Diamondback Energy, Inc
Diamondback Energy, Inc. (Form: 10-Q, Received: 05/04/2017 06:12:01)



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 March 31, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
 
 
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      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 April 28, 2017 , 98,128,043 shares of the registrant’s common stock were outstanding.





DIAMONDBACK ENERGY, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2017
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.
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).
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.

ii



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.
2024 Senior Notes
The Company’s 4.750% senior unsecured notes due 2024 in the aggregate principal amount of $500 million.
2025 Senior Notes
The Company’s 5.375% senior unsecured notes due 2025 in the aggregate principal amount of $500 million.
Senior Notes
The 2024 Senior Notes and the 2025 Senior Notes.
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, 2016 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 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)



 
March 31,
December 31,
 
2017
2016
 
(In thousands, except par values and share data)
Assets
 
 
Current assets:
 
 
Cash and cash equivalents
$
37,440

$
1,666,574

Restricted cash

500

Accounts receivable:
 
 
Joint interest and other
55,953

49,476

Oil and natural gas sales
83,425

70,349

Related party
98

297

Inventories
3,027

1,983

Derivative instruments
14,374


Prepaid expenses and other
4,457

2,987

Total current assets
198,774

1,792,166

Property and equipment:
 
 
Oil and natural gas properties, full cost method of accounting ($3,892,109 and $1,730,519 excluded from amortization at March 31, 2017 and December 31, 2016, respectively)
7,870,991

5,160,261

Midstream assets
56,833

8,362

Other property and equipment
70,170

58,290

Accumulated depletion, depreciation, amortization and impairment
(1,894,897
)
(1,836,056
)
Net property and equipment
6,103,097

3,390,857

Funds held in escrow
2,051

121,391

Derivative instruments
3,102

709

Deferred income taxes
123


Other assets
62,553

44,557

Total assets
$
6,369,700

$
5,349,680

Liabilities and Stockholders’ Equity
 
 
Current liabilities:
 
 
Accounts payable-trade
$
19,689

$
47,648

Accounts payable-related party

1

Accrued capital expenditures
94,810

60,350

Other accrued liabilities
80,763

55,330

Revenues and royalties payable
48,807

23,405

Derivative instruments

22,608

Total current liabilities
244,069

209,342

Long-term debt
985,786

1,105,912

Asset retirement obligations
18,939

16,134

Deferred income taxes
1,548


Total liabilities
1,250,342

1,331,388

Commitments and contingencies (Note 15)
 
 
Stockholders’ equity:
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized, 98,127,709 issued and outstanding at March 31, 2017; 90,143,934 issued and outstanding at December 31, 2016
981

901

Additional paid-in capital
5,034,007

4,215,955

Accumulated deficit
(383,121
)
(519,394
)
Total Diamondback Energy, Inc. stockholders’ equity
4,651,867

3,697,462

Non-controlling interest
467,491

320,830

Total equity
5,119,358

4,018,292

Total liabilities and equity
$
6,369,700

$
5,349,680

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 March 31,
 
2017
2016
 
(In thousands, except per share amounts)
Revenues:
 
 
Oil sales
$
207,074

$
79,020

Natural gas sales
9,922

4,022

Natural gas liquid sales
15,502

4,439

Lease bonus
1,602


Midstream services
1,130


Total revenues
235,230

87,481

Costs and expenses:
 
 
Lease operating expenses
26,626

18,223

Production and ad valorem taxes
15,725

7,962

Gathering and transportation
2,619

2,789

Midstream services
854


Depreciation, depletion and amortization
58,929

42,069

Impairment of oil and natural gas properties

30,816

General and administrative expenses (including non-cash equity-based compensation, net of capitalized amounts, of $7,063 and $8,350 for the three months ended March 31, 2017 and 2016, respectively)
13,744

12,979

Asset retirement obligation accretion
323

246

Total costs and expenses
118,820

115,084

Income (loss) from operations
116,410

(27,603
)
Other income (expense):
 
 
Interest income (expense), net
(12,225
)
(10,013
)
Other income
1,145

563

Gain on derivative instruments, net
37,701

1,426

Total other income (expense), net
26,621

(8,024
)
Income (loss) before income taxes
143,031

(35,627
)
Provision for income taxes
1,957


Net income (loss)
141,074

(35,627
)
Net income (loss) attributable to non-controlling interest
4,801

(2,715
)
Net income (loss) attributable to Diamondback Energy, Inc.
$
136,273

$
(32,912
)
Earnings per common share:


Basic
$
1.46

$
(0.46
)
Diluted
$
1.46

$
(0.46
)
Weighted average common shares outstanding:
 
 
Basic
93,161

71,026

Diluted
93,364

71,026


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, 2015
66,797
$
668

$
2,229,664

$
(354,360
)
$
233,001

$
2,108,973

Unit-based compensation




973

973

Stock-based compensation


10,141



10,141

Distribution to non-controlling interest




(2,115
)
(2,115
)
Common shares issued in public offering, net of offering costs
4,600
46

254,293



254,339

Exercise of stock options and vesting of restricted stock units
301
3

369



372

Net loss



(32,912
)
(2,715
)
(35,627
)
Balance March 31, 2016
71,698
$
717

$
2,494,467

$
(387,272
)
$
229,144

$
2,337,056

 
 
 
 
 
 
 
Balance December 31, 2016
90,144
$
901

$
4,215,955

$
(519,394
)
$
320,830

$
4,018,292

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



147,523

147,523

Unit-based compensation




819

819

Stock-based compensation


8,587



8,587

Distribution to non-controlling interest




(6,482
)
(6,482
)
Common shares issued in public offering, net of offering costs


14



14

Common shares issued for acquisition
7,686
77

809,096



809,173

Exercise of stock options and vesting of restricted stock units
298
3

355



358

Net income



136,273

4,801

141,074

Balance March 31, 2017
98,128
$
981

$
5,034,007

$
(383,121
)
$
467,491

$
5,119,358
























See accompanying notes to combined consolidated financial statements.

3

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

 
Three Months Ended March 31,
 
2017
2016
 
 
 
 
(In thousands)
Cash flows from operating activities:
 
 
Net income (loss)
$
141,074

$
(35,627
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
Provision for deferred income taxes
1,425


Impairment of oil and natural gas properties

30,816

Asset retirement obligation accretion
323

246

Depreciation, depletion, and amortization
58,929

42,069

Amortization of debt issuance costs
852

668

Change in fair value of derivative instruments
(39,375
)
3,691

Income from equity investment
(3
)

Equity-based compensation expense
7,063

8,350

Gain on sale of assets, net
(12
)

Changes in operating assets and liabilities:
 
 
Accounts receivable
(20,104
)
23,439

Accounts receivable-related party
199

27

Restricted cash
500


Inventories
(1,044
)
137

Prepaid expenses and other
(19,894
)
(530
)
Accounts payable and accrued liabilities
10,281

(5,121
)
Accounts payable and accrued liabilities-related party
(2
)
(12
)
Accrued interest
10,313

8,575

Revenues and royalties payable
25,402

(3,968
)
Net cash provided by operating activities
175,927

72,760

Cash flows from investing activities:
 
 
Additions to oil and natural gas properties
(116,174
)
(86,169
)
Additions to oil and natural gas properties-related party

(164
)
Acquisition of mineral interests
(8,579
)
(2,082
)
Acquisition of leasehold interests
(1,760,810
)
(16,923
)
Additions to midstream assets
(59
)

Acquisition of midstream assets
(48,329
)

Purchase of other property and equipment
(11,918
)
(1,142
)
Proceeds from sale of assets
1,238

123

Funds held in escrow
119,340


Equity investments
(188
)
(800
)
Net cash used in investing activities
(1,825,479
)
(107,157
)
Cash flows from financing activities:
 
 
Proceeds from borrowings under credit facility

8,500

Repayment under credit facility
(120,500
)
(11,000
)
Debt issuance costs
(418
)
(4
)
Public offering costs
(265
)
(179
)
Proceeds from public offerings
147,725

254,518

Proceeds from exercise of stock options
358

372

Distributions to non-controlling interest
(6,482
)
(2,115
)
Net cash provided by financing activities
20,418

250,092

Net increase (decrease) in cash and cash equivalents
(1,629,134
)
215,695


4

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

 
Three Months Ended March 31,
 
2017
2016
 
 
 
Cash and cash equivalents at beginning of period
1,666,574

20,115

Cash and cash equivalents at end of period
$
37,440

$
235,810

 
 
 
Supplemental disclosure of cash flow information:
 
 
Interest paid, net of capitalized interest
$
1,118

$
823

Supplemental disclosure of non-cash transactions:
 
 
Change in accrued capital expenditures
$
34,460

$
(23,646
)
Capitalized stock-based compensation
$
2,343

$
2,764

Common stock issued for oil and natural gas properties
$
809,173

$

Asset retirement obligation acquired
$
2,129

$
796


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 March 31, 2017 , 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 Rattler Midstream LLC (formerly known as 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 March 31, 2017 , the Company owned approximately 74% 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, 2016 , 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 May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers”. This update supersedes most of the existing revenue recognition requirements in GAAP and requires (i) an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services and (ii) requires expanded disclosures regarding the nature, amount, timing and certainty of revenue and cash flows from contracts with customers. The standard will be effective for annual and interim reporting periods beginning after December 15, 2017, with early application permitted for annual reporting period beginning after December 31, 2016. The standard allows for either full retrospective adoption, meaning the standard is applied to all periods presented in the financial statements, or modified retrospective adoption, meaning the standard is applied only to the most current period presented. The Company is currently evaluating the impact of this standard; however, it does not believe this standard will have a material impact on the Company’s consolidated financial statements.

In July 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-11, “Inventory”. This update applies to all inventory that is not measured using last-in, first-out or the retail inventory method. Under this update, an entity should measure inventory at the lower of cost and net realizable value. This standard was effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This standard should be applied prospectively with early adoption permitted as of the beginning of an interim or annual reporting period. The Company adopted this standard prospectively effective January 1, 2017. The adoption of this standard had no impact on the Company’s financial position, results of operations or liquidity because the Company currently measures its inventory at the lower of cost or net realizable value.

In November 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-17, “Income Taxes”. This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The standard was effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. This standard may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted this standard prospectively effective January 1, 2017. The Company will present deferred tax liabilities and assets as noncurrent.

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 believes the primary impact of adopting this standard will be the recognition of assets and liabilities on the balance sheet for current operating leases. The Company is still evaluating the impact of this standard.

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,

7


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


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 was effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company prospectively adopted this standard effective January 1, 2017. The Company revised its calculation of diluted earnings per share to exclude the amount of excess tax benefits that would be recognized in additional paid-in capital. The Company also adopted a policy to account for forfeitures as they occur.

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.

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, non-cash 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 June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-13, “Financial Instruments - Credit Losses”. This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This update will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company does not believe the adoption of this standard will have a material impact on the Company’s consolidated financial statements since the Company does not have a history of credit losses.

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 the Company’s consolidated financial statements.

In January 2017, the Financial Accounting Standards Board issued Accounting Standards Update 2017-01, “Business Combinations - Clarifying the Definition of a Business”. This update apples to all entities that must determine

8


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


whether they acquired or sold a business. This update provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This update will be effective for financial statements issued for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years. This update should be applied prospectively on or after the effective date. This update is not expected to have a material impact the Company’s financial statements or results of operations. The adoption of this update will change the process that the Company uses to evaluate whether the Company has acquired a business or an asset. This update will be applied prospectively and will not have an effect on prior acquisitions.

3.    ACQUISITIONS

On February 28, 2017, the Company completed its acquisition of certain oil and natural gas properties, midstream assets and other related assets in the Delaware Basin for an aggregate purchase price consisting of $1.74 billion in cash and 7.69 million shares of the Company’s common stock, of which approximately 1.15 million shares were placed in an indemnity escrow. This transaction includes the acquisition of (i) approximately 100,306 gross ( 80,339 net) acres primarily in Pecos and Reeves counties for approximately $2.5 billion and (ii) midstream assets for approximately $47.6 million . The Company used the net proceeds from the December 2016 equity offering, net proceeds from the December 2016 debt offering, cash on hand and other financing sources to fund the cash portion of the purchase price for this acquisition.

The Company is in the process of identifying and determining the fair values of the assets and liabilities assumed, and as a result, the estimates for fair value at March 31, 2017 are subject to change. The following represents the preliminary estimated fair value of the assets and liabilities assumed on the acquisition date. The aggregate consideration transferred was $2.6 billion , subject to post-closing adjustments, resulting in no goodwill or bargain purchase gain.
 
(in thousands)
Proved oil and natural gas properties
$
387,571

Unevaluated oil and natural gas properties
2,122,415

Midstream assets
47,554

Prepaid capital costs
3,460

Oil inventory
839

Revenues payable
(8,723
)
Asset retirement obligation
(1,550
)
Total fair value of net assets
$
2,551,566


The Company has included in its consolidated statements of operations revenues of $12.2 million and direct operating expenses of $2.7 million for the period from February 28, 2017 to March 31, 2017 due to the acquisition.


9


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


Pro Forma Financial Information

The following unaudited summary pro forma consolidated statement of operations data of Diamondback for the three months March 31, 2017 and 2016 have been prepared to give effect to the February 28, 2017 acquisition as if it had occurred on January 1, 2016. The pro forma data are not necessarily indicative of financial results that would have been attained had the acquisitions occurred on January 1, 2016. The pro forma data also necessarily exclude various operation expenses related to the properties and the financial statements should not be viewed as indicative of operations in future periods.
 
Three Months Ended March 31,
 
2017
2016
 
 
 
Revenues
$
258,159

$
102,664

Income from operations
133,162

(24,003
)
Net income
150,615

(29,312
)
Basic earnings per common share
1.62

(0.41
)
Diluted earnings per common share
1.61

(0.41
)

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 March 31, 2017 , the Company owned approximately 74% of the common units of the Partnership.

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.


10


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


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.

5.    PROPERTY AND EQUIPMENT

Property and equipment includes the following:
 
March 31,
December 31,
 
2017
2016
 
 
 
 
(in thousands)
Oil and natural gas properties:
 
 
Subject to depletion
$
3,978,882

$
3,429,742

Not subject to depletion
3,892,109

1,730,519

Gross oil and natural gas properties
7,870,991

5,160,261

Accumulated depletion
(747,033
)
(687,685
)
Accumulated impairment
(1,143,498
)
(1,143,498
)
Oil and natural gas properties, net
5,980,460

3,329,078

Midstream assets
56,833

8,362

Other property and equipment
70,170

58,290

Accumulated depreciation
(4,366
)
(4,873
)
Property and equipment, net of accumulated depreciation, depletion, amortization and impairment
$
6,103,097

$
3,390,857

 
 
 
Balance of acquisition costs not subject to depletion
 
 
Incurred in 2017
$
2,184,601

 
Incurred in 2016
$
788,662

 
Incurred in 2015
$
374,937

 
Incurred in 2014
$
442,159

 
Incurred in 2013
$
47,174

 
Incurred in 2012
$
54,576

 

The Company uses the full cost method of accounting for its oil and natural gas properties. Under this method, all acquisition, exploration and development costs, including certain internal costs, are capitalized and amortized on a composite unit of production method based on proved oil, natural gas liquids and natural gas reserves. Internal costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. Costs, including related employee costs, associated with production and operation of the properties are charged to expense as incurred. All other internal costs not directly associated with exploration and development activities are charged to expense as they are incurred. Capitalized internal costs were approximately $5.1 million and $5.0 million for the three months ended March 31, 2017 and 2016 , 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. Acquisition costs not currently being amortized are primarily related to unproved acreage that the Company plans to prove up through drilling. The Company has no plans to let any acreage expire. 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.

11


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



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.

As a result of the decline in prices, the Company recorded a non-cash impairment for the three months ended March 31, 2016 of $30.8 million , which is included in accumulated depletion, depreciation, amortization and impairment. The Company did no t record an impairment for the three months ended March 31, 2017 . 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.

At March 31, 2017 , there was $16.8 million in exploration costs and development costs and $2.2 million in capitalized interest that are not subject to depletion. At December 31, 2016 , there were no exploration costs, development costs or capitalized interest that are not subject to depletion.

6.    ASSET RETIREMENT OBLIGATIONS

The following table describes the changes to the Company’s asset retirement obligation liability for the following periods:
 
Three Months Ended March 31,
 
2017
2016
 
 
 
 
(in thousands)
Asset retirement obligations, beginning of period
$
17,422

$
12,711

Additional liabilities incurred
741

132

Liabilities acquired
2,129

796

Liabilities settled
(102
)
(344
)
Accretion expense
323

246

Revisions in estimated liabilities
(2
)
88

Asset retirement obligations, end of period
20,511

13,629

Less current portion
1,572

67

Asset retirement obligations - long-term
$
18,939

$
13,562


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,

12


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


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. During the three months ended March 31, 2017 and 2016 , the Company invested $0.2 million and $0.8 million , respectively, in this entity bringing its total investment to $6.5 million and $4.1 million at March 31, 2017 and 2016 , respectively. 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.

8.    DEBT

Long-term debt consisted of the following as of the dates indicated:
 
March 31,
December 31,
 
2017
2016
 
 
 
 
(in thousands)
4.750 % Senior Notes due 2024
$
500,000

$
500,000

5.375 % Senior Notes due 2025
500,000

500,000

Unamortized debt issuance costs
(14,214
)
(14,588
)
Partnership revolving credit facility

120,500

Total long-term debt
$
985,786

$
1,105,912


2024 Senior Notes

On October 28, 2016, the Company issued $500.0 million in aggregate principal amount of 4.750% Senior Notes due 2024 (the “2024 Senior Notes”). The 2024 Senior Notes bear interest at a rate of 4.750% 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. All of the Company’s existing and future restricted subsidiaries that guarantee its revolving credit facility or certain other debt guarantee the 2024 Senior Notes; provided, however, that the 2024 Senior Notes are not guaranteed by the Partnership, the General Partner, Viper Energy Partners LLC or Rattler Midstream LLC, and will not be guaranteed by any of the Company’s future unrestricted subsidiaries.

The 2024 Senior Notes were issued under, and are governed by, an indenture among the Company, the subsidiary guarantors party thereto and Wells Fargo, as the trustee, as supplemented (the “2024 Indenture”). The 2024 Indenture contains certain covenants that, subject to certain exceptions and qualifications, among other things, limit the Company’s ability and the ability of the restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make other distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting the Company’s restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and gas business and designate certain of the Company’s subsidiaries as unrestricted subsidiaries.

The Company may on any one or more occasions redeem some or all of the 2024 Senior Notes at any time on or after November 1, 2019 at the redemption prices (expressed as percentages of principal amount) of 103.563% for the 12-month period beginning on November 1, 2019, 102.375% for the 12-month period beginning on November 1, 2020, 101.188% for the 12-month period beginning on November 1, 2021 and 100.000% beginning on November 1, 2022 and at any time thereafter with any accrued and unpaid interest to, but not including, the date of redemption. Prior to November 1, 2019, the Company may on any one or more occasions redeem all or a portion of the 2024 Senior Notes at a price equal to 100% of the principal amount of the 2024 Senior Notes plus a “make-whole” premium and accrued and unpaid interest to the redemption date. In addition, any time prior to November 1, 2019, the Company may on any one or more occasions redeem the 2024 Senior Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the 2024 Senior Notes issued prior to such date at a redemption price of 104.750% , plus accrued and unpaid interest to the redemption date, with an amount equal to the net cash proceeds from certain equity offerings.


13


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


In connection with the issuance of the 2024 Senior Notes, the Company and the subsidiary guarantors entered into a registration rights agreement (the “2024 Registration Rights Agreement”) with the initial purchasers on October 28, 2016, pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2024 Senior Notes for a new issue of substantially identical debt securities registered under the Securities Act. Under the 2024 Registration Rights Agreement, the Company also agreed to use its commercially reasonable efforts to have the registration statement declared effective by the SEC on or prior to the 360th day after the issue date of the 2024 Senior Notes and to keep the exchange offer open for not less than 30 days (or longer if required by applicable law). The Company may be required to file a shelf registration statement to cover resales of the 2024 Senior Notes under certain circumstances. If the Company fails to satisfy these obligations under the 2024 Registration Rights Agreement, it agreed to pay additional interest to the holders of the 2024 Senior Notes as specified in the 2024 Registration Rights Agreement.

2025 Senior Notes

On December 20, 2016, the Company issued $500.0 million in aggregate principal amount of 5.375% Senior Notes due 2025 (the “2025 Senior Notes”). The 2025 Senior Notes bear interest at a rate of 5.375% per annum, payable semi-annually, in arrears on May 31 and November 30 of each year, commencing on May 31, 2017 and will mature on May 31, 2025. All of the Company’s existing and future restricted subsidiaries that guarantee its revolving credit facility or certain other debt guarantee the 2025 Senior Notes, provided, however, that the 2025 Senior Notes are not guaranteed by the Partnership, the General Partner, Viper Energy Partners LLC or Rattler Midstream LLC, and will not be guaranteed by any of the Company’s future unrestricted subsidiaries.
The 2025 Senior Notes were issued under an indenture, dated as of December 20, 2016, among the Company, the guarantors party thereto and Wells Fargo Bank, as the trustee (the “2025 Indenture”). The 2025 Indenture contains certain covenants that, subject to certain exceptions and qualifications, among other things, limit the Company’s ability and the ability of the restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make other distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting the Company’s restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and gas business and designate certain of the Company’s subsidiaries as unrestricted subsidiaries.
The Company may on any one or more occasions redeem some or all of the 2025 Senior Notes at any time on or after May 31, 2020 at the redemption prices (expressed as percentages of principal amount) of 104.031% for the 12-month period beginning on May 31, 2020, 102.688% for the 12-month period beginning on May 31, 2021, 101.344% for the 12-month period beginning on May 31, 2022 and 100.000% beginning on May 31, 2023 and at any time thereafter with any accrued and unpaid interest to, but not including, the date of redemption. Prior to May 31, 2020, the Company may on any one or more occasions redeem all or a portion of the 2025 Senior Notes at a price equal to 100% of the principal amount of the 2025 Senior Notes plus a “make-whole” premium and accrued and unpaid interest to the redemption date. In addition, any time prior to May 31, 2020, the Company may on any one or more occasions redeem the 2025 Senior Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the 2025 Senior Notes issued prior to such date at a redemption price of 105.375% , plus accrued and unpaid interest to the redemption date, with an amount equal to the net cash proceeds from certain equity offerings.

In connection with the issuance of the 2025 Senior Notes, the Company and the subsidiary guarantors entered into a registration rights agreement (the “2025 Registration Rights Agreement”) with the initial purchasers on December 20, 2016, pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2025 Senior Notes for a new issue of substantially identical debt securities registered under the Securities Act. Under the 2025 Registration Rights Agreement, the Company also agreed to use its commercially reasonable efforts to have the registration statement declared effective by the SEC on or prior to the 360th day after the issue date of the 2025 Senior Notes and to keep the exchange offer open for not less than 30 days (or longer if required by applicable law). The Company may be required to file a shelf registration statement to cover resales of the 2025 Senior Notes under certain circumstances. If the Company fails to satisfy these obligations under the 2025 Registration Rights Agreement, it agreed to pay additional interest to the holders of the 2025 Senior Notes as specified in the 2025 Registration Rights Agreement.


14


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


On April 26, 2017, the Company filed with the SEC its Registration Statement on Form S-4 relating to the exchange offers of the 2024 Senior Notes and the 2025 Senior Notes for substantially identical debt securities registered under the Securities Act.

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 March 31, 2017 , the credit agreement was guaranteed by Diamondback, Diamondback E&P LLC and Rattler Midstream 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 March 31, 2017 , the borrowing base was set at $1.0 billion , 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, as amended in December 2016, allows for the issuance of unsecured debt of up to $1.0 billion 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 March 31, 2017 , the Company had $1.0 billion in aggregate principal amount of senior unsecured notes outstanding.

As of March 31, 2017 and December 31, 2016 , 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

15


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


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

The Partnership entered into a $500.0 million secured revolving credit agreement, dated as of July 8, 2014, as amended, with Wells Fargo, as the administrative agent, sole book runner and lead arranger, and certain other lenders party thereto. The borrowing base is scheduled to be re-determined semi-annually with effective dates of April 1st and October 1st. In addition, the Partnership may request up to three additional redeterminations of the borrowing base during any 12 -month period. As of March 31, 2017 , the borrowing base was set at $275.0 million and the Partnership had no outstanding borrowings under the 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 1.0% to 2.00% in the case of the alternative base rate and from 2.00% to 3.00% 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

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.

Diamondback completed no other equity offerings during the three months ended March 31, 2017 and 2016 .

16


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



Partnership Equity Offering

In January 2017, the Partnership completed an underwritten public offering of 9,775,000 common units, which included 1,275,000 common units issued pursuant to an option to purchase additional common units granted to the underwriters. The Partnership received net proceeds from this offering of approximately $147.6 million , after deducting underwriting discounts and commissions and estimated offering expenses, of which Partnership used $120.5 million to repay the outstanding borrowings under its revolving credit agreement and intends to use the remaining net proceeds for general partnership purposes, which may include additional acquisitions.
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 March 31,
 
2017
2016
Net income (loss) attributable to common stock
$
136,273

$
(32,912
)
Weighted average common shares outstanding
 
 
Basic weighted average common units outstanding
93,161

71,026

Effect of dilutive securities:
 
 
Potential common shares issuable
203


Diluted weighted average common shares outstanding
93,364

71,026

Basic net income (loss) attributable to common stock
$
1.46

$
(0.46
)
Diluted net income (loss) attributable to common stock
$
1.46

$
(0.46
)

For the three months ended March 31, 2017 and 2016 , there were 14 shares and 194,737 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 March 31,
 
2017
2016
General and administrative expenses
$
7,063

$
8,350

Equity-based compensation capitalized pursuant to full cost method of accounting for oil and natural gas properties
2,343

2,764



17


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


Stock Options

The following table presents the Company’s stock option activity under the Company’s 2012 Equity Incentive Plan (“2012 Plan”) for the three months ended March 31, 2017 .
 
 
Weighted Average
 
 
 
Exercise
Remaining
Intrinsic
 
Options
Price
Term
Value
 
 
 
(in years)
(in thousands)
Outstanding at December 31, 2016
15,750

$
22.72

 
 
Exercised
(15,750
)
$
22.72

 
 
Outstanding at March 31, 2017

$

0.00
$


The aggregate intrinsic value of stock options that were exercised during the three months ended March 31, 2017 and 2016 was $1.2 million and $0.9 million , respectively.

Restricted Stock Units

The following table presents the Company’s restricted stock units activity under the 2012 Plan during the three months ended March 31, 2017 .
 
Restricted Stock
Awards & Units
Weighted Average Grant-Date
Fair Value
Unvested at December 31, 2016
206,004

$
70.33

Granted
82,220

$
108.56

Vested
(109,528
)
$
75.44

Forfeited
(69
)
$
91.59

Unvested at March 31, 2017
178,627

$
84.78


The aggregate fair value of restricted stock units that vested during the three months ended March 31, 2017 and 2016 was $11.3 million and $8.2 million , respectively. As of March 31, 2017 , the Company’s unrecognized compensation cost related to unvested restricted stock awards and units was $12.4 million . Such cost is expected to be recognized over a weighted-average period of 1.6 years.

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 2017, eligible employees received performance restricted stock unit awards totaling 37,440 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, 2017 to December 31, 2018 and cliff vest at December 31, 2018. Eligible employees received additional performance restricted stock unit awards totaling 74,880 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, 2017 to December 31, 2019 and cliff vest at December 31, 2019.

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.


18


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


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 2017 awards.
 
2017
 
Two-Year Performance Period
Three-Year Performance Period
Grant-date fair value
$
162.13

$
168.73

Risk-free rate
1.27
%
1.59
%
Company volatility
39.32
%
41.14
%

The following table presents the Company’s performance restricted stock units activity under the 2012 Plan for the three months ended March 31, 2017 .
 
Performance Restricted Stock Units
Weighted Average Grant-Date Fair Value
Unvested at December 31, 2015
252,471

$
103.06

Granted
118,169

$
166.53

Unvested at March 31, 2017 (1)
370,640

$
123.29

(1)
A maximum of 741,280 units could be awarded based upon the Company’s final TSR ranking.

As of March 31, 2017 , the Company’s unrecognized compensation cost related to unvested performance based restricted stock awards and units was $30.6 million . Such cost is expected to be recognized over a weighted-average period of 1.9 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.

The following table presents the phantom unit activity under the Viper LTIP for the three months ended March 31, 2017 .
 
Phantom Units
 
Weighted Average Grant-Date
Fair Value
Unvested at December 31, 2016
21,048

 
$
16.23

Granted
3,126

 
$
17.49

Unvested at March 31, 2017
24,174

 
$
16.39


As of March 31, 2017 , the unrecognized compensation cost related to unvested phantom units was $0.2 million . Such cost is expected to be recognized over a weighted-average period of 1.4 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 December 31, 2016, Wexford beneficially owned less than 1% of the Company’s outstanding common stock. The Chairman of the Board of Directors of both the Company and the General Partner was a partner at Wexford until his retirement from Wexford effective December 31, 2016. Another partner at Wexford serves as a member of the Board of Directors of the General Partner. Beginning January 1, 2017, Wexford and entities affiliated with Wexford are no longer considered related parties of the Company and any expenses after December 31, 2016 are no longer classified as related party expenses.


19


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


Related Party Revenue and Expenses

During the three months ended March 31, 2016 , the Company paid $0.3 million in lease operating expenses and $0.4 million in general and administrative expenses to related parties. During the three months ended March 31, 2016 , the Company received less than $0.1 million in other income from related parties.

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. The Company incurred total costs of $0.1 million during the three months ended March 31, 2016 under the Advisory Services Agreement.

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. The Partnership did no t incur any costs during the three months ended March 31, 2017 or March 31, 2016 under the Viper Advisory Services Agreement.

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. The Company paid rent of $0.3 million for the three months ended March 31, 2016 .

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 Company paid rent of less than $0.1 million during the three months ended March 31, 2016 . The Company received payments of less than $0.1 million from Bison in respect of this sublease during the three months ended March 31, 2016 .

The Partnership - Lease Bonus
During the three months ended March 31, 2017 , the Company paid the Partnership $1,500 in lease bonus payments to extend the term of one lease, reflecting an average bonus of $400 per acre. During the three months ended March 31, 2016 , the Company paid the Partnership $0.1 million in lease bonus payments to extend the term of one lease, reflecting an average bonus of $2,500 per acre.
12.    INCOME TAXES

The Company’s effective income tax rates were 1.4% and 0.0% for the three months ended March 31, 2017 and 2016 , respectively. Total income tax expense for the three months ended March 31, 2017 differed from amounts computed by applying the United States federal statutory tax rate to pre-tax income primarily due to current and deferred state income taxes and the change in valuation allowance that offsets the Company’s federal net deferred tax asset position. The Company incurs state income tax obligations in Texas, the primary state in which it operates, pursuant

20


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


to the Texas margin tax. Any positive net taxable income generated by the Company for federal income tax purposes for the three months ended March 31, 2017 is expected to be offset by federal net operating loss (“NOL”) carryforwards, for which a full valuation allowance has been provided. During the three months ended March 31, 2017 , the Company reduced its valuation allowance against its federal NOL by $27.4 million , bringing the total valuation allowance to $87.0 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.”

The Company has used fixed price swap contracts, fixed price basis swap contracts and costless collars with corresponding put and call options to reduce price volatility associated with certain of its oil and natural gas sales. With respect to the Company’s fixed price swap contracts and fixed price basis swap 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 or basis 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 or basis price. The Company has fixed price basis swaps for the spread between the WTI Midland price and the WTI Cushing price. 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. 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 March 31, 2017 , the Company had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted average contract price is disclosed.
 
2017
 
2018
 
Volume (Bbls/MMBtu)
 
Fixed Price Swap (per Bbl/MMBtu)
 
Volume (Bbls/MMBtu)
 
Fixed Price Swap (per Bbl/MMBtu)
Oil Swaps
3,302,000
 
$
53.13

 
904,000
 
$
54.96

Oil Basis Swaps
6,600,000
 
$
(0.72
)
 
5,475,000
 
$
(0.88
)
Natural Gas Swaps
5,500,000
 
$
3.16

 
1,350,000
 
$
3.60



21


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


 
Floor
 
Ceiling
 
Volume
(Bbls)
 
Fixed Price (per Bbl)
 
Volume
(Bbls)
 
Fixed Price (per Bbl)
January 2017 - December 2017
 
 
 
 
 
 
 
Costless Collars
4,402,000
 
$
46.69

 
2,201,000
 
$
56.03

January 2018 - March 2018
 
 
 
 
 
 
 
Costless Collars
540,000
 
$
47.00

 
270,000
 
$
56.34


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 March 31, 2017 and December 31, 2016 .
 
March 31, 2017
December 31, 2016
 
(in thousands)
Gross amounts of assets presented in the Consolidated Balance Sheet
$
17,476

$
709

Net amounts of assets presented in the Consolidated Balance Sheet
17,476

709

 
 
 
Gross amounts of liabilities presented in the Consolidated Balance Sheet

22,608

Net amounts of liabilities presented in the Consolidated Balance Sheet
$

$
22,608


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:
 
March 31, 2017
December 31, 2016
 
(in thousands)
Current assets: derivative instruments
$
14,374

$

Noncurrent assets: derivative instruments
3,102

709

Total assets
$
17,476

$
709

Current liabilities: derivative instruments
$

$
22,608

Total liabilities
$

$
22,608


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 March 31,
 
2017
2016
 
(in thousands)
Change in fair value of open non-hedge derivative instruments
$
39,375

$
(3,691
)
Gain (loss) on settlement of non-hedge derivative instruments
(1,674
)
5,117

Gain on derivative instruments
$
37,701

$
1,426



22


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


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 swaps, fixed price basis swaps and costless collars are measured internally using established 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 March 31, 2017 and December 31, 2016 .
 
March 31, 2017
December 31, 2016
 
(in thousands)
Fixed price swaps:
 
 
Quoted prices in active markets level 1
$

$

Significant other observable inputs level 2
17,476

23,317

Significant unobservable inputs level 3


Total
$
17,476

$
23,317



23


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


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.
 
March 31, 2017
December 31, 2016
 
Carrying
 
Carrying
 
 
Amount
Fair Value
Amount
Fair Value
 
(in thousands)
Debt:
 
 
 
 
Revolving credit facility
$

$

$

$

4.750% Senior Notes due 2024
500,000

504,200

500,000

491,250

5.375% Senior Notes due 2025
500,000

516,250

500,000

502,850

Partnership revolving credit facility


120,500

120,500


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 March 31, 2017 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 March 31, 2017 , the Company entered into new fixed price swaps. 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 March 31, 2017 . When aggregating multiple contracts, the weighted average contract price is disclosed.
 
Volume (Bbls/MMBtu)
 
Fixed Price Swap (per Bbl/MMBtu)
May 2017 - December 2017
 
 
 
Oil Swaps
184,000
 
$
53.99

Natural Gas Swaps
2,450,000
 
$
3.42

January 2018 - December 2018
 
 
 
Oil Swaps
1,825,000
 
$
53.44

Natural Gas Swaps
3,650,000
 
$
3.07



24


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


The Company’s Credit Facility

In connection with the Company’s spring 2017 redetermination, the agent lender under the credit agreement has recommended that the Company’s borrowing base be increased to $1.5 billion . This increase is subject to the approval of the required other lenders. Regardless of such adjustment, the Company has elected to increase the lenders’ aggregate commitment to $750.0 million from $500.0 million at March 31, 2017 .

The Partnership’s Credit Facility

In connection with the Partnership’s spring 2017 redetermination, the agent lender under the credit agreement has recommended that the Partnership’s borrowing base be increased to $315.0 million . This increase is subject to the approval of the required other lenders.

17.    GUARANTOR FINANCIAL STATEMENTS

As of March 31, 2017 , Diamondback E&P LLC and Diamondback O&G LLC (the “Guarantor Subsidiaries”) are guarantors under the Indentures relating to the 2024 Senior Notes and the 2025 Senior Notes. In connection with the issuance of the 2024 Senior Notes and the 2025 Senior Notes, the Partnership, the General Partner, Viper Energy Partners LLC and Rattler Midstream LLC were designated as Non-Guarantor Subsidiaries. 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
March 31, 2017
(In thousands)
 
 
 
 
 
Non–
 
 
 
 
 
 
 
Guarantor
 
Guarantor
 
 
 
 
 
Parent
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
911

 
$
7,966

 
$
28,563

 
$

 
$
37,440

Accounts receivable

 
130,161

 
9,217

 

 
139,378

Accounts receivable - related party

 
98

 
6,951

 
(6,951
)
 
98

Intercompany receivable
3,140,469

 
593,099

 

 
(3,733,568
)
 

Inventories

 
3,027

 

 

 
3,027

Other current assets
413

 
18,210

 
208

 

 
18,831

Total current assets
3,141,793

 
752,561

 
44,939

 
(3,740,519
)
 
198,774

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

 
7,102,157

 
769,393

 
(559
)
 
7,870,991

Midstream assets

 
56,833

 

 

 
56,833

Other property and equipment

 
70,170

 

 

 
70,170

Accumulated depletion, depreciation, amortization and impairment

 
(1,746,886
)
 
(156,795
)
 
8,784

 
(1,894,897
)
Net property and equipment

 
5,482,274

 
612,598

 
8,225

 
6,103,097

Funds held in escrow

 
2,051

 

 

 
2,051

Derivative instruments

 
3,102

 

 

 
3,102

Investment in subsidiaries
2,564,063

 

 

 
(2,564,063
)
 

Deferred income taxes
123

 

 

 

 
123

Other assets

 
27,500

 
35,053

 

 
62,553

Total assets
$
5,705,979

 
$
6,267,488

 
$
692,590

 
$
(6,296,357
)
 
$
6,369,700

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

 
$
19,658

 
$
31

 
$

 
$
19,689

Intercompany payable
48,003

 
3,692,516

 

 
(3,740,519
)
 

Other current liabilities
18,775

 
204,764

 
841

 

 
224,380

Total current liabilities
66,778

 
3,916,938

 
872

 
(3,740,519
)
 
244,069

Long-term debt
985,786

 

 

 

 
985,786

Asset retirement obligations

 
18,939

 

 

 
18,939

Deferred income taxes
1,548

 

 

 

 
1,548

Total liabilities
1,054,112

 
3,935,877

 
872

 
(3,740,519
)
 
1,250,342

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ equity
4,651,867

 
2,331,611

 
691,718

 
(3,023,329
)
 
4,651,867

Non-controlling interest

 

 

 
467,491

 
467,491

Total equity
4,651,867

 
2,331,611

 
691,718

 
(2,555,838
)
 
5,119,358

Total liabilities and equity
$
5,705,979

 
$
6,267,488

 
$
692,590

 
$
(6,296,357
)
 
$
6,369,700


26


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


Condensed Consolidated Balance Sheet
December 31, 2016
(In thousands)
 
 
 
 
 
Non–
 
 
 
 
 
 
 
Guarantor
 
Guarantor
 
 
 
 
 
Parent
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,643,226

 
$
14,135

 
$
9,213

 
$

 
$
1,666,574

Restricted cash

 

 
500

 

 
500

Accounts receivable

 
109,782

 
10,043

 

 
119,825

Accounts receivable - related party

 
297

 
3,470

 
(3,470
)
 
297

Intercompany receivable
3,060,566

 
359,502

 

 
(3,420,068
)
 

Inventories

 
1,983

 

 

 
1,983

Other current assets
481

 
2,319

 
187

 

 
2,987

Total current assets
4,704,273

 
488,018

 
23,413

 
(3,423,538
)
 
1,792,166

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

 
4,400,002

 
760,818

 
(559
)
 
5,160,261

Midstream assets

 
8,362

 

 

 
8,362

Other property and equipment

 
58,290

 

 

 
58,290

Accumulated depletion, depreciation, amortization and impairment

 
(1,695,701
)
 
(148,948
)
 
8,593

 
(1,836,056
)
Net property and equipment

 
2,770,953

 
611,870

 
8,034

 
3,390,857

Funds held in escrow

 
121,391

 

 

 
121,391

Derivative instruments

 
709

 

 

 
709

Investment in subsidiaries
(15,500
)
 

 

 
15,500

 

Other assets

 
9,291

 
35,266

 

 
44,557

Total assets
$
4,688,773

 
$
3,390,362

 
$
670,549

 
$
(3,400,004
)
 
$
5,349,680

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable-trade
$
30

 
$
45,838

 
$
1,780

 
$

 
$
47,648

Accounts payable-related party
1

 

 

 

 
1

Intercompany payable

 
3,423,538

 

 
(3,423,538
)
 

Other current liabilities
5,868

 
155,454

 
371

 

 
161,693

Total current liabilities
5,899

 
3,624,830

 
2,151

 
(3,423,538
)
 
209,342

Long-term debt
985,412

 

 
120,500

 

 
1,105,912

Asset retirement obligations

 
16,134

 

 

 
16,134

Total liabilities
991,311

 
3,640,964

 
122,651

 
(3,423,538
)
 
1,331,388

Commitments and contingencies

 

 

 

 

Stockholders’ equity
3,697,462

 
(250,602
)
 
547,898

 
(297,296
)
 
3,697,462

Non-controlling interest

 

 

 
320,830

 
320,830

Total equity
3,697,462

 
(250,602
)
 
547,898

 
23,534

 
4,018,292

Total liabilities and equity
$
4,688,773

 
$
3,390,362

 
$
670,549

 
$
(3,400,004
)
 
$
5,349,680




27


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


Condensed Consolidated Statement of Operations
Three Months Ended March 31, 2017
(In thousands)
 
 
 
 
 
Non–
 
 
 
 
 
 
 
Guarantor
 
Guarantor
 
 
 
 
 
Parent
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Oil sales
$

 
$
178,230

 
$

 
$
28,844

 
$
207,074

Natural gas sales

 
8,575

 

 
1,347

 
9,922

Natural gas liquid sales

 
13,643

 

 
1,859

 
15,502

Royalty income

 

 
32,050

 
(32,050
)
 

Lease bonus income

 

 
1,602

 

 
1,602

Midstream services

 
1,130

 

 

 
1,130

Total revenues