Moody's Upgrades Diamondback Energy (FANG) to 'Ba3'; Outlook Revised to Positive
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Moody's Investors Service (Moody's), upgraded Diamondback Energy, Inc.'s (Nasdaq: FANG) Corporate Family Rating (CFR) to Ba3 from B1, Probability of Default Rating (PDR) to Ba3-PD from B1-PD and senior unsecured notes to B1 from B2. At the same time, Moody's affirmed the company's SGL-2 Speculative Grade Liquidity (SGL) rating reflecting good liquidity. The rating outlook was revised to stable from positive.
"The upgrade reflects our expectation that Diamondback will deliver significant growth in 2017 while keeping a healthy balance sheet even if oil and natural gas prices remain at today's levels," commented Sajjad Alam, Moody's Senior Analyst. "Management has exhibited good operating and fiscal discipline since late 2014 by reducing and then ramping up its drilling program and achieving significant organic production and reserves growth while avoiding meaningful increases in debt."
Issuer: Diamondback Energy, Inc.
.... Corporate Family Rating, Upgraded to Ba3 from B1
.... Probability of Default Rating, Upgraded to Ba3-PD from B1-PD
.... Senior Unsecured Notes, Upgraded to B1 (LGD5) from B2 (LGD5)
.... Speculative Grade Liquidity Rating, Affirmed SGL-2
....Changed to Stable from Positive
Diamondback's Ba3 CFR reflects its growing, low cost and oil-weighted production platform in the Permian Basin; low financial leverage supported by opportunistic equity issuances; strong cash margins even in a $45/barrel oil price environment, and significant alternative liquidity through its 83% ownership interest in Viper Energy Partners LP (VEP, unrated), which had a market capitalization of $1.4 billion as of November 30, 2016. The rating is also supported by the company's excellent operating track record since its IPO in October 2012, deep drilling inventory in the prolific Midland Basin featuring stacked pay zones and predictable geology, which was further augmented by the recent acquisition in the Delaware Basin, and its high degree of operational control (~95%). The CFR is restrained by the limited scale of Diamondback's upstream operations, its narrow geographic focus and high level of capital spending that will likely produce negative free cash flow despite a significantly scaled back drilling program. Although Diamondback's production and reserves are smaller than most Ba rated E&P companies today, the company's high quality asset base and low debt level supports its Ba3 CFR.
Moody's expects Diamondback to have good liquidity through 2017, which is reflected in the SGL-2 rating. The company had no outstanding borrowings under its $500 million committed revolving credit facility as of September 30, 2016. The revolver borrowing base was increased to $1 billion by Diamondback's bank group during the Fall 2016 redetermination process, which demonstrates that it has substantial asset coverage of its existing revolver commitments. The revolver matures In November 2018. While Moody's expects the company to manage its capex near operating cash flow in 2017, any future negative free cash flow could be comfortably covered with revolver drawings. There should be ample headroom for future compliance with the financial covenants governing the credit facility through 2017. Diamondback's ownership interest in VEP and significant undeveloped Permian Basin acreage could generate alternative liquidity, if needed.
Diamondback's $500 million 4.75% senior unsecured notes due 2024 are rated B1, one notch below the Ba3 CFR given the significant size of the secured revolving credit facility relative to the senior notes, under Moody's Loss Given Default Methodology. The revolver has a first-lien claim to substantially all of Diamondback's assets.
The stable outlook reflects Diamondback's low leverage and low costs that should support significant growth through 2017. If Diamondback increases production above 80,000 boe per day on a sustained basis while maintaining the RCF/debt ratio above 40% and the leveraged full-cycle ratio above 1.5x, the ratings could be upgraded. The ratings could be downgraded if the company's capital productivity were to significantly decline and/or its financial leverage were to substantially increase. Moody's could downgrade the CFR if the RCF/debt ratio falls below 25% or the debt to average daily production ratio were to rise above $20,000 per boe on a sustained basis.
The principal methodology used in this rating was the Global Independent Exploration and Production Industry published in December 2011. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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