Fitch Ratings has placed the 'BBB-' Long-Term Issuer Default Rating (IDR) and all issue-level ratings of
The RWP follows the announcement that
The transaction significantly enhances Diamondback's footprint by adding high-quality acreage in the core of the
Fitch expects to resolve the RWP and equalize Endeavor's ratings with Diamondback's ratings at close, currently expected in 4Q24 subject to customary closing conditions. The closing of the transaction and resolution of the RWP could take longer than six months.
Key Rating Drivers
High Quality, Credit-Positive Merger: Fitch views the proposed merger positively for Endeavor's ratings as the company will benefit from Diamondback's higher ratings through strong strategic and operational ties post-close. Endeavor's large, low-cost Midland basin asset base will increase both Diamondback's total acreage and production size by approximately 70% and 75%, respectfully, 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
At 3Q23, 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
Conservative Standalone Leverage Below 0.5x: Fitch forecasts standalone EBITDA leverage will be maintained below 0.5x through 2027, given the company's low gross debt balance of just
Potential Standalone Corporate Governance Risks: Fitch views Endeavor's lack of an independent board and its ownership concentration as potential risks to the company's standalone credit profile. The company's founder,
Endeavor also engages in related-party transactions with companies owned by the founder. However, the terms of the credit agreement mitigate these risks, and Endeavor has moved toward professional management, including making outside hires for key management positions. Fitch recognizes corporate governance-related risks will meaningfully diminish post-close.
The credit agreement allows for income tax distributions to the limited partners in an amount necessary to cover their taxes. Additional cash distributions may be made if there is no event of default, at least 20% availability on the revolver and net funded debt to EBITDA is below 3.0x. Additionally, all transactions with affiliates must be done on fair and reasonable terms as would be accepted in a comparable arm's length transaction.
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 of
Key Assumptions
WTI oil prices of
Announced Diamondback merger closes in 4Q24;
Continued standalone production growth in 2024 with growth-linked spending thereafter;
Standalone discretionary distributions of
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 and favorable treatment of Endeavor debt.
Factors that could lead to a positive rating action independent of the transaction include:
Continued operational momentum and proved developed, producing reserve growth that leads to through-the-cycle production sustained above 300 mboepd;
Maintenance of midcycle EBITDA leverage below 2.0x;
Steps taken to further moderate corporate governance-related risks.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Material deviation from management's target leverage, resulting in midcycle EBITDA leverage sustained over 2.5x;
Pursuit of a growth-oriented capital deployment strategy in a manner that results in a substantially weaker liquidity position or leverage exceeding the above threshold;
Material deviation from financial policies that heightens governance risks and could negatively affect the credit profile.
Liquidity and Debt Structure
Robust Liquidity: Endeavor's liquidity profile is robust and consists of cash and cash equivalents of nearly
Issuer Profile
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
Endeavor has an ESG Relevance Score of '4' for Governance Structure as the company's founder,
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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