Fitch Ratings has assigned a 'BBB' rating to
The company intends to use the net proceeds from the notes to pay a portion of the cash consideration for the
The RWP placement follows the announcement that Diamondback has entered into a definitive agreement to merge with
Fitch expects to resolve the Rating Watch upon closing of the transaction, which is currently expected in 2Q24 subject to customary closing conditions. Fitch recognizes the closing of the transaction and resolution of the RWP could take longer than six months.
Key Rating Drivers
Credit-Accretive Merger, Funding Mix: Fitch views Diamondback's announced merger with Endeavor favorably given it is nearly 70% stock-funded and will have minimal impact on pro forma mid-cycle leverage metrics. Management remains committed to reducing pro forma net debt to below
Highly Accretive Midland Basin Assets: Endeavor's large, low-cost Midland basin asset base will increase both Diamondback's total acreage and production size by approximately 70% and 75%, respectively, and will be immediately accretive to operating and cash flow metrics. The pro forma company will hold approximately 838,000 net acres in the Permian (83% in the
Both standalone companies had the lowest Fitch-calculated production expenses per barrel among IG peers and consistently generate peer-leading Fitch-calculated cash netbacks supported by their high oil mix. Fitch expects the pro forma cost structure will improve further given the expectation of meaningful synergy realization post-close.
Significant FCF; Synergy Opportunities: Fitch forecasts significant FCF generation from the pro forma company and believes synergy opportunities associated with the deal are achievable post-close. Management has outlined approximately
By combining two peer-leading cost structures, Fitch expects immediate FCF accretion and forecasts over
Sub-1.5x Leverage; Disciplined FCF Allocation: Fitch's pro forma base case forecasts gross debt/EBITDA of 1.1x in 2025 and similar levels in 2027 at our
Supportive Affiliates: Diamondback has one publicly-traded affiliate with its approximately 48% ownership in
Derivation Summary
Pro forma the merger, Diamondback will be among the largest producers in Fitch's rated coverage. With pro forma production of approximately 815 Mboepd, Diamondback will be larger than standalone
Fitch believes
Diamondback's standalone, unhedged half-cycle netbacks are consistently toward the high end of Fitch's Permian peer average given the high liquids mix and low-cost nature of the asset base. Diamondback's 2025 pro forma leverage of 1.1x is also consistent with the aforementioned peers.
Key Assumptions
WTI oil prices of
Pro forma 2025 production of 815 Mboepd followed by flat growth thereafter;
Pro forma 2025 capex of
Prioritization of FCF toward managements post-close net debt target of
Measured increases in shareholder returns following achievement of debt targets;
Announced Endeavor merger closes in 2Q24.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch expects to resolve the RWP upon completion of the contemplated transaction under proposed terms.
Factors that could lead to a positive rating action for Diamondback independent of the transaction include:
Increased size and scale evidenced by production trending above 550 mboe/d while maintaining economic drilling inventory;
Standalone debt/PD at or below
Standalone mid-cycle EBITDA Leverage below 1.5x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Standalone mid-cycle EBITDA Leverage above 2.5x on a sustained basis;
Standalone debt/PD above
Material loss of operational momentum leading to lower than expected production volumes (300 mboe/d or lower) over a sustained period.
Liquidity and Debt Structure
Strong Liquidity: Diamondback's standalone cash and equivalents were approximately
Fitch does not expect material borrowings under the revolver post-close and believes the liquidity profile will be further supported by enhanced FCF generation post-close. Fitch believes Diamondback could enhance liquidity and accelerate debt reduction toward its post-close net debt goal of
Issuer Profile
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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