RATTLER MIDSTREAM LP - Quarter Report: 2021 March (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 March 31, 2021
OR
| ☐ | 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)
DE | 83-1404608 | |||||||||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |||||||||||||
| 500 West Texas | ||||||||||||||
| Suite 1200 | ||||||||||||||
| Midland, | TX | 79701 | ||||||||||||
| (Address of principal executive offices) | (Zip code) | |||||||||||||
(432) 221-7400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common 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 April 30, 2021, the registrant had outstanding 40,752,589 common units representing limited partner interests and 107,815,152 Class B units representing limited partner interests.
RATTLER MIDSTREAM LP
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2021
TABLE OF CONTENTS
| Page | |||||
i
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. | ||||
| Hydraulic fracturing | The process of creating and preserving a fracture or system of fractures in a reservoir rock, typically by injecting a fluid under pressure through a wellbore and into the targeted formation. | ||||
| 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. | ||||
ii
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 $500.0 million in aggregate principal amount of 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
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 ongoing COVID-19 pandemic on the oil and natural gas industry, including the impact on pricing and demand for oil and natural gas and the supply chain disruptions during the ongoing COVID-19 pandemic;
•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;
•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 recent 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.
iv
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.
v
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Rattler Midstream LP
Condensed Consolidated Balance Sheets
(Unaudited)
| March 31, | December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | 9,760 | $ | 23,927 | |||||||
| Accounts receivable—related party | 46,238 | 57,447 | |||||||||
| Accounts receivable—third party, net | 7,060 | 5,658 | |||||||||
| Sourced water inventory | 9,738 | 10,108 | |||||||||
| Other current assets | 948 | 1,127 | |||||||||
| Total current assets | 73,744 | 98,267 | |||||||||
| Property, plant and equipment: | |||||||||||
| Land | 85,826 | 85,826 | |||||||||
| Property, plant and equipment | 1,017,574 | 1,012,777 | |||||||||
| Accumulated depreciation, amortization and accretion | (110,491) | (100,728) | |||||||||
| Property, plant and equipment, net | 992,909 | 997,875 | |||||||||
| Right of use assets | 406 | 574 | |||||||||
| Equity method investments | 525,078 | 532,927 | |||||||||
| Real estate assets, net | 96,751 | 96,687 | |||||||||
| Intangible lease assets, net | 4,050 | 4,262 | |||||||||
| Deferred tax asset | 71,397 | 73,264 | |||||||||
| Other assets | 4,463 | 4,732 | |||||||||
| Total assets | $ | 1,768,798 | $ | 1,808,588 | |||||||
| Liabilities and Unitholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 524 | $ | 139 | |||||||
| Accrued liabilities | 39,428 | 42,508 | |||||||||
| Taxes payable | 217 | 192 | |||||||||
| Short-term lease liability | 406 | 574 | |||||||||
| Asset retirement obligations | 35 | 35 | |||||||||
| Total current liabilities | 40,610 | 43,448 | |||||||||
| Long-term debt | 545,450 | 569,947 | |||||||||
| Asset retirement obligations | 15,621 | 15,093 | |||||||||
| Total liabilities | 601,681 | 628,488 | |||||||||
| Commitments and contingencies (Note 14) | |||||||||||
| Unitholders’ equity: | |||||||||||
| General partner—Diamondback | 879 | 899 | |||||||||
Common units—public (41,277,589 units issued and outstanding as of March 31, 2021 and 42,356,637 units issued and outstanding as of December 31, 2020) | 374,432 | 385,189 | |||||||||
Class B units—Diamondback (107,815,152 units issued and outstanding as of March 31, 2021 and as of December 31, 2020) | 879 | 899 | |||||||||
| Accumulated other comprehensive income (loss) | (30) | (123) | |||||||||
| Total Rattler Midstream LP unitholders’ equity | 376,160 | 386,864 | |||||||||
| Non-controlling interest | 791,060 | 793,638 | |||||||||
| Non-controlling interest in accumulated other comprehensive income (loss) | (103) | (402) | |||||||||
| Total equity | 1,167,117 | 1,180,100 | |||||||||
| Total liabilities and unitholders’ equity | $ | 1,768,798 | $ | 1,808,588 | |||||||
See accompanying notes to condensed consolidated financial statements.
1
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands, expect per unit amounts) | |||||||||||
| Revenues: | |||||||||||
| Revenues—related party | $ | 87,078 | $ | 116,583 | |||||||
| Revenues—third party | 8,121 | 9,100 | |||||||||
| Other income—related party | 2,540 | 1,518 | |||||||||
| Other income—third party | 1,069 | 2,194 | |||||||||
| Total revenues | 98,808 | 129,395 | |||||||||
| Costs and expenses: | |||||||||||
| Direct operating expenses | 32,511 | 32,874 | |||||||||
| Cost of goods sold (exclusive of depreciation and amortization) | 8,811 | 15,961 | |||||||||
| Real estate operating expenses | 517 | 728 | |||||||||
| Depreciation, amortization and accretion | 11,246 | 12,506 | |||||||||
| Impairment and abandonments | 3,371 | — | |||||||||
| General and administrative expenses | 4,634 | 4,514 | |||||||||
| (Gain) loss on disposal of property, plant and equipment | 6 | 1,538 | |||||||||
| Total costs and expenses | 61,096 | 68,121 | |||||||||
| Income (loss) from operations | 37,712 | 61,274 | |||||||||
| Other income (expense): | |||||||||||
| Interest income (expense), net | (7,310) | (2,621) | |||||||||
| Income (loss) from equity method investments | (2,823) | (245) | |||||||||
| Total other income (expense), net | (10,133) | (2,866) | |||||||||
| Net income (loss) before income taxes | 27,579 | 58,408 | |||||||||
| Provision for (benefit from) income taxes | 1,671 | 3,820 | |||||||||
| Net income (loss) | 25,908 | 54,588 | |||||||||
| Less: Net income (loss) attributable to non-controlling interest | 19,893 | 41,557 | |||||||||
| Net income (loss) attributable to Rattler Midstream LP | $ | 6,015 | $ | 13,031 | |||||||
| Net income (loss) attributable to limited partners per common unit: | |||||||||||
| Basic | $ | 0.13 | $ | 0.28 | |||||||
| Diluted | $ | 0.13 | $ | 0.28 | |||||||
| Weighted average number of limited partner common units outstanding: | |||||||||||
| Basic | 41,742 | 43,700 | |||||||||
| Diluted | 41,742 | 43,700 | |||||||||
See accompanying notes to condensed consolidated financial statements.
2
Rattler Midstream LP
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Net income (loss) | $ | 25,908 | $ | 54,588 | |||||||
| Other comprehensive income (loss): | |||||||||||
| Change in accumulated other comprehensive income (loss) of equity method investees attributable to non-controlling interest | 299 | (195) | |||||||||
| Change in accumulated other comprehensive income (loss) of equity method investees attributable to limited partner | 93 | (63) | |||||||||
| Total other comprehensive income (loss) | 392 | (258) | |||||||||
| Comprehensive income (loss) | $ | 26,300 | $ | 54,330 | |||||||
See accompanying notes to condensed consolidated financial statements.
3
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 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Accumulated other comprehensive income | — | — | — | — | — | — | 93 | 299 | 392 | ||||||||||||||||||||
| Distribution equivalent rights payments | — | (418) | — | — | — | — | — | — | (418) | ||||||||||||||||||||
| Change in ownership of consolidated subsidiaries, net | — | 712 | — | — | — | (908) | — | — | (196) | ||||||||||||||||||||
| Cash paid for tax withholding on vested common units | — | (21) | — | — | — | — | — | — | (21) | ||||||||||||||||||||
| 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 | |||||||||||||
| 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 | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 25,908 | $ | 54,588 | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Provision for deferred income taxes | 1,671 | 3,820 | |||||||||
| Depreciation, amortization and accretion | 11,246 | 12,506 | |||||||||
| (Gain) loss on disposal of property, plant and equipment | 6 | 1,538 | |||||||||
| Impairment and abandonments | 3,371 | — | |||||||||
| Unit-based compensation expense | 2,332 | 2,219 | |||||||||
| (Income) loss from equity method investments | 2,823 | 245 | |||||||||
| Other | 503 | — | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable—related party | 11,209 | 31,674 | |||||||||
| Accounts payable, accrued liabilities and taxes payable | (6,092) | (8,540) | |||||||||
| Other | (309) | (63) | |||||||||
| Net cash provided by (used in) operating activities | 52,668 | 97,987 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property, plant and equipment | (5,860) | (52,046) | |||||||||
| Contributions to equity method investments | (3,663) | (32,563) | |||||||||
| Distributions from equity method investments | 9,107 | 9,761 | |||||||||
| Other | — | 42 | |||||||||
| Net cash provided by (used in) investing activities | (416) | (74,806) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowings from credit facility | 12,000 | 27,000 | |||||||||
| Payments on credit facility | (37,000) | — | |||||||||
| Repurchased units as part of unit buyback | (11,114) | — | |||||||||
| Distribution to public | (8,263) | (12,673) | |||||||||
| Distribution to Diamondback | (21,583) | (31,286) | |||||||||
| Other | (459) | (672) | |||||||||
| Net cash provided by (used in) financing activities | (66,419) | (17,631) | |||||||||
| Net increase (decrease) in cash | (14,167) | 5,550 | |||||||||
| Cash at beginning of period | 23,927 | 10,633 | |||||||||
| Cash at end of period | $ | 9,760 | $ | 16,183 | |||||||
| Supplemental disclosure of non-cash investing activity: | |||||||||||
| Accrued liabilities related to capital expenditures | $ | 8,725 | $ | 5,328 | |||||||
See accompanying notes to condensed consolidated financial statements.
5
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 March 31, 2021, the General Partner held a 100% general partner interest in the Partnership. Diamondback owns all of the Partnership’s 107,815,152 Class B units that provide a 72% voting interest. Diamondback owns and controls the General Partner.
As of March 31, 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 Amarillo Rattler, LLC (“Amarillo Rattler”), 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 6— 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 at the date of the financial statements.
6
Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
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 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:
| March 31, 2021 | December 31, 2020 | ||||||||||
| (In thousands) | |||||||||||
| Direct operating expenses accrued | $ | 18,987 | $ | 18,160 | |||||||
| Capital expenditures accrued | 8,725 | 5,328 | |||||||||
| Interest expense accrued | 5,859 | 12,969 | |||||||||
| Sourced water purchases accrued | 4,208 | 3,597 | |||||||||
| Other | 1,649 | 2,454 | |||||||||
| Total accrued liabilities | $ | 39,428 | $ | 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) | 392 | ||||
| Balance as of March 31, 2021 | $ | (133) | |||
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.
7
Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
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 is disaggregated by type of service and type of fee:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Type of Service: | |||||||||||
| Produced water gathering and disposal | $ | 66,328 | $ | 81,348 | |||||||
| Sourced water gathering | 16,577 | 30,767 | |||||||||
| Crude oil gathering | 6,791 | 7,777 | |||||||||
| Natural gas gathering | 5,400 | 4,930 | |||||||||
| Real estate contracts (non ASC 606 revenues) | 3,609 | 3,712 | |||||||||
| Surface revenue (non ASC 606 revenues) | 103 | 861 | |||||||||
| Total revenues | $ | 98,808 | $ | 129,395 | |||||||
4. 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 | March 31, 2021 | December 31, 2020 | |||||||||||||||
| (Years) | (In thousands) | ||||||||||||||||
| Buildings | 20-30 | $ | 103,979 | $ | 102,918 | ||||||||||||
| Tenant improvements | 15 | 4,506 | 4,506 | ||||||||||||||
| Land | N/A | 2,437 | 2,437 | ||||||||||||||
| Land improvements | 15 | 484 | 484 | ||||||||||||||
| Total real estate assets | 111,406 | 110,345 | |||||||||||||||
| Less: accumulated depreciation | (14,655) | (13,658) | |||||||||||||||
| Total investment in real estate, net | $ | 96,751 | $ | 96,687 | |||||||||||||
| As of | |||||||||||||||||
| Weighted Average Useful Lives | March 31, 2021 | December 31, 2020 | |||||||||||||||
| (Months) | (In thousands) | ||||||||||||||||
| In-place lease intangibles | 45 | $ | 11,435 | $ | 11,405 | ||||||||||||
| Less: accumulated amortization | (9,149) | (8,980) | |||||||||||||||
| In-place lease intangibles, net | 2,286 | 2,425 | |||||||||||||||
| Above-market lease intangibles | 45 | 3,623 | 3,623 | ||||||||||||||
| Less: accumulated amortization | (1,859) | (1,786) | |||||||||||||||
| Above-market lease intangibles, net | 1,764 | 1,837 | |||||||||||||||
| Total intangible lease assets, net | $ | 4,050 | $ | 4,262 | |||||||||||||
Depreciation and amortization expense for real estate assets was $1.2 million and $1.8 million for the three months ended March 31, 2021 and 2020, respectively.
8
Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
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 | |||||||||||||||||||||||||||
| $ | 502 | $ | 562 | $ | 674 | $ | 785 | $ | 811 | $ | 716 | |||||||||||||||||||||
5. PROPERTY, PLANT AND EQUIPMENT
The following table sets forth the Partnership’s property, plant and equipment:
| As of | |||||||||||||||||
| Estimated | March 31, | December 31, | |||||||||||||||
| Useful Lives | 2021 | 2020 | |||||||||||||||
| (Years) | (In thousands) | ||||||||||||||||
| Produced water disposal systems | 10-30 | $ | 657,200 | $ | 654,545 | ||||||||||||
Crude oil gathering systems(1) | 30 | 134,644 | 133,998 | ||||||||||||||
Natural gas gathering and compression systems(1) | 10-30 | 113,455 | 112,072 | ||||||||||||||
Sourced water gathering systems(1) | 30 | 112,275 | 112,162 | ||||||||||||||
| Total property, plant and equipment | 1,017,574 | 1,012,777 | |||||||||||||||
| Less: accumulated depreciation, amortization and accretion | (110,491) | (100,728) | |||||||||||||||
| Land | N/A | 85,826 | 85,826 | ||||||||||||||
| Total property, plant and equipment, net | $ | 992,909 | $ | 997,875 | |||||||||||||
(1)Included in gathering systems are $16.8 million and $27.5 million of assets at March 31, 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 $9.8 million and $10.7 million for the three months ended March 31, 2021 and 2020, respectively.
Capitalized internal costs and capitalized interest related to property, plant and equipment were immaterial for the three months ended March 31, 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. Impairment charges related to abandoned projects totaling $3.4 million were recorded during the three months ended March 31, 2021. During the three months ended March 31, 2020, the Partnership incurred immaterial losses related to weather damage at certain produced water disposal facilities, which are reflected in (gain) loss on disposal of property, plant and equipment in the condensed consolidated statement of operations. 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.
9
Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
6. EQUITY METHOD INVESTMENTS
The following table presents the carrying values of the Partnership’s equity method investments as of the dates indicated:
| Ownership Interest | March 31, 2021 | December 31, 2020 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| EPIC Crude Holdings, LP | 10 | % | $ | 115,844 | $ | 120,863 | |||||||||||
| Gray Oak Pipeline, LLC | 10 | % | 126,893 | 130,353 | |||||||||||||
Wink to Webster Pipeline LLC (1) | 4 | % | 85,731 | 82,631 | |||||||||||||
| OMOG JV LLC | 60 | % | 191,492 | 193,726 | |||||||||||||
Amarillo Rattler, LLC (2) | 50 | % | 5,118 | 5,354 | |||||||||||||
| Total | $ | 525,078 | $ | 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)On April 30, 2021, the Partnership sold its interest in the Amarillo Rattler joint venture. See Note 15 —Subsequent Events for further discussion.
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 March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| EPIC Crude Holdings, LP | $ | (5,436) | $ | (2,183) | |||||||
| Gray Oak Pipeline, LLC | 2,298 | 582 | |||||||||
| Wink to Webster Pipeline LLC | (563) | 188 | |||||||||
| OMOG JV LLC | 1,115 | 1,334 | |||||||||
| Amarillo Rattler, LLC | (237) | (166) | |||||||||
| Total | $ | (2,823) | $ | (245) | |||||||
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 three months ended March 31, 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. No other impairments were recorded for the Partnership’s equity method investments for the three months ended March 31, 2021 or 2020. The entities in which the Partnership is invested all serve customers in the oil and natural gas industry, which has been experiencing economic challenges as described above. It is possible that prolonged industry challenges could result in circumstances requiring impairment testing, which could result in potentially material impairment charges in future interim periods.
7. DEBT
Long-term debt consisted of the following as of the dates indicated:
| March 31, 2021 | December 31, 2020 | ||||||||||
| (In thousands) | |||||||||||
5.625% Senior Notes due 2025 | $ | 500,000 | $ | 500,000 | |||||||
| Operating Company revolving credit facility | 54,000 | 79,000 | |||||||||
| Unamortized debt issuance costs | (8,550) | (9,053) | |||||||||
| Total long-term debt | $ | 545,450 | $ | 569,947 | |||||||
10
Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
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 March 31, 2021, the Operating Company had $54.0 million of outstanding borrowings and $546.0 million available for future borrowings under the Credit Agreement. During the three months ended March 31, 2021 and 2020, the weighted average interest rate on borrowings under the Credit Agreement was 1.40% and 2.79%, respectively.
As of March 31, 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 to the Operating Company, which used such proceeds to pay down borrowings under the Credit Agreement.
The Notes are senior unsecured obligations of the Partnership, rank equally in right of payment with all of the Partnership’s existing and future senior indebtedness it may incur and initially are guaranteed on a senior unsecured basis by the Operating Company, Tall Towers, Rattler OMOG LLC and Rattler Ajax Processing LLC. Neither Diamondback nor the General Partner guarantee the Notes. In the future, each of the Partnership’s restricted subsidiaries that either (i) guarantees any of its or a guarantor’s other indebtedness or (ii) is classified as a domestic restricted subsidiary under the indenture governing the Notes and is an obligor with respect to any indebtedness under any credit facility will be required to guarantee the Notes.
8. 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 March 31, 2021, a total of 14,842,071 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.
11
Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
The following table presents the phantom unit activity under the LTIP for the three months ended March 31, 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 | (4,755) | $ | 12.59 | ||||||||
| Forfeited | (13,385) | $ | 5.79 | ||||||||
| Unvested at March 31, 2021 | 2,282,159 | $ | 16.59 | ||||||||
The aggregate fair value of phantom units that vested during the three months ended March 31, 2021 was $0.1 million. As of March 31, 2021, the unrecognized compensation cost related to unvested phantom units was $30.2 million, and is expected to be recognized over a weighted-average period of 3.04 years. For the three months ended March 31, 2021 and 2020, the Partnership incurred $2.3 million and $2.2 million, respectively, of unit–based compensation expense.
9. UNITHOLDERS’ EQUITY AND DISTRIBUTIONS
The Partnership has general partner and limited partner units. At March 31, 2021, the Partnership had a total of 41,277,589 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. Diamondback also beneficially owns 107,815,152 Operating Company units, representing a 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 months ended March 31, 2021, the Partnership repurchased approximately $11.1 million of common units under the repurchase program. As of March 31, 2021, $74.1 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. The following table summarizes changes in the ownership interest in consolidated subsidiaries during the period:
| Three Months Ended March 31, 2021 | |||||
| (In thousands) | |||||
| Net income (loss) attributable to the Partnership | $ | 6,015 | |||
| Change in ownership of consolidated subsidiaries | 712 | ||||
| Change from net income (loss) attributable to the Partnership's unitholders and transfers to non-controlling interest | $ | 6,727 | |||
There were no changes in ownership of consolidated subsidiaries during the three months ended March 31, 2020.
12
Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
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 April 28, 2021, the board of directors of the General Partner approved a cash distribution for the first quarter of 2021 of 0.20 per Operating Company unit and per common unit. Distributions due to common unitholders are payable on May 21, 2021, to common unitholders of record at the close of business on May 14, 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 months ended March 31, 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 | |||||||||||||||||||||||||||||
10. 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 months ended March 31, 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.
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands, except per unit amounts) | |||||||||||
| Net income (loss) attributable to Rattler Midstream LP | $ | 6,015 | $ | 13,031 | |||||||
Less: net (income) loss allocated to participating securities(1) | (418) | (652) | |||||||||
| Net income (loss) attributable to common unitholders | $ | 5,597 | $ | 12,379 | |||||||
| Weighted average common units outstanding: | |||||||||||
| Basic weighted average common units outstanding | 41,742 | 43,700 | |||||||||
| Effect of dilutive securities: | |||||||||||
Potential common units issuable(2) | — | — | |||||||||
| Diluted weighted average common units outstanding | 41,742 | 43,700 | |||||||||
| Net income per common unit, basic | $ | 0.13 | $ | 0.28 | |||||||
| Net income per common unit, diluted | $ | 0.13 | $ | 0.28 | |||||||
(1) Distribution equivalent rights granted to employees are considered participating securities.
(2) For the three months ended March 31, 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.
13
Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
11. RELATED PARTY TRANSACTIONS
Related party transactions include transactions with Diamondback. Among other agreements, the Partnership is a party to the following related party agreements with Diamondback.
Commercial Agreements
The Partnership derives substantially all of its revenue from its commercial agreements with Diamondback for the provision of midstream services. Revenues generated from commercial agreements with Diamondback consist of the following:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Produced water gathering and disposal | $ | 64,306 | $ | 79,101 | |||||||
| Sourced water gathering | 15,243 | 30,003 | |||||||||
| Natural gas gathering | 5,400 | 4,930 | |||||||||
| Crude oil gathering | 2,030 | 2,533 | |||||||||
| Surface revenue | 99 | 16 | |||||||||
| Total | $ | 87,078 | $ | 116,583 | |||||||
12. INCOME TAXES
The Partnership’s effective income tax rates were 6.1% and 6.5% for the three months ended March 31, 2021 and 2020, respectively. The decrease in the effective income tax rate for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, is primarily due to the impact of income attributable to the non-controlling interest and to state income taxes for the period.
For the three months ended March 31, 2021 and 2020, net income from continuing operations reflects income tax expense of $1.7 million and $3.8 million, respectively. Total income tax expense for the three months ended March 31, 2021 and 2020 differed from applying the U.S. statutory corporate income tax rate to pre-tax income primarily due to income attributable to the non-controlling interest and to state income taxes, net of federal benefit.
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. 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 March 31, 2021.
The American Rescue Plan was enacted on March 11, 2021 and the Coronavirus Aid, Relief, and Economic Security Act was enacted on March 27, 2020, which included a number of provisions applicable to U.S. income taxes for corporations. The Partnership has considered the impact of this legislation in the period of enactment and concluded there was not a material impact to the Partnership’s current or deferred income tax balances.
13. 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.
14
Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
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:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
Carrying Value(1) | Fair Value | Carrying Value(1) | Fair Value | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Debt: | |||||||||||||||||||||||
5.625% Senior Notes due 2025 | $ | 491,450 | $ | 521,950 | $ | 490,947 | $ | 528,125 | |||||||||||||||
| Operating Company revolving credit facility | $ | 54,000 | $ | 54,000 | $ | 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 March 31, 2021 quoted market price, a Level 1 classification in the fair value hierarchy.
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.
14. 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
As of March 31, 2021, the Partnership’s anticipated future capital commitments for its equity method investments include $8.7 million for the remainder of 2021 and $25.9 million in aggregate and reflect a reduction in future commitments due to the sale of Amarillo Rattler in April 2021.
15
Rattler Midstream LP
Condensed Notes to Consolidated Financial Statements - Continued
(Unaudited)
15. SUBSEQUENT EVENTS
Cash Distribution
On April 28, 2021, the board of directors of the General Partner approved a cash distribution for the first quarter of 2021 of 0.20 per common unit, payable on May 21, 2021, to unitholders of record at the close of business on May 14, 2021.
Divestitures
On April 22, 2021, the Partnership signed a definitive agreement to sell one of its real estate properties located in Midland, Texas for estimated proceeds of $10 million, subject to certain closing adjustments. This transaction is expected to close in the second quarter of 2021.
On April 30, 2021, each of Rattler and its joint venture partner Amarillo Midstream, LLC sold its 50% interest in Amarillo Rattler to EnLink Midstream Operating, LP for aggregate total gross potential consideration of $75 million, consisting of $50 million at closing, $10 million upon the first anniversary of closing and up to $15 million in contingent earn-out payments over a three-year span based upon Diamondback's development activity. Net of transaction expenses and working capital adjustments, the Partnership received $23.5 million at closing, with an incremental $5 million due in April 2022 and could receive up to $7.5 million in contingent payments from 2023 to 2025.
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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 March 31, 2021, our general partner held a 100% general partner interest in us. Diamondback held no common units and beneficially owned all of our 107,815,152 outstanding Class B units, representing approximately 72% of our total units outstanding. Diamondback also owns and controls our general partner.
As of March 31, 2021, we owned 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 then 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 ongoing 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 in the third and fourth quarters of 2020. As a result, we adjusted our operations to this new level of completion and production activity in the second half of 2020 and continue to do so in 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 continue to reduce operated capital expenditures towards a total of approximately half of 2020 levels. 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 depressed commodity price environment.
Divestitures
On April 22, 2021, we signed a definitive agreement to sell one of our real estate properties located in Midland Texas for proceeds of approximately $10 million, subject to certain closing adjustments. This transaction is expected to close in the second quarter of 2021.
On April 30, 2021, we and our joint venture partner, Amarillo Midstream, LLC, sold our respective interests in Amarillo Rattler for aggregate total gross potential consideration of $75 million, consisting of $50 million at closing, $10 million upon the first anniversary of closing and up to $15 million in contingent earn-out payments over a three-year span based upon Diamondback's development activity. Net of transaction expenses and working capital adjustments, we received $23.5 million at closing, with an incremental $5 million due in April 2022, and could receive up to $7.5 million in contingent payments from 2023 to 2025.
Operational Update
Highlights
For the three months ended March 31, 2021, as compared with the three months ended March 31, 2020:
•average crude oil gathering volumes were 85,210 Bbl/d, a decrease of 12% year over year;
•average natural gas gathering volumes were 130,437 MMBtu/d, an increase of 11% year over year;
•average produced water gathering and disposal volumes were 765,588 Bbl/d, a decrease of 19% year over year; and
•average sourced water gathering volumes were 267,834 Bbl/d, a decrease of 40% year over year.
Pipeline Infrastructure Assets
The following tables provide information regarding our gathering, compression and transportation system as of March 31, 2021 and utilization for the quarter ended March 31, 2021:
(Miles)(1) | Delaware Basin | Midland Basin | Permian Total | ||||||||||||||
| Crude oil | 108 | 46 | 154 | ||||||||||||||
| Natural gas | 157 | — | 157 | ||||||||||||||
| Produced water | 274 | 250 | 524 | ||||||||||||||
| Sourced water | 27 | 74 | 101 | ||||||||||||||
| Total | 566 | 370 | 936 | ||||||||||||||
(Capacity/capability)(1) | Delaware Basin | Midland Basin | Permian Total | Utilization | |||||||||||||||||||
| Crude oil gathering (Bbl/d) | 210,000 | 65,000 | 275,000 | 31 | % | ||||||||||||||||||
| Natural gas compression (Mcf/d) | 151,000 | — | 151,000 | 62 | % | ||||||||||||||||||
| Natural gas gathering (Mcf/d) | 180,000 | — | 180,000 | 53 | % | ||||||||||||||||||
| Produced water gathering and disposal (Bbl/d) | 1,330,000 | 1,805,000 | 3,135,000 | 24 | % | ||||||||||||||||||
| Sourced water gathering (Bbl/d) | 120,000 | 455,000 | 575,000 | 47 | % | ||||||||||||||||||
(1)Does not include any assets of the EPIC, Gray Oak, Wink to Webster, Amarillo Rattler or OMOG joint ventures.
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Factors Impacting Our Business
We expect our business to continue to be affected by the key factors discussed below. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, our actual results may vary materially from our expected results.
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. Our crude oil infrastructure assets consist of gathering pipelines and metering facilities, which collectively gather crude oil for our customers. Our facilities gather crude oil from horizontal and vertical wells in Diamondback’s ReWard, Spanish Trail, Pecos and Glasscock areas within the Permian. Our natural gas gathering and compression system consists of gathering pipelines, compression and metering facilities, which collectively service the production from Diamondback’s Pecos area assets within the Permian. Our water sourcing and distribution assets consist of water wells, hydraulic fracturing pits, pipelines and water treatment facilities, which collectively gather and distribute water from Permian aquifers to the drilling and completion sites through buried pipelines and temporary surface pipelines. Our produced water gathering and disposal system spans approximately 524 miles and consists of gathering pipelines along with produced water disposal wells and facilities which collectively gather and dispose of produced water from operations throughout Diamondback’s Permian acreage.
Our contracts with Diamondback promote cash flow stability and minimize our direct exposure to commodity price fluctuations, since we generally do not own any of the crude oil, natural gas or water that we gather and do not engage in the trading of crude oil or natural gas. However, the volumetric fees we charge are adjusted each calendar year by the amount of percentage change, if any, in the consumer price index from the preceding calendar year. No adjustment will be made if the percentage change would result in a fee below the initial fee set forth in the applicable commercial agreement and any adjustment to the volumetric fees shall not exceed 3% of the then-current fee. Further, the total adjustment of the fees shall never result in a cumulative volumetric fee adjustment of more than 30% of the initial fees set forth in the applicable commercial agreement
Supply and Demand for Crude Oil and Natural Gas
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. Generally, drilling and production activity will increase as crude oil and natural gas prices increase. Our throughput volumes depend primarily on the volumes of crude oil and natural gas produced by Diamondback in the Permian and, with respect to sourced water, the number of wells drilled and completed. 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. The commodities trading markets, as well as other supply and demand factors, may also influence the selling prices of 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.
Regulatory Compliance
The regulation of crude oil and natural gas gathering and transportation and water services activities by federal and state regulatory agencies has a significant impact on our business. Our operations are also impacted by new regulations, which have increased the time that it takes to obtain required permits.
Additionally, increased regulation of crude oil and natural gas producers in our areas of operation, including regulation associated with hydraulic fracturing, could reduce regional supply of crude oil, natural gas and water and, therefore, throughput on our infrastructure assets.
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Results of Operations
The following table sets forth selected historical operating data for the periods indicated:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands, except operating data) | |||||||||||
| Revenues: | |||||||||||
| Revenues—related party | $ | 87,078 | $ | 116,583 | |||||||
| Revenues—third party | 8,121 | 9,100 | |||||||||
| Other income—related party | 2,540 | 1,518 | |||||||||
| Other income—third party | 1,069 | 2,194 | |||||||||
| Total revenues | 98,808 | 129,395 | |||||||||
| Costs and expenses: | |||||||||||
| Direct operating expenses | 32,511 | 32,874 | |||||||||
| Cost of goods sold (exclusive of depreciation and amortization) | 8,811 | 15,961 | |||||||||
| Real estate operating expenses | 517 | 728 | |||||||||
| Depreciation, amortization and accretion | 11,246 | 12,506 | |||||||||
| Impairment and abandonments | 3,371 | — | |||||||||
| General and administrative expenses | 4,634 | 4,514 | |||||||||
| (Gain) loss on disposal of property, plant and equipment | 6 | 1,538 | |||||||||
| Total costs and expenses | 61,096 | 68,121 | |||||||||
| Income from operations | 37,712 | 61,274 | |||||||||
| Other income (expense): | |||||||||||
| Interest income (expense), net | (7,310) | (2,621) | |||||||||
| Income (loss) from equity method investments | (2,823) | (245) | |||||||||
| Total other income (expense), net | (10,133) | (2,866) | |||||||||
| Net income (loss) before income taxes | 27,579 | 58,408 | |||||||||
| Provision for (benefit from) income taxes | 1,671 | 3,820 | |||||||||
| Net income (loss) | 25,908 | 54,588 | |||||||||
| Less: Net income (loss) attributable to non-controlling interest | 19,893 | 41,557 | |||||||||
| Net income (loss) attributable to Rattler Midstream LP | $ | 6,015 | $ | 13,031 | |||||||
| Operating Data: | |||||||||||
Throughput(1) | |||||||||||
| Crude oil gathering (Bbl/d) | 85,210 | 97,293 | |||||||||
| Natural gas gathering (MMBtu/d) | 130,437 | 117,761 | |||||||||
| Produced water gathering and disposal (Bbl/d) | 765,588 | 941,628 | |||||||||
| Sourced water gathering (Bbl/d) | 267,834 | 446,713 | |||||||||
(1) Does not include any volumes from the EPIC, Gray Oak, Wink to Webster, Amarillo Rattler or OMOG joint ventures.
Comparison of the Three Months Ended March 31, 2021 and 2020
Revenues
Revenues decreased by $30.6 million to $98.8 million for the three months ended March 31, 2021 from $129.4 million for the three months ended March 31, 2020, primarily due to a reduction in sourced and produced water volumes due to Diamondback’s lower level of drilling and completion activity in the first quarter of 2021.
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Direct Operating Expenses
Direct operating expenses decreased by $0.4 million to $32.5 million for the three months ended March 31, 2021 from $32.9 million for the three months ended March 31, 2020. The decrease is 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) decreased by $7.2 million to $8.8 million for the three months ended March 31, 2021 from $16.0 million for the three months ended March 31, 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.
Depreciation, Amortization and Accretion
Depreciation, amortization and accretion was $11.2 million and $12.5 million for the three months ended March 31, 2021 and 2020, respectively. The decrease of $1.3 million was largely due to abandoned and sold assets during the fourth quarter of 2020 and first quarter of 2021, which reduced our asset base. In addition, a large number of assets were placed into service in the first quarter of 2020.
Impairment and Abandonments
Impairment and abandonments expense for the three months ended March 31, 2021 of $3.4 million related to capital projects that were abandoned due to capital budgeting and operational changes in plans.
Interest Expense, Net
Net interest expense was $7.3 million for the three months ended March 31, 2021, compared to $2.6 million for the three months ended March 31, 2020. This increase was primarily due to interest accrued on the notes which were issued in July 2020 and bear interest at a rate of 5.625% per annum.
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 (“net income (loss)”) before income taxes, 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 property, plant and equipment, 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 March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Reconciliation of Net Income (Loss) to Adjusted EBITDA: | |||||||||||
| Net income (loss) attributable to Rattler Midstream LP | $ | 6,015 | $ | 13,031 | |||||||
| Net income (loss) attributable to non-controlling interest | 19,893 | 41,557 | |||||||||
| Net income (loss) | 25,908 | 54,588 | |||||||||
| Interest expense, net of amount capitalized | 7,310 | 2,621 | |||||||||
| Depreciation, amortization and accretion | 11,246 | 12,506 | |||||||||
| Depreciation and interest expense related to equity method investments | 10,525 | 3,766 | |||||||||
| Impairments and abandonments related to equity method investments | 2,933 | — | |||||||||
| Non-cash unit-based compensation expense | 2,332 | 2,219 | |||||||||
| Impairment and abandonments | 3,371 | — | |||||||||
| (Gain) loss on disposal of property, plant and equipment | 6 | 1,538 | |||||||||
| Provision for income taxes | 1,671 | 3,820 | |||||||||
| Other | 12 | (78) | |||||||||
| Adjusted EBITDA | 65,314 | 80,980 | |||||||||
| Less: Adjusted EBITDA attributable to non-controlling interest | 47,135 | 57,624 | |||||||||
| Adjusted EBITDA attributable to Rattler Midstream LP | $ | 18,179 | $ | 23,356 | |||||||
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 depressed commodity markets and/or adverse macroeconomic conditions may limit our access to, or increase our cost of, capital or make capital unavailable on terms acceptable to us or at all.
Cash Distributions on Common Units
On April 28, 2021, the board of directors of our general partner approved a cash distribution for the first quarter of 2021 of 0.20 per common unit, payable on May 21, 2021, to common unitholders of record at the close of business on May 14, 2021. The board of directors of our general partner may change the distribution policy at any time and from time to time. See Note 9 —Unitholders’ Equity and Distributions for additional discussion of our distribution policy.
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Cash Flows
The following table presents our cash flows for the periods indicated:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Cash Flow Data: | |||||||||||
| Net cash provided by (used in) operating activities | $ | 52,668 | $ | 97,987 | |||||||
| Net cash provided by (used in) investing activities | (416) | (74,806) | |||||||||
| Net cash provided by (used in) financing activities | (66,419) | (17,631) | |||||||||
| Net increase (decrease) in cash | $ | (14,167) | $ | 5,550 | |||||||
Operating Activities
Net cash provided by operating activities decreased by $45.3 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due primarily to a $30.6 million decline in revenues and an increase in cash paid for interest of $11.7 million. The remaining reduction is largely due to changes in working capital, including the timing of when collections are made on accounts receivable and payments are made on accounts payable and accrued liabilities.
Investing Activities
Net cash used in investing activities was $0.4 million and $74.8 million during the three months ended March 31, 2021 and 2020, respectively, and was primarily related to additions to property, plant and equipment and contributions to our equity method investments, which were partially offset by distributions from our Gray Oak and OMOG equity method investments. The decrease in cash used in investing activities is the result of our equity method joint venture build cycle nearing its end and a change from a net outflow of capital contributions to a net inflow of cash distributions. See Note 6—Equity Method Investments included in the condensed notes to the consolidated financial statements included elsewhere in this report for further discussion.
Financing Activities
Net cash used in financing activities was $66.4 million during the three months ended March 31, 2021, and primarily related to distributions of $29.8 million to our unitholders, net payments on the credit facility of $25.0 million and $11.1 million in repurchases of common units under our repurchase program.
Net cash used in financing activities was $17.6 million during the three months ended March 31, 2020, and primarily related to distributions to our unitholders of $44.0 million partially offset by proceeds from borrowings on our credit facility of $27.0 million.
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 three months ended March 31, 2021, we repurchased approximately $11.1 million of common units under the repurchase program. As of March 31, 2021, $74.1 million remained available for use to repurchase common units under our common unit repurchase 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 a time 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
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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 three months ended March 31, 2021, our total capital expenditures were $5.9 million, of which $3.8 million was related to produced water disposal assets, $0.6 million was related to crude oil gathering assets, $0.4 million was related to natural gas gathering assets and $1.1 million was related to real estate assets. We estimate that our total capital expenditures related to midstream assets for 2021 will be between $60 million and $80 million, excluding our anticipated total capital commitments related to our equity method investments of approximately $10 million to $20 million. We also estimate that our distributions related to 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 depressed crude oil prices on our business.
We own equity interests in the EPIC, Gray Oak, Wink to Webster, Amarillo Rattler 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 | $ | 136,534 | $ | 3,466 | ||||||||||||||||
| Gray Oak Pipeline, LLC | 10 | % | February 15, 2019 | $ | 142,096 | $ | — | ||||||||||||||||
| Wink to Webster Pipeline LLC | 4 | % | July 30, 2019 | $ | 86,099 | $ | 21,901 | ||||||||||||||||
| OMOG JV LLC | 60 | % | October 1, 2019 | $ | 218,555 | $ | — | ||||||||||||||||
| Amarillo Rattler, LLC | 50 | % | December 20, 2019 | $ | 5,200 | $ | 500 | ||||||||||||||||
As of March 31, 2021, our anticipated future capital commitments for our equity method investments include $8.7 million for the remainder of 2021 and total $25.9 million in aggregate. As discussed in Note 15— Subsequent Events, on April 30, 2021, we sold our investment in Amarillo Rattler, LLC. For further discussion regarding these investments see Note 6 — Equity Method Investment.
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
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 March 31, 2021, there was $54.0 million of outstanding borrowings, and $546.0 million available for future borrowings, under the Operating Company’s revolving credit facility.
As of March 31, 2021, the Operating Company was in compliance with all financial covenants under its credit agreement.
For additional information regarding the revolving credit facility, see Note 7—Debt included in the condensed notes to the consolidated financial statements included elsewhere in this report.
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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 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.
Contractual Obligations
Except as may be discussed in Note 7—Debt and Note 14—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.
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.
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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 March 31, 2021, we had $54.0 million of outstanding borrowings and $546.0 million available for future borrowings under the credit agreement. During the three months ended March 31, 2021, the weighted average interest rate on borrowings under the credit agreement was 1.40%.
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 March 31, 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 March 31, 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 March 31, 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 14—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.
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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.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None.
Issuer Repurchases of Equity Securities
Our common unit repurchase activity for the three months ended March 31, 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) | ||||||||||||||||||||||||||
| January 1, 2021 - January 31, 2021 | 433,569 | $ | 10.02 | 433,569 | $ | 80,914 | ||||||||||||||||||||
| February 1, 2021 - February 28, 2021 | 411,041 | $ | 10.28 | 411,041 | $ | 76,688 | ||||||||||||||||||||
| March 1, 2021 - March 31, 2021 | 239,193 | $ | 10.72 | 237,245 | $ | 74,145 | ||||||||||||||||||||
| Total | 1,083,803 | $ | 10.27 | 1,081,855 | ||||||||||||||||||||||
(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, our board of directors 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 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 3.5 | ||||||||
| 3.6 | ||||||||
| 3.7 | ||||||||
| 3.8 | ||||||||
| 3.9 | ||||||||
| 4.1 | ||||||||
| 10.1 | ||||||||
| 21.1 | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 101 | The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 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: | May 5, 2021 | By: | /s/ Travis D. Stice | ||||||||
| Travis D. Stice | |||||||||||
| Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Date: | May 5, 2021 | By: | /s/ Teresa L. Dick | ||||||||
| Teresa L. Dick | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
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