CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a Long-term Issuer Default Rating (IDR) of 'BB' to QEP Resources, Inc. (NYSE:QEP).
The Rating Outlook is Stable.
Approximately $2.2 billion in debt is affected by today's rating action. A full list of rating actions follows at the end of this release.
QEP's ratings reflect the company's strong upstream metrics, adequate liquidity, and limited near term maturities, while concerns include the company's relatively small production base and a potential loss of operational momentum associated with capex reductions. QEP has taken several steps to manage leverage and liquidity. The company has reduced its capital budget from $1.2 billion in 2015, which included approximately $100 million of acquisition capital, to guidance of $450 - $500 million in 2016, as well as raising equity with gross proceeds of $379.5 million in 2016. QEP's upstream metrics are consistent with higher rated North American E&P peers but the rating is currently constrained by the company's limited size and scale.
The company reported production of 149 mboe/d for year-end 2015 spread across five core operating areas within the U.S. The largest production percentage growth came in the company's Permian and Williston basins, which accounted for 8% and 34% of 2015 production, respectively. The Haynesville and Midcontinent basins, representing 13% and 1% of production respectively, reported year over year declines. Capex for 2016 is estimated by Fitch to be at the low end of guidance of $450 million, funding plans to operate three rigs with one each in the Williston, Permian, and Pinedale. The company's total production growth has remained relatively flat since 2012 (CAGR 0.8%), but the company has high graded its profile by transitioning to liquids (oil and NGLs) over the same time frame through acquisitions and subsequent development activity. At year-end 2015, liquids comprised 45% of production, versus 22% in 2012.
KEY RATING DRIVERS
STRONG UPSTREAM METRICS
QEP has historically had strong operational metrics. The Fitch-calculated debt/ flowing barrel has continued to improve over the last four years dropping from a high of $22,023 in 2012 to $14,868 in 2015 as the company has reduced debt that was used to fund previous acquisitions. Fitch's base case forecasts debt/ flowing barrel to be about $14,000 in 2016. Proved reserves were 603 mmboe in 2015 resulting in a proved reserve life of 11 years. The three-year average organic reserve replacement ratio was 83% in 2015, down from 114% in 2014. The company reported negative revisions of 180 mmboe, of which 126 mmboe was due to lower pricing in 2015. A majority of revisions were PUDs. QEP reported strong operating reserve additions of 185 mmboe in 2015 mostly in the Williston, Unita and Permian basins. Debt/1P and Debt/PD increased slightly in 2015 to $3.68/boe and $6.31/boe respectively due to a decline in proved reserves as revisions largely offset extensions and discoveries.
QEP has continued to increase oil production and in 2015, 36% of equivalent production was oil, up significantly from 8% in 2011. The company's acquisition of additional Williston acreage in 2012 and entry into the Permian basin in 2014 has helped drive the liquids transition.
At year-end 2015, QEP had $376 million in cash and an undrawn $1.8 billion credit facility that matures in December 2019. The credit facility is unsecured and is not subject to semi-annual borrowing base redeterminations. Currently, the financial covenants, as defined in the credit facility agreement, require QEP to maintain a 60% net debt to capitalization ratio (36% at year-end 2015), net debt to LTM EBITDA of not more than 4.25x through 2017 and 3.75x thereafter, and a PV-9 net debt coverage test of 1.25x through 2017 and 1.50x thereafter. The debt to cap ratio does not have a carve-out for non-cash impairments but Fitch believes this will not be a concern. QEP may not have full availability of the $1.8 billion revolver at year end 2016 because of the 4.25x net debt covenant but liquidity is expected to be adequate. Fitch projects that the company will be slightly FCF positive for 2016 and will end the year with a cash balance of around $600 million.
On Feb. 29, 2016, the company raised approximately $330 million through an upsized stock offering and on Mar. 8, 2016, the underwriters exercised their option to purchase additional shares, increasing the total gross proceeds received by the company in connection with the offering to $379.5 million. The proceeds will be used to create additional bridge liquidity as well as prefund the upcoming $176.8 million maturity in September of 2016.
LIMITED NEAR TERM MATURITIES
QEP's maturity wall is manageable. $176.8 million is due in September 2016, $134.0 million in 2018 and $136.0 million in 2020, providing the company the opportunity to de-lever as the debt matures. The company ended 2015 with $2.2 billion in debt, unchanged from 2014 year-end. QEP plans to use part of the equity proceeds to prefund the 2016 maturity. Given the company's adequate liquidity and intent to spend within cash flow, there will likely be limited need to access the capital markets.
FLAT PRODUCTION PROFILE
Since 2012, production has consistently remained between 141 mboe/d and 149 mboe/d. Fitch forecasts production declines of around 2% in 2016 and 4% in 2017 and relatively flat production afterwards. While the company has acquired several properties in the Williston and Permian basins, their asset base is still relatively small compared to E&P peers. QEP plans to operate around three rigs for the remainder of 2016 with one each in the Williston, Permian, and Pinedale. The current drilling plan is reduced significantly from a high of 21 operated rigs during 2014, which should help the company to maintain cash flow neutrality but will also slow operational momentum.
SOLID 2016 HEDGE POSITION
At Dec. 31, 2015, assuming forecasted 2016 annual production of approximately 146 mboe/d, QEP had approximately 51% of its production covered with fixed-price swaps, including 73% of its gas production at $2.65 and 33% of its oil production at $55.84. The company entered into additional oil and gas derivative contracts in early 2016 with a focus on 2017 gas hedges.
Currently, approximately 52% of 2017 gas production is hedged at $2.70 and 15% of 2017 oil production is hedged at $54.39. Typically QEP enters into commodity derivative contracts for approximately 50% to 75% of its forecasted annual production by the end of the first quarter of each fiscal year. At Fitch's base case price deck of $35 oil in 2016 and $45 in 2017, Fitch forecasts that the company's hedges will provide uplift of approximately $206 million and $42 million in 2016 and 2017 respectively.
Fitch's key assumptions within the rating case for QEP include:
--WTI oil price that trends up from $35/bbl in 2016, $45/bbl in 2017, $55/bbl in 2018 to $65/bbl long term;
--Henry Hub gas price that trends up from $2.25/mcf in 2016, $2.50/mcf in 2017, $2.75/mcf in 2018 to $3.25/mcf long term;
--Production of approximately 146 mboe/d in 2016, followed by a modest decline in 2017;
--Capex in 2016 at the low end of guidance of $450 million, followed by increasing capex driven by supportive pricing signals.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
For an upgrade to 'BB+':
--Increased production size and scale in key production basins;
--Mid-cycle debt/EBITDA at or below 3.0x - 3.25x;
--Debt/flowing barrel under $15,000 and or debt/1P below $5.00/boe on a sustained basis;
Fitch does not anticipate a positive rating action in the near term given the current weak pricing environment.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
For a downgrade to 'BB-':
--Mid-cycle debt/EBITDA at or above 4.0x - 4.25x
--Mid-cycle debt/flowing barrel above $20,000 and or debt/1P above $7.00/boe;
--Leveraging acquisitions and/or shareholder-friendly actions.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
QEP Resources, Inc.
--Long-term IDR at 'BB';
--Senior unsecured bank facility at 'BB'/RR4;
--Senior unsecured notes at 'BB'/RR4.
The Rating Outlook is Stable
Summary of Financial Statement Adjustments
- Fitch has made no material adjustments that are not disclosed within the company's public filings
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers - Effective from 7 December 2015 to 1 April 2016 (pub. 07 Dec
Dodd-Frank Rating Information Disclosure Form