and the net cash receipts (payments) on settlements of derivative instruments for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| (In millions) | 2023 | 2022 | |||||||||
| Gain (loss) on derivative instruments, net | $ | (93) | $ | (552) | |||||||
| Net cash received (paid) on settlements(1) | $ | 1 | $ | (420) |
(1)The first quarter of 2022 includes cash paid on commodity contracts terminated prior to their contractual maturity of $135 million.
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 three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| (In millions) | 2023 | 2022 | |||||||||
| Interest expense, net | $ | (46) | $ | (40) | |||||||
| Other income (expense), net | $ | 53 | $ | 1 | |||||||
| Gain (loss) on extinguishment of debt | $ | — | $ | (54) | |||||||
| Income (loss) from equity investments | $ | 14 | $ | 9 |
The increase in net interest expense for the three months ended March 31, 2023 compared to the same period in 2022, primarily reflects (i) a $10 million increase in interest expense on our senior notes due primarily to the issuance of additional senior notes in the fourth quarter of 2022 as well as the net impact of other issuances and retirements of debt throughout 2022, and (ii) a $6 million increase in interest expense on our revolving credit facility due primarily to higher weighted average interest rates and borrowings to fund the cash portion of the Lario Acquisition. These increases were partially offset by a $9 million increase in capitalized interest costs, which reduce interest expense.
Gain (loss) on extinguishment of debt reflects the difference between the carrying value and reacquisition price for the repurchase and redemption of various senior notes during the 2022 period.
See Note 7—Debt of the condensed notes to the consolidated financial statements included elsewhere in this report for further details regarding outstanding borrowings.
Provision for (Benefit from) Income Taxes. The following table shows the provision for (benefit from) income taxes for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| (In millions) | 2023 | 2022 | |||||||||
| Provision for (benefit from) income taxes | $ | 207 | $ | 221 |
The change in our income tax provision for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to the decrease in pre-tax income which resulted largely from the changes in revenues from oil, natural gas and natural gas liquids 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 March 31, 2023, we had approximately $1.0 billion of liquidity consisting of $37 million in standalone cash and cash equivalents and $1.0 billion available under our credit facility. As discussed below, our capital budget for 2023 is $2.50 billion to $2.70 billion. We have approximately $10 million of senior notes which matured and were redeemed on May 1, 2023.
Future cash flows are subject to a number of variables, including the level of oil and natural gas production, volatility of commodity prices, and significant additional capital expenditures will be required to more fully develop our properties. Prices for our commodities are determined primarily by prevailing market conditions, regional and worldwide economic activity, weather and other substantially variable factors. These factors are beyond our control and are difficult to predict. See Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022. In order to mitigate this volatility, we enter into derivative contracts with a number of financial institutions, all of which are participants in our credit facility, to economically hedge a portion of our estimated future crude oil and natural gas production through the end of 2023 as discussed further in Note 11—Derivatives of the condensed notes to the consolidated financial statements and Item 3. Quantitative and Qualitative Disclosures About Market Risk—Commodity Price Risk included elsewhere in this report. 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.
Cash Flow
Our cash flows for the three months ended March 31, 2023 and 2022 are presented below:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In millions) | |||||||||||
| Net cash provided by (used in) operating activities | $ | 1,425 | $ | 1,252 | |||||||
| Net cash provided by (used in) investing activities | (1,279) | (716) | |||||||||
| Net cash provided by (used in) financing activities | (257) | (1,041) | |||||||||
| Net increase (decrease) in cash | $ | (111) | $ | (505) |
Operating Activities
Our operating cash flow is sensitive to many variables, the most significant of which is the volatility of prices for the oil and natural gas we produce. Prices for these commodities are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather and other substantially variable factors influence market conditions for these products. These factors are beyond our control and are difficult to predict.
The increase in operating cash flows for the three months ended March 31, 2023 compared to the same period in 2022 primarily resulted from (i) a reduction of $421 million in net cash paid on settlements of derivative contracts and (ii) fluctuations in other working capital balances due primarily to the timing of when collections were made on accounts receivable. These cash inflows were partially offset by (i) a decrease of $483 million in total revenue and (ii) an increase in our cash operating expenses of approximately $66 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 three months ended March 31, 2023 and 2022 was for drilling and completion costs in conjunction with our development program as well as the purchase of oil and gas properties including the Lario Acquisition, 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:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In millions) | |||||||||||
| Drilling, completions and non-operated additions to oil and natural gas properties(1) | $ | 580 | $ | 374 | |||||||
| Infrastructure additions to oil and natural gas properties | 42 | 44 | |||||||||
| Additions to midstream assets | 35 | 19 | |||||||||
| Total | $ | 657 | $ | 437 |
(1) See “—Recent Developments - Upstream Segment” above for additional detail on wells drilled and turned to production during the three and three months ended March 31, 2023 and 2022.
Financing Activities
During the three months ended March 31, 2023, net cash used in financing activities was primarily attributable to (i) $707 million in borrowings under credit facilities, net of repayments, (ii) $542 million of dividends paid to stockholders, (iii) $366 million of repurchases as part of the share and unit repurchase programs, and (iv) $34 million in distributions to non-controlling interest.
Net cash used in financing activities for the three months ended March 31, 2022 of $1.0 billion was primarily attributable to (i) $1.5 billion paid for the repurchase of principal outstanding on certain senior notes, as well as $47 million of additional premiums paid in connection with the repurchases, (ii) $107 million of dividends paid to stockholders, (iii) $47 million in distributions to non-controlling interests, and (iv) $49 million of repurchases as part of the share and unit repurchase programs, and (v) $21 million of repayments under credit facilities, net of borrowings. These cash outflows were partially offset by $750 million in proceeds from issuance of the senior notes in March 2022.
Capital Resources
Our working capital requirements are supported by our cash and cash equivalents and available borrowings under our revolving 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, 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 capital requirements.
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 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.
Revolving Credit Facilities and Other Debt Instruments
As of March 31, 2023, our debt, including the debt of Viper, consisted of approximately $6.3 billion in aggregate outstanding principal amount of senior notes, and $859 million in aggregate outstanding borrowings under revolving credit facilities.
As of March 31, 2023, the maximum credit amount available under our credit agreement was $1.6 billion, with $589 million in outstanding borrowings and approximately $1.0 billion available for future borrowings. In April 2023, we elected to extend the maturity date of our revolving credit facility from June 2, 2027 to June 2, 2028 and received the requisite consent of lenders thereunder, which will further improve our long-term liquidity position. The maturity date extension is expected to be effective on June 2, 2023, subject to certain customary closing deliverables and conditions.
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 March 31, 2023, 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 March 31, 2023, there were $270 million of outstanding borrowings and $230 million available for future borrowings under the Viper credit agreement.
For additional discussion of our outstanding debt as of March 31, 2023, see Note 7—Debt of the condensed notes to the consolidated financial statements included elsewhere in this report.
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 principal and interest on our revolving credit agreements and senior notes, (iii) payments of other contractual obligations and (iv) cash used to pay for dividends and repurchases of securities as discussed below.
2023 Capital Spending Plan
Our board of directors approved a 2023 capital budget for drilling, midstream and infrastructure of approximately $2.5 billion to $2.7 billion. We estimate that, of these expenditures, approximately:
-
$2.25 billion to $2.41 billion will be spent primarily on drilling 325 to 345 gross (293 to 311 net) horizontal wells and completing 330 to 350 gross (297 to 315 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 10,500 feet;
-
Approximately $80 million to $100 million will be spent on midstream infrastructure, excluding joint venture investments; and
-
Approximately $170 million to $190 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 17 drilling rigs and six 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 and any stock repurchases. 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. On February 16, 2023, our board of directors approved an
increase to the Company’s annual base dividend to $3.20 per share. We have declared a base dividend plus variable cash dividend for the first quarter of 2023 of $0.83 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.
As of April 28, 2023, we have repurchased 15.9 million shares of our common stock for a total cost of $1.9 billion since the inception of the stock 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, however, the stock repurchase program is at the discretion of our board of directors and can be amended, terminated or suspended at any time. See Note 8—Stockholders' Equity and Earnings Per Share of the condensed notes to the consolidated financial statements included elsewhere in this report.
Income Taxes
We expect our cash tax rate to be 10% to 15% of pre-tax income for the year ended December 31, 2023. See Note 10—Income Taxes of the condensed notes to the consolidated financial statements included elsewhere in this report.
Guarantor Financial Information
Diamondback E&P is the sole guarantor under the indentures governing the outstanding Guaranteed Senior 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 indentures governing the Guaranteed Senior Notes, such as, with certain exceptions, (i) in the event Diamondback E&P (or all or substantially all of its assets) is sold or disposed of, (ii) in the event Diamondback E&P ceases to be a guarantor of or otherwise be an obligor under certain other indebtedness, and (iii) in connection with any covenant defeasance, legal defeasance or satisfaction and discharge of the relevant indenture.
Diamondback E&P’s guarantees of the Guaranteed Senior 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 Guaranteed Senior Notes against Diamondback E&P may be limited under the U.S. Bankruptcy Code or state fraudulent transfer or conveyance law. Each guarantee contains a provision intended to limit Diamondback E&P’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent conveyance. However, there can be no assurance as to what standard a court will apply in making a determination of the maximum liability of Diamondback E&P. Moreover, this provision may not be effective to protect the guarantee from being voided under fraudulent conveyance laws. There is a possibility that the entire guarantee may be set aside, in which case the entire liability may be extinguished.
The following tables present summarized financial information for Diamondback Energy, Inc., as the parent, and Diamondback E&P, as the guarantor subsidiary, on a combined basis after elimination of (i) intercompany transactions and balances between the parent and the guarantor subsidiary and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor. The information is presented in accordance with the requirements of Rule 13-01 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations or financial position had the guarantor subsidiary operated as an independent entity.
| March 31, 2023 | December 31, 2022 | ||||||||||
| Summarized Balance Sheets: | (In millions) | ||||||||||
| Assets: | |||||||||||
| Current assets | $ | 966 | $ | 1,191 | |||||||
| Property and equipment, net | $ | 19,975 | $ | 18,252 | |||||||
| Other noncurrent assets | $ | 22 | $ | 164 | |||||||
| Liabilities: | |||||||||||
| Current liabilities | $ | 1,711 | $ | 1,547 | |||||||
| Intercompany accounts payable, non-guarantor subsidiary | $ | 2,233 | $ | 2,253 | |||||||
| Long-term debt | $ | 6,240 | $ | 5,647 | |||||||
| Other noncurrent liabilities | $ | 2,578 | $ | 2,509 |
| Three Months Ended March 31, 2023 | |||||
| Summarized Statement of Operations: | (In millions) | ||||
| Revenues | $ | 1,658 | |||
| Income (loss) from operations | $ | 843 | |||
| Net income (loss) | $ | 547 |
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, 2022.
Recent Accounting Pronouncements
See Note 2—Summary of Significant Accounting Policies of the condensed notes to the consolidated financial statements included elsewhere in this report for recent accounting pronouncements not yet adopted, if any.
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