Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Organization and Description of the Business
Diamondback Energy, Inc., together with its subsidiaries (collectively referred to as “Diamondback” or the “Company” unless the context otherwise requires), is an independent oil and 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. Diamondback was incorporated in Delaware on December 30, 2011.
The wholly-owned subsidiaries of Diamondback, as of September 30, 2019,2020, include Diamondback E&P LLC, a Delaware limited liability company, Diamondback O&G LLC, a Delaware limited liability company, Viper Energy Partners GP LLC, a Delaware limited liability company, Rattler Midstream GP LLC, a Delaware limited liability company, and Energen Corporation, an Alabama corporation (“Energen”). The consolidated subsidiaries include these wholly-owned subsidiaries as well as Viper Energy Partners LP, a Delaware limited partnership, (“Viper”), Viper’s subsidiary Viper Energy Partners LLC, a Delaware limited liability company, (“Viper LLC”), Rattler Midstream LP, (formerly known as Rattler Midstream Partners LP), a Delaware limited partnership, (“Rattler”), Rattler Midstream Operating LLC, (formerly known as Rattler Midstream LLC), a Delaware limited liability company, (“Rattler LLC”), Rattler LLC’s wholly-owned subsidiarysubsidiaries Tall City Towers LLC, a Delaware limited liability company (“Tall City”), Rattler Ajax Processing LLC, a Delaware limited liability company, Rattler OMOG LLC, a Delaware limited liability company, and Energen’s wholly-owned subsidiaries Energen Resources Corporation, an Alabama corporation, and EGN Services, Inc., an Alabama corporation.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries after all significant intercompany balances and transactions have been eliminated upon consolidation.
Viper isand Rattler are consolidated in the financial statements of the Company. As of September 30, 2019,2020, the Company owned approximately 54%58% of Viper’s total units outstanding. The Company’s wholly-owned subsidiary, Viper Energy Partners GP LLC, is the general partner of Viper. Immediately following the completion of the Drop-Down on October 1, 2019, the Company owned 731,500 common units and 90,709,946 Class B units, representing approximately 60% of Viper’s total units outstanding. See Note 4—Acquisitions and Divestitures and Note 20—Subsequent Events for additional information regarding this transaction.
Rattler is consolidated in the financial statements of the Company. As of September 30, 2019,2020, the Company owned approximately 71% of Rattler’s total units outstanding. The Company’s wholly-owned subsidiary, Rattler Midstream GP LLC, is the general partner of Rattler. The results of operations attributable to the non-controlling interest in Viper and Rattler are presented within equity and net income and are shown separately from the Company’s equity and net income attributable to the Company.
These condensed consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC. They reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to suchSEC rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10–Q should be read in conjunction with the Company’s most recent Annual Report on Form 10–K for the fiscal year ended December 31, 2018,2019, which contains a summary of the Company’s significant accounting policies and other disclosures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Certain amounts included in or affecting the Company’s consolidated financial statements and related disclosures must be estimated by management, requiring certain assumptions to be made with respect to values or conditions that cannot be known with certainty at the time the consolidated financial statements are prepared. These estimates and assumptions affect the amounts the Company reports for assets and liabilities and the Company’s
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Making accurate estimates and assumptions is particularly difficult as the oil and natural gas industry experiences challenges resulting from negative pricing pressure from the effects of COVID-19 and actions by OPEC members and other exporting nations on the supply and demand in global oil and gas markets. Companies in the oil and gas industry have changed near term business plans in response to changing market conditions. The aforementioned circumstances generally increase the uncertainty in the Company’s accounting estimates, particularly those involving financial forecasts.
The Company evaluates these estimates on an ongoing basis, using historical experience, consultation with experts and other methods the Company considers reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from the Company’s estimates. Any effects on the Company’s business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Significant items subject to such estimates and assumptions include estimates of proved oil and natural gas reserves and related present value estimates of future net cash flows therefrom, the carrying value of oil and natural gas properties, asset retirement obligations, the fair value determination of acquired assets and liabilities assumed, equity-based compensation, fair value estimates of commodity derivativesderivative instruments and estimates of income taxes.
ReclassificationsAccounts Receivable
Certain prior period amounts have been reclassifiedAccounts receivable consist of receivables from joint interest owners on properties the Company operates and from sales of oil and natural gas production delivered to conformpurchasers. The purchasers remit payment for production directly to the 2019 presentation. These reclassifications had no impact on net income, total assets, liabilities and stockholders’ equity or total cash flows.Company. Most payments for production are received within three months after the production date.
Investments
Equity investments in which the Company exercises significant influence but does not control are accounted for using the equity method. Under the equity method, generally the Company’s share of investees’ earnings or loss is recognized in the statement of operations. The Company reviews its investments to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, the Company would recognize an impairment provision.
Viper has an equity interest in a limited partnership that is so minor that Viper has no influence over the limited partnership’s operating and financial policies. This interest was acquired during the year ended December 31, 2014 and was accounted for under the cost method. Effective January 1, 2018, Viper adopted Accounting Standards Update (“ASU”) 2016-01 which requires Viper2016-13 and the subsequent applicable modifications to measurethe rule on January 1, 2020. Accounts receivable are stated at amounts due from joint interest owners or purchasers, net of an allowance for expected losses as estimated by the Company when collection is deemed doubtful. For receivables from joint interest owners, the Company typically has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings. Accounts receivable from joint interest owners or purchasers outstanding longer than the contractual payment terms are considered past due. The Company determines its investment at fair value which resultedallowance for each type of receivable by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the debtor’s current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for expected losses. The adoption of ASU 2016-13 did not result in a downward adjustment of $19 million to record the impact of this adoption. See Note 17—Fair Value Measurements.
New Accounting Pronouncements
Recently Adopted Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases”. This update applies to any entity that enters into a lease, with some specified scope exemptions. Under this update, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. While there were no major changes to the lessor accounting, changes were made to align key aspects with the revenue recognition guidance. Entities will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company enters into lease agreements to support its operations. These agreements are for leases on assets such as office space, vehicles and compressors. The Company has completed the process of reviewing and determining the agreements to which this new guidance applies. Upon adoption effective January 1, 2019, the Company recognized approximately $13 million of right-of-use assets, of which the total amount relatesmaterial change to the Company’s operating leases.allowance. At September 30, 2020 and December 31, 2019, the Company recorded an immaterial allowance for expected losses.
In January 2018,Non-controlling Interest
Non-controlling interest in the FASB issued ASU 2018-01, “Leases - Land Easement Practical Expedient for Transitionaccompanying condensed consolidated financial statements represents minority interest ownership in Viper and Rattler. When the Company’s relative ownership interests in Viper and Rattler change, adjustments to Topic 842”. This update applies to any entity that holds land easements. The update allows entities to adoptnon-controlling interest and additional paid-in-capital, tax effected, will occur. Because these changes in the ownership interests in Viper and Rattler do not result in a practical expedient to not evaluate existing or expired land easements under Topic 842 that were not previouslychange of control, the transactions are accounted for as leasesequity transactions under ASC Topic 810, Consolidation, which requires that any differences between the current leases guidance. An entitycarrying value of the Company’s basis in Viper and Rattler and the fair value of the consideration received are recognized directly in equity and attributed to the controlling interest.
In the second quarter of 2020, the Company recorded an adjustment to non-controlling interest for Rattler of $(329) million and to additional paid-in-capital of $329 million to reflect the ownership structure that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginningwas effective at the date that the entity adopts Topic 842.June 30, 2020. The Company adopted this standard effective January 1, 2019. The adoption of this update did not have anadjustment had no impact on its financial position, resultsearnings. See Note 11—Capital Stock and Earnings Per Share for a presentation of operations or liquidity.the change in ownership.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Recent Accounting Pronouncements
In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases”. This update provides clarification and corrects unintended application of certain sections in the new lease guidance.
The Company adopted this standard effective January 1, 2019.considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or clarifications of ASUs previously disclosed. The adoptionfollowing table provides a brief description of this update did not have an impactrecent accounting pronouncements and the Company’s analysis of the effects on its financial position, results of operations or liquidity.statements:
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Standard | Description | Date of Adoption | Effect on Financial Statements or Other Significant Matters |
Recently Adopted Pronouncements |
ASU 2016-13, “Financial Instruments - Credit Losses” | This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. | Q1 2020 | The Company adopted this update effective January 1, 2020. The adoption of this update did not have a material impact on its financial position, results of operations or liquidity since it does not have a history of credit losses.
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Pronouncements Not Yet Adopted |
ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” | This update is intended to simplify the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance. | Q1 2021 | This update is effective for public business entities beginning after December 15, 2020 with early adoption permitted. The Company does not believe that the adoption of this update will have an impact on its financial position, results of operations or liquidity. |
In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements”. This update provides another transition method of allowing entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted this standard effective January 1, 2019. The adoption of this update did not have an impact on its financial position, results of operations or liquidity.
In December 2018, the FASB issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors”. This update provides a practical expedient for lessors to elect not to evaluate whether sales taxes and other similar taxes are lessor costs. The update also requires a lessor to exclude from variable payments those costs paid directly by the lessee to third parties and include lessor costs paid by the lessor and reimbursed by the lessee. The Company adopted this standard effective January 1, 2019. The adoption of this update did not have an impact on its financial position, results of operations or liquidity.
See Note 18—Leases for more information on the adoption of these standards.
In June 2018, the FASB issued ASU 2018-07, “Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting”. This update applies the existing employee guidance to nonemployee share-based transactions, with the exception of specific guidance related to the attribution of compensation cost. The Company adopted this standard effective January 1, 2019. The adoption of this update did not have an impact on its financial position, results of operations or liquidity because the Company currently accounts for nonemployee share-based transactions in the same manner as employee share-based transactions.
In July 2018, the FASB issued ASU 2018-09, “Codification Improvements”. This update provides clarification and corrects unintended application of the guidance in various sections. The Company adopted this standard effective January 1, 2019. The adoption of this update did not have a material impact on its financial position, results of operations or liquidity.
In July 2019, the FASB issued ASU 2019-07, “Codification Updates to SEC Sections”. This update simplifies the guidance in various sections that was duplicative, redundant or outdated. The Company adopted this update effective July 2019. It did not have a material impact on its financial position, results of operations or liquidity.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”. This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This update will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company believes the adoption of this update will not have an impact on its financial position, results of operations or liquidity since it does not have a history of credit losses.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”. This update modifies the fair value measurement disclosure requirements specifically related to Level 3 fair value measurements and transfers between levels. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This update will be applied prospectively. The Company believes the adoption of this update will not have an impact on its financial position, results of operations or liquidity.
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal - Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
That Is a Service Contract”. This update requires the capitalization of implementation costs incurred in a hosting arrangement that is a service contract for internal-use software. Training and certain data conversion costs cannot be capitalized. The entity is required to expense the capitalized implementation costs over the term of the hosting agreement. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company believes the adoption of this update will not have an impact on its financial position, results of operations or liquidity.
In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”. This update clarifies that receivables arising from operating leases are not within the scope of this topic, but rather Topic 842, Leases. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This update will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company believes the adoption of this update will not have an impact on its financial position, results of operations or liquidity since it does not have a history of credit losses.
In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ”. This update clarifies guidance previously issued in ASU 2016-01, ASU 2016-13 and ASU 2017-12. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not believe the updates to the referenced standards will have an impact on its financial position, results of operations or liquidity.
In May 2019, the FASB issued ASU 2019-05, “Financial Instruments-Credit Losses (Topic 326)”. This update allows a fair value option to be elected for certain financial assets, other than held-to-maturity debt securities, that were previously required to be measured at amortized cost basis. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not believe the adoption of this standard will have an impact on its financial position, results of operations or liquidity.
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from Contracts with Customers
Sales of oil, natural gas and natural gas liquids are recognized at the point control of the product is transferred to the customer. Virtually all of the pricing provisions in the Company’s contracts are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, the quality of the oil or natural gas and the prevailing supply and demand conditions. As a result, the price of the oil, natural gas and natural gas liquids fluctuates to remain competitive with other available oil, natural gas and natural gas liquids supplies.
Oil sales
The Company’s oil sales contracts are generally structured where it delivers oil to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title and risk of loss of the product. Under this arrangement, the Company or a third party transports the product to the delivery point and receives a specified index price from the purchaser with no deduction. In this scenario, the Company recognizes revenue when control transfers to the purchaser at the delivery point based on the price received from the purchaser. Oil revenues are recorded net of any third-party transportation fees and other applicable differentials infollowing tables present the Company’s consolidated statements of operations.revenue from contracts with customers disaggregated by product type and basin:
Natural gas and natural gas liquids sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| Midland Basin | Delaware Basin | Other | Total | | Midland Basin | Delaware Basin | Other | Total |
| (in millions) |
Oil sales | $ | 348 | | $ | 257 | | $ | 1 | | $ | 606 | | | $ | 529 | | $ | 350 | | $ | 3 | | $ | 882 | |
Natural gas sales | 19 | | 17 | | 0 | | 36 | | | 7 | | 8 | | 1 | | 16 | |
Natural gas liquid sales | 36 | | 28 | | 1 | | 65 | | | 33 | | 25 | | 0 | | 58 | |
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Total | $ | 403 | | $ | 302 | | $ | 2 | | $ | 707 | | | $ | 569 | | $ | 383 | | $ | 4 | | $ | 956 | |
Under the Company’s natural gas processing contracts, it delivers natural gas to a midstream processing entity at the wellhead, battery facilities or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and remits proceeds to the Company for the resulting sales of natural gas liquids and residue gas. In these scenarios, the Company evaluates whether it is the principal or the agent in the transaction. For those contracts where the Company has concluded it is the principal and the ultimate third party is its
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
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| Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| Midland Basin | Delaware Basin | Other | Total | | Midland Basin | Delaware Basin | Other | Total |
| (in millions) |
Oil sales | $ | 1,030 | | $ | 750 | | $ | 5 | | $ | 1,785 | | | $ | 1,561 | | $ | 951 | | $ | 60 | | $ | 2,572 | |
Natural gas sales | 32 | | 29 | | 0 | | 61 | | | 17 | | 18 | | 1 | | 36 | |
Natural gas liquid sales | 88 | | 67 | | 1 | | 156 | | | 110 | | 78 | | 2 | | 190 | |
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Total | $ | 1,150 | | $ | 846 | | $ | 6 | | $ | 2,002 | | | $ | 1,688 | | $ | 1,047 | | $ | 63 | | $ | 2,798 | |
customer, the Company recognizes revenue on a gross basis, with transportation, gathering, processing, treating and compression fees presented as an expense in its consolidated statements of operations.
In certain natural gas processing agreements, the Company may elect to take its residue gas and/or natural gas liquids in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the product. Through the marketing process, the Company delivers product to the ultimate third-party purchaser at a contractually agreed-upon delivery point and receives a specified index price from the purchaser. In this scenario, the Company recognizes revenue when control transfers to the purchaser at the delivery point based on the index price received from the purchaser. The gathering, processing, treating and compression fees attributable to the gas processing contract, as well as any transportation fees incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing, treating and compression expense in its consolidated statements of operations.
Midstream Revenue
Substantially all revenues from gathering, compression, water handling, disposal and treatment operations are derived from intersegment transactions for services Rattler provides to exploration and production operations. The portion of such fees shown in the Company’s consolidated financial statements represent amounts charged to interest owners in the Company’s operated wells, as well as fees charged to other third parties for water handling and treatment services provided by Rattler or usage of Rattler’s gathering and compression systems. For gathering and compression revenue, Rattler satisfies its performance obligations and recognizes revenue when low pressure volumes are delivered to a specified delivery point. Revenue is recognized based on the per MMbtu gathering fee or a per barrel gathering fee charged by Rattler in accordance with the gathering and compression agreement. For water handling and treatment revenue, Rattler satisfies its performance obligations and recognizes revenue when the fresh water volumes have been delivered to the fracwater meter for a specified well pad and the wastewater volumes have been metered downstream of the Company’s facilities. For services contracted through third party providers, Rattler’s performance obligation is satisfied when the service performed by the third party provider has been completed. Revenue is recognized based on the per barrel fresh water delivery or a wastewater gathering and disposal fee charged by Rattler in accordance with the water services agreement.
Transaction price allocated to remaining performance obligations
The Company’s upstream product sales contracts do not originate until production occurs and, therefore, are not considered to exist beyond each days’ production. Therefore, there are no remaining performance obligations under any of our product sales contracts.
The majority of the Company’s midstream revenue agreements have a term greater than one year, and as such the Company has utilized the practical expedient in ASC 606, which states that the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under its revenue agreements, each delivery generally represents a separate performance obligation; therefore, future volumes delivered are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
The remainder of the Company’s midstream revenue agreements, which relate to agreements with third parties, are short-term in nature with a term of one year or less. The Company has utilized an additional practical expedient in ASC 606 which exempts it from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of an agreement that has an original expected duration of one year or less.
Contract balances
Under the Company’s product sales contracts, it has the right to invoice its customers once the performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s product sales contracts do not give rise to contract assets or liabilities under ASC 606.
Prior-period performance obligations
The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain natural gas and natural gas liquids sales may not be received for 30 to 90 days after the date
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
production is delivered, and as a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. The Company records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. The Company has existing internal controls for its revenue estimation process and related accruals, and any identified differences between its revenue estimates and actual revenue received historically have not been significant. For the three months and nine months ended September 30, 2019, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. The Company believes that the pricing provisions of its oil, natural gas and natural gas liquids contracts are customary in the industry. To the extent actual volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the revenue related to expected sales volumes and prices for those properties are estimated and recorded.
4. ACQUISITIONS AND DIVESTITURES
2019 Activity
Divestiture of Certain Conventional and Non-Core Assets Acquired from Energen
On May 23, 2019, the Company completed its divestiture of 6,589 net acres of certain conventional and non-core Permian assets, which were acquired by the Company in its merger with Energen, (as described below), for an aggregate sale price of $37 million. This divestiture did 0tnot result in a gain or loss because it did not have a significant effect on the Company’s reserve base or depreciation, depletion and amortization rate.
On July 1, 2019, the Company completed its divestiture of 103,750 net acres of certain conventional and non-core Permian assets, which were acquired by the Company in the merger with Energen, (as described below), for an aggregate sale price of $285 million. This divestiture did 0tnot result in a gain or loss because it did not have a significant effect on the Company’s reserve base or depreciation, depletion and amortization rate.
2019 Drop-Down Transaction
On July 29, 2019, the Company entered into a definitive purchase agreement to divest certain mineral and royalty interests to Viper for approximately 18.3 million of Viper’s newly-issued Class B units, approximately 18.3 million newly-issued units of Viper LLC with a fair value of $497 million and $190 million in cash, after giving effect to closing adjustments for net title benefits (the “Drop-Down”). Based on the volume weighted average sales price of Viper’s common units for the ten trading-day period ended July 26, 2019 of $30.07, the transaction is valued at $740 million. The mineral and royalty interests being divested in the Drop-Down represent approximately 5,490 net royalty acres across the Midland and Delaware Basins, of which over 95% are operated by the Company, and have an average net royalty interest of approximately 3.2% (the “Drop-Down Assets”). The Drop-Down closed on October 1, 2019 and was effective as of July 1, 2019. Viper funded the cash portion of the purchase price of the Drop-Down Assets through a combination of cash on hand and borrowings under Viper LLC’s revolving credit facility.
2018 Activity
Tall City Towers LLC
On January 31, 2018, Tall City, a subsidiary of the Company, completed its acquisition of the Fasken Center office buildings in Midland, TX where the Company’s corporate offices are located for a net purchase price of $110 million.
Ajax Resources, LLC
On October 31, 2018, the Company completed its acquisition of leasehold interests and related assets of Ajax Resources, LLC, which included approximately 25,493 net leasehold acres in the Northern Midland Basin, for $900 million in cash and approximately 2.6 million shares of the Company’s common stock (the “Ajax acquisition”). This transaction was effective as of July 1, 2018. The cash portion of this transaction was funded through a combination of cash on hand, proceeds from the sale of mineral interests to Viper (described below under the caption “2018 Drop-
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Condensed Notes to Consolidated Financial Statements-(Continued)
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Down Transaction”), borrowing under the Company’s revolving credit facility and a portion of the proceeds from the Company’s September 2018 senior note offering. See Note 11—Debt for information relating to this offering.
2018 Drop-Down Transaction
On August 15, 2018, the Company completed a transaction to sell to Viper mineral interests underlying 32,424 gross (1,696 net royalty) acres primarily in Pecos County, Texas, in the Permian Basin, approximately 80% of which are operated by the Company, for $175 million.
ExL Petroleum Management, LLC and EnergyQuest II LLC
On October 31, 2018, the Company completed its acquisitions of leasehold interests and related assets, one with ExL Petroleum Management, LLC and ExL Petroleum Operating, Inc. and one with EnergyQuest II LLC, for an aggregate of approximately 3,646 net leasehold acres in the Northern Midland Basin for a total of $313 million in cash. These transactions were effective as of August 1, 2018 and were funded through a combination of cash on hand, proceeds from the sale of assets to Viper (described immediately above) and borrowing under the Company’s revolving credit facility.
Energen Corporation Merger
On November 29, 2018, the Company completed its acquisition of Energen in an all-stock transaction, which was accounted for as a business combination (the “Merger”). Upon completion of the Merger, the addition of Energen’s assets increased the Company’s assets to: (i) over 273,000 net Tier One acres in the Permian Basin, (ii) approximately 7,200 estimated total net horizontal Permian locations, and (iii) approximately 394,000 net acres across the Midland and Delaware Basins. Under the terms of the Merger, each share of Energen common stock was converted into 0.6442 of a share of the Company’s common stock. The Company issued approximately 62.8 million shares of its common stock valued at a price of $112.00 per share on the closing date, resulting in total consideration paid by the Company to the former Energen shareholders of approximately $7 billion.
In connection with the closing of the Merger, the Company repaid outstanding principal under Energen’s revolving credit facility and assumed all of Energen’s other long-term debt. See Note 11—Debt for additional information.
Purchase Price Allocation
The Merger has been accounted for as a business combination, using the acquisition method. The following table represents the preliminary allocation of the total purchase price of Energen to the identifiable assets acquired and the liabilities assumed based on the fair values on the acquisition date, with any excess of the purchase price over the estimated fair value of the identifiable net assets acquired. Certain data necessary to complete the purchase price allocation is not yet available, and includes, but is not limited to, valuation of pre-acquisition contingencies, final tax returns that provide the underlying tax basis of Energen’s assets and liabilities and final appraisals of assets acquired and liabilities assumed. The Company will complete the purchase price allocation during the fourth quarter of 2019.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
The following table sets forth the Company’s preliminary purchase price allocation as of September 30, 2019:
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| (In millions) |
Consideration: | |
Fair value of the Company's common stock issued | $ | 7,136 |
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Total consideration | $ | 7,136 |
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Fair value of liabilities assumed: | |
Current liabilities | $ | 377 |
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Asset retirement obligation | 105 |
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Long-term debt | 1,099 |
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Noncurrent derivative instruments | 17 |
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Deferred income taxes | 1,408 |
|
Other long-term liabilities | 7 |
|
Amount attributable to liabilities assumed | $ | 3,013 |
|
| |
Fair value of assets acquired: | |
Total current assets | $ | 311 |
|
Oil and natural gas properties | 9,313 |
|
Midstream assets | 263 |
|
Investment in real estate | 11 |
|
Other property, equipment and land | 55 |
|
Asset retirement obligation | 105 |
|
Other postretirement assets | 3 |
|
Noncurrent income tax receivable, net | 76 |
|
Other long term assets | 12 |
|
Amount attributable to assets acquired | $ | 10,149 |
|
Pro Forma Financial Information
The following unaudited summary pro forma consolidated statement of operations data of Diamondback for the three and nine months ended September 30, 2018 have been prepared to give effect to the Merger as if it had occurred on January 1, 2018. The below information reflects pro forma adjustments for the issuance of the Company’s common stock in exchange for Energen’s outstanding shares of common stock, as well as pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including (i) the Company’s common stock issued to convert Energen’s outstanding shares of common stock and equity awards as of the closing date of the Merger, (ii) the depletion of Energen’s fair-valued proved oil and natural gas properties and (iii) the estimated tax impacts of the pro forma adjustments.
The pro forma results of operations do not include any cost savings or other synergies that may result from the Merger or any estimated costs that have been or will be incurred by the Company to integrate the Energen assets. The pro forma financial data does not include the results of operations for any other acquisitions made during the periods presented, as they were primarily acreage acquisitions and their results were not deemed material.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
The pro forma consolidated statement of operations data has been included for comparative purposes only and is not necessarily indicative of the results that might have occurred had the Merger taken place on January 1, 2018 and is not intended to be a projection of future results.
|
| | | | | | | |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| (in millions, except per share amounts) |
Revenues | $ | 919 |
| | $ | 2,655 |
|
Income from operations | $ | 431 |
| | $ | 1,280 |
|
Net income | $ | 156 |
| | $ | 727 |
|
Basic earnings per common share | $ | 0.97 |
| | $ | 4.50 |
|
Diluted earnings per common share | $ | 0.96 |
| | $ | 4.49 |
|
5. VIPER ENERGY PARTNERS LP
Viper is a publicly traded Delaware limited partnership, the common units of which are listed on the Nasdaq Global Select Market under the symbol “VNOM”. Viper was formed by Diamondback on February 27, 2014, to, among other things, own, acquire and exploit oil and natural gas properties in North America. Viper is currently focused on oil and natural gas properties in the Permian Basin and the Eagle Ford Shale. Viper Energy Partners GP LLC, a fully-consolidated subsidiary of Diamondback, serves as the general partner of Viper. As of September 30, 2019, the Company owned approximately 54% of Viper’s total units outstanding. Immediately following the completion of the Drop-Down on October 1, 2019, the Company owned 731,500 common units and 90,709,946 Class B units, representing approximately 60% of Viper’s total units outstanding. See Note 4—Acquisitions and Note 20—Subsequent Events for additional information regarding this transaction.
Equity Offering
On March 1, 2019, Viper completed an underwritten public offering of 10,925,000 common units, which included 1,425,000 common units issued pursuant to an option to purchase additional common units granted to the underwriters. Following this offering, the Company owned approximately 54% of Viper’s total units then outstanding. Viper received net proceeds from this offering of approximately $341 million, after deducting underwriting discounts and commissions and estimated offering expenses. Viper used the net proceeds to purchase units of Viper LLC. Viper LLC in turn used the net proceeds to repay a portion of the outstanding borrowings under the revolving credit facility and finance acquisitions during the period.
As a result of this public offering and Viper’s issuance of unit-based compensation, the Company’s ownership percentage in Viper was reduced. During the nine months ended September 30, 2019, the Company recorded a $74 million decrease to non-controlling interest in Viper with an increase to additional paid-in capital, which represents the difference between the Company’s share of the underlying net book value in Viper before and after the respective Partnership common unit transactions, on the Company’s consolidated balance sheet.
Recapitalization,Tax Status Election and Related Transactions by Viper
In March 2018, Viper announced that the Board of Directors of Viper’s General Partner had unanimously approved a change of Viper’s federal income tax status from that of a pass-through partnership to that of a taxable entity via a “check the box” election. In connection with making this election, on May 9, 2018 Viper (i) amended and restated its First Amended and Restated Partnership Agreement, (ii) amended and restated the First Amended and Restated Limited Liability Company Agreement of Viper LLC, (iii) amended and restated its existing registration rights agreement with the Company and (iv) entered into an exchange agreement with the Company, Viper’s General Partner and Viper LLC. Simultaneously with the effectiveness of these agreements, the Company delivered and assigned to Viper the 73,150,000 common units the Company owned in exchange for (i) 73,150,000 of Viper’s newly-issued Class B units and (ii) 73,150,000 newly-issued units of Viper LLC pursuant to the terms of a Recapitalization Agreement dated March 28, 2018, as amended as of May 9, 2018 (the “Recapitalization Agreement”). Immediately following that exchange, Viper continued to be the managing member of Viper LLC, with sole control of its operations, and owned approximately 36% of the outstanding units issued by Viper LLC, and the Company owned the remaining approximately 64% of the outstanding units issued by Viper LLC. Upon completion of Viper’s July 2018 offering of units, it owned
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
approximately 41% of the outstanding units issued by Viper LLC and the Company owned the remaining approximately 59%. Viper LLC units and Viper’s Class B units owned by the Company are exchangeable from time to time for Viper’s common units (that is, 1 Viper LLC unit and 1 Viper Class B unit, together, will be exchangeable for 1 Viper common unit).
On May 10, 2018, the change in Viper’s income tax status became effective. On that date, pursuant to the terms of the Recapitalization Agreement, (i) Viper’s General Partner made a cash capital contribution of $1 million to Viper in respect of its general partner interest and (ii) the Company made a cash capital contribution of $1 million to Viper in respect of the Class B units. The Company, as the holder of the Class B units, and Viper’s General Partner, as the holder of the general partner interest, are entitled to receive an 8% annual distribution on the outstanding amount of these capital contributions, payable quarterly, as a return on this invested capital. On May 10, 2018, the Company also exchanged 731,500 Class B units and 731,500 units in Viper LLC for 731,500 common units of Viper and a cash amount of $10,000 representing a proportionate return of the $1 million invested capital in respect of the Class B units. Viper’s General Partner continues to serve as Viper’s general partner and the Company continues to control Viper. After the effectiveness of the tax status election and the completion of related transactions, Viper’s minerals business continues to be conducted through Viper LLC, which continues to be taxed as a partnership for federal and state income tax purposes. This structure is anticipated to provide significant benefits to Viper’s business, including operational effectiveness, acquisition and disposition transactional planning flexibility and income tax efficiency. For additional information regarding the tax status election and related transactions, please refer to Viper’s Definitive Information Statement on Schedule 14C filed with the SEC on April 17, 2018 and Viper’s Current Report on Form 8-K filed with the SEC on May 15, 2018.
Partnership Agreement
The second amended and restated agreement of limited partnership, dated as of May 9, 2018, as amended as of May 10, 2018 (the “Viper Partnership Agreement”), requires Viper to reimburse Viper’s General Partner for all direct and indirect expenses incurred or paid on Viper’s behalf and all other expenses allocable to Viper or otherwise incurred by Viper’s General Partner in connection with operating Viper’s business. The Viper Partnership Agreement does not set a limit on the amount of expenses for which Viper’s General Partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for Viper or on its behalf and expenses allocated to Viper’s General Partner by its affiliates. Viper’s General Partner is entitled to determine the expenses that are allocable to Viper. For each of the three months ended September 30, 2019 and 2018, Viper’s General Partner allocated $1 million to Viper. For each of the nine months ended September 30, 2019 and 2018, Viper’s General Partner allocated $2 million to Viper.
Tax Sharing
In connection with the closing of the Viper Offering, Viper entered into a tax sharing agreement with Diamondback, dated June 23, 2014, pursuant to which Viper agreed to reimburse Diamondback for its share of state and local income and other taxes for which Viper’s results are included in a combined or consolidated tax return filed by Diamondback with respect to taxable periods including or beginning on June 23, 2014. The amount of any such reimbursement is limited to the tax Viper would have paid had it not been included in a combined group with Diamondback. Diamondback may use its tax attributes to cause its combined or consolidated group, of which Viper may be a member for this purpose, to owe less or no tax. In such a situation, Viper agreed to reimburse Diamondback for the tax Viper would have owed had the tax attributes not been available or used for Viper’s benefit, even though Diamondback had no cash tax expense for that period. For the three months and nine months ended September 30, 2019 and the three months and nine months ended September 30, 2018, Viper accrued a minimal amount of state income tax expense for its share of Texas margin tax for which Viper’s results are included in a combined tax return filed by Diamondback.
Viper LLC’s Revolving Credit Facility
Viper LLC has entered into a secured revolving credit facility with Wells Fargo, as administrative agent sole book runner and lead arranger. See Note 11—Debt for a description of this credit facility.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
6. RATTLER MIDSTREAM LP
Rattler is a publicly traded Delaware limited partnership, the common units of which are listed on the Nasdaq Global Select Market under the symbol “RTLR”.“RTLR.” Rattler was formed by Diamondback in July 2018 to own, operate, develop and acquire midstream infrastructure assets in the Midland and Delaware Basins of the Permian Basin. Rattler Midstream GP LLC (“Rattler’s General Partner”), a wholly-owned subsidiary of Diamondback, serves as the general partner of Rattler. As of September 30, 2019,2020, Diamondback owned approximately 71% of Rattler’s total units outstanding.
Prior to the completion of the Rattler OfferingRattler’s initial public offering (the “Rattler Offering”) in May of 2019, Diamondback owned all of the general and limited partner interests in Rattler. The Rattler Offering consisted of 43,700,000 common units representing approximately 29% of the limited partner interests in Rattler at a price to the public of $17.50 per common unit, which included 5,700,000 common units issued pursuant to an option to purchase additional common units granted to the underwriters on the same terms which closed on May 30, 2019.unit. Rattler received net proceeds of approximately $720 million from the sale of these common units, after deducting offering expenses and underwriting discounts and commissions.
In connection with the completion of Rattler’s initial public offering (the “Rattler Offering”),the Rattler Offering, Rattler (i) issued 107,815,152 Class B Units representing an aggregate 71% voting limited partner interest in Rattler in exchange for a $1 million cash contribution from Diamondback, (ii) issued a general partner interest in Rattler to Rattler’s General Partner, in exchange for a $1 million cash contribution from Rattler’s General Partner, and (iii) caused Rattler LLC to make a distribution of approximately $727 million to Diamondback. Diamondback, as the holder of the Class B units, and Rattler’s General Partner, as the holder of the general partner interest, are
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
entitled to receive cash preferred distributions equal to 8% per annum on the outstanding amount of their respective $1 million capital contributions, payable quarterly.
Diamondback has also entered into
6. REAL ESTATE ASSETS
The following schedule presents the cost and related accumulated depreciation of the Company’s real estate assets. The Company’s intangible lease assets and related accumulated amortization were immaterial as of September 30, 2020 and December 31, 2019.
| | | | | | | | | | | | | | | | | |
| Estimated Useful Lives | | September 30, 2020 | | December 31, 2019 |
| (Years) | | (in millions) |
Buildings | 20-30 | | $ | 102 | | | $ | 102 | |
Tenant improvements | 15 | | 5 | | | 5 | |
Land | N/A | | 2 | | | 2 | |
Land improvements | 15 | | 1 | | | 1 | |
Total real estate assets | | | 110 | | | 110 | |
Less: accumulated depreciation | | | (12) | | | (9) | |
Total investment in land and buildings, net | | | $ | 98 | | | $ | 101 | |
7. PROPERTY AND EQUIPMENT
Property and equipment includes the following agreements with Rattler:
Rattler’s Partnership Agreement
In connection with the closingas of the Rattler Offering, Rattler’s General Partnerdates indicated:
| | | | | | | | |
| September 30, | December 31, |
| 2020 | 2019 |
| | |
| (in millions) |
Oil and natural gas properties: | | |
Subject to depletion | $ | 19,426 | | $ | 16,575 | |
Not subject to depletion | 7,879 | | 9,207 | |
Gross oil and natural gas properties | 27,305 | | 25,782 | |
Accumulated depletion | (3,988) | | (2,995) | |
Accumulated impairment | (6,933) | | (1,934) | |
Oil and natural gas properties, net | 16,384 | | 20,853 | |
Midstream assets | 1,026 | | 931 | |
Other property, equipment and land | 135 | | 125 | |
Accumulated depreciation | (110) | | (74) | |
Total property and equipment, net | $ | 17,435 | | $ | 21,835 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of proved oil and Energen Resources Corporation entered intonatural gas properties. As a result of the sharp decline in commodity prices which began during the first amendedquarter of 2020 and restated agreementcontinued for most of limited partnershipthe second and third quarters of Rattler, dated May 28, 2019 (the “Rattler Partnership Agreement”). The Rattler Partnership Agreement requires Rattler to reimburse Rattler’s General Partner2020, the Company recorded non-cash ceiling test impairments for all direct and indirect expenses incurred or paid on Rattler’s behalf and all other expenses allocable to Rattler or otherwise incurred by Rattler’s General Partner in connection with operating Rattler’s business. The Rattler Partnership Agreement does not set a limit on the amount of expenses for which its general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for Rattler or on its behalf and expenses allocated to Rattler’s General Partner by its affiliates. Rattler’s General Partner is entitled to determine the expenses that are allocable to Rattler. For the three months and nine months ended September 30, 2019,2020 of $1.5 billion and $5.0 billion, respectively, which were included in accumulated depletion. The impairment charge affected the General Partner allocated $225,030Company’s results of operations but did not reduce its cash flow. In addition to commodity prices, the Company’s production rates, levels of proved reserves, future development costs, transfers of unevaluated properties and $262,937, respectively, of such expensesother factors will determine its actual ceiling test calculation and impairment analysis in future periods. If the trailing 12-month commodity prices continue to Rattler.
Rattler’s Services and Secondment Agreement
In connection with the closing of the Rattler Offering, Rattler entered into a services and secondment agreement with Diamondback, Diamondback E&P LLC, Rattler’s General Partner and Rattler LLC, datedfall as of May 28, 2019 (the “Services and Secondment Agreement”). Pursuantcompared to the Servicescommodity prices used in prior quarters, the Company may have material write downs in subsequent quarters. NaN impairment on proved oil and Secondment Agreement, Diamondback and its subsidiaries second certain operational, construction, design and management employees and contractors of Diamondback to Rattler’s General Partner, Rattler and its subsidiaries, providing management, maintenance and operational functions with respect to Rattler’s assets. The Services and Secondment Agreement requires Rattler’s General Partner and Rattler to reimburse Diamondbacknatural gas properties was recorded for the cost of the seconded employees and contractors, including their wages and benefits. For the three months andor nine months ended September 30, 2019, Rattler’s General Partner2019. Given the rate of change impacting the oil and Rattler paid Diamondback $1 million and $3 million, respectively, under the Services and Secondment Agreement.
gas industry described above, it is possible that circumstances requiring additional impairment testing will occur in future interim periods, which could result in potentially material impairment charges being recorded.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Rattler’s Tax Sharing Agreement
In connection with the closing of the Rattler Offering, Rattler LLC entered into a tax sharing agreement with Diamondback pursuant to which Rattler LLC will reimburse Diamondback for its share of state and local income and other taxes borne by Diamondback as a result of Rattler LLC’s results being included in a combined or consolidated tax return filed by Diamondback with respect to taxable periods including or beginning on May 28, 2019. The amount of any such reimbursement is limited to the tax that Rattler LLC would have paid had it not been included in a combined group with Diamondback. Diamondback may use its tax attributes to cause its combined or consolidated group, of which Rattler LLC may be a member for this purpose, to owe less or no tax. In such a situation, Rattler LLC agreed to reimburse Diamondback for the tax Rattler LLC would have owed had the attributes not been available or used for Rattler LLC’s benefit, even though Diamondback had no cash expense for that period.
For the three months and nine months ended September 30, 2019, Rattler accrued state income tax expense of $75,944 and $107,758, respectively, for its share of Texas margin tax for which Rattler’s share of Rattler LLC’s results are included in a combined tax return filed by Diamondback.
Other Agreements
Rattler has entered into a secured revolving credit facility with Wells Fargo Bank, National Association, as administrative agent, sole book runner and lead arranger. See Note 11—Debt for a description of this credit facility.
7. REAL ESTATE ASSETS
The following schedules present the cost and related accumulated depreciation or amortization (as applicable) of the Company’s real estate assets including intangible lease assets:
|
| | | | | | | | | |
| Estimated Useful Lives | | September 30, 2019 | | December 31, 2018 |
| (Years) | | (in millions) |
Buildings | 30 | | $ | 102 |
| | $ | 103 |
|
Tenant improvements | 15 | | 5 |
| | 4 |
|
Land | N/A | | 2 |
| | 1 |
|
Land improvements | 15 | | 1 |
| | 1 |
|
Total real estate assets | | | 110 |
| | 109 |
|
Less: accumulated depreciation | | | (8 | ) | | (4 | ) |
Total investment in land and buildings, net | | | $ | 102 |
| | $ | 105 |
|
|
| | | | | | | | | |
| Weighted Average Useful Lives | | September 30, 2019 | | December 31, 2018 |
| (Months) | | (in millions) |
In-place lease intangibles | 45 | | $ | 11 |
| | $ | 11 |
|
Less: accumulated amortization | | | (5 | ) | | (3 | ) |
In-place lease intangibles, net | | | 6 |
| | 8 |
|
| | | | | |
Above-market lease intangibles | 45 | | 4 |
| | 4 |
|
Less: accumulated amortization | | | (1 | ) | | (1 | ) |
Above-market lease intangibles, net | | | 3 |
| | 3 |
|
Total intangible lease assets, net | | | $ | 9 |
| | $ | 11 |
|
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
8. PROPERTY AND EQUIPMENT
Property and equipment includes the following:
|
| | | | | | |
| September 30, | December 31, |
| 2019 | 2018 |
| | |
| (in millions) |
Oil and natural gas properties: | | |
Subject to depletion | $ | 15,358 |
| $ | 12,629 |
|
Not subject to depletion | 9,464 |
| 9,670 |
|
Gross oil and natural gas properties | 24,822 |
| 22,299 |
|
Accumulated depletion | (2,605 | ) | (1,599 | ) |
Accumulated impairment | (1,144 | ) | (1,144 | ) |
Oil and natural gas properties, net | 21,073 |
| 19,556 |
|
Midstream assets | 884 |
| 700 |
|
Other property, equipment and land | 152 |
| 147 |
|
Accumulated depreciation | (66 | ) | (31 | ) |
Property and equipment, net of accumulated depreciation, depletion, amortization and impairment | $ | 22,043 |
| $ | 20,372 |
|
| | |
Balance of costs not subject to depletion: | | |
Incurred in 2019 | $ | 513 |
| |
Incurred in 2018 | 5,844 |
| |
Incurred in 2017 | 2,438 |
| |
Incurred in 2016 | 669 |
| |
Total not subject to depletion | $ | 9,464 |
| |
The Company uses the full cost method of accounting for its oil and natural gas properties. Under this method, all acquisition, exploration and development costs, including certain internal costs, are capitalized and amortized on a composite unit of production method based on proved oil, natural gas liquids and natural gas reserves. Internal costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. Costs, including related employee costs, associated with production and operation of the properties are charged to expense as incurred. All other internal costs not directly associated with exploration and development activities are charged to expense as they are incurred. Capitalized internal costs were approximately $8$14 million and $6$8 million for the three months ended September 30, 20192020 and 2018,2019, respectively, and $32$42 million and $20$32 million for the nine months ended September 30, 20192020 and 2018,2019, respectively. Costs associated with unevaluated properties are excluded from the full cost pool until the Company has made a determination as to the existence of proved reserves. The inclusion of the Company’s unevaluated costs into the amortization base is expected to be completed within three years to five years. Acquisition costs not currently being amortized are primarily related to unproved acreage that the Company plans to prove up through drilling. The Company has no plans to let any of the acreage, expire. Sales of oil and natural gas properties, whether orassociated with acquisition costs not currently being amortized, currently, are accountedexpire based on current drilling plans.
8. ASSET RETIREMENT OBLIGATIONS
The following table describes the changes to the Company’s asset retirement obligations liability for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil, natural gas liquids and natural gas.following periods:
| | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | 2019 |
| | |
| (in millions) |
Asset retirement obligations, beginning of period | $ | 94 | | $ | 136 | |
Additional liabilities incurred | 12 | | 6 | |
Liabilities acquired | 3 | | 3 | |
Liabilities settled | (1) | | (61) | |
Accretion expense | 5 | | 6 | |
| | |
Asset retirement obligations, end of period | 113 | | 90 | |
Less current portion(1) | 1 | | 0 | |
Asset retirement obligations - long-term | $ | 112 | | $ | 90 | |
Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter.(1) The test determines a limit, or ceiling, on the book valuecurrent portion of the proved oil and natural gas properties. Net capitalized costs are limited toasset retirement obligation is included in other accrued liabilities in the lowerCompany’s condensed consolidated balance sheets.
9. EQUITY METHOD INVESTMENTS
The following table presents the carrying values of unamortized cost net of deferred income taxes, or the cost center ceiling. The cost center ceiling is definedRattler’s equity method investments as the sum of (a) estimated future net revenue including estimated expenditures (based on current costs) to be incurred in developing and producing the proved reserves, discounted at 10% per annum, from proved reserves, based on the trailing 12-month unweighted average of the first-day-of-the-month price, adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue, and excludingdates indicated:
| | | | | | | | | | | | | | | | | |
| Ownership Interest | | September 30, 2020 | | December 31, 2019 |
| | | (in millions) |
EPIC Crude Holdings, LP | 10 | % | | $ | 123 | | | $ | 110 | |
Gray Oak Pipeline, LLC | 10 | % | | 135 | | | 115 | |
Wink to Webster Pipeline LLC | 4 | % | | 75 | | | 34 | |
OMOG JV LLC | 60 | % | | 195 | | | 219 | |
Amarillo Rattler, LLC | 50 | % | | 4 | | | 1 | |
Total | | $ | 532 | | | $ | 479 | |
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or non-cash writedown is required.
At September 30, 2019, there was $82 million in exploration costs and development costs and $102 million in capitalized interest that was not subject to depletion. At December 31, 2018, there were $68 million in exploration costs and development costs and $55 million in capitalized interest that was not subject to depletion.
9. ASSET RETIREMENT OBLIGATIONS
The following table describespresents income (loss) from Rattler’s equity method investees reflected in the changes to the Company’s asset retirement obligation liabilityCondensed Consolidated Statement of Operations for the following periods:periods indicated:
|
| | | | | | |
| Nine Months Ended September 30, |
| 2019 | 2018 |
| | |
| (in millions) |
Asset retirement obligations, beginning of period | $ | 136 |
| $ | 21 |
|
Additional liabilities incurred | 6 |
| 2 |
|
Liabilities acquired | 3 |
| — |
|
Liabilities settled | (61 | ) | (1 | ) |
Accretion expense | 6 |
| 1 |
|
Revisions in estimated liabilities | — |
| 1 |
|
Asset retirement obligations, end of period | 90 |
| 24 |
|
Less current portion | — |
| — |
|
Asset retirement obligations - long-term | $ | 90 |
| $ | 24 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | |
| (in millions) | | |
EPIC Crude Holdings, LP | $ | (2) | | | $ | 0 | | | $ | (5) | | | $ | 0 | | | |
Gray Oak Pipeline, LLC | 4 | | | 0 | | | 6 | | | 0 | | | |
| | | | | | | | | |
OMOG JV LLC | 1 | | | 0 | | | (11) | | | 0 | | | |
| | | | | | | | | |
| | | | | | | | | |
Total | $ | 3 | | | $ | 0 | | | $ | (10) | | | $ | 0 | | | |
The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. The Company estimates the future plugging and abandonment costs of wells, the ultimate productive life of the properties, a risk-adjusted discount rate and an inflation factor in order to determine the current present value of this obligation. To the extent future revisions to these assumptions impact the present value of the existing asset retirement obligation liability, a corresponding adjustment is made to the oil and natural gas property balance. The current portion of the asset retirement obligation liability is included in other accrued liabilities in the Company’s consolidated balance sheets.
10. EQUITY METHOD INVESTMENTS
In October 2014, the Company obtained a 25% interest in HMW Fluid Management LLC (“HMW LLC”), which was formed to develop, own and operate an integrated water management system to gather, store, process, treat, distribute and dispose of water to exploration and production companies operating in Midland, Martin and Andrews Counties, Texas.
On June 30, 2018, HMW LLC’s operating agreement was amended. As a result of the amendment, Rattler no longer recognizes an equity investment in HMW LLC but instead consolidates its undivided interest in the salt water disposal assets owned by HMW LLC. In exchange for Rattler’s 25% investment, Rattler received a 50% undivided ownership interest in 2 of the 4 SWD wells and associated assets previously owned by HMW LLC. Rattler’s basis in the assets is equivalent to its basis in the equity investment in HMW LLC.
On February 1, 2019, Rattler LLC obtainedacquired a 10% equity interest in EPIC Crude Holdings, LP (“EPIC”), which is buildingowns and operates a pipeline (the “EPIC project”pipeline”) that once fully operational, will transporttransports crude and NGLnatural gas liquids across Texas for delivery into the Corpus Christi market. As of September 30, 2019, Rattler’s total investment in the EPIC project was $89 million. During the nine months ended September 30, 2019, Rattler recorded net expenses of $532,800 related to the EPIC project. The EPIC project began initial operations during the third quarter of 2019.pipeline became fully operational in April 2020.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
On February 15, 2019, Rattler LLC obtainedacquired a 10% equity interest in Gray Oak Pipeline, LLC (“Gray Oak”), which is buildingowns and operates a pipeline (the “Gray Oak project”pipeline”) that once operational, will transporttransports crude from the Permian to Corpus Christi on the Texas Gulf Coast. As of September 30, 2019, Rattler’s total investment in the Gray Oak project was $114 million. During the nine months ended September 30, 2019, Rattler recorded net expenses of $189,374 related to the Gray Oak project. The Gray Oak project is anticipated to bepipeline became fully operational in the fourth quarter of 2019.April 2020.
On March 29, 2019, Rattler LLC executed a short-term promissory note to Gray Oak. The note allowsallowed for borrowing by Gray Oak of up to $123 million at 2.52% interest rate with a maturity date of March 31, 2022. DuringThe short-term promissory note was repaid on May 31, 2019.
On June 4, 2019, Rattler entered into an equity contribution agreement with respect to Gray Oak. The equity contribution agreement required Rattler to contribute equity or make loans to Gray Oak so that Gray Oak can, to the three months endedextent necessary, cure payment defaults under Gray Oak’s credit agreement and, in certain instances, repay Gray Oak’s credit agreement in full. Rattler’s obligations under the equity contribution agreement were limited to its proportionate ownership interest in Gray Oak, and such obligations were guaranteed by Rattler LLC, Tall City, Rattler OMOG LLC and Rattler Ajax Processing LLC. The equity contribution agreement and Rattler’s obligations under the agreement were terminated in September 30, 2019, there were 0 borrowings or repayments under this note. There were 0 outstanding loans at September 30, 2019.2020.
On July 30, 2019, Rattler LLC joined Wink to Webster Pipeline LLC as a 4% member, together with affiliates of ExxonMobil, Plains All American Pipeline, Delek US, MPLX LP and Lotus Midstream. The joint venture is developing a crude oil pipeline with origin points at Wink and Midland in the Permian Basin for delivery to multiple Houston area locations (the “Wink to Webster project”pipeline”). As of September 30, 2019, Rattler's total investment in the Wink to Webster project was $21 million. During the nine months ended September 30, 2019, Rattler recorded net income of $26,280 related to interest. The Wink to Webster projectpipeline is expected to begin service in the first half of 2021.
NaN impairments were recordedOn October 1, 2019, Rattler LLC acquired a 60% equity interest in OMOG JV LLC (“OMOG”). On November 7, 2019, OMOG acquired 100% of Reliance Gathering, LLC which owns and operates a crude oil gathering system in the Permian Basin, and was renamed as Oryx Midland Oil Gathering LLC following the acquisition.
On December 20, 2019, Rattler LLC acquired a 50% equity interest in Amarillo Rattler, LLC (“Amarillo Rattler”), which currently owns and operates the Yellow Rose gas gathering and processing system with estimated total processing capacity of 40,000 Mcf/d and over 84 miles of gathering and regional transportation pipelines in Dawson, Martin and Andrews Counties, Texas. Amarillo Rattler also intends to construct and operate a new 60,000 Mcf/d cryogenic natural gas processing plant in Martin County, Texas, as well as incremental gas gathering and compression and regional transportation pipelines. However, development of the new processing plant has been postponed pending a recovery in commodity prices and activity levels. The Company has contracted for Rattler’s equity method investmentsup to 30,000 Mcf/d of the capacity of the new processing plant pursuant to a gas gathering and processing agreement entered into with Amarillo Rattler in exchange for the nine months ended September 30, 2019 or 2018.Company’s dedication of certain leasehold interests to that agreement.
At September 30, 2019, there was $124,301 of capitalized interest that was related to equity method investments that have not yet begun operations.
11. DEBT
Long-term debt consisted of the following as of the dates indicated:
|
| | | | | | |
| September 30, | December 31, |
| 2019 | 2018 |
| | |
| (in millions) |
4.625% Notes due 2021(1) | $ | 400 |
| $ | 400 |
|
7.320% Medium-term Notes, Series A, due 2022(1) | 21 |
| 20 |
|
4.750 % Senior Notes due 2024 | 1,250 |
| 1,250 |
|
5.375 % Senior Notes due 2025 | 800 |
| 800 |
|
7.350% Medium-term Notes, Series A, due 2027(1) | 11 |
| 10 |
|
7.125% Medium-term Notes, Series B, due 2028(1) | 108 |
| 100 |
|
DrillCo Agreement | 42 |
| — |
|
Unamortized debt issuance costs | (22 | ) | (27 | ) |
Unamortized premium costs | 9 |
| 10 |
|
Revolving credit facility | 1,629 |
| 1,490 |
|
Viper revolving credit facility | 410 |
| 411 |
|
Rattler revolving credit facility | 103 |
| — |
|
Total long-term debt | $ | 4,761 |
| $ | 4,464 |
|
| |
(1) | At the effective time of the Merger, Energen became a wholly owned subsidiary of the Company and remained the issuer of these notes (the “Energen Notes”). |
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Rattler reviews its investments to determine if a loss in value which is other than temporary has occurred. If such a loss has occurred, Rattler recognizes an impairment provision. During the nine months ended September 30, 2020, Rattler’s loss from equity method investments includes a proportional charge of $16 million representing impairment recorded by the investee associated with its goodwill. During the three months and nine months ended September 30, 2020, Rattler’s loss from equity method investment includes an immaterial abandonment charge related to a project that is no longer expected to be completed. NaN other impairments were recorded for Rattler’s equity method investments for the three or nine months ended September 30, 2020 or 2019. Rattler’s investees all serve customers in the oil and gas industry, which has begun to experience economic challenges as described above. It is possible that prolonged industry challenges could result in circumstances requiring impairment testing, which could result in potentially material impairment charges in future interim periods.
Diamondback Notes
2024 Senior Notes10. DEBT
On October 28, 2016,Long-term debt consisted of the Company issued $500 million in aggregate principal amountfollowing as of 4.750% Senior Notes due 2024 (the “existing 2024 Senior Notes”). The existing 2024 Senior Notes bear interest at a ratethe dates indicated:
| | | | | | | | |
| September 30, | December 31, |
| 2020 | 2019 |
| | |
| (in millions) |
4.625% Notes due 2021 | $ | 191 | | $ | 399 | |
7.320% Medium-term Notes, Series A, due 2022 | 20 | | 21 | |
2.875% Senior Notes due 2024 | 1,000 | | 1,000 | |
4.750% Senior Notes due 2025 | 500 | | 0 | |
5.375% Senior Notes due 2025 | 800 | | 800 | |
3.250% Senior Notes due 2026 | 800 | | 800 | |
7.350% Medium-term Notes, Series A, due 2027 | 0 | | 11 | |
7.125% Medium-term Notes, Series B, due 2028 | 100 | | 108 | |
3.500% Senior Notes due 2029 | 1,200 | | 1,200 | |
DrillCo Agreement | 86 | | 39 | |
Unamortized debt issuance costs | (30) | | (19) | |
Unamortized discount costs | (28) | | (31) | |
Unamortized premium costs | 16 | | 9 | |
Revolving credit facility(1) | 0 | | 13 | |
Viper revolving credit facility(1) | 127 | | 97 | |
Viper 5.375% Senior Notes due 2027 | 480 | | 500 | |
Rattler revolving credit facility(2) | 85 | | 424 | |
Rattler 5.625% Senior Notes due 2025 | 500 | | 0 | |
Total debt, net | 5,847 | | 5,371 | |
Less: current maturities of long-term debt | (191) | | 0 | |
Total long-term debt | $ | 5,656 | | $ | 5,371 | |
(1) Each of 4.750% per annum, payable semi-annually, in arrears on May 1 and November 1 of each year and will maturethese revolving credit facilities matures on November 1, 2024. All of the Company’s existing and future restricted subsidiaries that guarantee its2022.
(2) The Rattler revolving credit facility or certain other debt guarantee the existing 2024 Senior Notes; provided, however, that the existing 2024 Senior Notes are not guaranteed by Viper, Viper’s General Partner, Viper LLC, Rattler, Rattler’s General Partner or Rattler LLC, and will not be guaranteed by any of the Company’s future unrestricted subsidiaries.matures on May 28, 2024.
On September 25, 2018,References in this section to the Company issued $750 million aggregate principal amount of new 4.750% Senior Notes due 2024 (the “New 2024 Notes”), which together with the existing Senior Notes are referred to as the 2024 Senior Notes, as additional notes under,shall mean Diamondback Energy, Inc. and subject to the terms of, the 2024 Indenture. The New 2024 Notes were issued in a transaction exempt from the registration requirements under the Securities Act. The Company received approximately $741 million in net proceeds, after deducting the initial purchasers’ discount and its estimated offering expenses, but disregarding accrued interest, from the issuance of the New 2024 Notes. The Company used a portion of the net proceeds from the issuance of the New 2024 Notes to repay the outstanding borrowings under its revolving credit facility and used the balance for general corporate purposes, including funding a portion of the cash consideration for the acquisition of assets from Ajax Resources, LLC.Diamondback O&G LLC, collectively, unless otherwise specified.
The 2024 Senior Notes were issued under, and are governed by, an indenture among the Company, the subsidiary guarantors party thereto and Wells Fargo, as the trustee, as supplemented (the “2024 Indenture”). The 2024 Indenture contains certain covenants that, subject to certain exceptions and qualifications, among other things, limit the Company’s ability and the ability of the restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make other distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting the Company’s restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and natural gas business and designate certain of the Company’s subsidiaries as unrestricted subsidiaries.
The Company may on any one or more occasions redeem some or all of the 2024 Senior Notes at any time on or after November 1, 2019 at the redemption prices (expressed as percentages of principal amount) of 103.563% for the 12-month period beginning on November 1, 2019, 102.375% for the 12-month period beginning on November 1, 2020, 101.188% for the 12-month period beginning on November 1, 2021 and 100.000% beginning on November 1, 2022 and at any time thereafter with any accrued and unpaid interest to, but not including, the date of redemption. Prior to November 1, 2019, the Company may on any one or more occasions redeem all or a portion of the 2024 Senior Notes at a price equal to 100% of the principal amount of the 2024 Senior Notes plus a “make-whole” premium and accrued and unpaid interest to the redemption date. In addition, any time prior to November 1, 2019, the Company may on any one or more occasions redeem the 2024 Senior Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the 2024 Senior Notes issued prior to such date at a redemption price of 104.750%, plus accrued and unpaid interest to the redemption date, with an amount equal to the net cash proceeds from certain equity offerings.
As required under the terms of the registration rights agreement relating to the New 2024 Notes, on March 22, 2019, the Company filed with the SEC its registration Statement on Form S-4, as amended on July 3, 2019 (the “Exchange Offer S-4”), relating to the exchange offer of the New 2024 Notes for substantially identical notes registered under the Securities Act of 1933, as amended. The Exchange Offer S-4 was declared effective by the SEC on July 11, 2019 and the Company closed the Exchange Offer on August 12, 2019.
2025 Senior Notes
On December 20, 2016, the Company issued $500 million in aggregate principal amount of 5.375% Senior Notes due 2025 (the “existing 2025 Senior Notes”). The existing 2025 Senior Notes bear interest at a rate of 5.375% per annum, payable semi-annually, in arrears on May 31 and November 30 of each year and will mature on May 31, 2025. All of the Company’s existing and future restricted subsidiaries that guarantee its revolving credit facility or certain
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
other debt guarantee the existing 2025May 2020 Senior Notes provided, however, that
On May 26, 2020, the existing 2025Company completed a notes offering of $500 million in aggregate principal amount of its 4.750% Senior Notes due 2025 (the “May 2020 Notes”). Interest on the May 2020 Notes accrues from May 26, 2020, and is payable in cash semi-annually on May 31 and November 30 of each year, beginning November 30, 2020. The May 2020 Notes mature on May 31, 2025. The Company received net proceeds of approximately $496 million from the offering of the May 2020 Notes. The May 2020 Notes are notthe Company’s senior unsecured obligations, and are guaranteed by Viper, Viper’s General Partner, ViperDiamondback O&G LLC Rattler, Rattler’s General Partner or Rattler LLC, and will(the “Guarantor”), but are not be guaranteed by any of the Company’s future unrestrictedother subsidiaries.
On January 29, 2018, the Company issued $300 million aggregate principal amount of new 5.375% Senior Notes due 2025 (the “New 2025 Notes”), which together with the existing 2025 Senior The May 2020 Notes are referredsenior in right or payment to as the 2025 Senior Notes, as additional notes under, and subject to the terms of, the 2025 Indenture. The New 2025 Notes were issued in a transaction exempt from the registration requirements under the Securities Act. The Company received approximately $308 million in net proceeds, after deducting the initial purchaser’s discount and its estimated offering expenses, but disregarding accrued interest, from the issuance of the New 2025 Notes. The Company used the net proceeds from the issuance of the New 2025 Notes to repay a portion of the outstanding borrowings under its revolving credit facility.
The 2025 Senior Notes were issued under an indenture, dated as of December 20, 2016, among the Company, the guarantors party thereto and Wells Fargo Bank, as the trustee (the “2025 Indenture”). The 2025 Indenture contains certain covenants that, subject to certain exceptions and qualifications, among other things, limit the Company’s ability and the ability of the restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make other distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting the Company’s restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and natural gas business and designate certainany of the Company’s subsidiaries as unrestricted subsidiaries.
The Company may on any one or more occasions redeem some or all ofand the 2025 Senior Notes at any time on or after May 31, 2020 at the redemption prices (expressed as percentages of principal amount) of 104.031% for the 12-month period beginning on May 31, 2020, 102.688% for the 12-month period beginning on May 31, 2021, 101.344% for the 12-month period beginning on May 31, 2022Guarantor’s future subordinated indebtedness and 100.000% beginning on May 31, 2023 and at any time thereafter with any accrued and unpaid interest to, but not including, the date of redemption. Prior to May 31, 2020, the Company may on any one or more occasions redeem all or a portion of the 2025 Senior Notes at a pricerank equal to 100% of the principal amount of the 2025 Senior Notes plus a “make-whole” premium and accrued and unpaid interest to the redemption date. In addition, any time prior to May 31, 2020, the Company may on any one or more occasions redeem the 2025 Senior Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the 2025 Senior Notes issued prior to such date at a redemption price of 105.375%, plus accrued and unpaid interest to the redemption date, with an amount equal to the net cash proceeds from certain equity offerings.
Energen Notes
At the effective time of the Merger, Energen became the Company’s wholly owned subsidiary and remained the issuer of $530 million aggregate principal amount of the Energen Notes, issued under an indenture dated September 1, 1996 with The Bank of New York as Trustee (the “Energen Indenture”). The Energen Notes consist of: (1) $400 million aggregate principal amount of 4.625% senior notes due on September 1, 2021, (2) $100 million of 7.125% notes due on February 15, 2028, (3) $20 million of 7.32% notes due on July 28, 2022, and (4) $10 million of 7.35% notes due on July 28, 2027.
The Energen Notes are the senior unsecured obligations of Energen and, post-merger, Energen, as a wholly owned subsidiary of the Company, continues to be the sole issuer and obligor under the Energen Notes. The Energen Notes rank equally in right of payment with all other senior unsecured indebtedness of Energen, including any unsecured guaranties by Energen of the Company’s indebtedness and the Guarantor’s existing and future senior indebtedness. The May 2020 Notes are effectively subordinated to Energen’s seniorthe Company’s and the Guarantor’s existing and future secured indebtedness, including Energen’s secured guaranty of all borrowings and other obligations under the Company’s revolving credit facility,if any, to the extent of the value of the collateral securing such indebtedness.
The Energen Indenture contains certain covenants that, subjectindebtedness, and structurally subordinated to certain exceptionsall of the existing and qualifications, limit Energen’s ability to incur or suffer to exist liens, to enter into salefuture indebtedness and leaseback transactions, to consolidate with or merge into any other entity, and to convey, transfer or lease its properties and assets substantially as an entirety to any person or entity. The Energen Indenture does not include a restriction on the paymentliabilities of dividends.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
On November 29, 2018, Energen guaranteed the Company’s indebtedness under its credit facilitysubsidiaries other than the Guarantor.
Second Amended and granted a lien on certain of its assets to secure such indebtedness and, on December 21, 2018, Energen’s subsidiaries guaranteed the Company’s indebtedness under its credit agreement and granted liens on certain of their assets to secure such indebtedness. As a result of such guarantees, under the terms of the 2024 Indenture and the 2025 Indenture, Energen also guaranteed the 2024 Senior Notes and the 2025 Senior Notes.
The Company’sRestated Credit Facility
The Company and Diamondback O&G LLC, as borrower, and Diamondback Energy, Inc., as parent guarantor, entered into the second amended and restated credit agreement, dated November 1, 2013, as amended, with a syndicate of banks, including Wells Fargo, as administrative agent, and its affiliate Wells Fargo Securities, LLC, as sole book runner and lead arranger. On June 28, 2019, the credit agreement was amended pursuant to an eleventh amendment, which implemented certain changes to the credit facility for the period on and after the date on which the Company’s unsecured debt achieves an investment grade rating from two rating agencies and certain other conditions in the credit agreement are satisfied, (the “investment grade changeover date”). The maximum credit amount available under the credit agreement is $5 billion, subject, prior to the investment grade changeover date, to a borrowing base basedwhich changes became effective on the Company’s oil and natural gas reserves and other factors (the “borrowing base”) and the elected commitment amount. Prior to the investment grade changeover date, the borrowing base is scheduled to be redetermined, under certain circumstances, annually with an effective dateNovember 20, 2019. As of May 1st, and, under certain circumstances, semi-annually with effective dates of May 1st and November 1st. In addition, the Company and Wells Fargo each may request up to 2 interim redeterminations of the borrowing base during any 12-month period. On and after the investment grade changeover date,September 30, 2020, the maximum credit amount available under the credit agreement will be based solely on the commitments of the lenders, and will no longer be limited by the borrowing base. On the investment grade changeover date, the aggregate commitments of the lenders will be set at an amount equal to the aggregate elected commitment amount in effect on such date.was $2 billion. As of September 30, 2019, the borrowing base was set at $3.4 billion,2020, the Company had elected a commitment amount of $2.5 billion and the Company had approximately $1.6 billion of0 outstanding borrowings under its revolving credit facility and $0.9$2.0 billion available for future borrowings under itsthe revolving credit facility. As of September 30, 2020, there was an aggregate of $3 million in outstanding letters of credit, which reduce the amount available under the credit agreement on a dollar-for-dollar basis. The weighted average interest rate on the credit facility was 1.83% and 2.27% for the three months and nine months ended September 30, 2020, respectively.
As of September 30, 2020, the Company was in compliance with all financial maintenance covenants under the revolving credit facility.
Diamondback O&G LLC is
Energen’s Notes
Energen became a wholly owned subsidiary of the borrower underCompany at the credit agreement.effective time of the merger and remained the issuer of an aggregate principal amount of $530 million in notes (the “Energen Notes”). As of September 30, 2019,2020, the credit agreement is guaranteed byEnergen Notes consist of: (1) $191 million aggregate principal amount of 4.625% senior notes due on September 1, 2021, (2) $100 million of 7.125% notes due on February 15, 2028, and (3) $20 million of 7.32% notes due on July 28, 2022.
The Company used the net proceeds from the offering of May 2020 Notes, among other things, to make an equity contribution to Energen to purchase $209 million in previously outstanding aggregate principal amount of Energen’s 4.625% senior notes pursuant to a tender offer.
During the third quarter of 2020, the Company Diamondback E&P LLC and Energen and its subsidiaries and will also be guaranteed by anyrepurchased $10 million in principal amount of the Company’s future subsidiaries that are classified as restricted subsidiaries under the credit agreement. On and after the investment grade changeover date, the Company and Diamondback O&G LLC will no longer be required to cause all restricted subsidiaries to guarantee the credit agreement, and, in certain circumstances, may cause guaranties made by subsidiary guarantors to be released. Prior to the investment grade changeover date, the credit agreement is also secured by substantially alloutstanding Energen 7.350% medium-term notes due on July 28, 2027 at a price of 120% of the assetsaggregate principal amount, which resulted in an immaterial loss on extinguishment of the Company, Diamondback O&G LLC and the guarantors. On and after the investment grade changeover date, the credit agreement will be unsecured and all liens securing the credit facility will be released.
The outstanding borrowings under the credit agreement bear interest at a per annum rate elected by the Company that is equal to an alternate base rate (which is equal to the greatest of the prime rate, the Federal Funds effective rate plus 0.5%, and 3-month LIBOR plus 1.0%) or LIBOR, in each case plus the applicable margin. Prior to the investment grade changeover date, the applicable margin ranges from 0.25% to 1.25% in the case of the alternate base rate and from 1.25% to 2.25% in the case of LIBOR, in each case depending on the amount of loans and letters of credit outstanding in relation to the commitment, which is defined as the least of the maximum credit amount, the borrowing base and the elected commitment amount. On and after the investment grade changeover date, the applicable margin will range from 0.125% to 1.0% per annum in the case of the alternate base rate and from 1.125% to 2.0% per annum in the case of LIBOR, in each case, depending on the pricing level, which in turn depends on the rating agencies’ rating of the Company’s unsecured debt. Prior to the investment grade changeover date, the Company is obligated to pay a quarterly commitment fee ranging from 0.375% to 0.500% per year on the unused portion of the commitment, which fee is also dependent on the amount of loans and letters of credit outstanding in relation to the commitment. On and after the investment grade changeover date, the commitment fee will range from 0.125% to 0.350% per year on the unused portion of the commitment, based on the pricing level, which in turn depends on the rating agencies’ rating of the Company’s unsecured debt.
Loan principal may be optionally repaid from time to time without premium or penalty (other than customary LIBOR breakage). Prior to the investment grade changeover date, loan principal is required to be repaid (a) to the extent the loan amount exceeds the commitment or the borrowing base, whether due to a borrowing base redetermination or
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
otherwise (in some cases subject to a cure period), (b) in an amount equal to the net cash proceeds from the sale of property when a borrowing base deficiency or event of default exists under the credit agreement and (c) at the maturity date of November 1, 2022. On and after the investment grade changeover date, loan principal is required to be repaid (a) to the extent the loan amount exceeds the commitment due to any termination or reduction of the aggregate maximum credit amount and (b) at the maturity date of November 1, 2022.
The credit agreement contains various affirmative, negative and financial maintenance covenants. These covenants, among other things, limit additional indebtedness, additional liens, sales of assets, mergers and consolidations, dividends and distributions, transactions with affiliates and entering into certain swap agreements and require the maintenance of the financial ratios described below.
|
| | |
Financial Covenant (prior to the investment grade changeover date) | | Required Ratio |
Ratio of total net debt to EBITDAX, as defined in the credit agreement | Not greater than 4.0 to 1.0 |
Ratio of current assets to liabilities, as defined in the credit agreement | Not less than 1.0 to 1.0 |
The covenant prohibiting additional indebtedness, applicable prior to the investment grade changeover date, allows for the issuance of unsecured debt in the form of senior or senior subordinated notes if no default would result from the incurrence of such debt after giving effect thereto and if, in connection with any such issuance, the borrowing base is reduced by 25% of the stated principal amount of each such issuance.
On and after the investment grade changeover date, the financial covenants listed above will be replaced by a financial covenant that will require the Company to not permit the total net debt to capitalization ratio, as defined in the credit agreement, to exceed 65%. Additionally, on and after the investment grade changeover date, many of the negative covenants set forth in the credit agreement will no longer restrict the Company, Diamondback O&G LLC and their restricted subsidiaries (the “Restricted Group”), including the covenants that limit (i) equity repurchases, dividends and other restricted payments, (ii) redemptions of the senior or senior subordinated notes, (iii) making investments, (iv) dispositions of property, (v) transactions with affiliates, and (vi) entering into swap agreements. In addition, on and after the investment grade changeover date, (i) the debt covenant will no longer restrict incurrences of debt by Diamondback O&G LLC and guarantors, and will allow non-guarantor restricted subsidiaries to incur debt for borrowed money in an aggregate principal amount up to 15% of consolidated net tangible assets (as defined in the credit agreement) and (ii) the liens covenant will be modified to allow the Restricted Group to create liens if the aggregate amount of debt secured by such liens does not exceed 15% of consolidated net tangible assets.
On August 28, 2019, the Company, the borrower and certain of the Company’s subsidiaries (the “Loan Parties”) entered into a Consent Letter with Wells Fargo allowing the Loan Parties to enter into certain swap agreements in respect of interest rates for United States Treasury securities for an aggregate notional principal amount of up to $3 billion, subject to certain conditions set forth in the consent, which otherwise would be in excess of the notional principal amount of interest rate swap agreements permitted under the revolving credit facility immediately prior to the effectiveness of the consent. As of September 30, 2019, the borrower was party to interest rate swap agreements with an aggregate notional principal amount of $2 billion, interest rates ranging from 1.3565% to 2.1509% and maturity dates ranging from August 24, 2020 to December 31, 2050.
As of September 30, 2019 and December 31, 2018, the Company was in compliance with all financial covenants under its revolving credit facility, as then in effect. The lenders may accelerate all of the indebtedness under the Company’s revolving credit facility upon the occurrence and during the continuance of any event of default. The credit agreement contains customary events of default, including non-payment, breach of covenants, materially incorrect representations, cross-default, bankruptcy and change of control. There are no cure periods for events of default due to non-payment of principal and breaches of negative and financial covenants, but non-payment of interest and breaches of certain affirmative covenants are subject to customary cure periods.
Viper’s Credit Agreement
On July 20, 2018, Viper LLC, as guarantor,borrower, entered into an amended and restated credit agreement with Viper, LLC, as borrower,guarantor, Wells Fargo, as administrative agent, and the other lenders. The credit agreement, as amended to the date hereof,(the “Viper credit agreement”), provides for a revolving credit facility in the maximum credit amount of $2 billion and a borrowing base based on Viper LLC’s oil and natural gas reserves and other factors (the “borrowing base”) of $725 million, subject to scheduled
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
semi-annual and other elective borrowing base redeterminations.. The borrowing base is scheduled to be re-determinedredetermined semi-annually with effective dates ofin May 1st and November 1st.November. In addition, Viper LLC and Wells Fargo each may request up to 3 interim redeterminationsredeterminations of the borrowing base during any 12-month period. Upon closing of the Drop-Down on October 1, 2019, theThe borrowing base under Viper LLC’s revolving credit facility was increased byreduced from $775 million to $580 million during the regularly scheduled (semi-annual) spring 2020 redetermination in the second quarter of 2020, and is expected to be reaffirmed at $125580 million to $725 million from $600 million. In connection with the commencement of the Viper Notes Offering described in Note 20—Subsequent Events below, Viper entered into a third amendment to Viper LLC’s revolving credit facility with Wells Fargo, as administrative agent, and certain required lenders party thereto, which provides for the waiver of the automatic reduction of the borrowing base that would otherwise occur upon the consummation of the Viper Notes Offering. In addition, the third amendment increased the maximum amount of unsecured senior or senior subordinated notes that may be issued by Viper LLC or Viper from $400 million to $1.0 billion. The amendment was approved by the requisite percentage of lenders underduring the revolving credit facility and became effective on October 8, 2019. If the amendment had not been approved, the borrowing base under the revolving credit facility would have decreased by $125 million upon consummation of the Viper Notes Offering.
regularly scheduled (semi-annual) fall 2020 redetermination in November 2020. As of September 30, 2019, the borrowing base was set at $600 million, and2020, Viper LLC had $410$127 million of outstanding borrowings and $190$453 million available for future borrowings under itsthe Viper credit agreement. The weighted average interest rate on the credit facility was 2.14% and 2.66% for the three months and nine months ended September 30, 2020, respectively. The revolving credit facility.facility will mature on November 1, 2022.
As of September 30, 2020, Viper funded LLC was in compliance with all financial maintenance covenants under the cash portionViper credit agreement.
Viper’s Notes
On October 16, 2019, Viper completed an offering in which it issued its 5.375% Senior Notes due 2027 in aggregate principal amount of $500 million (the “Viper Notes”). Viper received net proceeds of approximately $490 million from the offering of the purchase price forViper Notes. Viper loaned the Drop-Down through a combination of cash on hand and borrowings undergross proceeds to Viper LLC’s revolving credit facility.LLC. Viper LLC used the proceeds from the Viper Notes Offeringnotes offering to pay down borrowings under its revolving credit facility. Following these transactions, as of October 16, 2019,During the closing date of thethree months and nine months endedSeptember 30, 2020, Viper Notes Offering, there was $95 million in outstanding borrowings under Viper LLC’s revolving credit facility, the borrowing base under Viper LLC’s revolving credit facility wasrepurchased $7256 million and Viper LLC had $630$20 million, of available borrowing capacity under its revolving credit facility. Additionally, in connection with Viper’s fall redetermination expected to occur in November 2019, the lead bank under the Viper LLC’s revolving credit facility has recommended a borrowing base increase to $775 million from the current borrowing base of $725 million. The anticipated increase in the borrowing base is subject to approval by the requisite lenders under Viper LLC’s revolving credit facility.
The outstanding borrowings under the credit agreement bear interest at a per annum rate elected by Viper LLC that is equal to an alternate base rate (which is equal to the greatest of the prime rate, the Federal Funds effective rate plus 0.5% and 3-month LIBOR plus 1.0%) or LIBOR, in each case plus the applicable margin. The applicable margin ranges from 0.75% to 1.75% per annum in the case of the alternate base rate and from 1.75% to 2.75% per annum in the case of LIBOR, in each case depending on the amount of loans and letters of credit outstanding in relation to the commitment, which is defined as the lesser of the maximum credit amount and the borrowing base. Viper LLC is obligated to pay a quarterly commitment fee ranging from 0.375% to 0.500% per year on the unused portion of the commitment, which fee is also dependent on the amount of loans and letters of credit outstanding in relation to the commitment. Loan principal may be optionally repaid from time to time without premium or penalty (other than customary LIBOR breakage), and is required to be repaid (i) to the extent the loan amount exceeds the commitment or the borrowing base, whether due to a borrowing base redetermination or otherwise (in some cases subject to a cure period), (ii) in an amount equal to the net cash proceeds from the sale of property when a borrowing base deficiency or event of default exists under the credit agreement and (iii) at the maturity date of November 1, 2022. The loan is secured by substantially all of the assets of Viper and Viper LLC.
The credit agreement contains various affirmative, negative and financial maintenance covenants. These covenants, among other things, limit additional indebtedness, purchases of margin stock, additional liens, sales of assets, mergers and consolidations, dividends and distributions, transactions with affiliates and entering into certain swap agreements, and require the maintenance of the financial ratios described below:
|
| | |
Financial Covenant | | Required Ratio |
Ratio of total net debt to EBITDAX, as defined in the credit agreement | Not greater than 4.0 to 1.0 |
Ratio of current assets to liabilities, as defined in the credit agreement | Not less than 1.0 to 1.0 |
The covenant prohibiting additional indebtedness allows for the issuance of unsecured debt of up to $400 million in the form of senior unsecured notes and, in connection with any such issuance, the reduction of the borrowing base by 25% of the stated principal amount of each such issuance. A borrowing base reduction in connection with such issuance may require a portionrespectively of the outstanding principal amount of Viper Notes in open market purchases at a cash price ranging from 97.5% to 98.5% of the loanaggregate principal amount, which resulted in an immaterial gain on extinguishment of debt. The repurchase brought the total outstanding principal amount of Viper Notes down to be repaid.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
As$480 million as of September 30, 2019 and December 31, 2018, Viper was in compliance with all financial covenants under its revolving credit facility, as then in effect. The lenders may accelerate all of the indebtedness under Viper’s credit agreement upon the occurrence and during the continuance of any event of default. The credit agreement contains customary events of default, including non-payment, breach of covenants, materially incorrect representations, cross-default, bankruptcy and change of control. There are no cure periods for events of default due to non-payment of principal and breaches of negative and financial covenants, but non-payment of interest and breaches of certain affirmative covenants are subject to customary cure periods.2020.
Rattler’s Credit Agreement
In connection with the Rattler Offering, Rattler, as parent, and Rattler LLC, as borrower, entered into a credit agreement, dated May 28, 2019, with Wells Fargo, Bank, National Association, as administrative agent, and a syndicate of banks, including Wells Fargo Bank, National Association, as lenders party thereto (the “Rattler credit agreement”).
The Rattler credit agreement provides for a revolving credit facility in the maximum credit amount of $600 million. Loan principal may be optionally repaid from timemillion, which is expandable to time without premium or penalty (other than$1 billion upon Rattler’s election, subject to obtaining additional lender commitments and satisfaction of customary LIBOR breakage), and is required to be paid at the maturity date of May 28, 2024. The loan is guaranteed by Rattler and Tall City, and is secured by substantially all of the assets of Rattler LLC, Rattler and Tall City.conditions. As of September 30, 2019,2020, Rattler LLC had $103$85 million of outstanding borrowings and $497$515 million available for future borrowings under the Rattler credit agreement. The weighted average interest rate on the credit facility was 1.46% and 2.18% for the three months and nine months ended September 30, 2020, respectively.
As of September 30, 2020, Rattler LLC was in compliance with all financial maintenance covenants under the Rattler credit agreement.
See Note 18—Subsequent Events for a description of the amendment to the Rattler credit agreement which occurred subsequent to September 30, 2020.
Rattler’s Notes
On July 14, 2020, Rattler completed an offering (the “Notes Offering”) of $500 million in aggregate principal amount of its 5.625% Senior Notes due 2025 (the “Rattler Notes”). Interest on the Rattler Notes is payable on January 15 and July 15 of each year, beginning on January 15, 2021. The Rattler Notes mature on July 15, 2025. Rattler received net proceeds of approximately $490 million from the Notes Offering. Rattler loaned the gross proceeds to Rattler LLC, which Rattler LLC used to repay then outstanding borrowings under the Rattler credit agreement bear interest atagreement. The Rattler Notes are senior unsecured obligations of Rattler, rank equally in right of payment with all of Rattler’s existing and future senior indebtedness it may incur and initially are guaranteed on a per annum rate electedsenior unsecured basis by Rattler LLC, that is based onTall City, Rattler OMOG LLC and Rattler Ajax Processing LLC. Neither the prime rate or LIBOR, in each case plus an applicable margin. The applicable margin ranges from 0.250% to 1.250% per annum for prime-based loans and 1.250% to 2.250% per annum for LIBOR loans, in each case depending on the Consolidated Total Leverage Ratio (as defined inCompany nor Rattler’s General Partner guarantee the Rattler credit agreement). Rattler LLC is obligated to pay a quarterly commitment fee ranging from 0.250% to 0.375% per annum onNotes. In the unused portionfuture, each of the commitment, which fee is also dependent on the Consolidated Total Leverage Ratio.
The Rattler credit agreement contains various affirmative and negative covenants. These covenants, among other things, limit additional indebtedness, additional liens, sales of assets, mergers and consolidations, distributions and otherRattler’s restricted payments, transactions with affiliates, and entering into certain swap agreements, in each case of Rattler, Rattler LLC and their restricted subsidiaries. The covenants are subject to exceptions set forth in the Rattler credit agreement, including an exception allowing Rattler LLC or Rattler to issue unsecured debt securities and an exception allowing payment of distributions if no default exists. The Rattler credit agreement may be used to fund capital expenditures, to finance working capital, for general company purposes, to pay fees and expenses related to the Rattler credit agreement, and to make distributions permitted under the Rattler credit agreement.
The Rattler credit agreement also contains financial maintenance covenants that require the maintenance of the financial ratios described below:
|
| | |
Financial Covenant | | Required Ratio |
Consolidated Total Leverage Ratio commencing with the fiscal quarter ending September 30, 2019 | Not greater than 5.00 to 1.00 (or not greater than 5.50 to 1.00 for 3 fiscal quarters following certain acquisitions), but if the Consolidated Senior Secured Leverage Ratio (as defined in the Rattler credit agreement) is applicable, then not greater than 5.25 to 1.00) |
Consolidated Senior Secured Leverage Ratio commencing with the last day of any fiscal quarter in which the Financial Covenant Election (as defined in the Rattler credit agreement) is made | Not greater than 3.50 to 1.00 |
Consolidated Interest Coverage Ratio (as defined in the Rattler credit agreement) commencing with the fiscal quarter ending September 30, 2019 | Not less than 2.50 to 1.00 |
16
For purposes of calculating the financial maintenance covenants prior to the fiscal quarter ending June 30, 2020, EBITDA (as defined in the Rattler credit agreement) will be annualized based on the actual EBITDA for the preceding fiscal quarters starting with the fiscal quarter ending September 30, 2019.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Assubsidiaries that either (1) guarantees any of September 30, 2019, each of Rattler and Rattler LLC were in compliance with all financial covenantsits or a guarantor’s other indebtedness or (2) is classified as a domestic restricted subsidiary under the indenture governing the Rattler credit agreement. The lenders may accelerate all of theNotes and is an obligor with respect to any indebtedness under any credit facility will be required to guarantee the Rattler credit agreement upon the occurrence and during the continuance of any event of default. The Rattler credit agreement contains customary events of default, including non-payment, breach of covenants, materially incorrect representations, cross-default, bankruptcy and change in control. There are no cure periods for events of default due to non-payment of principal and breaches of negative and financial maintenance covenants, but non-payment of interest and breaches of certain affirmative covenants are subject to customary cure periods. With certain specified exceptions, the terms and provisions of the Rattler credit agreement generally may be amended with the consent of the lenders holding a majority of the outstanding loans or commitments to lend.Notes.
Alliance with Obsidian Resources, L.L.C.
The Company
Diamondback O&G LLC entered into a participation and development agreement (the “DrillCo Agreement”), dated September 10, 2018, with Obsidian Resources, L.L.C. (“CEMOF”) to fund oil and natural gas development. Funds managed by CEMOF and its affiliates have agreed to commit to funding certain costs out of CEMOF’s net production revenue and, for a period of time, to the extent not funded by such revenue, up to an additional $300 million, to fund drilling programs on locations provided by the Company. Subject to adjustments depending on asset characteristics and return expectations of the selected drilling plan, CEMOF will fund up to 85% of the costs associated with new wells drilled under the DrillCo Agreement and is expected to receive an 80% working interest in these wells until it reaches certain payout thresholds equal to a cumulative 9% and then 13% internal rate of return. Upon reaching the final internal rate of return target, CEMOF’s interest will be reduced to 15%, while the Company’s interest will increase to 85%. As of September 30, 2020 and December 31, 2019, CEMOF had funded approximately $33 million.CEMOF’s return related to this alliance was $86 million and $39 million, respectively. As of September 30, 2019, 82020, 15 joint wells have been drilled and completed.
12.11. CAPITAL STOCK AND EARNINGS PER SHARE
Diamondback did not complete any equity offerings during the nine months ended September 30, 20192020 and September 30, 2018.2019.
Viper’s Equity Offering
On March 1, 2019, Viper completed an underwritten public offering of 10,925,000 common units, which included 1,425,000 common units issued pursuant to an option to purchase additional common units granted to the underwriters. Following this offering, the Company owned approximately 54% of Viper’s total units then outstanding. Viper received net proceeds from this offering of approximately $341 million, after deducting underwriting discounts and commissions and estimated offering expenses. Viper used the net proceeds to purchase units of Viper LLC. Viper LLC in turn used the net proceeds to repay a portion of the outstanding borrowings under its revolving credit facility and finance acquisitions during the period.
In July 2018, Viper completed an underwritten public offering of 10,080,000 common units, which included 1,080,000 common units issued pursuant to an option to purchase additional common units granted to the underwriters. Following this offering, Diamondback owned approximately 59% of the total Viper units then outstanding. Viper received net proceeds from this offering of approximately $303 million, after deducting underwriting discounts and commissions and estimated offering expenses. Viper used the net proceeds to purchase units of Viper LLC. Viper LLC in turn used the net proceeds to repay a portion of the $362 million then outstanding borrowings under its revolving credit facility.
Rattler’s Initial Public Offering
Please see Note 6—5—Rattler Midstream LP for information regarding Rattler’s IPO.the Rattler Offering.
Stock Repurchase Program
In May 2019, the Company’s board of directors approved a stock repurchase program to acquire up to $2 billion of the Company’s outstanding common stock through December 31, 2020. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions, and are subject to market
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
conditions, applicable legal requirements, contractual obligations and other factors. The repurchase program does not require the Company to acquire any specific number of shares. This repurchase program may be suspended from time to time, modified, extended or discontinued by the board of directors at any time. During the three months andended September 30, 2020, the Company repurchased 0 common stock under this repurchase program. During the nine months ended September 30, 2019,2020, the Company repurchased approximately $296$98 million and $400 million, respectively, of common stock under this repurchase program. As of September 30, 2019, $1.62020, $1.3 billion remained available for use to repurchase shares under the Company's common stock repurchase program.program, although the Company has suspended this program to preserve liquidity.
Earnings (Loss) Per Share
The Company’s basic earnings per share amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share include the effect of potentially dilutive shares outstanding for the period. Additionally, for the diluted earnings per share computation, the per share earnings of Viper and Rattler are included in the consolidated earnings per share computation based on the consolidated group’s holdings of the subsidiary.
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
A reconciliation of the components of basic and diluted earnings per common share is presented in the table below:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | 2019 | | 2020 | 2019 |
| ($ in millions, except per share amounts, shares in thousands) |
Net income (loss) attributable to common stock | $ | (1,113) | | $ | 368 | | | $ | (3,778) | | $ | 727 | |
Weighted average common shares outstanding: | | | | | |
Basic weighted average common units outstanding | 157,833 | | 162,543 | | | 157,984 | | 164,070 | |
Effect of dilutive securities: | | | | | |
Potential common shares issuable(1) | 0 | | 237 | | | 0 | | 396 | |
Diluted weighted average common shares outstanding | 157,833 | | 162,780 | | | 157,984 | | 164,466 | |
Basic net income (loss) attributable to common stock | $ | (7.05) | | $ | 2.27 | | | $ | (23.91) | | $ | 4.44 | |
Diluted net income (loss) attributable to common stock | $ | (7.05) | | $ | 2.26 | | | $ | (23.91) | | $ | 4.42 | |
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | 2018 | | 2019 | 2018 |
| ($ in millions, except per share amounts, shares in thousands) |
Net income attributable to common stock | $ | 368 |
| $ | 157 |
| | $ | 727 |
| $ | 539 |
|
Weighted average common shares outstanding | | | | | |
Basic weighted average common units outstanding | 162,543 |
| 98,638 |
| | 164,070 |
| 98,603 |
|
Effect of dilutive securities: | | | | | |
Potential common shares issuable | 237 |
| 180 |
| | 396 |
| 217 |
|
Diluted weighted average common shares outstanding | 162,780 |
| 98,818 |
| | 164,466 |
| 98,820 |
|
Basic net income attributable to common stock | $ | 2.27 |
| $ | 1.59 |
| | $ | 4.44 |
| $ | 5.47 |
|
Diluted net income attributable to common stock | $ | 2.26 |
| $ | 1.59 |
| | $ | 4.42 |
| $ | 5.45 |
|
The Company had(1) For the following shares thatthree and nine months ended September 30, 2020, 0 potential common units were included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive. For the three months and nine months ended September 30, 2019, there were 50,814 and 40,291 potential common units excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive forunder the periods presented but could potentially dilute basic earnings per share in future periods:treasury stock method.
|
| | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | 2018 | | 2019 | 2018 |
| (in thousands) |
Restricted stock units | 51 |
| 13 |
| | 40 |
| 2 |
|
Change in Ownership of Consolidated Subsidiaries
13.The following table summarizes changes in the ownership interest in consolidated subsidiaries during the period:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) | | |
Net income (loss) attributable to the Company | $ | (1,113) | | | $ | 368 | | | $ | (3,778) | | | $ | 727 | |
Change in ownership of consolidated subsidiaries | 0 | | | 0 | | | 329 | | | 77 | |
Change from net income (loss) attributable to the Company's stockholders and transfers to non-controlling interest | $ | (1,113) | | | $ | 368 | | | $ | (3,449) | | | $ | 804 | |
12. EQUITY-BASED COMPENSATION
The following table presents the effects of the equity compensation plans and related costs:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | 2019 | | 2020 | 2019 |
| (in millions) |
General and administrative expenses | $ | 9 | | $ | 4 | | | $ | 27 | | $ | 27 | |
Equity-based compensation capitalized pursuant to full cost method of accounting for oil and natural gas properties | 4 | | (1) | | | 12 | | 9 | |
| | | | | |
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | 2018 | | 2019 | 2018 |
| (in millions) |
General and administrative expenses | $ | 4 |
| $ | 5 |
| | $ | 27 |
| $ | 18 |
|
Equity-based compensation capitalized pursuant to full cost method of accounting for oil and natural gas properties | (1 | ) | 2 |
| | 9 |
| 7 |
|
Diamondback Energy, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements-(Continued)
(Unaudited)
Restricted Stock Units
The following table presents the Company’s restricted stock units activity under the Equity Plan during the nine months ended September 30, 2019:2020:
| | | | | | | | |
| Restricted Stock Awards & Units | Weighted Average Grant-Date Fair Value |
Unvested at December 31, 2019 | 505,867 | | $ | 96.01 | |
Granted | 183,102 | | $ | 60.72 | |
Vested | (139,355) | | $ | 85.21 | |
Forfeited | (19,228) | | $ | 99.01 | |
Unvested at September 30, 2020 | 530,386 | | $ | 86.55 | |
|
| | | | | |
| Restricted Stock Awards & Units | Weighted Average Grant-Date Fair Value |
Unvested at December 31, 2018 | 324,224 |
| $ | 116.01 |
|
Granted | 468,778 |
| $ | 106.85 |
|
Vested | (217,300 | ) | $ | 100.47 |
|
Forfeited | (81,962 | ) | $ | 107.35 |
|
Unvested at September 30, 2019 | 493,740 |
| $ | 107.54 |
|
The aggregate fair value of restricted stock units that vested during the nine months ended September 30, 2020 and 2019 and 2018 was $4$12 million and $15$4 million, respectively. As of September 30, 2019,2020, the Company’s unrecognized compensation cost related to unvested restricted stock awards and units was $28 million. Such cost$27 million, which is expected to be recognized over a weighted-average period of 1.41.7 years.
In March 2019, eligible employees received performance restricted stock unit awards totaling 199,723 units from which a minimum of 0% and a maximum of 200% units could be awarded. The awards have aawarded based upon the TSR during the performance period of January 1, 2019 to December 31, 2021 and cliff vest at December 31, 2021.2021 subject to continued employment. In March 2019, eligible employees received performance restricted stock unit awards totaling 32,958 units from which a minimum of 0% and a maximum of 200% units could be awarded. The awards have a performance period of January 1, 2019 to December 31, 2021 and vest in 5 equal installments beginning on March 1, 2025.
The fair value of each performance restricted stock unit is estimated at the date of grant using a Monte Carlo simulation, which results in an expected percentage of units to be earned during the performance period.
The following table presents a summary of the grant-date fair values of performance restricted stock units granted and the related assumptions for the March 20192020 awards.
The following table presents the Company’s performance restricted stock units activity under the Equity Plan for the nine months ended September 30, 2019:2020:
On May 22, 2019, the board of directors of Rattler’s General Partner adopted the Rattler Midstream LP Long Term Incentive Plan (“Rattler LTIP”), for employees, consultants and directors of Rattler’s General Partner and any of its affiliates, including Diamondback, who perform services for Rattler. The Rattler LTIP provides for the grant of unit options, unit appreciation rights, restricted units, unit awards, phantom units, distribution equivalent rights, cash awards, performance awards, other unit-based awards and substitute awards.
Under the Rattler LTIP, the board of directors of Rattler’s General Partner is authorized to issue phantom units to eligible employees and non-employee directors. Rattler estimates the fair value of phantom units as the closing price of Rattler’s common units on the grant date of the award, which is expensed over the applicable vesting period. Upon vesting, the phantom units entitle the recipient to one common unit of Rattler for each phantom unit. The recipients are also entitled to distribution equivalent rights, which represent the right to receive a cash payment equal to the value of the distributions paid on one phantom unit between the grant date and the vesting date.
The following table presents the phantom unit activity under the Rattler LTIP for the nine months ended September 30, 2019:2020: