DIAMONDBACK ENERGY, INC. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto presented in this report as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs, and expected performance. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors. See " Part II. Item 1A. Risk Factors " and " Cautionary Statement Regarding Forward-Looking Statements ."
Overview
We operate in two business segments: (i) the upstream segment, which is engaged in the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in thePermian Basin inWest Texas and (ii) through our publicly-traded subsidiary, Rattler, the midstream operations segment, which is focused on ownership, operation, development and acquisition of the midstream infrastructure assets in the Midland and Delaware Basins of thePermian Basin . 2020 Recent Developments
COVID-19 and Recent Collapse in Commodity Prices
OnMarch 11, 2020 , theWorld Health Organization characterized the global outbreak of the novel strain of coronavirus, COVID-19, as a "pandemic." To limit the spread of COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines, causing some businesses to suspend operations and a reduction in demand for many products from direct or ultimate customers. Although many stay-at-home orders have expired and certain restrictions on conducting business have been lifted, the COVID-19 pandemic resulted in a widespread health crisis and a swift and unprecedented reduction in international andU.S. economic activity which, in turn, has adversely affected the demand for oil and natural gas and caused significant volatility and disruption of the financial markets. In earlyMarch 2020 , oil prices dropped sharply, and then continued to decline reaching negative levels. This was a result of multiple factors affecting supply and demand in global oil and natural gas markets, including actions taken byOPEC members and other exporting nations impacting commodity price and production levels and the ongoing COVID-19 pandemic. WhileOPEC members and certain other nations agreed inApril 2020 to cut production, which helped to reduce a portion of the excess supply in the market and improve oil prices, there is no assurance that this agreement will continue or be observed by its parties, and downward pressure on commodity prices has continued and could continue for the foreseeable future. The Company cannot predict if or when commodity prices will stabilize and at what levels. As a result of the reduction in crude oil demand caused by factors mentioned above, inMarch 2020 , we announced reductions to our capital plans for 2020 and have recently indicated that we expect our budget to remain in this lower range for the rest of 2020. We also lowered our total commodity production and oil production guidance for 2020 and, as ofAugust 3, 2020 , were targeting slightly lower oil production volumes in 2020 as compared to full year 2019, and took other actions discussed below. In addition, as a result of the sharp decline in commodity prices in earlyMarch 2020 , which decline continued for most of the second quarter of 2020, we recorded a non-cash ceiling test impairment for the six months endedJune 30, 2020 of approximately$3.5 billion , of which approximately$2.5 billion was recorded for the three months endedJune 30, 2020 and approximately$1.0 billion was recorded for the three months endedMarch 31, 2020 . These impairment charges adversely affected our results of operations but did not reduce our cash flows. If the trailing 12-month commodity prices continue to fall as compared to the commodity prices used in prior quarters, we will have material write downs in subsequent quarters. Our production, proved reserves and cash flows will also be adversely impacted. Our results of operations may be further adversely impacted by any government rule, regulation or order that may impose production limits, as well as pipeline capacity and storage constraints, in thePermian Basin where we operate. Given the dynamic nature of these events, we cannot reasonably estimate the period of time that the COVID-19 pandemic, the depressed commodity prices and the adverse macroeconomic will persist, the full extent of the impact they will have on our industry and our business, financial condition, results of operations or cash flows, or the pace or extent of any subsequent recovery. 32 -------------------------------------------------------------------------------- Table of Contents Our Response to the Commodity Price Volatility and Impact of COVID-19 •We have taken swift and decisive actions to protect the health and safety of our employees and preserve the strength of our organization during the COVID-19 pandemic and the depressed commodity price markets. •In response to historically low commodity prices, we made the decision to complete as few wells as possible in the second quarter of 2020, with no wells turned to production in the month ofJune 2020 . •We also curtailed 5% of our oil production during the second quarter of 2020. This curtailed production has been restored and is now receiving significantly higher realized prices than it would have received when the decision was made to curtail. We currently have three completion crews working to stem production declines to meet our fourth quarter 2020 production target of between 170,000 and 175,000 barrels of oil per day. •Our operated rig count declined rapidly in the second quarter of 2020, from 20 rigs onMarch 31, 2020 to six rigs currently, building a significant inventory of drilled but uncompleted wells.
•Assuming a continuation of current market conditions, we plan to operate between five and six operated drilling rigs and between three and four completion crews for the remainder of 2020.
•Our cash operating costs declined dramatically in the second quarter of 2020, and we intend to preserve some of these efficiencies in future periods.
•Based on current forward commodity prices, we expect to generate significant free cash flow in the second half of 2020 and in 2021. Under a maintenance capital scenario in 2021 should that become the base case operating plan, we anticipate that we will be able to hold expected fourth quarter 2020 oil production flat while spending 25% to 35% less than our 2020 capital budget, including lower midstream and infrastructure budgets. •We intend to remain focused on returning capital to our stockholders through our quarterly dividend while protecting our balance sheet, and intend to continue to drill, complete and produce hydrocarbons with the highest margins at the lowest capital and operating costs in the industry.
•We have hedged approximately 100% of our remaining expected 2020 oil production, including basis differentials and a majority of WTI contract exposure and removed all three-way collar hedge exposure to maximize downside protection.
•We have hedged approximately 50% of our expected 2021 oil production in the form of swaps and two-way collars.
Second Quarter 2020 and Other Recent Developments
•We recorded a net loss of$2.4 billion for the second quarter endedJune 30, 2020 , which reflected an impairment of oil and natural gas properties of approximately$2.5 billion as a result of the lower average trailing 12-month commodity pricing due to the sharp decline in commodity prices.
•Our average production was 294.1 MBOE/d during the second quarter of 2020.
•During the second quarter of 2020, we drilled 37 gross horizontal wells in the
•We turned 15 gross operated horizontal wells (ten in the
•The average lateral length for the wells completed during the second quarter of 2020 was 11,256 feet.
•As ofJune 30, 2020 , we had$1.9 billion of availability for future borrowings under our revolving credit facility and approximately$0.1 billion of cash on hand. •Our cash operating costs for the second quarter endedJune 30, 2020 were$6.44 per BOE, including lease operating expenses$3.85 per BOE, cash general and administrative expenses of$0.41 per BOE and production and ad valorem taxes and gathering and transportation expenses of$2.18 per BOE, representing a 24% decrease from the cash 33 -------------------------------------------------------------------------------- Table of Contents operating costs for the first quarter endedMarch 31, 2020 of$8.52 per BOE even with lower production volumes in the second quarter of 2020. •Our current drilling and completion costs in theMidland Basin are between$450 and$500 per lateral foot, with an estimated additional$80 to$100 of equip costs per lateral foot. •Our current drilling and completion costs in theDelaware Basin are between$650 and$700 per lateral foot, with an estimated additional$100 to$150 of equip costs per lateral foot.
•We completed a four well pad in
•Using new rotary steerable technology, we set a
•Reduced flaring as a percentage of net production to 0.3%, down 82% from the first quarter of 2020 and down 84% from 2019.
•OnJuly 31 2020 , our board of directors declared a cash dividend for the second quarter of 2020 of$0.3750 per share of common stock, payable onAugust 20, 2020 to our stockholders of record at the close of business ofAugust 13, 2020 . •InMay 2020 , we completed a registered offering of$500 million in aggregate principal amount of our 4.750% Senior Notes due 2025, or theMay 2020 Notes, resulting in the net proceeds of approximately$496 million . The proceeds of the offering of theMay 2020 Notes were used to purchase$209 million in aggregate principal amount of Energen's 4.625% senior notes pursuant to a tender offer. •InJuly 2020 , Rattler completed a notes offering of$500 million in aggregate principal amount of its 5.625% Senior Notes due 2025, or the Rattler Notes, under Rule 144A and Regulation S under the Securities Act, resulting in net proceeds of approximately$490 million . The proceeds from the offering of the Rattler Notes were used to repay outstanding borrowings under its revolving credit facility.
Upstream Segment
In our upstream segment, our activities are primarily directed at the horizontal development of the Wolfcamp and Spraberry formations in theMidland Basin and the Wolfcamp and Bone Spring formations in theDelaware Basin . We intend to continue to develop our reserves and increase production through development drilling and exploitation and exploration activities on our multi-year inventory of identified potential drilling locations and through acquisitions that meet our strategic and financial objectives, targeting oil-weighted reserves. Also, in our upstream segment, our publicly-traded subsidiary, Viper, is focused on owning and acquiring mineral interests and royalty interests in oil and natural gas properties in thePermian Basin and theEagle Ford Shale and derives royalty income and lease bonus income from such interests. As ofJune 30, 2020 , we had approximately 379,277 net acres, which primarily consisted of approximately 199,349 net acres in theMidland Basin and approximately 152,883 net acres in theDelaware Basin . As ofDecember 31, 2019 , we had an estimated 12,310 gross horizontal locations that we believe to be economic at$60 per Bbl West Texas Intermediate, or WTI. 34 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the total number of operated horizontal wells drilled and completed during the three months and six months endedJune 30, 2020 : Three Months Ended June 30, 2020 Six Months Ended June 30, 2020 Drilled Completed(1) Drilled Completed(2) Area Gross Net Gross Net Gross Net Gross Net Midland Basin 37 36 10 6 92 86 44 36 Delaware Basin 21 20 5 5 59 55 51 47 Total 58 56 15 11 151 141 95 83 (1)The average lateral length for the wells completed during the second quarter of 2020 was 11,256 feet. Operated completions during the second quarter of 2020 consisted of four Wolfcamp A wells, two Wolfcamp B wells, fourLower Spraberry wells, two Middle Spraberry wells, oneJo Mill well, oneSecond Bone Springs well, and oneThird Bone Springs well. (2)The average lateral length for the wells completed during the first six months of 2020 was 9,987 feet. Operated completions during the first six months of 2020 consisted of 51 Wolfcamp A wells, 11 Wolfcamp B wells, 11 Lower Spraberry wells, eight Middle Spraberry wells, threeJo Mill wells, sixSecond Bone Springs wells, and fiveThird Bone Springs wells.
As of
Vertical Wells Horizontal Wells Total
Area Gross Net Gross Net Gross Net
Midland Basin 1,547 1,453 1,051 955 2,598 2,408
Delaware Basin 29 26 556 522 585 548
Total 1,576 1,479 1,607 1,477 3,183 2,956
As of
Our development program is focused entirely within thePermian Basin , where we continue to focus on long-lateral multi-well pad development. Our horizontal development consists of multiple targeted intervals, primarily within the Wolfcamp and Spraberry formations in theMidland Basin and the Wolfcamp andBone Springs formations in theDelaware Basin .
Midstream Operations
In our midstream operations segment, Rattler's crude oil infrastructure assets consist of gathering pipelines and metering facilities, which collectively gather crude oil for its customers. Rattler's facilities gather crude oil from horizontal and vertical wells in our ReWard,Spanish Trail ,Pecos andGlasscock areas within thePermian Basin . Rattler's natural gas gathering and compression system consists of gathering pipelines, compression and metering facilities, which collectively service the production from ourPecos area assets within thePermian Basin . Rattler's water sourcing and distribution assets consists of water wells, hydraulic fracturing pits, pipelines and water treatment facilities, which collectively gather and distribute water fromPermian Basin aquifers to the drilling and completion sites through buried pipelines and temporary surface pipelines. Rattler's produced water gathering and disposal system spans approximately 503 miles and consists of gathering pipelines along with produced water disposal wells and facilities which collectively gather and dispose of produced water from operations throughout ourPermian Basin acreage. We have entered into multiple fee-based commercial agreements with Rattler, each with an initial term ending in 2034, utilizing Rattler's infrastructure assets or its planned infrastructure assets to provide an array of essential services critical to our upstream operations in theDelaware and Midland Basins. Our agreements with Rattler include substantial acreage dedications. OnMay 5, 2020 , we amended our commercial agreements with Rattler to, among other things, in certain cases add certain new areas to our dedication and commitment and revise the threshold for permitting releases of dedications in connection with transfers or swaps by us or our affiliates. 35
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Results of Operations
The following table sets forth selected operating data for the three months and
six months ended
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Revenues (in millions):
Oil sales $ 352 $ 947 $ 1,179 $ 1,690
Natural gas sales 21 (9) 25 20
Natural gas liquid sales 39 62 91 132
Total oil, natural gas and natural gas
liquid revenues $ 412 $ 1,000 Production Data (in thousands): Oil (MBbls) 16,045 17,402 34,370 33,517 Natural gas (MMcf) 31,857 21,439 63,977 43,123 Natural gas liquids (MBbls) 5,411 4,538 10,949 8,446 Combined volumes (MBOE) 26,765 25,513 55,982 49,150 Daily combined volumes (BOE/d) 294,126 280,365 307,592 271,548 Daily oil volumes (BO/d) 176,323 191,229 188,846 185,176 Average Prices: Oil ($ per Bbl)$ 21.99 $ 54.41 $ 34.31 $ 50.42 Natural gas ($ per Mcf)$ 0.63 $ (0.41) $ 0.39 $ 0.46 Natural gas liquids ($ per Bbl)$ 7.17 $ 13.60 $ 8.33 $ 15.64 Combined ($ per BOE)$ 15.39 $ 39.19 $ 23.13 $ 37.47 Oil, hedged ($ per Bbl)(1)$ 35.21 $ 53.95 $ 42.73 $ 50.56 Natural gas, hedged ($ per MMbtu)(1)$ 0.33 $ 0.04 $ 0.38 $ 0.77 Natural gas liquids, hedged ($ per Bbl)(1)$ 7.17 $ 14.41 $ 8.33 $ 16.16 Average price, hedged ($ per BOE)(1)$ 22.95 $ 39.39
(1)Hedged prices reflect the effect of our commodity derivative transactions on
our average sales prices. Our calculation of such effects includes gains and
losses on cash settlements for matured commodity derivatives, which we do not
designate for hedge accounting. Hedged prices exclude gains or losses resulting
from the early settlement of commodity derivative contracts.
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Production Data
Substantially all of our revenues are generated through the sale of oil, natural
gas liquids and natural gas production. The following tables set forth our
production data for the three months and six months ended June 30, 2020 and
2019:
Six Months Ended
Three Months Ended June 30, June 30,
2020 2019 2020 2019
Oil (MBbls) 60 % 68 % 61 % 68 %
Natural gas (MMcf) 20 % 14 % 19 % 15 %
Natural gas liquids (MBbls) 20 % 18 % 20 % 17 %
100 % 100 % 100 % 100 %
Three Months Ended June
Three Months Ended June 30, 2020 30, 2019
Midland Basin Delaware Basin Other(1) Total Midland Basin Delaware Basin Other(2) Total
(in thousands)
Production Data:
Oil (MBbls) 9,382 6,626 37 16,045 10,422 6,311 669 17,402
Natural gas (MMcf) 17,049 14,721 87 31,857 10,470 10,610 359 21,439
Natural gas liquids (MBbls) 3,146 2,244 21 5,411 2,595 1,885 58 4,538
Total (MBoe) 15,370 11,324 73 26,765 14,762 9,964 787 25,513
Six Months Ended June
Six Months Ended June 30, 2020 30, 2019
Midland Basin Delaware Basin Other(1) Total Midland Basin Delaware Basin Other(2) Total
(in thousands)
Production Data:
Oil (MBbls) 19,893 14,386 91 34,370 20,306 11,929 1,282 33,517
Natural gas (MMcf) 32,882 30,868 227 63,977 20,765 21,621 737 43,123
Natural gas liquids (MBbls) 6,194 4,707 48 10,949 4,785 3,542 119 8,446
Total (MBoe) 31,567 24,238 177 55,982 28,552 19,075 1,524 49,150
(1)Includes the Central Basin Platform, the
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Comparison of the Three Months Ended June 30, 2020 and 2019 and Six Months Ended
June 30, 2020 and 2019
Oil, Natural Gas and Natural Gas Liquids Revenues. Our oil, natural gas and natural gas liquids revenues are a function of oil, natural gas and natural gas liquids production volumes sold and average sales prices received for those volumes.
The net dollar effect of the change in prices (calculated as the change in
period-to-period average prices multiplied by current period production volumes
of oil, natural gas and natural gas liquids) and the net dollar effect of the
change in production (calculated as the increase in period-to-period volumes for
oil, natural gas and natural gas liquids multiplied by the period average
prices) are shown below:
Six Months Ended June
30, 2020 Compared to
Three Months Ended June 30, 2020 Compared to 2019 2019
Total net
Production dollar effect Change in Production Total net dollar
Change in prices volumes(1) of change prices volumes(1) effect of change
(in millions)
Effect of changes in price:
Oil $ (32.42) 16,045 $ (520) $ (16.12) 34,370 $ (554)
Natural gas $ 1.04 31,857 33 $ (0.07) 63,977 (5)
Natural gas liquids $ (6.43) 5,411 (35) $ (7.31) 10,949 (80)
Total revenues due to change in
price $ (522) $ (639)
Change in Total net Change in
production Prior period dollar effect production Prior period Total net dollar
volumes(1) Average Prices of change volumes(1) Average Prices effect of change
(in millions)
Effect of changes in production
volumes:
Oil (1,357) $ 54.41 $ (74) 853 $ 50.42 $ 43
Natural gas 10,418 $ (0.41) (4) 20,854 $ 0.46 10
Natural gas liquids 873 $ 13.60 12 2,503 $ 15.64 39
Total revenues due to change in
production volumes (66) 92
Total change in revenues $ (588) $ (547)
(1)Production volumes are presented in MBbls for oil and natural gas liquids and MMcf for natural gas.
Our oil, natural gas and natural gas liquids revenues for the three months endedJune 30, 2020 decreased by$588 million , or 59%, to$412 million from$1 billion during the three months endedJune 30, 2019 , primarily due to lower oil, natural gas and natural gas liquids sales prices. The increase in natural gas and natural gas liquids production volumes was due to a combination of increased drilling activity and growth through acquisitions. This increase was partially offset by temporarily curtailing a portion of our oil production volumes in the second quarter of 2020 in response to the sudden drop in demand and prices for oil stemming from the COVID-19 pandemic. Our oil, natural gas and natural gas liquids revenues for the six months endedJune 30, 2020 decreased by$547 million , or 30%, to$1.3 billion from$1.8 billion during the six months endedJune 30, 2019 primarily due to lower oil natural gas and natural gas liquids sales prices. The increases in production volumes were due to a combination of increased drilling activity and growth through acquisitions. 38
-------------------------------------------------------------------------------- Table of Contents Midstream Services Revenue. The following table shows midstream services revenue for the three months and six months endedJune 30, 2020 and 2019: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 (in millions) Midstream services revenue $ 11$ 16 $ 25 $ 35 Our midstream services revenue represents fees charged to our joint interest owners and third parties for the transportation of oil and natural gas along with water gathering and related disposal facilities. Midstream services revenue decreased to$11 million for the three months endedJune 30, 2020 and$25 million for the six months endedJune 30, 2020 primarily due to a reduction in sourced water volumes due to Diamondback's lower level of drilling and completion activity in the second quarter of 2020. This decrease was partially offset by increased produced water and crude oil and natural gas volumes due to the continued build out of certain midstream assets.
Lease Operating Expenses. The following table shows lease operating expenses for
the three months and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Amount Per BOE Amount Per BOE Amount Per BOE Amount Per BOE
(in millions, except per BOE amounts)
Lease operating expenses $ 103 $ 3.85 $ 127 Lease operating expenses for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 decreased by$24 million , or$1.13 per BOE. Lease operating expenses for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 decreased by$6 million , or$0.69 per BOE. In both cases, the decreases in lease operating expenses were primarily associated with a reduction in well maintenance activity related to properties acquired in the Energen acquisition and an improvement in power generation costs as a result of improved electrical availability. Production and Ad Valorem Tax Expense. The following table shows production and ad valorem tax expense for the three months and six months endedJune 30, 2020 and 2019: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Amount Per BOE Amount Per BOE Amount Per BOE Amount Per BOE (in millions, except per BOE amounts) Production taxes$ 19 $ 0.73 $ 46 $
1.82
3 0.10 18 0.69 32 0.58 32 0.64
Total production and ad valorem
expense $ 22 $ 0.83 $ 64 $
2.51
Production taxes as a % of oil, natural gas, and natural gas liquids revenue 4.6 % 4.6 % 4.7 % 4.7 % In general, production taxes are directly related to production revenues and are based upon current year commodity prices. Production taxes as a percentage of production revenues remained consistent for the three and six month periods endedJune 30, 2020 compared to the same periods in 2019. Ad valorem taxes are based, among other factors, on property values driven by prior year commodity prices. Ad valorem taxes for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 decreased by$15 million primarily due to a decline in commodity prices between periods coupled with a downward change in full year 2020 ad valorem estimates. 39
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Ad valorem taxes for the six months ended
Gathering and Transportation Expense. The following table shows gathering and transportation expense for the three months and six months endedJune 30, 2020 and 2019: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Amount Per BOE Amount Per BOE Amount Per BOE Amount Per BOE (in millions, except per BOE amounts) Gathering and transportation expense$ 36 $ 1.35 $ 17 $ 0.67 $ 72 $ 1.29 $ 29 $ 0.59 For the three months and six months endedJune 30, 2020 , the per BOE increases for gathering and transportation expenses are primarily attributable to recording minimum volume commitment fees in 2020, as well as an increase in fees for our gas production and an overall change in our product mix, with gas and natural gas liquids production becoming a greater percentage of overall production.
Midstream Services Expense. The following table shows midstream services expense
for the three months and six months ended
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(in millions)
Midstream services expense $ 32 $
17
Midstream services expense represents costs incurred to operate and maintain our oil and natural gas gathering and transportation systems, natural gas lift, compression infrastructure and water transportation facilities. Midstream services expense increased in the 2020 periods compared to 2019 primarily due to increased volumes largely attributable to additional build out of certain midstream assets.
Depreciation, Depletion and Amortization. The following table provides the
components of our depreciation, depletion and amortization expense for the three
months and six months ended
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(in millions, except BOE amounts)
Depletion of proved oil and natural gas properties $ 330 $ 345 $ 722 $ 656
Depreciation of midstream assets 10 8 20 16
Depreciation of other property and equipment 3 6 8 9
Depreciation, depletion and amortization expense $ 343
$ 359 $ 750 $ 681 Oil and natural gas properties depreciation, depletion and amortization per BOE$ 12.82
The decrease in depletion of proved oil and natural gas properties of$15 million for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 resulted primarily from a reduction in the average depreciation and depletion rate for our oil and natural gas properties in 2020, due largely to the full cost ceiling impairments recorded in the first quarter of 2020 and fourth quarter of 2019 as well as an increase in our reserve base. The increase in depletion of proved oil and natural gas properties of$66 million for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 resulted primarily from higher production levels and an increase in net book value on new reserves added. Impairment ofOil and Natural Gas Properties . As a result of the sharp decline in commodity prices during the first half of 2020, we recorded a non-cash ceiling test impairment for the three months and six months endedJune 30, 2020 of$2.5 billion and$3.5 billion , respectively, which was included in accumulated depletion. The impairment charge affected our 40 -------------------------------------------------------------------------------- Table of Contents results of operations but did not reduce cash flow. In addition to commodity prices, our production rates, levels of proved reserves, future development costs, transfers of unevaluated properties and other factors will determine our actual ceiling test calculation and impairment analysis in future periods. If the trailing 12-month commodity prices continue to fall as compared to the commodity prices used in prior quarters, we will continue to have material write downs in subsequent quarters. No impairment on proved oil and natural gas properties was recorded for the six months endedJune 30, 2019 . General and Administrative Expenses. The following table shows general and administrative expenses for the three months and six months endedJune 30, 2020 and 2019: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Amount Per BOE Amount Per BOE Amount Per BOE Amount Per BOE (in millions, except per BOE amounts) General and administrative expenses$ 11 $ 0.41 $ 13 $
0.51
9 0.35 18 0.33 23 0.47
Total general and administrative
expenses $ 20 $ 0.74 $ 22 $ 0.86 $ 44 $ 0.79 $ 49 $ 1.00
General and administrative expenses for the three months ended June 30, 2020 as
compared to the three months ended June 30, 2019 decreased by $2 million
primarily due to a decrease in rent and contract labor expense. General and
administrative expenses for the six months ended June 30, 2020 as compared to
the six months ended June 30, 2019 , decreased by $5 million primarily due to a
decrease in non-cash stock based compensation.
Net Interest Expense. The following table shows net interest expense for the
three months and six months ended
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(in millions)
Net interest expense $ 46 $ 49 $ 94 $ 95 Net interest expense remained relatively flat for the three and six month
periods ended
Derivative Instruments. The following table shows the net gain (loss) on derivative instruments and the net cash receipts on settlements of derivative instruments for the three months and six months endedJune 30, 2020 and 2019: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 (in millions) (Loss) gain on derivative instruments, net$ (361) $ 94 $ 181 $ (174) Net cash received on settlements 210 5 297 22 We are required to recognize all derivative instruments on the balance sheet as either assets or liabilities measured at fair value. We have not designated our derivative instruments as hedges for accounting purposes. As a result, we mark our derivative instruments to fair value and recognize the cash and non-cash changes in fair value on derivative instruments in our consolidated statements of operations under the line item captioned "(Loss) gain on derivative instruments, net." 41
-------------------------------------------------------------------------------- Table of Contents (Benefit From) Provision for Income Taxes. The following table shows provision for (benefit from) income taxes for the three months and six months endedJune 30, 2020 and 2019: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 (in millions) (Benefit from) provision for income taxes$ (681) $
102
The change in our income tax provision for the second quarter of 2020 compared to the same period in 2019 was primarily due to the pre-tax loss for the three months endedJune 30, 2020 , compared to pre-tax income for the three months endedJune 30, 2019 . The change in our income tax provision for the first half of 2020 compared to the same period in 2019 was primarily due to the pre-tax loss for the six months endedJune 30, 2020 , offset by discrete tax expense resulting from application of a valuation allowance on Viper's deferred tax assets, compared to pre-tax income for the six months endedJune 30, 2019 , offset by a discrete income tax benefit resulting from estimated deferred taxes recognized as a result of Viper's change in tax status.
Liquidity and Capital Resources
Historically, our primary sources of liquidity have been proceeds from our public equity offerings, borrowings under our revolving credit facility, proceeds from the issuance of our senior notes and cash flows from operations. Our primary uses of capital have been for the acquisition, development and exploration of oil and natural gas properties.
As we pursue our business and financial strategy, we regularly consider which capital resources, including cash flow and equity and debt financings, are available to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. Our future ability to grow proved reserves and production will be highly dependent on the capital resources available to us. Continued prolonged volatility in the capital, financial and/or credit markets due to the COVID-19 pandemic, the depressed commodity markets and/or adverse macroeconomic conditions may limit our access to, or increase our cost of, capital or make capital unavailable on terms acceptable to us or at all. Liquidity and Cash Flow Our cash flows for the six months endedJune 30, 2020 and 2019 are presented below: Six Months EndedJune 30, 2020 2019 (in millions)
Net cash provided by operating activities
(1,535) (1,772)
Net cash provided by financing activities 293 840
Net (decrease) increase in cash $ (69) $ 111 Operating Activities
The increase in operating cash flows primarily resulted from changes in our operating assets and liabilities, largely due to the timing, collection and payments of our accounts receivable and accounts payable, which were partially offset by a decrease in our oil and natural gas revenues due to a decrease in average prices received for our production during the six months endedJune 30, 2020 . Our operating cash flow is sensitive to many variables, the most significant of which is the volatility of prices for the oil and natural gas we produce. Prices for these commodities are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather and other substantially variable factors influence market conditions for these products. These factors are beyond our control and are difficult to predict. 42 -------------------------------------------------------------------------------- Table of Contents Investing Activities The purchase and development of oil and natural gas properties accounted for the majority of our cash outlays for investing activities. Net cash used in investing activities was$1.5 billion and$1.8 billion during the six months endedJune 30, 2020 and 2019, respectively. During the six months endedJune 30, 2020 , we spent (a)$1.3 billion on capital expenditures in conjunction with our development program, in which we drilled 151 gross (141 net) operated horizontal wells, of which 59 gross (55 net) wells were in theDelaware Basin and the remaining wells were in theMidland Basin , and turned 95 gross (83 net) operated horizontal wells to production, of which 51 gross (47 net) wells were in theDelaware Basin and the remaining wells were in theMidland Basin , (b)$94 million on additions to midstream assets, (c)$64 million on leasehold interest acquisitions, (d)$65 million for the acquisition of mineral interests, (e)$48 million on equity method investment contributions net of distributions received and (f)$6 million for the purchase of other property, equipment and land. During the six months endedJune 30, 2019 , we spent (a)$1.2 billion on capital expenditures in conjunction with our drilling program and related infrastructure projects, in which we drilled 172 gross (152 net) operated horizontal wells, of which 82 gross (73 net) wells were in theDelaware Basin and the remaining wells were in theMidland Basin , and turned 151 gross (137 net) operated horizontal wells to production, of which 68 gross (59 net) wells were in theDelaware Basin and the remaining wells were in theMidland Basin , (b)$111 million on additions to midstream assets, (c) $127 million on leasehold interest acquisitions, (d)$125 million for mineral interests acquisitions, (e)$186 million on equity method investments and (f)$7 million for the purchase of other property, equipment and land.
Financing Activities
Net cash provided by financing activities for the six months endedJune 30, 2020 and 2019 was$293 million and$840 million , respectively. During the six months endedJune 30, 2020 , the amount provided by financing activities was primarily attributable to$262 million of borrowings, net of repayments under our credit facility,$275 million in proceeds from the May Notes Offering, net of repayments and$43 million in proceeds from joint venture, partially offset by$7 million of share repurchases for tax withholdings,$98 million of share repurchases as part of our stock repurchase program,$118 million of dividends to stockholders and$62 million of distributions to non-controlling interest. The 2019 amount provided by financing activities was primarily attributable to$341 million in net proceeds from Viper's public offering completed onMarch 1, 2019 ,$720 million in net proceeds from the Rattler Offering and$43 million in proceeds from joint ventures, partially offset by$48 million of repayments, net of borrowings under our credit facility,$104 million of share repurchases as part of our stock repurchase program,$51 million of dividends to stockholders and$50 million of distributions to non-controlling interest.
Indebtedness
Second Amended and Restated Credit Facility
As ofJune 30, 2020 , the maximum credit amount available under our credit agreement was$2 billion , and we had approximately$119 million of outstanding borrowings under our credit agreement and$1.9 billion available for future borrowings. As ofJune 30, 2020 , there was an aggregate of$3 million in letters of credit outstanding under our credit agreement. The weighted average interest rate on the credit facility was 2.02% and 2.42% for the three months and six months endedJune 30, 2020 , respectively. The credit agreement matures onNovember 1, 2022 .
As of
The
OnMay 26, 2020 , we completed a registered offering of$500 million in aggregate principal amount of our 4.750% Senior Notes due 2025. Interest on theMay 2020 Notes accrues fromMay 26, 2020 , and is payable in cash semi-annually onMay 31 andNovember 30 of each year, beginningNovember 30, 2020 . TheMay 2020 Notes mature onMay 31, 2025 . We received net proceeds of approximately$496 million from the offering. We used the net proceeds, among other things, to make an equity contribution to Energen to purchase$209 million in aggregate principal amount of Energen's 4.625% senior notes pursuant to a tender offer. As ofJune 30, 2020 ,$191 million in aggregate principal amount of Energen's 4.625% senior notes remained outstanding. 43
-------------------------------------------------------------------------------- Table of Contents Viper's Credit Agreement The Viper credit agreement, as amended, or the Viper credit agreement, provides for a revolving credit facility in the maximum credit amount of$2 billion , a borrowing base based onViper LLC's oil and natural gas reserves and other factors (the "borrowing base") and a maturity date ofNovember 1, 2022 . The borrowing base was reduced from$775 million to$580 million during the spring 2020 scheduled semi-annual redetermination. The borrowing base is scheduled to be re-determined semi-annually in May and November. In addition,Viper LLC and Wells Fargo each may request up to three interim redeterminations of the borrowing base during any 12-month period. As ofJune 30, 2020 ,Viper LLC had$154 million of outstanding borrowings and$426 million available for future borrowings under the Viper credit agreement. Amounts borrowed under the Viper credit agreement bore interest at a weighted average rate of 2.41% and 2.82% for the three months and six months endedJune 30, 2020 , respectively.
As of
Viper's Notes
OnOctober 16, 2019 , Viper completed an offering in which it issued its 5.375% Senior Notes due 2027 in aggregate principal amount of$500 million , or the Viper Notes. Viper received net proceeds of approximately$490 million from the notes offering and loaned the gross proceeds toViper LLC to pay down borrowings under the Viper credit agreement. During the second quarter of 2020, Viper repurchased$14 million of the outstanding Viper Notes in open market purchases at a cash price ranging from 97.5% to 98.5% of the aggregate principal amount, which resulted in an immaterial gain on extinguishment of debt. As ofJune 30, 2020 ,$486 million in aggregate principal amount of the Viper Notes remained outstanding. Rattler's Credit Agreement The Rattler credit agreement provides for a revolving credit facility in the maximum credit amount of$600 million , which is expandable to$1 billion upon Rattler's election, subject to obtaining additional lender commitments and satisfaction of customary conditions. As ofJune 30, 2020 ,Rattler LLC had$523 million of outstanding borrowings and$77 million available for future borrowings under the Rattler credit agreement. The weighted average interest rate on the credit facility was 2.43% and 2.64% for the three months and six months endedJune 30, 2020 , respectively. The Rattler credit agreement has a maturity date ofMay 28, 2024 . In connection with the offering of the Rattler Notes described below completed onJuly 14, 2020 ,Rattler LLC used the proceeds of the offering to repay a portion of the outstanding borrowings under the Rattler credit agreement. As ofJune 30, 2020 , pro forma for the offering of the Rattler Notes, Rattler had$567 million available for borrowing under the Rattler credit agreement.
As of
Rattler's Notes OnJuly 14, 2020 , Rattler completed an offering of$500 million in aggregate principal amount of its 5.625% Senior Notes due 2025, or the Notes Offering. Interest on the Rattler Notes is payable onJanuary 15 andJuly 15 of each year, beginning onJanuary 15, 2021 . The Rattler Notes mature onJuly 15, 2025 . Rattler received net proceeds of approximately$490 million from the Notes Offering. Rattler loaned the gross proceeds toRattler LLC under the terms of a subordinated promissory note, dated as ofJuly 14, 2020 . The promissory note requiresRattler LLC to repay the intercompany loan to Rattler on the same terms and in the same amounts as the Rattler Notes and has the same maturity date, interest rate, change of control repurchase and redemption provisions.Rattler LLC used the proceeds from the Notes Offering to repay a portion of the outstanding borrowings under the Rattler credit agreement. For additional information regarding our indebtedness, see Note 10-Debt included in Notes to the Consolidated Financial Statements and Note 18-Subsequent Events included elsewhere in this report.
Capital Requirements and Sources of Liquidity
Our board of directors approved a 2020 capital budget for drilling and completion, midstream and infrastructure of approximately$2.8 billion to$3.0 billion . In response to the current commodity price environment, we have updated our 2020 capital budget to narrow our anticipated capital expenditures for 2020 to approximately$1.8 billion to$1.9 billion , representing a decrease of 36% over our 2019 capital budget. We estimate that, of these expenditures, approximately: 44 -------------------------------------------------------------------------------- Table of Contents •$1.565 billion to$1.630 billion will be spent on drilling and completing 170 to 200 gross (153 to 180 net) horizontal wells across our operated leasehold acreage in the Northern Midland and Southern Delaware Basins, with an average lateral length of approximately 10,000 feet;
•$125 million to
•$110 million to
We do not have a specific acquisition budget since the timing and size of acquisitions cannot be accurately forecasted.
InMay 2019 , our board of directors approved a stock repurchase program to acquire up to$2 billion of our outstanding common stock throughDecember 31, 2020 . Under this program, we did not repurchase any of our common stock during the second quarter of 2020, but repurchased approximately$98 million of common stock during the six months endedJune 30, 2020 . Although we have approximately$1.3 billion remaining available for future repurchases under this program, we have suspended the program to preserve liquidity. The amount and timing of our capital expenditures are largely discretionary and within our control. We could choose to defer a portion of these planned capital expenditures depending on a variety of factors, including but not limited to the success of our drilling activities, prevailing and anticipated prices for oil and natural gas, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners. We are currently operating six drilling rigs and three completion crews. We will continue monitoring commodity prices and overall market conditions and can adjust our rig cadence up or down in response to changes in commodity prices and overall market conditions. Based upon current oil and natural gas prices and production expectations for 2020, we believe that our cash flow from operations, cash on hand and borrowings under our revolving credit facility will be sufficient to fund our operations through year-end 2020. However, future cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, and significant additional capital expenditures will be required to more fully develop our properties. Further, our 2020 capital expenditure budget does not allocate any funds for leasehold interest and property acquisitions. If we require additional capital, we may seek such capital through traditional reserve base borrowings, joint venture partnerships, production payment financing, asset sales, offerings of debt and or equity securities or other means. We cannot assure you that the needed capital will be available on acceptable terms or at all. If we are unable to obtain funds when needed or on acceptable terms, we may be required to curtail our drilling programs, which could result in a loss of acreage through lease expirations. In addition, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to replace our reserves. If there is a decline in commodity prices, our revenues, cash flows, results of operations, liquidity and reserves may be materially and adversely affected.
Guarantor Financial Information
As ofJune 30, 2020 ,Diamondback O&G LLC is the sole guarantor under theDecember 2019 Notes Indenture governing theDecember 2019 Notes and theMay 2020 Notes and the 2025 Indenture governing the 2025 Senior Notes. In connection with the satisfaction and discharge of the indenture, dated as ofOctober 28, 2016 , as subsequently supplemented, amongDiamondback Energy, Inc. , the guarantor subsidiaries party thereto and Wells Fargo, as trustee, governingDiamondback Energy, Inc.'s then outstanding 4.750% Senior Notes due 2024, or the 4.750% senior notes,Diamondback E&P LLC andEnergen Corporation and its subsidiaries were released as guarantors under the 4.750% senior notes, the 2025Senior Notes and Diamondback O&G LLC's revolving credit facility.Rattler LLC was released as a guarantor underDiamondback O&G LLC's credit agreement onMay 28, 2019 . Viper, Viper'sGeneral Partner ,Viper LLC , Rattler, Rattler'sGeneral Partner and Rattler's subsidiaries remain non-guarantor subsidiaries.Diamondback O&G LLC's guarantees of theDecember 2019 Notes, theMay 2020 Notes and the 2025 Senior Notes are "full and unconditional," as that term is used in Regulation S-X, Rule 3-10(b)(3), except that such guarantees will be released or terminated in certain circumstances set forth in theDecember 2019 Notes Indenture and the 2025 Indenture, such as, with certain exceptions, (1) in the eventDiamondback O&G LLC (or all or substantially all of its assets) is sold or disposed of, (2) in the eventDiamondback O&G LLC ceases to be a guarantor of or otherwise be an obligor under certain other indebtedness, and (3) in connection with any covenant defeasance, legal defeasance or satisfaction and discharge of the relevant indenture. 45
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Table of ContentsDiamondback O&G LLC's guarantees of theDecember 2019 Notes, theMay 2020 Notes and the 2025 Senior Notes are senior unsecured obligations and rank senior in right of payment to any of its future subordinated indebtedness, equal in right of payment with all of its existing and future senior indebtedness, including its obligations under its revolving credit facility, and effectively subordinated to any of its existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness. The rights of holders of the Senior Notes againstDiamondback O&G LLC may be limited under theU.S. Bankruptcy Code or state fraudulent transfer or conveyance law. Each guarantee contains a provision intended to limitDiamondback O&G LLC's liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent conveyance. However, there can be no assurance as to what standard a court will apply in making a determination of the maximum liability ofDiamondback O&G LLC . Moreover, this provision may not be effective to protect the guarantee from being voided under fraudulent conveyance laws. There is a possibility that the entire guarantee may be set aside, in which case the entire liability may be extinguished. The following tables present summarized financial information forDiamondback Energy, Inc. , as the parent, andDiamondback O&G LLC , as the guarantor subsidiary, on a combined basis after elimination of (i) intercompany transactions and balances between the parent and the guarantor subsidiary and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor. The information is presented in accordance with the requirements of Rule 13-01 under theSEC's Regulation S-X. The financial information may not necessarily be indicative of results of operations or financial position had the guarantor subsidiary operated as an independent entity.
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