Diamondback Energy Inc. Outlook Revised To Negative On Weaker Credit Metrics; 'BBB-' Rating Affirmed

  • We expect U.S.-based oil and gas exploration and production company Diamondback Energy Inc.'s credit metrics will be significantly weaker than our prior forecast due to our latest oil and gas price revisions.
  • The company's sizable hedge position and recent budget reductions alleviate the impact on cash flow and its strong liquidity provides cushion.
  • We affirmed our 'BBB-' issuer credit rating on Diamondback and revised the outlook to negative from stable.
  • The negative outlook on Diamondback reflects our expectation of significantly weaker leverage metrics with average funds from operations (FFO) to debt of approximately 40% and debt to EBITDA greater than 2x over the next two to three years under our revised commodity price deck. We expect management will continue to take action as necessary to maintain a strong balance sheet and seek to operate within internally generated cash flow.
NEW YORK (S&P Global Ratings) March 25, 2020—S&P Global Ratings today took the rating actions above.
Credit measures worsen following our price deck revisions.  We are projecting FFO to debt will fall to approximately 35% with debt to EBITDA of about 2.5x this year on the back of our latest revision to our oil and gas price assumptions, which are underpinned by Saudi-Russian tensions as well as an unprecedented drop in demand due to COVID-19. Accordingly, we anticipate financial leverage will be weak for the rating this year before noticeably improving in 2021. We also expect production to decline modestly in 2021 and the oil production mix to dip below 65%.
The negative outlook on Diamondback reflects our expectation of significantly weaker leverage metrics, with average FFO to debt of approximately 40% and debt to EBITDA greater than 2x over the next two to three years under our revised commodity price deck. We expect management will continue to take action as necessary to maintain a strong balance sheet and seek to operate within internally generated cash flow.
We could lower the rating if credit measures weakened such that Diamondback's FFO to debt fell below 30% on a sustained basis without a clear path to improvement or if we believed management's financial policy were no longer consistent with investment-grade peers. We believe this could occur due to unforeseen operational issues, lower commodity prices, failure to meet production targets, or aggressive capital spending and pursuit of shareholder returns.
We could revise the outlook to stable if the company maintains conservative financial policy and FFO to debt comfortably above 45%.
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