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Rating Action:

Moody's rates Rattler Midstream's notes Ba3, assigns Ba2 CFR

07 Jul 2020

Approximately $500 million of new unsecured notes rated

New York, July 07, 2020 -- Moody's Investors Service ("Moody's") assigned first time ratings to Rattler Midstream LP (Rattler), including a Ba2 Corporate Family Rating (CFR), a Ba2-PD Probability of Default Rating (PDR) and a Ba3 rating to the company's proposed senior unsecured notes due 2025. Moody's also assigned a SGL-3 Speculative Grade Liquidity Rating reflecting adequate liquidity through 2021. The rating outlook is stable.

Net proceeds from the proposed note offering will be used to repay Rattler's revolving credit facility, which had $451 million in outstanding balance as of March 31, 2020.

Assignments:

..Issuer: Rattler Midstream LP

.... Probability of Default Rating, Assigned Ba2-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-3

.... Corporate Family Rating, Assigned Ba2

....Senior Unsecured Notes, Assigned Ba3 (LGD5)

Outlook Actions:

..Issuer: Rattler Midstream LP

....Outlook, Assigned Stable

RATINGS RATIONALE

Rattler's Ba2 CFR reflects its stand-alone credit profile of Ba3 with one-notch of uplift to reflect its strategic and operational importance to Diamondback Energy, Inc. (Diamondback, Ba1 stable). Rattler has long term fee-based water handling services, crude gathering and natural gas gathering and compression contracts with Diamondback. Substantially all of Diamondback's current acreage in the Permian Basin has been dedicated to Rattler for water services. The Ba2 CFR also reflects Rattler's projected low financial leverage through 2021 and good long-term organic growth prospects alongside Diamondback. Despite depressed oil prices in 2020, Diamondback's year-on-year production volume should stay relatively flat in 2020 due to its significant hedge protection. Diamondback has historically been one of the lowest cost and fastest growing E&P operators in the Permian Basin since 2017. Rattler's Ba2 CFR is constrained by its much smaller scale relative to higher rated midstream companies, reliance on a single customer, narrow geographic exposure, significant near term growth capital requirements, large projected negative free cash flow generation through 2022, and higher business risks involving its water handling businesses that are dependent on volatile drilling cycles. While Rattler's partnership agreement does not require it to make quarterly distributions, the current level of roughly $175 million in annual distributions will remain a substantial financial burden on the company and will push leverage well above its historical levels.

Rattler was formed by Diamondback in July 2018 and was spun off as a limited partnership in May 2019 through an IPO. Diamondback controls and consolidates Rattler through its 100% ownership of Rattler's general partner (GP), Rattler Midstream GP LLC. From a governance perspective, three of the five Board members of Rattler's GP are also Board members of Diamondback indicating strong strategic alignment between the two entities. Diamondback also owns 71% of Rattler's limited partnership (LP) units. Rattler's low-cost midstream solutions are imperative to Diamondback's own profitable growth. Diamondback has dedicated a substantial portion of its Midland and Delaware basin acreage to Rattler, including 96% of its gross acreage for produced water, 69% for fresh water, 43% for crude gathering and 21% for natural gas processing and compression services. While this tight relationship with Diamondback is a key credit strength, Rattler is unlikely to be rated above Diamondback without a substantially larger scale, customer diversification and cash flow base.

The proposed unsecured notes are rated Ba3, one notch below Rattler's Ba2 CFR because of the significant size of its secured revolving credit facility. The notes will have upstream guarantee from Rattler's principal operating subsidiaries. The notes will not have any guarantee from Diamondback, Rattler's general partner, or its equity investments in the EPIC and Gray Oak pipelines. Rattler's $600 million revolver has an all-asset pledge and a first-lien claim to substantially all of the partnership's assets.

Rattler should have adequate liquidity through 2021, which is reflected in the assigned SGL-3 rating. Pro forma for the notes offering, Rattler will have $60 million in cash and full availability under its $600 million committed revolving credit facility. Rattler will generate significant negative free cash flow through 2021 as it completes the remaining growth spending and maintains its high distributions. While management plans to cover the projected negative free cash with revolver borrowings, we expect the distribution level to be reduced should cash flow decline materially. The credit agreement may be used to fund capital expenditures, to finance working capital, for general company purposes, to pay fees and expenses related to the credit agreement, and to make distributions permitted under the credit agreement. The credit agreement has three financial covenants - a minimum interest coverage ratio of 2.5x, a maximum senior secured leverage of 3.5x and a maximum total leverage ratio of 5x. The revolver expires on 28 May 2024 and we expect ample covenant compliance cushion through 2021. The partnership has limited alternate liquidity given all its assets are encumbered to the revolver lenders.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Rattler's stable outlook reflects its low leverage and the stable rating outlook of Diamondback. Greater scale and diversification will be the primary driver of any future rating increase. We could consider an upgrade if the partnership can achieve annual EBITDA of about $500 million while maintaining low leverage and sustaining a distribution coverage ratio (FFO - Maintenance capex / Distributions) above 1.2x. The CFR could be downgraded if leverage exceeds 3x, the distribution coverage falls below 1x or Diamondback is downgraded. Any material reduction in Diamondback's ownership interest or control will also likely lead to a downgrade given Rattler's limited scale and diversification.

The principal methodology used in these ratings was Midstream Energy published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Rattler Midstream LP is a Midland, Texas based publicly traded limited partnership with water disposal and sourcing, oil gathering and natural gas gathering and compression assets in the greater Permian Basin.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please 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.

Sajjad Alam
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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