Fitch Ratings has assigned a 'BBB' rating to
Diamondback intends to use the proceeds from the notes, approximately 5.86 million shares of Diamondback common stock and cash on hand to fund the purchase price of the recently announced
Diamondback's 'BBB' rating reflects its high-quality, oil-oriented Permian production and a proved reserve base, competitive full-cycle break-even oil prices, expectation for substantial FCF generation and a sub-1.5x mid-cycle leverage profile. Credit concerns are limited and include Diamondback's single-basin focus, resulting in limited geographic, operational and hydrocarbon diversification.
Key Rating Drivers
Credit-Neutral Transaction: The company's proposed notes issuance and announced acquisition of Firebird is neutral to the credit profile given the large equity issuance, representing approximately 50% of the total purchase price, and expectation for further debt reduction in the near-term. Fitch expects the company will utilize its reserve-based lending credit facility (RBL) to fund a portion of the cash payment for FireBird although borrowings are expected to be reduced shortly after close given the robust FCF generation at current commodity prices. Management has also announced a
High-Quality, Accretive Assets: Fitch believes the FireBird acquisition is accretive to Diamondback's asset profile given the high quality, undeveloped inventory and the adjacent acreage position which should enhance production and capital efficiencies and improve overall returns. The transaction adds approximately 68,000 net acres in the
Robust FCF, Credit-Conscious Allocation: Fitch's base case forecasts approximately
Sub-1.5x Mid-Cycle Leverage: Fitch's base case forecasts gross debt/EBITDA of below 0.8x in 2022 and 0.9x in 2023 which moderates towards approximately 1.4x at Fitch's
Supportive MLP Affiliates: Diamondback has one publicly traded MLP affiliates with its approximately 54% ownership in
Derivation Summary
Diamondback is among the largest
Fitch believes
Diamondback's standalone, unhedged half-cycle netbacks of
Key Assumptions
WTI Oil price of
FireBird transaction closes in late 4Q22;
Average production of 380 mboepd in 2022 followed by acquisition growth in 2023 and annual low-to-mid single digit growth thereafter;
Post-close capex of approximately
Prioritization of FCF toward gross debt reduction;
Measured increases in shareholder returns following achievement of net debt targets.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Increased size and scale evidenced by production trending above 550 mboe/d while maintaining economic drilling inventory;
Standalone mid-cycle debt/EBITDA below 1.5x on a sustained basis;
Standalone debt/PD at or below
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Standalone mid-cycle debt/EBITDA above 2.5x on a sustained basis;
Standalone debt/PD above
Material loss of operational momentum leading to lower than expected production volumes (250 mboe/d or lower) over a sustained period.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Ample Liquidity: Standalone cash and equivalents were approximately
Fitch expects the company will utilize RBL capacity to fund a portion of the cash consideration of the FireBird transaction, but borrowings are expected to be repaid shortly after close. Additional potential liquidity sources include noncore E&P asset sales or other activities with Rattler and Viper affiliates.
Issuer Profile
Diamondback is an independent energy company engaged in the exploration and development of onshore
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Diamondback has an ESG Relevance Score of '4' for Group Structure as the company has a complex group structure with one separate MLP structure related to
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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