Diamondback Energy, Inc. -- Moody's changes Diamondback Energy's rating outlook to positive, affirms Ba1 CFR

Rating Action: Moody's changes Diamondback Energy's rating outlook to positive, affirms Ba1 CFRGlobal Credit Research - 17 Mar 2021Approximately $4.6 billion of rated debt affectedNew York, March 17, 2021 -- Moody's Investors Service, ("Moody's") changed Diamondback Energy, Inc.'s rating outlook to positive from stable. Moody's concurrently affirmed Diamondback's Ba1 Corporate Family Rating (CFR), Ba1-PD Probability of Default Rating (PDR), and Ba1 senior unsecured notes. The SGL-1 Speculative Grade Liquidity Rating was unchanged. These actions follow Diamondback's announcement on March 17, 2021 that it completed the acquisition of QEP Resources, Inc. (QEP, B2 Ratings Under Review for Upgrade).[1]"The positive outlook reflects our belief that Diamondback's credit profile will continue to strengthen following the acquisitions of QEP and Guidon Operating LLC (Guidon, unrated) that will significantly increase its free cash flow generation capacity by boosting overall production, reserves and drilling inventory by more than 30 percent," said Sajjad Alam, Moody's Senior Analyst. "The company will likely look to further reduce debt and optimize its maturity profile using free cash flow and proceeds from any potential sale of the acquired QEP Williston Basin assets."Affirmations:..Issuer: Diamondback Energy, Inc..... Probability of Default Rating, Affirmed Ba1-PD.... Corporate Family Rating, Affirmed Ba1....Senior Unsecured Notes, Affirmed Ba1 (LGD4) from (LGD3)Outlook Actions:..Issuer: Diamondback Energy, Inc.....Outlook, Changed To Positive From StableRATINGS RATIONALEDiamondback's Ba1 CFR is supported by its high-quality production and reserves in the Permian Basin; low cost and oil-weighted assets that generate peer leading cash margins; high-graded and expanded drilling inventory from recent acquisitions that will increase portfolio durability and the ability to deliver organic growth; low financial leverage; and a history of conservative financial policies, including significant equity issuances for acquisitions. The CFR is restrained by Diamondback's singular geographic focus in the Permian Basin and significant undeveloped acreage and the associated high future capital requirements. The rating also considers Diamondback's organizational complexity and acquisitive history as well as its controlling ownership interest in the publicly traded Viper Energy Partners LP (Viper, Ba3 stable) and Rattler Midstream LP (Rattler, Ba2 stable) that have a combined market capitalization of over $4 billion and could be a source of alternative liquidity, if needed.Diamondback's senior unsecured notes are rated Ba1, the same as Ba1 CFR, given the company's unsecured capital structure, including its $2 billion committed revolving credit facility, which ranks pari passu with the unsecured notes. Diamondback initiated a contingent cash tender offer on March 4, 2021 to acquire any and all of QEP's outstanding notes to simplify the capital structure, push out near-dated maturities and lower interest costs. In conjunction with the tender offer, Diamondback is also soliciting consents from QEP noteholders to amend certain covenants in the QEP notes indenture, which requires consent from a simple majority to take effect. The tender offer is due to expire on March 31, 2021.Diamondback should have very good liquidity through 2022, which is reflected in the SGL-1 rating. The company has downside price protection for roughly 50% of its projected production for 2021 that will help generate over $1 billion in free cash flow even if crude price declines modestly from today's levels. Diamondback had $104 million in cash and a largely undrawn revolver with $1.98 billion in available borrowing capacity under a $2 billion committed revolving credit facility as of December 31, 2020. The revolver is set to mature in November 2022, which will get extended in the near future. Diamondback has ample cushion under the 65% net debt to capitalization financial covenant in its credit agreement.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe CFR could be upgraded if the company can maintain its strong capital efficiency, consistently generate free cash flow, and achieve its contemplated debt reduction goal. Specifically, if the company can sustain the leveraged full-cycle ratio (LFCR) above 2x, debt/PD reserves near $6/boe, and the RCF/debt ratio above 50%, an upgrade could be considered. The CFR could be downgraded if Diamondback significantly outspends operating cash flow, experiences a sharp decline in capital productivity, or debt funds dividends or share repurchases. More specifically, if the RCF/debt ratio falls below 35% or the LFCR falls below 1.5x, a downgrade could occur.The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Diamondback Energy, Inc. is a Midland, Texas based publicly traded independent exploration and production company with operations in the Permian Basin in West Texas.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Form 8-K (SEC) 17-Mar-2021Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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