TEXT - S&P revises Magnum Hunter Resources outlook to stable

Thu Dec 13, 2012 3:15pm EST

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Overview
     -- Given higher than initially anticipated levels of acquisition activity 
and capital spending, U.S.-based Magnum Hunter Resource Corp.'s     
credit protection measures will likely show less improvement than what we
previously expected.
     -- We are revising our outlook on Magnum Hunter to stable from positive 
and affirming our 'B-' corporate credit rating.
     -- Magnum is adding $150 million to its existing senior unsecured notes 
due 2020, and we are lowering our issue rating on these senior notes to 'CCC' 
(two notches below the corporate rating) and revising the recovery rating to 
'6' from '5'. 
     -- The stable outlook reflects our expectation that the company's 
adjusted debt to EBITDA will improve to the 5x area by year-end 2013, an 
elevated, but still acceptable ratio for the rating. 
Rating Action
On Dec. 13, 2012, Standard & Poor's Ratings Services revised its outlook on 
Houston-based Magnum Hunter Resources Corp. (Magnum) to stable from positive 
and affirmed its 'B-' corporate credit rating on the company. 

In addition, Magnum added $150 million to its existing senior unsecured notes 
due 2020, bringing the total for this issue to $600 million. We also lowered 
our issue rating on the these notes to 'CCC' from 'CCC+' and revised the 
recovery rating on these notes to '6' from '5', indicating our expectation of 
negligible (0% to 10%) recovery for lenders in the event of a default. 

Rationale
The stable outlook reflects our expectation that Magnum will be able to grow 
production to an average of 20,000 boe per day in 2013 while keeping its 
adjusted debt to EBITDA ratio just below 5x. Our lowering of the senior 
unsecured issue rating reflects an updated valuation of the company's 
reserves, increases in the company's borrowing base, and higher levels of 
unsecured debt.

In 2013, under Standard & Poor's hydrocarbon pricing assumptions of $3 per 
million Btu Henry Hub natural gas and $80 per barrel West Texas Intermediate 
(WTI) crude oil in 2013, and assuming annual capital expenditures of about 
$330 million, we expect Magnum to generate about $250 million of EBITDA and 
post adjusted debt to EBITDA of 4.9x at year-end 2013. We have not assumed any 
acquisition or divestitures in our forecasts although the company has made 
public its intention to make substantial asset sales next year. 
The ratings on Magnum Hunter Resources Corp. (Magnum) reflect the company's 
relatively small asset base and production levels, moderate exposure to 
natural gas, high-cost structure, acquisitive growth strategy and spending 
levels in excess of projected operating cash flows over the next 12 months. 
The ratings also reflect the company's growing reserves and exposure to 
higher-return crude oil production, and modest geographic diversification 
among several resource plays. 

Standard & Poor's views Magnum's business profile as "vulnerable". The 
company's proved reserve base totals 67.7 million barrels of oil equivalents 
(boe) at the end of June 2012. This positions the company on the smaller end 
of rated exploration and production (E&P) companies. The company has moderate 
exposure to weak natural gas prices, with natural gas representing 36% of its 
reserves. Magnum's cost structure was also elevated compared with its E&P 
peers in 2011, especially given its exposure to natural gas. Despite these 
concerns, the company has started to reap the benefits of its recent 
acquisitions and capital spending in its oil-rich plays in 2012. We expect 
Magnum to increase production by about 140% by Dec. 31, 2012, compared with 
2011. Magnum was also able to reduce cash operating costs to $20.52 per boe in 
the first nine months of 2012 from $30.54 per boe in 2011 as a result of 
increased scale of operations and improvement in well costs. Moreover, 
Magnum's increasing exposure to oil and liquids (which should represent about 
50% of production in 2012) and current pricing should yield better 
profitability, going forward. 

Magnum's acreage positions in the Williston Basin (156,000 net acres) and the 
Eagle Ford (26,000 net acres) and the relative low-risk nature of resource 
play development should provide a solid platform for oil and liquids reserve 
and production growth in the medium to long term. The company's properties in 
the Appalachian Basin (467,000 net acres about 45% of the company's pro forma 
reserves and primarily natural gas) add further diversity to the company's 
operations. 

We view Magnum's financial profile as "highly leveraged." We have revised our 
2012 projected acquisition and capital spending to about $1 billion in 2012 
from $730 million, bringing total year-end 2012 debt at $1 billion pro forma 
for the proposed $150 million notes offering and treatment of Magnum's 
preferred stock as 50% debt. As a result, we expect debt to EBITDA to be very 
aggressive at more than 6x at year-end 2012. In 2013, under Standard & Poor's 
hydrocarbon pricing assumptions of $3 per million Btu Henry Hub natural gas 
and $80 per barrel WTI crude oil, and assuming annual capital expenditures of 
about $330 million, we expect Magnum to generate about $250 million of EBITDA. 
Debt to EBITDA should be 4.9x at year-end 2013 under these pricing assumptions 
and the absence of any acquisition or divestiture activity in 2013. 

Liquidity
Magnum's liquidity is "adequate". Ready sources of liquidity include $22 
million of cash and $200 million available under the company's $375 million 
secured credit facility due 2016--both as of Sept. 30, 2012. The borrowing 
base will decrease to $337.5 million following the issuance of $150 million of 
senior unsecured notes. Despite our expectation that the company will outspend 
2013 cash flows under our price assumptions, we believe liquidity will be 
supported by:

     -- Strong crude oil prices over the next 12 to 18 months;
     -- The ability to significantly reduce growth-related capital 
expenditures if needed;
     -- The ability to enhance liquidity by selling assets; and 
     -- The potential of a growing borrowing base as proved reserves are added.

The credit facility has financial covenants, including maximum leverage of 
4.5x through year-end 2012, stepping down to 4.25x as of March 30, 2013, and 
4x thereafter; a minimum current ratio of 1.00x; and minimum interest coverage 
of 2.5x. In 2012, the EBITDAX used for covenant calculations are based on the 
run-rate EBITDAX for the last reported quarter rather than the EBITDAX for the 
last 12 months. Magnum has limited leeway vis-a-vis its maximum leverage 
covenant and needs to continue to ramp up EBITDA generation to remain in 
compliance as the limits become more stringent in 2013. However, the company 
has been able to successfully amend the covenants in the past few months in 
conjunction with the redetermination of its borrowing base and its acquisition 
activity. 

Recovery analysis
The issue-level rating on Magnum's senior unsecured notes is 'CCC' (two 
notches below the corporate credit rating). The recovery rating is '6', 
suggesting negligible (0% to 10%) recovery in the event of a payment default. 
For the complete recovery analysis, see our recovery report on Magnum Hunter 
to be published soon after this report. 

Outlook
The stable outlook reflects our expectation that Magnum will be able to grow 
production to an average of about 20,000 boe/d in 2013 while keeping at about 
5x, a high but still acceptable level for the rating. We expect a growing 
borrowing base and the ability to sell assets or reduce growth capital 
expenditures to continue to support Magnum's liquidity.

We could lower the rating if liquidity declines below $75 million. Based on a 
$337 million borrowing base, such a scenario could occur if the company fails 
to materialize at least $130 million in asset sale without a reduction in 
spending, or make further debt-financed acquisitions.

We could raise the rating if the company meets its production target while 
reducing leverage below 4.5x and strengthening liquidity. We consider an 
upgrade unlikely over the next 12 months barring any asset sale due to our 
expectation that spending levels will remain high relative to the company's 
liquidity. 

Related Criteria And Research
     -- 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.
     -- Corporate Ratings Criteria 2008, published April 15, 2008. 


Temporary contact number: Ben B Tsocanos (203-800-5146)

Ratings List
Ratings Affirmed; Outlook Stable
                                          To                 From
Magnum Hunter Resources Corp.
 Corporate Credit Rating                  B-/Stable/--       B-/Positive/--

Downgraded
                                          To                 From
Magnum Hunter Resources Corp.
 $600 mil sr unsecd nts due 2020          CCC                CCC+
  Recovery Rating                         6                  5
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