TEXT-S&P cuts Plains Exploration & Production rating to 'BB-'
Overview -- U.S.-based Plains Exploration & Production Co. has completed its transaction to acquire deepwater Gulf of Mexico properties from BP and Shell. -- We are lowering our corporate credit rating to 'BB-'. We are lowering our issue rating on the company's senior unsecured debt to 'B' and revising the recovery rating to '6'. We are removing the ratings from CreditWatch negative. -- The negative outlook reflects the potential to lower the ratings in the next year if debt to EBITDA rises above 4x. Rating Action On Dec. 5, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Houston, Texas-based Plains Exploration & Production Co. (Plains) to 'BB-' from 'BB' and removed the ratings from CreditWatch negative where they were placed on Sept. 10, 2012. The outlook is negative. In addition, we lowered our issue rating on Plains Exploration & Production Co.'s senior unsecured debt to 'B' (two notches lower than the corporate credit rating) from 'BB-'. We revised the recovery rating on this debt to '6', reflecting our assessment of negligible (0% to 10%) recovery in the event of a default. Rationale The downgrade follows Plains' completed acquisition of deepwater Gulf of Mexico properties from BP PLC and Royal Dutch Shell PLC. The acquisition represents a strategic shift for Plains and presents increased execution risk, particularly given the complexities associated with operating in the deepwater Gulf of Mexico. Although the company currently has offshore exposure through its working interest in Point Arguello and Point Pedernales in California, as well as its ownership of Plains Offshore Operations Inc. in the Gulf of Mexico, these operations represent less than 10% of the company's existing reserve base and are modest in scale relative to the assets the company is acquiring. Further, the debt-financed nature of the transaction results in a meaningful deterioration in the company's credit protection measures. While we currently forecast that the company's credit ratios could return to preacquisition levels over the next 12 to 18 months, this could be delayed if management expands capital investment beyond currently contemplated levels in pursuit of improving shareholder returns. Despite these concerns, the transaction significantly expands Plains existing reserve base and production. The company estimates that these assets will increase proved reserves by 127 million barrel of oil equivalents (boe) and production by 67,000 boe per day, representing increases of 31% and 68%, respectively. New production will increase the company's exposure to oil production from current levels of 57% to approximately 70%. In addition, the company has numerous opportunities to expand its reserve base through recompletion, workover, and tie-in opportunities. Pro forma for the transaction, debt to EBITDA, which has been trending in the mid-2x area, will rise to more than 3x. Under our current pricing assumptions ($90 Brent and $3.00 natural gas in 2013), we estimate that leverage will fall to levels closer to 3x by the end of 2013. If the company is successful in completing planned divestitures (primarily its Haynesville and Madden assets), leverage could fall closer to 2.5x. Liquidity In our view, PXP's liquidity is "strong". Key elements of its liquidity profile include: -- We expect the company's liquidity sources (including cash, FFO, and revolving credit facility availability) to cover uses by more than 1.5x over the next 12 months. -- The company's sources of liquidity will likely cover potential uses even in the unlikely event that EBITDA declined by more than 30% from currently forecast levels. -- The company does not have any material long-term debt maturing over the next three years and amortization of the company's term loan is manageable. -- The company owns 51 million shares of McMoRan Exploration Co. stock that could serve as an alternative source of liquidity. Recovery analysis The rating on the company's senior secured debt is 'BB' (one notch higher than the corporate rating) and the recovery rating is '2', indicating our expectation of substantial (70% to 90%) recovery for the lenders in case of a payment default. The rating on the company's senior unsecured debt is 'B' (two notches lower than the corporate rating) indicating our expectations of negligible (0% to 10%) recovery for bondholders in the event of a payment default. The '6' recovery rating reflects our assessment of negligible (0% to 10%) recovery for lenders in the event of a default. Outlook The outlook is negative. We could lower the ratings if we believe Plains' debt to EBITDA will trend above 4x for a prolonged period. We could revise the outlook to stable or raise ratings if PXP delivers on its deleveraging plan, specifically by generating significant free operating cash flow and selling assets to pay down debt to where we believe debt to EBITDA will fall below 2.5x. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011. -- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Temporary telephone contact numbers: Lawrence Wilkinson (212-991-8514); Carin Dehne-Kiley (917-496-8208) Ratings List Downgraded; Off CreditWatch; Outlook Negative To From Plains Exploration & Production Co. Corporate Credit Rating BB-/Negative/-- BB/Watch Neg/-- Senior Unsecured B BB-/Watch Neg Recovery Rating 6 5 Ratings Affirmed Plains Exploration & Production Co. Senior Secured BB Recovery Rating 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.