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

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, as of June 30, 2023, we have one reportable segment, the upstream segment.

Second Quarter 2023 Highlights

Recorded net income of $556 million for the second quarter of 2023.
Increased our annual base dividend to $3.36 per share, paid dividends to stockholders of $150 million during the second quarter of 2023 and declared a base dividend payable in the third quarter of 2023 of $0.84 per share of common stock.
Repurchased $321 million of our common stock, leaving approximately $1.8 billion available for future purchases under our common stock repurchase program at June 30, 2023.
Repurchased $130 million in aggregate principal amount of our outstanding senior notes due 2026 and 2029.
Our cash operating costs for the second quarter of 2023 were $10.66 per BOE, including lease operating expenses of $4.88 per BOE, cash general and administrative expenses of $0.51 per BOE and production and ad valorem taxes and gathering and transportation expenses of $5.27 per BOE.
Our average production was 449.9 MBOE/d during the second quarter of 2023.
Drilled 86 gross horizontal wells in the Midland Basin and 12 gross horizontal wells in the Delaware Basin, and turned 89 gross operated horizontal wells (71 in the Midland Basin and 18 in the Delaware Basin) to production.
Incurred capital expenditures, excluding acquisitions, of $711 million during the second quarter of 2023.
Closed on the divestiture of non-core assets consisting of approximately 19,000 net acres in Glasscock County, TX for net cash proceeds at closing of $275 million.
To date, we have executed or announced non-core asset sale transactions, including those discussed in these highlights and “—Recent Developmen ts” below, involving gross proceeds of approximately $1.1 billion, in excess of our previously announced non-core asset divestiture target of at least $1.0 billion by year end 2023.

Recent Developments

Subsequent Divestiture Transaction

On July 28, 2023, we divested our 43% non-operating equity investment in OMOG for $225 million in gross cash proceeds and recorded an initial gain on the sale of equity method investments of approximately $27 million in the third quarter of 2023.

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 the first half of 2023 and 2022, NYMEX WTI price averaged $74.77 and $101.77 per Bbl, respectively, and NYMEX Henry Hub price averaged $2.54 and $6.04 per MMBtu, respectively. The war in Ukraine, 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 Operations

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 June 30, 2023, we had approximately 507,989 net acres, which primarily consisted of approximately 356,343 net acres in the Midland Basin and 151,325 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. Production is expected to grow slightly in the second half of 2023, with third quarter oil production projected to be between 262 and 265 MBO/d (440 to 445 MBOE/d). We anticipate we will continue to grow production organically at a low single digit annual pace in 2024, with a similar level of activity to 2023, primarily due to the quality of the acreage we are developing on a large scale in the Midland Basin, combined with a high mineral interest across our development plan. We anticipate that capital expenditures will decrease by approximately 5% in the third quarter of 2023 due to both lower well costs and lower drilling activity and, to a lesser degree, a slower completion cadence. We expect this will further decrease in the fourth quarter of 2023, setting a baseline for our 2024 capital development plan. We also expect lower completion costs in the coming quarters and into 2024 due to continuous decline in raw materials and service costs. The majority of our wells are now being completed with either a simulfrac or simulfrac e-fleet, reducing our exposure to spot frac prices.

The following table sets forth the total number of operated horizontal wells drilled and completed during the second quarter of 2023:


	Three Months Ended June 30, 2023				Six Months Ended June 30, 2023
	Drilled		Completed(1)		Drilled		Completed(2)
Area:	Gross	Net	Gross	Net	Gross	Net	Gross	Net
Midland Basin	86	81	71	66	156	146	140	131
Delaware Basin	12	10	18	16	24	21	37	34

Total	98	91	89	82	180	167	177	165

(1)The average lateral length for the wells completed during the second quarter of 2023 was 10,967 feet. Operated completions during the second quarter of 2023 consisted of 24 Lower Spraberry wells, 21 Wolfcamp A wells, 18 Wolfcamp B wells, 10 Jo Mill wells, seven Third Bone Spring wells, six Middle Spraberry wells, two Second Bone Spring wells and one Upper Spraberry well.

(2)The average lateral length for the wells completed during the first six months of 2023 was 10,889 feet. Operated completions during the first six months of 2023 consisted of 44 Wolfcamp A wells, 44 Lower Spraberry wells, 33 Wolfcamp B wells, 21 Jo Mill wells, 14 Third Bone Spring wells, 11 Middle Spraberry wells, eight Second Bone Spring wells, one Upper Spraberry well and one Barnett well.

As of June 30, 2023, we operated the following wells:


	As of June 30, 2023
	Vertical Wells		Horizontal Wells		Total
Area:	Gross	Net	Gross	Net	Gross	Net
Midland Basin	2,708	2,563	2,147	1,979	4,855	4,542
Delaware Basin	39	36	698	646	737	682

Total	2,747	2,599	2,845	2,625	5,592	5,224

As of June 30, 2023, we held interests in 11,843 gross (5,314 net) wells, including 1,031 gross (90 net) wells in which we have non-operated working interest.

Results of Operations

Comparison of the Three Months Ended June 30, 2023 and March 31, 2023

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.

The following table sets forth selected operating data for the three months ended June 30, 2023 and March 31, 2023:


	Three Months Ended
	June 30, 2023		March 31, 2023
Revenues (In millions):
Oil sales	$	1,708	$	1,654
Natural gas sales	48		69
Natural gas liquid sales	140		179
Total oil, natural gas and natural gas liquid revenues	$	1,896	$	1,902

Production Data:
Oil (MBbls)	23,946		22,624
Natural gas (MMcf)	50,809		47,388
Natural gas liquids (MBbls)	8,528		7,730
Combined volumes (MBOE)(1)	40,942		38,252

Daily oil volumes (BO/d)	263,143		251,378
Daily combined volumes (BOE/d)	449,912		425,022

Average Prices:
Oil ($ per Bbl)	$	71.33	$	73.11
Natural gas ($ per Mcf)	$	0.94	$	1.46
Natural gas liquids ($ per Bbl)	$	16.42	$	23.16
Combined ($ per BOE)	$	46.31	$	49.72

Oil, hedged ($ per Bbl)(2)	$	70.41	$	72.05
Natural gas, hedged ($ per Mcf)(2)	$	1.08	$	1.96
Natural gas liquids, hedged ($ per Bbl)(2)	$	16.42	$	23.16
Average price, hedged ($ per BOE)(2)	$	45.94	$	49.72

(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 June 30, 2023 and March 31, 2023:


	Three Months Ended
	June 30, 2023		March 31, 2023
Oil (MBbls)	58	%	59	%
Natural gas (MMcf)	21	%	21	%
Natural gas liquids (MBbls)	21	%	20	%
	100	%	100	%


	Three Months Ended June 30, 2023				Three Months Ended March 31, 2023
	Midland Basin	Delaware Basin	Other(1)	Total	Midland Basin	Delaware Basin	Other(1)	Total
Production Data:
Oil (MBbls)	18,528	5,410	8	23,946	17,720	4,892	12	22,624
Natural gas (MMcf)	35,515	15,232	62	50,809	33,548	13,786	54	47,388
Natural gas liquids (MBbls)	6,326	2,197	5	8,528	5,858	1,874	(2)	7,730
Total (MBOE)	30,773	10,146	23	40,942	29,169	9,064	19	38,252

(1)Includes the 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 second quarter of 2023 decreased by $6 million to $1.9 billion compared to the first quarter of 2023. The decrease was primarily due to a reduction of $126 million attributable to lower average prices received for our oil, natural gas and natural gas liquids production. The decrease in average prices was largely offset by an increase of $120 million attributable to the 7% growth in our combined volumes sold, 5% of which was due to new well completions during the second quarter and 2% of which was due to additional production from the Lario Acquisition.

Other Revenues. The following table presents other insignificant revenue for the three months ended June 30, 2023 and March 31, 2023:


	Three Months Ended
(In millions)	June 30, 2023		March 31, 2023
Other operating income	$	23	$	23

Lease Operating Expenses. The following table shows lease operating expenses for the three months ended June 30, 2023 and March 31, 2023:


	Three Months Ended
	June 30, 2023				March 31, 2023
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
Lease operating expenses	$	200	$	4.88	$	192	$	5.02

Lease operating expenses increased by $8 million in total and decreased by $0.14 on a per BOE basis for the second quarter of 2023 compared to the first quarter of 2023, primarily due to the growth in production volumes discussed above.

Production and Ad Valorem Tax Expense. The following table shows production and ad valorem tax expense for the three months ended June 30, 2023 and March 31, 2023:


	Three Months Ended
	June 30, 2023					March 31, 2023
(In millions, except per BOE amounts)	Amount			Per BOE		Amount			Per BOE
Production taxes	$	87		$	2.12	$	92		$	2.40
Ad valorem taxes	61			1.49		63			1.65
Total production and ad valorem expense	$	148		$	3.61	$	155		$	4.05

Production taxes as a % of oil, natural gas and natural gas liquids revenue	4.6		%			4.8		%

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 second quarter of 2023 decreased slightly compared to the first quarter of 2023, primarily due to a decrease in our natural gas and natural gas liquids revenues, which have a higher production tax rate.

Ad valorem taxes are based, among other factors, on property values driven by prior year commodity prices, and remained relatively consistent during the second quarter of 2023 as compared to the first quarter of 2023.

Gathering and Transportation Expense. The following table shows gathering and transportation expense for the three months ended June 30, 2023 and March 31, 2023:


	Three Months Ended
	June 30, 2023				March 31, 2023
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
Gathering and transportation	$	68	$	1.66	$	68	$	1.78

Gathering and transportation expenses remained relatively consistent during the second quarter of 2023 compared to the first quarter of 2023. The rate per BOE decreased primarily due to changes in our marketing agreements.

Depreciation, Depletion, Amortization and Accretion. The following table provides the components of our depreciation, depletion, amortization and accretion expense for the three months ended June 30, 2023 and March 31, 2023:


	Three Months Ended
(In millions, except BOE amounts)	June 30, 2023		March 31, 2023
Depletion of proved oil and natural gas properties	$	410	$	381
Depreciation and amortization of other property and equipment	16		17
Other amortization	1		1
Asset retirement obligation accretion	5		4
Depreciation, depletion, amortization and accretion	$	432	$	403
Oil and natural gas properties depletion rate per BOE	$	10.01	$	9.96
Depreciation, depletion, amortization and accretion per BOE	$	10.55	$	10.54

Depletion of proved oil and natural gas properties increased by $29.0 million for the second quarter of 2023 as compared to the first quarter of 2023 due primarily to the growth in production volumes discussed above and a slight increase in the depletion rate.

General and Administrative Expenses. The following table shows general and administrative expenses for the three months ended June 30, 2023 and March 31, 2023:


	Three Months Ended
	June 30, 2023				March 31, 2023
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
General and administrative expenses	$	21	$	0.51	$	29	$	0.76
Non-cash stock-based compensation	16		0.39		11		0.29
Total general and administrative expenses	$	37	$	0.90	$	40	$	1.05

The decrease in general and administrative expenses for the second quarter of 2023 compared to the first quarter of 2023 is due primarily to a $5 million reduction in compensation costs due to the first quarter of 2023 including revisions for 2022 annual bonuses. The remainder of the decrease is due largely to lower legal and professional services costs in the second quarter of 2023. The increase in non-cash stock-based compensation is due to recording a full quarter of expense on restricted stock units and performance restricted stock units granted in March 2023.

Other Operating Costs and Expenses. The following table shows other insignificant operating costs and expenses for the three months ended June 30, 2023 and March 31, 2023:


	Three Months Ended
(In millions)	June 30, 2023		March 31, 2023
Merger and integration expenses	$	2	$	8

Other operating expenses	$	32	$	34

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 June 30, 2023 and March 31, 2023:


	Three Months Ended
(In millions)	June 30, 2023		March 31, 2023
Gain (loss) on derivative instruments, net	$	(189)	$	(93)
Net cash received (paid) on settlements	$	(39)	$	1

See Note 11—Derivatives of the condensed notes to the consolidated financial statements for further details regarding our derivative instruments.

Other Income (Expense). The following table shows other income and expenses for the three months ended June 30, 2023 and March 31, 2023:


	Three Months Ended
(In millions)	June 30, 2023		March 31, 2023
Interest expense, net	$	(51)	$	(46)
Other income (expense), net	$	(21)	$	53
Gain (loss) on extinguishment of debt	$	(4)	$	—
Income (loss) from equity investments	$	16	$	14

The increase in net interest expense for the second quarter of 2023 compared to the first quarter of 2023 primarily reflects a $4 million increase in interest expense on our and Viper’s revolving credit facilities due primarily to higher weighted average interest rates and a $2 million decrease in capitalized interest costs, which reduce interest expense.

The change in other income (expense), net is primarily due to the first quarter of 2023 including the $53 million gain on the sale of Gray Oak as discussed further in Note 4—Acquisitions and Divestitures to the condensed notes to the consolidated financial statements.

See Note 7—Debt of the condensed notes to the consolidated financial statements for further details regarding outstanding borrowings and gain (loss) on extinguishment of debt.

Provision for (Benefit from) Income Taxes. The following table shows the provision for (benefit from) income taxes for the three months ended June 30, 2023 and March 31, 2023:


	Three Months Ended
(In millions)	June 30, 2023		March 31, 2023
Provision for (benefit from) income taxes	$	165	$	207

The change in our income tax provision for the second quarter of 2023 compared to the first quarter of 2023 was primarily due to the decrease in pre-tax income between the periods which resulted largely from the decline in revenues and an increase in losses on our derivative instruments. 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 Six Months Ended June 30, 2023 and 2022

The following table sets forth selected operating data for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
	2023		2022
Revenues (In millions):
Oil sales	$	3,362	$	4,135
Natural gas sales	117		418
Natural gas liquid sales	319		588
Total oil, natural gas and natural gas liquid revenues	$	3,798	$	5,141

Production Data:
Oil (MBbls)	46,570		40,175
Natural gas (MMcf)	98,197		85,557
Natural gas liquids (MBbls)	16,258		14,510
Combined volumes (MBOE)(1)	79,194		68,945

Daily oil volumes (BO/d)	257,293		221,961
Daily combined volumes (BOE/d)	437,536		380,912

Average Prices:
Oil ($ per Bbl)	$	72.19	$	102.92
Natural gas ($ per Mcf)	$	1.19	$	4.89
Natural gas liquids ($ per Bbl)	$	19.62	$	40.52
Combined ($ per BOE)	$	47.96	$	74.57

Oil, hedged ($ per Bbl)(2)	$	71.20	$	90.40
Natural gas, hedged ($ per Mcf)(2)	$	1.51	$	3.86
Natural gas liquids, hedged ($ per Bbl)(2)	$	19.62	$	40.52
Average price, hedged ($ per BOE)(2)	$	47.77	$	65.99

(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 six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
	2023		2022
Oil (MBbls)	59	%	58	%
Natural gas (MMcf)	21	%	21	%
Natural gas liquids (MBbls)	20	%	21	%
	100	%	100	%


	Six Months Ended June 30, 2023				Six Months Ended June 30, 2022
	Midland Basin	Delaware Basin	Other(1)	Total	Midland Basin	Delaware Basin	Other(2)	Total
Production Data:
Oil (MBbls)	36,248	10,302	20	46,570	28,634	11,479	62	40,175
Natural gas (MMcf)	69,063	29,018	116	98,197	55,412	29,938	207	85,557
Natural gas liquids (MBbls)	12,184	4,071	3	16,258	9,873	4,603	34	14,510
Total (MBOE)	59,943	19,209	42	79,194	47,742	21,072	131	68,945

(1)Includes the Rockies.

(2)Includes the Eagle Ford Shale and Rockies.

Our oil, natural gas and natural gas liquids revenues for the six months ended June 30, 2023 decreased by $1.3 billion, or 26%, to $3.8 billion from the same period in 2022 primarily due to a reduction of $2.1 billion attributable to lower average prices received for our oil production and to a lesser extent, our natural gas and natural gas liquids production. The decrease due to lower average prices was partially offset by an increase of $791 million attributable to the 15% growth in our combined volumes, which was primarily due to additional production from the FireBird Acquisition and the Lario Acquisition.

Other Revenues. The following table shows the other insignificant revenues for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
(In millions)	2023		2022
Other operating income	$	46	$	35

Lease Operating Expenses. The following table shows lease operating expenses for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
	2023				2022
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
Lease operating expenses	$	392	$	4.95	$	308	$	4.47

Lease operating expenses increased by $84 million, or $0.48 per BOE for the six months ended June 30, 2023 compared to the same period in 2022. The increase primarily consists of $55 million in production and operating expenses incurred on wells acquired in the FireBird Acquisition and the Lario Acquisition in 2023 and a $29 million overall increase in utility and service costs driven primarily by inflation. Currently, we expect our total lease operating expenses in 2023 to range from approximately $778 million to $877 million.

Production and Ad Valorem Tax Expense. The following table shows production and ad valorem tax expense for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
	2023					2022
(In millions, except per BOE amounts)	Amount			Per BOE		Amount			Per BOE
Production taxes	$	179		$	2.26	$	259		$	3.76
Ad valorem taxes	124			1.57		80			1.16
Total production and ad valorem expense	$	303		$	3.83	$	339		$	4.92

Production taxes as a % of oil, natural gas and natural gas liquids revenue	4.7		%			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 2023 period decreased slightly compared to the same period in 2022, primarily due to a large decrease in our natural gas and natural gas liquids revenues which have a higher production tax rate.

Ad valorem taxes are based, among other factors, on property values driven by prior year commodity prices. Ad valorem taxes for the six months ended June 30, 2023 as compared to the same period in 2022 increased by $44 million, partially due to recording (i) $23 million in additional ad valorem taxes related to higher valuations on existing wells in 2023 (ii) $15 million in ad valorem taxes for new well additions between the periods, and (iii) $6 million in ad valorem taxes for properties acquired in the FireBird Acquisition and the Lario Acquisition.

Gathering and Transportation Expense. The following table shows gathering and transportation expense for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
	2023				2022
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
Gathering and transportation	$	136	$	1.72	$	120	$	1.74

The increase in gathering and transportation expenses for the six months ended June 30, 2023 compared to the same period in 2022 is primarily attributable to the growth in production volumes discussed above. The rate per BOE remained consistent between periods.


	Six Months Ended June 30,
(In millions, except BOE amounts)	2023		2022
Depletion of proved oil and natural gas properties	$	791	$	592
Depreciation and amortization of other property and equipment	33		42
Other amortization	2		3
Asset retirement obligation accretion	9		6
Depreciation, depletion, amortization and accretion	$	835	$	643
Oil and natural gas properties depletion rate per BOE	$	9.99	$	8.59
Depreciation, depletion, amortization and accretion per BOE	$	10.54	$	9.33

The increase in depletion of proved oil and natural gas properties of $199 million for the six months ended June 30, 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 six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
	2023				2022
(In millions, except per BOE amounts)	Amount		Per BOE		Amount		Per BOE
General and administrative expenses	$	50	$	0.63	$	47	$	0.68
Non-cash stock-based compensation	27		0.34		28		0.41
Total general and administrative expenses	$	77	$	0.97	$	75	$	1.09

The increase in general and administrative expenses for the six months ended June 30, 2023 compared to the same period in 2023 was primarily due to higher professional services costs in the current year.

Currently, we expect cash general and administrative expenses to range from approximately $95 million to $122 million in 2023, and non-cash stock-based compensation to range from approximately $56 million to $73 million in 2023.

Other Operating Costs and Expenses. The following table shows the other insignificant operating costs and expenses for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
(In millions)	2023		2022
Other operating expenses	$	66	$	53


	Six Months Ended June 30,
(In millions)	2023		2022
Gain (loss) on derivative instruments, net	$	(282)	$	(653)
Net cash received (paid) on settlements(1)	$	(38)	$	(720)

(1)The six months ended June 30, 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 for further details regarding our derivative instruments.

Other Income (Expense). The following table shows other income and expenses for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
(In millions)	2023		2022
Interest expense, net	$	(97)	$	(79)
Other income (expense), net	$	32	$	2

Gain (loss) on extinguishment of debt	$	(4)	$	(58)
Income (loss) from equity investments	$	30	$	37

The increase in net interest expense for the six months ended June 30, 2023 compared to the same period in 2022, reflects (i) a net increase of $27 million in interest expense on our senior notes due primarily to $55 million in additional interest costs on senior notes issued in the fourth quarter of 2022, partially offset by the impact of retirements of various senior notes in 2023 and 2022, and (ii) a $14 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 and other corporate expenses. These increases were partially offset by a $17 million increase in capitalized interest costs, which reduce interest expense and other insignificant reductions from interest income and the amortization of debt issuances costs and discounts. Currently, we expect interest expense to range from approximately $191 million to $211 million in 2023.

Other income (expense), net for the six months ended June 30, 2023 includes a $53 million gain on the sale of Gray Oak as discussed further in Note 4—Acquisitions and Divestitures to the condensed notes to the consolidated financial statements, partially offset by various other insignificant expenses.

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 2023 and 2022.

See Note 7—Debt of the condensed notes to the consolidated financial statements 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 six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
(In millions)	2023		2022
Provision for (benefit from) income taxes	$	372	$	623

The change in our income tax provision for the six months ended June 30, 2023 compared to the same period in 2022 was primarily due to the decrease in pre-tax income resulting largely from the decline in revenues from oil, natural gas and natural gas liquids and slightly offset by a decrease in the loss on derivative instruments discussed above. See Note 10—Income Taxes of the condensed notes to the consolidated financial statements 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 have included 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 June 30, 2023, we had approximately $1.3 billion of liquidity consisting of $5 million in standalone cash and cash equivalents and $1.3 billion available under our credit facility. As discussed below, our capital budget for 2023 is $2.60 billion to $2.68 billion. As of June 30, 2023, we have no debt maturities until 2026.

Future cash flows are subject to a number of variables, including the level of oil and natural gas production and volatility of commodity prices. Further, 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 as discussed further in 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 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. 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 six months ended June 30, 2023 and 2022 are presented below:


	Six Months Ended June 30,
	2023		2022
	(In millions)
Net cash provided by (used in) operating activities	$	2,938	$	2,959
Net cash provided by (used in) investing activities	(1,874)		(1,232)
Net cash provided by (used in) financing activities	(1,207)		(2,340)
Net increase (decrease) in cash	$	(143)	$	(613)

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, which are influenced by regional and worldwide economic activity, weather and other substantially variable factors. These factors are beyond our control and are difficult to predict.

The decrease in operating cash flows for the six months ended June 30, 2023 compared to the same period in 2022 primarily resulted from (i) a decrease of $1.3 billion in total revenue and (ii) an increase in our cash operating expenses of approximately $90 million. These were partially offset by (i) a reduction of $682 million in net cash paid on settlements of derivative contracts, (ii) a reduction of $308 million in cash paid for taxes and (iii) fluctuations in other working capital balances due primarily to the timing of when collections were made on accounts receivable, and a reduction in overall accounts receivable and royalties payable resulting from the decline in commodity prices between periods. 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 six months ended June 30, 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.

Capital Expenditure Activities

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


	Six Months Ended June 30,
	2023		2022
	(In millions)
Drilling, completions and non-operated additions to oil and natural gas properties(1)	$	1,215	$	781
Infrastructure additions to oil and natural gas properties	88		82
Additions to midstream assets	65		42
Total	$	1,368	$	905

(1) See “—Recent Developments - Upstream Operations” above for additional detail on wells drilled and turned to production during the three and six months ended June 30, 2023 and 2022.

Financing Activities

During the six months ended June 30, 2023, net cash used in financing activities was primarily attributable to (i) $710 million of repurchases as part of the share and unit repurchase programs, (ii) $692 million of dividends paid to stockholders, (iii) $134 million paid for the retirement of principal outstanding on certain senior notes and (iv) $59 million in distributions to non-controlling interest. These cash outflows were partially offset by an additional $415 million in borrowings under credit facilities, net of repayments.

During the six months ended June 30, 2022, net cash used in financing activities was primarily attributable to (i) $1.9 billion paid for the retirement of principal outstanding on certain senior notes, as well as $49 million of additional premiums paid in connection with the redemptions, (ii) $648 million of dividends paid to stockholders, (iii) $110 million in distributions to non-controlling interests, (iv) $381 million of repurchases as part of the share and unit repurchase programs, and (v) $16 million of repayments under credit facilities, net of borrowings. These cash outflows were partially offset by $750 million in proceeds from the 4.250% Senior Notes due March 15, 2052.

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 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 June 30, 2023, our debt, including the debt of Viper, consisted of approximately $6.1 billion in aggregate outstanding principal amount of senior notes, and $567 million in aggregate outstanding borrowings under revolving credit facilities.

As of June 30, 2023, the maximum credit amount available under our credit agreement was $1.6 billion, with $343 million in outstanding borrowings and approximately $1.3 billion available for future borrowings. During the second quarter of 2023, we extended the maturity date of our revolving credit facility from June 2, 2027 to June 2, 2028, which further improves our long-term liquidity position.

Repurchases of Notes

In the second quarter of 2023, we opportunistically repurchased principal amounts of $30 million of our 3.250% Senior Notes due 2026 and $100 million of our 3.500% Senior Notes due 2029 in open market transactions for total cash consideration of $124 million, at an average of 95.5% of par value.

We may continue to repurchase some of our outstanding senior notes in open market purchases or in privately negotiated transactions in future periods.

Viper’s Credit Agreement

On May 31, 2023, Viper LLC entered into a tenth amendment to its existing credit agreement, which among other things, improved Viper’s short and long-term liquidity position by increasing the borrowing base from $580 million to $1.0 billion and increasing the elected commitment amount from $500 million to $750 million. The Viper credit agreement, which matures on June 2, 2025, had $224 million of outstanding borrowings and $526 million available for future borrowings as of June 30, 2023.

For additional discussion of our outstanding debt as of June 30, 2023, see Note 7—Debt of the condensed notes to the consolidated financial statements.

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, infrastructure and environmental of approximately $2.60 billion to $2.68 billion. We estimate that, of these expenditures, approximately:

$2.33 billion to $2.37 billion will be spent primarily on drilling 335 to 350 gross (302 to 315 net) horizontal wells and completing 330 to 345 gross (305 to 320 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 10,800+ feet;
Approximately $100 million to $120 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 14 drilling rigs and 4 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 July 26, 2023, our board of directors approved an increase to the Company’s annual base dividend to $3.36 per share and declared a base dividend for the second quarter of 2023 of $0.84 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 July 28, 2023, we have repurchased 18.2 million shares of our common stock for a total cost of $2.2 billion since the inception of the stock repurchase program, excluding excise tax. 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 (Loss) Per Share of the condensed notes to the consolidated financial statements.

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.

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.


	June 30, 2023		December 31, 2022
Summarized Balance Sheets:	(In millions)
Assets:
Current assets	$	671	$	1,191
Property and equipment, net	$	20,180	$	18,252
Other noncurrent assets	$	21	$	164
Liabilities:
Current liabilities	$	1,920	$	1,547
Intercompany accounts payable, non-guarantor subsidiary	$	2,253	$	2,253
Long-term debt	$	5,879	$	5,647
Other noncurrent liabilities	$	2,664	$	2,509


	Six Months Ended June 30, 2023
Summarized Statement of Operations:	(In millions)
Revenues	$	3,233
Income (loss) from operations	$	1,607
Net income (loss)	$	921

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 for recent accounting pronouncements not yet adopted, if any.

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