Diamondback Energy Launches IPO For Rattler Midstream Subsidiary

[Editor's note: This story was updated at 10:08 a.m. CDT May 13.]

Diamondback Energy Inc. launched the IPO of its midstream subsidiary on May 13 with proceeds earmarked to pay down the Permian Basin producer’s debt.

Diamondback is offering about 33.3 million common units of Rattler Midstream LP priced between $16 and $19 plus a 5 million-share greenshoe option. The offering represents a roughly 22% limited partner interest, or 25% with the option exercised, in Rattler. The balance will be owned by Diamondback and its subsidiaries.

At the mid-point of the IPO range of $17.50 per unit, Gabriele Sorbara, principal and senior equity analyst with Williams Capital Group LP, estimates the enterprise value of Rattler Midstream at $2.64 billion, in line with the firm’s valuation of between $2.4 billion and $3.1 billion.

Rattler Midstream was formed in July 2018 by Midland, Texas-based Diamondback to own, operate, develop and acquire midstream infrastructure assets in the Midland and Delaware sub-basins of the Permian Basin, where oil and gas production has soared.

RELATED: Diamondback Energy’s Rattler Midstream Files IPO

Diamondback had initially planned for its Rattler Midstream subsidiary to make its public debut last year. However, despite filing the regulatory documents to take Rattler public in early August 2018, energy IPOs came to a full stop in the second half of last year thanks to commodity volatility, particularly in crude markets.

“Several IPOs were taken off the market,” Christopher George, director of Drillinginfo’s Capitalize tracking platform, told Hart Energy earlier this year. “We had five S-1s across the sectors get pulled that did not go public. When price is the driver of valuation and the commodity price tanks, nobody wants to sell at a perceived discount.”

As of March 31, Rattler Midstream holds 781 miles of pipeline with roughly 232,000 barrels per day (bbl/d) of crude oil gathering capacity, 2.720 million bbl/d of permitted saltwater disposal capacity, 575,000 bbl/d of freshwater gathering capacity, 80 million cubic feet per day (MMcf/d) of natural gas compression capability and 150 MMcf/d of natural gas gathering capacity, according to filings with the U.S. Securities and Exchange Commission.

Additionally, Rattler Midstream owns equity interests in two long-haul crude oil pipeline—EPIC Crude Oil Pipeline and the Gray Oak Pipeline—which, upon completion, will run from the Permian Basin to the Texas Gulf Coast.

Rattler expects to list its common units on the NASDAQ Global Select Market under the ticker symbol “RTLR.”

Net proceeds from the IPO are expected to total roughly $546 million or $628 million with the greenshoe option fully exercised, Sorbara said. All proceeds from the offering will be distributed back to Diamondback, which he expects will be used to pay down a portion of the borrowings drawn on the company’s revolver.

“While the [Rattler] IPO was expected to be commenced after [first-quarter 2019] results and the valuation was in line with our expectations, we believe the execution of the transaction will be viewed as positive, as it provides the paydown of debt and optionality going forward,” he said in a research note on May 13.

During its first-quarter earnings announcement on May 7, Diamondback also revealed the sale of noncore assets with proceeds planned to reduce debt and fund a $2 billion share buyback program.

The noncore asset sales include 103,423 net acres in the Central Basin Platform, Eastern Shelf and the Northwest Shelf the company acquired in the Energen acquisition. Diamondback is also selling 6,589 net acres in the Southern Midland Basin in Crockett and Reagan counties, Texas.

The assets being sold have estimated net production of about 6,500 barrels of oil equivalent per day for the full year 2019 from over 3,000 producing wells, according to a company press release.

Diamondback’s adjusted net income of $229 million for the first quarter was up year-over-year from $162 million a year ago. The company reported earnings of $1.39 for the first quarter beating the Street consensus of $1.36, according to analysts with Tudor, Pickering, Holt & Co. (TPH).

Pro forma for the asset sale and Rattler Midstream IPO, Sorbara estimates Diamondback would have total liquidity on a standalone basis of roughly $1.3 billion, comprised of $116 million cash on hand and $1.2 billion available under its $2.5 billion borrowing base.

Credit Suisse, BofA Merrill Lynch and J.P. Morgan are lead book-running managers for the Rattler IPO. Barclays, Citigroup, Goldman Sachs & Co. LLC and Wells Fargo Securities are also acting as joint book-running managers.

Capital One Securities, Scotia Howard Weil, SunTrust Robinson Humphrey and UBS Investment Bank are senior co-managers for the offering. Evercore ISI, Morgan Stanley, RBC Capital Markets, Simmons Energy | A division of Piper Jaffray℠, Tudor, Pickering, Holt & Co., Raymond James, Seaport Global Securities, Northland Capital Markets, PNC Capital Markets LLC and TD Securities are also acting as co-managers.

Emily Patsy can be reached at epatsy@hartenergy.com.