TEXT-S&P revises Trident Resources Corp. outlook to negative

Wed Dec 5, 2012 1:17pm EST

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Overview
     -- We are revising our outlook on Trident Resources Corp. to
negative from stable.
     -- We are also affirming our 'B-' long-term corporate credit rating and 
'B' senior unsecured debt ratings on Trident Exploration Corp. 
     -- The '2' recovery rating on the notes is unchanged.
     -- Depressed natural gas prices will continue to pressure Trident's cash 
flow; we forecast that the company's existing operations will generate 
insufficient funds from operations to fund the company's maintenance capital 
on a sustained basis.
     -- The negative outlook reflects our opinion that Trident needs external 
funding, probably from its strategic review process, to sustain its 
operations. 

Rating Action
On Dec. 5, 2012, Standard & Poor's Ratings Services revised its outlook on 
Alberta-based Trident Resources Corp. to negative from stable. At the same 
time, Standard & Poor's affirmed its 'B-' long-term corporate credit and 'B' 
senior unsecured debt ratings on subsidiary Trident Exploration Corp. The '2' 
recovery ratings on the unsecured notes is unchanged, and indicates our 
expectation of substantial (70%-90%) recovery in a default scenario

The outlook revision reflects our expectation that weakening gas prices will 
stress Trident's cash flow such that it would be unable to fund its fixed 
charges through internally generated funds from operations (FFO) beyond 2013. 
We acknowledge that the above-market price gas hedges in place will provide 
Trident with sufficient cash flow to fund capex and finance expenses through 
2013; nevertheless, we believe the company needs external funding to sustain 
its current operations into 2014. We believe, under our price assumptions and 
given no change in the existing capital structure, that the company could 
breach its financial covenant in 2013.

Rationale
The ratings on Trident reflect Standard & Poor's view of the company's 
"vulnerable" business risk profile and "highly" leveraged' financial risk 
profile. We assess management as "fair". The ratings reflect what Standard & 
Poor's views as Trident's operations in the exploration and production (E&P) 
industry, exposure to natural gas prices, deteriorating credit measures, and 
less than adequate liquidity. That 70% of the company's 2013 gas production is 
hedged at above market prices marginally offsets the weaknesses, in our 
opinion.

Trident is a small E&P company with most of its coal bed methane (CBM) 
production from Alberta. As of Dec. 31, 2011, the company had a reserve base 
of 412 billion cubic feet equivalent and an average production of about 65 
million cubic feet a day for third quarter of 2012. As of Sept. 30, 2012, the 
company had about C$300 million in adjusted debt, which includes adjustments 
for accrued interest (about C$7 million) and asset-retirement obligations 
(about $16 million).

In our view, Trident's vulnerable business risk profile reflects operations in 
the  E&P industry; its narrow asset base, which is totally exposed to natural 
gas; and above-market priced hedges in place. The company's cash flow is 
exposed to the highly volatile and capital-intensive oil and gas E&P industry. 
In peak periods, hydrocarbon prices rise markedly and large profits result. 
Currently, gas-focused E&P companies are suffering from weak gas prices; and 
the risk remains that gas prices could remain low for a while.

We view Trident's narrow asset base as a credit weakness. The company's 
reserves consist of two CBM plays--the dry Horseshoe Canyon and the wet 
Mannville play in Alberta (which requires draining). Although we recognize 
that these CBM assets have very low geological risks (due to their homogenous 
nature) and low decline production rates, the plays limit Trident's reserves 
and production to dry natural gas only. Therefore, the company has no 
flexibility to produce oil and natural gas liquids and benefit from the 
elevated prices of liquids.

In our opinion, Trident's gas hedges in place will provide cash flow stability 
in 2013. However, we forecast that the company's EBITDAX and FFO could halve 
in 2014 from 2013 levels if it cannot layer on additional high-priced hedges 
for 2014. About 70% of Trident 2013 forecast production is hedged at the AECO 
hub in Alberta at about C$4.26 per gigajoule (GJ) compared with spot AECO 
prices at about C$3.27 per GJ. The company paid a premium of C$34.7 million in 
placing these hedges, we believe that the revenues and cash flow generated 
from these hedges will be about C$40 million higher under our price 
assumptions. 

We view Trident's financial risk profile as highly leveraged due to the 
company's deteriorating credit measures and inability to fund its maintenance 
capex (to keep production flat) with internally generated FFO. We expect 
Trident to end 2013 with an elevated 6.5-7.0x debt-to-EBITDAX. 

Our assumptions for the company include the following:
     -- Standard & Poor's West Texas Intermediate price assumptions are US$85 
per boe for 2012, US$80 for 2013, and US$75 for 2014; Henry Hub gas price 
assumptions are US$3.00 for 2013 and US$3.50 for 2014.
     -- Average production for 2013 will be 0%-5% lower than 2012 levels. 
     -- The company will have capex budget of about C$28 million for 2013 

     -- Commodity hedges will be as reported in Trident's 2012 third-quarter 
report.
     -- We expect the company's to generate C$40 million-C$50 million in 
EBITDAX in 2013. 
     -- We also expect it to end 2013 with debt-to-EBITDAX of about 7.0x-7.5x.

Liquidity
We believe Trident has less-than-adequate liquidity to cover its needs in the 
next 18 months, especially in the event of unforeseen EBITDA declines. Our 
assessment incorporates the following expectations and assumptions:
     -- We expect Trident to breach its interest coverage financial covenant 
of 2.25x in 2013 if EBITDA falls by more than 5% than what we have forecast at 
our price deck.
     -- We expect the company's sources of liquidity, which include FFO and 
availability under the revolving facility, to exceed its uses 2x in the next 
12 months.
     -- Trident has significant flexibility in its capex budget. 
     -- We do not expect the company to be able to withstand low-probability 
adverse events. 

Liquidity sources include about C$47 million of availability under Trident's 
revolving facility and the company's positive FFO. Based on our hydrocarbon 
price assumptions and hedges in place, we expect Trident's forecast FFO 
insufficient to fund its maintenance capex requirements. We believe additional 
borrowing under the credit facility or reduction in borrowing base could 
stress the company's current liquidity.  

Recovery analysis
For the complete recovery analysis, see "Trident Resources Corp.'s Recovery 
Rating Profile," published May 1, 2012 on RatingsDirect on the Global Credit 
Portal. 

Outlook
The negative outlook reflects Standard & Poor's expectations that Trident's 
credit measures will weaken into 2013. Although the company's existing hedges 
and capital flexibility will allow the funding of 2013 capex plans, we believe 
in the long term, Trident's operations are unsustainable at current natural 
gas prices unless the company reduces debt levels.

We will consider a downgrade if Trident cannot secure any additional funding, 
most probably through its strategic review process, or its liquidity continues 
to deteriorate. We will also likely take a negative rating action if the 
company's strategic review process is not at or near completion by mid-2013.

We could revise the outlook to stable if we view Trident's liquidity to be 
adequate, such that it can fund its maintenance capex and financing expenses 
through internally generated cash flow, while managing to sustain its 
business. Given the company's current operational profile and our pricing 
assumptions, we view a positive action as highly unlikely in the next 12-18 
months.

Trident does not disclose its financial results publicly. 

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Revised Assumptions For Assigning Recovery Ratings To The Debt Of Oil 
And Gas Exploration And Production Companies, Sept. 14, 2012
     -- Standard & Poor's Raises Its U.S. Natural Gas Price Assumptions; Oil 
Price Assumptions Are Unchanged, July 24, 2012
     -- Key Credit Factors: Global Criteria For Rating The Oil And Gas 
Exploration And Production Industry, Jan. 20, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Recovery: Criteria Guidelines For Recovery Ratings On Global 
Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List
Trident Resources Corp.

                              To                  From
Outlook Revised To Negative
 Corporate credit rating      B-/Negative/--      B-/Stable/--

Rating Affirmed/Recovery Rating Unchanged
Trident Exploration Corp.
 Senior unsecured debt        B
  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.
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