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

 
 
FORM 10-Q

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO 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)
 
DE
 
45-4502447
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)
 
 
 
500 West Texas
 
 
Suite 1200
 
 
Midland,
TX
 
79701
(Address of principal executive offices)
 
(Zip code)
(432) 221-7400
(Registrant's telephone number, including area code)
 
 Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
FANG
The Nasdaq Stock Market LLC
 
 
(NASDAQ Global Select Market)

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 preceding 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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
 
 
Accelerated Filer
 
 
 
 
 
Non-Accelerated Filer
 
 
Smaller Reporting Company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 

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.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No   

As of May 1, 2020, the registrant had 157,815,843 shares of common stock outstanding.




DIAMONDBACK ENERGY, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020
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.
Mb/d
Thousand barrels per day.
Mcf
Thousand cubic feet of natural gas.
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.
Operator
The individual or company responsible for the exploration and/or production of an oil or natural gas well or lease.
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.
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, which may be subject to expiration.

ii


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.
ASU
Accounting Standards Update
Equity Plan
The Company’s Equity Incentive Plan.
Exchange Act
The Securities Exchange Act of 1934, as amended.
FASB
Financial Accounting Standards Board
GAAP
Accounting principles generally accepted in the United States.
2025 Indenture
The indenture relating to the 2025 senior notes, dated as of December 20, 2016, among the Company, the subsidiary guarantors party thereto and Wells Fargo, as the trustee, as supplemented.
December 2019 Notes
The Company’s 2.875% senior unsecured notes due 2024 in the aggregate principal amount of $1.0 billion, the Company’s 3.250% senior unsecured notes due 2026 in the aggregate principal amount of $800 million and the Company’s 3.500% senior unsecured notes due 2029 in the aggregate principal amount of $1.2 billion.
December 2019 Notes Indenture
The indenture relating to the December 2019 Notes, dated as of December 5, 2019, among the Company and Wells Fargo, as the trustee, as supplemented by the first supplemental indenture dated as of December 5, 2019.
NYMEX
New York Mercantile Exchange.
Rattler
Rattler Midstream LP, a Delaware limited partnership.
Rattler’s General Partner
Rattler Midstream GP LLC, a Delaware limited liability company; the general partner of Rattler Midstream LP and a wholly-owned subsidiary of the Company.
Rattler LLC
Rattler Midstream Operating LLC, a Delaware limited liability company and a subsidiary of Rattler.
Rattler LTIP
Rattler Midstream LP Long-Term Incentive Plan.
Rattler Offering
Rattler’s initial public offering.
Rattler’s Partnership Agreement
The first amended and restated agreement of limited partnership, dated May 28, 2019.
SEC
United States Securities and Exchange Commission.
Securities Act
The Securities Act of 1933, as amended.
2025 Senior Notes
The Company’s 5.375% senior unsecured notes due 2025 in the aggregate principal amount of $800 million.
Senior Notes
The 2025 Senior Notes and December 2019 Notes.
Viper
Viper Energy Partners LP, a Delaware limited partnership.
Viper’s General Partner
Viper Energy Partners GP LLC, a Delaware limited liability company and the General Partner of the Partnership.
Viper LLC
Viper Energy Partners LLC, a Delaware limited liability company and a subsidiary of the Partnership.
Viper LTIP
Viper Energy Partners LP Long Term Incentive Plan.
Viper Offering
Viper’s initial public offering.
Viper’s Partnership Agreement
The second amended and restated agreement of limited partnership, dated May 9, 2018, as amended as of May 10, 2018.
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, 2019 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:

the volatility of realized oil and natural gas prices and the extent and duration of price reductions and increased production by OPEC members and other oil exporting nations;

the threat, occurrence, potential duration or other implications of epidemic or pandemic diseases, including the recent outbreak of a novel strain of coronavirus, or COVID-19, or any government responses to such occurrence or threat;

any impact of the ongoing COVID-19 pandemic on the health and safety of our employees;

logistical challenges and the supply chain disruptions;

general economic, business or industry conditions;

conditions in the capital, financial and credit markets and our ability to obtain capital needed for development and exploration operations on favorable terms or at all;

conditions of U.S. oil and natural gas industry and the effect of U.S. energy, monetary and trade policies;

U.S. and global economic conditions and political and economic developments, including the outcome of the U.S. presidential election and resulting energy and environmental policies;

our ability to execute our business and financial strategies;

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

levels of production;

the impact of reduced drilling activity;

regional supply and demand factors, delays or interruptions of production, and any governmental order, rule or regulation that may impose production limits;

our ability to replace our oil and natural gas reserves;

our ability to identify, complete and integrate acquisitions of properties or businesses;

competition in the oil and natural gas industry;

title defects in our oil and natural gas properties;

uncertainties with respect to identified drilling locations and estimates of reserves;


v


the availability or cost of rigs, equipment, raw materials, supplies, oilfield services or personnel;

restrictions on the use of water;

the availability of transportation, pipeline and storage facilities;

our ability to comply with applicable governmental laws and regulations and to obtain permits and governmental approvals;

federal and state legislative and regulatory initiatives relating to hydraulic fracturing;

future operating results;

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

operating hazards;

our ability to keep up with technological advancements.

capital expenditure plans;

other 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.

vi


PART I. FINANCIAL INFORMATION



ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Diamondback Energy, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 
 
 
 
 
 
 
March 31,
December 31,
 
2020
2019
 
(In millions, except par values and share data)
Assets
 
 
Current assets:
 
 
Cash and cash equivalents
$
149

$
123

Restricted cash
6

5

Accounts receivable:
 
 
Joint interest and other, net
178

186

Oil and natural gas sales, net
225

429

Inventories
36

37

Derivative instruments
534

46

Prepaid expenses and other current assets
140

43

Total current assets
1,268

869

Property and equipment:
 
 
Oil and natural gas properties, full cost method of accounting ($8,488 million and $9,207 million excluded from amortization at March 31, 2020 and December 31, 2019, respectively)
26,719

25,782

Midstream assets
987

931

Other property, equipment and land
130

125

Accumulated depletion, depreciation, amortization and impairment
(6,416
)
(5,003
)
Net property and equipment
21,420

21,835

Equity method investments
502

479

Derivative instruments
30

7

Deferred tax asset, net

142

Investment in real estate, net
107

109

Other assets
59

90

Total assets
$
23,386

$
23,531

















See accompanying notes to consolidated financial statements.

1

Diamondback Energy, Inc. and Subsidiaries
Consolidated Balance Sheets-(Continued)
(Unaudited)



 
March 31,
December 31,
 
2020
2019
 
(In millions, except par values and share data)
Liabilities and Stockholders’ Equity
 
 
Current liabilities:
 
 
Accounts payable-trade
$
245

$
179

Accrued capital expenditures
490

475

Other accrued liabilities
287

304

Revenues and royalties payable
292

278

Derivative instruments
16

27

Total current liabilities
1,330

1,263

Long-term debt
5,677

5,371

Derivative instruments
66


Asset retirement obligations
99

94

Deferred income taxes
1,888

1,886

Other long-term liabilities
10

11

Total liabilities
9,070

8,625

Commitments and contingencies (Note 18)




Stockholders’ equity:
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized, 157,815,843 issued and outstanding at March 31, 2020; 200,000,000 shares authorized, 159,002,338 issued and outstanding at December 31, 2019
2

2

Additional paid-in capital
12,265

12,357

Retained earnings
559

890

Total Diamondback Energy, Inc. stockholders’ equity
12,826

13,249

Non-controlling interest
1,490

1,657

Total equity
14,316

14,906

Total liabilities and equity
$
23,386

$
23,531

























See accompanying notes to consolidated financial statements.

2

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



 
Three Months Ended March 31,
 
2020
2019
 
(In millions, except per share amounts, shares in thousands)
Revenues:
 
 
Oil sales
$
827

$
743

Natural gas sales
4

29

Natural gas liquid sales
52

70

Lease bonus

1

Midstream services
14

19

Other operating income
2

2

Total revenues
899

864

Costs and expenses:
 
 
Lease operating expenses
127

109

Production and ad valorem taxes
71

55

Gathering and transportation
36

12

Midstream services
23

17

Depreciation, depletion and amortization
407

322

Impairment of oil and natural gas properties
1,009


General and administrative expenses
24

27

Asset retirement obligation accretion
2

2

Other operating expense
2

1

Total costs and expenses
1,701

545

(Loss) income from operations
(802
)
319

Other income (expense):
 
 
Interest expense, net
(48
)
(46
)
Other income, net
1

1

Gain (loss) on derivative instruments, net
542

(268
)
(Loss) gain on revaluation of investment
(10
)
4

Total other income (expense), net
485

(309
)
(Loss) income before income taxes
(317
)
10

Provision for (benefit from) income taxes
83

(33
)
Net (loss) income
(400
)
43

Net (loss) income attributable to non-controlling interest
(128
)
33

Net (loss) income attributable to Diamondback Energy, Inc.
$
(272
)
$
10

Earnings per common share:


Basic
$
(1.72
)
$
0.06

Diluted
$
(1.72
)
$
0.06

Weighted average common shares outstanding:
 
 
Basic
158,291

164,852

Diluted
158,494

165,061

Dividends declared per share
$
0.3750

$
0.1875







See accompanying notes to consolidated financial statements.

3

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 millions, shares in thousands)
Balance December 31, 2019
159,002

$
2

$
12,357

$
890

$
1,657

$
14,906

Unit-based compensation
 



5

5

Distribution equivalent rights payments
 



(1
)
(1
)
Stock-based compensation
 

10



10

Repurchased shares for tax withholding



(5
)


(5
)
Repurchased shares for share buyback program
(1,280
)

(98
)


(98
)
Distribution to non-controlling interest
 



(43
)
(43
)
Dividend paid
 


(59
)

(59
)
Exercise of stock options and vesting of restricted stock units
93


1



1

Change in ownership of consolidated subsidiaries, net
 





Net loss
 


(272
)
(128
)
(400
)
Balance March 31, 2020
157,815

$
2

$
12,265

$
559

$
1,490

$
14,316


 
Common Stock
Additional Paid-in Capital
Retained Earnings (Accumulated Deficit)
Non-Controlling Interest
Total
 
Shares
Amount
 
($ in millions, shares in thousands)
Balance December 31, 2018
164,273

$
2

$
12,936

$
762

$
467

$
14,167

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





341

341

Stock-based compensation



19



19

Repurchased shares for tax withholding
(125
)

(13
)


(13
)
Distribution to non-controlling interest





(26
)
(26
)
Dividend paid




(20
)

(20
)
Exercise of stock options and vesting of restricted stock units
468






Change in ownership of consolidated subsidiaries, net



77


(74
)
3

Net income




10

33

43

Balance March 31, 2019
164,616

$
2

$
13,019

$
752

$
741

$
14,514















See accompanying notes to consolidated financial statements.

4

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

 
Three Months Ended March 31,
 
2020
2019
 
 
 
 
(In millions)
Cash flows from operating activities:
 
 
Net (loss) income
$
(400
)
$
43

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
Provision for (benefit from) deferred income taxes
83

(33
)
Impairment of oil and natural gas properties
1,009


Asset retirement obligation accretion
2

2

Depreciation, depletion and amortization
407

322

Amortization of debt issuance costs
2

1

Change in fair value of derivative instruments
(455
)
285

Loss (gain) on revaluation of investment
10

(4
)
Equity-based compensation expense
9

14

Changes in operating assets and liabilities:
 
 
Accounts receivable
175

(63
)
Inventories
1

(4
)
Prepaid expenses and other
(4
)
(9
)
Accounts payable and accrued liabilities
(35
)
(190
)
Accrued interest
31

5

Revenues and royalties payable
14

8

Net cash provided by operating activities
849

377

Cash flows from investing activities:
 
 
Drilling, completions and non-operated additions to oil and natural gas properties
(690
)
(533
)
Infrastructure additions to oil and natural gas properties
(56
)
(36
)
Additions to midstream assets
(44
)
(58
)
Purchase of other property, equipment and land
(5
)
(4
)
Acquisitions of leasehold interests
(40
)
(75
)
Acquisitions of mineral interests
(65
)
(82
)
Contributions to equity method investments
(33
)
(149
)
Distributions from equity method investments
10


Net cash used in investing activities
(923
)
(937
)
Cash flows from financing activities:
 
 
Proceeds from borrowings under credit facility
430

484

Repayments under credit facility
(140
)
(314
)
Proceeds from joint venture
16

23

Debt issuance costs

(3
)
Proceeds from public offerings

341

Proceeds from exercise of stock options
1


Repurchased shares for tax withholdings
(5
)
(13
)
Repurchased shares as part of share buyback
(98
)

Distribution equivalent rights
(1
)

Dividends to stockholders
(59
)
(21
)
Distributions to non-controlling interest
(43
)
(26
)
Net cash provided by financing activities
101

471

Net increase (decrease) in cash and cash equivalents
27

(89
)
 
 
 
 
 
 

5

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

 
Three Months Ended March 31,
 
2020
2019
 
 
 
 
(In millions)
Cash and cash equivalents at beginning of period
128

215

Cash and cash equivalents at end of period
$
155

$
126

Supplemental disclosure of cash flow information:
 
 
Interest paid, net of capitalized interest
$
16

$
17

Supplemental disclosure of non-cash transactions:
 
 
Change in accrued capital expenditures
$
15

$
(10
)
Capitalized stock-based compensation
$
6

$
6

Asset retirement obligations acquired
$

$
3



The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets that sum to the total of the same such amounts shown above:
 
March 31, 2020
 
(In millions)
Cash and cash equivalents
$
149

Restricted cash
6

Total cash, cash equivalents and restricted cash shown in statement of cash flows
$
155

































See accompanying notes to consolidated financial statements.

6

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



1.    DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Organization and Description of the Business

Diamondback Energy, Inc., together with its subsidiaries (collectively referred to as “Diamondback” or the “Company” unless the context otherwise requires), is an independent oil and gas company currently focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas. Diamondback was incorporated in Delaware on December 30, 2011.

The wholly-owned subsidiaries of Diamondback, as of March 31, 2020, include Diamondback E&P LLC, a Delaware limited liability company, Diamondback O&G LLC, a Delaware limited liability company, Viper Energy Partners GP LLC, a Delaware limited liability company, Rattler Midstream GP LLC, a Delaware limited liability company, and Energen Corporation, an Alabama corporation (“Energen”). The consolidated subsidiaries include these wholly-owned subsidiaries as well as Viper Energy Partners LP, a Delaware limited partnership (“Viper”), Viper’s subsidiary Viper Energy Partners LLC, a Delaware limited liability company (“Viper LLC”), Rattler Midstream LP, a Delaware limited partnership (“Rattler”), Rattler Midstream Operating LLC, a Delaware limited liability company (“Rattler LLC”), Rattler LLC’s wholly-owned subsidiary Tall City Towers LLC, a Delaware limited liability company (“Tall City”), and Energen’s wholly-owned subsidiaries Energen Resources Corporation, an Alabama corporation, and EGN Services, Inc., an Alabama corporation.

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.

Viper is consolidated in the financial statements of the Company. As of March 31, 2020, the Company owned approximately 58% of Viper’s total units outstanding. The Company’s wholly-owned subsidiary, Viper Energy Partners GP LLC, is the general partner of Viper.

Rattler is consolidated in the financial statements of the Company. As of March 31, 2020, the Company owned approximately 71% of Rattler’s total units outstanding. The Company’s wholly-owned subsidiary, Rattler Midstream GP LLC, is the general partner of Rattler.

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, 2019, which contains a summary of the Company’s significant accounting policies and other disclosures.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Certain amounts included in or affecting the Company’s consolidated financial statements and related disclosures must be estimated by management, requiring certain assumptions to be made with respect to values or conditions that cannot be known with certainty at the time the consolidated financial statements are prepared. These estimates and assumptions affect the amounts the Company reports for assets and liabilities and the Company’s disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.


7

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

Making accurate estimates and assumptions are particularly difficult as the oil and gas industry experiences challenges resulting from negative pricing pressure from the effects of a decline in worldwide economic conditions. The decline in worldwide economic conditions is the result of a global COVID-19 pandemic announced in March 2020, which has reduced economic activity and resulted in a significant decline in the short term demand for oil and gas production. Companies in the oil and gas industry are beginning to change near term business plans in response to changing market conditions. The aforementioned circumstances generally increases the estimation uncertainty in our accounting estimates, particularly the accounting estimates involving financial forecasts.

The Company evaluates these estimates on an ongoing basis, using historical experience, consultation with experts and other methods the Company considers reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from the Company’s estimates. Any effects on the Company’s business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Significant items subject to such estimates and assumptions include estimates of proved oil and natural gas reserves and related present value estimates of future net cash flows therefrom, the carrying value of oil and natural gas properties, asset retirement obligations, the fair value determination of acquired assets and liabilities assumed, equity-based compensation, fair value estimates of derivative instruments and estimates of income taxes.

Accounts Receivable

Accounts receivable consist of receivables from joint interest owners on properties the Company operates and from sales of oil and natural gas production delivered to purchasers. The purchasers remit payment for production directly to the Company. Most payments for production are received within three months after the production date.

The Company adopted Accounting Standards Update (“ASU”) 2016-13 and the subsequent applicable modifications to the rule on January 1, 2020. Accounts receivable are stated at amounts due from joint interest owners or purchasers, net of an allowance for expected losses as estimated by the Company. For receivables from joint interest owners, the Company typically has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings. Accounts receivable from joint interest owners or purchasers outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for each type of receivable by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the debtor’s current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for expected losses. The adoption of ASU 2016-13 did not result in a material change to the Company’s allowance. At March 31, 2020, the Company recorded an allowance for doubtful accounts of $1 million related to joint interest and other receivables and $1 million related to oil and natural gas sales receivables.


8

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

Recent Accounting Pronouncements

The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or clarifications of ASUs previously disclosed. The following table provides a brief description of recent accounting pronouncements and the Company’s analysis of the effects on its financial statements:
Standard
Description
Date of Adoption
Effect on Financial Statements or Other Significant Matters
Recently Adopted Pronouncements
ASU 2016-13, “Financial Instruments - Credit Losses”
This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.
Q1 2020
The Company adopted this update effective January 1, 2020. The adoption of this update did not have a material impact on its financial position, results of operations or liquidity since it does not have a history of credit losses.

ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”
This update modifies the fair value measurement disclosure requirements specifically related to Level 3 fair value measurements and transfers between levels.
Q1 2020
The Company adopted this update effective January 1, 2020. The adoption of this update did not have an impact on its financial position, results of operations or liquidity since it does not have transfers between fair value levels.
ASU 2018-15, “Intangibles - Goodwill and Other - Internal - Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”
This update requires the capitalization of implementation costs incurred in a hosting arrangement that is a service contract for internal-use software. Training and certain data conversion costs cannot be capitalized. The entity is required to expense the capitalized implementation costs over the term of the hosting agreement.
Q1 2020
The Company adopted this update prospectively effective January 1, 2020. The adoption of this update did not have an impact on its financial position, results of operations or liquidity.
ASU 2019-05, “Financial Instruments-Credit Losses (Topic 326)”
This update allows a fair value option to be elected for certain financial assets, other than held-to-maturity debt securities, that were previously required to be measured at amortized cost basis.
Q1 2020
The Company adopted this update effective January 1, 2020. The adoption of this update did not have an impact on its financial position, results of operations or liquidity since it does not have any cost method investments.
ASU 2020-04, “Rate Reform (Topic 848)”
This update provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR.
Q1 2020
The Company adopted this update upon issuance and elected to use the optional expedient for contracts and hedging that reference LIBOR. The amendments in this update expire on December 31, 2022. The adoption of this update did not have an impact on its financial position, results of operations or liquidity.
Pronouncements Not Yet Adopted
ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes”
This update is intended to simplify the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance.
Q1 2021
This update is effective for public business entities beginning after December 15, 2020 with early adoption permitted. The Company does not believe that the adoption of this update will have an impact on its financial position, results of operations or liquidity.



9

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

3.    REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue from Contracts with Customers

Sales of oil, natural gas and natural gas liquids are recognized at the point control of the product is transferred to the customer. Virtually all of the pricing provisions in the Company’s contracts are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, the quality of the oil or natural gas and the prevailing supply and demand conditions. As a result, the price of the oil, natural gas and natural gas liquids fluctuates to remain competitive with other available oil, natural gas and natural gas liquids supplies.

Oil sales

The Company’s oil sales contracts are generally structured where it delivers oil to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title and risk of loss of the product. Under this arrangement, the Company or a third party transports the product to the delivery point and receives a specified index price from the purchaser with no deduction. In this scenario, the Company recognizes revenue when control transfers to the purchaser at the delivery point based on the price received from the purchaser. Oil revenues are recorded net of any third-party transportation fees and other applicable differentials in the Company’s consolidated statements of operations.

Natural gas and natural gas liquids sales

Under the Company’s natural gas processing contracts, it delivers natural gas to a midstream processing entity at the wellhead, battery facilities or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and remits proceeds to the Company for the resulting sales of natural gas liquids and residue gas. In these scenarios, the Company evaluates whether it is the principal or the agent in the transaction. For those contracts where the Company has concluded it is the principal and the ultimate third party is its customer, the Company recognizes revenue on a gross basis, with transportation, gathering, processing, treating and compression fees presented as an expense in its consolidated statements of operations.

In certain natural gas processing agreements, the Company may elect to take its residue gas and/or natural gas liquids in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the product. Through the marketing process, the Company delivers product to the ultimate third-party purchaser at a contractually agreed-upon delivery point and receives a specified index price from the purchaser. In this scenario, the Company recognizes revenue when control transfers to the purchaser at the delivery point based on the index price received from the purchaser. The gathering, processing, treating and compression fees attributable to the gas processing contract, as well as any transportation fees incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing, treating and compression expense in its consolidated statements of operations.

Midstream Revenue

Substantially all revenues from gathering, compression, water handling, disposal and treatment operations are derived from intersegment transactions for services Rattler provides to exploration and production operations. The portion of such fees shown in the Company’s consolidated financial statements represent amounts charged to interest owners in the Company’s operated wells, as well as fees charged to other third parties for water handling and treatment services provided by Rattler or usage of Rattler’s gathering and compression systems. For gathering and compression revenue, Rattler satisfies its performance obligations and recognizes revenue when low pressure volumes are delivered to a specified delivery point. Revenue is recognized based on the per MMbtu gathering fee or a per barrel gathering fee charged by Rattler in accordance with the gathering and compression agreement. For water handling and treatment revenue, Rattler satisfies its performance obligations and recognizes revenue when the fresh water volumes have been delivered to the fracwater meter for a specified well pad and the wastewater volumes have been metered downstream of the Company’s facilities. For services contracted through third party providers, Rattler’s performance obligation is satisfied when the service performed by the third party provider has been completed. Revenue is recognized based on the per barrel fresh water delivery or a wastewater gathering and disposal fee charged by Rattler in accordance with the water services agreement.


10

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

Transaction price allocated to remaining performance obligations

The Company’s upstream product sales contracts do not originate until production occurs and, therefore, are not considered to exist beyond each days’ production. Therefore, there are no remaining performance obligations under any of our product sales contracts.
The majority of the Company’s midstream revenue agreements have a term greater than one year, and as such the Company has utilized the practical expedient in ASC 606, which states that the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under its revenue agreements, each delivery generally represents a separate performance obligation; therefore, future volumes delivered are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
The remainder of the Company’s midstream revenue agreements, which relate to agreements with third parties, are short-term in nature with a term of one year or less. The Company has utilized an additional practical expedient in ASC 606 which exempts it from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of an agreement that has an original expected duration of one year or less.

Contract balances

Under the Company’s product sales contracts, it has the right to invoice its customers once the performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s product sales contracts do not give rise to contract assets or liabilities under ASC 606.

Prior-period performance obligations

The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain natural gas and natural gas liquids sales may not be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. The Company records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. The Company has existing internal controls for its revenue estimation process and related accruals, and any identified differences between its revenue estimates and actual revenue received historically have not been significant. For the three months ended March 31, 2020, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. The Company believes that the pricing provisions of its oil, natural gas and natural gas liquids contracts are customary in the industry. To the extent actual volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the revenue related to expected sales volumes and prices for those properties are estimated and recorded.

4.    VIPER ENERGY PARTNERS LP

Viper is a publicly traded Delaware limited partnership, the common units of which are listed on the Nasdaq Global Select Market under the symbol “VNOM”. Viper was formed by Diamondback on February 27, 2014, to, among other things, own, acquire and exploit oil and natural gas properties in North America. Viper is currently focused on owning and acquiring mineral interests and royalty interests in oil and natural gas properties in the Permian Basin and the Eagle Ford Shale. Viper Energy Partners GP LLC, a fully-consolidated subsidiary of Diamondback, serves as the general partner of Viper. As of March 31, 2020, the Company owned approximately 58% of Viper’s total units outstanding.


11

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

Partnership Agreement

The second amended and restated agreement of limited partnership, dated as of May 9, 2018, as amended as of May 10, 2018 (the “Viper Partnership Agreement”), requires Viper to reimburse Viper’s General Partner for all direct and indirect expenses incurred or paid on Viper’s behalf and all other expenses allocable to Viper or otherwise incurred by Viper’s General Partner in connection with operating Viper’s business. The Viper Partnership Agreement does not set a limit on the amount of expenses for which Viper’s General Partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for Viper or on its behalf and expenses allocated to Viper’s General Partner by its affiliates. Viper’s General Partner is entitled to determine the expenses that are allocable to Viper. For each of the three months ended March 31, 2020 and 2019, Viper’s General Partner allocated $1 million to Viper.

Tax Sharing

In connection with the closing of the Viper Offering, Viper entered into a tax sharing agreement with Diamondback, dated June 23, 2014, pursuant to which Viper agreed to reimburse Diamondback for its share of state and local income and other taxes for which Viper’s results are included in a combined or consolidated tax return filed by Diamondback with respect to taxable periods including or beginning on June 23, 2014. The amount of any such reimbursement is limited to the tax Viper would have paid had it not been included in a combined group with Diamondback. Diamondback may use its tax attributes to cause its combined or consolidated group, of which Viper may be a member for this purpose, to owe less or no tax. In such a situation, Viper agreed to reimburse Diamondback for the tax Viper would have owed had the tax attributes not been available or used for Viper’s benefit, even though Diamondback had no cash tax expense for that period. For the three months ended March 31, 2020 and 2019, Viper accrued a minimal amount of state income tax expense for its share of Texas margin tax for which Viper’s results are included in a combined tax return filed by Diamondback.

Viper LLC’s Revolving Credit Facility

Viper LLC has entered into a secured revolving credit facility with Wells Fargo, as administrative agent sole book runner and lead arranger. See Note 10Debt for a description of this credit facility.

5.    RATTLER MIDSTREAM LP

Rattler is a publicly traded Delaware limited partnership, the common units of which are listed on the Nasdaq Global Select Market under the symbol “RTLR.” Rattler was formed by Diamondback in July 2018 to own, operate, develop and acquire midstream infrastructure assets in the Midland and Delaware Basins of the Permian Basin. Rattler Midstream GP LLC (“Rattler’s General Partner”), a wholly-owned subsidiary of Diamondback, serves as the general partner of Rattler. As of March 31, 2020, Diamondback owned approximately 71% of Rattler’s total units outstanding.

Prior to the completion of Rattler’s initial public offering (the “Rattler Offering”) in May 2019, Diamondback owned all of the general and limited partner interests in Rattler. The Rattler Offering consisted of 43,700,000 common units representing approximately 29% of the limited partner interests in Rattler at a price to the public of $17.50 per common unit, which included 5,700,000 common units issued pursuant to an option to purchase additional common units granted to the underwriters on the same terms which closed on May 30, 2019. Rattler received net proceeds of approximately $720 million from the sale of these common units, after deducting offering expenses and underwriting discounts and commissions.

In connection with the completion of the Rattler Offering, Rattler (i) issued 107,815,152 Class B Units representing an aggregate 71% voting limited partner interest in Rattler in exchange for a $1 million cash contribution from Diamondback, (ii) issued a general partner interest in Rattler to Rattler’s General Partner, in exchange for a $1 million cash contribution from Rattler’s General Partner, and (iii) caused Rattler LLC to make a distribution of approximately $727 million to Diamondback. Diamondback, as the holder of the Class B units, and Rattler’s General Partner, as the holder of the general partner interest, are entitled to receive cash preferred distributions equal to 8% per annum on the outstanding amount of their respective $1 million capital contributions, payable quarterly.


12

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

Diamondback has also entered into the following agreements with Rattler:

Rattler’s Partnership Agreement

In connection with the closing of the Rattler Offering, Rattler’s General Partner and Energen Resources Corporation entered into the first amended and restated agreement of limited partnership of Rattler, dated May 28, 2019 (the “Rattler Partnership Agreement”). The Rattler Partnership Agreement requires Rattler to reimburse Rattler’s General Partner for all direct and indirect expenses incurred or paid on Rattler’s behalf and all other expenses allocable to Rattler or otherwise incurred by Rattler’s General Partner in connection with operating Rattler’s business. The Rattler Partnership Agreement does not set a limit on the amount of expenses for which its general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for Rattler or on its behalf and expenses allocated to Rattler’s General Partner by its affiliates. Rattler’s General Partner is entitled to determine the expenses that are allocable to Rattler. For the three months ended March 31, 2020, the General Partner allocated $0.1 million of such expenses to Rattler.

Rattler’s Services and Secondment Agreement
In connection with the closing of the Rattler Offering, Rattler entered into a services and secondment agreement with Diamondback, Diamondback E&P LLC, Rattler’s General Partner and Rattler LLC, dated as of May 28, 2019 (the “Services and Secondment Agreement”). Pursuant to the Services and Secondment Agreement, Diamondback and its subsidiaries second certain operational, construction, design and management employees and contractors of Diamondback to Rattler’s General Partner, Rattler and its subsidiaries, providing management, maintenance and operational functions with respect to Rattler’s assets. The Services and Secondment Agreement requires Rattler’s General Partner and Rattler to reimburse Diamondback for the cost of the seconded employees and contractors, including their wages and benefits. For the three months ended March 31, 2020, Rattler’s General Partner and Rattler paid Diamondback $2 million under the Services and Secondment Agreement.
Rattler’s Tax Sharing Agreement

In connection with the closing of the Rattler Offering, Rattler LLC entered into a tax sharing agreement with Diamondback pursuant to which Rattler LLC will reimburse Diamondback for its share of state and local income and other taxes borne by Diamondback as a result of Rattler LLC’s results being included in a combined or consolidated tax return filed by Diamondback with respect to taxable periods including or beginning on May 28, 2019. The amount of any such reimbursement is limited to the tax that Rattler LLC would have paid had it not been included in a combined group with Diamondback. Diamondback may use its tax attributes to cause its combined or consolidated group, of which Rattler LLC may be a member for this purpose, to owe less or no tax. In such a situation, Rattler LLC agreed to reimburse Diamondback for the tax Rattler LLC would have owed had the attributes not been available or used for Rattler LLC’s benefit, even though Diamondback had no cash expense for that period.

For the three months ended March 31, 2020, Rattler accrued state income tax expense of $0.1 million of Texas margin tax and the portion attributable to Rattler is included in a combined tax return filed by Diamondback.

Other Agreements

Rattler has entered into a secured revolving credit facility with Wells Fargo, as administrative agent, sole book runner and lead arranger. See Note 10Debt for a description of this credit facility.

6.    REAL ESTATE ASSETS    

The following schedules present the cost and related accumulated depreciation or amortization (as applicable) of the Company’s real estate assets including intangible lease assets:

13

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

 
Estimated Useful Lives
 
March 31, 2020
 
December 31, 2019
 
(Years)
 
(in millions)
Buildings
20-30
 
$
102

 
$
102

Tenant improvements
15
 
5

 
5

Land
N/A
 
2

 
2

Land improvements
15
 
1

 
1

Total real estate assets
 
 
110

 
110

Less: accumulated depreciation
 
 
(10
)
 
(9
)
Total investment in land and buildings, net
 
 
$
100

 
$
101


 
Weighted Average Useful Lives
 
March 31, 2020
 
December 31, 2019
 
(Months)
 
(in millions)
In-place lease intangibles
45
 
$
11

 
$
11

Less: accumulated amortization
 
 
(6
)
 
(6
)
In-place lease intangibles, net
 
 
5

 
5

 
 
 
 
 
 
Above-market lease intangibles
45
 
3

 
4

Less: accumulated amortization
 
 
(1
)
 
(1
)
Above-market lease intangibles, net
 
 
2

 
3

Total intangible lease assets, net
 
 
$
7

 
$
8



7.    PROPERTY AND EQUIPMENT

Property and equipment includes the following as of the dates indicated:

14

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

 
March 31,
December 31,
 
2020
2019
 
 
 
 
(in millions)
Oil and natural gas properties:
 
 
Subject to depletion
$
18,231

$
16,575

Not subject to depletion
8,488

9,207

Gross oil and natural gas properties
26,719

25,782

Accumulated depletion
(3,387
)
(2,995
)
Accumulated impairment
(2,943
)
(1,934
)
Oil and natural gas properties, net
20,389

20,853

Midstream assets
987

931

Other property, equipment and land
130

125

Accumulated depreciation
(86
)
(74
)
Total property and equipment, net
$
21,420

$
21,835

 
 
 
Balance of costs not subject to depletion:
 
 
Incurred in 2020
$
59

 
Incurred in 2019
604

 
Incurred in 2018
5,398

 
Incurred in 2017
2,124

 
Incurred in 2016
303

 
Total not subject to depletion
$
8,488

 


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 $14 million and $13 million for the three months ended March 31, 2020 and 2019, respectively. Costs associated with unevaluated properties are excluded from the full cost pool until the Company has made a determination as to the existence of proved reserves. The inclusion of the Company’s unevaluated costs into the amortization base is expected to be completed within five years. Acquisition costs not currently being amortized are primarily related to unproved acreage that the Company plans to prove up through drilling. The Company has no plans to let any of the acreage, associated with acquisition costs not currently being amortized, expire based on current drilling plans. Sales of oil and natural gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil, natural gas liquids and natural gas.

Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the proved oil and natural 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 revenue including estimated expenditures (based on current costs) to be incurred in developing and producing the proved reserves, discounted at 10% per annum, from proved reserves, based on the trailing 12-month unweighted average of the first-day-of-the-month price, adjusted for any contract provisions or financial derivatives, if any, that hedge the Company’s oil and natural gas revenue, and 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

15

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

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 sharp decline in commodity prices during the first quarter of 2020, the Company recorded a non-cash ceiling test impairment for the three months ended March 31, 2020 of $1.0 billion which was included in accumulated depletion. The impairment charge affected the Company’s results of operations but did not reduce its cash flow. In addition to commodity prices, the Company’s production rates, levels of proved reserves, future development costs, transfers of unevaluated properties and other factors will determine its actual ceiling test calculation and impairment analysis in future periods. If the trailing 12-month commodity prices continue to fall as compared to the commodity prices used in prior quarters, the Company will have material write downs in subsequent quarters. No impairment on proved oil and natural gas properties was recorded for the three months ended March 31, 2019.

The Company evaluates its long-lived assets (primarily comprised of midstream assets) for potential impairment whenever events or circumstances indicate it is more likely than not that the carrying amount of the asset, or set of assets, is greater than the fair value. An impairment involves comparing the estimated future undiscounted cash flows of an asset or set of assets with the carrying amount. If the carrying amount of the asset or set of assets exceeds the estimated undiscounted cash flows, then an impairment charge is recorded for the difference between the estimated fair value of the asset or set of assets and its carrying value. Given the rate of change impacting the oil and gas industry described above, it is possible that circumstances requiring additional impairment testing will occur in future interim periods, which could result in potentially material impairment charges being recorded.

At March 31, 2020, $228 million in exploration costs and development costs and $111 million in capitalized interest was not subject to depletion. At December 31, 2019, $228 million in exploration costs and development costs and $118 million in capitalized interest was not subject to depletion.


16

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

8.    ASSET RETIREMENT OBLIGATIONS

The following table describes the changes to the Company’s asset retirement obligations liability for the following periods:
 
Three Months Ended March 31,
 
2020
2019
 
 
 
 
(in millions)
Asset retirement obligations, beginning of period
$
94

$
136

Additional liabilities incurred
4

1

Liabilities acquired

3

Liabilities settled

(2
)
Accretion expense
2

2

Revisions in estimated liabilities


Asset retirement obligations, end of period
100

140

Less current portion
1


Asset retirement obligations - long-term
$
99

$
140



The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. The Company estimates the future plugging and abandonment costs of wells, the ultimate productive life of the properties, a risk-adjusted discount rate and an inflation factor in order to determine the current present value of this obligation. To the extent future revisions to these assumptions impact the present value of the existing asset retirement obligation liability, a corresponding adjustment is made to the oil and natural gas property balance. The current portion of the asset retirement obligation liability is included in other accrued liabilities in the Company’s consolidated balance sheets.

9.    EQUITY METHOD INVESTMENTS

The following table presents the carrying values of Rattler’s equity method investments as of the dates indicated:
 
Ownership Interest
 
March 31, 2020
 
December 31, 2019
 
 
 
(in millions)
EPIC Crude Holdings, LP
10
%
 
$
117

 
$
109

Gray Oak Pipeline, LLC
10
%
 
122

 
116

Wink to Webster Pipeline LLC
4
%
 
45

 
34

OMOG JV LLC
60
%
 
216

 
219

Amarillo Rattler, LLC
50
%
 
2

 
1

 
 
 
$
502

 
$
479



Income (loss) from equity method investees was not material for the three months ended March 31, 2020 or 2019.

On February 1, 2019, Rattler LLC acquired a 10% equity interest in EPIC Crude Holdings, LP (“EPIC”), which owns and operates a pipeline (the “EPIC pipeline”) that transports crude and NGL across Texas for delivery into the Corpus Christi market. The EPIC pipeline became fully operational in April 2020.

On February 15, 2019, Rattler LLC acquired a 10% equity interest in Gray Oak Pipeline, LLC (“Gray Oak”), which owns and operates a pipeline (the “Gray Oak pipeline”) that transports crude from the Permian to Corpus Christi on the Texas Gulf Coast. The Gray Oak pipeline became fully operational in April 2020.


17

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

On March 29, 2019, Rattler LLC executed a short-term promissory note to Gray Oak. The note allows for borrowing by Gray Oak of up to $123 million at 2.52% interest rate with a maturity date of March 31, 2022. The short-term promissory note was repaid on May 31, 2019. During the three months ended March 31, 2020, there were no borrowings or repayments under this note. There were no outstanding loans at March 31, 2020.

On June 4, 2019, Rattler entered into an equity contribution agreement with respect to Gray Oak. The equity contribution agreement requires Rattler to contribute equity or make loans to Gray Oak so that Gray Oak can, to the extent necessary, cure payment defaults under Gray Oak’s credit agreement and, in certain instances, repay Gray Oak’s credit agreement in full. Rattler’s obligations under the equity contribution agreement are limited to its proportionate ownership interest in Gray Oak, and such obligations are guaranteed by Rattler LLC, Tall City, Rattler OMOG LLC and Rattler Ajax Processing LLC.

On July 30, 2019, Rattler LLC joined Wink to Webster Pipeline LLC as a 4% member, together with affiliates of ExxonMobil, Plains All American Pipeline, Delek US, MPLX LP and Lotus Midstream. The joint venture is developing a crude oil pipeline with origin points at Wink and Midland in the Permian Basin for delivery to multiple Houston area locations (the “Wink to Webster pipeline”). The Wink to Webster pipeline is expected to begin service in the first half of 2021.

On October 1, 2019, Rattler LLC acquired a 60% equity interest in OMOG JV LLC (“OMOG”). On November 7, 2019, OMOG acquired 100% of Reliance Gathering, LLC which owns and operates a crude oil gathering system in the Permian Basin, and was renamed as Oryx Midland Oil Gathering LLC following the acquisition. Although Rattler’s equity interest is 60%, the investment is accounted for as an equity method investment as Rattler does not control operating activities and substantive participating rights exist with the controlling minority investor.

On December 20, 2019, Rattler LLC acquired a 50% equity interest in Amarillo Rattler, LLC, which currently owns and operates the Yellow Rose gas gathering and processing system with estimated total processing capacity of 40,000 Mcf/d and over 84 miles of gathering and regional transportation pipelines in Dawson, Martin and Andrews Counties, Texas. This joint venture also intends to construct and operate a new 60,000 Mcf/d cryogenic natural gas processing plant in Martin County, Texas as well as incremental gas gathering and compression and regional transportation pipelines. Although Rattler’s equity interest is 50%, the investment is accounted for as an equity method investment as Rattler does not control operating activities and substantive participating rights exist with the controlling investor.

Rattler reviews its investments to determine if a loss in value which is other than temporary has occurred. If such a loss has occurred, Rattler recognizes an impairment provision. No impairments were recorded for Rattler’s equity method investments for the three months ended March 31, 2020 or 2019. Rattler’s investees all serve customers in the oil and gas industry, which has begun to experience economic challenges as described above. It is possible that prolonged industry challenges could result in circumstances requiring impairment testing, which could result in potentially material impairment charges in future interim periods.

During the three months ended March 31, 2020, $0.3 million of capitalized interest was related to equity method investments that have not yet begun operations. There was no capitalized interest during the three months ended March 31, 2019.


18

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

10.    DEBT

Long-term debt consisted of the following as of the dates indicated:
 
March 31,
December 31,
 
2020
2019
 
 
 
 
(in millions)
4.625% Notes due 2021
$
400

$
399

7.320% Medium-term Notes, Series A, due 2022
20

21

2.875% Senior Notes due 2024
1,000

1,000

5.375% Senior Notes due 2025
800

800

3.250% Senior Notes due 2026
800

800

7.350% Medium-term Notes, Series A, due 2027
10

11

7.125% Medium-term Notes, Series B, due 2028
100

108

3.500% Senior Notes due 2029
1,200

1,200

DrillCo Agreement
55

39

Unamortized debt issuance costs
(19
)
(19
)
Unamortized discount costs
(31
)
(31
)
Unamortized premium costs
18

9

Revolving credit facility
199

13

Viper revolving credit facility
174

97

Viper 5.375% Senior Notes due 2027
500

500

Rattler revolving credit facility
451

424

Total long-term debt
$
5,677

$
5,371



References in this section to the Company shall mean Diamondback Energy, Inc. and Diamondback O&G LLC, collectively, unless otherwise specified.

Diamondback Notes

2025 Senior Notes

On December 20, 2016, Diamondback Energy, Inc. issued $500 million in aggregate principal amount of 5.375% senior notes due 2025 (the “existing 2025 notes”), under an indenture among us, the subsidiary guarantors party thereto and Wells Fargo, as the trustee (the “2025 indenture”). On January 29, 2018, Diamondback Energy, Inc. issued $300 million aggregate principal amount of new 5.375% senior notes due 2025 as additional notes under the 2025 indenture (the “new 2025 notes” and, together with the existing 2025 notes, 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 and will mature on May 31, 2025. Diamondback Energy, Inc.’s existing and future restricted subsidiaries that guarantee this revolving credit facility also guarantee the 2025 senior notes. The 2025 senior notes are not and will not be guaranteed by any of Diamondback Energy, Inc.’s unrestricted subsidiaries. Currently, the 2025 senior notes are not guaranteed by any of the Company’s subsidiaries other than Diamondback O&G LLC.
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

19

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

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.

The 2025 indenture contains certain covenants that, subject to certain exceptions and qualifications, among other things, limit Diamondback Energy, Inc.’s ability and the ability of its restricted subsidiaries to incur or guarantee additional indebtedness or issue certain redeemable or preferred equity, make certain investments, declare or pay dividends or make distributions on equity interests or redeem, repurchase or retire equity interests or subordinated indebtedness, transfer or sell assets, agree to payment restrictions affecting its restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets, enter into transactions with affiliates, incur liens and designate certain of its subsidiaries as unrestricted subsidiaries. These covenants are subject to numerous exceptions, some of which are material. Certain of these covenants are subject to termination upon the occurrence of certain events.

December 2019 Notes Offering

On December 5, 2019, Diamondback Energy, Inc. issued $1.0 billion in aggregate principal amount of 2.875% senior notes due 2024 (the “2024 notes”), $800 million in aggregate principal amount of 3.250% senior notes due 2026 (the “2026 notes”), and $1.2 billion aggregate principal amount of 3.500% senior notes due 2029, (the “2029 notes” and, together with the 2024 notes and the 2026 notes, the “December 2019 Notes”). The 2024 notes will mature on December 1, 2024, the 2026 notes will mature on December 1, 2026 and the 2029 notes will mature on December 1, 2029. Interest will accrue and be payable semi-annually, in arrears on June 1 and December 1 of each year, commencing on June 1, 2020. The December 2019 Notes are guaranteed by Diamondback O&G LLC and are not guaranteed by any of Diamondback Energy, Inc. other subsidiaries.

The December 2019 Notes were issued under an indenture, dated as of December 5, 2019, among the Company and Wells Fargo, as the trustee, as supplemented by the first supplemental indenture dated as of December 5, 2019 (collectively, the “December 2019 Notes Indenture”).
The Company may redeem (i) the 2024 notes in whole or in part at any time prior to November 1, 2024 (one month prior to the maturity date of the 2024 notes), (ii) the 2026 notes in whole or in part at any time prior to October 1, 2026 (two months prior to the maturity date of the 2026 notes) and (iii) the 2029 notes in whole or in part at any time prior to September 1, 2029 (three months prior to the maturity date of the 2029 notes) (each such date, a “par call date”), in each case at a redemption price equal to 100% of the principal amount of such notes plus a “make-whole” premium and accrued and unpaid interest to the redemption date. If the December 2019 Notes are redeemed on or after their respective par call dates, in each case, such December 2019 Notes will be redeemed at a redemption price equal to 100% of the principal amount of the December 2019 Notes to be redeemed plus interest accrued thereon to but not including the redemption date.

Upon the occurrence of a Change of Control Triggering Event (as defined in the December 2019 Notes Indenture), holders may require the Company to purchase some or all of their December 2019 Notes for cash at a price equal to 101% of the principal amount of the December 2019 Notes being purchased, plus accrued and unpaid interest, if any, to the date of purchase.

The December 2019 Notes Indenture contains certain covenants that, subject to certain exceptions and qualifications, among other things, limit Diamondback Energy, Inc.’s ability and the ability of certain of its subsidiaries to incur liens securing funded indebtedness and on Diamondback Energy, Inc.’s ability to consolidate, merge or sell, convey, transfer or lease all or substantially all of its assets.

Second Amended and Restated Credit Facility

Diamondback O&G LLC, as borrower, and Diamondback Energy, Inc., as parent guarantor, entered into the second amended and restated credit agreement, dated November 1, 2013, as amended, with a syndicate of banks, including Wells Fargo, as administrative agent, and its affiliate Wells Fargo Securities, LLC, as sole book runner and lead arranger. On June 28, 2019, the credit agreement was amended pursuant to an eleventh amendment, which implemented certain changes to the credit facility for the period on and after the date on which our unsecured debt achieves an investment grade rating from two rating agencies and certain other conditions in the credit agreement are satisfied, which changes became effective on November 20, 2019. As of March 31, 2020, the maximum credit amount

20

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

available under the credit agreement is $2.0 billion. As of March 31, 2020, Diamondback Energy, Inc. had approximately $199 million of outstanding borrowings under its revolving credit facility and $1.8 billion available for future borrowings under the revolving credit facility. The next regularly scheduled annual redetermination of the borrowing base is scheduled for the fall of 2020.

Diamondback O&G LLC is the borrower under the credit agreement, and, as of March 31, 2020, the credit agreement is guaranteed by Diamondback Energy, Inc. None of Diamondback Energy, Inc.’s other subsidiaries are guarantors under the revolving credit facility.

The outstanding borrowings under the credit agreement bear interest at a per annum rate elected by us that is equal to the alternate base rate (which is equal to the greatest of the prime rate, the Federal Funds effective rate plus 0.5%, and 3 month LIBOR plus 1.0%) or LIBOR, in each case plus the applicable margin. The applicable margin ranges from 0.125% to 1.0% per annum in the case of the alternative base rate and from 1.125% to 2.0% per annum in the case of LIBOR, in each case, depending on the pricing level, which in turn depends on the rating agencies’ ratings of our unsecured debt. We are obligated to pay a quarterly commitment fee ranging from 0.125% to 0.350% per year on the unused portion of the commitment, based on the pricing level, which in turn depends on the rating agencies’ ratings of our unsecured debt.
Loan principal may be optionally prepaid from time to time without premium or penalty (other than customary LIBOR breakage). Loan principal is required to be repaid (a) to the extent the loan amount exceeds the commitment due to any termination or reduction of the aggregate maximum credit amount and (b) at the maturity date of November 1, 2022.
The credit agreement contains a financial covenant that requires us to maintain a total net debt to capitalization ratio (as defined in the credit agreement) of no more than 65%. Our non-guarantor restricted subsidiaries may incur debt for borrowed money in an aggregate principal amount up to 15% of consolidated net tangible assets (as defined in the credit agreement) and we and our restricted subsidiaries may incur liens if the aggregate amount of debt secured by such liens does not exceed 15% of consolidated net tangible assets.

As of March 31, 2020 and December 31, 2019, the Company was in compliance with all financial covenants under the revolving credit facility, as then in effect. The lenders may accelerate all of the indebtedness under the 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.

Energen’s Notes
At the effective time of the merger with Energen, Energen became Diamondback Energy, Inc.’s wholly owned subsidiary and remained the issuer of an aggregate principal amount of $530 million in notes (the “Energen Notes”), issued under an indenture dated September 1, 1996 with The Bank of New York as Trustee (the “Energen Indenture”). As of March 31, 2020, the Energen Notes consist of: (1) $400 million aggregate principal amount of 4.625% senior notes due on September 1, 2021, (2) $100 million of