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 September 30, 2023, we have one reportable segment, the upstream segment.

Third Quarter 2023 Financial and Operating Highlights

• Recorded net income of $915 million for the third quarter of 2023.

• Increased our annual base dividend to $3.36 per share, paid dividends to stockholders of $149 million during the third quarter of 2023 and declared a combined base and variable dividend payable in the fourth quarter of 2023 of $3.37 per share of common stock.

• Repurchased $56 million, excluding excise tax, of our common stock, leaving approximately $1.8 billion available for future purchases under our common stock repurchase program at September 30, 2023.

• Our cash operating costs for the third quarter of 2023 were $10.51 per BOE, including lease operating expenses of $5.42 per BOE, cash general and administrative expenses of $0.51 per BOE and production and ad valorem taxes and gathering and transportation expenses of $4.58 per BOE.

• Our average production was 452.8 MBOE/d during the third quarter of 2023.

• Drilled 79 gross horizontal wells in the Midland Basin and 7 gross horizontal wells in the Delaware Basin, and turned 74 gross operated horizontal wells (73 in the Midland Basin and 1 in the Delaware Basin) to production.

• Incurred capital expenditures, excluding acquisitions, of $684 million during the third quarter of 2023.

• To date, we have executed or announced non-core asset sale transactions, including those discussed in these highlights and “—Recent Developments” below, involving gross proceeds of approximately $1.7 billion, in excess of our previously announced non-core asset divestiture target of at least $1.0 billion by year end 2023.

Transactions and Recent Developments

Acquisition and Divestiture Update

Deep Blue Acquisition and Divestiture of Water Assets

On September 1, 2023, we contributed our Water Assets with a net carrying value of $681 million in exchange for $516 million, a 30% equity ownership and voting interest in the newly formed Deep Blue joint venture and certain contingent consideration.

Divestiture Transaction

On July 28, 2023, we divested our 43% limited liability company interest in OMOG for $225 million in cash received at closing and recorded a gain on the sale of equity method investments of approximately $35 million in the third quarter of 2023.

See Note 4—Acquisitions and Divestitures of the condensed notes to the consolidated financial statements for further discussion of our acquisitions and divestitures.

Subsequent Events Transactions

Viper 2031 Notes Offering

On October 19, 2023, Viper completed the Viper 2031 Notes Offering of $400 million in aggregate principal amount of the Viper 2031 Notes. Viper received net proceeds of approximately $394 million, after deducting the initial purchasers’ discount and expected transaction costs, from the Viper 2031 Notes Offering.

Viper Acquisition

On November 1, 2023, Viper acquired certain mineral and royalty interests for total consideration consisting of approximately 9.02 million Viper common units and $750 million in cash, subject to customary post-closing adjustments. The mineral and royalty interests acquired in the Viper Acquisition represent 4,600 net royalty acres in the Permian Basin, plus an additional 2,700 net royalty acres in other major basins. The cash portion of this transaction was funded through a combination of cash on hand and held in escrow, borrowings under Viper LLC’s credit agreement, the proceeds from the Viper 2031 Notes and $200 million of proceeds from Viper’s issuance of common units to us under the common unit purchase and sale agreement.

See Note 15—Subsequent Events of the condensed notes to the consolidated financial statements for further details.

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 nine months ended 2023 and 2022, NYMEX WTI price averaged $77.28 and $98.25 per Bbl, respectively, and NYMEX Henry Hub price averaged $2.58 and $6.69 per MMBtu, respectively. The war in Ukraine and Israel-Hamas war, rising interest rates, global supply chain disruptions, concerns about a potential economic downturn or recession, and 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 September 30, 2023, we had approximately 500,793 net acres, which primarily consisted of approximately 354,084 net acres in the Midland Basin and 146,388 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 fourth quarter of 2023, with oil production projected to be between 269 and 273 MBO/d (455 to 460 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 multi-well pads and a high mineral interest across our development plan. We anticipate that capital expenditures will decrease by 5% to 10% in the fourth quarter of 2023 due to lower well costs, lower drilling activity and, to a lesser degree, a slower completion cadence. We expect this will set a baseline for our 2024 capital development plan. We also expect lower completion costs in the coming quarter and into 2024 due to a 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 periods indicated:

			Three Months Ended September 30, 2023																								Nine Months Ended September 30, 2023
			Drilled												Completed**(1)**												Drilled												Completed**(2)**
Area:			Gross						Net						Gross						Net						Gross						Net						Gross						Net
Midland Basin			79						69						73						70						235						215						213						201
Delaware Basin			7						6						1						1						31						27						38						35
Total			86						75						74						71						266						242						251						236

(1)The average lateral length for the wells completed during the third quarter of 2023 was 11,864 feet. Operated completions during the third quarter of 2023 consisted of 25 Lower Spraberry wells, 20 Wolfcamp A wells, 11 Jo Mill wells, eight Wolfcamp B wells, seven Middle Spraberry wells, one Third Bone Spring well, one Upper Spraberry well and one Barnett well.

(2)The average lateral length for the wells completed during the first nine months of 2023 was 11,184 feet. Operated completions during the nine months of 2023 consisted of 69 Lower Spraberry wells, 64 Wolfcamp A wells, 41 Wolfcamp B wells, 32 Jo Mill wells, 18 Middle Spraberry wells, 15 Third Bone Spring wells, eight Second Bone Spring wells, two Upper Spraberry wells and two Barnett wells.

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

			As of September 30, 2023
			Vertical Wells												Horizontal Wells												Total
Area:			Gross						Net						Gross						Net						Gross						Net
Midland Basin			2,667						2,525						2,219						2,048						4,886						4,573
Delaware Basin			39						36						700						649						739						685
Total			2,706						2,561						2,919						2,697						5,625						5,258

As of September 30, 2023, we held interests in 12,012 gross (5,347 net) wells, including 1,123 gross (89 net) wells in which we have non-operated working interest.

Results of Operations

Comparison of the Three Months Ended September 30, 2023 and June 30, 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 September 30, 2023 and June 30, 2023:

			Three Months Ended
			September 30, 2023						June 30, 2023
Revenues (In millions):
Oil sales			$	1,997					$	1,708
Natural gas sales			80						48
Natural gas liquid sales			188						140
Total oil, natural gas and natural gas liquid revenues			$	2,265					$	1,896
Production Data:
Oil (MBbls)			24,482						23,946
Natural gas (MMcf)			49,423						50,809
Natural gas liquids (MBbls)			8,943						8,528
Combined volumes (MBOE)(1)			41,662						40,942
Daily oil volumes (BO/d)			266,109						263,143
Daily combined volumes (BOE/d)			452,848						449,912
Average Prices:
Oil ($ per Bbl)			$	81.57					$	71.33
Natural gas ($ per Mcf)			$	1.62					$	0.94
Natural gas liquids ($ per Bbl)			$	21.02					$	16.42
Combined ($ per BOE)			$	54.37					$	46.31
Oil, hedged ($ per Bbl)(2)			$	80.51					$	70.41
Natural gas, hedged ($ per Mcf)(2)			$	1.62					$	1.08
Natural gas liquids, hedged ($ per Bbl)(2)			$	21.02					$	16.42
Average price, hedged ($ per BOE)(2)			$	53.74					$	45.94

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

(2)Hedged prices reflect the effect of our commodity derivative transactions on our average sales prices and include gains and losses on cash settlements for matured commodity derivatives, which we do not designate for hedge accounting. Hedged prices exclude gains or losses resulting from the early settlement of commodity derivative contracts.

Production Data. Substantially all of our revenues are generated through the sale of oil, natural gas and natural gas liquids production. The following tables provide information on the mix of our production for the three months ended September 30, 2023 and June 30, 2023:

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

			Three Months Ended September 30, 2023																								Three Months Ended June 30, 2023
			Midland Basin						Delaware Basin						Other**(1)**						Total						Midland Basin						Delaware Basin						Other**(1)**						Total
Production Data:
Oil (MBbls)			19,400						5,058						24						24,482						18,528						5,410						8						23,946
Natural gas (MMcf)			34,661						14,696						66						49,423						35,515						15,232						62						50,809
Natural gas liquids (MBbls)			6,705						2,232						6						8,943						6,326						2,197						5						8,528
Total (MBOE)			31,882						9,739						41						41,662						30,773						10,146						23						40,942

(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 third quarter of 2023 increased by $369 million to $2.3 billion compared to the second quarter of 2023. The increase consisted of $325 million attributable to higher average prices received for our oil, natural gas and natural gas liquids production and $44 million attributable to the 2% growth in our combined volumes sold.

Net Sales of Purchased Oil. Beginning in the third quarter of 2023, we entered into purchase transactions with third parties and separate sale transactions with third parties to satisfy certain of our unused oil pipeline capacity commitments. The following table presents the net sales of purchased oil from third parties for the three months ended September 30, 2023 and June 30, 2023:

			Three Months Ended
(In millions)			September 30, 2023						June 30, 2023
Sales of purchased oil			$	59					$	—
Purchased oil expense			59						—
Net sales of purchased oil			$	—					$	—

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

			Three Months Ended
(In millions)			September 30, 2023						June 30, 2023
Other operating income			$	16					$	23

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

			Three Months Ended
			September 30, 2023												June 30, 2023
(In millions, except per BOE amounts)			Amount						Per BOE						Amount						Per BOE
Lease operating expenses			$	226					$	5.42					$	200					$	4.88

Lease operating expenses increased by $26 million in total and increased by $0.54 on a per BOE basis for the third quarter of 2023 compared to the second quarter of 2023, primarily due to (i) $8 million in additional costs incurred for water services as a result of divesting our Water Assets in the third quarter of 2023, (ii) $6 million in increased spend on electrical generation and disposal related costs, (iii) $4 million due to the increase in production volumes, and (iv) other individually insignificant changes, including adjustments of prior period accruals in the second quarter of 2023.

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

			Three Months Ended
			September 30, 2023												June 30, 2023
(In millions, except per BOE amounts)			Amount						Per BOE						Amount						Per BOE
Production taxes			$	108					$	2.59					$	87					$	2.12
Ad valorem taxes			10						0.24						61						1.49
Total production and ad valorem expense			$	118					$	2.83					$	148					$	3.61
Production taxes as a % of oil, natural gas and natural gas liquids revenue			4.8		%										4.6		%

In general, production taxes are directly related to production revenues and are based upon current year commodity prices. Production taxes as a percentage of production revenues for the third quarter of 2023 increased slightly compared to the second quarter of 2023, primarily due to an increase in our natural gas and natural gas liquids sales, which have a higher production tax rate.

Ad valorem taxes are based, among other factors, on property values driven by prior year commodity prices. In the third quarter of 2023, we lowered our full year estimate of ad valorem taxes based on expected reductions in our tax rates and accordingly, decreased our ad valorem accrual compared to the second quarter of 2023.

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

			Three Months Ended
			September 30, 2023												June 30, 2023
(In millions, except per BOE amounts)			Amount						Per BOE						Amount						Per BOE
Gathering and transportation			$	73					$	1.75					$	68					$	1.66

The increases in gathering and transportation expenses and the per BOE amounts during the third quarter of 2023 compared to the second quarter of 2023 primarily resulted from incurring higher costs for third party oil gathering services after divesting our oil gathering assets in the third quarter of 2023.

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

			Three Months Ended
(In millions, except BOE amounts)			September 30, 2023						June 30, 2023
Depletion of proved oil and natural gas properties			$	426					$	410
Depreciation and amortization of other property and equipment			12						16
Other amortization			—						1
Asset retirement obligation accretion			4						5
Depreciation, depletion, amortization and accretion			$	442					$	432
Oil and natural gas properties depletion rate per BOE			$	10.23					$	10.01
Depreciation, depletion, amortization and accretion per BOE			$	10.61					$	10.55

Depletion of proved oil and natural gas properties increased by $16.0 million in the third quarter of 2023 as compared to the second quarter of 2023 due primarily to the growth in production volumes discussed above and an increase in the depletion rate.

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

			Three Months Ended
			September 30, 2023												June 30, 2023
(In millions, except per BOE amounts)			Amount						Per BOE						Amount						Per BOE
General and administrative expenses			$	21					$	0.51					$	21					$	0.51
Non-cash stock-based compensation			13						0.31						16						0.39
Total general and administrative expenses			$	34					$	0.82					$	37					$	0.90

General and administrative expenses remained consistent for the third quarter of 2023 compared to the second quarter of 2023. The decrease in non-cash stock-based compensation is due to forfeitures of unvested restricted stock units and performance restricted stock units during the third quarter of 2023.

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

			Three Months Ended
(In millions)			September 30, 2023						June 30, 2023
Merger and integration expenses			$	1					$	2
Other operating expenses			$	47					$	32

The increase in other operating expenses during the third quarter of 2023 compared to the second quarter of 2023 is primarily due to insignificant losses recorded on disposals of property, plant and equipment in the third quarter of 2023.

Derivative Instruments. The following table shows the net gain (loss) on derivative instruments and the net cash receipts (payments) on settlements of derivative instruments for the three months ended September 30, 2023 and June 30, 2023:

			Three Months Ended
(In millions)			September 30, 2023						June 30, 2023
Gain (loss) on derivative instruments, net			$	(76)					$	(189)
Net cash received (paid) on settlements			$	(24)					$	(39)

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 September 30, 2023 and June 30, 2023:

			Three Months Ended
(In millions)			September 30, 2023						June 30, 2023
Interest expense, net			$	(41)					$	(51)
Other income (expense), net			$	37					$	(21)
Gain (loss) on extinguishment of debt			$	—					$	(4)
Income (loss) from equity investments			$	9					$	16

The decrease in net interest expense for the third quarter of 2023 compared to the second quarter of 2023 primarily consists of a $6 million increase in capitalized interest costs, which reduce interest expense, and a $4 million decrease in interest expense on our revolving credit facility, which was undrawn for a portion of the third quarter of 2023.

The change in other income (expense), net is primarily due to the third quarter of 2023 including the $35 million gain on the sale of our equity method investment in OMOG 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 September 30, 2023 and June 30, 2023:

			Three Months Ended
(In millions)			September 30, 2023						June 30, 2023
Provision for (benefit from) income taxes			$	276					$	165

The change in our income tax provision for the third quarter of 2023 compared to the second quarter of 2023 was primarily due to the increase 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 Nine Months Ended September 30, 2023 and 2022

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

			Nine Months Ended September 30,
			2023						2022
Revenues (In millions):
Oil sales			$	5,359					$	5,988
Natural gas sales			197						714
Natural gas liquid sales			507						856
Total oil, natural gas and natural gas liquid revenues			$	6,063					$	7,558
Production Data:
Oil (MBbls)			71,052						60,813
Natural gas (MMcf)			147,620						131,356
Natural gas liquids (MBbls)			25,201						22,177
Combined volumes (MBOE)(1)			120,856						104,883
Daily oil volumes (BO/d)			260,264						222,758
Daily combined volumes (BOE/d)			442,696						384,187
Average Prices:
Oil ($ per Bbl)			$	75.42					$	98.47
Natural gas ($ per Mcf)			$	1.33					$	5.44
Natural gas liquids ($ per Bbl)			$	20.12					$	38.60
Combined ($ per BOE)			$	50.17					$	72.06
Oil, hedged ($ per Bbl)(2)			$	74.41					$	89.39
Natural gas, hedged ($ per Mcf)(2)			$	1.54					$	4.43
Natural gas liquids, hedged ($ per Bbl)(2)			$	20.12					$	38.60
Average price, hedged ($ per BOE)(2)			$	49.83					$	65.54

(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 nine months ended September 30, 2023 and 2022:

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

			Nine Months Ended September 30, 2023																								Nine Months Ended September 30, 2022
			Midland Basin						Delaware Basin						Other**(1)**						Total						Midland Basin						Delaware Basin						Other**(2)**						Total
Production Data:
Oil (MBbls)			55,648						15,360						44						71,052						43,344						17,370						99						60,813
Natural gas (MMcf)			103,724						43,716						180						147,620						86,198						44,817						341						131,356
Natural gas liquids (MBbls)			18,889						6,303						9						25,201						15,323						6,805						49						22,177
Total (MBOE)			91,824						28,949						83						120,856						73,033						31,645						205						104,883

(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 nine months ended September 30, 2023 decreased by $1.5 billion, or 20%, to $6.1 billion from the same period in 2022 primarily due to a reduction of $2.7 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 $1.2 billion attributable to the 15% growth in our combined volumes, which was primarily due to additional production from the FireBird Acquisition and the Lario Acquisition.

Net Sales of Purchased Oil. Beginning in the third quarter of 2023, we entered into purchase transactions with third parties and separate sale transactions with third parties to satisfy certain of our unused oil pipeline capacity commitments. The following table presents the net sales of purchased oil from third parties for the nine months ended September 30, 2023 and 2022:

			Nine Months Ended September 30,
(In millions)			2023						2022
Sales of purchased oil			$	59					$	—
Purchased oil expense			59						—
Net sales of purchased oil			$	—					$	—

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

			Nine Months Ended September 30,
(In millions)			2023						2022
Other operating income			$	62					$	55

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

			Nine Months Ended September 30,
			2023												2022
(In millions, except per BOE amounts)			Amount						Per BOE						Amount						Per BOE
Lease operating expenses			$	618					$	5.11					$	491					$	4.68

Lease operating expenses increased by $127 million, or $0.43 per BOE for the nine months ended September 30, 2023 compared to the same period in 2022. The increase primarily consists of (i) $76 million in production and operating expenses incurred in 2023 on wells acquired in the FireBird Acquisition and the Lario Acquisition, (ii) $43 million in additional utility and service costs driven primarily by inflation, and (iii) $8 million in additional costs incurred for water services as a result of divesting our Water Assets in the third quarter of 2023.

After giving effect to the divestiture of our Water Assets, we expect lease operating expenses to range from approximately $832 million to $881 million in 2023.

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

			Nine Months Ended September 30,
			2023												2022
(In millions, except per BOE amounts)			Amount						Per BOE						Amount						Per BOE
Production taxes			$	287					$	2.37					$	384					$	3.66
Ad valorem taxes			134						1.11						111						1.06
Total production and ad valorem expense			$	421					$	3.48					$	495					$	4.72
Production taxes as a % of oil, natural gas and natural gas liquids revenue			4.7		%										5.1		%

In general, production taxes are directly related to production revenues and are based upon current year commodity prices. Production taxes as a percentage of production revenues for the 2023 period decreased slightly compared to the same period in 2022, primarily due to a decrease in natural gas and natural gas liquids sales, 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 nine months ended September 30, 2023 as compared to the same period in 2022 increased by $23 million, partially due to recording $17 million in ad valorem taxes for properties acquired in the FireBird Acquisition and the Lario Acquisition and $6 million in ad valorem taxes related to new wells added between periods and changes in valuations on existing wells.

We expect production and ad valorem taxes to be approximately 7% of oil, natural gas and natural gas liquids revenue during 2023.

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

			Nine Months Ended September 30,
			2023												2022
(In millions, except per BOE amounts)			Amount						Per BOE						Amount						Per BOE
Gathering and transportation			$	209					$	1.73					$	191					$	1.82

The increase in gathering and transportation expenses for the nine months ended September 30, 2023 compared to the same period in 2022 is primarily attributable to the growth in production volumes discussed above. The rate per BOE decreased between periods, primarily due to the 2022 period including additional fees incurred on minimum volume commitments.

After giving effect to the divestiture of our oil gathering assets, we expect cash gathering and transportation expenses to range from approximately $269 million to $294 million in 2023.

Depreciation, Depletion, Amortization and Accretion. The following table provides the components of our depreciation, depletion, amortization and accretion expense for the nine months ended September 30, 2023 and 2022:

			Nine Months Ended September 30,
(In millions, except BOE amounts)			2023						2022
Depletion of proved oil and natural gas properties			$	1,217					$	908
Depreciation and amortization of other property and equipment			45						58
Other amortization			2						3
Asset retirement obligation accretion			13						10
Depreciation, depletion, amortization and accretion			$	1,277					$	979
Oil and natural gas properties depletion rate per BOE			$	10.07					$	8.66
Depreciation, depletion, amortization and accretion per BOE			$	10.57					$	9.33

The increase in depletion of proved oil and natural gas properties of $309 million for the nine months ended September 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 nine months ended September 30, 2023 and 2022:

			Nine Months Ended September 30,
			2023												2022
(In millions, except per BOE amounts)			Amount						Per BOE						Amount						Per BOE
General and administrative expenses			$	71					$	0.59					$	67					$	0.64
Non-cash stock-based compensation			40						0.33						42						0.40
Total general and administrative expenses			$	111					$	0.92					$	109					$	1.04

The increase in general and administrative expenses for the nine months ended September 30, 2023 compared to the same period in 2022 was primarily due to higher professional services costs in the current year.

Currently, we expect cash general and administrative expenses to range from approximately $90 million to $106 million and non-cash stock-based compensation to range from $49 million to $65 million, respectively, in 2023.

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

			Nine Months Ended September 30,
(In millions)			2023						2022
Merger and integration expenses			$	11					$	11
Other operating expenses			$	113					$	85

The increase in other operating expenses for the nine months ended September 30, 2023 compared to the same period in 2022 primarily resulted from additional midstream services expenses incurred for activity on leasehold acreage obtained in the FireBird Acquisition and Lario Acquisition.

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 nine months ended September 30, 2023 and 2022:

			Nine Months Ended September 30,
(In millions)			2023						2022
Gain (loss) on derivative instruments, net			$	(358)					$	(677)
Net cash received (paid) on settlements(1)			$	(62)					$	(816)

(1)The nine months ended September 30, 2022 includes cash paid on commodity contracts terminated prior to their contractual maturity of $138 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 nine months ended September 30, 2023 and 2022:

			Nine Months Ended September 30,
(In millions)			2023						2022
Interest expense, net			$	(138)					$	(122)
Other income (expense), net			$	69					$	(3)
Gain (loss) on extinguishment of debt			$	(4)					$	(59)
Income (loss) from equity investments			$	39					$	56

The increase in net interest expense for the nine months ended September 30, 2023 compared to the same period in 2022, reflects (i) a net increase of $46 million in interest expense on our senior notes due primarily to $82 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 and Viper’s revolving credit facilities due primarily to higher weighted average interest rates and borrowings to fund the cash portion of acquisitions and other corporate expenses. These increases were partially offset by a $34 million increase in capitalized interest costs, which reduce interest expense, and other insignificant reductions in interest income and the amortization of debt issuances costs and discounts.

Currently, we expect interest expense to range from approximately $180 million to $204 million in 2023.

Other income (expense), net for the nine months ended September 30, 2023 includes a $53 million gain on the sale of equity method investment in Gray Oak and $35 million gain on the sale of equity method investment in OMOG 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 nine months ended September 30, 2023 and 2022:

			Nine Months Ended September 30,
(In millions)			2023						2022
Provision for (benefit from) income taxes			$	648					$	913

The change in our income tax provision for the nine months ended September 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 was partially offset by the discrete income tax benefit recognized for the nine months ended September 30, 2022 related to a reduction in Viper’s valuation allowance against its deferred tax assets. 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 September 30, 2023, we had approximately $2.3 billion of liquidity consisting of $680 million in standalone cash and cash equivalents and $1.6 billion available under our credit facility. As discussed below, our revised capital budget for 2023 is $2.66 billion to $2.70 billion. As of September 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 nine months ended September 30, 2023 and 2022 are presented below:

			Nine Months Ended September 30,
			2023						2022
			(In millions)
Net cash provided by (used in) operating activities			$	4,296					$	4,884
Net cash provided by (used in) investing activities			(1,859)						(1,952)
Net cash provided by (used in) financing activities			(1,771)						(3,570)
Net increase (decrease) in cash			$	666					$	(638)

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 nine months ended September 30, 2023 compared to the same period in 2022 primarily resulted from (i) a decrease of $1.4 billion in total revenue, and (ii) an increase in our cash operating expenses of approximately $162 million. These were partially offset by (i) a reduction of $754 million in net cash paid on settlements of derivative contracts, (ii) a reduction of $365 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, including taxes receivable, and payments made on accounts payable. See “—**Results of Operations” for discussion of significant changes in our revenues and expenses.

Investing Activities

The majority of our net cash used for investing activities during the nine months ended September 30, 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. These cash outflows were partially offset by proceeds received from the divestitures of various oil and gas properties and other assets, 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:

			Nine Months Ended September 30,
			2023						2022
			(In millions)
Drilling, completions and non-operated additions to oil and natural gas properties(1)			$	1,826					$	1,203
Infrastructure additions to oil and natural gas properties			122						124
Additions to midstream assets			104						69
Total			$	2,052					$	1,396

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

Financing Activities

During the nine months ended September 30, 2023, net cash used in financing activities was primarily attributable to (i) $776 million of repurchases as part of the share and unit repurchase programs, (ii) $841 million of dividends paid to stockholders, (iii) $134 million paid for the retirement of principal outstanding on certain senior notes, and (iv) $84 million in distributions to non-controlling interest. These cash outflows were partially offset by an additional $98 million in borrowings under credit facilities, net of repayments.

During the nine months ended September 30, 2022, net cash used in financing activities was primarily attributable to (i) $1.9 billion paid for the repurchase, repayment and redemption of principal outstanding on certain senior notes, as well as $49 million of additional premiums paid in connection with the redemptions, (ii) $1.2 billion of dividends paid to stockholders, (iii) $904 million of repurchases as part of the share and unit repurchase programs, and (iv) $181 million in distributions to non-controlling interests. 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 September 30, 2023, our debt, including the debt of Viper, consisted of approximately $6.1 billion in aggregate outstanding principal amount of senior notes, and $250 million in aggregate outstanding borrowings under revolving credit facilities.

As of September 30, 2023, the maximum credit amount available under our credit agreement was $1.6 billion, with no outstanding borrowings and $1.6 billion available for future borrowings. 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 improved 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 September 22, 2023, Viper LLC entered into an eleventh and separately a twelfth amendment to its existing credit agreement, which among other things, (i) extended the maturity date from June 2, 2025, to September 22, 2028, (ii) maintained the maximum credit amount of $2.0 billion, (iii) increased the borrowing base from $1.0 billion to $1.3 billion upon consummation of the Viper Acquisition, (iv) increased the elected commitment amount from $750 million to $850 million, and (v) waived the automatic reduction of the borrowing base that would otherwise occur upon the consummation of the Viper 2031 Notes. The Viper credit agreement had $250 million of outstanding borrowings and $600 million available for future borrowings as of September 30, 2023.

Issuance of Viper 2031 Notes

On October 19, 2023, Viper completed the Viper 2031 Notes Offering of $400 million in aggregate principal amount of its 7.375% Senior Notes maturing on November 1, 2031. Through maturity, Viper expects to incur approximately $236 million in aggregate interest costs (approximately $30 million annually) for the Viper 2031 Notes.

For additional discussion of our outstanding debt as of September 30, 2023, see Note 7—Debt and Note 15—Subsequent Events 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, excluding those of Viper, 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 has approved a revised 2023 capital budget for drilling, midstream, infrastructure and environmental of approximately $2.66 billion to $2.70 billion, or the high end of our initial 2023 guidance range. We estimate that, of these expenditures, approximately:

• $2.37 billion to $2.39 billion will be spent primarily on drilling 340 to 350 gross (306 to 315 net) horizontal wells and completing 325 to 335 gross (305 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 11,000+ feet;

• Approximately $120 million to $130 million will be spent on midstream infrastructure, excluding equity method investments; and

• Approximately $170 million to $180 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 13 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.

Return of Capital Commitment

Currently, our board of directors has approved a return of capital commitment of at least 75% of free cash flow to our shareholders through repurchases under our share repurchase program, base dividends and variable dividends. The remainder of our free cash flow will be used primarily to reduce debt. On November 2, 2023, our board of directors declared a combined base and variable dividend for the third quarter of 2023 of $3.37 per share of common stock.

Free cash flow is a non-GAAP financial measure. As used by us, free cash flow is defined as cash flow from operating activities before changes in working capital in excess of cash capital expenditures and other adjustments as determined by us. We believe 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 November 3, 2023, we have repurchased 18.4 million shares of our common stock for a total cost of $2.3 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.

Other Commitments

We and Five Point currently anticipate collectively contributing $500 million in follow-on capital to fund future Deep Blue growth projects and acquisitions.

Income Taxes

We expect our cash tax rate to be 15% to 17% 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.

			September 30, 2023						December 31, 2022
Summarized Balance Sheets:			(In millions)
Assets:
Current assets			$	1,490					$	1,191
Property and equipment, net			$	20,482					$	18,252
Other noncurrent assets			$	30					$	164
Liabilities:
Current liabilities			$	1,966					$	1,547
Intercompany accounts payable, non-guarantor subsidiary			$	2,102					$	2,253
Long-term debt			$	5,540					$	5,647
Other noncurrent liabilities			$	2,686					$	2,509

			Nine Months Ended September 30, 2023
Summarized Statement of Operations:			(In millions)
Revenues			$	5,251
Income (loss) from operations			$	2,737
Net income (loss)			$	1,719

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.