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S&P upgrades Diamondback on increased Permian position after Energen acquisition

S&P Global Ratings raised its rating on Diamondback Energy Inc. to a notch below investment-grade following Diamondback's recent acquisition of fellow Permian driller Energen Corp., significantly increasing its position in the basin.

The rating agency bumped up its issuer credit rating on the company to BB+ from BB and lifted its issue-level rating on Diamondback's unsecured debt to BB+ from BB, with a recovery rating of 3.

S&P attributed the changes to the Energen deal and to Diamondback's smaller asset deals with Ajax Resources LLC, ExL Petroleum Operating Inc., ExL Petroleum Management LLC and EnergyQuest II LLC. Along with the increased position, the Energen deal adds to Diamondback's existing midstream capacity and creates synergy opportunities on drilling and completion costs in the Midland basin, S&P said.

Diamondback also recently announced that it will dial back its operations in 2019 while increasing its production, an effort to operate within cash flow.

"While we forecast revolver utilization to fund an outspend in 2019, we do not envision leverage to surpass 1.5x and expect funds from operations to debt above 60% over the next two years," S&P said.

S&P gave Diamondback a positive outlook on its expectation that the company will continue to develop its Permian assets over the next two years while operating within cash flow.

Fitch also initiated coverage of Diamondback with a stable outlook and a long-term issuer default rating of BBB-, its lowest investment-grade rating, citing the driller's increased position in the Permian. Fitch expects the company to move to an unsecured credit facility, which it would also rate BBB-.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found in the Sources section.