Diamondback expects to reach 2x leverage short-term, aims for below 1x long-term

By Devika Patel

Knoxville, Tenn., May 4 – Diamondback Energy Inc. has nearly reached its short-term leverage target of below 2x, but management believes it will take several quarters to get to its long-term target of below 1x, despite the company prioritizing debt reduction.

“We wanted to get our absolute debt reduced to where we were before the QEP and the Guidon acquisitions, which we’re almost there,” chief executive officer Travis D. Stice said on the company’s first quarter ended March 31 earnings conference call on Tuesday.

“I think in terms of leverage target, of course, leverage is a function of EBITDA, a function of oil price, but leverage targets, the board mandate has had us below 2x since the IPO, and we’ll be there now sooner rather than later.

“I think the longer-term run rate for leverage is probably 1x or below, and it’s going to take multiple quarters for us to get there, but we’re certainly encouraged with the way our forward outlook plan looks and our debt retirement strategy,” he said.

The company is generating a lot of free cash flow.

“Our free cash flow profile continues to improve,” Stice said.

“In the first quarter, we generated approximately $330 million of free cash flow, marking the third consecutive quarter of significant free cash generation,” he said.

It also plans to use cash from planned divestitures, expected to raise $832 million, for debt reduction.

“Yesterday, we also announced three non-core asset divestitures for gross expected proceeds of $832 million,” Stice said.

“By selling these non-core acreage positions in such a timely and opportunistic manner, we were able to take advantage of a strong A&D market and generate attractive cash returns for Diamondback shareholders.

“We anticipate using the combined proceeds from these non-core asset sales to accelerate debt reduction,” he said.

The company refinanced its debt last March with a sale of $2.2 billion of new senior notes due in 2023, 2031 and 2051 and a consent solicitation and tender offer for three QEP Resources, Inc. notes and one Diamondback note.

“In March, we executed a successful tender offer and refinancing of all of QEP bonds and one of Diamondback’s existing bonds,” Stice said.

“This refinancing equates to $40 million of annual interest expense savings and extended our average debt maturity by three years,” he said.

The refinancing left the company with three debt maturities that are callable this year. The company plans to retire these bonds.

“Today, we have three debt maturities that are callable before the end of this year, $191 million due later this year, $650 million due in 2023 and $432 million due in 2025,” Stice said.

“We expect to use cash on hand from internally generated cash flow as well as proceeds from our asset sales to retire these three tranches of bonds, reducing our absolute debt load and further strengthening our balance sheet,” Stice said.

As of March 31, Diamondback had $100 million in standalone cash and $52 million of borrowings outstanding under its revolving credit facility, with approximately $1.9 billion available for future borrowing under the facility, and $2 billion of total liquidity.

Long-term debt was $7.465 billion as of March 31, 2021, compared to $5,624 billion as of Dec. 31, 2020.

On March 18, Diamondback priced $2.2 billion of new senior notes (Ba1/BBB-/BBB) in three parts with maturities in 2023, 2031 and 2051.

The split-rated deal was rumored to have come off of the investment-grade desk.

A first $650 million tranche due March 24, 2023 priced at 99.99 with a 0.9% coupon to yield 0.905%, or 75 basis points over Treasuries. The two-year notes were guided in the Treasuries plus 100 bps area.

A second tranche, the largest tranche for $900 million and due March 24, 2031, comes with a 3.125% coupon. The 10-year notes had initial spread talk in the 175 bps area, priced at 99.659 and were sold with a spread of Treasuries plus 145 bps to yield 3.165%.

The 30-year tranche, $650 million of 4.4% senior notes, priced at 99.669. Spread talk had been in the Treasuries plus 225 bps area. The notes were sold with a spread of Treasuries plus 195 bps to yield 4.42%.

The 2023 notes have a par call after an initial non-call period. The 2031 and 2051 notes will have make-whole calls and then par calls.

Goldman Sachs & Co. LLC, Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, BofA Securities Inc., Citigroup Global Markets Inc., Morgan Stanley & Co. LLC and Wells Fargo Securities LLC were the bookrunners.

Proceeds were earmarked for a cash tender offer for one series of notes issued by Diamondback and three series of notes issued by QEP and for general corporate purposes.

On March 4, the company started any-and-all tender offers for the company’s 5.375% senior notes due 2025 and three series of QEP notes along with consent solicitations.

The offer ended at 11:59 p.m. ET on March 31.

On April 1, Diamondback announced the final results for the tender offers and consent solicitations.

Final tender results

The company had offered to purchase any and all of Diamondback’s $800 million outstanding 5 3/8% senior notes due 2025 (Cusip: 25278XAH2) for a total tender consideration of $1,033.75 per $1,000 note.

As of the final deadline, noteholders had tendered $367.79 million, or 45.97%, of their notes.

Additionally, under Diamondback’s offer to purchase any and all notes from the three series issued by QEP Resources listed below, noteholders had tendered an aggregate amount of $1,548,731,000, or 96.68%, of the notes. The breakdown of that amount is as follows:

• $440,161,000, or 94.65%, of the $465,061,000 outstanding of the 5 3/8% senior notes due 2022 (Cusip: 74733VAB6) for a total tender consideration of $1,058.75 per $1,000 note;

• $626,815,000, or 98.43%, of the $636.84 million outstanding of the 5¼% senior notes due 2023 (Cusip: 74733VAC4) for a total tender consideration of $1,058.75 per $1,000 note; and

• $481,755,000, or 96.35%, of the $500 million outstanding of the 5 5/8% senior notes due 2026 (Cusip: 74733VAD2) for a total tender consideration of $1,152.50 per $1,000 note.

The total considerations include a $30 early tender premium per $1,000 note.

Consent solicitation

There was a related consent solicitation as part of the offer.

The amendments in the consent solicitation were designed to eliminate substantially all of the restrictive covenants and related provisions and some events of default contained in the indenture.

Holders could not tender their notes without delivering consents and vice versa.

Noteholders representing a majority of the notes had to deliver consents to amend the provisions.

The requisite consents had been obtained for the QEP notes, since they are treated as one class.

A supplement to the indentures will become operative when a majority of the notes are purchased by Diamondback.

Details

The tender offers, which began on March 4, were being made in connection with, and were conditioned upon, the acquisition of QEP by Diamondback. The merger closed on March 17.

Additionally, the tender offers and consent solicitations were conditioned upon Diamondback completing at least one investment-grade public debt financing transactions that is sufficient with not more than $500 million being used under the company’s credit facility to pay for the offers.

The tender offers were also conditioned upon the receipt of a sufficient number of consents in the related consent solicitations.

The early deadline was 5 p.m. ET on March 17, also the withdrawal deadline.

The early acceptance date was March 23. March 24 was the early settlement date.

Final settlement was slated to occur on April 2.

Diamondback is a Midland, Tex., oil and natural gas company.

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