Diamondback Energy, Inc
Diamondback Energy, Inc. (Form: 10-Q, Received: 11/08/2016 17:33:26)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
 
FORM 10-Q

 
ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2016
OR
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-35700
 
 
Diamondback Energy, Inc.
(Exact Name of Registrant As Specified in Its Charter)
 
 

Delaware
 
45-4502447
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification Number)
 
 
500 West Texas, Suite 1200
Midland, Texas
 
79701
(Address of Principal Executive Offices)
 
(Zip Code)
(432) 221-7400
(Registrant Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes    ý      No    ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes    ý      No    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer
 
ý
 
Accelerated Filer
 
o
 
 
 
 
Non-Accelerated Filer
 
o
 
Smaller Reporting Company
 
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes    ¨      No    ý
As of November 3, 2016 , 78,066,147 shares of the registrant’s common stock were outstanding.





DIAMONDBACK ENERGY, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
TABLE OF CONTENTS
 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 








GLOSSARY OF OIL AND NATURAL GAS TERMS
The following is a glossary of certain oil and gas terms that are used in this Quarterly Report on Form 10-Q (this “report”):
Basin
A large depression on the earth’s surface in which sediments accumulate.
Bbl
Stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons.
Bbls/d
Bbls per day.
BOE
Barrels of oil equivalent, with six thousand cubic feet of natural gas being equivalent to one barrel of oil.
BOE/d
BOE per day.
British Thermal Unit or Btu
The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
Completion
The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency.
Crude oil
Liquid hydrocarbons retrieved from geological structures underground to be refined into fuel sources.
Finding and development costs
Capital costs incurred in the acquisition, exploitation and exploration of proved oil and natural gas reserves divided by proved reserve additions and revisions to proved reserves.
Gross acres or gross wells
The total acres or wells, as the case may be, in which a working interest is owned.
Horizontal drilling
A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at a right angle with a specified interval.
Horizontal wells
Wells drilled directionally horizontal to allow for development of structures not reachable through traditional vertical drilling mechanisms.
Mcf
Thousand cubic feet of natural gas.
Mcf/d
Mcf per day.
Mineral interests
The interests in ownership of the resource and mineral rights, giving an owner the right to profit from the extracted resources.
MMBtu
Million British Thermal Units.
Net acres or net wells
The sum of the fractional working interest owned in gross acres.
Oil and natural gas properties
Tracts of land consisting of properties to be developed for oil and natural gas resource extraction.
Play
A set of discovered or prospective oil and/or natural gas accumulations sharing similar geologic, geographic and temporal properties, such as source rock, reservoir structure, timing, trapping mechanism and hydrocarbon type.
Plugging and abandonment
Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface. Regulations of all states require plugging of abandoned wells.
Prospect
A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.
Proved reserves
The estimated quantities of oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.
Reserves
The estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to the market and all permits and financing required to implement the project. Reserves are not assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).

ii



Reservoir
A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.
Royalty interest
An interest that gives an owner the right to receive a portion of the resources or revenues without having to carry any costs of development.
Spacing
The distance between wells producing from the same reservoir. Spacing is often expressed in terms of acres (e.g., 40-acre spacing) and is often established by regulatory agencies.
Working interest
An operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production and requires the owner to pay a share of the costs of drilling and production operations.

iii



GLOSSARY OF CERTAIN OTHER TERMS
The following is a glossary of certain other terms that are used in this report.
2012 Plan
The Company’s 2012 Equity Incentive Plan.
Company
Diamondback Energy, Inc., a Delaware corporation.
Exchange Act
The Securities Exchange Act of 1934, as amended.
GAAP
Accounting principles generally accepted in the United States.
General Partner
Viper Energy Partners GP LLC, a Delaware limited liability company and the General Partner of the Partnership.
Indenture
The indenture relating to the Senior Notes, dated as of September 18, 2013, among the Company, the subsidiary guarantors party thereto and Wells Fargo, as the trustee, as supplemented.
NYMEX
New York Mercantile Exchange.
Partnership
Viper Energy Partners LP, a Delaware limited partnership.
Partnership agreement
The first amended and restated agreement of limited partnership, dated June 23, 2014, entered into by the General Partner and Diamondback in connection with the closing of the Viper Offering.
SEC
United States Securities and Exchange Commission.
Securities Act
The Securities Act of 1933, as amended.
Senior Notes
The Company’s 7.625% senior unsecured notes due 2021 in the aggregate principal amount of $450 million.
Viper LTIP
Viper Energy Partners LP Long Term Incentive Plan.
Viper Offering
The Partnerships’ initial public offering.
Wells Fargo
Wells Fargo Bank, National Association.


iv



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Various statements contained in this report that express a belief, expectation, or intention, or that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. In particular, the factors discussed in this report and detailed under Part II, Item 1A. Risk Factors in this report and our Annual Report on Form 10–K for the year ended December 31, 2015 could affect our actual results and cause our actual results to differ materially from expectations, estimates or assumptions expressed, forecasted or implied in such forward-looking statements.

Forward-looking statements may include statements about our:

business strategy;

exploration and development drilling prospects, inventories, projects and programs;

oil and natural gas reserves;

acquisitions, including our recently announced pending acquisition in the Southern Delaware Basin;

identified drilling locations;

ability to obtain permits and governmental approvals;

technology;

financial strategy;

realized oil and natural gas prices;

production;

lease operating expenses, general and administrative costs and finding and development costs;

future operating results; and

plans, objectives, expectations and intentions.

All forward-looking statements speak only as of the date of this report or, if earlier, as of the date they were made. We do not intend to, and disclaim any obligation to, update or revise any forward-looking statements unless required by securities laws. You should not place undue reliance on these forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.


v

Table of Contents
Diamondback Energy, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)



 
September 30,
December 31,
 
2016
2015
 
 
 
 
(In thousands, except par values and share data)
Assets
 
 
Current assets:
 
 
Cash and cash equivalents
$
167,269

$
20,115

Restricted cash
500

500

Accounts receivable:
 
 
Joint interest and other
33,030

41,309

Oil and natural gas sales
52,471

36,004

Related party
13

1,591

Inventories
1,969

1,728

Derivative instruments

4,623

Prepaid expenses and other
3,018

2,875

Total current assets
258,270

108,745

Property and equipment:
 
 
Oil and natural gas properties, full cost method of accounting ($1,702,426 and $1,106,816 excluded from amortization at September 30, 2016 and December 31, 2015, respectively)
4,942,193

3,955,373

Pipeline and gas gathering assets
8,362

7,174

Other property and equipment
58,205

48,621

Accumulated depletion, depreciation, amortization and impairment
(1,784,780
)
(1,413,543
)
Net property and equipment
3,223,980

2,597,625

Other assets
43,430

44,349

Total assets
$
3,525,680

$
2,750,719

Liabilities and Stockholders’ Equity
 
 
Current liabilities:
 
 
Accounts payable-trade
$
38,834

$
20,008

Accounts payable-related party
2

217

Accrued capital expenditures
47,807

59,937

Other accrued liabilities
64,393

44,293

Revenues and royalties payable
17,561

16,966

Derivative instruments
6,428


Total current liabilities
175,025

141,421

Long-term debt
497,813

487,807

Derivative instruments
1,807


Asset retirement obligations
15,740

12,518

Total liabilities
690,385

641,746

Commitments and contingencies (Note 15)
 
 
Stockholders’ equity:
 
 
Common stock, $0.01 par value, 100,000,000 shares authorized, 78,066,147 issued and outstanding at September 30, 2016; 66,797,041 issued and outstanding at December 31, 2015
781

668

Additional paid-in capital
3,059,080

2,229,664

Accumulated deficit
(544,992
)
(354,360
)
Total Diamondback Energy, Inc. stockholders’ equity
2,514,869

1,875,972

Non-controlling interest
320,426

233,001

Total equity
2,835,295

2,108,973

Total liabilities and equity
$
3,525,680

$
2,750,719

See accompanying notes to combined consolidated financial statements.

1

Table of Contents
Diamondback Energy, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
2015
 
2016
2015
 
(In thousands, except per share amounts)
Revenues:
 
 
 
 
 
Oil sales
$
126,353

$
101,307

 
$
306,698

$
301,850

Natural gas sales
6,334

5,673

 
14,465

14,431

Natural gas liquid sales
9,444

4,966

 
20,932

16,129

Total revenues
142,131

111,946

 
342,095

332,410

Costs and expenses:
 
 
 
 
 
Lease operating expenses
22,180

22,189

 
59,080

65,117

Production and ad valorem taxes
9,123

8,966

 
25,244

25,036

Gathering and transportation
2,843

1,688

 
8,064

4,343

Depreciation, depletion and amortization
44,746

52,375

 
126,686

169,148

Impairment of oil and natural gas properties
46,368

273,737

 
245,536

597,188

General and administrative expenses (including non-cash equity-based compensation, net of capitalized amounts, of $6,265 and $4,402 for the three months ended September 30, 2016 and 2015, respectively, and $20,643 and $13,659 for the nine months ended September 30, 2016 and 2015, respectively)
9,908

7,526

 
32,411

23,446

Asset retirement obligation accretion expense
270

238

 
770

588

Total costs and expenses
135,438

366,719

 
497,791

884,866

Income (loss) from operations
6,693

(254,773
)
 
(155,696
)
(552,456
)
Other income (expense):
 
 
 
 
 
Interest income (expense)
(10,234
)
(10,633
)
 
(30,266
)
(31,404
)
Other income
907

300

 
1,647

1,248

Gain (loss) on derivative instruments, net
2,034

27,603

 
(8,665
)
26,834

Total other expense, net
(7,293
)
17,270

 
(37,284
)
(3,322
)
Loss before income taxes
(600
)
(237,503
)
 
(192,980
)
(555,778
)
Provision for (benefit from) income taxes

(81,461
)
 
368

(194,823
)
Net loss
(600
)
(156,042
)
 
(193,348
)
(360,955
)
Net income (loss) attributable to non-controlling interest
1,630

739

 
(2,716
)
2,264

Net loss attributable to Diamondback Energy, Inc.
$
(2,230
)
$
(156,781
)
 
$
(190,632
)
$
(363,219
)
Earnings per common share:


 


Basic
$
(0.03
)
$
(2.40
)
 
$
(2.60
)
$
(5.88
)
Diluted
$
(0.03
)
$
(2.40
)
 
$
(2.60
)
$
(5.88
)
Weighted average common shares outstanding:
 
 
 
 
 
Basic
77,167

65,251

 
73,318

61,727

Diluted
77,167

65,251

 
73,318

61,727


See accompanying notes to combined consolidated financial statements.

2

Table of Contents
Diamondback Energy, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Unaudited)


 
Common Stock
Additional Paid-in Capital
Retained Earnings (Accumulated Deficit)
Non-Controlling Interest
Total
 
Shares
Amount
 
(In thousands)
Balance December 31, 2014
56,888
$
569

$
1,554,174

$
196,268

$
234,202

$
1,985,213

Unit-based compensation




2,956

2,956

Stock-based compensation


15,827



15,827

Distribution to non-controlling interest




(6,113
)
(6,113
)
Common shares issued in public offering, net of offering costs
9,488
94

649,979



650,073

Exercise of stock options and vesting of restricted stock units
281
4

2,715



2,719

Net income (loss)



(363,219
)
2,264

(360,955
)
Balance September 30, 2015
66,656
$
667

$
2,222,695

$
(166,951
)
$
233,309

$
2,289,720

 
 
 
 
 
 
 
Balance December 31, 2015
66,797
$
668

$
2,229,664

$
(354,360
)
$
233,001

$
2,108,973

Net proceeds from issuance of common units - Viper Energy Partners LP
 



93,564

93,564

Unit-based compensation




2,974

2,974

Stock-based compensation


23,193



23,193

Distribution to non-controlling interest




(6,397
)
(6,397
)
Common shares issued in public offering, net of offering costs
10,925
109

805,728



805,837

Exercise of stock options and vesting of restricted stock units
344
4

495



499

Net loss



(190,632
)
(2,716
)
(193,348
)
Balance September 30, 2016
78,066
$
781

$
3,059,080

$
(544,992
)
$
320,426

$
2,835,295

























See accompanying notes to combined consolidated financial statements.

3

Table of Contents
Diamondback Energy, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

 
Nine Months Ended September 30,
 
2016
2015
 
 
 
 
(In thousands)
Cash flows from operating activities:
 
 
Net loss
$
(193,348
)
$
(360,955
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
Benefit from deferred income taxes

(194,790
)
Impairment of oil and natural gas properties
245,536

597,188

Asset retirement obligation accretion expense
770

588

Depreciation, depletion, and amortization
126,686

169,148

Amortization of debt issuance costs
2,023

1,918

Change in fair value of derivative instruments
12,858

77,532

Income from equity investment
(65
)

Equity-based compensation expense
20,643

13,659

(Gain) loss on sale of assets, net
37

(91
)
Changes in operating assets and liabilities:
 
 
Accounts receivable
(7,600
)
13,112

Accounts receivable-related party
1,578


Inventories
(241
)
225

Prepaid expenses and other
(2,064
)
569

Accounts payable and accrued liabilities
10,590

22,756

Accounts payable and accrued liabilities-related party
(216
)

Accrued interest
8,564

8,324

Revenues and royalties payable
595

(9,579
)
Net cash provided by operating activities
226,346

339,604

Cash flows from investing activities:
 
 
Additions to oil and natural gas properties
(241,609
)
(326,441
)
Additions to oil and natural gas properties-related party
(637
)
(26
)
Acquisition of royalty interests
(137,782
)
(32,291
)
Acquisition of leasehold interests
(591,785
)
(425,507
)
Additions to pipeline and gas gathering assets
(1,188
)
(2
)
Purchase of other property and equipment
(9,805
)
(992
)
Proceeds from sale of assets
1,566

97

Equity investments
(800
)
(2,702
)
Net cash used in investing activities
(982,040
)
(787,864
)
Cash flows from financing activities:
 
 
Proceeds from borrowings under credit facility
98,000

392,501

Repayment under credit facility
(89,000
)
(577,001
)
Debt issuance costs
(128
)
(303
)
Public offering costs
(800
)
(586
)
Proceeds from public offerings
900,675

650,688

Proceeds from exercise of stock options
498

2,718

Distribution to non-controlling interest
(6,397
)
(6,113
)
Net cash provided by financing activities
902,848

461,904

Net increase in cash and cash equivalents
147,154

13,644

Cash and cash equivalents at beginning of period
20,115

30,183

Cash and cash equivalents at end of period
$
167,269

$
43,827


4

Table of Contents
Diamondback Energy, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Continued
(Unaudited)

 
Nine Months Ended September 30,
 
2016
2015
 
 
 
 
(In thousands)
Supplemental disclosure of cash flow information:
 
 
Interest paid, net of capitalized interest
$
19,845

$
21,117

Supplemental disclosure of non-cash transactions:
 
 
Change in accrued capital expenditures
$
(12,130
)
$
(70,579
)
Capitalized stock-based compensation
$
5,525

$
5,125


See accompanying notes to combined consolidated financial statements.

5

Table of Contents
Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)



1.    DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Organization and Description of the Business

Diamondback Energy, Inc. (“Diamondback” or the “Company”), together with its subsidiaries, 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, 2016 , 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, and White Fang Energy LLC, a Delaware limited liability company. The consolidated subsidiaries include the wholly-owned subsidiaries as well as Viper Energy Partners LP, a Delaware limited partnership (the “Partnership”), and the Partnership’s wholly-owned subsidiary Viper Energy Partners LLC, a Delaware limited liability company.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries after all significant intercompany balances and transactions have been eliminated upon consolidation.

The Partnership is consolidated in the financial statements of the Company. As of September 30, 2016 , the Company owned approximately 83% of the common units of the Partnership and the Company’s wholly-owned subsidiary, Viper Energy Partners GP LLC, is the General Partner of the Partnership.

These 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 such 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, 2015 , 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 disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.

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, equity-based compensation, fair value estimates of commodity derivatives and estimates of income taxes.


6


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


New Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-03, “Interest–Imputation of Interest”. This update requires that debt issuance costs related to a recognized debt liability (except costs associated with revolving debt arrangements) be presented in the balance sheet as a direct deduction from that debt liability, consistent with the presentation of a debt discount, to simplify the presentation of debt issuance costs. This update is effective for financial statements issued for fiscal years beginning after December 15, 2015. The Company retrospectively adopted this new standard effective January 1, 2016. Adoption of this standard only affects the presentation of the Company’s consolidated balance sheets and did not have a material impact on its consolidated financial statements.

In January 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-01, “Financial Instruments–Overall”. This update applies to any entity that holds financial assets or owes financial liabilities. This update requires equity investments (except for those accounted for under the equity method or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. This update will be effective for public entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. Entities should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. While this update will not have a direct impact on the Company, the Partnership will be required to mark its cost method investment to fair value with the adoption of this update.

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 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. This update will be effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Entities will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact that the adoption of this update will have on the Company’s financial position, results of operations and liquidity.

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. Under this update, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update will be effective for annual and interim reporting periods beginning after December 15, 2017, with early application not permitted. This update allows for either full retrospective adoption, meaning this update is applied to all periods presented in the financial statements, or modified retrospective adoption, meaning this update is applied only to the most current period presented. The Company is currently evaluating the impact, if any, that the adoption of this update will have on the Company’s financial position, results of operations and liquidity.

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-09, "Compensation - Stock Compensation". This update applies to all entities that issue equity-based payment awards to their employees. Under this update, there were several areas that were simplified including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact that the adoption of this update will have on the Company's financial position, results of operations and liquidity.

In April 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-10, “Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing”. This update clarifies two principles of Accounting Standards Codification Topic 606: identifying performance obligations and the licensing implementation guidance. This standard has the same effective date as Accounting Standards Update 2016-08, the revenue recognition standard discussed above. The adoption of this standard is not expected to have a material impact on the Company's financial position, results of operations and liquidity.


7


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


In May 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-12, “Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients”. This update applies only to the following areas from Accounting Standards Codification Topic 606: assessing the collectability criterion and accounting for contracts that do not meet the criteria for step 1, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modification at transition, completed contracts at transition and technical correction. This standard has the same effective date as Accounting Standards Update 2016-08, the revenue recognition standard discussed above. The adoption of this standard is not expected to have a material impact on the Company's financial position, results of operations and liquidity.

In August 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments”. This update apples to all entities that are required to present a statement of cash flows. This update provides guidance on eight specific cash flow issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. This update will be effective for financial statements issued for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years with early adoption permitted. This update should be applied using the retrospective transition method. Adoption of this standard will only affect the presentation of the Company’s cash flows and will not have a material impact on its consolidated financial statements.

3.    ACQUISITIONS

2016 Activity

On September 1, 2016, the Company acquired from an unrelated third party leasehold interests and related assets in the Southern Delaware Basin for an aggregate purchase price of $560.0 million , subject to certain adjustments. This transaction included approximately 38,765 gross ( 19,180 net) acres primarily in Reeves and Ward counties, 19 gross producing vertical wells, 11 gross producing horizontal wells, saltwater disposal and gathering infrastructure and other related assets. The Company financed this acquisition with net proceeds from the July 2016 equity offering discussed in Note 9 and cash on hand.

2015 Activity

During the nine months ended September 30, 2015, the Company completed acquisitions from unrelated third parties of an aggregate of approximately 16,034 gross ( 12,396 net) acres in the Midland Basin, primarily in northwest Howard County, for an aggregate purchase price of approximately $426.1 million . The acquisitions were accounted for according to the acquisition method, which requires the recording of net assets acquired and consideration transferred at fair value. These acquisitions were funded with the net proceeds of the May 2015 equity offering discussed in Note 9 and borrowings under the Company’s revolving credit facility discussed in Note 8.

On July 9, 2015, the Company completed the sale of an approximate average 1.5% overriding royalty interest in certain of its acreage primarily located in Howard County, Texas to the Partnership for $31.1 million . The Partnership primarily funded this acquisition with borrowings under its revolving credit facility discussed in Note 8.

4.    VIPER ENERGY PARTNERS LP

The Partnership is a publicly traded Delaware limited partnership, the common units of which are listed on the NASDAQ Global Market under the symbol “VNOM”. The Partnership was formed by Diamondback on February 27, 2014, to, among other things, own, acquire and exploit oil and natural gas properties in North America. The Partnership is currently focused on oil and natural gas properties in the Permian Basin. Viper Energy Partners GP LLC, a fully-consolidated subsidiary of Diamondback, serves as the general partner of, and holds a non-economic general partner interest in, the Partnership. As of September 30, 2016 , the Company owned approximately 83% of the common units of the Partnership.


8


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


Partnership Agreement

In connection with the closing of the Viper Offering, the General Partner and Diamondback entered into the first amended and restated agreement of limited partnership, dated June 23, 2014 (the “Partnership Agreement”). The Partnership Agreement requires the Partnership to reimburse the General Partner for all direct and indirect expenses incurred or paid on the Partnership’s behalf and all other expenses allocable to the Partnership or otherwise incurred by the General Partner in connection with operating the Partnership’s business. The Partnership Agreement does not set a limit on the amount of expenses for which the 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 the Partnership or on its behalf and expenses allocated to the General Partner by its affiliates. The General Partner is entitled to determine the expenses that are allocable to the Partnership.

Tax Sharing

In connection with the closing of the Viper Offering, the Partnership entered into a tax sharing agreement with Diamondback, dated June 23, 2014, pursuant to which the Partnership agreed to reimburse Diamondback for its share of state and local income and other taxes for which the Partnership’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 the Partnership 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 the Partnership may be a member for this purpose, to owe less or no tax. In such a situation, the Partnership agreed to reimburse Diamondback for the tax the Partnership would have owed had the tax attributes not been available or used for the Partnership’s benefit, even though Diamondback had no cash tax expense for that period.

Other Agreements

See Note 11 —Related Party Transactions for information regarding the advisory services agreement the Partnership and the General Partner entered into with Wexford Capital LP (“Wexford”).

The Partnership has entered into a secured revolving credit facility with Wells Fargo, as administrative agent sole book runner and lead arranger. See Note 8 —Debt for a description of this credit facility.


9


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


5.    PROPERTY AND EQUIPMENT

Property and equipment includes the following:
 
September 30,
December 31,
 
2016
2015
 
 
 
 
(in thousands)
Oil and natural gas properties:
 
 
Subject to depletion
$
3,239,767

$
2,848,557

Not subject to depletion-acquisition costs
 
 
Incurred in 2016
671,815


Incurred in 2015
420,039

433,769

Incurred in 2014
487,958

543,399

Incurred in 2013
61,871

68,351

Incurred in 2012
60,743

61,297

Total not subject to depletion
1,702,426

1,106,816

Gross oil and natural gas properties
4,942,193

3,955,373

Accumulated depletion
(636,771
)
(512,144
)
Accumulated impairment
(1,143,498
)
(897,962
)
Oil and natural gas properties, net
3,161,924

2,545,267

Pipeline and gas gathering assets
8,362

7,174

Other property and equipment
58,205

48,621

Accumulated depreciation
(4,511
)
(3,437
)
Property and equipment, net of accumulated depreciation, depletion, amortization and impairment
$
3,223,980

$
2,597,625


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. All internal costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized internal costs were approximately $3.9 million and $4.0 million for the three months ended September 30, 2016 and 2015 , respectively, and $13.0 million and $12.1 million for the nine months ended September 30, 2016 and 2015 , 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 to five years. Sales of oil and natural gas properties, whether or not being amortized currently, are accounted 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.

Under this 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 the proved oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes, or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, 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 excluding 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.


10


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


As a result of the decline in prices, the Company recorded non-cash impairments for the nine months ended September 30, 2016 and 2015 of $245.5 million and $597.2 million , respectively, which are included in accumulated depletion. The impairment charge affected the Company’s reported net income 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 other factors will determine its actual ceiling test calculation and impairment analysis in future periods.

6.    ASSET RETIREMENT OBLIGATIONS

The following table describes the changes to the Company’s asset retirement obligation liability for the following periods:
 
Nine Months Ended September 30,
 
2016
2015
 
 
 
 
(in thousands)
Asset retirement obligation, beginning of period
$
12,711

$
8,486

Additional liability incurred
406

448

Liabilities acquired
3,022

3,123

Liabilities settled
(402
)
(4
)
Accretion expense
770

588

Revisions in estimated liabilities
25

60

Asset retirement obligation, end of period
16,532

12,701

Less current portion
792

39

Asset retirement obligations - long-term
$
15,740

$
12,662


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.

7.    EQUITY METHOD INVESTMENTS

In October 2014, the Company paid $0.6 million for a 25% interest in HMW Fluid Management 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. The board of this entity may also authorize the entity to offer these services to other counties in the Permian Basin and to pursue other business opportunities. The Company has committed to invest an aggregate amount of $5.0 million in this entity. During the nine months ended September 30, 2016 , the Company invested $0.8 million in this entity bringing its total investment to $4.1 million at September 30, 2016 . The Company will retain a minority interest after all commitments are received. The entity was formed as a limited liability company and maintains a specific ownership account for each investor, similar to a partnership capital account structure. Therefore, the Company accounts for this investment under the equity method of accounting.


11


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


8.    DEBT

Long-term debt consisted of the following as of the dates indicated:
 
September 30,
December 31,
 
2016
2015
 
 
 
 
(in thousands)
7.625 % Senior Notes due 2021
$
450,000

$
450,000

Unamortized debt issuance
(6,687
)
(7,693
)
Revolving credit facility

11,000

Partnership revolving credit facility
54,500

34,500

Total long-term debt
$
497,813

$
487,807


Senior Notes

On September 18, 2013, the Company completed an offering of $450.0 million in aggregate principal amount of 7.625% senior unsecured notes due 2021 (the “2021 Senior Notes”). The 2021 Senior Notes bear interest at the rate of 7.625% per annum, payable semi-annually, in arrears on April 1 and October 1 of each year, commencing on April 1, 2014 and will mature on October 1, 2021. On June 23, 2014, in connection with the Viper Offering, the Company designated the Partnership, the General Partner and Viper Energy LLC as unrestricted subsidiaries and, upon such designation, Viper Energy LLC, which was a guarantor under the indenture governing of the 2021 Senior Notes, was released as a guarantor under the indenture. As of September 30, 2016 , the 2021 Senior Notes are fully and unconditionally guaranteed by Diamondback O&G LLC, Diamondback E&P LLC and White Fang Energy LLC and will also be guaranteed by any future restricted subsidiaries of Diamondback. The net proceeds from the 2021 Senior Notes were used to fund the acquisition of mineral interests underlying approximately 14,804 gross ( 12,687 net) acres in Midland County, Texas in the Permian Basin.

The 2021 Senior Notes were issued under, and are governed by, an indenture among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association (“Wells Fargo”), as the trustee, as supplemented (the “Indenture”). The 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, or redeem or repurchase, capital stock, prepay subordinated indebtedness, sell assets including capital stock of 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 gas business and designate certain of the Company’s subsidiaries as unrestricted subsidiaries. If the Company experiences certain kinds of changes of control or if it sells certain of its assets, holders of the 2021 Senior Notes may have the right to require the Company to repurchase their 2021 Senior Notes.

The Company will have the option to redeem the 2021 Senior Notes, in whole or in part, at any time on or after October 1, 2016 at the redemption prices (expressed as percentages of principal amount) of 105.719% for the 12-month period beginning on October 1, 2016, 103.813% for the 12-month period beginning on October 1, 2017, 101.906% for the 12-month period beginning on October 1, 2018 and 100.000% beginning on October 1, 2019 and at any time thereafter with any accrued and unpaid interest to, but not including, the date of redemption. See Note 16. Subsequent Events–Tender Offer and Redemption–Existing 2021 Senior Notes.

The Company’s Credit Facility

On June 9, 2014, Diamondback O&G LLC, as borrower, entered into a first amendment and on November 13, 2014, Diamondback O&G LLC entered into a second amendment to the second amended and restated credit agreement, dated November 1, 2013 (the “credit agreement”). The first amendment modified certain provisions of the credit agreement to, among other things, allow one or more of the Company’s subsidiaries to be designated as “Unrestricted Subsidiaries” that are not subject to certain restrictions contained in the credit agreement. In connection with the Viper Offering, the Partnership, the General Partner and Viper Energy Partners LLC were designated as unrestricted subsidiaries under the credit agreement. As of September 30, 2016 , the credit agreement was guaranteed

12


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


by Diamondback, Diamondback E&P LLC and White Fang Energy LLC and will also be guaranteed by any future restricted subsidiaries of Diamondback. The credit agreement is also secured by substantially all of the assets of Diamondback O&G LLC, the Company and the other guarantors.

The second amendment increased the maximum amount of the credit facility to $2.0 billion , modified the dates and deadlines of the credit agreement relating to the scheduled borrowing base redeterminations based on the Company’s oil and natural gas reserves and other factors and added new provisions that allow the Company to elect a commitment amount that is less than its borrowing base as determined by the lenders. The borrowing base is scheduled to be re-determined semi-annually with effective dates of May 1st and November 1st. In addition, the Company may request up to three additional redeterminations of the borrowing base during any 12 -month period. As of September 30, 2016 , the borrowing base was set at $700.0 million , of which the Company had elected a commitment amount of $500.0 million , and the Company had no outstanding borrowings.

The outstanding borrowings under the credit agreement bear interest at a rate elected by the Company that is equal to an alternative 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 0.50% to 1.50% in the case of the alternative base rate and from 1.50% to 2.50% in the case of LIBOR, in each case depending on the amount of the loan outstanding in relation to the borrowing base. 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 borrowing base, which fee is also dependent on the amount of the loan outstanding in relation to the borrowing base. 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 (a) to the extent that the loan amount exceeds the borrowing base, whether due to a borrowing base redetermination or 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, 2018.

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
 
Required Ratio
Ratio of total debt to EBITDAX
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 $750.0 million in the form of senior or senior subordinated 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 portion of the outstanding principal of the loan to be repaid. As of September 30, 2016 , the Company had $450.0 million in aggregate principal amount of senior unsecured notes outstanding. See Note 16. Subsequent Events–Tender Offer and Redemption–Existing 2021 Senior Notes.

As of September 30, 2016 and December 31, 2015 , 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.

The Partnership’s Credit Agreement

On July 8, 2014, the Partnership entered into a secured revolving credit agreement with Wells Fargo, as the administrative agent, sole book runner and lead arranger. The credit agreement, as amended, provides for a revolving credit facility in the maximum amount of $500.0 million , subject to scheduled semi-annual and other elective collateral borrowing base redeterminations based on the Partnership’s oil and natural gas reserves and other factors. The borrowing base is scheduled to be re-determined semi-annually with effective dates of April 1st and October 1st. In addition, the

13


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


Partnership may request up to three additional redeterminations of the borrowing base during any 12 -month period. As of September 30, 2016 , the borrowing base was set at $175.0 million . On August 5, 2016, the Partnership repaid $78.0 million of its outstanding borrowings with a portion of the proceeds from its August 2016 public offering of common units and, as of September 30, 2016, the Partnership had $54.5 million outstanding under its credit agreement.

The outstanding borrowings under the credit agreement bear interest at a rate elected by the Partnership that is equal to an alternative 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 0.5% to 1.50% in the case of the alternative base rate and from 1.50% to 2.50% in the case of LIBOR, in each case depending on the amount of the loan outstanding in relation to the borrowing base. The Partnership is obligated to pay a quarterly commitment fee ranging from 0.375% to 0.500% per year on the unused portion of the borrowing base, which fee is also dependent on the amount of the loan outstanding in relation to the borrowing base. 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 (a) to the extent that the loan amount exceeds the borrowing base, whether due to a borrowing base redetermination or otherwise (in some cases subject to a cure period) and (b) at the maturity date of July 8, 2019. The loan is secured by substantially all of the assets of the Partnership and its subsidiaries.

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 debt to EBITDAX
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 $250.0 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 portion of the outstanding principal of the loan to be repaid.

The lenders may accelerate all of the indebtedness under the Partnership’s credit agreement upon the occurrence and during the continuance of any event of default. The Partnership’s 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.

9.    CAPITAL STOCK AND EARNINGS PER SHARE

During the nine months ended September 30, 2016 and 2015 , Diamondback completed the following equity offerings:

In January 2016, the Company completed an underwritten public offering of 4,600,000 shares of common stock, which included 600,000 shares of common stock issued pursuant to an option to purchase additional shares granted to the underwriter. The stock was sold to the underwriter at $55.33 per share and the Company received proceeds of approximately $254.5 million from the sale of these shares of common stock, net of offering expenses and underwriting discounts and commissions.

In July 2016, the Company completed an underwritten public offering of 6,325,000 shares of common stock, which included 825,000 shares of common stock issued pursuant to an option to purchase additional shares granted to the underwriters. The stock was sold to the underwriters at $87.24 per share and the Company received proceeds of approximately $551.8 million from the sale of these shares of common stock, net of estimated offering expenses and underwriting discounts and commissions.

In January 2015, the Company completed an underwritten public offering of 2,012,500 shares of common stock, which included 262,500 shares of common stock issued pursuant to an option to purchase additional shares

14


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


granted to the underwriter. The stock was sold to the underwriter at $59.34 per share and the Company received proceeds of approximately $119.4 million from the sale of these shares of common stock, net of offering expenses and underwriting discounts and commissions.

In May 2015, the Company completed an underwritten public offering of 4,600,000 shares of common stock, which included 600,000 shares of common stock issued pursuant to an option to purchase additional shares granted to the underwriter. The stock was sold to the underwriter at $72.53 per share and the Company received proceeds of approximately $333.6 million from the sale of these shares of common stock, net of offering expenses and underwriting discounts and commissions.

In August 2015, the Company completed an underwritten public offering of 2,875,000 shares of common stock, which included 375,000 shares of common stock issued pursuant to an option to purchase additional shares granted to the underwriter. The stock was sold to the underwriter at $68.74 per share and the Company received proceeds of approximately $197.6 million from the sale of these shares of common stock, net of offering expenses and underwriting discounts and commissions.

Earnings 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 the Partnership are included in the consolidated earnings per share computation based on the consolidated group’s holdings of the subsidiary.

A reconciliation of the components of basic and diluted earnings per common share is presented in the table below:
 
Three Months Ended September 30,
 
2016
2015
 
Income
Shares
Per Share
Income
Shares
Per Share
 
(in thousands, except per share amounts)
Basic:
 
 
 
 
 
 
Net income (loss) attributable to common stock
$
(2,230
)
77,167

$
(0.03
)
$
(156,781
)
65,251

$
(2.40
)
Effect of Dilutive Securities:
 
 
 
 
 
 
Dilutive effect of potential common shares issuable
$

0

 

0
 
Diluted:
 
 
 
 
 
 
Net income (loss) attributable to common stock
$
(2,230
)
77,167

$
(0.03
)
$
(156,781
)
65,251

$
(2.40
)

 
Nine Months Ended September 30,
 
2016
2015
 
Income
Shares
Per Share
Income
Shares
Per Share
Basic:
 
 
 
 
 
 
Net income (loss) attributable to common stock
(190,632
)
73,318

(2.60
)
(363,219
)
61,727
(5.88
)
Effect of Dilutive Securities:
 
 
 
 
 
 
Dilutive effect of potential common shares issuable

0

 

0
 
Diluted:
 
 
 
 
 
 
Net income (loss) attributable to common stock
(190,632
)
73,318

(2.60
)
(363,219
)
61,727
(5.88
)

15


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)



For the three months and nine months ended September 30, 2016 , there were 192,155 shares and 288,739 shares, respectively, that were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive for the periods presented. These shares could dilute basic earnings per share in future periods.

10.    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,
 
2016
2015
 
2016
2015
General and administrative expenses
$
6,265

$
4,402

 
$
20,643

$
13,659

Equity-based compensation capitalized pursuant to full cost method of accounting for oil and natural gas properties
916

1,534

 
5,525

5,125


Stock Options

The following table presents the Company’s stock option activity under the Company’s 2012 Equity Incentive Plan (“2012 Plan”) for the nine months ended September 30, 2016 .
 
 
Weighted Average
 
 
 
Exercise
Remaining
Intrinsic
 
Options
Price
Term
Value
 
 
 
(in years)
(in thousands)
Outstanding at December 31, 2015
39,500

$
21.66

 
 
Exercised
(23,750
)
$
20.96

 
 
Outstanding at September 30, 2016
15,750

$
22.72

1.35
$
1,311

Vested and Expected to vest at September 30, 2016
15,750

$
22.72

1.35
$
1,163

Exercisable at September 30, 2016

$

0.00
$


The aggregate intrinsic value of stock options that were exercised during the nine months ended September 30, 2016 and 2015 was $1.3 million and $8.4 million , respectively. As of September 30, 2016 , the unrecognized compensation cost related to unvested stock options was less than $0.1 million . Such cost is expected to be recognized over a weighted-average period of 0.3 years.

Restricted Stock Units

The following table presents the Company’s restricted stock units activity under the 2012 Plan during the nine months ended September 30, 2016 .
 
Restricted Stock
Awards & Units
Weighted Average Grant-Date
Fair Value
Unvested at December 31, 2015
159,759

$
64.66

Granted
193,206

$
64.66

Vested
(164,851
)
$
63.02

Forfeited
(4,885
)
$
69.41

Unvested at September 30, 2016
183,229

$
66.02


The aggregate fair value of restricted stock units that vested during the nine months ended September 30, 2016 and 2015 was $11.8 million and $9.8 million , respectively. As of September 30, 2016 , the Company’s unrecognized compensation cost related to unvested restricted stock awards and units was $7.7 million . Such cost is expected to be recognized over a weighted-average period of 1.3 years.

16


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)



Performance Based Restricted Stock Units

To provide long-term incentives for the executive officers to deliver competitive returns to the Company’s stockholders, the Company has granted performance-based restricted stock units to eligible employees. The ultimate number of shares awarded from these conditional restricted stock units is based upon measurement of total stockholder return of the Company’s common stock (“TSR”) as compared to a designated peer group during a two -year or three -year performance period.

In February 2016, eligible employees received performance restricted stock unit awards totaling 174,325 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, 2016 to December 31, 2017 and cliff vest at December 31, 2017. Eligible employees received additional performance restricted stock unit awards totaling 87,163 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, 2016 to December 31, 2018 and cliff vest at December 31, 2018.

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 February 2016 awards.
 
2016
 
Two-Year Performance Period
Three-Year Performance Period
Grant-date fair value
$
103.41

$
102.35

Risk-free rate
0.86
%
1.10
%
Company volatility
41.91
%
42.16
%

The following table presents the Company’s performance restricted stock units activity under the 2012 Plan for the nine months ended September 30, 2016 .
 
Performance Restricted Stock Units
Weighted Average Grant-Date Fair Value
Unvested at December 31, 2015
90,249

$
137.14

Granted
261,488

$
103.06

Forfeited
(6,875
)
$
137.14

Unvested at September 30, 2016 (1)
344,862

$
111.30

(1)
A maximum of 689,724 units could be awarded based upon the Company’s final TSR ranking.

As of September 30, 2016 , the Company’s unrecognized compensation cost related to unvested performance based restricted stock awards and units was $19.9 million . Such cost is expected to be recognized over a weighted-average period of 1.5 years.

Phantom Units

Under the Viper LTIP, the Board of Directors of the General Partner is authorized to issue phantom units to eligible employees. The Partnership estimates the fair value of phantom units as the closing price of the Partnership’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 one common unit of the Partnership for each phantom unit.


17


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


The following table presents the phantom unit activity under the Viper LTIP for the nine months ended September 30, 2016 .
 
Phantom Units
 
Weighted Average Grant-Date
Fair Value
Unvested at December 31, 2015
25,348

 
$
16.89

Granted
21,696

 
$
16.57

Vested
(24,350
)
 
$
17.27

Forfeited
(1,646
)
 
$
15.48

Unvested at September 30, 2016
21,048

 
$
16.23


The aggregate fair value of phantom units that vested during the nine months ended September 30, 2016 was $0.4 million . As of September 30, 2016 , the unrecognized compensation cost related to unvested phantom units was $0.3 million . Such cost is expected to be recognized over a weighted-average period of 1.7 years.

11.    RELATED PARTY TRANSACTIONS

Immediately upon the completion of the Company’s initial public offering on October 17, 2012, Wexford beneficially owned approximately 44% of the Company’s outstanding common stock. As of September 30, 2016 , Wexford beneficially owned less than 1% of the Company’s outstanding common stock. A partner at Wexford serves as Chairman of the Board of Directors of each of the Company and the General Partner. Another partner at Wexford serves as a member of the Board of Directors of the General Partner.

The following table summarizes amounts included in the consolidated statements of operations attributable to related party transactions for the three months and nine months ended September 30, 2016 and 2015 :

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
2015
 
2016
2015
 
(in thousands)
Revenues:
 
 
 
 
 
Natural gas sales
$

$

 
$

$
2,640

Natural gas liquid sales


 

2,544

Total related party revenues
$

$

 
$

$
5,184

Costs and expenses:
 
 
 
 
 
Lease operating expenses
$
807

$

 
$
2,397

$

Production and ad valorem taxes


 

153

Gathering and transportation


 

969

General and administrative expenses
597

665

 
1,600

1,672

Total related party costs and expenses
$
1,404

$
665

 
$
3,997

$
2,794

Other Income:
 
 
 
 
 
Other income
$
40

$
40

 
$
128

$
119

Total other related party income
$
40

$
40

 
$
128

$
119



18


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


The following table summarizes amounts paid to related parties during the three months and nine months ended September 30, 2016 and 2015 :
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
2015
 
2016
2015
 
(in thousands)
Wexford:
 
 
 
 
 
Advisory services
$
125

$
125

 
$
375

$
375

Advisory services - The Partnership

125

 

375

Total amounts paid to Wexford
$
125

$
250

 
$
375

$
750

Wexford related entities:
 
 
 
 
 
Bison Drilling and Field Services LLC
$

$
24

 
$

$
32

Fasken
393

268

 
1,094

672

WT Commercial Portfolio, LLC
42

40

 
126

119

Total amounts paid to Wexford related entities
$
435

$
332

 
$
1,220

$
823

The Partnership
 
 
 
 
 
Lease Bonus
$
5

$

 
$
309

$

Total amounts paid to related parties
$
565

$
582

 
$
1,904

$
1,573


The following table summarizes amounts received from related parties during the three months and nine months ended September 30, 2016 and 2015 :

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
2015
 
2016
2015
 
(in thousands)
Wexford related entities:
 
 
 
 
 
Bison Drilling and Field Services LLC
$
44

$
40

 
$
140

$
119

Coronado Midstream LLC (1)
$

$

 
$

$
4,062

Total amounts received from Wexford related entities
$
44

$
40

 
$
140

$
4,181

(1)
As of March 2015, Coronado Midstream LLC is no longer a related party.

Advisory Services Agreement - The Company

The Company entered into an advisory services agreement (the “Advisory Services Agreement”) with Wexford, dated as of October 11, 2012, under which Wexford provides the Company with general financial and strategic advisory services related to the business in return for an annual fee of $0.5 million , plus reasonable out-of-pocket expenses. The Advisory Services Agreement had an initial term of two years commencing on October 18, 2012, and continues for additional one -year periods unless terminated in writing by either party at least ten days prior to the expiration of the then current term.

Advisory Services Agreement - The Partnership

In connection with the closing of the Viper Offering, the Partnership and the General Partner entered into an advisory services agreement (the “Viper Advisory Services Agreement”) with Wexford, dated as of June 23, 2014, under which Wexford provides the Partnership and the General Partner with general financial and strategic advisory services related to the business in return for an annual fee of $0.5 million , plus reasonable out-of-pocket expenses. The Viper Advisory Services Agreement has an initial term of two years commencing on June 23, 2014, and will continue for additional one -year periods unless terminated in writing by either party at least ten days prior to the expiration of the then current term.


19


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


Drilling Services

Bison Drilling and Field Services LLC (“Bison”) has performed drilling and field services for the Company under master drilling and field service agreements. Under the Company’s most recent master drilling agreement with Bison, effective as of January 1, 2013, Bison committed to accept orders from the Company for the use of at least two of its rigs. During the nine months ended September 30, 2016 , the Company did no t utilize any Bison rigs.

Coronado Midstream

The Company is party to a gas purchase agreement, dated May 1, 2009, as amended, with Coronado Midstream LLC, formerly known as MidMar Gas LLC, an entity that owns a gas gathering system and processing plant in the Permian Basin. Under this agreement, Coronado Midstream LLC is obligated to purchase from the Company, and the Company is obligated to sell to Coronado Midstream LLC, all of the gas conforming to certain quality specifications produced from certain of the Company’s Permian Basin acreage. An entity controlled by Wexford had owned an approximately 28% equity interest in Coronado Midstream LLC until Coronado Midstream LLC was sold in March 2015. Coronado Midstream LLC is no longer a related party and any revenues, production and ad valorem taxes and gathering and transportation expense after March 2015 are not classified as those attributable to a related party.

Midland Corporate Lease

Effective May 15, 2011, the Company occupied corporate office space in Midland, Texas under a lease with an initial five -year term, which was extended for an additional ten -years in November 2014. The office space is owned by Fasken, which is controlled by an affiliate of Wexford.

Field Office Lease

The Company leased field office space in Midland, Texas from an unrelated third party commencing on March 1, 2011. On March 1, 2014, the building was purchased by WT Commercial Portfolio, LLC, which is controlled by an affiliate of Wexford. The term of the lease expires on February 28, 2018. During the third quarter of 2014, the Company entered into a sublease with Bison, in which Bison leased the field office space on the same terms as the Company’s lease for the remainder of the lease term.

The Partnership - Lease Bonus
During the three months ended September 30, 2016 , the Company paid the Partnership $5,000 in lease bonus payments to extend the term of two leases, reflecting an average bonus of $200 per acre. During the nine months ended September 30, 2016 , the Company paid the Partnership $0.3 million in lease bonus payments to extend the term of six leases, reflecting an average bonus of $1,371 per acre.
12.    INCOME TAXES

The Company incurred a tax net operating loss ("NOL") for the nine months ended September 30, 2016 due principally to the ability to expense certain intangible drilling and development costs under current regulations. There is no tax refund available to the Company, nor is there any current income tax payable. In light of the impairment of oil and gas properties, management has recorded a $64.9 million valuation allowance against the Company's federal NOLs, bringing the total valuation allowance to $126.0 million . The valuation allowance reduces the Company’s deferred assets to a zero value, as management does not believe that it is more-likely-than-not that this portion of the Company's NOLs are realizable. Management believes that the balance of the Company's NOLs are realizable only to the extent of future taxable income primarily related to the excess of book carrying value of properties over their respective tax bases. No other sources of future taxable income are considered in this judgment.

13. DERIVATIVES

All derivative financial instruments are recorded at fair value. The Company has not designated its derivative instruments as hedges for accounting purposes and, as a result, marks its derivative instruments to fair value and recognizes the cash and non-cash changes in fair value in the combined consolidated statements of operations under the caption “Gain (loss) on derivative instruments, net.”


20


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


The Company has used fixed price swap contracts and fixed price basis swap contracts to reduce price volatility associated with certain of its oil and natural gas sales. With respect to the Company’s fixed price swap and fixed price basis contracts, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is less than the swap price, and the Company is required to make a payment to the counterparty if the settlement price for any settlement period is greater than the swap price. The Company’s derivative contracts are based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on New York Mercantile Exchange West Texas Intermediate pricing and with natural gas derivative settlements based on the New York Mercantile Exchange Henry Hub pricing.

By using derivative instruments to hedge exposure to changes in commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. The Company’s counterparties are participants in the secured second amended and restated credit agreement, which is secured by substantially all of the assets of the guarantor subsidiaries; therefore, the Company is not required to post any collateral. The Company does not require collateral from its counterparties. The Company has entered into derivative instruments only with counterparties that are also lenders in our credit facility and have been deemed an acceptable credit risk.

As of September 30, 2016 , the Company had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted average contract price is disclosed.
 
2016
 
2017
 
Volume (Bbls/MMBtu)
 
Fixed Price Swap (per Bbl/MMBtu)
 
Volume (Bbls/MMBtu)
 
Fixed Price Swap (per Bbl/MMBtu)
Oil Swaps
276,000
 
$
43.52

 
1,095,000
 
$
45.86

Oil Basis Swaps
1,288,000
 
$
(0.67
)
 
6,935,000
 
$
(0.71
)
Natural Gas Swaps
0
 
$

 
3,650,000
 
$
3.10


Balance sheet offsetting of derivative assets and liabilities

The fair value of swaps is generally determined using established index prices and other sources which are based upon, among other things, futures prices and time to maturity. These fair values are recorded by netting asset and liability positions that are with the same counterparty and are subject to contractual terms which provide for net settlement.

The following tables present the gross amounts of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties and the resulting net amounts presented in the Company’s consolidated balance sheets as of September 30, 2016 and December 31, 2015 .
 
September 30, 2016
December 31, 2015
 
(in thousands)
Gross amounts of recognized assets
$

$
4,623

Gross amounts of recognized liabilities
(8,235
)

Net amounts of assets presented in the Consolidated Balance Sheet
$
(8,235
)
$
4,623



21


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


The net amounts are classified as current or noncurrent based on their anticipated settlement dates. The net fair value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:
 
September 30, 2016
December 31, 2015
 
(in thousands)
Current Assets: Derivative instruments
$

$
4,623

Total Assets
$

$
4,623

Current Liabilities: Derivative instruments
$
6,428

$

Noncurrent Liabilities: Derivative instruments
1,807


Total Liabilities
$
8,235

$


None of the Company’s derivatives have been designated as hedges. As such, all changes in fair value are immediately recognized in earnings. The following table summarizes the gains and losses on derivative instruments included in the combined consolidated statements of operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
2015
 
2016
2015
 
(in thousands)
Change in fair value of open non-hedge derivative instruments
$
2,425

$
(7,901
)
 
$
(12,858
)
$
(77,532
)
Gain (loss) on settlement of non-hedge derivative instruments
(391
)
35,504

 
4,193

104,366

Gain (loss) on derivative instruments
$
2,034

$
27,603

 
$
(8,665
)
$
26,834


14.    FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. The Company uses appropriate valuation techniques based on available inputs to measure the fair values of its assets and liabilities.
 
Level 1 - Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.

Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

Level 3 - Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Certain assets and liabilities are reported at fair value on a recurring basis, including the Company’s derivative instruments. The fair values of the Company’s fixed price crude oil swaps are measured internally using established

22


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


commodity futures price strips for the underlying commodity provided by a reputable third party, the contracted notional volumes, and time to maturity. These valuations are Level 2 inputs.

The following table provides fair value measurement information for financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 .
 
September 30, 2016
December 31, 2015
 
(in thousands)
Fixed price swaps:
 
 
Quoted prices in active markets level 1
$

$

Significant other observable inputs level 2
(8,235
)
4,623

Significant unobservable inputs level 3


Total
$
(8,235
)
$
4,623


Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The following table provides the fair value of financial instruments that are not recorded at fair value in the consolidated balance sheets.
 
September 30, 2016
December 31, 2015
 
Carrying
 
Carrying
 
 
Amount
Fair Value
Amount
Fair Value
 
(in thousands)
Debt:
 
 
 
 
Revolving credit facility
$

$

$
11,000

$
11,000

7.625% Senior Notes due 2021
450,000

477,562

450,000

450,000

Partnership revolving credit facility
54,500

54,500

34,500

34,500


The fair value of the revolving credit facility approximates its carrying value based on borrowing rates available to the Company for bank loans with similar terms and maturities and is classified as Level 2 in the fair value hierarchy. The fair value of the Senior Notes was determined using the September 30, 2016 quoted market price, a Level 1 classification in the fair value hierarchy. The fair value of the Partnership’s revolving credit facility approximates its carrying value based on borrowing rates available to us for bank loans with similar terms and maturities and is classified as Level 2 in the fair value hierarchy.

15.    COMMITMENTS AND CONTINGENCIES

The Company could be subject to various possible loss contingencies which arise primarily from interpretation of federal and state laws and regulations affecting the natural gas and crude oil industry. Such contingencies include differing interpretations as to the prices at which natural gas and crude oil sales may be made, the prices at which royalty owners may be paid for production from their leases, environmental issues and other matters. Management believes it has complied with the various laws and regulations, administrative rulings and interpretations.

16.    SUBSEQUENT EVENTS

Commodity Contracts

Subsequent to September 30, 2016, the Company entered into new commodity contracts which include fixed price basis contracts, fixed price swaps of natural gas and costless collars with corresponding put and call options. Under the Company’s costless collar contracts, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is less than the put option price, and the Company is required to make a payment to the counterparty if the settlement price for any settlement period is greater than the call option price. If the settlement price is between the put and the call price, there is no payment required. With respect to the Company’s fixed price swap and fixed price basis contracts, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is less than the swap price, and the Company is required to make a payment

23


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


to the counterparty if the settlement price for any settlement period is greater than the swap price. The Company’s derivative contracts are based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on New York Mercantile Exchange West Texas Intermediate pricing and with natural gas derivative settlements based on the New York Mercantile Exchange Henry Hub pricing.

The following tables present the derivative contracts entered into by the Company subsequent to September 30, 2016. When aggregating multiple contracts, the weighted average contract price is disclosed.
 
Volume (Bbls/MMBtu)
 
Fixed Price Swap (per Bbl/MMBtu)
January 2017 - December 2017
 
 
 
Oil Basis Swaps
1,825,000
 
$
(0.76
)
Natural Gas Swaps
3,650,000
 
$
3.29

January 2018 - December 2018
 
 
 
Oil Basis Swaps
4,380,000
 
$
(0.88
)

 
Floor
 
Ceiling
 
Volume
(Bbls)
 
Fixed Price (per Bbl)
 
Volume
(Bbls)
 
Fixed Price (per Bbl)
November 2016 - December 2016
 
 
 
 
 
 
 
Costless Collars
610,000
 
$
45.00

 
305,000
 
$
54.95

January 2017 - June 2017
 
 
 
 
 
 
 
Costless Collars
1,810,000
 
$
45.00

 
905,000
 
$
54.35


The Company’s Credit Facility

In connection with the Company’s fall 2016 redetermination, the agent lender under the credit agreement has recommended that the Company’s borrowing base be increased to $1.0 billion . Notwithstanding such adjustment, the Company intends to continue to limit the lenders’ aggregate commitment to $500.0 million .

The Partnership’s Credit Facility

In connection with the Partnership’s fall 2016 redetermination, the agent lender under the credit agreement has recommended that the Partnership’s borrowing base be increased to $275.0 million .

4.75% Senior Notes due 2024

On October 28, 2016, the Company completed an offering of $500.0 million in aggregate principal amount of its 4.75% Senior Notes due 2024 (the “2024 Senior Notes”). The 2024 Senior Notes bear interest at a rate of 4.75% per annum, payable semi-annually, in arrears on May 1 and November 1 of each year, commencing on May 1, 2017 and will mature on November 1, 2024. As of the closing date, the 2024 Senior Notes are fully and unconditionally guaranteed by Diamondback O&G LLC and Diamondback E&P LLC and will also be guaranteed by any future restricted subsidiary of the Company. The Company received $496.0 million in net proceeds from the offering of the 2024 Senior Notes, which were used, in part, to repurchase all of the Company’s outstanding 2021 Senior Notes accepted for purchase in a related tender offer, to pay fees and expenses thereof and to redeem the 2021 Senior Notes that remained outstanding after completion of the tender offer. For a discussion of the tender offer and related redemption, see “-Tender Offer and Redemption-Existing 2021 Senior Notes” below. The Company intends to use the remaining net proceeds from the offering of the 2024 Senior Notes for general corporate purposes, which may include the funding of a portion of the Company’s capital development plans.

Tender Offer and Redemption-Existing 2021 Senior Notes

On October 21, 2016, the Company commenced a cash tender offer to purchase any and all of its 2021 Senior Notes, which tender offer expired on October 27, 2016 and settled on October 28, 2016. Holders of the 2021 Senior

24


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


Notes that were validly tendered and accepted at or prior to the expiration time of the tender offer, or who delivered the 2021 Senior Notes pursuant to the guaranteed delivery procedures, received total cash consideration of $1,059.69 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the settlement date. An aggregate of $330.1 million principal amount of the 2021 Senior Notes was validly tendered in the tender offer. The remaining 2021 Senior Notes that were not tendered in the tender offer were redeemed by the Company. The redemption payment included approximately $119.9 million of outstanding principal at a redemption price of 105.719% of the principal amount of the redeemed 2021 Senior Notes, plus accrued and unpaid interest thereon to the redemption date. Upon deposit of the redemption payment with the paying agent on October 28, 2016, the indenture governing the 2021 Senior Notes was fully satisfied and discharged. The cash tender offer for the 2021 Senior Notes and redemption of the remaining 2021 Senior Notes were funded with a portion of the net proceeds from the offering of the 2024 Senior Notes in the aggregate principal amount of $500.0 million discussed in more detail above under the heading “–4.75% Senior Notes due 2024.”

17.    GUARANTOR FINANCIAL STATEMENTS

Diamondback E&P LLC, Diamondback O&G LLC and White Fang Energy LLC (the “Guarantor Subsidiaries”) are guarantors under the Indenture relating to the Senior Notes. On June 23, 2014, in connection with the Viper Offering, the Company designated the Partnership, the General Partner and Viper Energy Partners LLC (the “Non-Guarantor Subsidiaries”) as unrestricted subsidiaries under the Indenture and, upon such designation, Viper Energy Partners LLC, which was a guarantor under the Indenture prior to such designation, was released as a guarantor under the Indenture. Viper Energy Partners LLC is a limited liability company formed on September 18, 2013 to own and acquire mineral and other oil and natural gas interests in properties in the Permian Basin in West Texas. The following presents condensed consolidated financial information for the Company (which for purposes of this Note 17 is referred to as the “Parent”), the Guarantor Subsidiaries and the Non–Guarantor Subsidiaries on a consolidated basis. Elimination entries presented are necessary to combine the entities. The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the Guarantor Subsidiaries operated as independent entities. The Company has not presented separate financial and narrative information for each of the Guarantor Subsidiaries because it believes such financial and narrative information would not provide any additional information that would be material in evaluating the sufficiency of the Guarantor Subsidiaries.


25


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


Condensed Consolidated Balance Sheet
September 30, 2016
(In thousands)
 
 
 
 
 
Non–
 
 
 
 
 
 
 
Guarantor
 
Guarantor
 
 
 
 
 
Parent
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
133,279

 
$
26,232

 
$
7,758

 
$

 
$
167,269

Restricted cash

 

 
500

 

 
500

Accounts receivable

 
75,583

 
9,918

 

 
85,501

Accounts receivable - related party

 
13

 

 

 
13

Intercompany receivable
2,915,582

 
317,103

 

 
(3,232,685
)
 

Inventories

 
1,969

 

 

 
1,969

Other current assets
213

 
2,712

 
93

 

 
3,018

Total current assets
3,049,074

 
423,612

 
18,269

 
(3,232,685
)
 
258,270

Property and equipment:
 
 
 
 
 
 
 
 
 
Oil and natural gas properties, at cost, based on the full cost method of accounting

 
4,249,936

 
692,816

 
(559
)
 
4,942,193

Pipeline and gas gathering assets

 
8,362

 

 

 
8,362

Other property and equipment

 
58,205

 

 

 
58,205

Accumulated depletion, depreciation, amortization and impairment

 
(1,652,185
)
 
(140,613
)
 
8,018

 
(1,784,780
)
Net property and equipment

 
2,664,318

 
552,203

 
7,459

 
3,223,980

Investment in subsidiaries
(73,559
)
 

 

 
73,559

 

Other assets

 
8,533

 
34,897

 

 
43,430

Total assets
$
2,975,515

 
$
3,096,463

 
$
605,369

 
$
(3,151,667
)
 
$
3,525,680

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable-trade
$

 
$
38,797

 
$
37

 
$

 
$
38,834

Accounts payable-related party
2

 

 

 

 
2

Intercompany payable

 
3,232,685

 

 
(3,232,685
)
 

Other current liabilities
17,331

 
117,105

 
1,753

 

 
136,189

Total current liabilities
17,333

 
3,388,587

 
1,790

 
(3,232,685
)
 
175,025

Long-term debt
443,313

 

 
54,500

 

 
497,813

Derivative instruments

 
1,807

 

 

 
1,807

Asset retirement obligations

 
15,740

 

 

 
15,740

Total liabilities
460,646

 
3,406,134

 
56,290

 
(3,232,685
)
 
690,385

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ equity
2,514,869

 
(309,671
)
 
549,079

 
(239,408
)
 
2,514,869

Non-controlling interest

 

 

 
320,426

 
320,426

Total equity
2,514,869

 
(309,671
)
 
549,079

 
81,018

 
2,835,295

Total liabilities and equity
$
2,975,515

 
$
3,096,463

 
$
605,369

 
$
(3,151,667
)
 
$
3,525,680


26


Diamondback Energy, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
(Unaudited)


Condensed Consolidated Balance Sheet
December 31, 2015
(In thousands)
 
 
 
 
 
Non–
 
 
 
 
 
 
 
Guarantor
 
Guarantor
 
 
 
 
 
Parent
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
148

 
$
19,428

 
$
539

 
$

 
$
20,115

Restricted cash

 

 
500

 

 
500

Accounts receivable

 
67,942

 
9,369

 
2

 
77,313

Accounts receivable - related party

 
1,591

 

 

 
1,591

Intercompany receivable
2,246,846

 
205,915

 

 
(2,452,761
)
 

Inventories

 
1,728

 

 

 
1,728

Other current assets
450

 
6,572

 
476

 

 
7,498

Total current assets
2,247,444

 
303,176

 
10,884

 
(2,452,759
)
 
108,745

Property and equipment:
 
 
 
 
 
 
 
 
 
Oil and natural gas properties, at cost, based on the full cost method of accounting

 
3,400,381

 
554,992

 

 
3,955,373

Pipeline and gas gathering assets

 
7,174

 

 

 
7,174

Other property and equipment

 
48,621

 

 

 
48,621

Accumulated depletion, depreciation, amortization and impairment