RATTLER MIDSTREAM LP - Quarter Report: 2021 June (Form 10-Q)

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 June 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-38919

Rattler Midstream LP

(Exact Name of Registrant As Specified in Its Charter)

83-1404608

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification Number)

500 West Texas

Suite 1200

Midland,

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 Units	RTLR	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 July 30, 2021, the registrant had outstanding 40,776,404 common units representing limited partner interests and 107,815,152 Class B units representing limited partner interests.

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RATTLER MIDSTREAM LP

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2021

TABLE OF CONTENTS


			Page
Glossary of Oil and Natural Gas Terms			ii
Glossary of Certain Other Terms			iii
Cautionary Statement Regarding Forward-Looking Statements			iv

PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)			1
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations			2
Condensed Consolidated Statements of Comprehensive Income			3
Condensed Consolidated Statements of Changes in Unitholders’ Equity			4
Condensed Consolidated Statements of Cash Flows			6
Condensed Notes to Consolidated Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19

Item 3. Quantitative and Qualitative Disclosures About Market Risk			28

Item 4. Controls and Procedures			29

PART II. OTHER INFORMATION
Item 1. Legal Proceedings			29

Item 1A. Risk Factors			29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29



Item 6. Exhibits			31

Signatures			32

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GLOSSARY OF OIL AND NATURAL GAS TERMS

The following is a glossary of certain oil and natural gas industry terms 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 or barrel			One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to crude oil, natural gas liquids or other liquid hydrocarbons.
Bbl/d			Bbl 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 found in the earth, which may be refined into fuel sources.


Dry hole or dry well			A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.








Hydrocarbon			An organic compound containing only carbon and hydrogen.






Mcf			One thousand cubic feet of natural gas.
Mcf/d			One thousand cubic feet of natural gas per day.





MMBtu			One million British Thermal Units.
MMBtu/d			One million British Thermal Units per day.

Natural gas			Hydrocarbon gas found in the earth, composed of methane, ethane, butane, propane and other gases.





Operator			The individual or company responsible for the exploration and/or production of a crude oil or natural gas well or lease.






Reserves			Estimated remaining quantities of crude 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 crude oil and natural gas or related substances to the market and all permits and financing required to implement the project. Reserves should not be 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., potentially recoverable resources from undiscovered accumulations).
Reservoir			A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or crude oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.



Throughput			The volume of product transported or passing through a pipeline, plant, terminal or other facility.

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GLOSSARY OF CERTAIN OTHER TERMS

The following is a glossary of certain other terms used in this report:



ASU			Accounting Standards Update.
ASC			Accounting Standards Codification.
Diamondback			Diamondback Energy, Inc., a Delaware corporation, and its subsidiaries other than the Partnership and its subsidiaries (including the Operating Company).



Exchange Act			The Securities Exchange Act of 1934, as amended.

FASB			Financial Accounting Standards Board.
GAAP			Accounting principles generally accepted in the United States.
General Partner			Rattler Midstream GP LLC, a Delaware limited liability company; the general partner of the Partnership and a wholly owned subsidiary of Diamondback.



LIBOR			The London interbank offered rate.
LTIP			Rattler Midstream LP Long Term Incentive Plan.
Nasdaq			The Nasdaq Global Select Market.
Notes			The 5.625% Senior Notes due 2025 issued on July 14, 2020.
OPEC			Organization of the Petroleum Exporting Countries.
Operating Company			Rattler Midstream Operating LLC, a Delaware limited liability company and a consolidated subsidiary of the Partnership.

Partnership			Rattler Midstream LP, a Delaware limited partnership.

Partnership agreement			The first amended and restated agreement of limited partnership, dated May 28, 2019.

SEC			Securities and Exchange Commission.
Securities Act			The Securities Act of 1933, as amended.

iii

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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 our Annual Report on Form 10-K for the year ended December 31, 2020 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. Unless the context requires otherwise, references to “we,” “us,” “our” or the “Partnership” are intended to mean the business and operations of the Partnership and its consolidated subsidiaries.

Forward-looking statements may include statements about:

•Diamondback’s ability to meet its drilling and development plans on a timely basis or at all;

•the volatility of realized oil and natural gas prices, including in Diamondback’s area of operation in the Permian Basin;

•the implications and logistical challenges of epidemic or pandemic diseases, including the COVID-19 pandemic and its impact on the oil and natural gas industry pricing and demand for oil and natural gas and supply chain logistics;

•changes in general economic, business or industry conditions;

•conditions in the capital, financial and credit markets;

•competitive conditions in our industry and the effect of U.S. energy, environmental, monetary and trade policies on our industry and business;

•actions taken by third party operators, gatherers, processors and transporters;

•the demand for and costs of conducting midstream infrastructure services;

•our ability to successfully implement our business plan;

•our ability to complete internal growth projects on time and on budget;

•our ability to identify, complete and effectively integrate acquisitions into our operations;

•our ability to achieve anticipated synergies, system optionality and accretion associated with acquisitions;

•the impact of potential impairment charges;

•the results of our investments in joint ventures;

•competition from the same and alternative energy sources;

•energy efficiency and technology trends;

•operating hazards and other risks incidental to our midstream services;

•natural disasters, weather-related delays, casualty losses and other matters beyond our control;

•the impact of severe weather conditions, including the February 2021 winter storms in the Permian Basin, on Diamondback’s production volumes;

•increases in our tax liability;

•the effect of existing and future laws and government regulations;

•the effects of future litigation; and

•certain other factors discussed elsewhere in this report.

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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. 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.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Rattler Midstream LP

Condensed Consolidated Balance Sheets

(Unaudited)


	June 30,		December 31,
	2021		2020
	(In thousands)
Assets
Current assets:
Cash	$	17,550	$	23,927
Accounts receivable—related party	38,395		57,447
Accounts receivable—third party, net	10,586		5,658
Sourced water inventory	9,362		10,108
Other current assets	855		1,127
Total current assets	76,748		98,267
Property, plant and equipment:
Land	85,826		85,826
Property, plant and equipment	1,018,174		1,012,777
Accumulated depreciation, amortization and accretion	(119,521)		(100,728)
Property, plant and equipment, net	984,479		997,875
Right of use assets	235		574
Equity method investments	517,962		532,927
Real estate assets, net	85,045		96,687
Intangible lease assets, net	3,899		4,262
Deferred tax asset	67,323		73,264
Other assets	4,193		4,732
Total assets	$	1,739,884	$	1,808,588
Liabilities and Unitholders’ Equity
Current liabilities:

Accounts payable	$	90	$	139
Accrued liabilities	39,621		42,508
Taxes payable	217		192
Short-term lease liability	235		574

Asset retirement obligations	79		35
Total current liabilities	40,242		43,448
Long-term debt	496,953		569,947
Asset retirement obligations	16,135		15,093


Total liabilities	553,330		628,488
Commitments and contingencies (Note 15)
Unitholders’ equity:

General partner—Diamondback	859		899
Common units—public (41,075,836 units issued and outstanding as of June 30, 2021 and 42,356,637 units issued and outstanding as of December 31, 2020)	375,773		385,189
Class B units—Diamondback (107,815,152 units issued and outstanding as of June 30, 2021 and as of December 31, 2020)	859		899
Accumulated other comprehensive income (loss)	10		(123)
Total Rattler Midstream LP unitholders’ equity	377,501		386,864
Non-controlling interest	809,053		793,638
Non-controlling interest in accumulated other comprehensive income (loss)	—		(402)
Total equity	1,186,554		1,180,100
Total liabilities and unitholders’ equity	$	1,739,884	$	1,808,588

See accompanying notes to condensed consolidated financial statements.

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Rattler Midstream LP

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands, expect per unit amounts)
Revenues:
Revenues—related party	$	91,579	$	78,031	$	178,657	$	194,614
Revenues—third party	5,967		7,175		14,088		16,275
Other income—related party	2,542		1,470		5,082		2,988
Other income—third party	1,043		2,059		2,112		4,253
Total revenues	101,131		88,735		199,939		218,130
Costs and expenses:
Direct operating expenses	26,299		37,378		58,810		70,252
Cost of goods sold (exclusive of depreciation and amortization)	10,298		4,744		19,109		20,705
Real estate operating expenses	544		590		1,061		1,318
Depreciation, amortization and accretion	15,239		12,100		26,485		24,606
Impairment and abandonments	—		—		3,371		—
General and administrative expenses	4,956		4,175		9,590		8,689
(Gain) loss on disposal of assets	5,005		1,243		5,011		2,781
Total costs and expenses	62,341		60,230		123,437		128,351
Income (loss) from operations	38,790		28,505		76,502		89,779
Other income (expense):
Interest income (expense), net	(8,235)		(1,926)		(15,545)		(4,547)
Gain (loss) on sale of equity method investments	22,989		—		22,989		—
Income (loss) from equity method investments	4,472		(13,034)		1,649		(13,279)
Total other income (expense), net	19,226		(14,960)		9,093		(17,826)
Net income (loss) before income taxes	58,016		13,545		85,595		71,953
Provision for (benefit from) income taxes	3,539		1,083		5,210		4,903
Net income (loss)	54,477		12,462		80,385		67,050
Less: Net income (loss) attributable to non-controlling interest	42,032		9,640		61,925		51,197
Net income (loss) attributable to Rattler Midstream LP	$	12,445	$	2,822	$	18,460	$	15,853
Net income (loss) attributable to limited partners per common unit:
Basic	$	0.30	$	0.05	$	0.42	$	0.33
Diluted	$	0.30	$	0.05	$	0.42	$	0.33
Weighted average number of limited partner common units outstanding:
Basic	41,033		43,812		41,386		43,756
Diluted	41,033		43,812		41,386		43,756

See accompanying notes to condensed consolidated financial statements.

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Rattler Midstream LP

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Net income (loss)	$	54,477	$	12,462	$	80,385	$	67,050
Other comprehensive income (loss):
Change in accumulated other comprehensive income (loss) of equity method investees attributable to non-controlling interest	103		(181)		402		(376)
Change in accumulated other comprehensive income (loss) of equity method investees attributable to limited partner	40		(59)		133		(122)
Total other comprehensive income (loss)	143		(240)		535		(498)
Comprehensive income (loss)	$	54,620	$	12,222	$	80,920	$	66,552

See accompanying notes to condensed consolidated financial statements.

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Rattler Midstream LP

Condensed Consolidated Statements of Changes in Unitholders’ Equity

(Unaudited)


	Limited Partners						General Partner		Non-Controlling Interest		Accumulated Other Comprehensive Income		Non-Controlling Interest-Accumulated Other Comprehensive Income
	Common Units	Amount		Class B Units	Amount		Amount		Amount		Amount		Amount		Total
	(In thousands)
Balance at December 31, 2020	42,357	$	385,189	107,815	$	899	$	899	$	793,638	$	(123)	$	(402)	$	1,180,100
Repurchased units as part of unit buyback	(1,082)	(11,114)		—	—		—		—		—		—		(11,114)
Unit-based compensation	—	2,332		—	—		—		—		—		—		2,332
Issuance of common units	3	—		—	—		—		—		—		—		—

Other comprehensive income (loss)	—	—		—	—		—		—		93		299		392
Change in ownership of consolidated subsidiaries, net	—	712		—	—		—		(908)		—		—		(196)
Cash paid for tax withholding on vested common units	—	(21)		—	—		—		—		—		—		(21)
Distribution equivalent rights payments	—	(418)		—	—		—		—		—		—		(418)
Distributions	—	(8,263)		—	(20)		(20)		(21,563)		—		—		(29,866)
Net income (loss)	—	6,015		—	—		—		19,893		—		—		25,908
Balance at March 31, 2021	41,278	374,432		107,815	879		879		791,060		(30)		(103)		1,167,117
Repurchased units as part of unit buyback	(475)	(5,198)		—	—		—		—		—		—		(5,198)
Unit-based compensation	—	2,485		—	—		—		—		—		—		2,485
Issuance of common units	273	—		—	—		—		—		—		—		—

Other comprehensive income (loss)	—	—		—	—		—		—		40		103		143
Change in ownership of consolidated subsidiaries, net	—	1,941		—	—		—		(2,476)		—		—		(535)
Cash paid for tax withholding on vested common units	—	(1,693)		—	—		—		—		—		—		(1,693)
Distribution equivalent rights payments	—	(456)		—	—		—		—		—		—		(456)
Distributions	—	(8,183)		—	(20)		(20)		(21,563)		—		—		(29,786)
Net income (loss)	—	12,445		—	—		—		42,032		—		—		54,477
Balance at June 30, 2021	41,076	$	375,773	107,815	$	859	$	859	$	809,053	$	10	$	—	$	1,186,554

See accompanying notes to condensed consolidated financial statements.

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Rattler Midstream LP

Condensed Consolidated Statements of Changes in Unitholders’ Equity - Continued

(Unaudited)


	Limited Partners						General Partner		Non-Controlling Interest		Accumulated Other Comprehensive Income		Non-Controlling Interest-Accumulated Other Comprehensive Income
	Common Units	Amount		Class B Units	Amount		Amount		Amount		Amount		Amount		Total
	(In thousands)
Balance at December 31, 2019	43,700	$	737,777	107,815	$	979	$	979	$	376,928	$	(198)	$	(625)	$	1,115,840
Unit-based compensation	—	2,219		—	—		—		—		—		—		2,219
Distribution equivalent rights payments	—	(652)		—	—		—		—		—		—		(652)
Other comprehensive income (loss)	—	—		—	—		—		—		(63)		(195)		(258)
Distributions	—	(12,673)		—	(20)		(20)		(31,266)		—		—		(43,979)
Net income (loss)	—	13,031		—	—		—		41,557		—		—		54,588
Balance at March 31, 2020	43,700	739,702		107,815	959		959		387,219		(261)		(820)		1,127,758
Unit-based compensation	450	2,120		—	—		—		—		—		—		2,120
Distribution equivalent rights payments	—	(644)		—	—		—		—		—		—		(644)
Other comprehensive income (loss)	—	—		—	—		—		—		(59)		(181)		(240)
Distributions	—	(12,673)		—	(20)		(20)		(31,267)		—		—		(43,980)
Change in ownership of consolidated subsidiaries, net	—	(329,034)		—	—		—		419,647		—		—		90,613
Units repurchased for tax withholding	(154)	(1,365)		—	—		—		—		—		—		(1,365)
Net income (loss)	—	2,822		—	—		—		9,640		—		—		12,462
Balance at June 30, 2020	43,996	$	400,928	107,815	$	939	$	939	$	785,239	$	(320)	$	(1,001)	$	1,186,724

See accompanying notes to condensed consolidated financial statements.

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Rattler Midstream LP

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
	2021		2020
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	80,385	$	67,050
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for deferred income taxes	5,210		4,903
Depreciation, amortization and accretion	26,485		24,606

(Gain) loss on disposal of assets	5,011		2,781
Unit-based compensation expense	4,817		4,339
Impairment and abandonments	3,371		—
Gain (loss) on sale of equity method investments	(22,989)		—
(Income) loss from equity method investments	(1,649)		13,279
Distributions from equity method investments	9,055		—
Other	1,007		—
Changes in operating assets and liabilities:
Accounts receivable—related party	19,052		28,166


Accounts payable, accrued liabilities and taxes payable	(3,525)		(18,787)
Other	2,182		5,527
Net cash provided by (used in) operating activities	128,412		131,864
Cash flows from investing activities:
Additions to property, plant and equipment	(17,713)		(91,587)
Contributions to equity method investments	(6,454)		(66,032)
Distributions from equity method investments	9,107		17,870
Proceeds from the sale of equity method investments	23,455		—
Proceeds from the sale of real estate	9,118		—

Other	250		42
Net cash provided by (used in) investing activities	17,763		(139,707)
Cash flows from financing activities:


Proceeds from borrowings from credit facility	24,000		99,000
Payments on credit facility	(98,000)		—


Repurchased units as part of unit buyback	(16,312)		—


Distribution to public	(16,446)		(25,346)
Distribution to Diamondback	(43,166)		(62,573)
Other	(2,628)		(2,701)
Net cash provided by (used in) financing activities	(152,552)		8,380
Net increase (decrease) in cash	(6,377)		537
Cash at beginning of period	23,927		10,633
Cash at end of period	$	17,550	$	11,170






Supplemental disclosure of non-cash investing activity:

Accrued liabilities related to capital expenditures	$	5,963	$	39,710

See accompanying notes to condensed consolidated financial statements.

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Rattler Midstream LP

Condensed Notes to Consolidated Financial Statements

(Unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

The Partnership is a publicly traded Delaware limited partnership focused on owning, operating, developing and acquiring midstream infrastructure assets in the Midland and Delaware Basins of the Permian Basin.

As of June 30, 2021, the General Partner held a 100% general partner interest in the Partnership and Diamondback beneficially owned all of the Partnership’s 107,815,152 outstanding Class B units, representing approximately 72% of the Partnership’s total units outstanding. Diamondback owns and controls the General Partner.

As of June 30, 2021, the Partnership owned a 28% controlling membership interest in the Operating Company and Diamondback owned, through its ownership of the Operating Company units, a 72% economic, non-voting interest in the Operating Company. As required by GAAP, the Partnership consolidates 100% of the assets and operations of the Operating Company in its financial statements and reflects a non-controlling interest attributable to Diamondback. In addition to the Operating Company, other consolidated subsidiaries of the Partnership include Tall City Towers LLC (“Tall Towers”), Rattler Ajax Processing LLC and Rattler OMOG LLC.

The Partnership also owns indirect interests in OMOG JV LLC (“OMOG”), EPIC Crude Holdings, LP (“EPIC”), EPIC Crude Holdings GP, LLC, Wink to Webster Pipeline LLC (“Wink to Webster”) and Gray Oak Pipeline, LLC (“Gray Oak”), which are accounted for as equity method investments as discussed further in Note 7— Equity Method Investments.

Basis of Presentation

The accompanying condensed consolidated financial statements and related notes thereto were prepared in accordance with GAAP. All significant intercompany balances and transactions have been eliminated upon consolidation. The Partnership reports its operations in one reportable segment. Effective in the first quarter of fiscal 2021, the Partnership determined the former real estate operations segment no longer met the criteria to be an operating segment due to a change in focus and the relative immateriality of the activity.

These condensed consolidated financial statements have been prepared by the Partnership 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 SEC rules and regulations, although the Partnership 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 Partnership’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which contains a summary of the Partnership’s significant accounting policies and other disclosures.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications had no effect on the previously reported total assets, total liabilities, unitholders’ equity, results of operations or cash flows.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Certain amounts included in or affecting the Partnership’s financial statements and related notes 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 financial statements are prepared. These estimates and assumptions affect the amounts the Partnership reports for assets and liabilities and the Partnership’s disclosure of contingent assets and liabilities as of the date of the financial statements.

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Making accurate estimates and assumptions is particularly difficult in the oil and natural gas industry given the challenges resulting from volatility in oil and natural gas prices. For instance, in 2020, the effects of COVID-19, and actions by OPEC members and other exporting nations on the supply and demand in global oil and natural gas markets, resulted in significant negative pricing pressure in the first half of 2020, followed by a recovery in pricing and an increase in demand in the second half of 2020 and into 2021. Many companies in the oil and natural gas industry, including Diamondback, changed their business plans in response to changing market conditions. Such circumstances generally increase the uncertainty in the Partnership’s accounting estimates, particularly those involving financial forecasts.

The Partnership evaluates these estimates on an ongoing basis, using historical experience, consultation with experts and other methods it considers reasonable in each particular circumstance. Nevertheless, actual results may differ significantly from the Partnership’s estimates. Any effects on the Partnership’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, but are not limited to, (i) revenue accruals, (ii) the fair value of long-lived assets, (iii) asset retirement obligations and (iv) income taxes.

Accrued Liabilities

Accrued liabilities consist of the following as of the dates indicated:



	June 30, 2021		December 31, 2020
	(In thousands)
Direct operating expenses accrued	$	14,733	$	18,160
Capital expenditures accrued	5,963		5,328
Interest expense accrued	12,891		12,969
Sourced water purchases accrued	4,722		3,597
Other	1,312		2,454
Total accrued liabilities	$	39,621	$	42,508

Accumulated Other Comprehensive Income

The following table provides changes in the components of accumulated other comprehensive income, net of related income tax effects (in thousands):



Balance as of December 31, 2020	$	(525)
Other comprehensive income (loss)	535
Balance as of June 30, 2021	$	10

Recent Accounting Pronouncements

Recently Adopted Pronouncements

In December 2019, the FASB issued 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. This update is effective for public business entities beginning after December 15, 2020, with early adoption permitted. The Partnership adopted this update effective January 1, 2021. The adoption of this update did not have a material impact on its financial position, results of operations or liquidity.

The Partnership considers the applicability and impact of all ASUs. ASUs not discussed above were assessed and determined to be either not applicable or clarifications of ASUs previously disclosed.

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

The Partnership generates revenues by charging fees on a per unit basis for gathering crude oil and natural gas, delivering and storing sourced water, and collecting, recycling and disposing of produced water.

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Surface revenue, rental and real estate income and amortization of out of market leases are outside the scope of ASC Topic 606, “Revenue from Contracts with Customers.”

Disaggregation of Revenue

In the following table, revenue from contracts with customers is disaggregated by type of service and fee:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Type of Service:
Produced water gathering and disposal	$	68,605	$	68,498	$	134,933	$	149,846
Sourced water gathering	16,105		4,888		32,682		35,655
Crude oil gathering	6,797		7,309		13,588		15,086
Natural gas gathering	5,924		4,500		11,324		9,430
Real estate contracts (non ASC 606 revenues)	3,585		3,529		7,194		7,241
Surface revenue (non ASC 606 revenues)	115		11		218		872
Total revenues	$	101,131	$	88,735	$	199,939	$	218,130

4. DIVESTITURES

On April 30, 2021, each of the Partnership and its joint venture partner, Amarillo Midstream, LLC, sold its 50% interest in Amarillo Rattler, LLC (“Amarillo Rattler”) to EnLink Midstream Operating, LP for aggregate total gross potential consideration of $75.0 million, consisting of $50.0 million at closing, $10.0 million upon the first anniversary of closing and up to $15.0 million in contingent earn-out payments over a three-year span based upon Diamondback's development activity. The earn-out payments are contingent on connected wells drilled in Diamondback’s leasehold acreage in the specified earn-out area during each year between 2023 and 2025. Net of transaction expenses and working capital adjustments, the Partnership received $23.5 million at closing, with an incremental $5.0 million due in April 2022, which resulted in a gain from sale of equity method investments of $23.0 million, which is included in gain (loss) on sale of equity method investments on the consolidated statement of operations. The Partnership’s share of the contingent earn-out payments, which cannot exceed $7.5 million in total over the three-year span, will be recorded if and when the contingent payments become realizable.

On June 28, 2021, the Partnership closed on the sale of one of its real estate properties located in Midland, Texas for proceeds of $9.1 million, including closing adjustments. The sale resulted in a loss on disposal of $1.6 million, which is included in (gain) loss on disposal of assets on the consolidated statement of operations.

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5. REAL ESTATE ASSETS

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


		As of
	Estimated Useful Lives	June 30, 2021		December 31, 2020
	(Years)	(In thousands)
Buildings	20-30	$	93,364	$	102,918
Tenant improvements	15	4,506		4,506
Land	N/A	947		2,437
Land improvements	15	484		484
Total real estate assets		99,301		110,345
Less: accumulated depreciation		(14,256)		(13,658)
Total investment in real estate, net		$	85,045	$	96,687


		As of
	Weighted Average Useful Lives	June 30, 2021		December 31, 2020
	(Months)	(In thousands)
In-place lease intangibles	45	$	11,502	$	11,405
Less: accumulated amortization		(9,289)		(8,980)
In-place lease intangibles, net		2,213		2,425

Above-market lease intangibles	45	3,623		3,623
Less: accumulated amortization		(1,937)		(1,786)
Above-market lease intangibles, net		1,686		1,837
Total intangible lease assets, net		$	3,899	$	4,262

Depreciation and amortization expense for real estate assets was $1.1 million and $1.7 million for the three months ended June 30, 2021 and 2020, respectively, and $2.3 million and $3.5 million for the six months ended June 30, 2021 and 2020, respectively.

The following table presents the Partnership’s estimated amortization expense related to lease intangibles for the periods indicated (in thousands):


Remainder of
2021		2022		2023		2024		2025		Thereafter
$	337	$	628	$	749	$	860	$	882	$	443

See Note 4 —Divestitures for discussion of the Partnership’s significant real estate divestiture.

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6. PROPERTY, PLANT AND EQUIPMENT

The following table sets forth the Partnership’s property, plant and equipment:


		As of
	Estimated Useful Lives	June 30, 2021		December 31, 2020
	(Years)	(In thousands)
Produced water disposal systems	10-30	$	657,786	$	654,545
Crude oil gathering systems(1)	30	136,218		133,998
Natural gas gathering and compression systems(1)	10-30	111,830		112,072
Sourced water gathering systems(1)	30	112,340		112,162
Total property, plant and equipment		1,018,174		1,012,777
Less: accumulated depreciation, amortization and accretion		(119,521)		(100,728)
Land	N/A	85,826		85,826
Total property, plant and equipment, net		$	984,479	$	997,875

(1)Included in gathering systems are $15.1 million and $27.5 million of assets at June 30, 2021 and December 31, 2020, respectively, that are not subject to depreciation, amortization and accretion as the systems were under construction and had not yet been put into service.

Depreciation expense related to property, plant and equipment was $13.8 million and $10.0 million for the three months ended June 30, 2021 and 2020, respectively, and $23.5 million and $20.5 million for the six months ended June 30, 2021 and 2020, respectively.

Capitalized internal costs and capitalized interest related to property, plant and equipment were immaterial for the three and six months ended June 30, 2021 and 2020.

The Partnership evaluates its long-lived 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 with the carrying amount. If the carrying amount of the asset exceeds the estimated future undiscounted cash flows, then an impairment charge is recorded for the difference between the estimated fair value of the asset and its carrying value. No such impairment charges were recorded during the three months ended June 30, 2021, or the three and six months ended June 30, 2020. 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. Abandonment charges of $3.4 million related to projects which had begun, but were later terminated, were recorded in depreciation, amortization and accretion on the consolidated statement of operations during the six months ended June 30, 2021.

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7. EQUITY METHOD INVESTMENTS

The following table presents the carrying values of the Partnership’s equity method investments as of the dates indicated:


	Ownership Interest		June 30, 2021		December 31, 2020
			(In thousands)
EPIC Crude Holdings, LP	10	%	$	114,315	$	120,863
Gray Oak Pipeline, LLC	10	%	124,891		130,353
Wink to Webster Pipeline LLC (1)	4	%	86,493		82,631
OMOG JV LLC	60	%	192,263		193,726
Amarillo Rattler, LLC (2)	—	%	—		5,354
Total			$	517,962	$	532,927

(1)The Wink to Webster joint venture is developing a crude oil pipeline (the “Wink to Webster pipeline”). The Wink to Webster pipeline’s main segment began interim service operation in the fourth quarter of 2020, and the joint venture is expected to begin full commercial operations in the fourth quarter of 2021.

(2)The ownership interest in Amarillo Rattler was 50% at December 31, 2020. See Note 4 —Divestitures for discussion regarding the sale of this equity method investment during the second quarter of 2021.

Currently, the Partnership receives distributions from Gray Oak and OMOG, which are classified within the operating or investing sections of the consolidated statements of cash flows by determining the nature of each distribution. The following table presents total distributions received from the Partnership’s equity method investments for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands)

Gray Oak Pipeline, LLC	$	5,535	$	4,090	$	11,293	$	9,051

OMOG JV LLC	3,520		4,019		6,869		8,819

Total	$	9,055	$	8,109	$	18,162	$	17,870

The following table summarizes the income (loss) of equity method investees reflected in the condensed consolidated statement of operations for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands)
EPIC Crude Holdings, LP	$	(2,672)	$	(616)	$	(8,108)	$	(2,799)
Gray Oak Pipeline, LLC	3,532		1,171		5,830		1,753
Wink to Webster Pipeline LLC	(528)		12		(1,091)		200
OMOG JV LLC	4,291		(13,514)		5,406		(12,180)
Amarillo Rattler, LLC	(151)		(87)		(388)		(253)
Total	$	4,472	$	(13,034)	$	1,649	$	(13,279)

The Partnership reviews its equity method investments to determine if a loss in value which is other than temporary has occurred. If such a loss has occurred, the Partnership recognizes an impairment provision. During the six months ended June 30, 2021, the Partnership’s loss from equity method investments includes a proportional charge of $2.9 million representing impairment recorded by the investee associated with abandoned projects. During the three and six months ended June 30, 2020, the Partnership’s loss from equity method investments includes a proportional charge of $15.8 million representing impairment recorded by the investee associated with its goodwill. No other impairments were recorded for the Partnership’s equity method investments for the three and six months ended June 30, 2021 or 2020. The entities in which the Partnership is invested all serve customers in the oil and natural gas industry, which experienced economic challenges due to the COVID-19 pandemic and other macroeconomic factors during 2020. If similar economic challenges occur in future interim

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periods, it could result in circumstances requiring the Partnership to record potentially material impairment charges of its equity method investments.

8. DEBT

Long-term debt consisted of the following as of the dates indicated:


	June 30, 2021		December 31, 2020
	(In thousands)
5.625% Senior Notes due 2025	$	500,000	$	500,000
Operating Company revolving credit facility	5,000		79,000
Unamortized debt issuance costs	(8,047)		(9,053)
Total long-term debt	$	496,953	$	569,947

The Operating Company’s Revolving Credit Facility

The Operating Company’s credit agreement (the “Credit Agreement”) provides for a revolving credit facility in the maximum amount of $600.0 million, which is expandable to $1.0 billion upon the Partnership’s election, subject to obtaining additional lender commitments and satisfaction of customary conditions. Loan principal may be optionally repaid from time to time without premium or penalty (other than customary LIBOR breakage), and is required to be paid at the maturity date of May 28, 2024. As of June 30, 2021, the Operating Company had $5.0 million of outstanding borrowings and $595.0 million available for future borrowings under the Credit Agreement. During the three and six months ended June 30, 2021, the weighted average interest rate on borrowings under the Credit Agreement was 1.36% and 1.39%, respectively. During the three and six months ended June 30, 2020, the weighted average interest rate on borrowings under the Credit Agreement was 2.43% and 2.64%, respectively.

As of June 30, 2021, the Operating Company was in compliance with all financial maintenance covenants under the Credit Agreement.

2025 Senior Notes

On July 14, 2020, the Partnership completed a notes offering (the “Notes Offering”) of $500.0 million in aggregate principal amount of its 5.625% Senior Notes due 2025 (the “Notes”). Interest on the Notes is payable on January 15 and July 15 of each year, beginning on January 15, 2021. The Notes mature on July 15, 2025. The Partnership received net proceeds of approximately $489.5 million from the Notes Offering. The Partnership loaned the gross proceeds of $500.0 million to the Operating Company, which used such proceeds to pay down borrowings under the Credit Agreement.

9. UNIT-BASED COMPENSATION

On May 22, 2019, the board of directors of the General Partner adopted the Rattler Midstream LP Long Term Incentive Plan (“LTIP”) for employees, consultants and directors of the General Partner and any of its affiliates, including Diamondback, who perform services for the Partnership. The LTIP provides for the grant of unit options, unit appreciation rights, restricted units, unit awards, phantom units, distribution equivalent rights, cash awards, performance awards, other unit-based awards and substitute awards. As of June 30, 2021, a total of 14,568,824 common units had been reserved for issuance pursuant to the LTIP. Common units that are cancelled, forfeited or withheld to satisfy exercise prices or tax withholding obligations will be available for delivery pursuant to other awards. The LTIP is administered by the board of directors of the General Partner or a committee thereof.

Phantom Units

Under the LTIP, the board of directors of the General Partner is authorized to issue phantom units to eligible employees and non-employee directors. The Partnership estimates the fair value of phantom units based on the closing price of the Partnership’s common units on the grant date of the award, and expenses this value over the applicable vesting period. Upon vesting, the phantom units entitle the recipient to one common unit of the Partnership for each phantom unit. The recipients are also entitled to distribution equivalent rights, which represent the right to receive a cash payment equal to the value of the distributions paid on one phantom unit between the grant date and the vesting date.

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The following table presents the phantom unit activity under the LTIP for the six months ended June 30, 2021:


	Phantom Units	Weighted Average Grant-Date Fair Value
Unvested at December 31, 2020	2,089,668	$	17.07
Granted	210,631	$	11.01
Vested	(436,188)	$	19.14
Forfeited	(24,065)	$	6.49
Unvested at June 30, 2021	1,840,046	$	16.02

The aggregate fair value of phantom units that vested during the six months ended June 30, 2021 was $8.3 million. As of June 30, 2021, the unrecognized compensation cost related to unvested phantom units was $27.7 million, and is expected to be recognized over a weighted-average period of 2.77 years. For the three and six months ended June 30, 2021, the Partnership incurred $2.5 million and $4.8 million, respectively, of unit–based compensation expense. For the three and six months ended June 30, 2020, the Partnership incurred $2.1 million and $4.3 million, respectively, of unit–based compensation expense.

10. UNITHOLDERS’ EQUITY AND DISTRIBUTIONS

The Partnership has general partner and limited partner units. At June 30, 2021, the Partnership had a total of 41,075,836 common units issued and outstanding and 107,815,152 Class B units issued and outstanding, of which no common units and 107,815,152 Class B units, representing approximately 72% of the Partnership’s total units outstanding, were beneficially owned by Diamondback. At June 30, 2021, Diamondback also beneficially owned 107,815,152 Operating Company units, representing an overall 72% economic, non-voting interest in the Operating Company. The Operating Company units and the Partnership’s Class B units beneficially owned by Diamondback are exchangeable from time to time for the Partnership’s common units (that is, one Operating Company unit and one Partnership Class B unit, together, will be exchangeable for one Partnership common unit).

Common Unit Repurchase Program

On October 29, 2020, the board of directors of the General Partner approved a common unit repurchase program to acquire up to $100 million of the Partnership’s outstanding common units. The common unit repurchase program is authorized to extend through December 31, 2021 and the Partnership intends to purchase common units under the repurchase program opportunistically with cash on hand and free cash flow from operations. The repurchase program may be suspended from time to time, modified, extended or discontinued by the board of directors of the General Partner at any time. During the three and six months ended June 30, 2021, the Partnership repurchased approximately $5.2 million and $16.3 million, respectively, of common units under the repurchase program. As of June 30, 2021, $68.9 million remained available for use to repurchase common units under the Partnership’s common unit repurchase program.

Changes in Ownership of Consolidated Subsidiaries

Non-controlling interest in the accompanying condensed consolidated financial statements represents Diamondback’s ownership in the net assets of the Operating Company. Diamondback’s relative ownership interest in the Operating Company can change due to the Partnership’s public offerings, issuance of units for acquisitions, issuance of unit-based compensation, repurchases of common units and distribution equivalent rights paid on the Partnership’s units. These changes in ownership percentage and the disproportionate allocation of net income to Diamondback discussed below result in adjustments to non-controlling interest and common unitholder equity, tax effected.

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The following table summarizes changes in the ownership interest in consolidated subsidiaries during the period:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Net income (loss) attributable to the Partnership	$	12,445	$	2,822	$	18,460	$	15,853

Change in ownership of consolidated subsidiaries	1,941		(329,034)		2,653		(329,034)
Change from net income (loss) attributable to the Partnership's unitholders and transfers to non-controlling interest	$	14,386	$	(326,212)	$	21,113	$	(313,181)

In the second quarter of 2020, the Partnership recorded adjustments to non-controlling interest of $419.6 million, common unitholder equity of $(329.0) million, and deferred tax assets of $90.6 million to reflect the ownership structure that was effective at June 30, 2020. The adjustment had no impact on earnings for the three months ended June 30, 2020.

Cash Distributions on Common Units

The board of directors of the General Partner sets and administers the cash distribution policies for the Partnership and the Operating Company. Cash distributions paid by the Operating Company to Diamondback and the Partnership as the holders of the Operating Company’s common units are determined by the board of directors of the General Partner on a quarterly basis. The partnership agreement does not require the Partnership to pay minimum distributions to its common unitholders on a quarterly or other basis, and the Partnership does not employ structures intended to consistently maintain or increase distributions over time. On August 2, 2021, the board of directors of the General Partner approved a cash distribution for the second quarter of 2021 of $0.25 per Operating Company unit and per common unit. Distributions due to common unitholders are payable on August 23, 2021, to common unitholders of record at the close of business on August 16, 2021. The board of directors of the General Partner may change the distribution policies at any time and from time to time.

The following table presents information regarding cash distributions approved by the board of directors of the General Partner and paid during the three and six months ended June 30, 2021:


			Distributions
			(in thousands)
Period	Amount per Unit		Operating Company Distributions to Diamondback		Common Unitholders		Declaration Date	Unitholder Record Date	Payment Date
Q4 2020	$	0.20	$	21,563	$	8,263	February 17, 2021	March 8, 2021	March 15, 2021
Q1 2021	$	0.20	$	21,563	$	8,183	April 28, 2021	May 14, 2021	May 21, 2021

11. EARNINGS PER COMMON UNIT

Earnings per common unit on the condensed consolidated statements of operations is based on the net income of the Partnership for the three and six months ended June 30, 2021 and 2020, which is the amount of net income that is attributable to the Partnership’s common units. The Partnership’s net income is allocated wholly to the common units, as the General Partner does not have an economic interest.

Basic and diluted earnings per common unit is calculated using the two-class method. The two-class method is an earnings allocation proportional to the respective ownership among holders of common units and participating securities. Basic earnings per common unit is calculated by dividing net income by the weighted-average number of common units outstanding during the period. Diluted earnings per common unit also considers the dilutive effect of unvested common units granted under the LTIP, calculated using the treasury stock method.

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A reconciliation of the components of basic and diluted earnings per common unit is presented in the table below:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands, except per unit amounts)
Net income (loss) attributable to Rattler Midstream LP	$	12,445	$	2,822	$	18,460	$	15,853
Less: net (income) loss allocated to participating securities(1)	(456)		(644)		(874)		(1,296)
Net income (loss) attributable to common unitholders	$	11,989	$	2,178	$	17,586	$	14,557
Weighted average common units outstanding:
Basic weighted average common units outstanding	41,033		43,812		41,386		43,756
Effect of dilutive securities:
Potential common units issuable(2)	—		—		—		—
Diluted weighted average common units outstanding	41,033		43,812		41,386		43,756
Net income per common unit, basic	$	0.30	$	0.05	$	0.42	$	0.33
Net income per common unit, diluted	$	0.30	$	0.05	$	0.42	$	0.33

(1) Distribution equivalent rights granted to employees are considered participating securities.

(2) For the three and six months ended June 30, 2021 and 2020, no potential common units were included in the computation of diluted earnings per unit because their inclusion would have been anti-dilutive under the treasury stock method for the periods presented. However, such potential common units could dilute basic earnings per unit in future periods.

12. RELATED PARTY TRANSACTIONS

Related party transactions include transactions with Diamondback. The Partnership has entered into certain agreements that govern these transactions, the most significant of which are commercial agreements for the provision of midstream services to Diamondback. The Partnership derives substantially all of its revenue from these commercial agreements, which consist of the following amounts for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Produced water gathering and disposal	$	67,387	$	66,185	$	131,693	$	145,286
Sourced water gathering	16,029		4,894		31,272		34,897
Natural gas gathering	5,925		4,500		11,325		9,430
Crude oil gathering	2,157		2,452		4,187		4,985
Surface revenue	81		—		180		16
Total	$	91,579	$	78,031	$	178,657	$	194,614

13. INCOME TAXES

The following table provides the Partnership’s provision for (benefit from) income taxes and the effective income tax rate for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(In thousands, except for tax rate)
Provision for (benefit from) income taxes	$	3,539		$	1,083		$	5,210		$	4,903
Effective tax rate	6.1		%	8.0		%	6.1		%	6.8		%

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The Partnership’s effective income tax rates for the three and six months ended June 30, 2021 and 2020 differed from amounts computed by applying the United States federal statutory tax rate to pre-tax income for the period, primarily due to net income attributable to the non-controlling interest and to state taxes, net of federal benefit. For the three and six months ended June 30, 2021 and 2020, the Partnership recorded discrete income tax expense related to unit-based compensation of $0.2 million and $0.3 million, respectively.

The Partnership’s total net deferred tax assets consist primarily of the tax basis over the financial statement carrying value of its investment in the Operating Company and of net operating loss carryforwards. In the second quarter of 2020, the Partnership recorded an adjustment through unitholders’ equity to the carrying value of its investment in the Operating Company, resulting in a decrease in the Partnership’s deferred tax liability related to its investment in the Operating Company. As a result of management’s assessment each period, including consideration of all available positive and negative evidence, management continued to determine that it is more likely than not that the Partnership will realize its deferred tax assets as of June 30, 2021 and 2020.

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 Partnership’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 Partnership 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 Nonrecurring Basis

The following table provides the fair value of financial instruments that are not recorded at fair value in the condensed consolidated balance sheets:


	June 30, 2021				December 31, 2020
	Carrying Value(1)		Fair Value		Carrying Value(1)		Fair Value
	(In thousands)
Debt:
5.625% Senior Notes due 2025	$	491,953	$	525,100	$	490,947	$	528,125
Operating Company revolving credit facility	$	5,000	$	5,000	$	79,000	$	79,000

(1) The carrying value includes associated deferred loan costs and any remaining discount or premium, if any.

The fair value of the Operating Company’s revolving credit facility approximates its carrying value based on borrowing rates available to the Partnership for bank loans with similar terms and maturities and is classified as Level 2 in the fair value hierarchy. The fair value of the Notes was determined using the June 30, 2021 quoted market price, a Level 1 classification in the fair value hierarchy.

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Rattler Midstream LP

Condensed Notes to Consolidated Financial Statements - Continued

(Unaudited)

Fair Value of Financial Assets

The Partnership has other financial instruments consisting of cash, accounts receivable, other current assets, accounts payable, accrued liabilities and various other current liabilities. The carrying value of these instruments approximates fair value because of the short-term nature of the instruments.

15. COMMITMENTS AND CONTINGENCIES

The Partnership may be a party to various routine legal proceedings, disputes and claims from time to time arising in the ordinary course of its business, including those that arise from interpretation of federal and state laws and regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. The Partnership’s management believes there are currently no such matters that, if decided adversely, will have a material adverse effect on the Partnership’s financial condition, results of operations or cash flows.

Commitments

After giving effect to the sale of Amarillo Rattler, as of June 30, 2021, the Partnership’s anticipated future capital commitments for its equity method investments include $5.9 million for the remainder of 2021 and $23.1 million in aggregate.

16. SUBSEQUENT EVENTS

Cash Distribution

On August 2, 2021, the board of directors of the General Partner approved a cash distribution for the second quarter of 2021 of $0.25 per common unit, payable on August 23, 2021, to unitholders of record at the close of business on August 16, 2021.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto presented in this report as well as our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors. See “Cautionary Statement Regarding Forward-Looking Statements.”

Overview

We are a Delaware limited partnership 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, one of the most prolific oil producing areas in the world. We have elected to be treated as a corporation for U.S. federal income tax purposes.

We provide crude oil, natural gas and water-related midstream services (including water sourcing and transportation and produced water gathering and disposal) to Diamondback under long-term, fixed-fee contracts. In addition to our midstream infrastructure assets, we own equity interests in three long-haul crude oil pipelines, which run from the Permian to the Texas Gulf Coast. In addition, we own equity interests in third-party operated gathering systems and processing facilities supported by dedications from Diamondback. We are critical to Diamondback’s development plans because we provide a long-term midstream solution to its increasing crude oil, natural gas and water-related services needs through our robust infield gathering systems and produced water disposal capabilities.

As of June 30, 2021, our general partner held a 100% general partner interest in us and Diamondback held no common units and beneficially owned all of our 107,815,152 outstanding Class B units, representing approximately 72% of our total outstanding units. Diamondback also owns and controls our general partner.

As of June 30, 2021, we own a 28% controlling membership interest in the Operating Company and Diamondback owns, through its ownership of the Operating Company units, a 72% economic, non-voting interest in the Operating Company. However, as required by GAAP, we consolidate 100% of the assets and operations of the Operating Company in our financial statements and reflect a non-controlling interest.

Recent Developments

COVID-19 and Commodity Prices

In early March 2020, oil prices dropped sharply and continued to decline briefly reaching negative levels as a result of multiple factors affecting the supply and demand in global oil and natural gas markets, including (i) actions taken by OPEC members and other exporting nations impacting commodity price and production levels, and (ii) a significant decrease in demand due to the COVID-19 pandemic. However, certain restrictions on conducting business that were implemented in response to the COVID-19 pandemic have since been lifted as improved treatments and vaccinations for COVID-19 have been rolled-out globally since late 2020. As a result, oil and natural gas prices have improved in response to the expected increase in demand for production.

We derive substantially all of our revenue from our commercial agreements with Diamondback, which do not contain minimum volume commitments. In response to the decrease in oil prices in early 2020 discussed above, Diamondback reduced its drilling and development plan on the acreage dedicated to us, which directly and adversely impacted Diamondback’s demand for our midstream services. Diamondback resumed completion activity to stem production declines and respond to rising commodity prices in the third and fourth quarters of 2020, but has kept production relatively flat during the first six months of 2021, using excess cash flows for debt repayment and to return capital to its stockholders rather than expanding its drilling program. As a result, we adjusted our operations to this new level of completion and production activity in the second half of 2020 and into 2021. We cannot predict the extent to which Diamondback’s business would be impacted if conditions in the energy industry were to deteriorate again, nor can we estimate the impact such conditions would have on Diamondback’s ability to execute its drilling and development plan on the dedicated acreage or to perform under our commercial agreements.

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During 2021, we expect to reduce operated capital expenditures significantly to a level of less than half of 2020 amounts. Combined with our equity method joint venture build cycle nearing its end and changing from a net outflow of capital contributions to a net inflow of cash distributions, we believe that this stabilized volume outlook will present a meaningful free cash flow generation even in this volatile commodity price environment.

Divestitures

On April 30, 2021, we and our joint venture partner, Amarillo Midstream, LLC, each sold our respective 50% interests in Amarillo Rattler to EnLink Midstream Operating, LP. Net of transaction expenses and working capital adjustments, we received $23.5 million at closing. An incremental $5.0 million is payable to us in April 2022, and we could receive up to $7.5 million in total contingent earn-out payments from 2023 to 2025.

On June 28, 2021, we closed on the sale of one of our real estate properties located in Midland, Texas for proceeds of $9.1 million, including closing adjustments, which resulted in a loss on disposal of $1.6 million which is included in gain (loss) on disposal of property, plant and equipment on the consolidated statement of operations.

See Note 4 —Divestitures included in the condensed notes to the consolidated financial statements included elsewhere in this report for further discussion of our divestitures.

Operational Update

Highlights

For the three months ended June 30, 2021, as compared with the three months ended June 30, 2020:

•average crude oil gathering volumes were 84,014 Bbl/d, a decrease of 8% year over year;

•average natural gas gathering volumes were 141,529 MMBtu/d, an increase of 32% year over year;

•average produced water gathering and disposal volumes were 801,967 Bbl/d, an increase of 4% year over year; and

•average sourced water gathering volumes were 241,570 Bbl/d, an increase of 209% year over year.

Pipeline Infrastructure Assets

The following tables provide information regarding our gathering, compression and transportation system as of June 30, 2021 and utilization for the quarter ended June 30, 2021:


(Miles)(1)	Delaware Basin	Midland Basin	Permian Total
Crude oil	112	46	158
Natural gas	159	—	159
Produced water	270	249	519
Sourced water	27	74	101
Total	568	369	937


(Capacity/capability)(1)	Delaware Basin	Midland Basin	Permian Total	Utilization
Crude oil gathering (Bbl/d)	225,000	65,000	290,000	30	%
Natural gas compression (Mcf/d)	151,000	—	151,000	78	%
Natural gas gathering (Mcf/d)	180,000	—	180,000	65	%
Produced water gathering and disposal (Bbl/d)	1,330,000	1,784,000	3,114,000	26	%
Sourced water gathering (Bbl/d)	120,000	455,000	575,000	42	%

(1)Does not include any assets of our equity method investment joint ventures.

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Results of Operations

The following table sets forth selected historical operating data for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands, except operating data)
Revenues:
Revenues—related party	$	91,579	$	78,031	$	178,657	$	194,614
Revenues—third party	5,967		7,175		14,088		16,275
Other income—related party	2,542		1,470		5,082		2,988
Other income—third party	1,043		2,059		2,112		4,253
Total revenues	101,131		88,735		199,939		218,130
Costs and expenses:
Direct operating expenses	26,299		37,378		58,810		70,252
Cost of goods sold (exclusive of depreciation and amortization)	10,298		4,744		19,109		20,705
Real estate operating expenses	544		590		1,061		1,318
Depreciation, amortization and accretion	15,239		12,100		26,485		24,606
Impairment and abandonments	—		—		3,371		—
General and administrative expenses	4,956		4,175		9,590		8,689
(Gain) loss on disposal of assets	5,005		1,243		5,011		2,781
Total costs and expenses	62,341		60,230		123,437		128,351
Income (loss) from operations	38,790		28,505		76,502		89,779
Other income (expense):
Interest income (expense), net	(8,235)		(1,926)		(15,545)		(4,547)
Gain (loss) on sale of equity method investments	22,989		—		22,989		—
Income (loss) from equity method investments	4,472		(13,034)		1,649		(13,279)
Total other income (expense), net	19,226		(14,960)		9,093		(17,826)
Net income (loss) before income taxes	58,016		13,545		85,595		71,953
Provision for (benefit from) income taxes	3,539		1,083		5,210		4,903
Net income (loss)	54,477		12,462		80,385		67,050
Less: Net income (loss) attributable to non-controlling interest	42,032		9,640		61,925		51,197
Net income (loss) attributable to Rattler Midstream LP	$	12,445	$	2,822	$	18,460	$	15,853

Operating Data:
Throughput(1)
Crude oil gathering (Bbl/d)	84,014		91,256		84,609		94,275
Natural gas gathering (MMBtu/d)	141,529		107,502		136,014		112,631
Produced water gathering and disposal (Bbl/d)	801,967		771,337		783,878		856,483
Sourced water gathering (Bbl/d)	241,570		78,059		254,629		262,386

(1) Does not include any volumes from our equity method investment joint ventures.

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Sources of Our Revenues

We currently generate a substantial portion of our revenues under fee-based commercial agreements with Diamondback, each with an initial term ending in 2034, utilizing our infrastructure assets or our planned infrastructure assets to provide an array of essential services critical to Diamondback’s upstream operations on certain dedicated acreage in the Delaware and Midland Basins.

Commodity price fluctuations indirectly influence our activities and results of operations over the long-term, since they can affect production rates and investments by Diamondback and third-parties in the development of new crude oil and natural gas reserves. Commodity prices are volatile and influenced by numerous factors beyond our or Diamondback’s control, including the domestic and global supply of and demand for crude oil and natural gas. Furthermore, our ability to execute our development strategy in the Permian will depend on crude oil and natural gas production in that area, which is also affected by the supply of and demand for crude oil and natural gas.

Comparison of the Three Months Ended June 30, 2021 and 2020 and Six Months Ended June 30, 2021 and 2020

Revenues

Revenues increased by $12.4 million to $101.1 million for the three months ended June 30, 2021 from $88.7 million for the three months ended June 30, 2020, primarily due to an increase in sourced water, produced water and gas volumes. The increase in these volumes stems from an overall recovery in Diamondback’s drilling and production activities after curtailments in the second quarter of 2020 in response to the COVID-19 pandemic and other economic factors.

Revenues decreased by $18.2 million to $199.9 million for the six months ended June 30, 2021 from $218.1 million for the six months ended June 30, 2020. This decrease relates primarily to a reduction in sourced water, produced water and oil volumes due to Diamondback’s lower level of drilling and completion activity in first quarter of 2021. In addition, the February 2021 winter storms in the Permian Basin caused the further loss of approximately four to five days of Diamondback’s total net production. This decrease was partially offset by an increase in gas volumes largely due to the continued build out of certain midstream assets that Diamondback contributed to us, as well as the additional build out of historical Partnership systems.

Direct Operating Expenses

Direct operating expense was $26.3 million and $58.8 million for the three and six months ended June 30, 2021, respectively, compared to $37.4 million and $70.3 million for the three and six months ended June 30, 2020. The decreases in the 2021 periods compared to the 2020 periods are largely due to a focus on cost cutting efforts along with a reduction in expenses related to declining volumes in 2021.

Cost of Goods Sold

Cost of goods sold (exclusive of depreciation and amortization) increased by $5.6 million to $10.3 million for the three months ended June 30, 2021 from $4.7 million for the three months ended June 30, 2020. The increase primarily relates to higher sourced water volumes due to Diamondback’s increased level of drilling and completion activity in the second quarter of 2021 compared to the second quarter of 2020 during which Diamondback curtailed a portion of its drilling and completion activity.

Cost of goods sold (exclusive of depreciation and amortization) decreased by $1.6 million to $19.1 million for the six months ended June 30, 2021 from $20.7 million for the six months ended June 30, 2020. The decrease primarily relates to a reduction in sourced water volumes due to Diamondback’s lower level of drilling and completion activity in the first quarter of 2021, which was partially offset by an increased level of drilling and completion activity in the second quarter of 2021 as discussed above.

Interest Expense, Net

Net interest expense was $8.2 million and $15.5 million for the three and six months ended June 30, 2021, respectively, compared to $1.9 million and $4.5 million for the three and six months ended June 30, 2020, respectively. The increases in the 2021 periods compared to the 2020 periods primarily relate to interest accrued on the Notes which were issued in July 2020 and bear interest at a rate of 5.625% per annum.

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Gain (loss) on Sale of Equity Method Investments

The $23.0 million gain on sale of equity method investments for the three and six months ended June 30, 2021 related to the sale of our interest in Amarillo Rattler. See Note 4 —Divestitures included in the condensed notes to the consolidated financial statements included elsewhere in this report for discussion of the sale.

Income (loss) from Equity Method Investments

Income from equity method investments was $4.5 million and $1.6 million for the three and six months ended June 30, 2021, respectively, compared to losses of $13.0 million and $13.3 million for the three and six months ended June 30, 2020, respectively. The loss in the 2020 periods primarily related to a proportional charge of impairment recorded by the investee associated with its goodwill. See Note 7 — Equity Method Investments included in the condensed notes to the consolidated financial statements included elsewhere in this report for additional discussion.

Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is a supplemental non-GAAP financial measure used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance and compare the results of our operations period to period without regard to our financing methods or capital structure.

We define Adjusted EBITDA as net income (loss) attributable to Rattler Midstream LP plus net income (loss) attributable to non-controlling interest before interest expense (net of amount capitalized), depreciation, amortization and accretion on assets and liabilities of the Operating Company, our proportional depreciation and interest expense related to equity method investments, our proportional impairments and abandonments related to equity method investments, non-cash unit-based compensation expense, impairment and abandonments, (gain) loss on disposal of assets, (gain) loss from sale of equity method investment, provision for income taxes and other. The GAAP measure most directly comparable to Adjusted EBITDA is net income (loss). However, Adjusted EBITDA is not a measure of net income (loss) as determined by GAAP. We exclude the items listed above from net income (loss) in arriving at Adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as historic costs of depreciable assets.

Adjusted EBITDA should not be considered an alternative to net income (loss) or any other measure of financial performance or liquidity presented in accordance with GAAP. Our computation of Adjusted EBITDA excludes some, but not all, items that affect net income (loss), and these measures may vary from those of other companies. As a result, Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies.

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The following table presents a reconciliation of net income to Adjusted EBITDA for each of the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Reconciliation of Net Income (Loss) to Adjusted EBITDA:
Net income (loss) attributable to Rattler Midstream LP	$	12,445	$	2,822	$	18,460	$	15,853
Net income (loss) attributable to non-controlling interest	42,032		9,640		61,925		51,197
Net income (loss)	54,477		12,462		80,385		67,050
Interest expense, net of amount capitalized	8,235		1,926		15,545		4,547
Depreciation, amortization and accretion	15,239		12,100		26,485		24,606
Depreciation and interest expense related to equity method investments	10,036		7,244		20,561		11,010
Impairments and abandonments related to equity method investments	—		15,839		2,933		15,839
Non-cash unit-based compensation expense	2,485		2,120		4,817		4,339
Impairment and abandonments	—		—		3,371		—
(Gain) loss on disposal of assets	5,005		1,243		5,011		2,781
Gain (loss) on sale of equity method investments	(22,989)		—		(22,989)		—
Provision for income taxes	3,539		1,083		5,210		4,903
Other	22		(138)		34		(216)
Adjusted EBITDA	76,049		53,879		141,363		134,859
Less: Adjusted EBITDA attributable to non-controlling interest	55,084		38,288		102,219		95,912
Adjusted EBITDA attributable to Rattler Midstream LP	$	20,965	$	15,591	$	39,144	$	38,947

Liquidity and Capital Resources

Overview

Our primary sources of liquidity have been cash generated from operations, borrowings under the Credit Agreement and the issuance of the Notes. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions. We do not have any commitment from Diamondback, our general partner or any of their respective affiliates to fund our cash flow deficits or provide other direct or indirect financial assistance to us. Should we require additional capital, the indirect effect of volatile commodity markets and/or adverse macroeconomic conditions may limit our access to, or increase our cost of, capital or make capital unavailable on terms acceptable to us or at all.

Cash Distributions on Common Units

On August 2, 2021, the board of directors of our general partner approved a cash distribution for the second quarter of 2021 of $0.25 per common unit, payable on August 23, 2021, to common unitholders of record at the close of business on August 16, 2021. The board of directors of our general partner may change the distribution policy at any time and from time to time. See Note 10 —Unitholders’ Equity and Distributions included in the condensed notes to the consolidated financial statements included elsewhere in this report for additional discussion of our distribution policy.

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Cash Flows

The following table presents our cash flows for the periods indicated:


	Six Months Ended June 30,
	2021		2020
	(In thousands)
Cash Flow Data:
Net cash provided by (used in) operating activities	$	128,412	$	131,864
Net cash provided by (used in) investing activities	17,763		(139,707)
Net cash provided by (used in) financing activities	(152,552)		8,380
Net increase (decrease) in cash	$	(6,377)	$	537

Operating Activities

Net cash provided by operating activities decreased by $3.5 million during the six months ended June 30, 2021 compared to the six months ended June 30, 2020, due primarily to the $18.2 million decline in revenues and an increase in cash paid for interest of $9.2 million. These decreases were partially offset by reductions of $11.5 million in direct operating expenses and $1.6 million in cost of goods sold, and distributions representing returns on investment from our equity method investments of $9.1 million. The remaining decrease stems from largely offsetting changes in working capital due primarily to the timing of when collections are made on accounts receivable and payments are made on accounts payable and accrued liabilities. See — Results of Operations for further discussion of changes in revenue, operating expenses and interest expense and Note 7 — Equit y Method Investments included in the condensed notes to the consolidated financial statements included elsewhere in this report for further discussion of distributions.

Investing Activities

Net cash provided by investing activities was $17.8 million during the six months ended June 30, 2021, and primarily consists of $23.5 million of proceeds from the sale of our Amarillo Rattler equity method investment, $9.1 million in proceeds from the sale of a real estate asset, and $9.1 million in distributions considered to be returns of investment received from our equity method investments. These proceeds were partially offset by capital expenditures for property, plant and equipment of $17.7 million and contributions to our equity method investments of $6.5 million, which continue to decrease as discussed in — Recent Developments.

Net cash used in investing activities was $139.7 million during the six months ended June 30, 2020, and primarily related to additions to property, plant and equipment and contributions to our equity method investments, which were partially offset by distributions considered to be returns of investment received from our Gray Oak and OMOG equity method investments.

Financing Activities

Net cash used in financing activities was $152.6 million during the six months ended June 30, 2021, and primarily related to (i) distributions of $59.6 million to our unitholders, (ii) net payments on the credit facility of $74.0 million as we continue to reduce our borrowings and (iii) $16.3 million in repurchases of common units under our repurchase program during the period.

Net cash provided by financing activities was $8.4 million during the six months ended June 30, 2020, and primarily related to proceeds from borrowings on the Operating Company’s revolving credit facility of $99.0 million, partially offset by distributions to our unitholders of $88.0 million during the period.

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Common Unit Repurchase Program

On October 29, 2020, the board of directors of our general partner approved a common unit repurchase program to acquire up to $100 million of our outstanding common units. The common unit repurchase program is authorized to extend through December 31, 2021 and we intend to purchase common units under the repurchase program opportunistically with cash on hand and free cash flow from operations. The repurchase program may be suspended from time to time, modified, extended or discontinued by the board of directors of our general partner at any time. During the six months ended June 30, 2021, we repurchased approximately $16.3 million of common units under the repurchase program. As of June 30, 2021, $68.9 million remained available for use to repurchase common units under our program.

Capital Requirements and Sources of Liquidity

The midstream energy business is capital intensive, requiring the maintenance of existing gathering systems and other midstream assets and facilities and the acquisition or construction and development of new gathering systems and other midstream assets and facilities. However, with respect to capital expenditures incurred for acquisitions or capital improvements, we have some discretion and control. In times of reduced operational activity, we may choose to defer a portion of our budgeted capital expenditures until later periods to achieve the desired balance between sources and uses of liquidity and prioritize capital projects that we believe have the highest expected returns and potential to generate near-term cash flow. Subject to financing alternatives, we may also increase our capital expenditures significantly to take advantage of opportunities we consider to be attractive. We consistently monitor and may adjust our projected capital expenditures in response to factors both within and outside our control.

For the six months ended June 30, 2021, our total capital expenditures were $17.7 million, which primarily consisted of $13.9 million related to produced water disposal assets, $1.2 million related to crude oil gathering assets, $1.3 million related to natural gas gathering assets, and $1.2 million related to real estate assets. We estimate that our total capital expenditures related to midstream assets for 2021 will be between $30 million and $50 million, excluding our anticipated total capital commitments related to our equity method investments of approximately $5 million to $15 million. We also estimate that distributions from our equity method investments will be between $35 million to $45 million. However, this range could decrease due to the continued impact, either directly or indirectly, of the COVID-19 pandemic or volatile crude oil prices on our business.

We own equity interests in the EPIC, Gray Oak, Wink to Webster and OMOG joint ventures. Each of these joint ventures is accounted for using the equity method. The following table sets forth our cumulative capital contributions and anticipated future capital commitment for each of our equity method investment interests:


	Ownership Interest		Acquisition Date	Cumulative Capital Contributions to Date		Anticipated Future Capital Commitment
				(In thousands)
EPIC Crude Holdings, LP	10	%	February 1, 2019	$	137,534	$	2,466
Gray Oak Pipeline, LLC	10	%	February 15, 2019	$	142,096	$	—
Wink to Webster Pipeline LLC	4	%	July 30, 2019	$	87,389	$	20,611
OMOG JV LLC	60	%	October 1, 2019	$	218,555	$	—

As of June 30, 2021, we anticipate making additional contributions of $5.9 million to our equity method investments during the remainder of 2021. For further discussion regarding these investments see Note 7 — Equity Method Investment included in the condensed notes to the consolidated financial statements included elsewhere in this report.

Based upon current expectations for 2021, we believe that our cash flows from operations, cash on hand and borrowing under our revolving credit facility will be sufficient to fund our operations and anticipated future capital commitments through the 12-month period following the filing of this report and thereafter.

Indebtedness

At June 30, 2021, we have $505.0 million in principal amount of outstanding indebtedness, which consists of Notes and borrowings under the Operating Company’s revolving credit facility as discussed further below.

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The Operating Company’s Revolving Credit Facility

The Operating Company’s credit agreement provides for a revolving credit facility in the maximum credit amount of $600.0 million, which is expandable to $1.0 billion upon our election, subject to obtaining additional lender commitments and satisfaction of customary conditions. As of June 30, 2021, there was $5.0 million of outstanding borrowings, and $595.0 million available for future borrowings, under the Operating Company’s revolving credit facility. The weighted average interest rate on borrowings under the Credit Agreement was 1.36% and 1.39% for the three and six months ended June 30, 2021, respectively. The credit agreement matures on May 28, 2024.

As of June 30, 2021, the Operating Company was in compliance with all financial covenants under its Credit Agreement.

Notes Offering

On July 14, 2020, we completed an offering of our 5.625% senior notes due 2025 in the aggregate principal amount of $500.0 million. We received net proceeds of approximately $489.5 million from the notes offering. We loaned the gross proceeds of $500.0 million of the notes offering to the Operating Company, which used the proceeds from the notes offering to repay then outstanding borrowings under its revolving credit facility. Interest on the notes is payable semi-annually, and the first interest payment was made on January 15, 2021.

For additional information regarding the outstanding debt, see Note 8—Debt included in the condensed notes to the consolidated financial statements included elsewhere in this report.

Contractual Obligations

Except as may be discussed in Note 8—Debt and Note 15—Commitments and Contingencies included in the condensed notes to the consolidated financial statements included elsewhere in this report, there were no material changes to our contractual obligations and other commitments, from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

Critical Accounting Policies

There have been no changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

Off-Balance Sheet Arrangements

We currently have no significant off-balance sheet arrangements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, including the effects of adverse changes in commodity prices and interest rates as described below. The primary objective of the following information is to provide quantitative and qualitative information about our potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in oil and natural gas prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses.

Commodity Price Risk

We currently generate the majority of our revenues pursuant to fee-based agreements with Diamondback under which we are paid based on volumetric fees, rather than the underlying value of the commodity. Consequently, our existing operations and cash flows have little direct exposure to commodity price risk. However, Diamondback and our other customers are exposed to commodity price risk, and extended reduction in commodity prices could reduce the production volumes available for our midstream services in the future below expected levels. Although we intend to maintain fee-based pricing terms on both new contracts and existing contracts for which prices have not yet been set, our efforts to negotiate such terms may not be successful, which could have a materially adverse effect on our business.

We may acquire or develop additional midstream assets in a manner that increases our exposure to commodity price risk. Future exposure to the volatility of crude oil, natural gas and natural gas liquids prices could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions to our unitholders.

Credit Risk

We are subject to counterparty credit risk related to our midstream commercial contracts, lease agreements and joint venture receivables. We derive substantially all of our revenue from our commercial agreements with Diamondback. As a result, we are directly affected by changes to Diamondback’s business related to operational and business risks or otherwise. We cannot predict the extent to which Diamondback’s business would be impacted if conditions in the energy industry were to deteriorate, nor can we estimate the impact such conditions would have on Diamondback’s ability to execute its drilling and development program or to perform under our agreements. While we monitor the creditworthiness of purchasers, lessees and joint venture partners with which we conduct business, we are unable to predict sudden changes in solvency of these counterparties and may be exposed to associated risks. Nonperformance by a counterparty could result in significant financial losses.

Interest Rate Risk

We are subject to market risk exposure related to changes in interest rates on our indebtedness under the Operating Company’s credit agreement. The terms of the Credit Agreement provide for interest at a rate elected by the Operating Company that is based on the prime rate or LIBOR, in each case plus margins ranging from 0.250% to 1.250% for prime-based loans and 1.250% to 2.250% per annum for LIBOR loans, in each case depending on the Consolidated Total Leverage Ratio (as defined in the Credit Agreement). The Operating Company is obligated to pay a quarterly commitment fee ranging from 0.250% to 0.375% per annum on the unused portion of the commitment, which fee is also dependent on the Consolidated Total Leverage Ratio.

As of June 30, 2021, we had $5.0 million of outstanding borrowings and $595.0 million available for future borrowings under the Credit Agreement. During the three and six months ended June 30, 2021, the weighted average interest rate on borrowings under the Credit Agreement was 1.36% and 1.39%, respectively.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Control and Procedures. Under the direction of the Chief Executive Officer and Chief Financial Officer of our general partner, we have established disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer of our general partner, as appropriate to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

As of June 30, 2021, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of our general partner, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer of our general partner have concluded that as of June 30, 2021, our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Due to the nature of our business, we may be involved in various routine legal proceedings, disputes and claims from time to time arising in the ordinary course of our business activities. In the opinion of our management, there are currently no such matters that, if decided adversely, will have a material adverse effect on our financial condition, results of operations or cash flows. See Note 15—Commitments and Contingencies included in the condensed notes to the consolidated financial statements included elsewhere in this report.

ITEM 1A. RISK FACTORS

Our business faces many risks. Any of the risks discussed in this report and our other SEC filings could have a material impact on our business, financial position or results of operations. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also materially impair our business operations, financial condition or future results.

As of the date of this filing, we continue to be subject to the risk factors previously disclosed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021. There have been no material changes in our risk factors from those described in our Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None.

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Issuer Repurchases of Equity Securities

Our common unit repurchase activity for the three months ended June 30, 2021 was as follows:


Period	Total Number of Units Purchased(1)	Average Price Paid Per Unit (2)		Total Number of Units Purchased as Part of Publicly Announced Plan	Approximate Dollar Value of Units that May Yet Be Purchased Under the Plan (3)
	($ in thousands, except per unit amounts)



April 1, 2021 - April 30, 2021	315,000	$	10.97	315,000	$	70,688
May 1, 2021 - May 31, 2021	318,186	$	10.79	160,000	$	68,947
June 1, 2021 - June 30, 2021	—	$	—	—	$	68,947






Total	633,186	$	10.88	475,000

(1)Includes common units repurchased from employees in order to satisfy tax withholding requirements. Such units are retired immediately upon repurchase.

(2)The average price paid per common unit is net of any commissions paid to repurchase common units.

(3)In October 2020, the board of directors of our general partner approved a common unit repurchase program to acquire up to $100 million of our outstanding common units through December 31, 2021. This repurchase program may be suspended from time to time, modified, extended or discontinued by the board of directors of our general partner at any time.

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ITEM 6. EXHIBITS


Exhibit Number						Description


3.1						Certificate of Limited Partnership of Rattler Midstream LP (incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-1 (File No. 333-226645) filed on August 7, 2018).
3.2						Certificate of Amendment to the Certificate of Limited Partnership of Rattler Midstream LP (incorporated by reference to Exhibit 3.2 of Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-226645) filed on January 22, 2019).
3.3						First Amended and Restated Agreement of Limited Partnership of Rattler Midstream LP, dated May 28, 2019 (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K (File 001-38919) filed on May 29, 2019).
3.4						Certificate of Formation of Rattler Midstream Operating LLC (formerly White Fang Energy LLC) (incorporated by reference to Exhibit 3.3 of the Registrant’s Registration Statement on Form S-1 (File No. 333-226645) filed on August 7, 2018).
3.5						Certificate of Amendment to the Certificate of Formation of Rattler Midstream Operating LLC (formerly White Fang Energy LLC) (incorporated by reference to Exhibit 3.4 of the Registrant’s Registration Statement on Form S-1 (File No. 333-226645) filed on August 7, 2018).
3.6						Certificate of Amendment to the Certificate of Formation of Rattler Midstream Operating LLC (formerly Rattler Midstream LLC) (incorporated by reference to Exhibit 3.6 of Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-226645) filed on January 22, 2019).
3.7						Second Amended and Restated Limited Liability Company Agreement of Rattler Midstream Operating LLC (incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K (File 001-38919) filed on May 29, 2019).
3.8						Certificate of Formation of Rattler Midstream GP LLC (incorporated by reference to Exhibit 3.6 of the Registrant’s Registration Statement on Form S-1 (File No. 333-226645) filed on August 7, 2018).
3.9						First Amended and Restated Limited Liability Company Agreement of Rattler Midstream GP LLC (incorporated by reference to Exhibit 3.3 of the Registrant’s Current Report on Form 8-K (File 001-38919) filed on May 29, 2019).
4.1						Indenture, dated as of July 14, 2020, among Rattler Midstream LP, as issuer, Rattler Midstream Operating LLC, Tall City Towers LLC, Rattler OMOG LLC and Rattler Ajax Processing LLC, as guarantors, and Wells Fargo Bank, National Association, as trustee (including the form of Rattler Midstream LP’s 5.625% Senior Notes due 2025) (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K (File 001-38919) filed on July 14, 2020).























31.1*						Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2*						Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1**						Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
101						The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statement of Changes in Unitholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Condensed Notes to Consolidated Financial Statements.
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).


*			Filed herewith.
**			The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		RATTLER MIDSTREAM LP

		By:	RATTLER MIDSTREAM GP LLC,
			its general partner

Date:	August 5, 2021	By:	/s/ Travis D. Stice
			Travis D. Stice
			Chief Executive Officer
			(Principal Executive Officer)

Date:	August 5, 2021	By:	/s/ Teresa L. Dick
			Teresa L. Dick
			Chief Financial Officer
			(Principal Financial Officer)