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