Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) and unsecured ratings of
The ratings have been removed from Rating Watch Negative, and a Stable Outlook has been assigned. Fitch has also assigned an IDR and senior unsecured ratings of 'BBB' to
The affirmation of the ratings and Stable Outlook reflects the clearer operational and more de-risked capital allocation plan, in conjunction with a more supportive pricing environment, since the transaction announcement which should materially improve the near-term FCF profile and reduces overall execution risk for management's debt repayment plan. Fitch also believes the potential for non-core asset sales could further accelerate gross debt reduction and anticipates any cash flow will be prioritized towards gross debt repayment. The current $65+/bbl Brent oil price environment provides considerable cash flow headroom and supports the company's deleveraging capacity.
KEY RATING DRIVERS
High-Grading, FCF Generative Assets: Fitch views Diamondback's pro forma asset profile favorably, given QEP and Guidon's adjacent acreage, which immediately compete for capital. Their sizeable proved developed producing reserves (PDP) streams also incrementally add FCF. The transactions add approximately 65 mboepd of core Permian production in 2021 and high-grades Diamondback's drilling inventory, which enhances production and capital efficiencies and should improve overall returns.
Diamondback expects to maintain its low-cost structure with LOE expenses of approximately
FCF Forecast, Credit-Conscious Allocation: Fitch's base case forecasts approximately
Cash flows in 2021 are supported by Diamondback's current hedge position with approximately 65% of expected oil production hedged at an average price of approximately
Leveraging Transaction, Deleveraging Capacity: Fitch recognizes that the transactions are leveraging near term, but expect deleveraging in 2021 through gross debt reduction. Fitch believes the high-graded pro forma asset profile and currently supportive pricing environment combined with Diamondback's current hedge position provides support for FCF generation and gross debt repayment capacity. Fitch's base case forecasts gross debt/EBITDA of 2.4x in 2021, dropping to 1.7x in 2022 as management executes its gross debt reduction plan. The potential disposition of QEP's Williston assets would also accelerate gross debt repayment.
Supportive MLP Affiliates: Diamondback has two publicly traded MLP affiliates, 71% ownership in
DERIVATION SUMMARY
Diamondback is among the largest
Fitch believes
Diamondback's standalone, unhedged half-cycle netbacks of
The combinations of ConocoPhillips-Concho, Pioneer-Parsley, and Devon-WPX have largely resulted in positive rating momentum due to the increase in size and scale, while maintaining sub-1.5x leverage metrics. Diamondback's transactions more modestly increase production size, while maintaining leverage in the 2x range which are both consistent with 'BBB' rating tolerances.
KEY ASSUMPTIONS
WTI oil price of
Pro forma production of about 370 mboepd (nearly 60% oil) in 2021 followed by annual low-to-mid single digit growth thereafter;
Field-level and DC&E costs stay relatively flat through the forecast on a boe basis;
Pre-QEP Capex of
Prioritization of FCF towards 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:
Continued credit conscious portfolio management initiatives that expand the company's economic drilling inventory;
Increased size and scale evidenced by production trending above 550 mboe/d with some combination of the following:
Stand-alone mid-cycle debt/EBITDA below 1.5x (FFO adjusted leverage below 1.5x) on a sustained basis;
Stand-alone debt/flowing barrel below
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Inability to execute on gross debt reduction targets.
Stand-alone mid-cycle debt/EBITDA above 2.5x (FFO adjusted leverage above 2.5x) on a sustained basis;
Stand-alone mid-cycle debt/flowing barrel 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
Adequate Liquidity: Stand-alone cash and equivalents were approximately
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 two separate MLP structures 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.
RATING ACTIONSENTITY/DEBT RATING PRIOR
QEP Resources, Inc. LT IDR BBB New Rating WD
senior unsecured
LT BBB New Rating
Diamondback Energy, Inc. LT IDR BBB Affirmed BBB
senior unsecured
LT BBB Affirmed BBB
Diamondback O&G LLC LT IDR BBB Affirmed BBB
senior unsecured
LT BBB Affirmed BBB
Energen Corporation LT IDR BBB Affirmed BBB
senior unsecured
LT BBB Affirmed BBB
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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